Clean Harbors, Inc. (CLH) on Q4 2023 Results - Earnings Call Transcript

Operator: Greetings, and welcome to the Clean Harbors Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel. Thank you, sir. You may begin. Michael McDonald : Thank you, Christine, and good morning, everyone. With me on today's call are our Chief Executive Officer, Eric Gerstenberg and Mike Battles; and our EVP and Chief Financial Officer, Eric Dugas, and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. 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 cautioned not to place undue reliance on these statements, which reflect management's opinions all as of today, February 21, 2024. Information on potential factors and risks that could affect our results 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 today other than through filings made concerning this reporting period. Today's discussion includes references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of these 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. Let me turn the call over to Eric Gerstenberg to start. Eric? Eric Gerstenberg : Thanks, Michael. Good morning, everyone, and thank you for joining us. Our full year and fourth quarter 2023 performance underscores the role of our Environmental Services segment as the long-term growth engine for Clean Harbors. The strong core we have built through organic initiatives and strategic M&A continues to strengthen our sustainable business model with unique competitive advantages. These advantages include a portfolio of difficult to replicate assets, a diverse customer base, high-value services anchored by strong pricing as well as an outstanding and highly skilled workforce. As our ES results were up 2023 demonstrated we continue to drive increased efficiencies in areas such as labor, transportation and logistics, while capturing meaningful acquisition synergies as we advance our Vision 2027 strategy. Before discussing the quarter, I want to take a moment to recognize the valuable contributions and substantial efforts of our entire team in delivering a terrific 2023. To our employees, thank you for everything you do to make Clean Harbor successful. Turning to Q4 performance on Slide 3. Environmental Services capped a record year with an outstanding fourth quarter in its ninth consecutive quarter of year-over-year EBITDA growth. That concluded an exceptional 2023 for this segment, where we increased our annual adjusted EBITDA margin by 160 basis points. All of our ES businesses, Technical Services, Safety-Kleen environment, industrial services and field services, delivered growth in Q4 as demand for our highly trained workforce and unique asset base continues to be strong. SKSS fell short of our expectations in Q4. The market pricing improvements we saw in October faded as the quarter progressed. Volumes sold was a positive metric and increased significantly from Q4 in 2022 as the team worked hard to continue to grow its sales pipeline, especially with our blended and value-added products to offset weaker pricing. Mike will provide more detail on SKSS in his remarks. As we often do, I want to highlight our remarkable safety results. The team delivered a Q4 TRIR of 0.51, which resulted in a full year of 2023 rate of 0.63, the best safety performance in our history and far exceeding our annual goal. We can't say enough about the great work the organization continues to do around safety and how meaningful it is to all of our stakeholders. Turning to Environmental Services on Slide 4. Segment revenue increased 7% due to continued service growth, increased disposal volumes, solid pricing and the addition of the Thompson Industrial while EBITDA increased 16%, resulting in margin expansion of 190 basis points from the fourth quarter of 2022. In the quarter, as it has all year, our Safety-Kleen Environmental Services business led the way with 11% top line growth. Containerized waste services continued its strong growth trajectory stemming from sales initiatives designed to drive more waste into our network. Technical Services revenue rose 5%, led by pricing and greater year-over-year volumes into our incinerators, landfills and our TSDFs incineration utilization was 85% versus 84% a year ago. Average incineration pricing was up 7% in the quarter due to a favorable mix and pricing initiatives and for the year, incineration pricing was up 9%. For 2023, utilization was 84% as we conducted substantial repair work, including winterization at our Southern plants due to the deep freezes of the past several years. We continue to see a consistent flow of remediation and waste projects in the quarter, which helped drive a 24% increase in Q4 landfill volumes with the average pricing up 3%. For the year, landfill volumes and average price were both up 10% reflecting the growth in larger project opportunities we captured in the market in 2023. In addition, we have seen the pipeline for our unique total PFAS continue to grow. We believe we are the only company that can provide a fully integrated end-to-end solution to the market, which includes commercially scalable destruction. Despite no large-scale emergency response events, field service revenue was up 3% in Q4 through better cross-selling and leverage of our organization. Industrial Services revenue grew 8% in the quarter as it benefited from a strong fall turnaround season in the addition of Thompson Industrial. As I mentioned a moment ago, overall ES segment EBITDA was up for an impressive 16% to Q4, more than double our revenue growth of 7% as we leverage our facilities, fix assets and workforce. For the full year, the ES margin rose 160 basis points to 24.4%. we enhanced our margins, not only from pricing, but from our cost savings programs as well as our productivity and technology initiatives. In 2024, we will continue to seek innovative ways to apply AI analytics and greater automation to our business. For example, we are enhancing our proprietary wind system to minimize revenue leakage, eliminate our lower rental costs, apply more sophisticated pricing strategies and pursue sales opportunities more rapidly. Before turning it over to Mike, please turn to Slide 5 for an overview of our recently announced HEPACO acquisition. We believe that HEPACO will be a terrific addition to the company and contribute to considerable shareholder value in the coming years. It is a $400 million all-cash transaction that we currently expect to close in the first half of this year. HEPACO operates across 40 locations, 17 states and on an adjusted basis, generated about $270 million in revenue and approximately $36 million of adjusted EBITDA last year. It is an attractive deal that we expect will generate approximately $20 million in synergies after its whole year of operation, which would equate to a 7.1x multiple. The acquisition of HEPACO gives us access to additional markets and new customers as well as enhanced capabilities around railway and transportation responses. We look forward to adding in approximately 1,000 employees to the Clean Harbors family. We are confident that they will benefit from our deep knowledge of field service business, greater scale and career opportunities. Mike, Eric and I have visited with their team right after we announced the deal and we see a very strong cultural fit that should lead to a seamless integration. