Clean Harbors, Inc. (NYSE:CLH) Q1 2024 Earnings Call Transcript

Clean Harbors, Inc. (NYSE:CLH) Q1 2024 Earnings Call Transcript May 1, 2024

Clean Harbors, Inc. beats earnings expectations. Reported EPS is $1.29, expectations were $1.16. Clean Harbors, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the Clean Harbors First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to turn the floor over to your host, Michael McDonald, General Counsel for Clean Harbors. Sir, the floor is yours.

Michael McDonald: Thank you, Christine, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, 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 are cautioned not to place undue reliance on these statements, which reflect management's opinions all these of today, May 1, 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. Before we get into our prepared remarks, I want to take a moment to recognize our 23,000 strong Clean Harbors team for their efforts in Q1. Thank you for your focus and dedication to safely delivering on our commitments to customers and the communities we serve. I also wanted to welcome the HEPACO and Noble teams to Clean Harbors. We look forward to your leadership and insight as we continue to set the standard for our industry. I also wanted to highlight our safety results for Q1, not a financial metric, but in our view, the most important metric. Our total recordable incident rate or TRIR was 0.69 for the quarter, which gets us off to a good start to the year.

Starting on Slide 3. We opened the year with an even stronger than expected first quarter performance as we exceeded the guidance that we provided on our year-end earnings call. Our 5% top line growth drove a 7% increase in adjusted EBITDA with margins improving year-over-year. Robust demand continues across our Environmental Services segment. All of our ES businesses, technical services, Safety-Kleen Environmental, Industrial Services and Field Services delivered better-than-expected growth in the quarter. Volumes coming into our disposal and recycling network continue to increase. Our ES segment grew both organically and through strategic M&A from HEPACO. Within SKSS, which Mike will cover in more detail, lubricant pricing was soft until the very end of the quarter.

Our Corporate segment was up year-over-year due to compensation, acquisitions and professional fees. Turning to Environmental Services on Slide 4, segment revenue increased 10%, with two-thirds driven by organic growth from volumes and pricing and a third from the acquisition of Thompson and HEPACO. Adjusted EBITDA increased 16%, resulting in margin expansion of 130 basis points from the first quarter of 2023. Q1 represented our 10th consecutive quarter of year-over-year adjusted EBITDA growth in this segment and the highest Q1 adjusted EBITDA margin for the ES and company's history. Our Technical Services business was the primary contributor to ES top line growth, posting a revenue increase of 11%. A record level of Q1 drum volumes flow throughout our network, which also helped drive the record deferred revenue you see on our balance sheet.

As a result of heavy Q1 maintenance schedule and weather disruptions in January, which we noted on our year-end call, incineration utilization was 79% in the quarter, in line with our expectations. Average incineration pricing increased 6% in the quarter, thanks to mix and pricing. Despite all the turnaround time we've had in the early part of 2024, we still expect that our incinerator should deliver mid- to high 80s utilization for the full-year. Although land [indiscernible] down modestly year-over-year, healthy drum volumes and base business drove a 16% increase in average price per ton. As with our incinerators, landfills should deliver a very good quarter in 2024, given the market conditions we see today. Those favorable conditions should also support the other 100-plus permanent hazardous waste management facilities we maintain in our network.

Safety-Kleen Environmental Services generated another quarter of record -- revenue growth, climbing 9% largely on the strength of containerized waste and other core services. Field Service revenue was up 10% in Q1, driven by consistent base business, ER events and high employee utilization. The field service results included in the first week of contributions from HEPACO, which we acquired towards the end of March. Early returns on that acquisition have us very encouraged about its future potential. Industrial Service revenue grew 7% in the quarter, largely from the addition of Thompson as that group continues to focus on higher margin work and cost controls. Overall, it has produced an excellent start to 2024 in Q1. With that, let me turn things over to Mike.

Mike?

Michael Battles: Thanks, Eric, and good morning. Turning to SKSS on Slide 5. The year began with a challenging demand environment for both base oil and lubricants, which led to lower pricing, particularly for our noncontracted volumes sold in the spot market. High volumes produced and sold were similar to the prior year. So it really was the pricing environment impacted us, which you can see in the year-over-year adjusted EBITDA comparison. The weakness in pricing was partially offset by the shift we had completed to a charge oil collection model versus the pay-for-oil average we had a year ago in our waste oil collection services. We added 55 million gallons of waste oil as we aggressively manage our spread to gather feedstock at the best price possible.

