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. [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, 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 3. 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-Kleen Sustainability Solutions 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 a 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 OilPlus 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…

Thanks, Alan. We are continuing to evaluate opportunities to drive organic growth through internal investments. Along those lines, our new state-of-the-art incinerator in Kimball, Nebraska remains on plan and on budget. While we could certainly put it to work today, we're excited to have that come to market with 70,000 tons of much needed capacity in early 2025. We entered 2023 with healthy momentum across all our key environmental services businesses. Our primary markets remain in great shape, given the underlying market dynamics and essential nature of our business. Within the Environmental Services segment, our backlog of waste remains at record levels, particularly due to the December outages, which well positions us for 2023. Given the diversity of our customer base, we expect healthy demand for our network of disposal and recycling assets to continue all year based on our customer interactions. Our service businesses all experienced solid growth in 2022. And with the expansion of our billable head count throughout the year, we should benefit from those new hires here in 2023. We expect our base business to continue to grow due to the ongoing re-shoring trend among manufacturers and investments in areas like semiconductors, pharma and EV batteries. We also expect project opportunities to continue to be healthy this year as monies from the infrastructure bill and other programs are released into the market as well as regulators providing more clarity around PFAS. Based on the results of our comprehensive third-party PFAS study, where we released late last year, we believe our incinerators not only represent the most appropriate solution for PFAS compounds but the only commercially scalable destruction solution already available in the market. Within SKSS, we continue to carefully manage both ends of our re-refining spread and collect the waste oil volumes needed to support our plants. Despite base oil demand taking a step down in Q4 from the heightened Q3 levels, today, we are beginning to experience a normal seasonal pickup, and when we are confident overall market conditions will remain favorable this year. While 2022 presents a challenge as a difficult comp for us, we see numerous opportunities to enhance our profitability in this segment, including raising production from 2022 levels including a full year of contribution from our synergy plan, increasing sales of blended products and capitalizing on the increasing interest in our sustainable products. Additionally, our KLEEN+ base oil brand that we launched in mid-2022 is helping to facilitate discussions with customers seeking solutions that will lower the environmental impact of their automotive and industrial lubricant products. With that, let me turn it over to Mike Battles.

Thank you, Eric, and good morning, everyone. Turning to our income statement on Slide 8. Q4 revenue increased 14% to $1.28 billion with nearly all of that coming from organic growth. For the year, we grew 36% to nearly $5.2 billion with the majority coming from organic growth and a full year of contributions from HPC, which we acquired in October of 2021. Q4 adjusted EBITDA was 29% higher than a year ago, coming in at $224.2 million, which equates to a margin of 17.5% or 190 basis points increase from Q4 of last year. We achieved this result through gross margin improvements, fixed cost leverage and controlling SG&A spending. For the year, adjusted EBITDA climbed 51%, with margins up 200 basis points to 19.8%. If you look at our 2022 results by segment, you’ll see that all three of our reporting segments meaningfully contributed to the overall margin expansion. This is an outstanding accomplishment given the inflationary environment we operate in all year long. Q4 gross margins improved 110 basis points to 30.3%. This is the first quarter where we had HPC in both periods, and our gross profit improvement reflects our ability to price to offset inflation, increase margins through productivity improvements and deliver strong operational efficiency gains. Q4 SG&A expense as a percentage of revenue improved 100 basis points to 13.2%. On our Q4 2021 earnings call a year ago, we shared the large opportunity to realize synergies as we integrate HPC. Our results reflect those captured efficiencies. On top of that, we continue to leverage our global capability center in India and diligently monitor all our costs. For the full year, SG&A costs as a percentage of revenue was 12.1%, reflecting a reduction of 200 basis points, in line with our November guidance. As we look…

Thank you. [Operator Instructions] Our first question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.

Good morning. So Alan, I was sitting here counting on my fingers and toes. I think you’ve done 140 earnings calls, and I believe I’ve been on all of them, and I wish you the best of luck.

Thank you, Michael. Some of those were good calls and some were not as good, right?

It’s always interesting, but I’ll say this out loud because I think people ought to acknowledge it. You always could see where the puck was going. And I always respect that about you. So Mike Battles, price, and I think about the lines of business at environmental, are we getting price in all three pieces to the technical services side, industrial field services and SKE. And when you think about that, how much of its rollover from last year versus rollover plus you’ve discovered price as a component of growth.