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike? Mike Battles : Thanks, Eric, and good morning. Turning to SKSS on Slide 6, after a promising start in October, following the September price increase, base oil and blended pricing began to shift the other way and grew more challenging as we moved through the quarter. As a result, SKSS revenue was 7% lower year-over-year in the quarter. The weakness in base oil and blended pricing was partially offset by greater volumes sold at both base and blended oil as well as a shift to charge for oil versus a pay-for-oil average a year ago for our waste oil collection services. SKSS adjusted EBITDA declined 14% in Q4, entirely related to the more narrow spread compared to last year and the pricing slowdown we experienced over the course of the quarter. Despite the lower year-over-year revenue, we maintained a healthy adjusted EBITDA margin of 21.7%. To feed our refineries, we collected 53 million gallons of waste oil in the quarter, the team worked diligently to secure gallons at the best possible price, while ensuring our plants had the feedstock they needed. As we've highlighted previously, one of our strategies for reducing the volatility of this business is to grow our blended volumes. Not only does blended oil generate more imminent dollars in base oil, it tends to be more stable because we're selling branded products such as motor oil and hydraulic fluid. In Q4, blended volumes increased by more than 60%. We intend to continue to focus on opportunities to sell a larger percentage of branded products going forward. Blended products sales accounted for 23% of volumes sold in Q4, up from 17% a year ago. We recognize that this business has faced challenges in 2023 as the market continued to adjust after an extraordinary 2022 and after a series of price declines and destocking by customers throughout much of 2023. Going forward, our strategy for SKSS will continue to center on affecting those areas within our control, including the price we charge for the collection of used motor oil, labor and transportation costs and re-refining production rates. We will continue to focus on the expansion of our blended products such as motor oil and hydraulic fluids. In 2024, we intend to increase sales of our blended volumes through both direct and wholesale channels. We are also moving ahead with our promising group free program we outlined on our last earnings call. We expect to launch this initiative in Q2. Turning to Slide 7 and our capital allocation strategy. At our Investor Day last March, we shared our 5-year strategy, Vision 2027, which outlines our plan to grow both organically and through acquisition. The foundation of that strategy is to drive margin improvement each year through economies of scale are a highly leverageable network of permanent facilities, unique assets and trained personnel. We will continue to lead to increasing -- this will continue to lead to increasing cash flow generation and value creation for our shareholders. On the M&A front, we evaluated a number of transactions during the quarter, culminating in the HEPACO agreement we announced earlier this month. We continue to see a healthy flow of potential candidates for both operating segments and will remain very active on the M&A front as we execute our Vision 2027. In terms of growth CapEx, the largest internal investment in our history is our new Kimball brake incinerator, which is on track to open commercially later this year. We expect the original design and build to cost $180 million to $185 million. Based on our ongoing conversations with customers about Kimball and in response to their future plans, we have elected to add several enhancements into the facility at an aggregate cost of approximately $15 million. These enhancements, driven by demand will include more direct burn base and additional specialized lines designed to handle certain types of high acid materials. These additions will enable that site to handle and process even more high-margin materials in containerized waste. We still anticipate that the new incinerator will commence operations late this year. To that end, we do expect to incur some nonrecurring startup costs related to Kimball this year. Since a onetime in nature, we likely will adjust the amount of our reported EBITDA. Difficult to estimate the exact amount today and it partly depends on our official launch date, but we know it will be several million dollars. We will report on that as we are closer to our commercial launch. We are also planning a second sizable capital project this year. It relates to our Baltimore site. We recently purchased a large parcel land next to our existing plant and we intend to invest and upgrade that property with an eye towards consolidating -- with an eye toward consolidation of our brand service offerings, adding more recycling capabilities for our network and creating a production line for containerized manufacturing servicing our entire network. The total cost of the real estate and site upgrades we intend to make will total approximately $20 million. We expect to ramp up activities at that location over the course of this year. I'll let Eric do speak to our debt structure and leverage, but I'd like to conclude by emphasizing that we continue to be bullish on our growth projects for our ES segment. We entered 2024 with -- we entered 2024 with considerable momentum in this segment. We expect the favorable market conditions, whether restoring infrastructure spend or regulatory trends to continue to support our profitable growth plans for 2024. Our backlog and dialogue with customers gives us confidence about demand this year. Our project pipeline is strong, our pricing strategies are working. Industrial Services coming off a record year, and we expect that business to continue to grow, and field services will greatly benefit from the addition of HEPACO once that closes. After challenging 2023, we see SKSS returning to growth and profitability in 2024 with market pricing appeared to have stabilized following a decline during the end of last year as well as a host of growth projects I outlined earlier. We have much to be excited about in both Environmental Services and SKSS. And with that, let me turn the call over to our CFO, Eric Dugas. Eric? Eric Dugas : Thanks, Mike, and good morning, everyone. Turning to the income statement on Slide 9. As Eric and Mike outlined, Environmental Services segment posted strong Q4 results to finish off a record year. Revenues across our service lines in ES were up from the prior year and the demand picture for our environmental service offerings remains strong. The profitable growth in our ES segment this quarter more than offset the decline in SKSS and resulted in a 14% year-over-year EBITDA growth for the entire company. Adjusted EBITDA was in line with our expectations at $254.9 million and up more than $30 million from Q4 a year ago. Our adjusted EBITDA margin in the quarter was 19%, up 150 basis points and driven by improvements in the ES margin that Eric Gerstenberg outlined earlier. Gross margin in the quarter was 31%, an increase of 70 basis points from a year ago. For the year, our gross margin was 30.7%. As we move into 2024, we are focused on executing several initiatives to drive greater productivity improvements and operational efficiencies, which we expect will continue to drive margin expansion. SG&A expense as a percentage of revenue was 12.4% in Q4, which is 80 