Greetings, and welcome to the Clean Harbors, Inc. Fourth Quarter 2019 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, Inc. Thank you. Mr. McDonald you may begin.

Thank you, Melissa, 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 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, February 26, 2020. 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 today's call other than through filings 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?

Thanks, Michael. Good morning, everyone. Thank you for joining us. Starting on Slide 3, before discussing our financial results, I want to speak to our safety performance. I'm proud to report that 2019 was the best safety year in our history with our total recordable incident rate and other key metrics at record lows. Over the past five years, we have seen our focus on safety drive real positive results for us and have helped us protect our work force better and better each year. And our highest priority at the company is that each employee's goes home uninjured every day. Turning to our financials, we concluded 2019 with another quarter of profitable growth in Q4, led by environmental service segment which achieved better than expected results on a combination of higher landfill and incineration volumes, project wins and strengthen our field services. On the top-line the SK branch business and our field service group offset some industrial and energy-related weakness and sluggishness in SK Oil. Revenues were up 1% for the quarter and favorable business mix drove an 8% growth of adjusted EBITDA and a 100 basis point improvement in margin. For the full year, adjusted EBITDA grew by 10% on a 3% increase in revenue and we generated record adjusted free cash flow of $208.5 million. Credit for our results belongs to our entire team who not only helped us set some financial records, but did so safely all year. Turning to our segment results beginning with environmental services on Slide 4. Revenues were up modestly as our facilities and field services offset some softness in industrial and energy services. High single-digit adjusted EBITDA growth fueled 140 basis point margin improvement as the segment top 20% for the third straight quarter. As it relates to our facilities, it…

Thank you, Alan, and good morning everyone. Turning to Slide 9, in our income statement, as Alan indicated, we delivered good profitable growth in Q4. We increased revenue by 12.8 million which represents 1% growth from the prior year. Adjusted dividend grew by 10.3 million. This reflects a mix of business, we experienced in the quarter, pricing initiatives and operational efficiencies. From a gross profit perspective, we saw a decline in Q4 on both an absolute dollar and percentage basis from a year ago due to business mix including the project work associated with the 2008 California wildfires and higher costs related to labor, insurance and healthcare expenses. Just to touch on insurance for a moment, like many companies, we are seeing costs in nearly every type of insurance rising, particularly property, auto and excess casualty. We will continue to drive our cost saving initiatives to offset these higher insurance costs as well as to continue to focus on safety to lower incidents and incident severity. On a full year basis, gross profit increased by approximately 30 million with gross margin, essentially flat year-over-year. SG&A expenses were down significantly in the quarter compared with a year ago, declining by 18.4 million, which drove a 240 basis point improvement in percentage terms. In Q4 of 2018, we had significant bad debt charge associated with the customer bankruptcy even asset that one-time item. We had a considerable improvement driven by higher revenue within both operating segments and lower corporate costs due to a series of cost saving initiatives, moving employees to lower cost jurisdictions and reduced incentive compensation compared with a year ago. On a full year basis, SG&A expenses were down 110 basis points. For 2020, using the midpoint of our guidance range, we would expect SG&A to be up in…

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Noah Kaye with Oppenheimer and Company. Please proceed with your question.

For incinerator, appreciate you calling out the large project impact on pricing trend this quarter. But still you got double-digit price growth for the year. What is sort of the right price mix range that we should be thinking about on incineration for 2020? What do you have on the guide?

And so I think that at the end of the day, we've had a steady growth of both mix and price. And as we said in previous calls, two-thirds mix, one-third price, I think that continues into 2020. I think that we still have kind of a strong mix as we entered Q4 of kind of higher value waste streams and we continue to manage our price and increased prices on customers and we'll do that. And we did that in 2019. We're going to do that 2020 going forward.

So maybe then, just that alone should give you really nice EBITDA growth if that's sustained in 2020. How should we think about maybe some of the offsets that you're thinking about within ES?

I mean the incinerators in Atlanta have done really well. We've had had some struggles in the industrial services business. We've tried to expand margins in that business and we'll continue to do that. We're not planning on a lot of good growth out of that business in 2020 as we think about it. We're trying to hold the line and take some costs out and manage that more profitably.

Excellent. At a high level, what are you going to do with all those cash? I mean, it's really the question now, you talked about it a little bit in the prepared remarks, but at this trajectory you're going to be under levered, you generating a lot of cash this year, exiting the year with a high cash balance. Can you tell us a little bit about, just as it sits today, your thoughts on prioritizing debt repayment, M&A or share repurchases, where is sort of the bias at this point?

