Alan McKim - Chairman, President, Chief Executive Officer Mike Battles - EVP, Chief Financial Officer Eric Gerstenberg - President, Chief Operating Officer Jim Buckley - SVP, Investor Relations Michael McDonald - General Counsel

Greetings! Welcome to the Clean Harbors, Third Quarter 2021 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. 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 Mr. McDonald’s, you may begin.

Thank you, Robin. 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. The slides for today's call are posted on our website, and we invite you to follow along. The 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 November 3, 2021. 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 revisions 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-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. And now, I'd like to turn the call over to our CEO, Alan McKim. Alan.

Thanks Michael. Good morning everyone. On slide three you can see the strong contributions we received from both Environmental Services and Safety-Kleen Sustainability Solutions business, really in posting the highest quarterly revenue in our history. Within Environmental Services we benefited from a consistent flow of high-value waste streams in our disposal and recycling network. We also benefited from a recovery in a number of service businesses in the quarter, particularly our industrial services business. The SKSS segment outperformed our expectations. Market conditions caused the re-refining spread to remain wide all quarter, and the team executed well in a disruptive environment. Product demand was robust throughout Q3 due to the industry supply shortfalls and growing interest and our sustainability offerings. Without question, our industry has had to deal with economic headwinds, including higher supply chain, labor and transportation costs. We met those head on, putting in place a multitude of necessary price increases to offset the rising expenses. Adjusted EBITDA grew 10% from a year ago, resulting in a healthy 19.5% margin. Adjusted free cash flow was in line with our expectations and we are on track to hit our new increased annual target. Turning to our segments, starting on slide four, Environmental Service Revenue grew 15%. Favorable mix and pricing in our disposal network, combined with increased activities in a number of our service businesses, including industrial and field services really drove the year-over-year increase. Industrial Services grew 24% as customers continue to move forward with large turnarounds to reduce the backlog of maintenance projects that have been deferred due to the pandemic. Our base business and field services, excluding decontamination work was up approximately 25%, reflecting a more typical level of scheduled work and other smaller response jobs. As expected, adjusted EBITDA in the ES business segment was down…

Thank you, Alan, and good morning everyone. Turning to our income statement on slide nine, revenue increased 22% in the quarter, driven by top-line growth of more than $75 million in each segment. It is important to note that almost all that growth is organic. Adjusted EBITDA was 10% higher than a year ago, coming in at $185.1 million. Our EBITDA margin for the quarter was strong at 19.5%. On a percentage basis, SG&A was up 30 basis points from a year ago to 14%, largely due to higher incentive compensation, as well as severance and integration costs. For the full year, using the mid-point of our guidance range, that now includes HPC for a portion of Q4, we expect SG&A to be up in absolute dollars from the prior year, but flat to slightly down on a percentage basis. Depreciation and amortization in Q3 declined slightly to $71.5 million, in line with our expectations. For 2021, we now anticipate depreciation and amortization in the range of $295 million to $305 million, which includes the impact of HPC. Income from operations increased by 25%, reflecting our 22% revenue growth, as well as benefits from our pricing strategies. Turning to slide 10, cash and short-term marketable securities at quarter end were $711.5 million, up more than $140 million from year-end and up approximately $45 million from June 30. Debt in quarter end was $1.55 billion, with leverage on a net debt basis of 1.4x. Debt ratio obviously changed recently with the addition of $1 billion of seven year term debt at LIBOR plus two to support the HPC acquisition. Our weighted average cost of debt today, including our recently issued debt is 3.3% and we continue to have no debt maturities until 2024. Turning to cash flows on slide 11, cash…

Thank you. [Operator Instructions]. Our first question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your questions.

Very good morning all, and thanks for taking the questions.

Hi Noah!

Hi, how are you? Maybe can you start by talking about the acceleration of pricing initiatives which you mentioned during the prepared remarks? I guess what level of price in ES do you believe is needed to drive margin expansion in the segment as we head into 2022. What's your confidence and ability to get that price? And how much can you actually drive in F&S, including HydroChem or does it need to come primarily from the disposal side.

