Clean Harbors, Inc. (CLH) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Clean Harbors Inc Second Quarter 2021 Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors, Inc. Thank you, Mr. McDonald. You may begin. Michael McDonald: Thank you, Christine, and good morning, everyone. With me on today's call are Chairman, President and Chief Executive Officer, Alan S. McKim; EVP and Chief Financial Officer, Mike Battles; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our website, and we invite you to follow along. The matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, August 4, 2021. Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call other than through filings made concerning this reporting period. In addition, today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are available in today's news release, on our website and in the appendix of today's presentation. And now I'd like to turn the call over to our CEO, Alan McKim. Alan? Alan McKim: Thanks, Michael. Thanks, everyone, for joining us. Lots of exciting information to share with you this morning. Starting with safety first. Our safety results are behind plan as, we continue to experience minor safety incidences around slips and trips and falls. We're certainly doubling down our efforts to meet our safety targets this year, including initiating several safety standdowns across our entire network. I am optimistic that we can reverse this trend. Turning to outstanding Q2 performance on Slide 3. This quarter was a good example of what we can deliver when all our core lines of business are on the upward trajectory, particularly our disposal network. In addition, the spread we manage in our re-refining business had widening due to the favorable market conditions. Because the quarter concluded with 2 terrific months, our results far exceeded the guidance we gave in early May. Environmental Services rebounded from the impacts of the Q1 deep freeze in the Gulf, and we saw strong volumes in the quarter. Safety-Kleen Sustainability Solutions delivered far better-than-expected profitability due to multiple base oil pricing gains driven by supply conditions in the market and the overall management of our used motor oil to base oil spread. Adjusted EBITDA in Q2 was a record $187.8 million, up 36% from a year ago. Our margins increased 80 basis points to 20.3%, reflecting the benefits of pricing initiatives and cost-reduction efforts. Adjusted free cash flow was a strong at $114.6 million. Turning to our segments, beginning with Environmental Services on Slide 4. Revenues grew 18% on growth in disposal volumes and strong Industrial Services activity. We benefited from a favorable comparison with Q2 of last year when the pandemic lockdowns impacted the overall economy. Industrial Services performed particularly well, posting revenue growth of more than 50% as a backlog of deferred maintenance projects began to come to market. Adjusted EBITDA in this segment was flat year-over-year due to the high level of government assistance and high-margin COVID decontamination work in Q2 of last year. These factors were offset by higher revenue, cost savings and favorable mix. Government assistance programs totaled $4.4 million in the quarter, down from $19.7 million in Q2 a year ago. Incineration utilization was 87%, flat with the prior year but up nicely from 80% in Q1, which was affected by weather-related shutdowns that disrupted 6 of our 9 incinerators. Mix of waste, along with pricing initiatives, pushed our average price up 5% from a year ago. We entered Q2 with deferred revenue at the highest level in our history, and waste volumes in the quarter remained robust as we continue to recover from the unplanned Q1 shutdowns. Landfill volumes rose 13% in the quarter as we finally saw increased activity within our project pipeline, and we also benefited from a 10% jump in average pricing. COVID decon revenue in Q2 was $11 million, with most of that coming in the early -- in the quarter. That work has slowed to a trickle in recent weeks, and we are currently assuming very little contribution in the back half of the year. Conversely, we're seeing a good lift in our base Field Services work. The pace of parts washer services continue to pick up as we hit 240,000 services for the first time since the pandemic began. Moving to Slide 5. SKSS revenue more than doubled. This reflected much higher base oil and blended pricing as well as greater volumes than a year ago when we temporarily suspended some production at our re-refineries. On a sequential basis, SKSS revenue increased more than 30% from Q1, fueled by strong demand for our base oil. Adjusted EBITDA climbed by nearly $55 million year-over-year, while margins soared more than $0.31 -- 31% -- to more than 31%, excuse me, reflecting the widening of our re-refining spread and a return to more normal production levels. SKSS margin also was driven higher by the productivity and cost initiatives that we implemented as part of our organizational changes over this past year. Waste oil collections continue to ramp up nicely during the quarter, coming in at 57 million gallons compared with 43 million gallons a year ago and 47 million gallons in Q1. Our percentages of blended products and direct volumes came in as expected. And given the market environment, including the additive shortages, we continue to prioritize opportunities to move our large volume of base oil, at least in the short term, at higher-than-normal margins. While the outsized returns we saw from SKSS in Q2 are not an accurate barometer for how we expect this business to perform long term. The segment's first half performance this year further supports our decision to separate this business out from SK Environmental. That move enabled us to manage the spread much more tightly than we would have, had it remained as part of the branch network, a stronger focus and a more active management and all aspects of our oil collection was precisely the rationale behind our decision. That goal dovetails perfectly with our pending Vertex acquisition. Vertex has been a strong outlet for third-party oil, particularly industrial oils, which can be used in the manufacture of IMO 2020-compliant marine diesel oil. Through its Louisiana plant, Vertex is an important supplier to the MDO market in the Gulf region. That broadens the scope of our business to include the generators of industrial fuels, tank bottoms and other waste oil fuels that meet the MDO requirements, but don't necessarily fit well with our current base oil plants. The Vertex network will support our growth in our Field Services and our Industrial Services business in the years ahead. Turning to Slide 6. In a separate release this morning, we announced the signing of a definitive agreement to acquire HydroChemPSC in an all-cash deal for $1.25 billion. We're excited about the prospects for our combined businesses and confident that this transaction will build sustainable shareholder value. HPC is planning for $744 million of revenue this year and approximately $115 million of adjusted EBITDA. We believe that the operational productivity and sales synergies will be broad-based and achievable in this combination. As a result, we expect to