Clean Harbors, Inc.

Greetings, and welcome to the Clean Harbors, Inc. First Quarter 2022 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors, Inc., Thank you, sir. You may begin.

Thank you, Christina, 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, and SVP of Investor Relations Jim Buckley. Slides for today's call are posted on our 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, May 4, 2022. Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call, other than through filings made concerning this reporting period. Today's discussion will include references to non-GATT measures. Clean Harvest believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable GATT measures are available in today's news release, on our website, and in the appendix of today's presentations. With that, I'd like to turn the call over to our CEO, Alan McKim. Alan? Thanks, Michael.

Good morning, everyone, and thank you for joining us. I'd like to start today's call with a topic I'm passionate about, and that's safety. It's our priority here as we focus across the organization our number one core value. Having had the privilege of being in this seat for more than 40 years, I've always envisioned that by continuing to integrate safety into our culture, that we could show continuous improvement and really generate an annual total recordable incident rate of under one, with our true goal of being zero incidents. We took a significant step toward that milestone in Q1, concluding the quarter with a TRIR of 0.97. When you look at the waste industry, that level of safety would far exceed anything that our peers are delivering. And I want to express my appreciation to our entire team for looking out for one another and more importantly, practicing our core safety philosophy of safety starts with me, Libet365. That mindset is critical in order for us to achieve our goal of a sub 1-0 TRIR for this year. Turning to our Q1 financial results on slide three, we exceeded our Q1 guidance as both segments performed ahead of expectations. Our results were consistent with the past several quarters, with strong demand across our key lines of business, driving healthy top line growth. In what has historically been a seasonally weakest quarter, margins came in at a solid 15.4%. Outside of the first quarter of 2021, this quarter was our best Q1 margin performance since we purchased Safety Clean in 2012. Despite supply and inflationary challenges, the team executed well. implementing comprehensive pricing programs supported by cost control initiatives. A couple of metrics that are not on the slide, but I wanted to mention this morning are hiring and turnover. On the hiring side, our recruiting team has done an excellent job attracting new talent and expanding our workforce, given all the demand for our services. In Q1, we added a significant number of billable employees. and expect to extend that hiring momentum in the coming quarters. The opportunity to work for a sustainability-focused company that protects the environment has really been a strong selling point for our recruiting team. Over the past several years, we've made substantial investment in our workforce. These have included offering additional benefits, absorbing healthcare cost increases, increasing compensation, and promoting more employees from within. These investments have resulted in a decreased voluntary turnover. After a brief uptick in the second half of 2021, voluntary turnover has since receded to pre-pandemic 2019 levels. Clean Harbors is a place where many people have built and are continuing to build a successful career. With more now than 6,000 of our employees having been with us over 10 years, and of those, even 1,500 have been here more than 25 years. That creates a lot of stability across our business and a wealth of institutional knowledge that enables us to train the next generation of leaders here. Turning to our segment starting on slide four, environmental service revenue grew 45% in Q1. This increase reflected the HPC acquisition in late 21 and healthy organic growth driven by customer demand and increased pricing. While we're still in the early innings of integrating HPC, after just one full quarter, we're already beginning to benefit their broad capabilities, particularly as we've moved into the spring turnaround season. The potential to capture synergies and to cross-sell our products and services is quite extensive. During the quarter, the pace of activity in our services business quickened considerably, resulting in strong organic growth. Revenue in our legacy industrial service business, if you exclude HPC, grew 24%. Likewise, our base business in field services, not including HPC, and the decontamination work in both the periods, increased 28%, driven by cross-selling and a steady flow of small to medium emergency response jobs. Safety, clean, environmental also continued at positive momentum, increasing 9% from a year ago. Looking at the ES segment profitability, adjusted EBITDA climbed 31% in Q1 on strong revenue and pricing, coupled with cost control initiatives. As expected, segment margin was down year over year. This is primarily attributed to a tough comp with Q1 of 2021, which included both the government assistance and a higher level of COVID emergency response work, as well as the fact that we have yet to fully integrate the HPC business. Environmental service margins should improve as we move through the year, and we would expect the incremental benefits of our pricing, cost reductions, and synergy initiatives, excuse me, to more than