Clean Harbors, Inc. (CLH) on Q2 2022 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Clean Harbors, Inc. Second Quarter 2022 Conference Call. . 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 Chairman, President and Chief Executive Officer, Alan McKim; EVP and Chief Financial Officer, Mike Battles; President and Chief Operating Officer, Eric Gerstenberg; 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 are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, August 3, 2022. Information on potential factors and risks that could affect our 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. 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. With that, I'd like to turn the call over to our CEO, Alan McKim. Alan? Alan McKim: Thanks, Michael. Good morning, everyone, and thank you for joining us. I'd like to start by talking once again about safety. It's a critical metric for us and our employees that is often underappreciated by investors. For customers, it's one of the most important numbers that we deliver and can oftentimes decide who wins in a competitive bid. For 2022, we challenged the team with an ambitious goal of delivering a total recordable incident rate, or TRIR, of under 1 for the year. Through June 30, we are currently at 0.82 and in a good position to achieve that milestone for the first time in our 42-year history. Our level of safety far exceeds anything that our peers are delivering and is a competitive differentiator for us. The team is doing a phenomenal job this year. Turning to Q2 financial results on Slide 3. We have far -- we far exceeded our guidance for the quarter on the strength of both of our operating segments, each of which was a great story to tell. I'll let Mike walk you through the specifics of our financials, but I want to focus on 4 key takeaways from our results this quarter before going through the segments. First, demand for our services, particularly our scarce disposal assets, has never been higher. As U.S. manufacturing continues to flourish, we are processing more volumes of high-value waste than ever before, largely due to partnerships with companies like 3M, who closed their captive incinerator earlier this year. And other captives are also in the final stages of determining whether they will shut down and outsource. Second, HydroChemPSC, now branded as HPC Industrial, which includes our legacy Industrial Service business, is proving to be a great acquisition. The deal elevated our Industrial Service offerings, provided us with an impressive set of assets and talented employees, and gave us a market leadership position. While we still have work to do to capture all the synergies available to us, the cultural fit remains strong and we are excited about the long-term prospects for this business. Third, all our service businesses, whether the Field Services, Safety-Kleen Environmental, our retail or energy services, are on a positive trajectory. While our organic growth results were impressive this quarter, we believe they could have been even higher if the labor market weren't so tight, and we could have hired more and faster. And lastly, the rise in our Safety-Kleen Sustainability Solutions profitability to record levels is not transitory. While we are benefiting from a historically wide spread, many of the favorable market changes are long-lasting in nature. For example, the positive impacts of IMO 2020 are permanent. And as ESG becomes more prevalent, we are seeing interest in our sustainable base oil and blended products grow exponentially. We expect to command a premium for our green products in the future. Years ago, we were forced to discount our base oil output to move volumes. Those days are long gone. Overall, in an inflationary and supply chain-challenged environment, our team executed exceptionally well to meet the record demand for our services through effective pricing, cost-reduction programs, process improvements and best-in-class industry performance. Turning to segments on Slide 4. Environmental Services grew 51% in Q2. Approximately 60% of that growth was generated by the addition of HPC. While the remainder of the results of increased disposal recycling and service demand, incineration utilization was 90% and average incineration pricing increased by 18%. At the same time, landfill volumes rose by 36% from a sizable pickup in remediation and waste projects. We capitalized on an extensive spring turnaround season in our Industrial Services Group, while Field Services grew 35% through a steady stream of emergency response projects and the addition of HPC's utility business. COVID decon work generated $5 million in the quarter, about half the size of a year ago. Safety-Kleen Environmental also grew 21% in Q2 with healthy demand for its core service offerings. Looking at our Environmental Service segment profitability. Adjusted EBITDA rose 53% in Q2 on the higher revenue, supported by our pricing efforts to offset inflation, coupled with cost reductions and technology investments to enhance our overall productivity. Segment margin expanded by 40 basis points from a year ago and more than 500 basis points on a sequential basis from Q1. If you exclude HPC, which has not even hit its full stride in terms of capturing synergies, margins were up 250 basis points from a year ago. Moving to Slide 5. Revenue in our Safety-Kleen Sustainability segment was up 31% in Q2 on the back of higher pricing of our oil products versus a year ago. Adjusted EBITDA rose by more than $30 million or 53%. We continue to maximize our re-refining spread by carefully managing our collection costs on the front end and capitalizing on pricing and market demand on the back end. Waste oil collection volumes were up again in the quarter as we gathered 60 million gallons at favorable cost levels, up from $57 million a year ago. Our sales of blended products and direct volumes came in as expected in the quarter given the ongoing additive shortages in the market and the profitability that we're generating on our base oil sales. The value of our base oil also continues to rise not just due to industry conditions but the recognition of the quality, scarcity and reliability of our re-refined products. In conjunction with that view, we recently launched our Clean Plus brand to really fully capture that value. Turning to Slide 6. We continue to evaluate opportunities to execute on all elements of our capital allocation strategy. On the M&A front, we completed a bolt-on acquisition late in the quarter of a vacuum gas oil