I mean, clearly we would like to do a significant acquisition at a reasonable price and we are really well positioned to do that. We have certainly been looking at a lot of deals. There's been a lot of deal books flowing around. And I think we're well positioned to do that. We've also been certainly trimming some of the one off businesses that we have that maybe came through prior acquisitions and as we mentioned, sold a couple of businesses. We actually sold one yesterday. So we're really, I think doing all the things to position ourselves to be really laser focused on our environmental business and our Safety-Kleen business and looking at opportunities through acquisition to expand those businesses. That would certainly be my top of the list priority for the cash.

Thank you. Our next question comes from the line of Luke Junk with Baird. Please proceed with your question.

So a first question just regarding IMO 2020, I appreciate it's still early here, but just curious anecdotally at least what you're seeing on the ground from blenders and other purchasers of used motor oil so far this year. And in a similar vein, just wondering how are you seeing the state of the utility export market for sulfur fuel oil right now?

Yes. I can start, we really came into the New Year here with things looking really favorable as it relates to IMO 2020, we started seeing high sulfur fuel oil, really come down in value and really become quite oversupplied. And we also saw base oil prices begin rising all the major base oil suppliers. So everything sort of was playing into what we had forecasted. And then, I think over the last six weeks, there's certainly been some significant disruptions on finished products, whether it be jet fuel or fuel oil or other products like base oil and as well as crude oil decline, a significant decline in crude oil. So it's a little bit difficult for us to really anticipate what the end result will be for IMO 20 particularly because all the ship owners need to come in full compliance with no exemption after March. But you've still got this whole global, sort of crisis going on right now. And it's sort of given us uncertainty about just what we would benefit from IMO 2020 this year. On the used motor oil side, volumes are very strong for us. Certain parts of the markets are very long. The outlets for oil is very constrained. We are communicating with our customers to keep them informed making sure that they know that we will be there for -- to be their service provider because a lot of the outlets have dried up for used motor oil that's not going into a re-refining operation.

That's great. And then, I guess along a similar line, there's obviously been quite a bit of movement in base oil prices so far this year as you noted Alan, line of increases a month or so ago now, some concerns around corona virus starting to creep in more recently. Can you just help us understand what's baked into the guidance for base oil pricing sitting here today?

Luke, I'll take that one actually. And so I -- we've tried to say kind of base oil pricing kind of as it stands today with the price increases and the price decreases. As we always try to do this, we try to take up very kind of where it is today and that can change obviously tomorrow, but our guidance includes the price drops that happened very recently if you will.

Okay. That's helpful. And then last question, just --, I don't know if you have a number here in terms of the --

Luke one more thing, I wanted to stress that the base business is very strong. So we've talk about IMO and we're talking about -- we're going to manage our spread and we think that the rest of the business, whether it be the SK branch business, whether it be the ES business, and that's going to continue to be very strong and we don't see anything out there that, we get a little stuck on IMO. We don't see anything out there that would cause us pause and we really are very, very bullish on 2020. So I want that to be very clear here that. We're not guiding for IMO. We're concerned about base oil price dropping and all that good stuff. But the underlying base business and our ability to manage the spread, nothing has changed there and we're really very positive on it.

So, I think when we put together our budgets and got those approved in December that was based on pricing at that point. And even though pricing went up in January and all the majors went up and we're starting to see some price declines today. Our price and which in our forecast for the year was based on that old price. So we're probably doing pretty good.

We're probably okay.

Okay. That's helpful. And then just last question on the base business, just wondering if you could expand on the opportunity from here to continue to drive those high value waste streams into your network, both in terms of what the market's giving you and any additional internal actions that you've taken to free up capacity?

Yes. We continue to look for ways to debottleneck and add more processing capacity at our incinerators to get more throughput. And that really over the next two or three years, we're going to continue to invest capital, whether it be in shredders or in feed systems. We have a very large backlog of waste coming into the year. Our deferred revenue is up, our volumes and inventory are strong. And quite frankly, the demand for a lot of our customers is very strong right now. The chemical industry is really very strong for us and looking at those real difficult waste streams. And we've seen some chemical plants coming online. So I think our expectation on incineration as we continue to look at ways of getting more of volumes through our network of incinerators because we have a very strong backlog there.

Thank you. Our next question comes from line of Michael Hoffman with Stifel. Please proceed with your question.

