Clean Harbors, Inc.

Greetings, and welcome to the Clean Harbor's fourth quarter and full year 2023 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. To ask a question today, please press star 1 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDowell, General Counsel. Thank you, sir. You may begin.

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 caution not to place undue reliance on these statements, which reflect management's opinions only as of today, February 21, 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 gap 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? Thanks, Michael. Good morning, everyone, and thank you for joining us. Our full year and fourth quarter 2023 performance underscores the role of long-term growth engine for Clean Harbors. The strong core we have built through organic initiatives and strategic M&A continues to strengthen our sustainable business model with unique competitive advantages. These advantages include a portfolio difficult to replicate assets, a diverse customer base, high-value services anchored by strong pricing, as well as an outstanding and highly skilled workforce. As our ES results throughout to drive increased efficiencies in areas such as labor, transportation, and logistics, while capturing meaningful acquisition synergies as we advance our Vision 2027 strategy. Before discussing the quarter, I want to take a moment to recognize the valuable contributions and substantial efforts of our entire team in delivering a terrific 2023. To our employees, thank you for everything you do to make Clean Harbor successful. Turning to Q4 performance on slide three, That concluded an exceptional 2023 for this segment, where we increased our annual adjusted EBITDA margin by 160 basis points. All of our ES businesses, technical services, safety, clean, environmental, industrial services, and field services delivered growth in Q4 as demand for our highly trained workforce and unique asset base continues to be strong. The market pricing improvements we saw in October faded as the quarter progressed. Volume sold was a positive metric, an increase significantly from Q4 in 2022, as the team worked hard to continue to grow its sales pipeline, especially with our blended and value-added products, to offset weaker pricing. Mike will provide more detail on SKSS in his remarks. As we often do, I want to highlight our remarkable safety results. the team delivered a Q4 TRIR of 0.51, which resulted in a full year of 2023 rate of 0.63, the best safety performance in our history and far exceeding our annual goal. We can't say enough about the great work the organization continues to do around safety and how meaningful it is to all of our stakeholders. Turning to environmental services on slide four, increased disposal volumes, solid pricing, and the addition of the Thompson Industrial, while EBITDA increased 16%, resulting in margin expansion of 190 basis points from the fourth quarter of 2022. In the quarter, as it has all year, our safety, clean environmental services business led the way with 11% top-line growth. Containerized waste services continued its strong growth trajectory, into our network. Technical services revenue rose 5%, led by pricing and greater year-over-year volumes into our incinerators, landfills, and our TSDS. Q4 incineration utilization was 85% versus 84% a year ago. Average incineration pricing was up 7% in the quarter due to a favorable mix of pricing initiatives, and for the year, incineration pricing was up 9%. For 2023, Utilization was 84% as we conducted substantial repair work, including winterization at our southern plants due to the deep freezes of the past several years. We continue to see a consistent flow of remediation and waste projects in the quarter, which helped drive a 24% increase in Q4 landfill volumes, with the average pricing up 3%. For the year, landfill volumes and average price were both up 10%, In addition, we have seen the pipeline for our unique total PFAS solution continue to grow. We believe we're the only company that can provide a fully integrated end-to-end solution to the market, which includes commercially scalable destruction. Despite no large-scale emergency response events, field service revenue was up 3% in Q4 through better cross-selling and leverage of our organization. Industrial services revenue grew 8% in the addition of Thompson Industrial. As I mentioned a moment ago, overall ES segment EBITDA was up an impressive 16% to Q4, more than double our revenue growth of 7% as we leveraged our facilities, fixed assets, and workforce. For the full year, the ES margin rose 160 basis points to 24.4%. We enhanced our margins, not only from pricing, 2024, we will continue to seek innovative ways to apply AI analytics and greater automation to our business. For example, we are enhancing our proprietary wind system to minimize revenue leakage, eliminate or lower rental costs, apply more sophisticated pricing strategies, and pursue sales opportunities more rapidly. Before turning it over to Mike, Please turn to slide five for an overview of our recently announced HEPCO acquisition. We believe that HEPCO will be a terrific addition to the company and contribute to considerable shareholder value in the coming years. It is a 400 million all cash transaction that we currently expect to close in the first half of this year. HEPCO operates across 40 locations, 17 states, and on an adjusted basis generated about 270 million in revenue It is an attractive deal that we expect will generate approximately $20 million in synergies after its full year of operation, which would equate to a 7.1 times multiple. The acquisition of HEPCO gives us access to additional markets and new customers, as well as enhanced capabilities around railway and transportation responses. We look forward to adding it. that they will benefit from our deep knowledge of field service business, greater scale, and career opportunities. Mike, Eric, and I visited with their team right after we announced the deal, and we see a very strong cultural fit that should lead to a seamless integration. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike.