achieve $40 million-plus of synergies after our first full year of operating HPC, which would translate to a purchase multiple of about 8.1x on a post-synergized basis. As you can see by the numbers on the slide, HPC brings a lot to Clean Harbors in terms of footprint, customer base, services, assets, and importantly, a talented team. In addition, HPC is the only provider of industrial cleaning and specialty services, who maintains a dedicated manufacturing and technology center. It is a true competitive advantage as it gives HPC the ability to fabricate customized tools that handle complex and very unique applications. This technology will enable our combined company to improve safety and operate with less labor as we roll out these robotic and hands-free technologies to our customer base. Turning to Slide 7. The reasons behind this transaction, which we expect to close later this year are many. HPC is a leader with terrific assets that will enhance our industrial service capability, particularly in the high-value areas of specialty work and facility services. The addition of its fleets and sites will give us size and scale in what remains a highly fragmented market. On the Field Services side, which accounts for about 15% of their total revenues, HPC brings a strong presence in utility vertical that will complement our nationwide Field Services organization. Another key reason we were attracted to HPC is their differentiated technology. When it comes to hands-free devices and increased automation, they're the leader in the industry, and part of our ESG efforts here at Clean Harbors has been around continuously improving safety for our people and the sites that we operate on. The acquisition of HPC is another important step in that effort. HPC's customer service approach, commitment to innovation and business philosophy mirror our same principles in many ways. That cultural fit is in part what makes this an exciting acquisition for us and why we're confident it will succeed. We know that we're acquiring a first-class organization led by a strong and experienced management team. In addition to the cost synergies and as a strategic buyer, we see a lot of cross-selling opportunities with HPC's customer base, particularly through waste disposal and emergency response contracts. HPC does not operate any disposal plants. And our network of landfills and industrial oil plants will enable HPC to offer more bundled services to its existing customers. We see a multitude of ways for this acquisition to generate both short- and long-term shareholder value. We're excited to welcome the more than 5,000 members of the HPC team to the Clean Harbors family. Moving to Slide 8. Another important announcement we made today is that we're officially moving forward ahead with our plans to build a new 70,000-ton incinerator in Kimball, Nebraska. With an expected cost of about $180 million, this project will be the largest internal investment in our history. It is an investment we're excited to make, and we intend to mimic the design that we used in our El Dorado site, which should also cut down on our construction time line. We believe that we can permit, design and build this facility over a 4-year time frame and that we have the plant operationally by the end of 2024 and accepting waste in the first half of '25. Here on Slide 9, on the upper left, you can see a nice aerial shot of the Kimball site today with the existing kiln. On the lower right photo, you can see our engineering plan for where the new incinerator will sit. It will be integrated right into the heart of our existing facility to maximize our efficiencies and waste handling at the site. We have a strong relationship with the Kimball community given our 25-year plus ownership of our existing incinerator at that site. We're confident that the new jobs and increased business activity this plant will bring will benefit the region and the entire state. And having that additional capacity will enable us to provide greater environmental service capabilities to our customers, particularly in the Western U.S. We're confident that incineration demand, driven by the ongoing U.S. chemical and manufacturing expansion, combined with the continuing closure of captive incinerators, will enable all this additional capacity to be readily absorbed when the new kiln opens for business. Turning to Slide 10. Given our strong cash flow, cash balance and low leverage, we've been in an excellent position to execute our capital allocation strategy. We've continued to invest capital into the business, including today's Kimball announcement. And on the acquisition front, we're excited about both HPC and Vertex. Going forward, we'll continue to look for similar opportunities, both internal and external, that generate the best returns. With our leverage levels increasing following the close of the HPC transaction, we'll be more closely evaluating reducing our debt going forward. And we also intend to continue with share repurchases as we believe our stock represents a great value at its current levels. Given all we have had to cover today, let me just close by reiterating how excited we are here. Coming off a very strong Q2, we entered the second half of the year with considerable momentum across all of our key markets. The North American economy, particularly in the industrial space, should support our continued growth. We're anxious to bring onboard HPC and the Vertex assets. As Mike will cover, we're expecting a record-setting financial year for the company. So with that, let me turn it over to Mike Battles. Mike Battles: Thank you, Alan, and good morning, everyone. Turning to our income statement on Slide 12. We delivered exceptional results this quarter. Revenue increased 30% year-over-year on the strength of greater volumes, higher pricing, especially in base and blended products, and a meaningful pickup in our service businesses. Adjusted EBITDA grew an impressive 36% to $187.8 million. We recorded our 14th consecutive quarter of year-over-year margin improvement despite a very difficult comp a year ago. Our revenue mix, widened re-refining spread, SG&A cost-reduction programs and $5.2 million in government assistance resulted in an 80 basis point improvement in EBITDA margin as we exceeded 20% for the quarter. If you back the government monies out of both periods, our EBITDA margin improved from 16.2% a year ago to 19.7% this past quarter. SG&A costs increased by approximately $20 million year-over-year, reflecting the $216 million increase in revenues. On a percentage basis, we improved our SG&A by 120 basis points. For the full year, using the midpoint of our guidance range, we expect SG&A to be up in absolute dollars from the prior year and flat to slightly down on a percentage basis. Depreciation and amortization in Q2 declined slightly to $71.6 million in line with our expectations. For 2021, we continue to anticipate depreciation and amortization in the range of $280 million to $290 million. Income from operations increased by 83%, reflecting our high revenue growth, coupled with prior year cost initiatives. Turning to Slide 13. Our balance sheet at June 30 remained in excellent shape. Cash and short-term marketable