Yes, Michael, I think that it is – certainly, as we look at Q1, a lot of its rollover of price we did in the back half of the year because as you remember, Q1, we didn’t – we started to put price increases in place in Q4 and Q1, but most of them were in place until the back half of Q1. So I think that the year-on-year kind of price increases will certainly impact Q1. But make no mistake, I think that there’s also – we also continue down the path of looking at ways to increase price in all three or four of the, let’s say, the Environmental Services business, whether it be tech service, on disposal, field services, industrial and the SK branch business. I think there’s plenty of good opportunities there. You talk about kind of learning kind of how to do it more effectively. I think that’s true. I think that pricing will be part of our story – has been part of our story for many years and will continue. I think that there’s certainly opportunities there to continue to drive price well beyond the rollover that we see here in Q1.

And on a point of clarification around industrial and field services. If I think about what you look like today versus what you look like in 2016, am I right in that you basically have consolidated the other three major national players. And so the discipline that comes into the market about price should be better whatever the economic environment looks like.

Sure. Yes. This is Alan. Michael, I think there was certainly some benefits of bringing some major players together and leveraging the technology and leveraging the relationships that we all had with our key customers. And I think one of the things we’ve been able to do is work with a lot of our accounts to provide better safety programs, better technology, hands-free technology, bring more R&D now into the business, working with them to develop ways of performing the kind of services on these massive plants to help them get back online faster and safer and at a lower cost. And I think the customers really have benefited, I think, from that consolidation that’s taken place.

Yes, Michael, and this is Eric. I’ll add to that. I think that with our platform that we have today, we’re obviously an unparalleled national provider of field services and industrial services. We have as you know, many national accounts with locations throughout North America that we are able to support with the broad network that we have today.

Okay. That helps. And then the free cash flow, Mike, you had a very strong corporate overhead number, which I’m assuming is above average incentive comp for a great year, well deserved. So that pays out in the spring of 2023, that’s a headwind, I’m assuming into the free cash flow assumption. Is that about $10 million? Is that the right way to think about?

I think it’s a little less than that. We had a great year in 2021 as well. So the rollover impact is $5 million to $10 million, Michael, I’d say.

Okay. But there are some things like that. Working capital is a pretty healthy use in 2022? Is it assumed neutral? Or do you assume it’s a source in 2023 when I think about the free cash?

Yes. When you look at free cash flow for 2022, certainly, working capital receivables, inventory, other areas was quite a use. We’re assuming in the guide that we kind of hold the line on working capital, I think that’s going to be a positive. Obviously, if we get better at it and we’re putting a lot of programs in place to get better at managing receivables, getting paid faster. If that gets better, that’s a big win to free cash flow. But we’re assuming that it gets no worse. I think part of the challenge in 2022 was a very large acquisition and the integration around that. And so that was a bit of a headwind in 2022 from a free cash flow perspective as it relates to working capital.

Okay. And then just to be clear, the corporate overhead guide is off the $237 million – 3% to 5% growth off the $237 million not normalized, like...

Yes. We took the actual number, and we assume there’s going to be some – the thing when you think of the corporate cost, I think we assume that there’s wage inflation, things like that. There are other cost-saving initiatives that we’re putting in place. Those aren’t in the guide, and we’re hopeful we’ll do better than that.

Okay. Thank you very much.

Okay, Michael.

Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Thanks for taking the questions and congratulations to all. Eric, congratulations on the appointment. I guess, Kimball, the $90 million spend increase for 2023, that was always in plan. And so I just want to confirm, a, that you’re re-iterating the budget there. But then I guess we’ve seen just broadly across a number of industries, some delays in terms of large project timing and some CapEx inflation. And so with you reiterating the time line in the budget, can you just talk through for us what drives your confidence and ability to bring the plant online timely, any line of sight to major equipment deliveries, labor ability and so forth?

Yes. Noah, this is Eric. I’ll respond to that. So yes, reconfirming the $90 million estimate spend for 2023. The way we look at this project, we obviously have a wealth of experience from how we built out our El Dorado addition, Train 2 and from that, we’ve applied it to the much of the same principle as to how we’re thinking about building out Kimball, how we’ve been building out Kimball. So the components, how we’re managing it, the same management team from a construction, general contractor that we’re using, albeit internally. We’re managing that very closely. We meet monthly and go through the project. We do have some longer lead time items, but those continue to be on track as we went through 2022 and into 2023. So we’re still confident in meeting our start-up date and our start-up timing for that 70,000 tons.

Okay. Great. Thanks. And then I just want to make sure I’m clear on how you’re thinking about the SKSS business here in 1Q and kind of the cadence of the year. The comp is still favorable here in 1Q, obviously, it gets tougher as we go later in the year. But it sounds like basically, you’ve accumulated some inventory. There were some impacts from weather, but you can take advantage of the seasonal uptick to sell that through. I guess, how long would you expect to take to work that off? Is that a quarter or two? And then how you think about the sort of the cadence of performance for the segment over the year?

