Clean Harbors, Inc.
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Greetings, and welcome to Clean Harbors, Incorporated First quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike McDonald, General Counsel for Clean Harbors, Inc. Thank you, Mr. McDonald. You may begin.

[Michael Robert McDonald:]

Thank you, Diego, 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; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our website and we invite you to follow along. Matters that 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, May 2nd, 2018. 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 revision to the statements made in this morning's call, other than through filings that will be made concerning this reporting period. In addition, 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 non-GAAP 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?

[Alan S. McKim:]

Okay. Thanks, Michael. Good morning, everyone, and thank you for joining us. Starting on slide 3, let me begin with a discussion of our change in segments. After a year of planning, we created a new structure for our legacy Clean Harbors organizations comprising six regions, which include both sales and service. These regions supported by our facilities organization and several national product lines resulted in the consolidation of three reporting segments

[Michael L. Battles:]

Thank you, Alan and good morning, everyone. Turning to slide 10 and our income statement, we kicked off 2018 with strong top-line growth, as revenue rose 9% or more than $60 million. This growth was driven by contributions from both Environmental Services and Safety-Kleen. Gross margin declined year-over-year due to our mix of business in the quarter, as well as facility costs related to unplanned disruptions at several locations early in the quarter, which we discussed in our Q4 call. We believe that our focus on pricing and shifting toward higher margin waste volumes in our disposal network will enable us to improve our gross margin performance going forward. Higher revenue and improved leverage, combined with our ongoing cost reduction programs contributed to a 100-basis-point improvement in SG&A expenses. For 2018, we expect this trend to continue and anticipate SG&A as a percentage of revenue to be slightly down with 2017 as we levered the new regional structure. Depreciation and amortization was up slightly from a year ago, reflecting the addition of Veolia as well as higher amortization in our landfills given the greater volumes we disposed of, this past quarter. For full-year 2018, we expect depreciation and amortization in the range of $295 million to $305 million, which includes the addition of Veolia's fleet of assets. Income from operations for the first quarter more than doubled year-over-year to $11 million, primarily reflecting the higher level of revenue. Q1 2018 adjusted EBITDA increased 10% as we benefited from the higher revenue and cost controls, particularly in SG&A. Looking at the bottom-line, we reported a GAAP net loss of $0.22 per share for the quarter. Adjusted net loss for Q1, which includes the effect of non-cash valuation allowances on tax loss carry-forwards in Canada, was $0.12 per share. Turning to the balance sheet on slide 11, we ended the year with cash and short-term marketable securities of $224.1 million, down from our year-end balance of more than $350 million. This is primarily the result of the $120 million all cash acquisition of the Veolia's U.S. industrial business and share repurchases. DSO came in higher than expected at 76 days, which is up four days since yearend. The Veolia transaction accounted for nearly half of the increase. We are committed to reducing our DSO as we move through the year by increasing our focus on collections and improving contract terms, particularly with our industrial and energy customers. Turning to our cash flow highlights on slide 12, Q1 cash from operations was $51.9 million was down slightly year-over-year. Q1 CapEx, net of disposals, was $43.4 million, leading to Q1 adjusted free cash flow of $8.5 million. These numbers are consistent with previous expectations for 2018. For the full-year, we continue to target CapEx net of asset disposals of $170 million to $190 million, which includes our plans for Veolia. For the year, we continue to anticipate generating adjusted free cash flow in the range of $125 million to $155 million. During Q1, we repurchased $14.3 million of stock or approximately 280,000 shares. As Alan mentioned, we're continuing to target share buybacks for the full-year in the neighborhood of 1 million shares, but that remains subject to a variety of factors that could move that number up or down. Given where the stock closed yesterday, we believe Clean Harbors stock represents a great buying opportunity. Moving to guidance on slide 13, based on our Q1 results and current market conditions, we continue to expect 2018 adjusted EBITDA in the range of $440 million to $480 million. The midpoint of that range represents an 8% increase year-over-year. Looking at our 2018 adjusted EBITDA guidance from a quality perspective, we expect our Q2 year-over-year percentage increase to be in the mid- to high-single-digit range versus prior year. Here is how our annual 2018 guidance translates into a segment perspective. We expect adjusted EBITDA for the newly formed Environmental Services segment to increase by approximately 10% in 2018. This growth will be primarily driven by a combination of pricing, mix and margin enhancements in our disposal business augmented by Industrial and Field Services opportunities, we continue to expect the addition of the Veolia U.S. industrial business to add $8 million to $10 million in adjusted EBITDA this year. Safety-Kleen is on track to generate an approximately 10% increase in adjusted EBITDA fueled by the closed loop, increases in base oil and blended product pricing, as well as the core SK branch network. We expect the negative adjusted EBITDA in our Corporate segment to increase in the low teens in 2018 with costs from acquisitions and higher compensation and benefits, including 401(k) outweighing our ongoing cost saving problems. In summary, we begin 2018 on a strong note. We're focused not just on putting together one or two good quarters, but delivering consistent, predictable and profitable growth over the long-term. And we believe the proof of that will begin to emerge as we move through 2018 and deliver on our guidance. With that Diego, please open up the call for questions.