No, I think. This is Alan, I think pricing really needs to come from across the board. Certainly transportation impacts all pieces of our business, as you know and that's where we have seen the greatest amount of challenge, in moving our waste materials, but also servicing customers and gathering waste. So we definitely know that, we've had limitations on getting new equipment and getting trailers, getting subcontractors to support us when we’ve now maxed out on internal capability. So I would say transportation really has tentacles throughout all aspects of our business. But as we think about price increases moving forward, we recognize that many other costs, materials and supplies, labor costs are going up, fuel, other, energy, natural gas and so forth. So our team which has been in place for years here, really is working forward across all lines of business, with pricing initiatives that have been not only going on this year, but are going to be actually accelerated going into 2022.

Okay, thanks. And just sort of your confidence around ability to get enough price to drive margin expansion in ES for next year.

Yeah, I think certainly we have some cost headwinds, in regard to our labor cost and other costs as you know. So we are not only hoping to offset those increasing costs, but also to get some on margin expansion from that.

Yeah Noah, I think the different this year versus prior years as well, is that stick rates have been actually much better than we expected, and that's going to continue. I think the message is people got it, they understand it. Their costs are going up across the board, and so when we've gone to customers with price increases, they've been receptive.

Yeah, it makes sense. And just as a follow up around HydroChem, you provide a little bit of color around the integration so far. Can you give us a little bit more on where you’re first focusing on kind of some of the key early initiatives, the priorities. And then if it’s possible, can we get any thoughts about the cadence of how those $40 million in cost synergies flow through over the balance of the first full year.

Sure. Well certainly our day one plan was to get HydroChem up and running on a platform, which we successfully did, and you know the management team is in place now, and we've got some terrific people that came over from HydroChem. Combined with our team, we are really feeling excited about moving forward. There are obviously some synergies that we’ll be working on in the next three months here to close out the year and then moving forward into next year, a big focus will be on sort of looking at contracts, because we do have a number of customer overlaps within our businesses and so we're going to have to be working real closely with our customers as we combine contracts together, so we can move forward into 2022 with sort of everything under one corporate organization here. So that's going to be our primary focus is to get those contracts rationalized.

Okay, perfect. Thanks so much.

Our next question is from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Yes hi! Good morning everyone.

Good morning.

Hi Jerry!

Can we talk about the incinerator pricing cadence based on contracts that you have in place heading into the fourth quarter. What level of incinerator price increases are you expecting based on what's already planned for the quarter? And then, you know coming back to the 3M announcement now that some of your customers had more time to process what 3M is doing, I'm wondering if you had increase for potential similar arrangements in terms of increasing scope with existing customers that might be vertically integrated in incinerators. Thanks.

Hi Jerry! This is Mike. I’ll start and then I’ll turn it over to Eric, who is with us today. So when you think about pricing for Q3, as we said, as Alan said in his prepared remarks, Q3 pricing in incineration was up 11% and in the past we've been asked about what it is that mix versus price, and we’ve always said, two-thirds mix, one-third price. I think in Q3 it's more two-thirds price, one-third mix. So we have been getting kind of a lot of price and has contacts have come up for renewal, even off-cycle discussions, we've been able to drive price in incineration at a pretty high clip, kind of all year as you know versus last year and the year before and we continue to drive kind of good price expansion in that business. And so I expect that, as contract come up for renewal and as we have, as Alan said not just in incineration, but in all parts of our business, we've been able to drive – we'll be able to drive price to drive profitability in the business. And when talking about 3M, I’ll turn it over to Eric and give you some more color on that.

Yeah Jerry, this is Eric. So our start-up with 3M continues to go well. We've been handling a significant amount of volume from them throughout the course of this year and continue to implement our strategy with servicing all of their locations. As we look at our other captives in the industry, we have relationships with every one of those units that have a captive incinerator and we continue to work closely with them. They've been our customers for a long time. There is certainly areas that we can continue to help them on reducing their costs by leveraging our network. So there does continue to look like there's opportunities there ahead of us.

Okay, great. And then on the re-refining spreads, you mentioned a record quarter for you folks. Can you talk about how do you view normalized re-refining margins posts IMO 2020 now that the world will hopefully be normalizing post COVID. Where do you expect re-refining margins to shake out compared to prior cycle levels?

