Clean Harbors, Inc. (NYSE:CLH) Q4 2022 Earnings Call Transcript

Clean Harbors, Inc. (NYSE:CLH) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Greetings, and welcome to the Clean Harbors Fourth Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors. 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 S. McKim; EVP and Chief Financial Officer, Mike Battles; President and Chief Operating Officer, Eric Gerstenberg; SVP and Chief Accounting 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 are cautioned not to place undue reliance on these statements which reflect management’s opinions only as of today, March 1, 2023.

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 our CEO, Alan McKim. Alan?

Alan McKim: Thanks, Michael. Good morning, everyone, and thank you for joining us. Starting on Slide 3. Before discussing our year-end results, I want to reflect for a moment on the fact that this will be my final earnings call as CEO, and I’ll be passing the torch to Eric and Mike at the end of this month. As I mentioned on our Q3 call, it’s been my privilege to lead this tremendous organization and I’ve enjoyed communicating and engaging with our shareholders over the years, maybe some quarters a little bit more than others. The company has been on a remarkable growth trajectory for the past five-plus years, and I’m confident that you’ll see more of these exceptional results under Eric and Mike’s leadership, along with the rest of the executive team, that now includes Eric Dugas, as our Chief Financial Officer and Brian Weber as our President of our Safety-Kleen Sustainability Solutions segment, which we announced in a separate news release this morning.

Eric Dugas is an outstanding Chief Accounting Officer and has become a strong business partner to the operational teams. He’ll be a terrific CFO for us. Brian is a 30-year employee who has held many key roles at the company. Most recently, he has led our M&A efforts and managing many corporate functions but he also oversaw a bulk products and services business, BPS, within SKSS. BPS includes a variety of services such as our sale and distribution of blended products through our OilPlus closed-loop program. Based on his background and broad expertise, Brian is the ideal choice to lead SKSS through its next stage of growth and build on the company’s strong position as the most sustainable offering in the lubricants market. Having said all that about the team, I’m still going to be here come April working on overall strategy, M&A and driving technology enhancements that support our future growth, productivity and lowering cost.

Turning to our results. I’ll let Mike take you through the details. But overall, I’d say that we experienced most of the same positive trends in Q4 that we saw all year, particularly in our Environmental Services segment. That enabled us to conclude a record 2022 with continued strong performance. The quarter also continued to demonstrate the considerable leverage in our business model as 14% top line growth drove a 29% increase in Q4 adjusted EBITDA. Our most impressive results, however, for both the quarter and the year was in our safety results, where we delivered the best year in our history. As a management team, we work hard to try to make sure that all our colleagues return home to their families every day uninjured. Our goal for 2022 was to achieve a total recordable incident rate below one.

This year, the team achieved an amazing TRIR of 0.73 and I’m so thankful to the entire organization for all their hard work achieving that rate, and we’re going to continue to challenge them in 2023 to be even better. In addition to our fantastic safety results, we hit $1 billion of adjusted annual EBITDA for the first time in our history in 2022, while improving our return on invested capital for the fifth consecutive year. Revenue for the year was up 36% and adjusted EBITDA increased 51% with a record margin of 19.8%. And we achieved some other notable accomplishments this past year including combining HPC with our legacy U.S. Industrial Service business, advancing the construction of our new incinerator in Nebraska, acquiring our A3 refinery facility, launching our KLEEN+ brand in our base oil market, reducing our voluntary turnover, while significantly increasing hiring of our billable headcount and finally, releasing our groundbreaking PFAS incineration study.

Turning to our Environmental Services segment on Slide 4. The 15% growth in revenue was driven by a combination of volume and pricing. We continue to see considerable demand for our network of disposal and recycling assets. In Q4, we benefited from manufacturing and chemical industry tailwinds as reassuring regulatory enforcement and projects generated healthy volumes for our facilities. Incineration utilization was 84% in the quarter, reflecting multi-day unplanned outages at both Deer Park and El Dorado due to the extreme weather that we had during December. Nevertheless, the mix of higher value waste streams in Q4 resulted in a 21% increase in average incineration pricing. Q4 landfill volumes rose by 28% as we continue to win multiple waste project opportunities.

Our Industrial Service business performed well in Q4 as we continue to harmonize our U.S. operations now working under the HPC Industrial brand. Safety-Kleen Environmental revenue was up more than 20% as core offerings have now surpassed pre-pandemic levels. Field Services revenue grew 8% due to pricing and branch growth initiatives. Looking at Environmental Service segment profitability, adjusted EBITDA growth again outpaced our top line increasing by 35%. We worked hard to make sure that our pricing kept up with inflation but while also implementing a myriad of cost reduction and productivity initiatives. We leveraged our SG&A costs while substantially growing this segment. Collectively, this fueled a 340 basis point increase in our Environmental Services margins from a year ago.