securities at quarter end were $666.3 million, up approximately $95 million from year-end and from March 31. Our debt was $1.55 billion at quarter end, with leverage on a net debt basis approaching 1.5x. Our weighted average cost of debt before factoring in the HydroChem transaction is 4.2% with no debt maturities until 2024. To finance the all-cash HydroChem deal, we intend to issue $1 billion of additional debt and fund the remainder between cash on hand and free cash flow we generate from now until the deal closes. We have yet to finalize our plans, and we'll have to assess market rates as we get closer to executing this transaction. However, I would expect the majority, if not all of that financing, to take the form of a term loan B that gives us low interest rates and flexibility to pay down our balance without penalty. Based on our current guidance and assuming the deal closes in Q4, we will anticipate ending the year somewhere around 3.3x levered, with a target of lowering that net debt leverage into the mid-2s by year-end 2022. Turning to cash -- to Q2 cash flows on Slide 14. Cash from operations in Q2 was extremely strong at $162.4 million. Our working capital management initiatives, including collections of aid receivables and inventory management, also benefited -- benefiting our cash position. CapEx net of disposals was up slightly year-over-year at $47.8 million, which was in line with our expectations. The result of all these efforts was a record Q2 adjusted free cash flow of $114.6 million. For 2021, we now expect net CapEx in the range of $190 million to $210 million, which reflects the addition of some initial spend on the Kimball incinerator. Turning to the second -- during the second quarter, we bought back 200,000 shares at a total cost of $18.9 million. Of our $600 million authorization, we now have more than $160 million remaining. Moving to Slide 15. Based on our Q2 results and current market conditions, we are raising our 2021 guidance. We now expect adjusted EBITDA in the range of $620 million to $650 million with a midpoint of $635 million. While we expect both transactions to close this year, this guidance range does not assume any contribution from the Vertex assets or from the HydroChemPSC transaction. Looking at the midpoint of our guidance from a quarterly perspective, we expect Q3 adjusted EBITDA to be at a level similar to slightly above Q3 2020, which would infer that Q4 is approximately flat to slightly above the prior year. Based on where we are at midyear, here's how our full year 2021 adjusted EBITDA guidance translates to our segments. In Environmental Services, we expect adjusted EBITDA to decline in the low single digits on a percentage basis from full year 2020. We still expect the benefit from growth in our incineration profitability, a continued rebound in both the Safety-Kleen branches and Industrial Services and incremental growth in base Field Service, with all these businesses supported by our comprehensive cost-reduction measures. That said, these factors are not enough to offset the year-over-year decline in high-margin decontamination work and more significantly, a lot contribution from government assistance programs in 2020 that totaled $35.6 million in this segment versus about $10 million this year. For SKSS, we anticipate adjusted EBITDA to more than double from a year ago. The midpoint of our guidance assumes growth of approximately 120%. The combination of our abnormally widespread and having both our production and collection volumes return to pre-pandemic annual levels is driving this result. That level of adjusted EBITDA would also put us approximately 45% above what the segment achieved in 2019, which demonstrates how well we are managing the business, the impact of IMO 2020 on our markets and the supersized spread caused by supply-driven price increases in base oil and blended products. Our guidance assumes that the spread will continue to narrow in the back half of the year. The exact timing and the pace of that will be determined by market conditions. As a final SKSS reference point, in 2020, this segment received government assistance of $3.7 million. That amount will likely be cut in half this year. In our corporate segment, we now expect negative adjusted EBITDA to be up single digits from 2020 largely due to higher incentive comp given the successful year we're having. We also had about $3 million in government assistance in 2020 in corporate versus less than $0.5 million this year. For the full year 2021, our adjusted EBITDA guidance now assumes receiving a total of $11 million to $12 million in government program assistance, primarily from Canada. Based on our current EBITDA guidance and working capital assumptions, we now expect 2021 adjusted free cash flow in the range of $280 million to $315 million or a midpoint of $300 million. In closing, Q2, in many ways, was a continuation and acceleration of the positive business trends we experienced in Q1. We have every reason to believe that will continue through the remainder of 2021 and also see macro trends that should support further profitable growth in the years ahead. We are excited to move forward with our incineration expansion plans in Nebraska. And lastly, with the expected additions of the Vertex assets and the HydroChemPSC business, we expect to see significant growth and synergy opportunities for us in 2022 and beyond. With that, Christine, please open up the call for questions. Operator: Our first question comes from the line of Tyler Brown with Raymond James. Tyler Brown: Mike, just to be clear, so neither HydroChem or Vertex are in the guide? Is that correct? Mike Battles: Tyler, that's correct. There's been no -- all the numbers we quoted this morning don't have any M&A in it because it's not closed. Tyler Brown: Okay. Perfect. And so can you just kind of bridge the midpoint change, the $580 million to $635 million. I mean I know there's a lot of moving pieces in there. Just how much of that is really wide spreads, better trends? It sounds like there's higher incentive comp working against you, but then maybe a little bit more government assistance? Mike Battles: Yes. I think you have most of the piece parts. The biggest piece is the spread being wide in the price increases that we've had in the back half of Q2 and here in Q3 that really were a 40% increase and a 30% increase in our ability to kind of manage the front end of the spread on the CFO pricing. That really led to kind of a supersized margin -- supersized results in Q2, and then that's going to carry over into Q3. Tyler, we did -- the SKSS business did $63 million of EBITDA in Q2 of 2021. It did $8 million last year. So that was -- and I think that spread continues, and that's really part of the beat. And then from there, we say, okay, well, it's beating. We're going to continue on at least through Q3. And we've kept that spread pretty wide in Q3. The other thing that happened on the Environmental Services side is that Industrial Services came back probably faster than we anticipated. We expected it's going to be a good year, but they really had -- that revenue is up 50% from prior year. Again, we -- I thought that was a really great result, and I'm