[Operator:]

Thank you. We'll now conduct a question-and-answer session. Our first question comes from Hamzah Mazari with Macquarie. Please state your question. Kayvon Rahbar - Macquarie Capital (USA), Inc. Hi. This is Kayvon Rahbar. I'm filling in for Hamzah. Can you please frame for us how your go-to-market strategy may be changing from what it used to be, given the change in the reported structure?

[Alan S. McKim:]

Yeah. On a regional basis, we have one sales organization now focused within in most cases four different districts, and all selling all lines of business within the Clean Harbors Environmental Service business which is different where we used to have different salespeople selling our Field Service business, our Industrial Services business or our Tech Services business. So our go-to-market strategy is really to have one salesperson own each of our accounts supported by specialists and other experts on a national (00

[Michael L. Battles:]

Yeah. Sure, Kayvon. This is Mike. So we remain focused as to allocating capital whether it'd be buybacks or CapEx or M&A. We have a strong pipeline of acquisition candidates both large and small and continue to work that. So, no real change in our historical strategy. We certainly have the cash flows and the dry powder to do something large and we still have a strong pipeline. Kayvon Rahbar - Macquarie Capital (USA), Inc. Okay. Thank you.

[Alan S. McKim:]

Okay.

[Operator:]

Thank you. Our next question comes from Noah Kaye with Oppenheimer & Company. Please state your question.

[Noah Kaye:]

Thanks. Good morning. Maybe following up on the previous question, transitioning to a single sales point focus for an account makes a lot of sense. Where exactly is that effort? I mean have these salespeople already gotten all of the training and the support systems in place? Or is this something that you expect to kind of evolve over the course of the next say year or two?

[Alan S. McKim:]

There really was very minimal change to customer ownership and all of that work was completed. You might recall that we moved our entire sales organization, which is about 950 people, to a single CRM platform and sales force. We historically had a couple of other CRMs that were the result of some acquisitions that we had made and some of the legacy systems we used and so all of that transition is done. We still have a large corporate account program, which encompasses 500-plus customers. Some of them are very large enterprise wide accounts, others are large key accounts for us certainly and really was no change at all with any of the ownership and leadership of those accounts. So pretty minimal change directly for the customer, probably more of a realignment as it relates to a lot of our specialists and sales reps that we have.

[Noah Kaye:]

Yeah. That makes sense. And I think intuitively we can all grasp the business rationale for this consolidation. Real synergy potential in the cross-selling asset utilization procurement, operating costs and so I kind of wonder is it possible to offer some early thoughts about the potential dollar scope of all these synergies that you see?

[Alan S. McKim:]

I think we're probably not prepared to kind of share or come up with a number right now. Mike, do you have any thoughts on that?

[Michael L. Battles:]

Yeah Alan. So it really isn't a cost play per se. I mean, there were some costs and we had saving that did affect Q1, Noah. But really it's more of a driving incremental revenue and incremental margin. And as Alan said in his prepared remarks around putting quotas and driving more profitable growth, that is part of the story here. It's not just – we did the regional structure which I think is going well early days would suggest that. But really I think it's also the fact that we kind of put in better metrics around cross-selling with specific target and improving profitability, which I think was lacking.

[Noah Kaye:]

I appreciate that color, makes sense. And then, maybe one more from me. It feels like we still have some good run in the IP cycle here. I think you commented in the press release and in your prepared remarks. But just to take maybe one or two metrics for you, where do you think, for example, incinerator utilization should trend over the balance of 2018 and how should we think about some additional sort of metrics that would manifest some of these tailwinds?

[Michael L. Battles:]

Yeah. So Noah, it's always been – I think the plants are running well. So we had – as we mentioned in the Q4 call, we had some unplanned shutdowns. We had some bad weather in Deer Park and other areas. And so we think those are behind us, but it's always been an issue with mix not utilization. So the plants that we've been able to get kind of a good amount of utilization in the plants all year even with the new El Dorado plant, that was – as we said, it would take a few years to get up to that level of utilizations, it took a few months. And so that's been a great story. The real issue here in how we drive incremental profitability is a mix shift and getting more kind of a higher margin waste streams through our network. One thing that – I was thinking about a data point, the turnaround season in the U.S. is kind of going as expected. And I'd say Canada is probably a little better than what we expected. If you're thinking about data points in the marketplace, we see that – we see turnaround season being kind of very strong, which is going to help both our U.S. industrial business and our newly acquired Veolia business.

