Clean Harbors, Inc.

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. 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. Thank you, sir. You may begin.

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? Thanks, Michael. Good morning, everyone, and thank you for joining us. Starting on slide three, 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 clean sustainability solution 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 our 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 Oil Plus 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 the 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 result, 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 23 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 in 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 Clean Plus 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 service segment on slide four, the 15 percent growth in revenue is 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 reshoring, 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 percent increase in average incineration pricing. Q4 landfill volumes rose by 28 percent 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 clean environmental revenue was up more than 20 percent 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 five. Profitability in our SKSS segment cooled down after a record-breaking 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 22 started to abate in Q4. This improvement should be a tailwind for overall base oil demand in 23, 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 oil plus program. Turning to slide six in 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 in 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? Thanks, Alan.