Clean Harbors, Inc. (NYSE:CLH) Q4 2023 Earnings Call Transcript
Clean Harbors, Inc. (NYSE:CLH) Q4 2023 Earnings Call Transcript February 21, 2024
Clean Harbors, Inc. beats earnings expectations. Reported EPS is $1.82, expectations were $1.68. Clean Harbors, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Clean Harbors Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel. Thank you, sir. You may begin.
Michael McDonald : Thank you, Christine, and good morning, everyone. With me on today's call are our Chief Executive Officer, 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 cautioned not to place undue reliance on these statements, which reflect management's opinions all 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 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 Eric Gerstenberg to start. Eric?
Eric Gerstenberg : Thanks, Michael. Good morning, everyone, and thank you for joining us. Our full year and fourth quarter 2023 performance underscores the role of our Environmental Services segment as the 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 of 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 were up 2023 demonstrated we continue 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 3. Environmental Services capped a record year with an outstanding fourth quarter in its ninth consecutive quarter of year-over-year EBITDA growth. 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-Kleen environment, industrial services and field services, delivered growth in Q4 as demand for our highly trained workforce and unique asset base continues to be strong.
SKSS fell short of our expectations in Q4. The market pricing improvements we saw in October faded as the quarter progressed. Volumes sold was a positive metric and increased 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 4. Segment revenue increased 7% due to continued service growth, 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-Kleen Environmental Services business led the way with 11% top line growth. Containerized waste services continued its strong growth trajectory stemming from sales initiatives designed to drive more waste into our network. Technical Services revenue rose 5%, led by pricing and greater year-over-year volumes into our incinerators, landfills and our TSDFs incineration utilization was 85% versus 84% a year ago.
Average incineration pricing was up 7% in the quarter due to a favorable mix and 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% reflecting the growth in larger project opportunities we captured in the market in 2023. In addition, we have seen the pipeline for our unique total PFAS continue to grow. We believe we are 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 quarter as it benefited from a strong fall turnaround season in the addition of Thompson Industrial. As I mentioned a moment ago, overall ES segment EBITDA was up for an impressive 16% to Q4, more than double our revenue growth of 7% as we leverage our facilities, fix 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, but from our cost savings programs as well as our productivity and technology initiatives. In 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 our lower rental costs, apply more sophisticated pricing strategies and pursue sales opportunities more rapidly. Before turning it over to Mike, please turn to Slide 5 for an overview of our recently announced HEPACO acquisition. We believe that HEPACO 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. HEPACO operates across 40 locations, 17 states and on an adjusted basis, generated about $270 million in revenue and approximately $36 million of adjusted EBITDA last year. It is an attractive deal that we expect will generate approximately $20 million in synergies after its whole year of operation, which would equate to a 7.1x multiple.
The acquisition of HEPACO gives us access to additional markets and new customers as well as enhanced capabilities around railway and transportation responses. We look forward to adding in approximately 1,000 employees to the Clean Harbors family. We are confident that they will benefit from our deep knowledge of field service business, greater scale and career opportunities. Mike, Eric and I have 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?
Mike Battles : Thanks, Eric, and good morning. Turning to SKSS on Slide 6, after a promising start in October, following the 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 at 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 EBITDA 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 EBITDA 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 imminent dollars in 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 products sales accounted for 23% of volumes sold in Q4, up from 17% a year ago. We recognize that this business has faced challenges in 2023 as the market continued 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. Turning to Slide 7 and our capital allocation strategy. At our Investor Day last March, we shared our 5-year strategy, Vision 2027, which outlines 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 are a highly leverageable network of permanent facilities, unique assets and trained personnel. We will continue to lead to increasing -- 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 HEPACO agreement we announced earlier this month.
We continue to see a healthy flow of potential candidates for both operating 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 Kimball brake incinerator, which is on track to open commercially later this year. We expect the original design and build to cost $180 million to $185 million. Based on our ongoing conversations with customers about Kimball and in response to their future plans, we have elected to add several enhancements into the facility at an aggregate cost of approximately $15 million. These enhancements, driven by demand will include more direct burn base and additional specialized lines designed to handle certain types of high acid materials.