basis points better than the prior year's quarter. For the full year, we also landed at 12.4% as we remain focused on managing SG&A head count and offsetting wage and other inflationary pressures. For 2024, we anticipate our SG&A expense as a percentage of revenue to be at a similar or slightly lower level. Depreciation and amortization in Q4 came in at $98.3 million. For the full year, our depreciation and amortization was $365.8 million, up from 2022, which reflects the Thompson acquisition and incremental amortization resulting from increased landfill volumes in 2023. For 2024, we expect depreciation and amortization in the range of $300 million to $390 million. Income from operations in Q4 was $147.3 million, up 16% from the prior year. For the full year, income from operations was $612.4 million. Net income for the quarter was $98.3 million, resulting in earnings per share of $1.81. For full year 2023, our EPS was $6.95 per share. Turning to the balance sheet highlights on Slide 10. Cash and short-term marketable securities at quarter end were $551 million, up more than $130 million from September. Our balance sheet remains in great shape. We ended 2023 with total debt of $2.3 billion, a net debt-to-EBITDA ratio of 1.9x and having no significant debt amounts coming due until 2027. Our overall weighted average pretax cost of debt at year-end was 5.3%. In December, we successfully completed an amendment to our term loan that lowered our borrowing rate by 25 basis points and representing annualized interest rate savings of nearly $2.5 million. In connection with the HEPACO transaction, we plan to add incremental borrowings to this term loan as part of our deal financing. Clean Harbors will continue to responsibly manage our leverage position and overall capital structure with an eye towards creating the highest overall return for shareholders over the long term and maintaining flexibility to ensure that we can respond when acquisition opportunities arise. Turning to cash flows on Slide 11. Cash provided from operations in Q4 was $278.9 million. CapEx net of disposals was $105.9 million, up from the prior year due to the investments in our incineration network, including Kimball that accounted for $25.4 million of our Q4 CapEx. In the quarter, adjusted free cash flow was a record of $173 million. For the full year 2023, net CapEx totaled $412.7 million, in line with our expectations. The Kimball incinerator accounted for $82.6 million of the full year spend. For the year, adjusted free cash flow was $321.9 million, up 11% in 2023. If you add back the Kimball spend -- excuse me, up 11% from 2022. If you add back the Kimball spend to that total, we would have exceeded $400 million of adjusted free cash flow. For 2024, we expect our net CapEx to be in the range of $390 million to $420 million. This level of spend includes approximately $65 million to complete the Kimball construction including the planned enhancements and approximately $20 million for the expansion of the Baltimore facility, which Mike discussed earlier. During Q4, we bought back approximately 211,000 shares of stock at a total cost of $33.2 million or an average price of $157 a share. For the full year, we bought back approximately 328,000 shares or $51 million of Clean Harbors stock. In December, our Board authorized a $500 million expansion of our repurchase plan. We currently have $554 million of authorized and available repurchases under this program. Moving to Slide 12. Based on our Q4 and 2023 results, along with current market conditions for both of our operating segments, we expect 2024 adjusted EBITDA in the range of $1.05 billion to $1.11 billion, with a midpoint of $1.08 billion. This guidance assumes no contribution from HEPACO. Once we conclude the regulatory process and close on this transaction, we will update our guidance accordingly. Looking at our annual guidance from a quarterly perspective, we're expecting Q1 adjusted EBITDA growth of 2% to 3% with our ES segment performance offsetting current market conditions in SKSS and higher corporate costs. Similar to 2023, some severe weather in January this year impacted our disposal networks, some branch locations and customers. Despite these challenges, we still expect to deliver a strong quarter of profitable growth in the ES segment in Q1. For full year 2024 adjusted EBITDA guidance will translate to our reporting segments as follows: in Environmental Services, we expect adjusted EBITDA at the midpoint of our guidance to increase approximately 5% to 7% from full year 2023. Demand for all of our service businesses remains consistently strong. In addition, demand for our disposal and recycling facilities continues to enable us to execute on our pricing strategies, capture more volumes and drive a more favorable mix into our network. For SKSS, we expect full year 2024 adjusted EBITDA at the midpoint of our guide to increase 6% to 8% from 2023 with a challenging year we had in 2023 and the continued uncertainty around global commodity markets, we are assuming some pricing pressures continue in our forecasting of this segment. Given some of the promising initiatives we have underway, such as our Group III project and increasing blended sales, we expect to hear substantial progress in this segment and towards greater long-term stability. In our Corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA to be up 3% to 5% this year from 2023. This reflects a full year of Thompson industrial costs, and rising expenses in areas such as insurance and wages and benefits, partly offset by our wide range of cost savings initiatives. For adjusted free cash flow, our expectations for 2024 is for a range of $340 million to $400 million or a midpoint of $370 million. As mentioned earlier around CapEx plans, we have some internal growth investments we are planning this year, starting with the approximately $65 million to complete the Kimball construction as well as the $20 million for the Baltimore expansion. If you add back the Kimball in Baltimore spend, the midpoint of our adjusted free cash flow guidance would be more than $450 million or over 40% of our current adjusted EBITDA midpoint expectation. In conclusion, Q4 was a great finish to a record year in our ES segment. Trends coming into 2024 in this segment remained favorable. We continue to see substantial demand across our network, not just within our incinerators with our TSDFs, landfills and recycling operations as well. We ended the year with steady volumes and a healthy backlog. Our positive facilities outlook is further supported by an encouraging level of interest across all of our services businesses. Within SKSS, the market appears to be stabilizing as we approach the summer driving season. Overall, we expect to generate profitable growth in both operating segments in 2024 and continue to execute against our Vision 2027 goals. With that, operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye : Looking at 1Q '24 specifically, I would love to understand a little bit better the segment expectations. I know historically, the company doesn't guide. But given the comments around whether and of course, the swing that we saw in SKSS this past quarter, I would just love to understand a little bit more and put any finer point on what your expectations are for each of those segments? Eric Dugas: I'll take that one. And as we just communicated, we see Q1 