Mike again asked my favorite question. So your cash conversion has actually improved quite nicely. I mean in '16 you were 17.5% of EBITDA for a free cash flow and now you're up to almost 40. How would you -- and then a cash flow from ops is going to remain 4% of sales to 12. Where are we in your sort of rolling five year plan of where this could go?

Yes. That's been really a function of, as Alan mentioned in his remarks to kind of better systems and processes to kind of come to get the bills out the door and get the cash in the door. And I think that is -- we have a lot of customers and it takes a lot of work and there's a lot of hard effort by -- led by the team here in Norwell to kind of really drive that and you're starting to see that in the results. I'm hopeful as Alan talks about, better technology and a focus on that. We'll continue to see that type of better conversion and getting our bills out faster, having better terms and conditions and as such, getting our cash faster and driving, working capital down. So I'm really pleased with, as you say Michael, we've had some decent progress in that area. As far as dividend to cash flow conversion, I'm hopeful that just continues.

Okay. So there's upside to these ratios and that's a combination of efforts around financial controls is also -- that's demonstrating the sort of predictable repeatability of the operating leverage of the fixed assets too, right? I mean that's the way to look at it. Right?

And you see it now in ROIC too, no matter how you calculate it, we've actually had a huge increase in ROIC over the past two or three years and in our metrics how we calculate it, it's doubled over the past few years.

Okay. So the next question then is a point of leverage on that. So the debt markets practically giving money away. We've got companies that have raised money at 2.5% on 10 year money. I mean that's almost free. Can't are you, are you in a position to try and take advantage of that given what you've done in the last year, year and a half on the mix of your fixed versus variable in your fixed swap things of that nature?

The short answer, Michael, is yes. When we put this new leverage in place, we made sure that it was covenant light so that if we had a transactional event that Alan talked about earlier to do something really large, we would have the leverage capacity to do just that. And so when we financed all our debt, we've done, as you know, the last three years, we've done large refinancings to lower our interest rate, like quite a bit. And so we're really proud of that and we have a good 75% fixed, 25% variable rate. And so we still experienced some of the god news today. And so I'm really hopeful that if there's an opportunity out there for the market that that makes sense both strategically and financially. You know, we'll be there with the dry powder, if you will, to go to go execute on that.

All right, well, so that kind of a lay up into the next question. So there's a very big chunk of assets just got sold. I'm curious what was appealing about that for Clean Harbor? Because 600 million in revenues in hazardous waste don't come available very often. So I going assume you love. So what are you looking for if that wasn't it?

We're very familiar with those assets. We've looked at them over the last 10 years as they've changed hands from -- a public, the company to private equity ownership through to bankruptcy's and subsequently acquired by, one of the other bigger players in the industry. And we certainly know those assets really well. And we just you know, we're not able to put together a deal that we felt was the right deal for our company. And, there are other opportunities out there that, that might be better from a value and strategy strategic standpoint. Michael, but clearly we're looking at all opportunities that we can.

Okay. And then, Alan, you and your comments statement about chemical activity was good. Can you frame that in a sense of where you think that that dose from here, because we have had a fair amount, I mean, a couple hundred million dollars has been spent in developing new capacity in the Gulf Coast. So, how do think about where that trend line is in chemical and then in particular in the current environment around the Corona virus and that may or may not portend?

I think the real difficult to handle streams and what we would call out direct burn volumes have never been higher. And in many cases we're constrained and how much we can handle due to our capacity from a permit standpoint, air pollution, control standpoint. And so, we are not able to meet some requirements that customers have and they're not finding outlets as well for that and other competitors, so to speak. There are additional plants coming online. We see with the forecast for natural gas being where it is that, it's a very favorable environment to produce chemicals. And we don't know what this disruption in supply chain that we're seeing whether more will be brought back to the States or not. But we are looking at ways that we can expand our incineration capacity because we think that it's not just a strong economy that's driving it. There's some real increases in overall volumes being generated.

Okay. So, let's phrase the question about, what's your reaction is to the OA buying Gum Springs and what you think may or may not come out of that transaction.

The only thing I would say is, we've competed with Gum Springs for years and years with the capabilities and the permits that they have. And so from us, it's an ownership change, but I think as a kiln like that, which is very much similar to with cement kiln and we've competed with other cement kilns and they are a part of the mix and handling hazardous waste out there. We don't see a change. They do compete on some low price lean water streams. But, I think that's probably the only thing I would comment on Michael right now. Is it something that we've competed with for years.