Moving to Slide 5. Profitability in our SKSS segment cooled down after a record break in Q3. Revenue in the segment was up 9% in the quarter on higher pricing and revenues from the acquisition that we completed in June as well as some higher sales of recycled fuel oil. Because of the plant disruptions that took place in December, which was based on the extreme weather impacts that we had. Our adjusted EBITDA and margins declined based on our revenue mix as we sold less volumes of base oil and lubricants. We made the strategic decision in the quarter to build up some base and blended inventory for a seasonally stronger period in the first half of this year when we expect demand and margins to be more attractive. Our Q4 profitability was affected by severe weather at multiple re-refineries that impacted production levels and also resulted in higher costs.

On the waste oil collection side, however, volumes were strong again, up slightly from a year ago. Given market conditions, our sales of blended products and our direct volumes at 8% of total output was essentially in line with our expectations. The additive shortages that plagued the lubricant industry through much of 2022 started to abate in Q4. This improvement should be a tailwind for overall base oil demand in 2023, while also enabling us to increase our blended volumes this year. We also made investments in the direct lube oil sales force to drive growth with our OilPlus program. Turning to Slide 6 and our capital allocation strategy. On the M&A front, we are continuing to see a good flow of potential bolt-on transactions for both our operating segments.

In late December, we purchased a small waste oil collection business in West Texas. And more recently, we signed a purchase and sale agreement to acquire Thompson Industrial Services and an all-cash deal for approximately $100 million. We expect that deal to close at the end of this month. This transaction, which will add approximately $120 million in annual revenue, will expand our industrial service presence in the Southeast U.S. It will broaden our capabilities and bring us into verticals where we have sold Environmental Services, but not industrial services, verticals like paper, mining and power. With the acquisition of HPC, we have built a scalable platform to add complementary industrial services companies like Thompson that are synergistic and enhance our cross-selling of Environmental Services.

Mike will take you through some of our recent debt activities. But the key takeaway is that we will continue to maintain a strong balance sheet that will enable us to remain opportunistic on the M&A front. So with that, let me turn things over to Eric Gerstenberg. Eric?

Eric Gerstenberg: Thanks, Alan. We are continuing to evaluate opportunities to drive organic growth through internal investments. Along those lines, our new state-of-the-art incinerator in Kimball, Nebraska remains on plan and on budget. While we could certainly put it to work today, we’re excited to have that come to market with 70,000 tons of much needed capacity in early 2025. We entered 2023 with healthy momentum across all our key environmental services businesses. Our primary markets remain in great shape, given the underlying market dynamics and essential nature of our business. Within the Environmental Services segment, our backlog of waste remains at record levels, particularly due to the December outages, which well positions us for 2023.

Given the diversity of our customer base, we expect healthy demand for our network of disposal and recycling assets to continue all year based on our customer interactions. Our service businesses all experienced solid growth in 2022. And with the expansion of our billable head count throughout the year, we should benefit from those new hires here in 2023. We expect our base business to continue to grow due to the ongoing re-shoring trend among manufacturers and investments in areas like semiconductors, pharma and EV batteries. We also expect project opportunities to continue to be healthy this year as monies from the infrastructure bill and other programs are released into the market as well as regulators providing more clarity around PFAS.

Based on the results of our comprehensive third-party PFAS study, where we released late last year, we believe our incinerators not only represent the most appropriate solution for PFAS compounds but the only commercially scalable destruction solution already available in the market. Within SKSS, we continue to carefully manage both ends of our re-refining spread and collect the waste oil volumes needed to support our plants. Despite base oil demand taking a step down in Q4 from the heightened Q3 levels, today, we are beginning to experience a normal seasonal pickup, and when we are confident overall market conditions will remain favorable this year. While 2022 presents a challenge as a difficult comp for us, we see numerous opportunities to enhance our profitability in this segment, including raising production from 2022 levels including a full year of contribution from our synergy plan, increasing sales of blended products and capitalizing on the increasing interest in our sustainable products.

Additionally, our KLEEN+ base oil brand that we launched in mid-2022 is helping to facilitate discussions with customers seeking solutions that will lower the environmental impact of their automotive and industrial lubricant products. With that, let me turn it over to Mike Battles.

