So Michael Hoffman, Diversified Industrial Research at Stifel Group Head. We're sticking on our industrial waste thesis, just having talked with Enviri. We have up on stage with us is Clean Harbors. We have one of the co-CEOs, Eric Gerstenberg, and his Chief Financial Officer, Eric Dugas. Thank you both for - Eric's -
Thank you.
This will be confusing, Eric. Want to go, "Hello, Eric." What's happening?
So I have this really cool list of questions, and then lots of stuff happened this week.
Oh, yeah. It's been an exciting week.
It's been an exciting week. So just some of you who are with us are in the room, but we took about 14 investors into headquarters yesterday. Mike Battles, who is your co-CEO, sitting next to me, and I'd made this statement. I said, "You know, stock's doing really well. There's really good sort of operating leverage, but the multiple's not improving." He got bristled and went, "Well, I don't know. Wait a minute. The multiple's better than you think." Look at that. But on a relative basis, where I'm going with this, there's been 4 or 5 chunky transactions. Interesting enough, your chunky transaction, you didn't pay this. You bought it as well. You have co, you didn't pay this. That have been sold for 12-16 times.
Mm-hmm.
Up until about three months ago, you were trading at 10, 11, now you're at 12.5. You're the 800-pound gorilla in the business, so what is it going to take for the market to understand the repeatable or recurring aspect of, compounding aspect of this business? What is, from your perspective, on the inside looking out, what would you tell them that they, to get them comfortable why it... And I'm not here to argue multiple expansion is why you should buy a stock, but it is fascinating that Heritage Environmental sold at 16x, Circon went for 12x-13x, U.S. Ecology went for 14x.
Yeah.
And here you are.
So I'll, I'll list a few different things, and then, I'm sure Eric will complement. So really, number one, our asset base across the board. We have really a moat of facility assets from our incineration network, managing over 70% of the commercial hazardous waste incineration. Our TSDF network, which allows us to aggregate waste and feed those incinerators, landfills, wastewater treatment plants, and then our collection plant platform. We have over 700 branches throughout North America that complement each other by sharing people and assets to be able to service our customers. So that's really where I'd start. I think one of the things that we continue to want to get investors comfortable with is our oil business. I think the Safety-Kleen Sustainable Solutions business, that drags on our multiple a little bit more than it should.
It's a great business. We collect used motor oil, we sell it and recycle it into a great base oil and blended oil product. We're moving into making a Group III oil, and we're also leveraging our blended growth along with the partnership that we have with Castrol. So that is. I think that's one area that's kind of dragged our multiple from being at the 14, 15, 16% that it should be. On the environmental side, very clear that we've had great margin expansion. We've driven price to offset inflation. We've also managed our cost structure, and our path to EBITDA margin expansion is very clear, and we're going to continue to do that across the board.
Okay, so let's tackle the 800-pound gorilla in the room then, this is used oil. I've had this view, and I've said it to the investment community, if, if you can get comfortable with that business at a baseline, assume it's that number forever.
Mm-hmm.
Now, let's figure out, would you own Clean Harbors because of what ES can do from a compounding standpoint? So what do you think that... I mean, and how I want to frame this is, we went from $130 million of EBITDA in 2019. You have all of the oddities of the pandemic and everything that happens. I think we can fairly say it over-earned at $310.
Yes.
But some stuff changed. I'm, oh, 2020, things like that. What is the new... If 130 was the right, because it's virtually the same set of assets, oh, a little bit of additions. I mean, maybe you're at 160 million gallons of production instead of 150, but it's essentially the same business as 2019.
Mm-hmm.
What's the base? What should everybody get comfortable really, truly is the base?
Our baseline to get comfortable is around that 190-200 area.
Okay.
And then we're going to grow it from there. And the way we're going to grow it there is to be able to continue to make sure we manage the front end, which is in our control of what we're charging or paying for that oil, grow our blended business, take out cost, continue to work on our circular arrangement, and make also that Group III oil. That's going to be a higher differentiating quality product, and that will grow into the mid-2s, as we go forward.