2% to 3% greater than last year. When you break that down by segment, obviously, kind of the momentum we're seeing in the Environmental Services segment, we continue to kind of expect that in 2024. As I mentioned in my prepared comments, we did still have some weather challenges in the quarter as we did last year. But I think with our pricing initiatives and other things we still see in that quarter, particularly a high single-digit growth rate kind of quarter-over-quarter, approaching that 10%. With SKSS, we entered 2023 last year still on the strong tailwinds of 2022. So Q1, as we look at SKSS for Q1 of 2024, down below last year, but it should pick up as we move throughout the year. Noah Kaye : Yes. I'm leery of doing math on the call. Yes, that gets me to a pretty steep drop in SKSS year-over-year, as you're suggesting. And so the thought is that as we get into the balance of the year on SKSS, maybe you can talk through the Group III initiative, the blended ones and kind of what the self-help looks like this year for SKSS, as I recall, you also had some production issues in the third quarter and lapping those should support as well. But maybe just help us understand some of the drivers to get to that 6% to 8% EBITDA growth. Eric Dugas: I'll start again and Mike, please pick up on some of the prepared comments here. Yes. Obviously, a little bit of a steep decline in Q1, as I mentioned. As the year rolls out, as we said, the Group III project does come in kind of in the summer time frame. When you kind of look at the cadence for the full year, we kind of see Q2 on the SKSS business, getting towards that flattish point on a year-over-year basis. And then as we move into Q3, Q3 last year in SKSS is really where we saw that big drop and so as we feel as we move into Q3, assuming prices remain where they are today, we should have a good year-over-year comp there. The last point I'd make before I let Mike add on is just from a blended sales perspective, great momentum kind of in Q4 from a blended sales perspective. We'll continue to drive those initiatives in 2024. And I think that will really help as we move into the summer driving season in the latter half of that season. Mike, anything to add? Mike Battles: So one thing I'd say on this is that it was a surprise to us in Q4 and really kind of all year, and when we put this in the guide, is a bit of a kind of a discount, spot discount to a Motiva posted for our Group II posted pricing. And that discount is not always there, but it will seem very, very wide in Q4. And so the growth rates as we go into 2024, the growth rates -- we're not assuming that kind of recovers anytime soon. And so when you look at kind of Q1 year-over-year, it is, as Eric said, a high teens, low 20 type of decline and so that kind of puts us a little behind the curve as far as getting to some growth for the year. We still want to grow as I said in my remarks, mid- to high single digits for the year, but that Q1 is still going to be a drag. And so we see it picking up recently, and that's great. But we're just going to start with a bit of a boost of headwinds going into the year. And on the Group III, that's been great. The file has been running. We're saving the plant up to run. That's a $3 million to $4 million winner in 2024. That's not a -- that's going to be great over some time horizon. But in 2024, it's pretty modest. The plants are running well. They have recovered quite a bit, but January was still tough on those plans as they were for the incinerator as recurred to preside his remarks. Noah Kaye : If I could sneak in one more question about the 80% of the business that's growing high single digits entering 1Q. You mentioned PFAS. Mike Battles: 87% -- Noah Kaye : Thank you for the precision. The commentary in the call mentioned PFAS. The total PFAS solution, and I think it was even in the release as well. Can you maybe just dimension for us what the PFAS-related revenues were in 2023? And what your thinking in 2024 could be? And how contingent that is on EPA action? Eric Gerstenberg : Noah, this is Eric Gerstenberg. I'll take that one. Our overall revenues in 2023 was in the range of $50 million to $70 million. And our pipeline went out that our pipeline continues to grow across our business with opportunities from customers trying to leverage everything that we can offer. And as we've said in the past, offering our total PFAS solutions is really around how we can provide sampling services, analysis of PFAS in groundwater as well as contaminated soils. How we can leverage our remediation team? how we can do drinking water and industrial water? and then provide really that overall commercially offering disposal through our landfills and our incinerators. So it's really the pipeline has grown probably about 20% to 25% year-over-year and continues to grow as we get our solutions out into the market and as things -- as talk continues out there. So a little -- a lot of continued opportunity there for our network. Mike Battles: We've talked a lot about. One last thing. We talked about PFAS over the past few years, and obviously, people have been waiting for it, and we're actually starting to see it now. And Eric's observation is about trying to provide a full PFAS solution, which is as far as end disposal, which is scalable and ready today, we're really excited about that. And as Eric said, that pipeline is very strong going into 2024. So more to come on that. I think there's a lot of good things we've been talking about for a number of years are trying to materialize, clearly. Operator: Our next question comes from the line of Tyler Brown with Raymond James. Tyler Brown : First off, just congratulations on the TRIR numbers. I know those are very important to you and obviously your employees. And I get that a safer workplace is very important for a variety of reasons. But Eric, is there any financial implications of a more consistent, call it, safety record? Is there any kind of impact on go-forward accruals at all? Or is that not the case? Eric Gerstenberg : Certainly, as we continue to lower our TRIR and perform safely across the organization, reducing risk and our insurance costs are evident as well. We focus a lot as well on our transportation compliance and how we reduce incidents across our network. So overall, there is as time continues to progress, and we continue to drive our safety and transportation compliance across our network. There is financial improvement that comes along with that. Mike Battles: Tyler,, the only thing I'd add to that, Eric, is absolutely right, but the challenge is those costs have gone up. So although we've had like less incidents and less injuries, the cost per is growing at a pretty healthy clip. And so that's been a cost kind of in our financial statements for the past few years, and it will be in 2024 as well. Tyler Brown : We've seen a lot of inflation insurance on the transportation side, you can talk about that at another time. But Eric, as a little -- just a question on the EBITDA bridge for '24. So can we just talk about some of the puts and takes? I get a little bit back to Noah's question, too. But I think at the midpoint, you're looking for a $65 million to $70 million increase, but won't just simply the Q3 incinerator and refinery issues not recurring, be something like $25 million of that $65 million plus you've got the base III initiative. I know we had a