encouraged by the back half kind of Q3 turnarounds that we have coming up. And as such, that raised our guidance. On the corporate side, yes, it did go down a little bit because of incentive comp. But I'm here to tell you that, that incentive comp is actually probably close to the max it can be. So my point being, any incremental dollar that we get should be -- should have a very favorable margin flow-through. Because outside of safety, which Alan says we're struggling with a bit, most of our targets are hitting kind of at the max, if you will. Tyler Brown: Okay. Okay. No, that's helpful. And then, Alan, this is a more conceptual question, but I think you guys upgraded your wind ERP platform a few years ago. You've obviously been reworking your technology. But can you just talk about potential integration risk? I mean there's a lot of moving pieces going on right now with HydroChem and Vertex and whatnot. It sounds like HydroChem also has some really interesting technology. And I was just hoping you could expand on that a little bit as well. Alan McKim: Sure. I think when you think about Clean Harbors' technology that it brings, it's much around sort of the systems to manage the business from the quote to cash and our proprietary system really enables us to take a company like HPC and really roll it onto our network. There are some one-off systems they have that certainly will take a hard look at and determine whether we integrate those into our platform or not. But for the most part, we really have, I think, that investment in our technology to leverage significantly and that's exciting for us, and we try to do that for day one. I think the technology that HPC is bringing is really more on the operations side, out in the field, where they can bring that technology to customers within the plants, whether it's leak detection, whether it's hands-free technology for cleaning or high-pressure work, things that really drive safety improvements and lower labor costs, which is really what a lot of our large customers are -- and we're looking for. So bringing 2 technology companies together with different kinds of technology I think is going to be a home run for us. Tyler Brown: Yes. Very interesting. And then my last one, just real quickly. On the $40 million of synergies, can you kind of parse out the 2 or 3 buckets there? So it sounds like most of those are kind of operating synergies, not necessarily to cross-sell even though you talked about that. And then will there also be any capital synergies as you guys will be a much bigger buyer of equipment? Mike Battles: Yes. Tyler, this is Mike, and I'll take a shot at that. The -- it is mostly operational. We don't have any -- in the $40 million, we don't have any kind of cross-sell opportunities. We don't like a lot of -- put a lot of revenue synergies into a model. They tend to take a little longer, a little harder to achieve. Not to say we don't have a line of sight to them. I think we can get them, but we hate to kind of put those in a number that we share with investors just because they tend to be harder to achieve. So most of those are operational synergies around -- as you can see the footprint, there's a lot of overlap in leases between the 2 businesses. Alan just talked about the ERP system and the back-office support that, that provides. There is some back-office synergies of costs and systems that we should see some savings on. We think that $40 million is very doable, and we're hopeful to get a good chunk of that in the first year. Alan McKim: And I think in regard to capital, one of the things that we're excited to leverage is our refurbishment capabilities. We have 6 locations around North America that could take and really extend the life of these assets, and that is something that we think we can bring to the table as well as a further reduction on rental of assets, internalization of disposal. Probably the best one is maintenance. We perform the majority of our maintenance in-house. HPC, for the most part, outsources maintenance. So we think we can really leverage that network of refurbishment and maintenance facilities that we have as well as our disposal network. Operator: Our next question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: Congrats on the outstanding quarter. So much to cover here. I guess just picking up with HydroChem. The industrial logic here seems extremely compelling. My question is really more about like a typical business profile, financial profile for the company. I mean I think 2020 and 2021 have been anything but typical. So would you say the 2021 projections for HydroChem are a fair representation of what they would do on a stand-alone basis? Has this historically been kind of a low to mid-single digit top line, mid-teens EBITDA-margin-type business? Mike Battles: Noah, this is Mike. The -- going back in time, it has been growing. The thing that makes it such a unique asset is its EBITDA margins and its ability, for all the things Alan said, around automation and hands-free technology and some of the systems and processes, they've been able to drive margins at a pretty good level. So those margins have been mid-teens as that revenue has grown. 2020 is a weird year for us and for everyone, really. So it's a hard comparison. But they've been growing that business for the past 3 or 4 years and generating kind of mid-teen margins. We expect that to continue in a post-pandemic world. Noah Kaye: Okay. Terrific. And then I think just touching on what Alan was saying before around bringing these unique technologies together. What is the opportunity just from an operational perspective to do some knowledge sharing around technology design implementation? I mean you made the point that this acquisition is really the only company to have its own technology design and manufacturing center. Can you leverage that across the rest of Clean Harbors going forward so that is really this business becomes even more sort of technology leading in terms of the services that can provide? Alan McKim: Yes. I think when you look at our industrial business, which is both in the U.S. and Canada, about $400 million we believe that we can take and really leverage PSC's technology across our customer base, particularly in Canada, which would enable us to really introduce some newer technology that otherwise we haven't had to offer. There are some off-the-shelf robotics technologies that can be used, but just a very unique capability they have that's been in place for well over 20 years. And I think it's what's been driving their much higher margins than we've enjoyed in the industrial side. Operator: Our next question comes from the line of Michael Hoffman with Stifel. Michael Hoffman: Alan, most companies never tell us when safety's got an issue and they got to bring incremental focus. So kudos to you because it's important everybody goes home to their family. Alan McKim: Absolutely. Michael Hoffman: Mike, on the $70 million year-over-year EBITDA increase, can you split it between what's ES and what's SKSS? And then in those 2, how much is things that are above average? Like incineration getting a really good pricing, but does that normalize when your capacity utilization settles