Yes. Noah, so when you think about kind of the – I think that, that inventory get worked off in the first half. March, April, May is kind of a very busy kind of season for the sales of our base and blended products. I think that when you think about the cadence, Q1 will be flattish, maybe up a little bit from last year. Q2 and Q3, given the record quarters we had in the SKSS business, they’re probably going to be down and Q4 will be up given some of the weather challenges we had in Q4 of 2022. So I think the V will be an easier V if you will, in Q4 of 2023. But – so I think of the cadence of the year, I think Q1 is flattish Q2, Q3 down, Q4 up.

Really helpful. Thank you.

All right, Noah.

Our next question comes from the line of Quinn Fredrickson with Baird. Please proceed with your question.

Good morning, guys. Thanks for taking my question and congrats to Eric and Brian.

Hi, Quinn.

Yes, congrats to Eric and Brian and best luck to Alan.

Thank you.

So Mike, I just wanted to start out with – you made some comments in the past about the ES business, kind of starting with industrial production as a base for growth. Can you give us a sense for just what kind of IP environment you might be assuming for the 2023 guidance?

Yes, Quinn. So I think that we’ve had a couple of great years of ES organic growth. In 2022, it was 20% organic growth. In 2021, it was 8% organic growth. Industrial production is scheduled to be low to mid-single digits. I think that we can do better than that, but we can’t be – we can’t assume that we’re just going to continue to kind of go at the level that we’ve been at given the large growth that we’ve had in 2021 and 2022. So I’d say that’s mid-single as I think about ES revenue growth in 2023.

Okay. Thank you. That’s helpful. And then secondly, Eric, just building on your comments on SKSS spread. Can you just give us a little more color on your ability to manage the spread and your confidence in managing the spread in 2023? And just looking for what’s maybe structurally changed for the better, whether your ability to manage collection costs, IMO 2020 market consolidation or any other factors?

Sure. So going back in time a little bit, we separated out our bulk products and services business. And that was predominantly around the collection of used motor oil, the used loop and selling back our direct blended products into the market. That’s the organization that we talked about earlier when we announced the change with Brian Weber. By separating out that organization, we also put in a significant amount of discipline around managing how we collect used motor oil, the prices in the market that we charge or pay for that oil and then through the re-refinery process, how we sell that direct blended oil. So there’s a significant amount of discipline with that organizational structure change that we’ve put in place. It’s obviously reflective in our numbers from 2021 and 2022, and we continue to have that in place today, and we’ll be – we’re very confident that our spread management processes today are better than ever, very robust. We know who we're competing against. We know the customers that we're managing, and we're very confident of our continuous to be able to manage that spread.

Okay, thank you very much, guys.

Thanks Quinn.

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

Hi. This is Adam Bubes on for Jerry today. Thanks for taking my question. You recently announced the results of the third-party study demonstrating safe destruction of PFAS at your incinerators. Are you able to update us on how you're thinking about the PFAS opportunity in terms of tons or volumes? And if incineration is designated a safe disposal method, do you need to build additional capacity beyond the Kimball, Nebraska plant to capture that incremental volume?

Yes. So we – as mentioned, we continue to believe that high temperature thermal destruction is the best disposal technology for managing particularly contaminated soils. We do not feel that we have to build any additional capacity across our network. Our plants are very robust and Kimball will obviously provide an additional complementary tonnage to managing PFAS contaminated soils. I think it's too early to tell right now what – and put a number on the tonnage that we would expect out of this. Regulations are still being changed and we continue to be heavily involved in that process. We continue to communicate to all regulatory agencies on what our test has unveiled and we're working with customers on different opportunities that they have to remediate their sites depending on how the regulatory environment plays out.

Great. And then can you help us think about your assumptions for base oil prices that's contemplated in the guide?

Yes, Adam. So we assume that base oil pricing moderates over the course of the year. We assume that – you know how base oil pricing work, Q1 is kind of low. Q2 is up, Q3 is up, Q4 is down, and we assume that base oil prices on average for the year will be down a bit year-over-year in the guidance.

Great, thanks so much.

[Operator Instructions] Our next question comes from the line of Jim Ricchiuti with Needham. Please proceed with your question.

Hi, good morning. And again, congratulations to all on the career developments, Alan, particularly to you, a question I have just with respect to Thompson Industrial, I wonder if you could talk a little bit about that any additional color you could provide, including overlap with HPC?