really, really tough weather back in '23. I know there's some here in '24. But just talk about the puts and takes. It feels like maybe something is working against you, that I'm not totally seen or are you just being conservative? Eric Dugas: Thanks, Tyler. Good questions. You're spot on some of the things you noted last year. I do think as we lay the guidance out there, there is a little bit of conservative baked in. We're seeing very strong demand. We're continuing to see that. But we are recognizing that there's a little uncertainty out there from an overall macroeconomic perspective, and we're trying to be a little bit conservative and recognize that in our guidance. I think when you talk about Q3, in particular, and some of the challenges we saw last year from the plant disruptions, first, I would say that the plants are up and running well. But we do have -- in the coming year here, we're going to continue to make some investments, some winterization type projects that we did last year as well and that are paying off for us right now. There's also some other incremental projects, kind of some 1- and 5-year type turnarounds that we have planned for next year. And so we do have to kind of build that in and that helps to kind of offset some of the uptick from the things that you mentioned. But when you look at the ES segment next year, we're going to continue, I think, to have strong organic growth I think that's a big piece of the guidance going forward. That's going to be in the tails of continued strong pricing initiatives and some of the efficiencies and things on the cost side that we're driving that I mentioned in my comments. You'll have a few more months of Thompson. And really, I think you will see some improvements from more time in the incinerators and facilities overall. I guess the last thing I mentioned just on the ES side is going back to the volumes, we're continuing to see really good volumes that don't necessarily need to go through our incineration network, right? So the Safety-Kleen branch business, tremendous revenue growth there this year. You'll see it in our financials. But a lot of that waste we can handle outside the incinerators through our TSDFs or other means. So plenty of room for growth there. So those are some of the big areas in ES. SKSS -- obviously, if you do the math, a rather modest growth profile next year, 6%, 7%, really that's growing based upon increased blended volumes. We do have the Group III and then some better running in some of the facilities, especially in the back half of the year. So those are the 2 segments and then corporate really kind of inflationary pressures as the business grows. So hopefully, that provides a little more color for you, Tyler? Tyler Brown : That's very helpful. Lots of pieces there. Just my last one here on the HEPACO deal. Can you just talk a little more about the $20 million of synergies, I guess. Did they direct much waste into your technical assets? Or is that an opportunity? Again, just kind of any more color on the $20 million, how quickly that comes? Eric Gerstenberg : Sure, Tyler. This is Eric Gerstenberg, I'll help to answer that. One of the big opportunities that we see with HEPACO is that they provided a national emergency response call center that they leveraged their branches on the East Coast, but also provides us for an opportunity to leverage Clean Harbor's branches on the West Coast of the U.S. So that is a large opportunity that we can penetrate our existing field service branches through the customers that they manage emergency responses for. So that's a big opportunity. There are also areas that we haven't had a lot of growth in like rail, some of the rail customers that they have and transportation that they have. So large opportunities to grow our businesses there and be able to leverage our people and equipment and their people and equipment and branches that they have that are in locations, geographical locations that we are not. So really a great team there, just an excellent fit. Really excited about a few meetings that we've had with their team and really excited about the complement of synergies that they will have to our network. Operator: Our next question comes from the line of Tobey Sommer with Truist. Tobey Sommer : This is Jasper Bibb on for Tobey. Looks like the incinerator and landfill price both accelerating year-over-year versus the third quarter. Is there anything that drove that beyond mix? And how are you thinking about the ability to hold disposal price in the '24 as, I guess, inflation more broadly seems to be coming down? Eric Gerstenberg : I'll take that one, Jasper. Just in terms of the pricing that we saw kind of accelerating from Q3 into Q4, part of that was driven by some of the planned disruptions we had in Q3 and just the utilization much stronger utilization, probably a better mix in Q4 drove that year-over-year for quarter-to-quarter. I think when you look into 2024, as I mentioned earlier, on the pricing front, given the demand, given the discussions we're having with customers, we will continue to price in a way that we can meet or even exceed a little bit of the inflation. I think last week, you saw some inflation figures come out. It's tending to be a little bit persistent and more persistent than perhaps we thought and we'll continue to price accordingly along with cost cutting. Forgive me, I forget the second part of your question there. Tobey Sommer : No, you covered both of them. Just wanted to ask another one on HEPACO acquisition. It seems like a fairly large asset for the field services space. Could you characterize for us like how fragmented is that market today? And how you might be thinking about the potential for revenue synergies there with additional consolidation? Eric Gerstenberg : Tobey, this is Eric. I'll take that one. So tremendous opportunities there with their revenue base, as we said, they did about $270 million of revenue. A lot of it was with customers that we did not have deep penetration with. They have branch locations that we are not -- overall, it's -- the field service market is pretty large over a $3 billion to $4 billion market that we're continuing to grow in. So their footprint overlaying with our footprint creates a lot of opportunity, but it's still a fragmented market that we have an opportunity to grow in. Tobey Sommer : And just to clarify, last one. Are some of the weather items that you talked about hitting the 1Q guide for SKSS? Or is that more of an environmental services impact? Eric Gerstenberg : Yes. I would say that's more environmental services related. The decrease that we had in January did impact some of our collections as well as our plant operations there. As we've talked about before, we did do a substantial investment in 2023 in winterizing one of our incineration trains down in El Dorado, Arkansas. We still have another one to do this year. So that one was impacted along with some of our Deer Park facility. So we -- it's largely environmental services. Operator: Our next question comes from the line of Jerry Revich, Goldman Sachs. Q –Jerry Revich: In my reserves, I’m wondering if you could just expand on the margin outlook for this year and the margin expansion that you’re targeting. Can you just talk about what proportion of that is driven by improved contract terms versus underlying pricing and the other moving pieces, if you wouldn’t mind