back to a long-term average or SKSS, the base oil price is way above normal? Can you help us with that? Mike Battles: Yes. Michael, so the big driver of that kind of initial guidance to where we are today is really in the SKSS business. And that spread that Alan -- that we talked about being very large and no one kind of anticipated that, and that has been kind of a big driver. The ES business has done well. We have -- we talked about that kind of going down $30 million, $40 million, and now we're guiding, if you take the midpoint of my comments in the low 20s. And so that's done better than we had thought. I think based on incineration volumes, we've talked about field and industrial coming back kind of better than expected. So that's done well. And that's -- and we're really proud of that ES business. But what's driving the beat in the guide is really the SKSS business and the team and the leadership that we -- that Alan demonstrated by bringing those -- breaking out the oil business, out of the SK branch business, merging it with our SK Oil business and really driving kind of both sides of the spread, along with market conditions in IMO 2020 and all those things have really driven a supersized Q2 outcome and a really big upgrade in guidance for the year, and again, something we're really excited about. The question you're asking about what's continuing on. Hard to answer because of the fact that we don't know if it's kind of just better management. Is it IMO 2020? Or is it kind of a supersized spread that comes back to normal in the back half of the year. We have it returned to normal in our model, in our guide, Michael. I'm not sure exactly when that happens, but that's in our guide. Michael Hoffman: So just to parse this a little bit, $55 million, $60 million of the $70 million is SKSS, the rest is ES. And some portion of that $55 million, $60 million is an above-average base oil price, which we all kind of have to try and figure out. Maybe it's half of it. And that's what I got to think about in making up in a headwind going into '22 before all the benefit of these deals. Mike Battles: That's exactly right, Michael. The only thing I'd say is -- the only thing that -- one more add to that is that the corporate segment is up a bit because of incentive comp is that kind of its max levels. As I said earlier, it stays -- it's in our guide to be max for the rest of the year. So incremental dollars will have a better flow-through. But that is part of it as well. So SKSS, up a ton, ES up a bit, doing well; corporate up a bit; incentive comp. Michael Hoffman: Got it. All right. 3M has just announced they are going to -- the headline says 3M to expand collaboration with Clean Harbors. But probably the most significant thing when I'm reading this is they are announcing they're closing all their captives, and everything is coming to you. So clearly, that supports why you're doing Kimball, but can you absorb all this volume before Kimball gets built? What's the volume number look like? What -- help us understand the significance of this statement by 3M. Mike Battles: Yes. So there's a lot of ways to think about this, and I'll let Alan comment on the strategic partnership and how happy we are for that. But when you think about the numbers, Michael, that plant, the Cottage Grove, Minnesota incinerator, has been in turnaround since the fall. And so we have been getting a fair amount of that waste kind of anyways, which we have with all our captive customers. We've been getting that incremental waste. And so the difference here is that because of the challenges that, that plant has had, they are giving that waste forever. And that's a big deal for us. We've talked about strategically being -- captive closure's a big part of the strategy, and this is the largest captive incinerator in North America. And so we're really proud of the fact that working with 3M and allowing us to be part of a strategic partnership with such a prominent company really validates everything we've been doing for the past 2 years and dovetails really nicely with the new incinerator. But as far as incremental volumes, knowing that we have a problem in that area, we've already been getting those volumes. I don't know, Alan, if you want to add anything. Alan McKim: I would say that we have been debottlenecking our incinerators. We've been adding capabilities like the shredders. We put a $10 million shredding system in it, our Aragonite incinerator. We have expanded our autoclave network to put more medical waste into the autoclave side of the treatment and get that out of our incineration. So we're trying to move stuff out of our incinerators and move it into a different treatment technology. So I think -- and we also have room for utilization improvement. We're running at 87%. We can do better, and we'll continue to see an improvement there. So I think we're going to be okay, but it is going to be important for us to expand. Michael Hoffman: Okay. On the HPC acquisition, so in 2011, Alan, you tried to buy Badger, and the arbitrage market grew that all up for you. But how do I compare what you're getting at HPC versus what you're trying to get at Badger because that was a big hydrochem -- hydrovac play. I mean when I read HPC's stuff, it looks like that's a big hydrovac play. Is that -- how do I think about those 2 comparatively? Alan McKim: Yes. I think much -- totally different. I mean when you think about the daylight business that Badger was, which is basically, at the time, I think they had 500 or 600 units out performing a lot of work for the utility industry and -- in the street, so to speak. HPC is very much embedded in their customer sites. They have 180 embedded sites. We call them in-site programs in our speak here. But I think $400-plus million is business that comes in every day because they're on the sites. Now they do use hydrovac high-pressure equipment and vac trucks and all the things that we do across our entire Field Services and Industrial Service business. I think the difference is that we typically handle the waste as part of those services, whether it's liquid waste or it's solid waste. For example, we have 14,000 roll-off containers, and PSC doesn't do that kind of work. And so internalizing more of that and bringing more of that waste into our treatment facilities and our landfills, I think, is where we'll see some real opportunity there. But really totally different than the Badger deal. Michael Hoffman: Okay. Fair enough. And then another company, , reported earlier this week, beat their numbers because the temporary rental space in Canada, in particular, was very good. So is that an opportunity here to finally monetize some of those assets you've sought to monetize? Alan McKim: We just sold one of our camps down in the Permian just recently, realizing that, that wasn't core for us. And as you know, the camps that we have up in Fort McMurray really provides support for our own folks up there. We have 500, 600 people working at the large oil sands facilities up there. So we'll continue to look at that, Michael, but I think that it's not sort of short term for us right now. Michael Hoffman: Okay. And then last one. Mike, on the debt, based on where your