re-refinery and waste oil collection business based primarily in Georgia and Florida. This acquisition will not only generate additional production for us, but will reduce our overall transportation cost by providing a local outlet for the waste oil we collect in the Southeast U.S. Part of our strategy also includes divesting businesses that we believe are outside of our core focus. In Q2, we sold non-core Western Canadian assets that were part of our legacy Oil and Gas segment for proceeds of approximately $18 million. Given the unique nature of these assets and a limited crossover with Clean Harbors core services, we determined that this business would perform better under new ownership. From a CapEx perspective, the build-out of our Nebraska incinerator remains on plan and on schedule, and that substantial investment will bring 70,000 tons of needed capacity into the market in early '25. In the interim, we are continuing to make investments around our expanding throughput and in various parts of our disposal recycling network to facilitate our growth. And this year, we're adding a considerable amount of landfill cell capacity. Mike will touch upon our debt and share repurchase program in his comments. But let me conclude by saying that we see no indication of the trends that supported our stellar Q2 results slowing in the back half of '22. Our network of disposal and recycling assets remain in high demand, and that demand should accelerate faster in the years ahead through infrastructure spending, strict enforcement of U.S. and Canadian regulations, captive incinerator closures, a robust project pipeline and reshoring of multiple industries. We will continue to invest in and grow our network in order to meet this increased demand. Within our service businesses, we are continuing to hire as rapidly as possible to meet the demand and to facilitate additional growth. For SKSS, our refining business is well managed in all phases from the collection to the production to sales. There's been a paradigm shift in this business over the past 2 years since the implementation of IMO 2020. In addition, our sustainability products continue to gain traction with our customers. So as we move through the back half of '22, we will continue to leverage our superior systems and processes to drive margin improvement like we've seen in the first half of the year. We have an industry-leading executive team and focused and fostered a culture of accountability to optimize our performance. We expect to deliver record top and bottom line results this year along with a robust free cash flow to support our capital allocation strategy. So with that, let me turn it over to Mike Battles. Mike? Michael Battles: Thank you, Alan, and good morning, everyone. Let's start with our income statement on Slide 8. Revenue increased to a record $1.3 billion in the second quarter. Of the $430 million increase from last year's second quarter, we estimate that approximately $210 million is related to HPC. Excluding HPC and currency impacts in both periods, our revenue grew by approximately 25% on an organic basis. Adjusted EBITDA was 65% higher than a year ago, coming in at $309.1 million. That equates to a margin of 22.8%, a 250 basis point improvement year-on-year. We delivered that record margin performance with improvement in our gross profit and strong controls over SG&A costs. Gross margin improved 50 basis points to 33.8%, which speaks to our intelligent pricing and the productivity improvements Alan touched on. SG&A expense as a percentage of revenue improved by 190 basis points from a year ago to 11.5% due to leveraging revenue from HPC and eliminating or reducing a range of non-billable costs. Despite inflationary pressures that remain pervasive, SG&A on an absolute dollar basis was up only $31.5 million on approximately $430 million of additional revenue, which is fantastic. For the full year, we now expect SG&A expense as a percentage of revenue to be approximately 12%, which is substantially below our 2021 level. Depreciation and amortization in Q2 increased as expected to $87.9 million, reflecting the addition of the HPC assets. For 2022, we now anticipate depreciation and amortization in the range of $335 million to $345 million. Income from operations in Q2 increased by 92%, reflecting our sizable revenue growth, combined with our efforts for across-the-board margin improvements. Turning to the balance sheet on Slide 9. Cash and short-term marketable securities at quarter end were $415 million, flat with prior year. We ended Q2 with debt of just over $2.5 billion. Leverage on a net debt-to-EBITDA basis has now declined to approximately 2.6x after being north of 3x the start of the year. Based on the midpoint of our new 2022 EBITDA and free cash flow guidance, we expect to reduce our leverage to below 2x by year-end. Our weighted average cost of debt is currently 3.84% with about 70% of our debt at fixed rates. Even with the recent rate hikes, we are confident that we are in good shape from a debt perspective. Turning to cash flows on Slide 10. Cash from operations in Q2 was $170.6 million, in line with our expectations. CapEx net of disposals was $76 million, up approximately 60% from a year ago as we've added HPC, made progress with our Nebraska incinerator and expanded cells at several of our landfills. The new incinerator accounted for $9 million in Q2 and approximately $14 million year-to-date. We now expect that to be in the range of $45 million to $50 million for the full year, slightly ahead of our previous range as the build-out is proceeding well. Adjusted free cash flow in Q2 was $94.6 million compared with $114.6 million in Q2 a year ago due to higher CapEx previously mentioned and the expansion of working capital related to the growth of the business. For Q2, we now expect net CapEx to be in the range of $320 million to $340 million, up slightly from our previous guidance due to the increase in our Kimball -- in our 2022 Kimball spend and inflationary costs for supplies and vehicles. During Q2, we bought back 335,000 shares of stock at a total cost of $30 million. We have approximately $120 million remaining under our existing buyback program. Moving to Slide 11. Based on our outstanding second quarter results and current market conditions for both operating segments, we are substantially raising our 2022 adjusted EBITDA guidance to a range of $975 million to $1.005 billion with a midpoint of $990 million. Looking at our guidance from a quarterly expected perspective, we