fleshing that out, please? A –Eric Gerstenberg : Jerry, this is Eric. I’ll start. Our margin expansion is really driven by a number of things. Obviously, we drove pricing to make sure that we’re offsetting inflation. We also have driven a number of efficiency product projects, cost controls, externalizing, transportation and maintenance and rentals across that network. Really, in long-haul transportation, most of our long-haul transportation is all internalized currently. So that’s been a big impact to our margin improvements for routing, waste and managing it through our network. So the – when you look at the overall improvement in margins year-over-year, we continue to have a longer-term aspirational goal of getting to that 30% EBITDA margins in that business. And we think that we continue to have a path to get there. And that’s between cost efficiencies, routing, management of our facilities, how to leverage our relationships with our customers even better to manage all of their collective waste streams, we think we can get there. Q –Jerry Revich: And then can I ask you on the Safety-Kleen business? Obviously, we had some softer pricing over the course of the quarter, but you still put up really attractive margins this year at the trough of the cycle. Can you just talk about taking a step back in addition to IMO 2020, just the competitive structure improvement that you’ve seen in this market that’s driving such attractive economics at a point in the cycle where obviously, base oil pricing is not terribly attractive. Mike Battles: This is Mike. I think that the I’m glad you brought that point up, I think that $1 billion business or a $900 million business that is a 21% margin is a pretty good business. It throws off a fair amount of cash flows, and I think it’s very accretive to our business. So although we’re down a bit from where we thought we were going to be, I still think it’s very effective. And I think I really want to make sure the team understands that they did an excellent job of managing everything that they could control. There was, as I said earlier, a huge disconnect between the pricing and Group III base oil and the spot market that’s out there. So I do think that the team did a nice job of kind of managing what they could manage. Go hard on charge for oil, drive gallons into our refineries and the refineries produced high-quality base and blended oil. I think if you look at 2024, the blended oil has been much – has been a good story and we continue to drive that. We’re up 6% the are pretty small numbers from 17% to 24% but still a meaningful difference as far as our profitability. And I think as you go into 2024, we continue to grow that blended oil business. I do think that’s going to be a good growth driver for us as well as the group III, as we talked about before, as well as solving some of our production problems that we had in 2023. Q –Jerry Revich: And it sounds like the industry is acting appropriately in terms of charging for collections based on your prior comments. Is that right, Mike? A –Mike Battles: Yes, it’s always a battle. It’s always a battle to go and fight for that business to try to win that business, but we do think we’ve been able to drive that type of – drive from PFO to CFO is hard to do. I think the team did a good job doing just that. And without losing material [indiscernible] gallons. Operator: Our next question comes from the line of Jim Ricchiuti with Needham. Jim Ricchiuti : Mike, maybe just a follow-up on that last point. Do you have a target in mind that you'd like to see blended represent of the business looking out through '24? Mike Battles: Yes. I think that's it's a good question, Jim. I think that we talked a long time ago about switching the business around it. It's going to be a grind. I don't think in our guide, we had improving modestly. We don't have it going to 50-50, it's 24% in Q4, we have growing miles in through the course of the year. I don't have the set target in mind. I do think the 2 things we're trying to do is get more of blended oil and get more oil under contract versus spot pricing. And both of those things have helped -- will help drive the stability of that business going forward because it doesn't move as fast as base oil does. I don't have a set goal over a time horizon, but certainly, growth in that will help stabilize that business and drive more profitability into SKSS. Jim Ricchiuti : How much conservatism is built in, do you think, on the group III? I mean it sounds like you're assuming some modest contribution in '24. Presumably, that starts to scale going into '25. Mike Battles: Yes, I think that's a reasonable number. I think $3 million to $4 million, which I talked about earlier, I don't think that's a crazy answer. I do think it takes -- we have to do a lot of routing, a lot of routing software to ensure we're getting the right gallons and making sure we're filling our plants without causing a ton of transportation cost to make the math work. And so I do think that's a reasonable expectation for 2025, But I don't think it's overly conservative or overly aggressive. Jim Ricchiuti : And then just one follow-up just on HEPACO. I realize the acquisition hasn't closed yet, but I wonder when you talk about additional markets that this gets you into, deeper into customers that you don't get into as actively as the rest of the business? Or is it geographic and how predictable is this business? if you can give us some color on that? Eric Gerstenberg : Sure, Jim. This is Eric. I'll take that one again. So the -- when we look at the overlay of their branch network, as mentioned earlier, they have about 40 different branch locations and about 25 of those branch locations are in geographies that we firmly don't have field service branches. So a nice match there. Additionally, the one key market that they've been a big part of is providing support services, transfer services, emergency response services for large rail companies. And that's a great market for us to continue to build with the HEPACO team into our platform and provide large-scale emergency response field services as well as what we've already provided, which is the disposal services. So a nice network there. They also have done an excellent job of penetrating small emergency response work within transportation providers nationally. Even up into Canada, they've used a subcontractor network, particularly on the West Coast and up in Canada, which overlays perfectly with the branch opportunities we have. So a number of areas that really help our organization grow and work together. Mike Battles: The thing I'd add to that, Jim, is that if you think of urgent response, it's pretty lumpy, but it's actually not lumpy. They do many, many small scale emergency responses every day. Just like we did, frankly. And so that is a pretty stable business. Obviously, I can't tell when the next bill is going to happen, but I know there's going to be a lot to happen. And so when we give out the guidance for 2024, we didn't assume kind of a large-scale, a multimillion dollar type of project we never do. If those things happen, those are upside to the model historically. Whether that be the avian flu for us, whether that be the BP oil's bill, those are kind of upside to any model. We don't budget or guide assuming those types of large-scale responses. These are just normal run rate type of work to happen kind