current credit is and your term B, are we logical in pricing this somewhere between 3.5% and 4.25% as we put it into our model? Mike Battles: It would be much lower than that given the term loan B market and what we've been seeing in the marketplace, much more favorable than that. Michael Hoffman: Perfect. That's great. Congratulations on all of this. Interesting day. Mike Battles: Thanks, Michael. Operator: Our next question comes from the line of Hamzah Mazari with Jefferies. Ryan Gunning: This is actually Ryan Gunning filling in for Hamzah. My first question is just you've clearly taken a lot of costs out of the business over the last several years. Could you maybe just comment on how much room there is remaining on the cost side to take out, either on the gross margin line or SG&A bucketed it out? Mike Battles: Yes, Ryan. So we've done some good cost actions. We've -- automation, moving employees to low-cost jurisdictions, focusing on cost synergies that are out there. I think that it is -- that we've committed to 30 to 50 basis points a year, and that's through cost and pricing. We've done 3.5 years, 14 consecutive quarters of year-over-year margin improvement. That is not -- that's price and cost, and that will continue in -- over the foreseeable future. Ryan Gunning: Got it. Appreciate it. That's helpful. And then for my follow-up, maybe could you just comment on the competitive landscape, you're seeing in hazardous waste, either with larger consolidation that you think could happen longer-term captives closing or any other dynamics long term and how that may change profitability for the business over time? Alan McKim: Yes. I think the long-term trend has been for captives to look at winding down their operations. It might be part of their ESG program. It might be part of just lowering cost and getting out of that noncore side of the business, if you would. So we see a continuation of that. We also see opportunities like these in-site locations where customers are looking to outsource and bring in people within the plants to help them manage their environmental programs, putting in the technology, systems to track ways to manage compliance to basically report for them all of their hazard waste activity. So I think that outsourcing trend is going to continue. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Jeff Silber: I wanted to circle back to the SKSS segment. I know you're not guiding for 2022 yet. But if we look at the adjusted EBITDA margins for this business on a stand-alone basis, if my math is correct, you did about 16.5% in 2020. I think it was closer to about 21% in 2019. It's going to be a heck of a lot higher this year. Do you think going forward we can be higher than that 21% level that you achieved in 2019 in that segment? Mike Battles: Jeff, this is Mike. I'll take a shot at that. So I think that at the end of the day, the question you have to ask yourself is how much of this is IMO 2020. My view is it's a material amount of the spread that we're getting, and that continues. One would imagine when the economy cools down a bit and refineries get running and base oil prices get back to some level of normalcy, we'll be able to manage that spread like we have for many, many years. And so my view on this is that -- but there is a change, and that change is IMO 2020, and I think that is a material impact to these financials. And I think that obviously continues in 2022. But what that means from a margin standpoint, Jeff, hard to say. Jeff Silber: I understand, but I appreciate that kind of framework. It is helpful. And then big picture, we've got an infrastructure build that seems to have finally been moving through Congress. Can you talk about the potential benefits from that bill to your company? Alan McKim: Well, certainly, it might sound minor. But I mean, the fact that it might help our driving situation. We have a large fleet. We have over 4,500 CDL drivers. We're looking for hundreds of drivers right now, as many other companies are across the industry. And that bill does -- my understanding, does lower the age limit for new drivers to enter the workforce, and that would be something that would be very positive for us. There are taxes that possibly are coming out of that for haz waste generators. Obviously, that could be a negative to have customers look more at their operations and the generation of waste. But that's -- it's interesting that they're looking at haz waste generation as a source of funds for infrastructure. We also hope that there will be some additional spending on super fund cleanup, so that would be really positive for our landfills. Because usually, during the infrastructure, you do come across a lot of waste disposal needs. So it's kind of a few things there just to comment, but we'll have to wait and see. Operator: Our next question comes from the line of Jerry Revich with Goldman Sachs. Adam Bubes: This is Adam on for Jerry today. I was wondering if you could help us think about the organic growth profile of the HPC business and how that organic growth has trended more recently? Mike Battles: Yes. A GDP type of grower, Adam, I would say, looking at the back the past few years. Good growing. They've done some organic growth. They've -- as Alan mentioned, they put in kind of a leak detection type of business. They've had tried to grow some businesses, and they've actually done a pretty good job over the past few years. Alan McKim: Yes. And I think -- organically, almost from the beginning, they grew their utility business, basically our Field Service business. And they've grown that to about $120 million -- $115 million in revenue. So I think that's a nice growth story for them that we'll benefit from. Adam Bubes: Okay. And then my second question is in incineration. Out of the 5% price increase, what was mix-related versus true year-over-year price? And then mix has been a really strong tailwind over the last several quarters. Do you expect that to normalize as we move into the back half of the year? Mike Battles: Yes. Adam, I think that a big chunk of this growth was price. We have been working on price in Q1 and Q2, and we're seeing some of that. We will continue to see some of that in Q3. When we went up against a tough mix be, we have for many, many years. And so I feel like that's going to continue on. And we're building this new incinerator in Nebraska to handle kind of the highly chlorinated waste, like we did in El Do, and that will just -- I think we'll have plenty of capacity in the network to take all of that. Operator: Our next question comes from the line of Larry Solow with CJS Securities. Larry Solow: Congratulations, lots of exciting things going on. Just a couple of questions, just a couple of follow-ups. Most of my things have been answered. But just peeling back the onion a little bit on the growth of HydroChem historically, the GDP-type growth. I imagine the customer base has expanded over the years. And I suppose as you guys acquire them, perhaps you can accelerate that expansion, cross-selling or whatnot. Any color on that? Alan McKim: Certainly, it's going to be key for us. I mean they have many customers where there's a huge opportunity for us to bring in our services