Despite the difficult Q1, we're encouraged by more recent trends. Base oil demand has begun to recover, leading to a rising market prices as we head into the balance of the year. In Q1, we increased our blended sales volumes by 36% as we focus on more value-added products. Blended sales or pricing tends to be a less volatile than base oil, accounted for 21% of our total volumes sold up from 15% a year ago. Another program, which will insist in both the stability and profitability of this segment is our Group III base oil project. We now have dedicated one of our smaller re-refineries to full-time Group III production. We are enthusiastic about the long-term potential for this initiative as we move to open more Group III production in the coming quarters.

And lastly, we have been hard at work in recent years to find the ideal partner that recognizes the value of our KLEEN+ base oil and lower carbon footprint it carries. We wanted to align with someone who had the brand recognition to meaningfully impact the lubricants market. Turning to Slide 6. We are partnering with Castrol on the nationwide launch of MoreCircular, a lower carbon footprint offering. This is an exciting and innovative program, and we're thrilled to work alongside with the industry's leading brands to bring it to their customers. Under the terms of this multiyear agreement, Castrol will be responsible for selling this sustainable product offering by using a considerable marketing muscle to drive its success. Safety-Kleen will be responsible for the collection of waste oil from Castrol customers in the program.

We will also supply our baseload to Castrol to include in their MoreCircular lubricants. We see this arrangement as a strong validation of our high-quality, sustainable base oil given the recognition of Castrol's lubricants and brand. This program evolved following a series of highly successful market trials and will be officially launched later this month at a key industry expo. We are thrilled to have Castrol's endorsement by partnering with us on their close -- their own closed loop solution. We have said that as EV transition plays out -- we said that as EV transition plays out over the next several decades, we see our green base oil as an ideal bridge for this market. It offers an opportunity for companies, particularly those with large vehicle fleets to immediately lower their carbon footprint.

We look forward to updating you on this promising program in the quarters ahead. Turning to Slide 7. Eric and I, along with the entire executive team are laser-focused on our capital allocation strategy. We are now in the second year of Vision 2027, our five-year growth plan that relies on a mix of organic growth and acquisitions. As I outlined on our last call, and I believe it bears repeating, the foundation of the strategy is to drive margin improvement every year through pricing and productivity gains and by achieving economies of scale on not only a highly leveraged network of permanent facilities and unique assets, but also a highly-trained personnel to provide our customers with increased value from our services. This will continue to lead to increasing cash flow generation and long-term shareholder value creation.

The HEPACO acquisition with our headline M&A transaction in Q1, we also recently completed and attracted bolt-on deal with the acquisition of Noble Oil to support our collection footprint in the Mid-Atlantic market and add more re-refining capacity. We continue to evaluate other potential transactions and see a healthy pipeline of candidates. We expect to remain active with acquisitions as we execute against Vision 2027. In terms of growth CapEx, we continue to advance our Kimball Nebraska incinerator, which remains on track to open commercially in Q4. Sufficed to say, we are eager to bring this $200 million investment online as that capacity is much needed in the market based on many trends from reshoring to new regulations such PFAS to government infrastructure spending.

Adding a permitted scarce asset will create another long-term competitive advantage for Clean Harbors. On our last call, we detailed the planned $20 million expansion of our Baltimore facility to create a regional hub with manufacturing capabilities. We completed the purchase in Q1 and we'll be investing in and upgrading the site over the course of the year with material savings to be achieved in 2025. Let me conclude my remarks by emphasizing how bullish we are on our growth prospects in 2024. Favorable market dynamics and the current economy should support our continued momentum. We have a clear line of sight across multiple businesses that should enable us to achieve our profitable goal plans for this year. Demand for our services continued to accelerate as evidenced by Eric's mentioned, of our record deferred revenue and strong pipeline of products.

In addition, our conversations with customers about their future needs and the opening of the Kimball incinerator reinforces our confidence in the ES segment. For SKSS, with all the initiatives highlighted earlier, several of which have great multiyear potential, we expect to return that segment to more stable profitable growth in 2024. Overall, we have much to be excited about in both our operating segments this year. With that, let me turn it over to our CFO, Eric Dugas. Eric?

Eric Dugas: Thank you, Mike, and good morning, everyone. Turning to the income statement on Slide 9. We started off the year on a strong note with another great performance by the ES segment. The positive demand trends that have underpinned three straight years of healthy revenue growth in this segment continued in Q1 as revenues across all four businesses were up from the prior year. Adjusted EBITDA of $230 million was above the expectations we provided on our Q4 call and up $15 million from a year ago. Our adjusted EBITDA margin in the quarter was 16.7%, up 20 basis points year-on-year and driven by the ES segment. Gross margin in the quarter was 29.5%, an increase of 80 basis points from a year ago. Within gross margin, we are seeing the benefit of our continued focus on pricing, greater productivity and operational efficiencies.