expect Q3 adjusted EBITDA to be approximately 50% higher than what we posted in Q3 of 2021 due to HPC's contribution, continued strong demand in the ES segment and increased SKSS segment profitability. Here's how our revised full year 2022 adjusted EBITDA guidance translates to our segments. In Environmental Services, we now expect adjusted EBITDA at the midpoint of our guidance to increase approximately 38% from full year 2021. We will benefit from volume growth across all our core lines of business and the addition of HPC. We are offsetting the impact of inflation with the implementation of our comprehensive pricing strategies and enhancing our profits and margin through a myriad of cost-reduction activities. For SKSS, we now anticipate full year adjusted EBITDA at the midpoint of our guidance to increase approximately 35% from 2021. Given the current marketing conditions, these improvements we have made in that business and the initiatives we have underway, such as Clean Plus, we are not expecting our spread to narrow much in the back half beyond typical seasonal slowdowns. In our corporate segment, at the midpoint of our guide, we now expect negative adjusted EBITDA to be up approximately 10% from 2021, a slight increase from previous guidance. The year-over-year increase is largely due to addition -- the addition of a full year of HPC corporate cost and wage inflation, offset by lower severance and integration expense compared with a year ago. Based on our free -- our first half free cash flow results, working capital assumptions and revised adjusted EBITDA guidance, we are also raising our 2022 adjusted free cash flow to a range of $310 million to $350 million or a midpoint of $330 million. As a reminder, that range includes the significant investment in Kimball. Excluding that investment, our adjusted free cash flow midpoint would be approximately $380 million this year. In closing, I share Alan's enthusiasm about our growth prospects for 2022 and beyond. I talked about Clean Harbor's resiliency in our Q1 earnings call. I believe that characteristic is a hallmark of our organization, evidenced by our profitable growth trajectory and consistently strong performance. We are a critical vendor and partner for our customers. And for many of them, we serve as their sustainability solution. I personally remain very bullish about both our operating segments even in the face of inflationary pressures. With that, Christine, please open up the call for questions. Operator: . Our first question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: These are some pretty incredible results. So congratulations to the team on this. And I would like to maybe start with picking up on some of the comments you made around the outlook. And Mike, your comment around resiliency, I think, is something that a lot of investors are trying to wrap their heads around right now. We hear a lot of commentary broadly about an economic slowdown, decelerating manufacturing indicators. And it looks like for your business, I mean, all the lights are green at this point. So can you talk a little bit about what gives you confidence in the sustainability of some of the trends in Environmental Services into the back half and potentially beyond? Alan McKim: Noah, maybe I'll start. This is Alan. I think the company has grown through many recessions and passed through many recessions and really have tried to take advantage of the opportunities that those downturns present and whether it's looking at M&A or it's expanding geographically to continue sort of growth and keeping our top line going and our profitability going. So I think from our experience going through all those downturns in the past, I think we feel really confident in our ability to deal with whatever gets thrown at us from a slowdown standpoint. But I think the growth that we're seeing with expanding manufacturing, with on-shoring, I think is quite significant. And I think we're seeing it in our volumes coming into our plants. When we look at our deferred, our deferred, Eric is up again. You might want to speak to that backlog that we have. Eric Gerstenberg: Yes. We continue to have a very strong backlog of deferred inventory. Our bulk volumes have continued to grow. Our project business is up. And across the board, as you know, we have a very, very diverse customer base. And that customer base has been spinning off volumes into all of our plants, not just our incinerators, our recycling plants, water treatment plants, our landfills. All volumes of waste and flavors have been increasing. And so very strong outlook going into the future here. Michael Battles: Yes. No, I also say that there's strength in regulatory enforcement. We've certainly seen that in the first half of the year. And I don't see how that changes going forward. So all those 3 things: Alan was talking about reshoring, Eric talking about our pipeline and the high house waste streams that we take and the increased regulatory enforcement, all kind of bode well regardless of what happens in the market. And as Alan said, he's been doing this for 42 years. He's seen plenty of recessions, and we always come out at the other end stronger. Noah Kaye: Appreciate the commentary. And then I just want to pick up on your comments around SKSS product pricing and potentially being able to price that at a premium to the market. I guess, can you give us some additional color around that? Is that something you're seeing currently? Do you see that happening more around base oils or blended products? Just help us understand what exactly you mean by the level of pricing and the timing around pricing at a premium. Michael Battles: Yes. No, this is Mike. We certainly see the early innings of this. I mean we came out with a new brand. We're getting a lot of traction in the marketplace. As Alan said, the days of discounting our base oil are kind of long gone, and we're actually pricing that at or above. And there's more work to do there. I mean, I think people have to understand that, that the sustainability nature of it and kind of how we can provide kind of documentation of sustainability and energy savings to our customers. But that is just -- I see that's a boon for the long term, not just here in Q3 and Q4. Noah Kaye: Right. So just to confirm, you're pricing base oil now at or above the market? Alan McKim: I would say we're probably at market now, whereas we were discounting quite a bit. I also think that we've put together a better logistics plan to manage the business in such a