that we can provide and complement their great relationships they have with their accounts. So a lot of opportunity there on that side of the business, Larry. Larry Solow: And Alan, you've been looking at this asset for a while. Did this kind of come together, any color in terms of conversations? Was this -- it doesn't sound it was a bidding process, but it's just been something that you've -- I'm sure you've known these guys for quite some time, but just in terms of historical perspective. Alan McKim: Yes. We've tried many times over the years with the original PSC acquisition and assets both on the environmental side and the industrial side to acquire these. So we're very, very familiar. We've got a lot of people working here that have got a lot of familiarity with the team there and worked together with that team over the years. So this is something that we did ourselves. We made the approach. This was a private equity-owned company and one that we were very familiar with. And we just thought that this was the right time and the right opportunity for us to pull the trigger on this. Larry Solow: Right. And switching gears real fast, just on, I guess, what now looks like an even smaller tuck-in, but nice little acquisition pending on the Vertex Energy. And if I'm not mistaken, a majority or a significant piece of their capacity has actually been historically filled by open-market purchases. So perhaps some good efficiencies under your umbrella going forward. Any thoughts on that? Alan McKim: We've had a long relationship with Vertex, buying a lot of their oil, doing swaps together. We actually bought our from Fallon Re-refinery them several years ago. And so I think, again, know them well. We tried to buy the Heartland Refinery prior to them acquiring it. And they've done some nice things. They have some permits that are going to enable it to expand that we'll want to now invest in. And I think, as Mike said, IMO 2020 has changed. And so this gives us an opportunity to handle more oils that I think is going to fit well into the new market that exists. Larry Solow: And just lastly, you mentioned IMO 2020. And clearly impossible to sort of gauge how much of the price equilibrium or in-equilibrium is sustainable. Certainly, there will be the -- on the shorter side, that will probably improve as re-refines ramp up. But just looking at IMO 2020 by itself in a vacuum, and maybe that's a difficult to ask, too, but do you think you're achieving sort of that full benefit today from that alone or maybe excess benefit because -- from that, too, any way to sort of gauge that by itself? Alan McKim: I think that the long-term trend is going to be to recycle and reuse oil. I think that's where industry and government is looking. And so taking used motor oil and re-refining it over and over again and reusing it is clearly what's in everybody's best interest to do. And with the material that otherwise would have been burnt as a fuel, as you know, the 3% sulfur fuel now being at 0.5%, it's all about reducing emissions and lowering greenhouse gases. And that just further drives sort of that kind of material to recycler so that they can find ways of getting beneficial reuse of that product. So I personally think we're in the early innings there. I think the pandemic has really disrupted so much. It's really hard to kind of put a finger on where we are in the life cycle of IMO. Operator: Our next question comes from the line of David Manthey with Baird. David Manthey: A lot of good news to digest here. So HydroChem, you mentioned that there are some high-value waste streams that can be directed to your incinerators. Are they an incineration customer today of Clean Harbors? Alan McKim: No. Not necessarily incineration waste. I would say that we do handle some catalyst waste from a lot of customers that they service, for example. But we're pretty competitive right now. And we, quite frankly, have not enjoyed a disposal business from them. The PSC assets that were sold years ago, the environmental assets that were sold to Steri then subsequently to Harsco, I would say we have probably benefited more of that waste disposal than we have. David Manthey: Okay. All right. And then, Mike, I think in your monologue, you said that exiting this year, net debt-to-EBITDA of 3 and change. I assume you meant including the debt from both of these deals but no EBITDA from the deals. Is that correct? Mike Battles: I think we've modeled a little bit in to get to that answer, and it depends on the timing of the closure of those transactions. Alan McKim: But I don't think any EBITDA was in there in your guidance. Mike Battles: Okay. Right, right. Alan McKim: But the debt was in that. Mike Battles: That's right. That's right. David Manthey: The debt was. Right. Okay. That was what I thought. And then we can certainly calculate this. I think you've been asked a number of times about some of the moving parts here. But how should we think about the debt ratio if we do include EBITDA from these deals and we sort of factor out government assistance and decon and kind of the abnormal spreads maybe? Have you thought about that? Can you give us any kind of view? Otherwise, again, we can calculate it. And then related to that, too, is where is your comfort level at this point as a company? What range of net debt-to-EBITDA are you okay with? Mike Battles: So Dave, as you've articulated, there's a lot of moving parts here, and it's hard to kind of piece part each piece and pro forma things in and out. But I think if you just took -- basically took our 2021 guidance and assume that carries over into 2022 and then you add in what we've already said on Vertex and on HydroChem and some level of synergies on both those transactions, you get to the mid-2s alone in mid -- at the end of 2022. And so I think that's -- I think mid-2 is a good spot to be in, frankly, and it does allow us to do other things like building a great new incinerator in Nebraska as well as do some buybacks. And so I think that -- I think this is -- although it's a fair amount of debt we're assuming, we're also getting a fair amount of EBITDA. And as such, I think the ratio gets in a pretty good spot. I'd say mid-2s is a good spot to be in, very consistent with the market, and we'll see where we go from there. Operator: Our next question comes from the line of Jim Ricchiuti with Needham. Jim Ricchiuti: I wonder if you could talk a little bit about the customer overlap between yourselves and HPC. Is there much? Alan McKim: I am sure there is. We haven't been able to, at this point, look at some of that detailed information. We do have to go through a Hart-Scott-Rodino filing here. And so at this point, there's some information that is not available to us just yet until that clearance takes place. But I'm sure there is. We're very familiar with their -- certainly with many of their locations they service but not specifically, can we address it yet. Jim Ricchiuti: Okay. And I'm assuming, Alan, you probably wouldn't be able to answer the next question either, just given that just if we think about the profile of their business from a standpoint of market verticals or maybe you can give a little color on that. Mike Battles: Yes. So I'll