These additions will enable that site to handle and process even more high-margin materials in containerized waste. We still anticipate that the new incinerator will commence operations late this year. To that end, we do expect to incur some nonrecurring startup costs related to Kimball this year. Since a onetime in nature, we likely will adjust the amount of our reported EBITDA. Difficult to estimate the exact amount today and it partly depends on our official launch date, but we know it will be several million dollars. We will report on that as we are 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 land next to our existing plant and we intend to invest and upgrade that property with an eye towards consolidating -- with an eye toward consolidation of our brand 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 do speak to our debt structure and leverage, but I'd like to conclude by emphasizing that we continue to be bullish on our growth projects for our ES segment. We entered 2024 with -- we entered 2024 with considerable momentum in this segment. We expect the favorable market conditions, whether restoring infrastructure spend or regulatory trends to continue to support our profitable growth plans 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 coming off a record year, and we expect that business to continue to grow, and field services will greatly benefit from the addition of HEPACO once that closes. After challenging 2023, we see SKSS returning to growth and profitability in 2024 with market pricing appeared to have stabilized following a decline during 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. And with that, let me turn the call over to our CFO, Eric Dugas. Eric?
Eric Dugas : Thanks, Mike, and good morning, everyone. Turning to the income statement on Slide 9. As Eric and Mike outlined, Environmental Services segment posted strong Q4 results to finish off a record year. Revenues across our service lines in ES were up from the prior year and the demand picture for our environmental service offerings remains strong. The profitable growth in our ES segment this quarter more than offset the decline in SKSS and resulted in a 14% year-over-year EBITDA growth for the entire company. Adjusted EBITDA was in line with our expectations at $254.9 million and up more than $30 million from Q4 a year ago. Our adjusted EBITDA margin in the quarter was 19%, up 150 basis points and driven by improvements in the ES margin that Eric Gerstenberg outlined earlier.
Gross margin in the quarter was 31%, an increase of 70 basis points from a year ago. For the year, our gross margin was 30.7%. As we move into 2024, we are focused on executing several initiatives to drive greater productivity improvements and operational efficiencies, which we expect will continue to drive margin expansion. SG&A expense as a percentage of revenue was 12.4% in Q4, which is 80 basis points better than the prior year's quarter. For the full year, we also landed at 12.4% as we remain focused on managing SG&A head count and offsetting wage and other inflationary pressures. For 2024, we anticipate our SG&A expense as a percentage of revenue to be at a similar or slightly lower level. Depreciation and amortization in Q4 came in at $98.3 million.
For the full year, our depreciation and amortization was $365.8 million, up from 2022, which reflects the Thompson acquisition and incremental amortization resulting from increased landfill volumes in 2023. For 2024, we expect depreciation and amortization in the range of $300 million to $390 million. Income from operations in Q4 was $147.3 million, up 16% from the prior year. For the full year, income from operations was $612.4 million. Net income for the quarter was $98.3 million, resulting in earnings per share of $1.81. For full year 2023, our EPS was $6.95 per share. Turning to the balance sheet highlights on Slide 10. Cash and short-term marketable securities at quarter end were $551 million, up more than $130 million from September. Our balance sheet remains in great shape.
We ended 2023 with total debt of $2.3 billion, a net debt-to-EBITDA ratio of 1.9x and having no significant debt amounts coming due until 2027. Our overall weighted average pretax cost of debt at year-end was 5.3%. In December, we successfully completed an amendment to our term loan that lowered our borrowing rate by 25 basis points and representing annualized interest rate savings of nearly $2.5 million. In connection with the HEPACO transaction, we plan to add incremental borrowings to this term loan as part of our deal financing. Clean Harbors will continue to responsibly manage our leverage position and overall capital structure with an eye towards creating the highest overall return for shareholders over the long term and maintaining flexibility to ensure that we can respond when acquisition opportunities arise.