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Mike Battles: Thank you, Eric, and good morning, everyone. Turning to our income statement on Slide 8. Q4 revenue increased 14% to $1.28 billion with nearly all of that coming from organic growth. For the year, we grew 36% to nearly $5.2 billion with the majority coming from organic growth and a full year of contributions from HPC, which we acquired in October of 2021. Q4 adjusted EBITDA was 29% higher than a year ago, coming in at $224.2 million, which equates to a margin of 17.5% or 190 basis points increase from Q4 of last year. We achieved this result through gross margin improvements, fixed cost leverage and controlling SG&A spending. For the year, adjusted EBITDA climbed 51%, with margins up 200 basis points to 19.8%. If you look at our 2022 results by segment, you’ll see that all three of our reporting segments meaningfully contributed to the overall margin expansion.

This is an outstanding accomplishment given the inflationary environment we operate in all year long. Q4 gross margins improved 110 basis points to 30.3%. This is the first quarter where we had HPC in both periods, and our gross profit improvement reflects our ability to price to offset inflation, increase margins through productivity improvements and deliver strong operational efficiency gains. Q4 SG&A expense as a percentage of revenue improved 100 basis points to 13.2%. On our Q4 2021 earnings call a year ago, we shared the large opportunity to realize synergies as we integrate HPC. Our results reflect those captured efficiencies. On top of that, we continue to leverage our global capability center in India and diligently monitor all our costs.

For the full year, SG&A costs as a percentage of revenue was 12.1%, reflecting a reduction of 200 basis points, in line with our November guidance. As we look ahead to 2023, we expect SG&A costs as a percentage of revenue to remain in this 12% range. Depreciation and amortization in Q4 increased as expected to $87 million, largely reflecting acquisitions. For the full year, depreciation and amortization rose $347.6 million €“ rose to $347.6 million, just above the range we provided in November. For 2023, we anticipate depreciation and amortization in the range of $345 million to $355 million. Income from operations in Q4 increased 55% to $127.4 million, driven by healthy revenue growth, combined with our margin improvement in environmental services.

For the full year, our income from ops climbed to an impressive 82% to $634.7 million. Net income in the quarter was $82.5 million, up 68% from a year ago. And for the full year, both net income and GAAP EPS more than doubled to $411.7 million and $7.56 per share. Turning to our balance sheet highlights on Slide 6. Cash and short-term marketable securities at year-end was $555 million, up more than $40 million from September 30. We ended the year with debt of just over $2.4 billion. We took several prudent steps related to our debt in Q4 and subsequent to year-end. First, during Q4, we strategically paid down our variable rate debt by $100 million in response to the rising interest rate environment. Second, in January, we refinanced the remaining $640 million of our Term Loan B loan due in 2024.

We achieved this by issuing $500 million of new eight-year unsecured senior notes due 2031 and by tapping our ABL revolver for $114 million. Leveraging our lower rate revolver not only decreases our interest expense, but also lowered the cost of refinancing and provides flexibility to more easily reduce our debt further going forward, should we elect to do so. Leverage on a net debt-to-EBITDA basis at year-end was approximately 1.9x after being north of 3x to start the year. Our weighted average cost of debt today, following the refinancing in January is approximately 5%, with almost 80% of our debt at fixed rates. Turning to cash flows on Slide 10. Cash from operations in Q4 was a robust $268.7 million. CapEx net of disposals was $96.8 million, up from the prior year, primarily reflecting the ongoing construction of our Nebraska incinerator.

In Q4, we spent roughly $18 million on the Kimball project, which brings our full year spend to $45 million. For 2022, we delivered adjusted free cash flow of $289.9 million at the top end of the range we provided in November. For 2023, we expect our net CapEx to be in the range of $400 million to $420 million. The majority of the increase from the $336 million we reported in 2022 relates to our investment in Kimball, which we expect to double to approximately $90 million in 2023. We’re also continuing to invest in our transportation fleet and equipment to accommodate the growth of our business, eliminate third-party rental spend whenever possible. During Q4, we bought back just over 52,000 shares of stock at a total cost of $6 million. Year-to-date, we’ve repurchased 537,000 shares at a total cost of $50.2 million for an average cost of $93.51 a share.

And we have approximately $105 million remaining under our existing buyback program. Moving to Slide 11. Based on our 2022 results and current market conditions for both our operating segments, we expect 2023 adjusted EBITDA in the range of $1.01 billion to $1.05 billion with a midpoint of $1.03 billion. Looking at our guidance from a quarterly perspective, we expect Q1 adjusted EBITDA to be approximately 20% higher than Q1 of 2022. Now I’ll provide the breakout of how our full year 2023 adjusted EBITDA guidance translates to our business segments. In Environmental Services, we expect adjusted EBITDA at the midpoint of our guidance to increase 6% to 7% from full year 2022. Demand for our disposal facilities continues to enable us to maintain our pricing strategies, drive higher volumes and funnel more favorable mix into our network.