of every day at both the Clean Harbors business and the HEPACO business do. So although it sounds a little lumpy, it is not lumpy. Operator: Our next question comes from the line of David Manthey with Baird. David Manthey: First question is a general one on your end markets. So looking at the verticals over the past several years, [ tens ] and refining are up, manufacturing down. Maybe you could talk about current business conditions and what your expectations are for '24? And then in that important Chems vertical is incrementally natural -- incrementally lower natural gas better, like is $1.50 better than $2.50? Or is just low in general, low enough? Eric Gerstenberg : Yes, Dave, I'll start, and I'm sure the others will add in. But certainly, lower natural gas helps. It helps continue to facilitate more onshoring because the chemical manufacturing, manufacturing in general can help reduce their costs, and it makes it even better for them to continue to onshore. We're across all the verticals that we manage, and it's quite expensive, as you know. We have not seen any slowdown, even though we have a little bit of a trepid outlook to the industrial production slowing, the chemical vertical, the refinery business, the manufacturing that we've seen, the onshoring continues -- pipeline continues to be growing in every one of our business units supported by all those different verticals. So strength there across the board that we see. The chemical business as we mentioned in our script, we've added additional capital investment in Kimball. That's really around that chemical industry and how that's been growing and how it's spurred off additional waste streams. Our relationships with our customers have continued to grow more solid. They want to make sure that for all of their growth that they have reliable disposal capabilities, disposal assets and secured capacity. So that's all working together well with what our plan has been here. David Manthey: Okay. Not to belabor this point, but I'm wondering in terms of the natural gas, like in the short term, is there some linearity? Or are you just talking in general like if it's in a range of $1.50 to $3.50, that's low enough to get people to change behaviors on a long-term basis. I'm just wondering with natural gas down here, does that give you a tailwind over the next 3 to 6 months? Or is it not that? Is it more of a secular long-term relationship? Eric Gerstenberg : I think we view it, Dave, more as a long term. David Manthey: And then the second question, I think it was Eric Dugas that noted you've got a couple of 1 to 5-year turnarounds coming up and in light of that and just in light of the coming year, is there any indication you can give us on what your planned downtime schedule might look like, obviously, subject to change every year. But if we were to think about when some of these chunkier projects are going to happen, when should we think about those? A – Unidentified Company Representative: Yes, Dave, I'll start, and then Eric Gerstenberg will probably have a little color as needed. But I did mention a couple of projects. Overall, I think year-over-year, when you look at our downtime right now, we're forecasting a pretty flat downtime pattern. In terms of the large projects that I noted, I think right now, we're looking at Q2 is when it's scheduled kind of early on in Q2. Eric, I don't know if you want to add to that, but? Eric Gerstenberg : Yes, Dave, we have a pretty extensive project that we have to do down at our Houston incinerator and that project, it actually is going to be 8 years that we're going to be doing it. It's redoing our back-end wastewater treatment system, which supports both the incineration trains. So we look to do that. We're going to be starting that project in early Q2. Team has done an awesome job of planning it out, and we have a good plan in place there. And so we'll be executing on that in the second quarter and getting that behind us, along with some additional air pollution control and winterization projects. Operator: Our next question comes from the line of Michael Hoffman with Stifel. Michael Hoffman : Jim, you're somewhere there in the background. I know you are. The seasonal turnaround business, how do I compare that year-over-year? That $2.5 billion or $2 billion of revenues before HEPACO, sort of $1.4 industrial maintenance services and cleaning and $600 million is field services. How do I think about that $1.4 billion? What's that activity look like? Eric Gerstenberg : We actually think Michael or look at this year as a stronger industrial turnaround plan up in Canada. A lot of that their turnarounds didn't happen in 2023. So we have a really strong pipeline up in Canada. U.S. overall, pretty well flat although seeing some early momentum here as we go into March of the staffing that they need to support their turnarounds in the U.S. side. So overall, we would say that the turnaround season, our turnaround in 2024 seem to be incremental in our industrial business. Michael Hoffman : And then when I think about field services, correct me if I'm wrong, and about $100 million is remediation stuff. But the rest of it is response to lots of little things. How does the HEPACO business look like to like? Is that going to be response to lots of little things? That's sort of the same thing. It's just a lot of small little 5, 10 grand type of cleanups and they happen year in and year out. Eric Gerstenberg : Yes, Michael, that $600 million is independent of our remediation work that we do. Remediation is above and beyond that $600 million. It is a lot of continuous emergency response, small in scale. We didn't have a large-scale emergency response event, as you know, in 2023. So it's routine services. We support a wealth of utilities throughout the country. Utilities can be -- the work there can be driven by weather events across the board. But it's happening, it's continuous. It's repeatable. And so continued growth there as things get more and more turbulent with weather across the country. Mike Battles: The only thing I'd add to that, Michael, is that HEPACO very similar. We met, as Eric mentioned, now with the team a couple of times now, and the business is very similar to kind of our business. They do have as Eric noted in his prepared remarks, a good focus on rail and transportation response services. That's an area where we think we can really leverage and drive going forward. But I think that it is a -- I think it's very similar as far as the day-to-day small still side of the road, off we go. Michael Hoffman : Switching gears, SKSS where are you in recovering the spread? I get if base oil prices move sharp and quick there's a lag to getting the spread corrected. But where are we in the recovering of the spread where you can adjust the front end. So now you've got the spread back in line. Mike Battles: We're working through that. I think that we had -- we're guiding in Q1, as we got a question earlier about Q1 guide for SKSS that we're in the middle of doing that kind of as we speak. And I think that gets back to normal as you look at kind of Q2 and the rest of the year. Michael Hoffman : And then can you just -- what's the interest expense supposed to be in 2024? Mike Battles: 120-ish? Give me 1 second to find that number exactly, Michael. Michael Hoffman : While that's happening, did I do my math correctly on the run here, midpoint of