Clean Harbors CEO discusses company growth, impact of COVID-19 and path forward

Clean Harbors Inc., Norwell, Massachusetts, announced financial results for the first quarter on April 29.

Financial highlights include:

• Company revenues up 10 percent to $858.6 million
• Increases in net income to $11.6 Million, or EPS of $0.21, with adjusted EPS of $0.28
• 21 percent growth in adjusted EBITDA to $122.6 million
• Improved adjusted EBITDA margin by 130 basis points to 14.3 percent

“We delivered record adjusted EBITDA in Q1 with strong growth in both operating segments,” Clean Harbors President and CEO Alan McKim says. “We drove substantial volumes of high-value waste streams into our disposal and recycling network, benefitting from consistent base business, multiple projects and favorable weather. These factors contributed to a 21 percent increase in adjusted EBITDA over the first quarter of 2019 and a 130 basis-point improvement in adjusted EBITDA margin.”

Q1 results and review

Revenues increased 10 percent to $858.6 million from $780.8 million in the same period of 2019. Income from operations grew 92 percent to $45.5 million, up from $23.7 million.

Net income was $11.6 million, or $0.21 per diluted share. This compares with net income of $1 million, or $0.02 per diluted share, for the same period in 2019. Adjusted for certain items in both periods, adjusted net income was $15.6 million, or $0.28 per diluted share, for the first quarter, compared with adjusted net income of $5.1 million, or $0.09 per diluted share, in the same period of 2019.

Adjusted EBITDA increased 21 percent to $122.6 million from $101.7 million in the same period of 2019.

“Profitability in our Environmental Services segment increased 22 percent for the quarter on top-line growth of 11 percent, driven by our disposal facilities,” McKim says. “Incineration utilization climbed to 86 percent and we captured more high-value waste streams across our network. Our landfills benefitted from steady base business and several projects that helped generate a 39 percent increase in volumes. Field services revenue grew nearly 50 percent largely due to cleanup of a chemical plant fire and COVID-19 decontamination work.

“Our Safety-Kleen segment also grew profitably, with a 12 percent increase in adjusted EBITDA on 8 percent higher revenue. Core offerings such as containerized waste services and vacuum services contributed to steady growth in our branch network. Waste oil collection was stable at 55 million gallons, and we gradually increased our charge-for-oil (CFO) rates during the quarter. Within Safety-Kleen Oil, we generated greater production volumes and our transportation costs improved from a year ago when flooding and frozen rivers disrupted barge traffic.”

On the company’s response to the coronavirus pandemic

“Although the impact of COVID-19 on our Q1 results was limited, it progressively worsened toward quarter end as shelter-in-place orders took hold in the United States and Canada,” McKim says. “In anticipation of the economic downturn and softer demand, particularly for Safety-Kleen, we took decisive actions to align our cost structure with the current environment and protect our balance sheet.”

The company’s actions to respond to COVID-19 included:

• Downsizing its workforce through furloughs and other actions
• Implementing a non-billable hiring freeze, travel restrictions and wage freeze
• Shuttering nearly half of its re-refinery production due to supply constraints and market demand
• Drawing down $150 million on its revolving credit facility
• Lowering its expected 2020 net capital expenditures spend by more than $50 million
• Withdrawing 2020 annual guidance until market conditions stabilize

Business outlook

Despite concerns over COVID-19, McKim says that they company is well-positioned for the latter half of 2020.

“Our prudent cost actions position us well for the anticipated reopening of the U.S. and Canadian economies in the second half of 2020,” McKim says. “Although we have seen some cancellations and project delays due to COVID-19, we expect Environmental Services to weather the current downturn well. We exited Q1 with a healthy backlog of waste streams in our disposal network and have not seen a meaningful decline from most of our large quantity generators. In addition, we are continuing to perform COVID-19 decontamination work and handling growing volumes of infectious waste for a variety of customers.

“With stay-at-home orders greatly reducing vehicle travel across North America, the pandemic is limiting near-term demand for our core Safety-Kleen offerings, including used motor oil (UMO) collection. We expect our branch business to rebound when shelter-in-place mandates are lifted and low gasoline prices and a reduction in air travel encourage a steady increase in driving. In our SK Oil business, our re-refining spread has contracted with the drop in crude prices. Despite our aggressive increase in charge-for-oil pricing, near-term demand for base oil has dropped precipitously, prompting us to shutter some re-refining capacity until the markets improve.

“Our first-quarter results further demonstrated the strength of our business model, the value of our irreplaceable portfolio of disposal assets and our front-line role in emergency response,” McKim concluded. “Our market leadership, financial liquidity and positive free cash flow will enable us to navigate this global crisis.”

Earnings call highlights

Clean Harbors held its earnings call April 29. During the call, McKim and Clean Harbors EVP and CFO Mike Battles discussed how the company is looking to position itself for the future.

McKim on M&A activity:

“In terms of M&A, we're not likely to be active near-term. Long-term, we believe we will emerge from this market downturn stronger both financially and operationally than some of our peers, which will allow us to be opportunistic.”

 “We see some competitors at a 5-, 6-times leverage and not knowing where their new EBITDA numbers are going to come out, there may be some opportunities for us to look at both some smaller or larger deals where we might be a good partner with them. We certainly had passed [on] a lot of transactions over the last couple of years because of the leverage that a lot of private equity firms were putting on some of our competitors and the prices that [we would have to pay]. But maybe that world is going to change, we just don't know until things settle out here the next two or three months.”

Battles on the company’s pipeline of work:

“What we're seeing … now is that … we had a healthy backlog kind of going into Q1, and we exited the quarter with still a very healthy backlog. The incinerators are running very well and large quantity generators continue. I was seeing signs of a slowdown, we absolutely are. But as I sit here today, I think that the plants still are running well with a healthy backlog of waste streams. And many of the things that we deal with in the large quantity generators, whether it be chemical manufacturing, petrochem, agriculture, we're still seeing agrochem, we're still seeing a lot of those waste streams coming into the network. So, I'm hopeful that incinerator is going to continue to do well here and kind of carry us for a bit through Q2 and beyond.”

McKim on the company’s decontamination work:

“We've done about 2,500 or so [decontaminations] at this point, and some of them [are] significant and some are small. Probably in the $50 million range would probably be a good estimate right now in what we are thinking [regarding how much decontamination work we’ll do for the year], but clearly the amount of demand has been significant. We've certainly not been able to meet all the demands, but we have shifted quite a bit of our workforce. We brought people out of the Safety-Kleen business. We brought people out of our industrial services business to bring them over into our emergency response teams and help complement the Field Services organization. So, that's worked quite well and continues on as we speak.”

McKim on how the company’s superfund work has been impacted by COVID-19:

“We definitely saw early in the beginning of the second quarter a number of projects get pushed to the third quarter or even to the fourth quarter. … I would say [the delay is] as much to do with a concern with the virus as it is [about] anything [else]. Getting into one of these projects mobilizing a lot of people from across the country and … getting halfway into it and then having a problem with a virus outbreak is more of the concern than the spending of the dollars.”

McKim on his thoughts regarding increased competition, specifically with U.S. Ecology and Harsco’s recent M&A activity:

“I think consolidation is good for the industry. I mean, certainly, having stronger competitors … I always found is really good for the business. And so, from that standpoint, when you look at how much money is being paid for those acquisitions that you mentioned, you know, they got to get a return on that investment. And so, our hope and expectation would be is that they're going to be rational and that's going to be good for the industry.”