Yeah, I think we certainly see the impacts of IMO when we look at outlets for recycled fuel oil versus our internalization of taking used motor oil and re-refining in to base oil, and so we could clearly see it in that market. We're going into the fourth quarter here and into the winter months with record inventory, over 40 million gallons inventory, so we're well positioned to have what we need in our facilities to process and we're now looking at alternatives for some of our oil, because there's just a ton of oil around and I think that's evident of IMO 2020 in my opinion anyway. And so I think that moving forward into ’22, although we think that you know base oil pricing may start coming down, I think the team that we put in place at the beginning of this year to run this segment of our business is really doing an excellent job of maintaining that spread and I think customers are really interested in our green oil, you know the whole idea of our sustainability program. I think we could sell a lot more direct lube oil to our customers if not for the additive shortages that we had, the hydrogen problems that the industry is having in getting hydrogen. So I think next year we’ll be able to offset probably some decline in base oil pricing, with a further high margin sale of our blended direct materials, because the demand is there, we just need to get them the product.

I appreciate the discussion, thanks.

Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your questions.

Hey! Good morning guys.

Good morning.

Hey Tyler!

Hey Mike! On the guidance it looks like you raised EBITDA midpoint, but I call it $30 million. I think you called out the $15 million in HydroChem. But my hunch is, is there some moving pieces in that other $15 million. I don't know if you totally look at it this way, but could you bridge the other $15 million. I know you got good guys like wider spreads and then maybe some things working against you, but could you maybe bucket some of that?

Sure Tyler. So it really is the addition of HydroChem. Just to clarify, when you talk about HydroChem, you know that has up to $5 million of severance and integration costs, and on a monthly basis the business is not linear, right. We talked about over $100 million of EBITDA in that business, but $15 million looks pretty light for Q4. We didn’t buy that business until after the first week of October. October is a great month for the industrial business, a lot of turnaround is happening and November and December tend to be slower. And so it's important to note that $15 million is not a – please don't take $15 million as a run rate as you go into 2022 from a mass exercise. I know you guys love spreadsheets. You know when you think about other things, it really is you know that – I’ve called consistently spreads starting to narrow and as we sit here talking to you, I don't see that happening, so as such that’s allowed us to raise our guidance again in Q4. There are a lot of moving pieces, whether it be severance cost, integration costs, other things we're doing, but that’s – I'd say at a high level, that’s just driving it.

Okay, that's helpful. And then Alan, on the pricing flexibility, I mean I get it in disposal, maybe even charge for oil and S.K., maybe even emergency response, but in these industrial cleaning contracts, how much pricing flexibility do you have? Is that – those contracts maybe escalated annually or can you go back and maybe touch pricing there more often, you know in times like this.

I think that you know there's been a, certainly a shift over the last and a half with our relationships with a lot of large industrial accounts. We gave back a lot of price concessions and even though we had firm contracts with firm pricing, we gave back millions of dollars during 2020 with pricing concessions. We are going back to those customers and others and realizing that yes, we have contracts in place, maybe some of them are not coming up for renewal for a year or two, but we are raising prices to those customers as well. We're going back and getting those concessions and then some certainly for sure. And with the shortage in labor, with the inability to get equipment and transportation costs, there isn't a customer that we do business with that hasn't been touched by what we read about in the paper, all the supply chain issues. And so you know our feeling is quite frankly, you know if we can't get the kind of margins for the risks that we're taking, we're not going to continue to do business, we're going to move forward and share those resources with other customers where we can make the margin and we can recover the cost increases that we're seeing.

Okay, that's helpful. And then just lastly, I know it is early, but just any flavor on CapEx for next year? I assume you're going to have a big jump in Kimball spend.

Yeah, yeah Tyler. So you know you have a couple of things there. You're going to have you know the HydrChem addition, and that’s going to generate a fair amount of EBITDA, but they also need capital and you know we have about $55 million which we talked about before for the incinerator keyed up for 2022.

So is mid-two’s a good place holder or is it maybe towards three?

We have to go through our budget process and that includes the capital budget, so I hate to kind of give 2022 guidance on this call.

Okay, alright, I appreciated it. Thank you.

Our next question is from the line of Michael Hoffman with Stifel. Please proceed with your question.

Hey, thank you very much. Alan, if I could start with safety, I applaud that you share that with us. So what do you think happened? Is it just that everybody was having to work so hard because there were such labor issues and then you had to kind of bring attention back to that and then I want to follow up with a labor question.