way where we're not held somewhat captive. If our plants are full and we need to move product, we're now able to reposition product to get closer to the market. And I would just say, manage the overall supply chain much better instead of discounting to move products. And so I think those 2 factors have allowed us to keep our pricing relatively at market pricing right now, and we think we can even do better than that. Operator: Our next question comes from the line of Tyler Brown with Raymond James. Patrick Brown: Congrats on the quarter here. On ES, Alan, is there any way you could parse the 18% incinerator pricing between, call it, core price and mix? It seemed like mix was a good guy. Eric Gerstenberg: Yes. Tyler, this is Eric again. I'll answer. The -- as you know, all of the captive incinerators continue to be our customers' as well. And we've had strong partnerships with them just like the evolution of the 3M partnership. So we see other captives that are closing here shortly, and we work in conjunction with them to handle some of those difficult waste streams. So that pipeline continues to be strong. Patrick Brown: Okay. Yes. That's very interesting. Okay. Just shifting gears over to SK. So I want to kind of focus on the part that you have a little bit more control over on the front end. So you mentioned IMO is seemingly having an impact. And I don't know exactly how to ask this question. But basically, if you looked at history, I mean how much better is your PFO tracking versus what you might have expected at this level of base oil in the past? And again, I don't know if that's a great way to ask the question, but I'm trying to understand how much of the better spread is based on some of your front-end actions. Alan McKim: Sure. So we bought Safety-Kleen in 2012. And as you know, we were doing -- they were doing about $150 million in the following year, probably close to $70 million. So we really experienced a significant downturn in base oil pricing as a result of the disconnect that happened back then with crude oil. And so honestly, looking at Safety-Kleen 10 years later, we're probably $500 million EBITDA or better. And I think what we have seen is our ability to manage the spread, our ability to manage particularly what we pay for oil on The Street. And I would say that sitting here, we're probably paying 1/3 less than what we would have been paying when we first bought Safety-Kleen back in early 2013. I would also say that IMO 2020 really has increased the demand on diesel. I think there has created a surplus in bunker oil and a surplus in subsequently used motor oil. And so the market is long. We anticipate that continue, and that's why we think there's really been a shift here, and we don't anticipate that changing. The many ships have put scrubbers on. But we really think that continuous demand on marine diesel is going to continue to play out real positively for us in the future. Patrick Brown: Okay. Yes. That's extremely helpful. But on the flip side, on the back end, so I'm just going to look at this really simply. I'm a pretty simple guy. But basically, you're selling some 140 million gallons of base and blended oil annually. You've got the addition of Clean Plus. You're trying to help the market understand the green aspects of re-refined oils. So basically, the idea is that should help you improve your price realization versus, call it, the base oil index. Basically, you can't control base oil because it's a commodity, but you can improve your "spreads" to that index. Is that kind of a good way to think about it conceptually? Alan McKim: Yes. Certainly, as it purely relates to base oil, but our real opportunity here is to continue to grow our blended business where we even have a better margin than our base oil margin. And we've really been constrained over the past 2 years with additives. We even had a recent force majeure because of the flooding out in St. Louis, for example. So additives has been a real problem, not only for us but for the industry, which has curtailed demand to some extent for our base oil, but also our ability to actually manufacture the necessary blended oil that we want to sell and that we have a demand for. And so we believe we'll continue to grow our direct and our indirect blended materials and really branding that as a green product, we think we will have a premium margin because of that side of the business. Patrick Brown: Okay. Excellent. My last one. Mike, did the Georgia re-refinery closed this quarter? It appears maybe it did, but how much capacity does that plant have? Eric Gerstenberg: Capacity is 18 million gallons with potential to expand. Michael Battles: And it did close in Q2 -- late in Q2, Tyler. And Tyler, it's 150 million -- we sell 150 million gallons of oil a year. Patrick Brown: Plus the 18? Eric Gerstenberg: Exclusive of the -- 18 is an inbound Uomo number. We're making BGO with that plant down there. Operator: Our next question comes from the line of Larry Solow with CJS Securities. Lawrence Solow: Congrats as well on a fabulous quarter. I guess the first question, Alan, maybe just on the environmental piece. We've all been worried about sort of the sustainability on the SKSS. But an amazing quarter and you've listed a host of things that sounds like your visibility, at least through the end of the year for the margin improvement, is strong. And it probably looks -- points to even an improvement in margins as you just -- with synergies from the large acquisition you made. But just going forward, I think there's still concerns that maybe some of this is not sustainable. Maybe you had like this perfect storm going on. And as the economy slows over the next couple of years, just trying to play devil's advocate. I know you listed a whole bunch of things that will offset this onshoring PFAS infrastructure bill. But do you have any concern that just a general economic slowdown will inevitably lead to some slowdown in your business? Michael Battles: Larry, I'm going to start then Alan will jump in. So first of all, when you think about the ES business, we talked about last quarter, the ES margins, as we look at the year, year-on-year will be flat to prior year. We see that given the strong performance here in Q2 and our view of the back half of the year, we think that's going to be up 80, 90 basis points year-on-year. So when the dust settles on 2022, we think those margins will be up sustainably from 2021, which were an all-time record, just so people kind of get their head around that. The -- and so where we go from there, I think the pipeline remains incredibly strong. We had a quarterly operating review last week, and we kind of asked that question less than 6 or 7 times. And everyone kind of said, "Pipelines are really very robust." And they -- those go out well past into 2023 and beyond. So again, I'm really very bullish about kind of our long-term view on that. And we talk about cost-containment activities. I mean the list is long, and we're building a new list. And so that list will continue -- and that's part of our culture. That's part Clean Harbors. That's when I talk about resiliency, that's what you see. And so that really is kind of what we're working on right now because we know that's going to be challenging. Lawrence Solow: Absolutely. Okay. And just switching gears on -- just on SKSS. I know the Georgia facility -- the small or the 18 million gallons you added, it sounds like a nice incremental purchase there. What are your thoughts about more expansion on that side? I know you guys took a shot at some of the Vertex assets last year. Are there still things -- are there still assets out the re-refineries that you guys are looking at? And is that -- I would think of possible additional acquisitions that you're focused on. Is that a fair statement? Alan McKim: I think clearly, there's some opportunity in the M&A space, certainly. And I think there's also opportunities to expand our existing plants. Eric, you might want to speak for that. Eric Gerstenberg: Yes. Well, while we took the synergy asset into our network, we have the ability to continue to expand our hydrotreating capacity in our existing plants. We also have some targeted efficiency projects to grow our throughput across every one of our re-refineries. So we're very bullish about continuing to grow internally but also look at acquisitions. Lawrence Solow: Okay. Great. And then just lastly, just back just on the PFAS. I know I mentioned that earlier. Could you just give us a general update? Anything going on, on that space? I suppose you're not building in too much. There's a lot going on. But in terms of near-term revenue opportunities, I assume you're not building in too much in your 2022 guidance. But can you just maybe just give us a sort of a quick update on that? Eric Gerstenberg: Yes. So on the PFAS side, obviously, the regulations continue to evolve. And Clean Harbors continues to be very well positioned through not only our treatment assets, our landfill assets, but most importantly, our incineration assets. And we continue to believe that RCRA permitted high-temperature thermal destruction through our units is really the preferred disposal methodology for PFAS contaminants. In fact, we've done some testing with a third-party testing company, and we've proven out what we've suspected all along: that our emissions are really 5 to 8x the order of magnitude safer than the most stringent state and federal guidelines out there. So we're really excited about the future. We have not factored in a big growth because of PFAS, but that will -- that market will continue to evolve. Operator: Our next question comes from the line of David Manthey with Baird. David Manthey: So speaking about the structurally higher spreads in the oil business, could you talk about how you're currently sourcing used motor oil? And what I mean by that is approximately how much is contractual versus just negotiated on The Street. And of those contracted volumes, could you discuss the escalation indexes versus what you might have had 5 years ago? I suspect they're more favorable for you these days, but if you could just give us some color on that. Alan McKim: Sure. I'll start here. Certainly, we have our national accounts, and one of the things that we offer a lot of major corporations is a North American footprint. And so we negotiate those contracts and really make sure that they're good for both sides. We're -- we also have a lot of branch-owned accounts. And so that business is negotiated at the local level based on those markets. We typically are looking at pricing our services based on what the recycled fuel oil market is because that's where a lot of oil goes. It basically a lot of your off-spec oil, your industrial oil, a lot of the hazardous waste that we collect from oil spills and tank cleanings and all those kind of things all go into that local recycled oil market, which we participate in quite aggressively, quite frankly. So I think we really look at our market pricing today much more granular, much more regional, and we don't lock ourselves into anything that's going to get us in trouble. And I think that's all through our learnings back in that early 2013, '14. But we're not going to go back there. I think the bottom line here for us as well is that all of those used motor oil customers are generating other demands for services, whether they're parts washer or their oil filter disposal or it's containerized waste emergency response. So we're driving a lot more high-priced containerized waste into our network through our sustainability solutions segment. And that's really the win I think we're really seeing today. David Manthey: Okay. And I don't mean to throw wet blanket on your excellent results today, but if... Alan McKim: You're going to. David Manthey: But I'm going to anyway. If we were to enter a recession in 2023, you mentioned reshoring and we've talked a lot about the U.S. chemical renaissance and other factors that are favorable to you. But could you just discuss when you think about your cyclical end markets, what would the impact of a, say, minus 5% industrial production print be like if that was the state of being in 2023 for Clean Harbors? Michael Battles: Yes. Dave, that -- thanks for the wet blanket. I appreciate that. I guess you go back to kind of 2020 when the pandemic hit, and everything kind of stopped. But you look at our EBITDA over the past -- over that time period, and we continued to grow as if there wasn't a pandemic at all. It's hard for me to say what we would do. But as I said before, we're incredibly resilient and incredibly reactionary. And that means taking out costs and managing the business more effectively and closing sites and shuttering plants. I mean going back to 2020, we closed 5 of our 6 re-refineries. That was an amazing -- over the course of like a month. And we made that from the idea we had to do it to the fact we started the process. That just shows how fast we are, how nimble we are. And so regardless of what happens -- and I think