Service demand remains healthy. I should note that our guidance does not include the Thompson Industrial transaction at this time. For SKSS, we anticipate full year 2023 adjusted EBITDA at the midpoint of our guidance to decrease by approximately 15% from 2022, reflecting recent base oil pricing trends. Despite the recent decline in base oil pricing, we have a number of meaningful offsets that Eric outlined in his remarks. In our Corporate segment, at the midpoint of our guide, we now expect negative adjusted EBITDA to be up low-single-digits from 2022. The year-over-year change is due to wage inflation and rising insurance expense, partially offset by cost-saving initiatives and lower bonus compensation compared with 2022 where we had record results across the board.

Based on our 2022 free cash flow results, rising interest rates and latest working capital assumptions, we expect 2023 adjusted free cash flow in the range of $305 million to $345 million, or $325 million at the midpoint. I want to remind everyone that this range includes the $90 million we are spending on the new incinerator this year. If you add that back, the midpoint of our guidance range would be about $415 million. In summary, Q4 was a great finish to a record year. As Alan highlighted, we again saw lots of the same favorable trends in the quarter that we experienced throughout the year. This is a substantial €“ there is substantial demand in our network with a very healthy backlog. Volumes in their network of facilities are further supported by encouraging levels of interest across our service businesses.

Based on our demand level, we are seeing as we kick off the year, we are projecting to continue the positive growth trajectory in 2023, led by our Environmental Services segment, where we maintain a bullish outlook. We expect another strong year for Clean Harbors in 2023. Not only are we bullish about our prospects for 2023, but we believe our long-term outlook is positive and plan to share our perspective on that at our Investor Day, which will take place on March 29 in Chicago with the larger executive team. The event will conclude with a tour of our re-refinery, that’s across the border in Indiana. I encourage any institutional investors or analysts interested in attending to reach out to Jim. With that, Christine, please open up the call for questions.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.

Michael Hoffman: Good morning. So Alan, I was sitting here counting on my fingers and toes. I think you’ve done 140 earnings calls, and I believe I’ve been on all of them, and I wish you the best of luck.

Alan McKim: Thank you, Michael. Some of those were good calls and some were not as good, right?

Michael Hoffman: It’s always interesting, but I’ll say this out loud because I think people ought to acknowledge it. You always could see where the puck was going. And I always respect that about you. So Mike Battles, price, and I think about the lines of business at environmental, are we getting price in all three pieces to the technical services side, industrial field services and SKE. And when you think about that, how much of its rollover from last year versus rollover plus you’ve discovered price as a component of growth.

Mike Battles: Yes, Michael, I think that it is €“ certainly, as we look at Q1, a lot of its rollover of price we did in the back half of the year because as you remember, Q1, we didn’t €“ we started to put price increases in place in Q4 and Q1, but most of them were in place until the back half of Q1. So I think that the year-on-year kind of price increases will certainly impact Q1. But make no mistake, I think that there’s also €“ we also continue down the path of looking at ways to increase price in all three or four of the, let’s say, the Environmental Services business, whether it be tech service, on disposal, field services, industrial and the SK branch business. I think there’s plenty of good opportunities there.

You talk about kind of learning kind of how to do it more effectively. I think that’s true. I think that pricing will be part of our story €“ has been part of our story for many years and will continue. I think that there’s certainly opportunities there to continue to drive price well beyond the rollover that we see here in Q1.

Michael Hoffman: And on a point of clarification around industrial and field services. If I think about what you look like today versus what you look like in 2016, am I right in that you basically have consolidated the other three major national players. And so the discipline that comes into the market about price should be better whatever the economic environment looks like.

Alan McKim: Sure. Yes. This is Alan. Michael, I think there was certainly some benefits of bringing some major players together and leveraging the technology and leveraging the relationships that we all had with our key customers. And I think one of the things we’ve been able to do is work with a lot of our accounts to provide better safety programs, better technology, hands-free technology, bring more R&D now into the business, working with them to develop ways of performing the kind of services on these massive plants to help them get back online faster and safer and at a lower cost. And I think the customers really have benefited, I think, from that consolidation that’s taken place.

Eric Gerstenberg: Yes, Michael, and this is Eric. I’ll add to that. I think that with our platform that we have today, we’re obviously an unparalleled national provider of field services and industrial services. We have as you know, many national accounts with locations throughout North America that we are able to support with the broad network that we have today.

Michael Hoffman: Okay. That helps. And then the free cash flow, Mike, you had a very strong corporate overhead number, which I’m assuming is above average incentive comp for a great year, well deserved. So that pays out in the spring of 2023, that’s a headwind, I’m assuming into the free cash flow assumption. Is that about $10 million? Is that the right way to think about?

Mike Battles: I think it’s a little less than that. We had a great year in 2021 as well. So the rollover impact is $5 million to $10 million, Michael, I’d say.