Yes, Jim, this is Mike, and I'll start. Eric or Alan, feel free to jump in. We're really excited about Thompson Industrial. It brings industrial cleaning to a part of the country where we don't have a very large industrial presence, like Alan mentioned. The Southeast is not an area where we have a huge IS business. So bringing that type of – so there isn't a lot of overlap today with HydroChem. A small amount, but not a lot. And so we're excited about our ability to sell environmental services businesses into that – into those new customers and provide perhaps some cross-sell around that. As Alan said, it was about $100 million purchase price and that will close probably at the end of this month.

Got it. Thank you.

It also provides us – just one other thing, Jim, this is Eric. It also provides an entrance to other markets that we haven't traditionally been in and particularly that Southeast market pulp and paper as well as the utility sector.

Okay, thanks for that. And just with respect – Mike, to the comments that you made about industrial production. I mean typically, I guess, you do tend to lag some of that. But I'm wondering if you're seeing any early changes in customer demand with respect to a slowing economy. I mean, it sounds like you actually have a pretty good pipeline. But I'm just wondering if you have seen any subtle changes in the market.

Jim, we pulled the sales team yesterday, and the answer is no. The pipeline remains as robust and it's strong as it was back in the fall.

Got it. Thank you. Just last question, if I may. You mentioned pricing and how this also relates to customer behavior. As we go through this inflationary period, does it become any more challenging to put some of these increases across? Or is there just a better understanding and appreciation of the overall environment that allows you to continue to use price as a lever when appropriate.

Jim, I've never had a conversation with the customer that they say kind of okay to price increases. It's always a discussion with buildup of our costs, a thoughtful discussion on value. It's a thoughtful discussion on customer service and timeliness and so all of that goes into the mix. I would say that we've been very successful and as you can see from the 2022 results, in particular, Q4 of driving those price increases, I think that continues into 2023. But it's never an easy conversation. The fact that there's still a fair amount of inflation has made that conversation easier. It gives us more evidence and support, but it's never an easy conversation around pricing.

I’d probably mention just one other thing. I mean, with the capacity constraints that we've had, both in assets like resources for equipment, personnel, there are some customers that we've had to walk away from when we've had those hard conversations and realize that we need to put our people and our equipment to work where we can kind of create the best value and we're not going to giving those services away. And so I think that is some discipline, particularly on the industrial side that we have begun to put in place that I think will start paying off for us in the future years here.

Got it. Thank you for that. And congratulations on the year.

Thanks Jim.

[Operator Instructions] Our next question is a follow-up from Michael Hoffman with Stifel. Please proceed with your question.

Hi, thank you for taking this. The one that probably should get asked, East Palestine, is there going to be a benefit from that after the fact that I know you didn't participate in willingness of burning the chemicals, but is there a benefit after the fact?

Michael, we participated in some of the emergency response, and we've provided some solutions to the regulatory authorities to and to Norfolk Southern on options. However, before we really manage or take any of that material, we're being very transparent with the government agencies and the governments that we have our disposal facilities in. At this point, we don't – we're not – have not started to take any volumes there.

Okay. And then everybody thinks PFAS is going to be this amazing opportunity. I'm in that camp kind of think about it like PCBs were in the 80s and early 90s but there're things have to happen before it becomes that. Can we talk about those a little bit and share with the market? What does EPA have to do? And when do you expect them to do what they have to do? This is rule-making. And then the second part of the question is, am I correct that all of your incineration capacity, the way the permits work, bringing this volume in is incremental and doesn't need a permit modification and you can still do all of the hazardous waste stuff that's permitted but this can be incremental without having to modify permits.

Michael, this is Mike. I'll answer that. You're right that it does take increased regulation kind of the definition of kind of how clean is clean. It's hard for our customers who may have PFAS in their soil or somewhere on their sites to address the issue because there's not a clear definition of when am I done? What is clean? And so we think like this will take some time to get that regulations in place. And I think that PFAS will play out over decades. And I think like PCBs, it will be a winner for Clean Harbors and for the industry for a very long time. To the point to your second question is, can we take the soil, if you will, in our current incinerators from a permanent projective, the answer is yes. And sometimes, it's just an add-on because it's so inert. And so I do think that is a clear opportunity for us and we've seen it in some public environments in Air Force bases in other areas, military bases, where we've done some of this work and we will continue to do this work. And I do think, like you, I think it's a very long-term tailwind for Clean Harbors and for the industry.

Okay, thanks for taking the question.

Thank you, Michael.

We have no further questions at this time. Mr. McKim, I would like to turn the floor back over to you for closing comments.

Okay. Thanks for joining us today. Mike, Eric Dugas and Jim will be participating at the Raymond James conference next week. And as Mike mentioned, we'll be hosting our Investor Day in four weeks. I look forward to seeing some of you there in person later this month. Thanks for being here today.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.