Okay.
And Michael, I would just add to that when you analogize to the 2019 being the same business, perhaps the assets are very similar, but I think we internally have done a lot of things coming from that low water mark of $130, both internally, breaking out the SKSS business from the Safety-Kleen branded business, for instance. I think that helped both sides of the Safety-Kleen business. It allowed our used motor oil collectors to really focus on that part of the business. We're much better in terms of managing the used motor oil and our collection costs in that side of the business, which helps profitability. And then you had some external factors. I think IMO 2020 did play a role. And so, you know, I certainly don't see this business...
I don't want anybody to think, you know, we're going to go back to that $130. I think we've done a lot of things with the assets-
I think there are structural things that mean it's better than 130?
Absolutely.
Yes.
I think that's. I did wanna. Yes, that's fair enough.
Okay.
I didn't. I never thought $3.10 was going to $1.30, 'cause IMO 2020 alone happened.
Yep.
But I wanted to establish somewhere in the market's mind, if you just said it's gonna be this forever... And by the way, at 190, my sense is you're at $75-$80 million of free cash.
Mm-hmm. Yeah. Very, very attractive Free Cash Flow generator.
45% free cash today of that, of that one. And then, you know, you gotta layer in corporate overhead, but it's, but before corporate overhead, and corporate overhead at 4.5% of revenues is not outlandish. You're not, you're not-
No, you're in the right ballpark there, 45-50% free cash flow conversion.
Yeah. Right. So it's good cash generator, stable, right? If you can get comfortable with that, where are we wrong? What happens, macro, I would go, "Oh, shoot, this is $170." What's a, what's a macro thing that you can't control that says we're wrong?
An event, some sort of event again. We don't think we're going back. Dislocated price in the market, and that—we don't, we just don't see that, obviously.
That's a short-term dislocation, 'cause it then eventually resets and sta-
Exactly. Like, like the pandemic drove, you know, you had many of our customers manage their inventories differently-
Yep
... because of supply chain issues. So you had people really stocking up in 2022, and then the reverse happened in 2022.
In 2023.
Excuse me, in 2023.
Yep.
you kind of had that-
Right
... that seesaw effect. So absent a major event, you know, I can, I think we can all agree, a pandemic was a, hopefully, a once in a lifetime type of event.
Yeah. Okay, so
Stability is the name of the game here.
What I'm trying to build here is that the market should be able to get comfortable, 190 is a good number?
Yes.
All right.
And growing.
Right. But it doesn't even need to grow. It's just, if it's 190 constant, you can maintain the stability, you can make it boring.
Yes.
Okay.
Today, as you know, it's only really 15% of our business overall.
Yeah, and so I'm gonna have this conversation about what the growth rate of ES looks like, and if that 190 is constant, then if I look out 5 years, it's 10%, or I look out 10 years, it's 7.5. It's a smaller, smaller piece.
Mm-hmm.
Just to remind everybody, it's – people go, "Well, just why don't they sell it?" But the challenge is, the permitting structure exists at Safety-Kleen, the holding company, which impacts Safety-Kleen Environmental, the branch business, and Safety-Kleen Sustainable Solutions. So it's a, it's a cumbersome sale. It's not impossible.
Not impossible, but also, we'd add that those customers that we collect used motor oil from, we're also collecting other waste streams, containerized waste that feed our environmental network as well.
Right. Okay. All right, so let's go back to environmental services. I think of it as... Man, you, you've all talked about this. You did at the analyst day. There's four subsegments. There's technical services, Safety-Kleen Environmental, there's industrial services, there's field and emergency, field service and emergency response. But I take another look at it, and I go, TS and the branch business, Safety-Kleen Environmental-
Mm-hmm
... there's $2.5 billion, right?
Mm-hmm. Yeah.