SG&A expense as a percentage of revenue was 13.2% in Q1, which is slightly higher than the prior year's quarter. Some of that increase was acquisition-related as we absorbed some initial SG&A costs and incurred some incremental transaction-related severance costs as well as higher professional fees. We expect this percentage to improve in the upcoming quarters as we continue to manage SG&A headcount and further integrate the HEPACO and Noble Oil acquisition. For the full-year 2024, we anticipate our SG&A expense as a percentage of revenue to be in the mid-12% range, which is consistent with prior year. Depreciation and amortization in Q1 came in at $95 million, up from a year ago due to our acquisitions. For 2024, we now expect depreciation and amortization in the range of $390 million to $400 million.

Income from operations in Q1 was approximately $125 million, up slightly from the prior year. Q1 net income was $69.8 million, resulting in an earnings per share of $1.29. Turning to the balance sheet highlights on Slide 10. Cash and short-term marketable securities at quarter end were $443 million. In connection with the HEPACO and Noble transactions, we added $500 million in incremental debt to our term loan to finance those deals. Even with those additional borrowings, our balance sheet remains strong. We ended Q1 with total debt of $2.8 billion, a net debt-to-EBITDA ratio of 2.4x and continue to have no significant debt amounts coming due until 2027. Our weighted average pretax cost of debt at quarter end was 5.7%. Turning to cash flows on Slide 11.

Cash provided from operations in Q1 was $19 million, reflecting our seasonally weakest quarter. CapEx, net of disposals, was $137 million, up significantly from prior year due to investments in our facilities network, including approximately $20 million for our Kimball expansion and $15 million for our Baltimore facility. In the quarter, adjusted free cash flow was a negative $118 million which was in line with our expectations. In addition to CapEx spend, this total reflects the timing of incentive comp payments, interest payments and working capital. For the full-year 2024, we now expect our net CapEx to be in the range of $400 million to $430 million. This range includes the new additions of HEPACO and Noble Oil plus approximately $65 million to complete the construction of our Kimball incinerator and approximately $20 million for the purchase and expansion of the Baltimore facility.

During Q1, we bought back approximately 27,000 shares of stock at a total cost of $5 million or an average price of approximately $183 a share. At March 31, we had $549 million remaining in our repurchase program. Moving to Slide 12. Based on our Q1 results, current market conditions and our recent acquisitions. We are raising our 2024 adjusted EBITDA to a range of $1.10 billion to $1.15 billion with a midpoint of $1.125 billion. This guidance assumes $30 million of contribution from HEPACO this year and approximately $5 million from Noble Oil. Looking at our annual guidance from a quarterly perspective, we are expecting Q2 adjusted EBITDA growth of 7% to 8% versus prior year. We expect ES to continue its upward trajectory, and SKSS should benefit from the rising base oil pricing environment to deliver growth versus prior year.

We now expect this revised full-year 2024 adjusted EBITDA guidance to translate to our segments as follows: In Environmental Services, we expect adjusted EBITDA in 2024 at the midpoint of our guidance to increase 10% to 12% from 2023; leveraging our network of assets, volume growth in our core lines of business, pricing strategies; the addition of HEPACO and multiple cost mitigation initiatives will drive this result. For SKSS, we expect full-year 2024 adjusted EBITDA at the midpoint of our guidance to increase 6% to 8% from 2023. Given current market conditions and where we are today, we expect pricing to improve here in Q2 and into the back half. The promising initiatives that Mike outlined give us confidence that we can achieve this anticipated level of growth despite the slow start of the year.

In our Corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA results to be 8% to 9% -- to be up 8% to 9% this year compared to 2023. More than half of that increase is additional costs from the acquired companies and related severance and integration costs. Looking at it as a percentage of revenue, we expect Corporate segment results to be flat to slightly down from prior year. For adjusted free cash flow, we continue to expect a range of $340 million to $400 million for 2024 or a midpoint of $370 million. If you take that midpoint and add back the Kimball and Baltimore spend, you arrive at adjusted free cash flow of $455 million, which is greater than 40% of our adjusted EBITDA expectations at the midpoint. In summary, Q1 was a great start to the year.

We expect a favorable demand environment to support strong profitable growth throughout the remainder of this year. The ES segment has a healthy backlog of waste, a robust project pipeline, including PFAS opportunities and our services business all have good momentum. And we expect our SKSS segment to begin posting year-over-year growth this year. Overall, we look forward to the remainder of this year and continue to execute against our longer-term Vision 2027 goals. And with that, Christine, please open the call for questions.

See also

30 Small Business Ideas for Teens and

Top 10 Artificial Intelligence (AI) SEO Tools in 2024.

To continue reading the Q&A session, please click here.