Yeah, I think you know we've seen it over the last 18 months and you know a lot of us think that there's just a huge distraction, particularly going through the pandemic. You know people, we just think that they are not focused and you know it's a lot of slips, trips and falls, you know stepping into a pot hole and twisting an ankle. We’re not seeing tremendous, you know hugely injuries, but we're just seeing a lot of these small crazy things that otherwise we just would have never seen you know I think before the last 18 months or so, and so we – I guess we chalk it up to maybe a distraction at this point. But you know our TRIR, certainly with a combination of HPC you know will probably be close to one or even under moving forward, because we have a lot more billable hours now coming over, but you know I think we're just going through this sort of disruption and I think that's what's causing some of these issues.

And then the labor issue, my view is that total addressable pool has shrunk permanently and that where this doesn't – you can't fix this with just paying people more. So how do you address expanding the addressable pool for Clean Harbors? Where you go looking to make that pool bigger, so that you have people you can try and hire?

Yeah, I think you know we have to really look at all places, you know whether it's the trade schools or the maritime academies or it’s you know going into the driver schools or the military. You know we have close to 800 military personnel now, former military personnel now working for us, so that's been a great place for us to recruit from and we've got some real strong relationships with the army there that we want to expand, but we have to do better. We are several thousand people short. Our revenues are constrained by our staffing and we also know that from a safety standpoint, you know that first year employee tends to have a higher incident rate than certainly other employees who've been here longer, more experienced, better trained. So really doubling down on training, onboarding and really trying to fill those open key positions that we have out in the field.

Okay, and then Mike, can you help us. We are modelers and spreadsheet people. So what's the rollover M&A sales and EBITDA you want us to use for HydroChem?

Yeah so, if you say you know $15 million and there's you know let's say $3 million of severance and integration, so that’s – and then we’ve already said publicly $115 million plus $20 million, $25 million of integration synergy cost, so you can do the math on that and you can get a roll over number from there.

Okay, so I’m thinking $115 million less $15 million and then help me with the $3 million. Is that $3 million is incremental to the $15 million, so it's a negative, it's really $12 million.

So it's, so let’s say its $15 million for the quarter, so say its $15 million for the quarter, $115 million we’ve already said publicly plus $20 million, $25 million of synergy costs. So that gives you like $135 million minus the $15 million, so it’s probably at $115 million run rate; incremental EBITDA 2022.

Got it, and then if I did the math right, you're somewhere between up to maybe $100 million above 2019 in used oil, SKSS. Some piece of that as Alan alluded to has to have benefited from IMOs. So when the number corrects, what I am interested in is there is 115 from HPC, there’s potentially on an annualized basis 15 to 20 from Vertex. So I think we can have a conversation that says, even if there is corrected 100% on January 1, you’re not down, your flat, maybe up, all else being, without any other growth anywhere else. Is that the right way to start the thought processes about ’22?

Yes, so we have to go through a budget process that includes a Board review as well as CapEx budget. So it’s hard to kind of speak to that, kind of with some much level of precision. But I would say that the, when you think about the spread, you know as we talked about it about before Michael, it's kind of three things. It is kind of impact of the IMO 2020. I’d say strong spread management by the team we put in place kid of earlier this year and it is wide. And I don’t know, it’s really hard for me to predict kind of when that, when that gets back to, when that contracts. And if that contracts, it’s certainly not going to happen on January 1. As you know, it took a long time to get to here. It will also take a long time to get back to whatever normal is; I don't know what normal is. So it's really hard for – I mean I think personally believe for us and people in our industry, this will be one of the hardest budgets and hardest guidances we’ll have to do in our time here, because that's going to be really hard to predict and if and when that does come back to whatever that was kind of pre-pandemic if it does. So it's hard for me. The good news is, I don't have to give that today. I have time to think about kind of where we are. We’ll have a conversation in February about that, looking forward to it.

Okay. Thank you very much.

Thanks Michael.

Thank you. [Operator Instructions]. Our next question is from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Thank you. Good morning. You talk about in the ES business, some of the project volumes stalling a bit, at least in your slide you talked about it as a result of the pandemic. Just as we're starting to see some of the Delta concerns, you know seemingly hopefully abating more recently, should we see that turn around. I assume you're starting to already.

You know we have a pretty good pipeline, but Eric maybe you might want to comment on that.