Large generator, small generator, but it's a, it's an industrial waste management fixed facility. Leverage collection, network leverage.
Mm-hmm.
Should be pretty good pricing, year in and year out, coming at this price cost. You'll learn you could price the last three years. Is that the right way to think about that?
Absolutely. Absolutely.
So if we have 2% industrial production and 3% inflation, this should be a 6-ish kind of organic growth rate?
Yeah, we feel high single digits.
Better than-
Yeah, I mean, we're doing 7%. We did 7% organic growth across all of ES, TS being the biggest piece of that.
Yeah
... in Q1 here, and that's kind of where we're guiding to for the rest of the year, so.
So 6, 7, and that kind of backdrop is, I mean, people can think about that, that's that sort of rate of compounding. And then you talked about focus on margins. If you're managing your price cost spread alone and on there, there's operating leverage on that high 20% margin, 30, 20, 30 basis points a year, just kind of over and over again.
That's right.
That's a good way to think about that?
That's the way we're. Our aspiration is to drive to those high twenties.
Okay. So the other $2.4 billion in revenues is sort of $1 billion for industrial clean services, and then about now, just about $1 billion with HEPACO in field service and emergency response.
Yep.
That's a billable hour type of business. That's about asset utilization of labor and equipment.
Mm-hmm.
What's the pricing opportunity there?
Yeah, separating the two, first of all, in the industrial side, we wanna be having our employees work day in, day out at large industrial customers, chemical plants, refineries. And we're able to get embedded and then be able to leverage that business into specialty services, which is a higher margin business, and also be there to collect the waste off of those industrial customers. So we're, we have leverage on how we bundle our services into those chemical and refinery plants, and that's an opportunity for us. On the field service side, a little bit different. There, we're running out the door. We're working for utility customers, the largest utilities throughout North America.
As they have events and they need support to be able to support the utilities, we're in there on an emergency response basis, not, not just performing emergency response, but running out the door to help them change out transformers. And that is a very recurring, repetitive basis with a critical service level agreement with those customers that we gotta be there within 1.5-2 hours.
Right.
So that, that's what gives us our leverage there, being able to respond to their needs in a timely fashion.
And these are thousands of incidences at, you know, $10,000, $15,000, $20,000 kind of a pop.
That's right.
These aren't million-dollar things. These are lots of little things over and over and over.
The million-dollar things are on top of those.
Yeah.
Those are the large projects that occur. In our history, the bird flus, the Gulf oil spill-
Yeah
... you know, things like-
But this is-
These are everyday events.
It might not be at the same location, but the repetitiveness of several hundred thousand, you know, of these as a market. Well, 100,000, and you have your chunk of it.
That's right.
Over and over again.
Very recurring. We get a lot of questions: "Hey, is this because it's an emergency response basis, how much of this work is recurring?" A vast majority of it can be considered recurring. We're just not sure-
Location, but it's gonna happen.
Exactly. We don't know where, we don't know when, but we, we know we'll have a branch nearby that we can respond.
But there's 70, 80, 100,000 of these you're gonna process a year now at $1 billion of revenues.
That's right.
You know, over and over and over again.
Yeah. Continuing to build our footprint, leverage our branch openings, open more field service offices. A lot of the field services we're doing today is for some of those smaller customers. So Safety-Kleen environmental type customers, believe it or not, we have a great field service presence with those small customers and continues to grow.
So what's the operating leverage in these two businesses? And, I mean, 'cause the industrial services businesses are really big customers who tend to squeeze the daylights out of vendors. So is, is that more about the quality of it and a relatively stable margin, and-
It is. It's, you know, obviously, they have big demands, and they have very well-schooled purchasing people. However, that's about having a great safety record, which we have, and be able to be there when their needs or their plant shutdown is required to have our quality people and our quality equipment there. There is customers there that we've chosen to walk away from because they didn't wanna pay for our types of services, but we're really trying to focus on those customers that value our partnership, value our safety record, value our specialty services that come along with that base industrial of our people embedded into their plants, and that's our opportunity.