offset the impact of inflation. Within our disposal network, incineration utilization improved to 85% from 80% in Q1 a year ago. Average incineration pricing was up 2% from a year ago based on mix in the quarter, which included some project volumes. So if you use a market basket approach, our average price was up 7%. A pickup in projects also enabled us to increase the tonnage into our landfills by 14%. The head of our remediation team recently commented that the first half of this year is already the strongest that we've seen in the last five years. Revenue from COVID decontamination work totaled approximately $9 million in Q1. That amount was greater than we anticipated, but down substantially from $28 million in Q1 a year ago. We did not expect much more COVID work here in 2022. Pot washer services were flat with a year ago, while most safety clean branch core offerings, including containerized waste pickup and vac services, grew at a very strong pace. Moving to slide five, revenue in our SKSS segment was up 44 percent through a combination of healthy production levels at our plants and higher base and blend product pricing backed by overall market demand. Adjusted EBITDA rose by more than 20 million, or 64 percent. We continue to capitalize on market conditions to maximize our re-refining spread through product pricing gains and effective management of our collection costs. Waste oil collection volumes were up again, growing 13% to 53 million gallons, and at a PFO lower than Q4, as we had to address some inflationary pressures in that business. Our percentage 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 in our base oil. Turning to slide six, I want to touch on a handful of growth initiatives that we have underway. This is an exciting time at Clean Harbors. Given all the demand we're seeing, we're really laying out the foundation for our momentum to continue in years ahead. We have invested in a number of areas, such as expanding our inside sales team, supporting our safety clean environmental business, we were already seeing a lower customer churn. With bringing HPC into the fold, we've launched a renewed focus on cross-selling. For example, at a top industrial service customer in the chemical industry, we leveraged the HPC relationship to secure a greater share of industrial cleaning, specialty services, and waste disposal work at one of their sites. And in Canada, we parlayed HPC's custom tooling technology to convert a customer from performing a turnaround at their plant every three years to really making it more of an annual event. And our technology-based solution created a more efficient and expedited process for the customer, overall shortening the shutdown period. From a branding perspective, we've combined the Hydrochem PSE name with our legacy Clean Harbors Industrial Services brand, to create HPC Industrial whose logo you can see on the slide. We will officially be rolling out this new branding in all our contracts and legal entities on July 1st. We're confident that by combining our industrial services organizations under one brand, we'll simplify our service and communications to our industrial service customers. Finally, when we look at the incineration market, capacity is scarce. We're bringing 70,000 tons of additional capacity online in early 2025, which is attractive to companies that are weighing whether to shut down their captive incinerators. Turning to slide seven, we continue to evaluate opportunities to execute on elements of our capital allocation strategy. Internal investments are being prioritized around expanding throughput in our network, whether in disposal, recycling, or re-refining. certainly with the Akimbal incinerator being our most substantial long-term investment that remains on schedule. We're also adding a considerable amount of landfill cell capacity this year. On the M&A front, we continue to look at several bolt-on acquisition candidates that could support growth for one or both of our two operating segments. So let me conclude by reiterating what our numbers over the past few quarters have proven, that demand has never been stronger. Within our disposal network, we have a healthy backlog of volume and a strong sales pipeline, particularly within waste projects. Underlying trends, such as U.S. infrastructure spending, chemical manufacturing, and reshoring of multiple industries, are providing encouraging backdrop for our entire environmental segment. Within SKSS, the demand environment for our sustainable products remains very strong, supported by global supply dynamics and the rise in value of our re-refined base oil. We will continually carefully manage the front end of our re-refining spread, achieve greater transportation efficiencies using rail, and really target market-specific pricing to help counter those rising costs that we see. Across the organization, we are confident that we have pricing and cost reduction strategies in place To offset inflation in 2022, we have a uniformity of our systems and processes that enables us to respond quickly to market conditions, and we have an industry-leading team that is second to none. And we have instilled a culture of accountability and continuous improvement here at Clean Harbors, and that drives our results. So as I look out over the remainder of 22 and beyond, the market conditions are highly favorable across all our core lines of business. And we continue to expect Clean Harbors to deliver strong, profitable growth and a robust free cash flow this year. So with that, let me turn it over to Mike Battles.