going back to 2008, I think most of the business kind of hung together very well. Areas like tech service and other areas grew because these things are very hard to find other homes for us. So I really do believe that if a recession would happen, no one wants that to happen, I think that we'll be kind of well positioned like we have been for 42 years. I mean Alan's kind of -- as Alan said earlier in his -- in an earlier question, like he's seen plenty of recessions. And we come out, we use that as an opportunity to get nimble, to maybe M&A will be available to us, and we can grow even faster. Operator: Our next question comes from the line of Michael Hoffman with Stifel. Michael Hoffman: I'm here. Alan, I've covered you for a long time. I don't think I've ever heard you use the word thrived in a quote in a press release. That's how strong you feel about the business right now. Alan McKim: Right. Yes. Michael Hoffman: So Mike, taking your guidance about segments, ES, around $890 million; SKSS, around $310 million; that's corporate overhead, around $210 million. That gets you to the $990 million? Michael Battles: Yes. I think you're pretty close. I think it's a little higher on the ES side and a little higher on the corporate side. But I think you're in the ballpark, Michael. Michael Hoffman: Okay. So we might be in like the $225 million, and that puts us in a right around $910 million, okay. That gets me to the SKSS. So you all have and all of us have sort of looked back on '19 and said, "That was kind of a normal world in SKSS." Did round numbers, $130 million. And now we've had this extraordinary spread expansion. At this point, we're up somewhere in the $180 million difference. How much of that at this point do you really think is structural? Because your guidance this year in February, you acknowledged there would be some narrowing and that the guidance reflected that. We've now plowed right through that. What stays with us of that $180 million as supply and demand rebalances. I don't think oil is coming down below 80 anytime soon. So maybe 80 is the base there. Help us understand what reflection is on that $180 million. Michael Battles: Yes. Michael, I think you're right. We have talked about normal years being $130 million. But a lot of things have changed since 2019, which includes regulation, which includes breaking out the SK oil business between kind of sustainability being much more of a focus of our customers. And all those things have kind of changed kind of my thinking and let's say, our thinking about kind of what this business does long term. And whether it be the business growing to be -- to managing the front of the spread. Alan talked about it on the call, but I'm going to give you some more color on this. Having tankage in the right place and having better terminals and more terminals to store our oil, all those small things, when you break the business out, it's not just changing an org chart. It's actually kind of focusing energy on the business to manage it better. And so now we have a winter storage program where we take base oil and move it down closer to our customers in the wintertime so that we don't run short and have to go out and buy oil from -- in the marketplace. And all those small things are really going to -- I think, going to change the game forever. I mean, obviously, crude prices are up. And there's -- and 60% of base oil is coming from Russia and Ukraine. And I'm sure that's not going to get better anytime soon. But I'm here to tell you that I think that the new norm is much, much higher than, say, the $130 million that we talked about. Hard for me to say that today what that's going to be. certainly, it's much closer to where we're going to end in 2022 than where we ended in 2019. That's for sure, yes. Michael Hoffman: Okay. Eric, on the Georgia plant, the 18 million gallons, what's the yield into the VGO? Is it the same 3 to -- 3/4 of... Eric Gerstenberg: 75%. Michael Hoffman: 75%? Eric Gerstenberg: 70%, 75%. Michael Hoffman: And then is there a plan to put a hydrotreater on and convert that to base oil? Or do you take that VGO and push it into your other plants and turn it into base oil? Eric Gerstenberg: We certainly, in the short term, plan to move that VGO into our other plants. But we've had some initial discussions about expanding some hydrotreating capacity there in the future. Michael Hoffman: Okay. And then on the incineration side, there's -- between yourselves and Gum Springs or Veolia, there's a fairly significant percentage increase in the market. Veolia comes -- I think if I got this right, comes on first. So how do you feel about the impact of that potentially 100,000 tons coming in relative to where your pricing structure is today, the supply-demand? How does that normalize some of that capacity in the marketplace? Eric Gerstenberg: Yes. We feel pretty good about the capacity that's coming on and the utilization continuing to be high across all of our units. The volume of waste being generated across multiple different customer groupings continues to expand. Our incinerators are really uniquely positioned to capture very difficult-to-handle waste streams and mix. And that's what we're seeing in the market. That's what we've really focused our structure around is handling more drums, handling more direct burn. So we continue to be very bullish about it, and that capacity will come on. I'm not sure -- I really don't think that Gum Springs will be before us, but we really feel good about our position here. And that added capacity is much needed in the market. Michael Hoffman: Okay. So that takes me to the next piece of this broadly. You -- I think this might be a reasonable statement. I think you all have enjoyed a rate of change in price that you probably have never seen in -- since the beginning of the company. So you've changed unit prices pretty much across all product lines. What is your comfort and confidence that you hold on to the unit price changes when and if we do enter into a cycle and eventually, there's a cycle? Alan McKim: Michael, certainly, this is Alan. Costs continue to rise, right, whether it's natural gas, transportation costs, just the overall cost of service, labor. All those inflationary costs that we've all seen are not going to go away. And so we've had to be aggressive in pricing for our services, but at the same time, taken out a lot of costs here. We had a reduction in force in April. We continue to look at opportunities to move cost to lower-cost jurisdictions, expand the use