take a shot at that. The first piece is about 100 -- as Alan said, $115 million, $120 million utilities business. And that is very similar to our Field Service business, doing manhole clean-outs and things like that. Then they have about 30%, 35% in specialty services, as Alan said, leak detection, order detection type of technology. And the rest of it, I'd say is, let's say, a standard turnaround paper services, using the automation that Alan mentioned earlier, going into plants and doing 2-week turnaround, bringing the HydroChem now, the Clean Harbor team in there and doing the cleanout of the heat exchangers and other pipes and tubing in there. Alan McKim: Yes. A lot of chemical, petrochemical refining sort of large plants that need that ongoing sort of maintenance and help them sustain those plants is a big part of what they do. And anticipating that there probably won't be any refineries built and some being taken down, keeping the existing ones up and running is really a critical role that they play and one that will continue to play. Jim Ricchiuti: And just with respect to your results, you alluded in the press release to a meaningful contribution from Industrial Services. I think you said roughly 50% -- over 50% growth. Can you talk about the backlog of deferred maintenance? Where do we stand with that? Are you -- are we at the point where this business continues to grow maybe beyond historical levels in the coming quarters? Or have we worked down some of this deferred maintenance backlog? Alan McKim: I think the pandemic really created such a disruption across so many industries and clearly the ones that we serve with our industrial as well as PSC. They're just starting to come out. There's still obviously COVID that we're all dealing with out there. The concern about large people -- large groups of people coming on these customer sites are certainly out there, particularly in Canada. So I think there's still a large buildup of opportunity in need, and we're going to see that this year, we think, and into next year. But I think it's going to become more normalized as we move through next year and into '23. But it's certainly not yet there where we are here in '21. Jim Ricchiuti: Got it. Last question, just rising costs. I mean we're hearing that from everyone. And I'm wondering, you've taken some pricing actions and whatnot. But I'm just wondering, how big a headwind is this for you guys? Alan McKim: I think that the supply chain disruption is having an impact on our business. Transportation, supplies, even steel drums, the driver shortage that we mentioned, cost increases across the board, those are the things that really have forced us to go back to our customers and raise prices. And I think customers appreciate the fact that they're seeing it in their own businesses that labor costs are going up, fuel costs are going up and so forth. So we're on top of that. I think we're doing a really good job of managing the profitability of our business as we know costs continue to increase. But just like last year, during the pandemic, we also were willing to give concessions to our customers when they needed it when they were going through the difficult times. And so we're -- I would say that we got our hands on the throttle there. Jim Ricchiuti: Okay. Congratulations on the results and the acquisition announcement. Alan McKim: Okay. Great. Thank you. Operator: Our next question comes from the line of Alexander Leach with Berenberg. Alexander Leach: Congrats on the quarter. Just a quick one from me. Can you explain exactly why it was more difficult to sort of tightly manage the spread under the prior structure with the sort of combination of the branch and oil business? Alan McKim: Yes. I would say that the business was much more decentralized, and the branches had 8 or 9 different lines of business to manage. And by basically splitting out the bulk products and services piece of our SKSS business, we really moved all oil-related activities, whether it be oil filters, oil -- base oil -- excuse me, blended oil sales, used motor oil collections, took all those things. And we're now able to offer those customers sort of defined pricing plans to meet their needs, even bundling things together, and just more closely managing those customers that otherwise might have had 8 or 9 different lines of business being provided to them by Safety-Kleen. I just think having that centralized focus, having a leadership team that's really driving that and really understanding what's going on in the market, particularly to do with the recycled fuel oil market, I just think we've gotten better at that now with the focus that we've now put on the business. Alexander Leach: Sure. And sticking with the SKSS business. Sorry if I missed this earlier, but can you just discuss the trends you've been seeing in the first few weeks of Q3? Has supply already begun to increase? Have the spreads narrowed at all? Has that process already begun in terms of the step down that you communicated earlier in H2? Mike Battles: Alexander, there's been no change in July. Operator: Our next question comes from the line of William Grippin with UBS. William Grippin: Just one quick one for me. Just wondering if you could talk about the extent to which you may have any remaining permitting risks around the new Kimball incinerator. And then what's already locked in? And what do you have left to do until you can start construction there? Alan McKim: We certainly have involved all levels of government and the local community in regard to our plan. And we wouldn't be announcing this if we hadn't felt very strongly that we have the support of both the state and the community there. So we're -- we've been out there for 25-plus years. We've got a wonderful team there, and that community has been very supportive. And I think we're hopeful that this -- since we've already permitted a very similar facility recently with the federal EPA, we should not have a problem. This is going to meet the new mac standards without question. Operator: There are no further questions at this time. I would like to turn the call back over to Mr. McKim for closing comments. Alan McKim: Okay. Thanks for joining us today. Our Investor Relations calendar remains very active in the coming months here and so -- starting with the Needham event actually next week. So enjoy the rest of your summer, and stay safe out there. Thank you very much. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.CLH Ratings Summary
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Clean Harbors Reports Strong Q4 Results & Outlook
Clean Harbors, Inc. (NYSE:CLH) reported its Q4 results, with EPS of $0.89 coming in above the consensus estimate of $0.68. Revenue came in at $1.12 billion, compared to the consensus estimate of $1.02 billion.
The company experienced strong top-line growth in Q4 driven by its HPC acquisition and robust demand across most of the business. However, margins contracted as cost inflation continued to increase.
The company provided its full 2022-year guidance, which came in slightly ahead of the Street expectations, and noted that it expects oil spreads to narrow following favorable demand and supply dynamics in 2021.