[Noah Kaye:]

Great. Thanks. I suspect there will be some follow-up to that, but nice execution and I'll jump back in queue.

[Alan S. McKim:]

Thank you.

[Operator:]

Our next question comes from Jeff Silber with BMO Capital Markets. Please state your question.

[Jeffrey Marc Silber:]

Thank you so much. I know this is not your business, but a lot of the municipal solid waste providers, they have been impacted about things going on in China with recycling. I'm just curious, are you seeing different kinds of wastes coming into your facilities because of those disruptions?

[Alan S. McKim:]

No, it wouldn't have any bearing on us at all, not any part of our mix at all.

[Jeffrey Marc Silber:]

Okay, great. And then, is it possible – and forgive me, I don't have the information in front of me. Did you break out the Veolia impact separately in terms of the impact on growth in the quarter?

[Michael L. Battles:]

We didn't, but we can give you those numbers. It was about $17.5 million, $18 million of revenue and about $2 million of EBITDA for the five weeks we owned them.

[Jeffrey Marc Silber:]

Okay, great. And then how about – you mentioned a significant project completion that drove up your landfill tonnage. I'm just curious now that that's over what the impact was in the quarter to just help us model going forward?

[Michael L. Battles:]

We normally don't break those out, Jeff, so because we think that there's project – there was a very large one that happened in Q1, but they happen kind of regularly, and the good message is I think that the pipeline remained strong for other larger types of projects that are coming online and so we feel good about the rest of the year. But we normally don't break out kind of large projects. The fact remains that (00

[Jeffrey Marc Silber:]

Okay, great. And then just one quick follow-up. I know you reiterated your cash flow guidance. I know the first quarter is typically light seasonally, but came in a little bit lighter than the year ahead. What do you think is going to drive the improvements on a year-over-year basis in free cash flow for the rest of the year?

[Michael L. Battles:]

Yeah. Jeff, so we were impacted in Q1 by a couple of things, by a bonus payment that we talked about in the Q4 call, and we did have a little less interest, a little bit of taxes and so it came in as expected. Really what we need to do is focus our attention on AR and drive AR. If you look at the cash flow statement you'll see kind of AR was a bit of a good guy in Q1 last year and a detriment here in Q1 of 2018. We don't think that the aging is getting worse. We feel good about it. We're not concerned about it. It's just a focus of us and we have a full-year to get after that and the team's already starting to go chase, kind of get back in that mode and go chase those receivables.

[Jeffrey Marc Silber:]

Okay, great. I appreciate the color.

[Alan S. McKim:]

Okay.

[Operator:]

Thank you. Our next question comes from Bobby Burleson with Canaccord. Please state your question.

[Unknown Speaker:]

Hey guys. It's John DeCoursey (00

[Alan S. McKim:]

Yeah. We have – you'll notice on our financial statements about $68 million in deferred revenue and that's sort of reflective of the amount of waste that we have in backlog and in our plant. So we have a very large amount of waste in our network to be processed and incinerated. And our drum volumes particularly have been very strong year-over-year. So I think we see the economic conditions both in the U.S. and Canada improving and driving more waste volumes from our regular wage generating customers. And I think to Mike's point, we also have a good pipeline of projects and large remediation type jobs that are in our pipeline as well. So I think looking at our competitors, we believe that our competitors, particularly on the incineration side, are enjoying equal amount of improved utilization as well. And I think that volume is going to continue to improve throughout this year and even in next year as some additional plants come online.

[Unknown Speaker:]

Okay. Thank you for that. And then a follow-up question kind of on the qualitative growth color that you guys have provided. With the first quarter growth for adjusted EBITDA being better than the flat rate that you had spoken to last quarter. And the new Q2 color, does that change the previous expectation for the second half weighting of this year, just trying to get a scale of the higher growth in the second quarter and kind of what's driving that change, if there is a change?

[Michael L. Battles:]

Yeah. John (00

[Unknown Speaker:]

Okay. Thanks, guys.

[Alan S. McKim:]

Okay.

[Operator:]

Thank you. Our next question comes from Hank Elder with Goldman Sachs. Please state your question.

[Hank Elder:]

Hi guys. Yeah. This is Hank on for Brian. Thanks for taking the questions. So the top-line in Safety-Kleen was pretty strong, but the segment margins, especially in Safety-Kleen were a little below, maybe year-over-year on where would have thought, was that a function of seeking out higher volume or mix or is something else going on?