Thanks, Eric, and good morning. Turning to SKSS on slide six, after a promising start in October, following a September price increase, base oil and blended pricing began to shift the other way and grew more challenging as we moved through the quarter. As a result, SKSS revenue was 7% lower year-over-year in the quarter. The weakness in base oil and blended pricing was partially offset by greater volumes sold of both base and blended oil, as well as a shift to charge-for-oil versus a pay-for-oil average a year ago for our waste oil collection services. SKSS adjusted dividend declined 14% in Q4, entirely related to the more narrow spread compared to last year and the pricing slowdown we experienced over the course of the quarter. Despite the lower year-over-year revenue, we maintained a healthy adjusted dividend margin of 21.7%. To feed our refineries, we collected 53 million gallons of waste oil in the quarter. The team worked diligently to secure gallons at the best possible price while ensuring our plants had the feedstock they needed. As we've highlighted previously, one of our strategies for reducing the volatility of this business is to grow our blended volumes. Not only does blended oil generate more emitter dollars than base oil, it tends to be more stable because we're selling branded products such as motor oil and hydraulic fluid. In Q4, blended volumes increased by more than 60%. We intend to continue to focus on opportunities to sell a larger percentage of branded products going forward. Blended product sales accounted for 23 percent of volume sold in Q4, up from 17 percent a year ago. We recognize that this business has faced challenges in 2023 as the market continues to adjust after an extraordinary 2022 and after a series of price declines and destocking by customers throughout much of 2023. Going forward, our strategy for SKSS will continue to center on affecting those areas within our control including the price we charge for the collection of used motor oil, labor and transportation costs, and re-refining production rates. We will continue to focus on the expansion of our blended products, such as motor oil and hydraulic fluids. In 2024, we intend to increase sales of our blended volumes through both direct and wholesale channels. We are also moving ahead with our promising group-free program we outlined on our last earnings call. We expect to launch this initiative in Q2. Turn to slide seven in our capital allocation strategy. At our investor day last March, we shared our five-year strategy, Vision 2027, which outlined our plan to grow both organically and through acquisition. The foundation of that strategy is to drive margin improvement each year through economies of scale on a highly leverageable network of permanent facilities, unique assets, and trained personnel. This will continue to lead to increasing cash flow generation and value creation for our shareholders. On the M&A front, we evaluated a number of transactions during the quarter, culminating in the HEPCO agreement we announced earlier this month. We continue to see a healthy flow of potential candidates for both offering segments and will remain very active on the M&A front as we execute our Vision 2027. In terms of growth capex, the largest internal investment in our history is our new Kimmel, Nebraska incinerator, which is on track to open commercially later this year. We expect the original design and build to cost $180 to $185 million. Based on our ongoing conversation with customers about Kimball and in response to their future plans, we have elected to add several enhancements to the facility at an aggregate cost of approximately $15 million. These enhancements, due by demand, will include more direct burn bays and additional specialized lines designed to handle certain types of high hazardous materials. These additions will enable that site to handle and process even more high-margin materials and containerized waste. We still anticipate that the new incinerator will commence operations late this year. To that end, we do expect to incur some non-recurring startup costs related to Kimball this year. Since they're one time in nature, we likely will adjust them out of our reported EBITDA. Difficult to estimate the exact amount today, as it partly depends on our official launch date, but we know it will be several million dollars. We will report on that as we get closer to our commercial launch. We are also planning a second sizable capital project this year. It relates to our Baltimore site. We recently purchased a large parcel of land next to our existing plant, and we intend to invest and upgrade that property with an eye toward consolidation of our branch service offerings, adding more recycling capabilities for our network, and creating a production line for containerized manufacturing servicing our entire network. The total cost of the real estate and site upgrades we intend to make will total approximately $20 million. We expect to ramp up activities at that location over the course of this year. I'll let Eric Dugan speak to our debt structure and leverage, but I'd like to conclude by emphasizing that we continue to be bullish on our growth prospects for our ES segment. We entered 2024 with considerable momentum in this segment. We expect the favorable market conditions, whether reshoring, infrastructure spend, or regulatory trends, to continue to support our profitable growth plan for 2024. Our backlog and dialogue with customers gives us confidence about demand this year. Our project pipeline is strong. Our pricing strategies are working. Industrial services is coming off a record year, and we expect that business to continue to grow. and field services will greatly benefit from the addition of HEPCO once that closes. After a challenging 2023, we see SKSS returning to growth and profitability in 2024, with market pricing appearing to have stabilized following a decline toward the end of last year, as well as a host of growth projects I outlined earlier. We have much to be excited about in both environmental services and SKSS. With that, let me turn the call over to our CFO, Eric Dukas. Thank you.