Okay. I think there's fairly significant switching costs in technical services and Safety-Kleen Environmental. Is there a switching cost issue? I mean, like, you're really big in the energy space on doing tank bottom cleanouts, so you exchange steam cleaning, pigging pipes. You're big.
We are.
You got a significant share. So does that share give you a little bit of room to, you know, to, you know...
Quality. Yeah.
Yeah?
It does. The specialty that we have and the quality jobs that we do of being able to clean a tank or clean a high heat exchanger unit using technology such as ultrasonics, that allows you to take a heat exchanger and be able to clean it so it operates better for our customers. Those types of specialty services is what we're known for and keeps us embedded with those customers.
So one piece of the business that we don't talk a whole lot about here, but I think is really important, is that a lot of the industrial services business is built around InSite locations. So these are locations at industrial sites where we have people embedded there every single day. Could be a team of three or four, could be a team of seven or eight, could be a larger team, and they're on site at these locations, doing a lot of day-to-day kind of industrial cleaning type work. And then, as turnarounds come up or the need for specialty services that are a higher, higher margin, you know, we'll come in and do that work too.
When you think about switching costs or the stickiness of the customer, because we're there day to day, doing work, identifying work, getting to know the people in the lunchroom or the coffee room, you know, there's some switching costs there, and there's stickiness there that keep us on site.
So to that end, does that allow for margin expansion, or is that a relatively stable margin business?
What we're gonna see, the InSite location is set at relatively stable margins. Now, we're gonna grow margins across the entire business, and then the specialty, the things that require maybe a different type of labor, more specialized equipment, those margins are gonna continue and increase. One area that we've really tried to tackle, I'd say, over the last two years, really, since the HydroChem acquisition, is internalizing more and more of our work through our labor force, being less reliant upon subcontractors.
Right.
You can see, if you look at our turnover statistics, Michael, that we're holding on to folks, and we're able to internalize more of that work and increase margins that way. In an environment that we're all operating on right now, where labor is tight, inflation is still sticky, wage inflation, in particular, I think, is still sticky. The fact that we can hold on to our people, not have to do more training, have more tenured people that are safer, all of those things are driving our margins. We saw it last year in the industrial services business. We don't really show it publicly, but you saw some tremendous margin growth there that showed itself in the entire environmental services segment.
But a lot of that was in industrial services, where we saw the pricing gains and the internalization of a lot of the work.
Two other things that I'd highlight on the industrial business. We're in the midst of putting in a better platform to run that business on, called our Industrial Services Platform, and that takes very-
IT platform.
IT platform. That takes very sophisticated contracts with these large clients and narrows it down into an electronic worksheet for our workers that make sure that we capture everything that we should be billing for on the with these customers to help get us margin expansion and be more efficient. Additionally, when we're embedded onsite, and Eric mentioned that, we have 2,600 employees that are working day in, day out at customer sites. That leverages opportunities to find waste, hazardous waste from those locations, industrial large tank cleaning that feeds into our network-
Okay
-as well.
Billable hour businesses tend to talk about the sort of utilization of that labor need to be in sort of the high 80s, pushing 90, or how do you feel about that utilization from your perspective?
Yeah, very strong. We're at that low 90s today. We continue to add to our billable workforce to complement. We added 1,000 net billable heads. That utilization is high, where we have employees that are 50, 60, 70 hours of work on a continuous recurring basis. We're also trying to lower our subcontractor base. We've used too many subcontractors, and we now have an opportunity to reduce our costs there, and that's continuing to leverage all those branch offerings where we could have field services support IS, or IS support field services, develop labor pools, and we're working on that. So, our utilization of our employees is very high across all of our service businesses today.
As Eric said, we've done a solid job of reducing our turnover and really focusing on our employee base.
Okay, so I wanna talk about PFAS.
Mm.