Yeah Jim, clearly as we've gone through this year, our pipeline has been increasing quarter-to-quarter. The difficulty came about when many of these projects were restricted from getting permits to be able to move forward and do the clean ups that were required. And so the permit process has continued to be somewhat delayed. But our pipeline has grown, our visibility of projects today is much better than a year ago, and we do foresee as we go into the fourth quarter and get into 2022 that we’ll have a much more robust project business into our sites.

Got it, and just with respect to HPC, I can certainly appreciate the short term goals that you need in terms of integrating the business. But you’ve also talked about, cross selling opportunities and I'm wondering, how soon in 2022 might we begin to see the benefits of that.

Yeah, at least I’ll start. I think we’ve looked really from a sales standpoint, we've sort of combined our sales organizations together now and I think looking at the white space that exist across particularly the top 40 or 50 accounts of HPC and vice versa, Clean Harbors as well, and so I think the team has really done a good job in these early weeks to start planning the strategies against that white space that existence on some of these contracts that we each have, kind of share our capabilities across those accounts. I'm not sure, Eric if you want to add any.

Yeah I would say in the early days that our teams on both sides now combined as one, are very excited about the cross sell opportunities. You think about refineries and chemical plants alone, pre-acquisition, obviously HydroChem was really only doing industrial cleaning, and things like leak detection and repair, and there's an opportunity to combine forces to do additional material processing, tank clean outs together, transportation and disposal of those tank clean outs. So our teams, our sales working together, they are already knee deep back into starting to expand and cross sell without our customer base.

Jim as we’ve given out these numbers, either in the earnings and the announcements we’ve made, in connection with the acquisition and through the earnings calls, our models do not include any across sell.

Got it, and just with respect to pricing at HPC, I assume same kind of dynamics that you're seeing in the ES business. Have they’ve been, what have they been doing on the pricing side as we've seen some of this inflationary pressure really build or is this something that you're addressing now at HPC, that part of the business.

Yeah I would say we're just addressing it now. We were restricted during the entire integration process of looking at any pricing data right up until the close. So with the close taking place on the 8th, it's sort of been from that point on now that we've really been aggressively trying to look at all that. But I would say, the three months prior to signing our agreement, HPC did a pretty good job of managing pricing certainly with their customer base. But it had to take a pause during the integration. So I think we can be more aggressive now and try to get everything at least underway in the near term here.

Got it. Thanks very much.

Thank you. Our next question is from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Thanks so much. I wanted to switch the topics to what’s going on in Washington. I know things are still not yet finalized, but you had a few more months to look at some of the plans that they've been talking about, from an infrastructure perspective etcetera. Any indication what impact that could have on your business over the next few years?

You know, I think one of the key things is to look, lowering the age on drivers to 18 and that, there are a lot of, a lot of routes that we do and a lot of movements that we do that would help us a lot, to be able to put on a new generation of drivers sooner and I think that will help in that issue across the board. But I think, I don't know Eric, do you know where we are with PFAS as this point. I know that’s a big topic that people have asked.

Yeah, PFAS continues to be a big focus. Obviously in October the EPA issued a PFAS policy statement, therefore the first focus over the next year or two is around drinking water and groundwater. We continue to follow very closely where they are going with the legislation they look to create and what levels and limits they deploy. But that continues to be an opportunity for us, but it's going to be a long, long time in the making and really a long tail over 10 to 20 years of how we look at that.

Okay, that's helpful. And just keeping the discussion about the regulatory environment, I don't know if you can give us a little bit more color on the issues with the Vertex Energy closing in. What are the milestone we should be looking for over the next few months before that deal closes? Thanks.

Sure Jeff. So you know as we mentioned, we did get a second request from the Federal Trade Commission. We are working to respond to that and that includes providing all of the data we need to give a thoughtful response back to the government. You know until then, we are just working. That business continues as a separate standalone public company and so do, and so we’re both work – we both have a list of things we have to go do and we are working on it every day.

Alright, fair enough. Thanks so much.

Thanks Jeff. [End of Q&A]:

[Operator Instructions] Thank you. This concludes our question-and-answer session. I'll turn the floor over to Mr. McKim for closing comments.

Okay Rob, thanks. Thanks for joining us today. We are participating in the Baird Industrial Conference next week, and certainly a number of other conferences before year end. So we look forward to speaking with many of you at those events. Have a safe day!

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.