Turning to cash flows on Slide 11. Cash provided from operations in Q4 was $278.9 million. CapEx net of disposals was $105.9 million, up from the prior year due to the investments in our incineration network, including Kimball that accounted for $25.4 million of our Q4 CapEx. In the quarter, adjusted free cash flow was a record of $173 million. For the full year 2023, net CapEx totaled $412.7 million, in line with our expectations. The Kimball incinerator accounted for $82.6 million of the full year spend. For the year, adjusted free cash flow was $321.9 million, up 11% in 2023. If you add back the Kimball spend -- excuse me, up 11% from 2022. If you add back the Kimball spend to that total, we would have exceeded $400 million of adjusted free cash flow.
For 2024, we expect our net CapEx to be in the range of $390 million to $420 million. This level of spend includes approximately $65 million to complete the Kimball construction including the planned enhancements and approximately $20 million for the expansion of the Baltimore facility, which Mike discussed earlier. During Q4, we bought back approximately 211,000 shares of stock at a total cost of $33.2 million or an average price of $157 a share. For the full year, we bought back approximately 328,000 shares or $51 million of Clean Harbors stock. In December, our Board authorized a $500 million expansion of our repurchase plan. We currently have $554 million of authorized and available repurchases under this program. Moving to Slide 12. Based on our Q4 and 2023 results, along with current market conditions for both of our operating segments, we expect 2024 adjusted EBITDA in the range of $1.05 billion to $1.11 billion, with a midpoint of $1.08 billion.
This guidance assumes no contribution from HEPACO. Once we conclude the regulatory process and close on this transaction, we will update our guidance accordingly. Looking at our annual guidance from a quarterly perspective, we're expecting Q1 adjusted EBITDA growth of 2% to 3% with our ES segment performance offsetting current market conditions in SKSS and higher corporate costs. Similar to 2023, some severe weather in January this year impacted our disposal networks, some branch locations and customers. Despite these challenges, we still expect to deliver a strong quarter of profitable growth in the ES segment in Q1. For full year 2024 adjusted EBITDA guidance will translate to our reporting segments as follows: in Environmental Services, we expect adjusted EBITDA at the midpoint of our guidance to increase approximately 5% to 7% from full year 2023.
Demand for all of our service businesses remains consistently strong. In addition, demand for our disposal and recycling facilities continues to enable us to execute on our pricing strategies, capture more volumes and drive a more favorable mix into our network. For SKSS, we expect full year 2024 adjusted EBITDA at the midpoint of our guide to increase 6% to 8% from 2023 with a challenging year we had in 2023 and the continued uncertainty around global commodity markets, we are assuming some pricing pressures continue in our forecasting of this segment. Given some of the promising initiatives we have underway, such as our Group III project and increasing blended sales, we expect to hear substantial progress in this segment and towards greater long-term stability.
In our Corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA to be up 3% to 5% this year from 2023. This reflects a full year of Thompson industrial costs, and rising expenses in areas such as insurance and wages and benefits, partly offset by our wide range of cost savings initiatives. For adjusted free cash flow, our expectations for 2024 is for a range of $340 million to $400 million or a midpoint of $370 million. As mentioned earlier around CapEx plans, we have some internal growth investments we are planning this year, starting with the approximately $65 million to complete the Kimball construction as well as the $20 million for the Baltimore expansion. If you add back the Kimball in Baltimore spend, the midpoint of our adjusted free cash flow guidance would be more than $450 million or over 40% of our current adjusted EBITDA midpoint expectation.
In conclusion, Q4 was a great finish to a record year in our ES segment. Trends coming into 2024 in this segment remained favorable. We continue to see substantial demand across our network, not just within our incinerators with our TSDFs, landfills and recycling operations as well. We ended the year with steady volumes and a healthy backlog. Our positive facilities outlook is further supported by an encouraging level of interest across all of our services businesses. Within SKSS, the market appears to be stabilizing as we approach the summer driving season. Overall, we expect to generate profitable growth in both operating segments in 2024 and continue to execute against our Vision 2027 goals. With that, operator, please open the call for questions.
Operator: [Operator Instructions] Our first question comes from the line of Noah Kaye with Oppenheimer.
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