of our rail network to lower our transportation costs. I mean anything you can think of, right, is on our list of things to do to really address the pressures. But the bottom line is we need to continue to move pricing and particularly in our industrial business, where our margins are not where they -- we want them to be and the fact that we have -- we don't have enough capacity to service all of the customers that we have with the labor constraints, equipment constraints that we have. We're out 2 years on trying to get tractors in some cases. And so like we work with our customers during COVID, where we gave some concessions back, we'll work with our accounts. But overall, we need to continue to address the issues of our margins as inflationary costs and other costs continue to increase here. Michael Hoffman: The last one for me, there was an industrial recession in second half of 2015, all of 2016. What is different about Clean Harbors today versus that operating period, and therefore, give us the market more confidence that this $990 million, while it might have some spread compression on oil in that, maybe that's really $940 million. But that's the baseline. Alan McKim: If you remember, after the Eveready acquisition and a lot of our growth and expansion, going after a lot of the oil sands work and a lot of the fracking work, we were generating close to $150 million in EBITDA on that part of our business. We'll probably generate $25 million in EBITDA in that business now because we've sold a lot of those assets, as you know, and we've really tried to focus on the pure environmental side and the industrial service side of that business. And so when we were going through all those challenging times during that recession, as you talked about, we made up for that loss. We grew in other parts of our business. And I think we grew because the nature of our customer base, the verticals that we service, whether it be health care and the expansion we're doing in health care, adding autoclaves, expanding our medical waste capabilities, the retail side of business. The retail side has been a real growth market for us. Whether it's the pharmaceuticals or the big boxes, the regulatory environment on them has been extremely stringent on how they're dealing with their returns and their waste materials. That market has really been growing. And so when we look at some of these verticals that historically might not have been of any size, we're really seeing those grow for us. And we continue to kind of drive route density, go after those small quantities. And I think those are the things that we can do and grow through another recession. Operator: Our next question comes from the line of Jim Ricchiuti with Needham. James Ricchiuti: I wanted to just go through HPC, if I could, which seems to be performing better than expected. And I'm hearing comment on a couple of things. In terms of the costs, are you ahead of the target there? Are you -- have your expectations for that business changed versus where you were earlier in the acquisition? Eric Gerstenberg: Yes. Jim, this is Eric. Our synergies continue to be on track as we go through 2022 here. We still have a lot of opportunity to continue to work with our branches. Most importantly is really working with those large customers that we're servicing there and continuing to expand the margins that we're getting with those customers, develop partnerships with them better, support them better. But we're really just midway through some of the synergies we've looked at. Alan McKim: I think I would say we're probably lagging on the pricing initiatives. So keeping up with the tremendous cost increases that we've taken on simply from inflationary cost increases. I would say that's one part of the business that's lagged, and we're hoping that we can continue to do a better job in that area. James Ricchiuti: When would you anticipate potentially -- without us talking about price increases and specifics, but when would you start to assume some of that might begin to flow through? Alan McKim: We've been doing it. It's taken longer than we've wanted to. We've rebranded it. We've had to merge and consolidate contracts. And so it's taken a little bit of extra time for us to make both the legal and pricing contracts rationalized and -- but we're in the midst of doing that, and I would expect that we'll continue to see that throughout the rest of this year, yes. Eric Gerstenberg: It certainly has started to show up here in the second quarter, but we have a long way to go here in the latter half of this year. James Ricchiuti: Got it. And you talked -- just a follow-up question. Just you talked about cost containment, but you're also dealing with a lot of inflationary pressures. I'm just curious, have you begun to see any plateauing of some of the cost pressures that you've been experiencing over the last several quarters in either part of the business? Michael Battles: Tim, this is Mike. No, we really haven't. We certainly see -- the things that we see so far, obviously, fuel prices are coming down a bit, which is helpful. But outside of that, some of the things -- some of the price increases we see don't -- like wage inflation, that doesn't go away. And so I feel like that's not going back. Certainly, some of the commodities for steel and steel drums and so forth has started to slow down, but we really haven't seen it in our pricing just yet, that cost yet. Alan McKim: Eric, you might want to speak to just the call pricing as an example of what we saw from where we were to where we are today as an example. Eric Gerstenberg: Yes. The materials that we use in our parts washers, both the solvents and a ESOL cleaning solution, have really elevated over 250% over the past year and 1.5 years. So we're continuing to see that. So costs are continuing to increase in certain areas. On the labor side, as Mike said, while we've been fairly successful at adding over 1,000 people year-to-date, we still have a long way to go on continuing to retain good employees and grow our employee base. James Ricchiuti: Are you seeing moderation in the attrition levels? Eric Gerstenberg: We are. We are. We've reduced our attrition rate. Michael Battles: Yes. I think we're flat. I think we're flat, Jim, from where we were, which is good, which I think as we start to see that belt. And so as Eric said, we've done a better job of hiring people. So that's why we're up headcount from year-end. James Ricchiuti: Got it. Congratulations on the quarter. Michael Battles: Thank