And then I wanna talk about incineration, incineration and incineration capacity, but within the context of the PFAS storyline. So we've been socializing for about five years that we thought PFAS was an investable thesis from a stock market standpoint. And interestingly enough, you all as a company, I think wisely, first said, "I'm not gonna talk about this for a while," but did start doing so in 2023. This became more a recurring aspect of your message. What does the market need to understand about, one, your relative position in PFAS today, what it might be, and what has to happen for the market need it to occur?
Sure. Our position today is that we're able to offer total PFAS solutions. What we mean by that is, number one, we can perform sampling, we can perform background analysis through our labs, we can service and clean drinking water, we can clean industrial water, we can excavate and remediate sites that have high levels of contamination and feed that into our landfills and incinerators, and we can help with the change out of AFFF, where it needs to be changed to a different material. We can do all that. We're the only scalable company that we think that positions us well in that. To continue to change, what we need is the to work through, number one, get better regulatory parameters, particularly around ground contamination. We think that's coming. That was-
That's a remediation MCL.
Remediation MCL, we need that. And then also more clarity on funding. Who's gonna pay the bill, and who are the customers that we're working with? So we have 1,200 salespeople throughout North America that can offer up this total PFAS solutions, depending on the customer type, sites. And we have specialists, 25, 30 PFAS specialists, that are in selling those services. So clarity on funding, along with regulatory clarity, is what's gonna build this network and help deal with this problem that we all have.
You're doing about $50-ish million of revenues today?
That's right.
Predominantly on a military basis.
It is, it is... It's a, it's a mix. I would say that 50-70 drinking water and industrial water is 40%-50%. The rest of it is, we are seeing contaminated sites that we're cleaning up, but that, that those customers know that they don't wanna extend any more liability and want incineration into our sites.
Okay. You did an independent study at your Aragonite facility to show that incineration had a high degree, so multi-nines worth of destruction?
That's right.
EPA has come back with its disposal hierarchy. It has acknowledged thermal.
Mm-hmm.
It actually quoted your study, but it's asking you to do another study. Basically, you're doing one level of volatile organic compounds, and you got to prove that you can manage this at a higher or more efficient level of destruction relative to the volatile organic compounds.
That's right. That's right.
Is there anything from your perspective that says you won't pass that test?
Not at all. Not at all. We're, we feel very confident about doing that second round of testing. And what's even more exciting about it, too, is that when we did our first test at our Aragonite incinerator, we did it with a third party that helped give validity to the study and the-
You'll use that same third party?
We're gonna use the same one. The DoD and the EPA is working with us together on this next one.
Okay.
So we're really excited to continue our partnership in building out with them.
So DoD was predisposed to thermal all along.
Mm.
EPA was, "Eh," you know, 'cause it's climate and air and all that. What's gotten them around the bend here to be more receptive to thermal as an option?
I think just that. I think a big part of it is the study we performed, and there's been a couple other studies out there as well. They've done their own, and then there's been another company that's done some. So, I think they've really, you know, proving out the study that the six nines that we've had of destruction efficiency was a big step towards-
This is 99.9999.
That's right.
Right. And are you doing liquids or solids or both?
Both.
Both.
Both. Liquids more in the form of the AFFF and solids more in the contaminated type soils.
Would solids tend to be lightly contaminated, and that's what you're burning, or highly contaminated, and that's what you would burn?
I would say both. Both.
Okay.
We're really seeing those types. Think of an event like if an airport is gonna put in a new runway, there, on that airport, there's been firefighting drills, and that's gonna be a high contamination area that needs to be excavated. So we're seeing a gamut.
Okay.
And then we just see some customers, some educated customers, that really say, "I know I want incineration.
You want, you want sure destruction, that's why. You don't want sequestration, you want sure destruction.
That's right.
Okay... So that segues into incineration. So you've alluded to this at the beginning, that you're nearly 70% of the outsourced market. You're bringing capacity online. A competitor of Veolia is bringing capacity online. Can the market absorb that and not see the bottom fall out of the marketplace? What's your view of that—all of that capacity coming in? Because it's all coming on within 6-12 months of each other.