[Michael L. Battles:]

Hank, can you repeat that question? I'm sorry.

[Hank Elder:]

Sorry. The margins in Safety-Kleen I guess were a little below where we would have thought given the top-line performance. So was that a function of volume or seeking out higher volume, the mix or something else?

[Michael L. Battles:]

Yeah. Hey, so, yeah, I'm not sure, we were very pleased with the results of Safety-Kleen for the quarter. They had improved their EBITDA margin by 220 basis points year-over-year. And we look back at eight of the last nine quarters, the margin has improved year-over-year for SK. So I guess it could do better. We always push ourselves and push our team to do better and there's spread to be had there as oil prices have gone up and trying to hold the line on CFO. But overall, I think the executive team is pleased with the performance of SK and is in line with our expectations.

[Hank Elder:]

Okay, got it. And then on the OpEx, you guys I think did a great job on the cost control this quarter. But you mentioned that the higher corporate expense year-over-year, do you think that kind of the savings in 1Q will continue or should we expect those expenses to pick up moving through the rest of the year?

[Michael L. Battles:]

Yeah, Hank, that's where we thought that we're pleasantly surprised by the results in the quarter versus kind of what we had said before. I think healthcare costs came in a little better than what we thought. We think some of the costs we're going to have to invest in our team is in process, but not a ton more here in Q1. And so we – when we talk about for the full-year, we think that's probably going to do a little better than what we originally had thought.

[Hank Elder:]

Okay. Thanks, guys.

[Operator:]

Thank you. Our next question comes from Charlie Wohlhuter with Raymond James Financial. Please state your question.

[Charles Wohlhuter:]

Hi. Thanks, everyone for taking my questions here. Following up on that previous question about the SG&A, Alan or Mike, when you mentioned about the incentive comp changes here incorporating ROIC and then based upon Mike, your just previous comments about the lower healthcare cost, are there any sort of incentive comp deltas to think about this year versus last year?

[Alan S. McKim:]

No, not really. I think we're going to continue to see an improvement in EBITDA, which is really what is the management incentive plan and a lot of our senior executive incentive plans is predominantly driven off that EBITDA margin improvement and therefore incentive comp is tied to that improvement. So we anticipate both to improve, as well as now with a percentage of that being focused on improving on ROIC and we put that in place at the beginning of this year and that will be another additional metric that we're going to continue to drive across the entire organization.

[Charles Wohlhuter:]

Okay. Got it. Thank you. And then, Mike, you mentioned earlier about the pipeline for some larger projects in – well formally Tech Services and I believe you said something along the lines of a larger – or I'm sorry, a lower margin profile. How do you price or factor in transportation cost with those projects? Is that incorporated into the pricing or negotiations or is that a piece perhaps that is causing the margin profile to be a bit lower than perhaps originally expected?

[Alan S. McKim:]

Not necessarily. I mean, clearly, we tend to separate out our transportation rates and there is some variability with it in regard to our fuel surcharges that we include. We have been raising prices as a result of our costs going up in transportation. It's a big component across the entire company over 4,500 drivers, CDL drivers. We're moving a lot of waste. We're also using a lot of rail and even barges to move product. And so transportation is very important as we price these projects and manage them particularly as some of these projects might be a little delayed to move forward, we really try to move – go back to our customers and address any transportation changes that need to be addressed.

[Charles Wohlhuter:]

Okay. So all that being said is transportation is not a root cause of the lower margin profile of these projects in the pipeline?

[Alan S. McKim:]

No, I think it's just – when you look at very large 100,000 ton plus kind of projects going into landfills, they tend to be more competitively priced simply because of the nature of those kinds of events and that's based on historical, so it's nothing new. It's really how large event projects tend to be bid for our landfill business.

[Charles Wohlhuter:]

Okay. Got it. Thank you.

[Alan S. McKim:]

Okay.

[Operator:]

Our next question comes from Michael Hoffman with Stifel. Please state your question.

[Michael E. Hoffman:]

Thank you very much. Nice to see you back on a path of potential repeatable predictability. Can I ask on the free cash flow working capital, I get what your comment was, Mike, your 7% of revs is your cash flow from ops in this quarter. The average for the year needs to be 10%. Is most of that going to be working capital given what you've shared with us about – if we stay at the midpoint, that's a pretty healthy working capital play, how do I see that play out? Is that 2Q, 3Q, is it 3Q and 4Q, where is the timing of that?