you. Operator: Our next question comes from the line of Jerry Revich with Goldman Sachs. Adam Bubes: This is Adam Bubes on for Jerry today. Excluding the new Nebraska incinerator, can you talk about the magnitude of capacity increases you expect to achieve from investments in existing incineration plants alone? Eric Gerstenberg: Yes. Adam, this is Eric. We continue to look and target 5,000 to 10,000 tons a year of incremental capacity across our network of incineration. But I'd also say that we also are expanding our other plants, not only the landfills cell capacity, our recycling infrastructure, water treatment infrastructure. So a number of different areas that we're growing capacity in because we've seen the demand across all of the different types of disposal waste streams throughout our network. Adam Bubes: Got it. That's helpful. And then on the landfill side, what was landfill pricing this quarter on a mix-adjusted basis? And how should we think about mix-adjusted pricing going forward amid recent industry consolidation? Michael Battles: You got us from that one, Adam. I'd say that, well, certainly, the volumes are up quite a bit. And when project work happens, that usually takes our average price down. I'm not sure what that mix-adjusted number is. But certainly, the landfills performed very well this quarter, and we see a really strong pipeline of waste projects coming into our network. Going back to industry consolidation, I think that's good for Clean Harbors. I think that they're going to be very disciplined in their pricing. And I think we're the beneficiary of that. Alan McKim: And I think the other thing, just to add to what Eric was mentioning, not only are we expanding our oil recycling, but we're expanding our solvent recycling to meet the demands, particularly in the chip manufacturing. We have new plants being built in Ohio. We're expanding our Ohio recycling facility. We have many -- several solvent recycling plants where we want to make additional investments. Clearly, the goal here is to recycle and reuse as much as we possibly can. And we're doing a really good job of that, and we're getting buyers of those recycled products. But I think in the end, you need more incineration capacity because the captive market is going to continuously look at the high cost of natural gas, look at it as a noncore part of their business and outsource a lot of those difficult to treat waste stream. So when we look at the expansion of capacity like we did with El Do, we have no doubt that, that capacity is going to be needed. Operator: . Our next question comes from the line of Zane Karimi with D.A. Davidson. Zane Karimi: Congratulations on the strong results. Michael Battles: Thanks, Zane. Alan McKim: Thank you. Zane Karimi: Maybe an extension on Jim's question earlier, but the Environmental Service business seems to have a lot of things working together to produce these strong results. But could you help differentiate how much of this was growth was organic versus HPC contributions? And how are the rates of growth and margin profiles of the legacy biz versus HPC differing at this point? Michael Battles: Yes. Zane, this is Mike. So from an organic standpoint, the Environmental Services business grew at 24% organically. It grew 46% reported. So that is kind of what the different pieces are. I'm not sure if I'm answering your question or not. Zane Karimi: Yes. Yes. And then from a margin perspective, are you seeing any differences there between the legacy business versus the HPC contributions? Michael Battles: Yes. Sure. So the Environmental Services margins are up 40 basis points kind of year-on-year. But if you take out HydroChem doing an apples-to-apples comparison, we're up over 250 basis points year-on-year. So it really is a testament to the pricing and cost controls we talked about on this call that really have been driving that good margin improvement, kind of up with HydroChem and even up better without it. And if you go one step further and back out government funding and decon work from last year, we're up almost 300 basis points year-on-year. Zane Karimi: Okay. Okay. And then through the era of COVID, employee turnover has been a fairly impactful theme across almost all industries, in which there are more and more new employees in important roles. So maybe can you speak to how or if this has seemed to impact your emergency response or accident response jobs? Any updates on the number of emergency response types of jobs to date? Alan McKim: Yes. Let me start and maybe Eric can chime in here. But I think one of the key things to mention here is that we've been here since COVID began. Our people in the field performed probably 23,000 responses. And so it was a monumental task for our teams to come in to work and service our customers, not only from an emergency standpoint for basic everyday services that we offer. So our hats off to them. We have a hybrid workforce across some of our office locations, and we're mindful of the fact that some people are still hesitant to commit to the office, but we're doing a pretty good job there. I would say that our new hires in the field, clearly, we realize how important it's going to be to onboard them. And we've made new investments in HR, recruiting, really to try to get close to the market and really close to the needs of the organization. And I think so far, that's been pretty good. Eric, you might want to comment on that. Eric Gerstenberg: Yes. No. Thanks, Alan. We -- at the tail end of last year, we really restructured our recruiting, onboarding organization to align it directly with the business units. So the all senior business leaders and recruiting are extremely well aligned to really focus on, number one, decreasing the turnover, which we've been successful at stabilizing that; and increasing our new field employees and bringing them on fast and efficiently and well trained. And we're seeing the dividends that paid off. But as we spoke about earlier in the call as well, though, we still have a long way to go to really get our workforce where it needs to be. But we're seeing positive trends with what we've done across the business. 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. The team will be active on the Investor Relations front in the next several months, starting with the Raymond James event in New York City later this month. So have a great rest of the summer and stay safe. 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.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.