That's right. We're very confident, and we're confident because of a few different things. Number one, the backlog that the whole environmental services market has today is very strong and continues to grow in anticipation of those units coming online. Continues to be more legislative and regulatory requirements that some things like we were just talking about, that's there. Captives are another continued opportunity, that there most likely will be more captive closures, which will drive volume. So along with the presence that we have, our growth in the market of how we service customers, we're very confident that we'll fill up these units.
So you have-
They are, too, and they...
Yeah, I mean, I think Veolia said the same thing at their Analyst Day.
Yeah. Yep.
One of the things I think that Alan takes a lot of pride in, and you've been there for 36 something?
34.
34, the last 40 years. You know, hiring really smart people who know end markets really, really well, and I've forgotten this gentleman's name, and knew more about the captive incineration market than anybody on the face of the earth, works for you guys.
Mm-hmm.
And sort of appreciating which of that infrastructure is more likely be like 3M, in a position where they were seeing rising CapEx costs and, you know, the optics of this from an expense standpoint, was less and less attractive. What's your confidence of, based on your own G2, that some more of the chunky bits, like a 3M, you know, another 20,000 or 40,000 tons, are gonna come out of the market?
Well, first, the overall captive market is about 40 different units.
It's about 900,000 tons.
It is. And those companies are also our customers today.
Right.
So not only are they feeding waste into their own units, but they're feeding waste into our units, and our network of other types of flavors and waste that isn't going into their captives. So we have strong relationships with them. We know them. We work well with them. We look at all those opportunities to be able to help save them costs, have them focus on what they do best, making products, as an example, and we, our relationship has grown, continues to grow with them. There's only a handful, though, that really would have the potential. Rotary kilns, 14 of the 40 are rotary kilns, that might have some cost improvement by either having somebody like us operate them or, or shutting them down.
We feel pretty comfortable that there will continue to be an evolution of how that plays out, whether we own or operate their unit and/or they come offline because their utilization is low. They'd have to do a lot of more capital investment, the 3M scenario. We think that's gonna continue to evolve.
When you think about the 14 rotary kilns, what percentage of that 900,000 tons would that represent?
It's directionally, I'd say probably in the 40, 40% of that.
Okay. So it's a chunky number.
It's a chunky number.
So, you know, even a little bit of that comes out, plus the ongoing foreign direct investment and reshoring, recovery of industrial production, you know, adding, if Veolia is right, theirs is 100,000 tons. I'm a little suspicious if that's really that number.
Mm.
But that's 170,000 tons coming into the market.
Mm-hmm.
It's gonna stay tight for a while.
Yeah, and I think, Michael, you know, what I like to share, if I'm a captive operator, you know, one of the things that I gotta figure out, if I'm gonna shut my unit down, is where are these waste streams gonna go?
Right.
I think with us opening up our Kimball, Nebraska facility, that's an opportunity for some of these folks to-
I encourage-
Refocus on doing what they do best.
Yeah.
And sending captive volumes to us, you know, similar to what 3M did or similar to what some of these captive operators are doing today with some of the complex waste streams that they just can't handle.
Okay. So in the last minute, I have to ask this one question. So there was a news article broke yesterday in Canada, that GFL was a seller of its environmental services business, about CAD 1.8 billion revenues, five hundred million Canadian. But you have about CAD 700 million of revenues in Canada. It's the number one player in containerized industrial liquids. You love containerized businesses.
We do.
Is that a good fit for you?
Could be. Could be, yeah. Yeah. Sounds, sounds interesting. Yeah, they, they have a nice footprint, some past management that used to be part of our team.
Yep.
So yeah, that's, we'll-
Never say never.
Never say never.
All right. You heard it here, folks. Thank you very much for making time for me.
Thank you.
I appreciate it.
Thank you.