guidance, SKSS to be 185, segment EBITDA, ES would be 1170 and corporate overhead is about $275 million. Mike Battles: You're definitely in the ballpark of that. The midpoint is $115 million to $120 million on the interest expense there. Yes, really just kind of the rollover of some higher interest costs, higher interest rates -- Michael Edward Hoffman Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Group Head of Diversified Industrials Research And then not to belabor this, but shouldn't we think about SKSS more about dollars of profit versus a margin because it's a spread business. Mike Battles: Totally agree with that, Michael, I think that it's just -- we always -- that strong all year, and I think that, that hardens still pretty good. That's why we made the observation. Michael Hoffman : I just want to make sure I'm not trying to chase revenues as much as I'm trying to chase the quality of the operating leverage. Mike Battles: That's right. Operator: Our next question comes from the line of William Grippin with UBS. William Grippin : My first one, sorry if I missed it, but what are you assuming in the guide for 2024 for the new incinerator and then what do you think that could be at the full run rate, just given the enhancements you've discussed here? Eric Dugas: Yes, sure. I'll take that one. This is Eric Dugas. So in our guide, as we said, we expect to start the plant up in late Q4. In the guide, there's really minimal kind of EBITDA given the expectations. One thing we did talk about in Mike's prepared comments, is the fact that we will have some drag for start-up costs and things of that nature here in Q4, really depending upon the timing -- excuse me, in 2024, depending on the timing of hiring folks and the ultimate kind of start-up of the plant. So we'll talk about those going forward. Certainly don't expect them to be more than $10 million, probably $10 million or less when we talk about those things. And like I said, we'll talk about it going forward. As you roll out the new incinerator and you think about long term, we would expect, and I think we stated this before, the plant will be able to generate roughly $40 million of EBITDA when it's fully turned on based upon today's rates. Again, this year, kind of minimal. Next year, we expect to ramp up, Eric, maybe 25, 000 to 30,000 tonnes, so probably halfway there and then have the thing be at full capacity kind of in 2025 at that run rate I just mentioned. A – Unidentified Company Representative: Still in the 2025, 2026 -- capacity of 50,000 to 60,000 tons. William Grippin : Got it. So that $40 million still holds just even with the additional investments you discussed? A – Unidentified Company Representative: Yes. It all proves it all planned. William Grippin : On the Group III initiative here, how are you thinking about that? Is it potential margin expansion opportunity? Or incremental EBITDA. And I know you talked about, I think, $3 million to $4 million here in 2024. But obviously, as that ramps, just curious what you see as the opportunity there? And then how are you seeing competition for the higher-quality UMO that you’ll need to feed that plant. Mike Battles: Yes, William, I’ll answer that. The Group III is – it doesn’t take a lot additional effort to collect higher quality UMO. The plant runs as it always does. There’s no incremental investment needed. It’s really more of a technology and ensuring that we get the right UMO gallons just to fill our plan. There is some competition for that. There’s always competition for high quality UMO. I don’t think that’s going to be a gate to our growth. We do think that, that Group III does provide anywhere from $1 to $2 of incremental profit as we look at this business going out. How this ramp is really kind of up to us and getting kind of some self-help using a sell-side terminology effort before that is trying to get those plans kind of segregated [indiscernible] once you start a plant in Group III, you really can’t start going back and forth. It takes a huge amount of cleanup work to kind of get that plant kind of up and running to run Group III. And once you start Group III, you really can’t stop it. So we want to make sure that our systems and processes work well before we start expanding that. So that’s going to take some time. That’s going to take some time. But the gallons are there. We certainly have the plans that can do it. We know how to do it. We’ve done some pilots, as we talked about back in the Q3 call. They worked well. We just got to systematize it better because we just can’t – we just can’t do it in a pilot forever. So that’s going to be 2023’s exercises, 2024’s exercise, excuse me, it’s going to be to really systematize this so that we can make sure we’re consistently picking the right talent, keep the plants running to keep the plant in Hampshire as we go forward to other plants to produce Group III. Eric Gerstenberg : I think just to add to that, William, just overall this year, we look to convert anywhere from 4 million to 6 million gallons to UMO to good quality Group III. Over the long term, we’ve really identified about 20 million to 25 million gallons of our collection – our current collections that can be segregated, properly managed properly through the right re-refinery material and produce at Group III. Operator: Our final question comes from the line of John Mazzoni with Wells Fargo. John Mazzoni : I'll say for a really quick one. Just in terms of the kind of AI analytics and the technology. Could you talk about what really -- what inning we're in and kind of opposed from this proprietary, say, wind systems or other types of like monitoring. Is there a longer term Internet of Things opportunity? And again, if this is kind of early days, it would be just helpful just to frame kind of what you're looking at and what the kind of evolving landscape could be? Mike Battles: Yes, John, I'll start. This is Mike. I'm glad you asked the question. I think that AI -- we've done a lot over the past few years, we've done a fair amount of robotic process automation, whether that be invoices, whether that be billing, whether that be vendor management. And now we're using it around profiling, around programming. I mean I do see it internet of things coming, but I think we're getting a lot of bet already today around RPA and then ultimately in AI. Have we done generative AI and done all that. I think we're still working on that. But I do think that the organization is in front of the curve, not behind the curve around our adoption of RPA and AI. And I'm really excited given the size of the company and the scale of the company and the need to kind of get there, we have to stay in front of that. And we continue to make substantive investments in IT and AI to drive that type of growth going forward. Operator: Mr. Gerstenberg, I would now like to turn the floor back over to you for closing comments. Eric Gerstenberg : Thanks for joining us today. Management will be participating in several upcoming IR events this quarter, starting with the JP Morgan High Yield Conference next week and then the Raymond James conference the following week. We look forward to seeing some of you at these and some of the upcoming subsequent events after that. Thank you. 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.
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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.