[Michael L. Battles:]

Michael, so it's going to happen during the course of the year, kind of Q2, Q3. Q1 was particularly low because of the bonus payment that we paid here in Q1 of 2018. So that was made it kind of unusually low from a working capital perspective. We assume that's going to get back as the year rolls on. Certainly, if you look at our cash flow statement and look at accounts receivable which I mentioned earlier, that was a bit of a drag as well in Q1 this year when last year was bit of a pickup. And so, we feel that that's just a matter of focus. Our aging hasn't changed. Our profiles of receivables haven't changed. It's just a matter of going and getting it. So I'm less concerned about the cash flows, given the Q1 performance. It was a little lighter than prior year, but more to do kind of a one-off payment than anything else and I still feel good about that, kind of midpoint of that range.

[Michael E. Hoffman:]

Okay. And then, you've shared with us your thoughts about the progression of both Environmental Services and Safety-Kleen, the margins through (00

[Michael L. Battles:]

Yes, sir.

[Michael E. Hoffman:]

Okay. So, if I think about that, you did $146 million in corporate overhead last year that put you kind of at $165 million, Safety-Kleen goes to $275 million that puts the assets somewhere between $350 million and $355 million. Is that the right – to get me to the midpoint, that's the right way to think about it?

[Michael L. Battles:]

Yes. Yes. And certainly, Michael, as I said before, I think that the beat in Q1 gives us more confidence in as the year rolls itself out. So we thought that one quarter of goodness does not mean a guidance change, but certainly as we roll the numbers out and the beat to happen in Q1 gives us some positive momentum for the rest of the year.

[Michael E. Hoffman:]

Fair enough. And I'm not trying to press on a change of guidance, so it's just – let's just meet and beat for the moment. The ESO (00

[Michael L. Battles:]

Yeah, Michael, and I probably should repeat it in my prepared remarks but we did comment in the Q4 call in Environmental Services, primarily in Tech, there was a $7 million, I'd say due to weather and fire and other types of disruptions in Q1 that did, if you add those back to our Q1 numbers would be – would result in a 100-basis-point beat in the margins for – versus prior year versus Environmental Services. So although we were – we realized to kind of get to the margin we're talking about we had to do better than a 100-basis-point decline year-over-year, we've realized that a good chunk of that has to do with some ice storms in Deer Park and other things we talked about in the Q4 call.

[Michael E. Hoffman:]

Okay. That's good to know. And then when I look at the $165 million in corporate overhead this year and the benefits of the reorg both driving incremental growth, but do I see that number come down on an absolute basis in 2019 or is it that it will grow slower as you drive operating leverage against it?

[Michael L. Battles:]

I think both happen. I think that we look for opportunity as we put this structure together and look to maximize not just head count, but space and capacity in some of our locations that should help corporate expenses. Also as you said, the incremental revenue and the leverage we get off that's going to help the margin numbers well.

[Michael E. Hoffman:]

Okay. And then just to clarify a margin question that was asked earlier. The right way to look at this is you're supposed to look at it against direct revenues and your EBITDA not the third-party revenues. If you did look at it as third-party, the question earlier in SK, the margin was – your 210 basis points as I'm taking $278 million of revenues and dividing that into $62 million to get to the 22 point (00

[Michael L. Battles:]

Yeah. No, Michael, we were a little confused about...

[Michael E. Hoffman:]

Just to clarify that, somebody was looking at I think yeah – I think they were looking at the wrong number.

[Michael L. Battles:]

We were a little confused at the question, but we're happy to answer your questions and we're really proud of how SK has done and we do base of direct revenue.

[Michael E. Hoffman:]

Right. Right. That's how to calculate margin though. And then back to the other margin question or the issue with regards to project, the way to think about project bidding is you cover all your fixed costs and Technical Services asset base through base revenues, recurring revenues, and now (00

[Michael L. Battles:]

That's right.

[Michael E. Hoffman:]

Right, right. So that's why that business can be lower margin in that context, because it's more competitively bid to cover just variable cost?

[Michael L. Battles:]

That's right.

[Alan S. McKim:]

That's right.

[Michael E. Hoffman:]

Okay. Okay. That's – I just want to make sure none of those things have changed. All right. Great. Thank you.

[Michael L. Battles:]

Thank you, Michael.

[Operator:]

Thank you. There are no additional questions at this time. I'll turn it back to management for closing remarks. Thank you.

[Alan S. McKim:]

Okay. Thanks for joining us today. We do have a strong IR calendar coming up and we'll be in New York and Boston next week. So we look forward to seeing many of you at these and other events in the coming months. Have a great day.

[Operator:]

Thank you. This concludes today's teleconference. All parties may disconnect. Have a great day.