And Michael as you may know, that they're required to continue to take the spent hot liners. And so, that is there they're committed to doing that in this transaction. And those, those we competed a little bit on, but they're going to be tied up with those for quite of period time.

Yes. It uses a lot of capacity. It seems like it was almost more of a landfill play that an incinerator play around PFAS.

I would anticipate that. Yes.

And so to that end, are you potentially looking at the -- sort of what I'd call more of the equipment or fixed asset side approaches around either granulated active carbon or reverse osmosis or even ion exchange and sort of tackling PFAS from that perspective as well.

Yes. We're not land filling PFAS and we're really much more into the treatment side at this point. And so our focus is not, going after the large PFAS opportunities. Right now. There are, you know, some very large projects out in the Midwest and then other markets that we've seen. But, we are seeing some real demand on our remediation equipment our water treatment equipment. And so to your point, part of that whole expansion of products and services that we're going to be making is really to help meet the needs of the industry for the treatment side of the business.

All right. And last one for me. Do you have any visibility on when the DOE market analysis of re-refining used oil will be out there late? Was supposed to be out in December?

They are late and we've been pushing Michael, but the answer to your -- specific answer to your question is no, we do not have an estimate today.

Yes. Michael, we know the study is complete, but, it's with some regulatory body, so it has nothing's been released yet as you know.

Okay. I saw one of your teams, by the way at a conference I was yesterday and they had their PFAS display up and they were surrounded. Lots of people were talking to them.

Yes. There's a lot of uncertainty certainly with those -- forever chemicals that you're hearing about out there.

We would definitely get a lot of inbound interest, that's for sure, Michael.

Thank you. Our next question comes from the line of Hamzah Mazari with Jefferies. Please proceed with your question.

Hi, this is [indiscernible] filling in for Hamzah. Could you comment on any changes in the competitive landscape, your scene and hazardous waste with Veolia recently getting larger and also with Harsco among others? Thanks.

Well, certainly I think the Harsco transaction that was announced [indiscernible]. I think they're probably going through their process there. And we do business together with those companies. So the company does about a $100 million of business with our competitors, very much like the chemical industry doing business with each other. And I think particularly with Harsco, we hope to be a preferred supplier with them if they choose us for waste disposal needs as we were with other players. And so because they don't really have disposal assets like we have. I think, we'll hope to develop a good relationship there and we have continuously used their facilities, the clean earth facilities for example as well. In the case of the Veolia, I think it's really -- we haven't seen any real change at all. From what they're doing, they divested their energy business here in North America. And we've been quite surprised, quite frankly, because they've really been selling off businesses like their solid waste business or energy waste energy business. So that was somewhat of a surprise for us.

Great. Thank you. I just have one more question. I'll turn it over. I've noticed that you've taken a lot of costs out of the business over the past few years. Can you comment on how much runway is left on the cost takeout, either on the gross margin line or SG&A and the big buckets?

I think that we continue to deploy technology is a way of taking costs out of our business and automation, whether it's robotic process automation or AI or other things that that clearly can make us more efficient. We're also expanding our inside sales our whole a customer call center, we just relocated our Richardson headquarters to Noelle. We shifted roughly over 300 people. And we now have a small Richardson office with about 50 people or so. And through that consolidation which was essentially former Safety-Kleen headquarters that we acquired in 2012. There was some real synergies in doing that. And as we have done that consolidation, we see a continuous opportunities to take out more costs than automation will play a key role in that as well.

Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

I wanted to shift over to your direct lube program. You highlighted the strong growth in the quarter, but I think in the press release you said, it was below your internal targets. Is there something going on internally? Is it the market acceptance of this? Any color would be great. Thanks.

Yes. I think as we meet with the team and understand the successes that we've had and some of the disappointments we've had in the last 2.5, 3 years, we're seeing certainly many companies that are infested and [indiscernible] different products that we have. And we continue to have a, a real strong pipeline. On the service delivery side, I think on the supply side, the supply chain side, I think we really have put a lot more focus on that because I think, the stickiness, it hasn't been where we want it to be. Our customer, we're only getting about 60%, where repetitive purchases, where historically in the safety claim business, it's very much a subscription business and we're getting 80% or 90% subscription. So I think that's been something that from a supply chain standpoint we're addressing. And I hope as we continue to grow, we'll hold onto more of those customers that we're bringing in and do a better job of servicing them. So I would say that would be -- if there was a check mark there about something that we haven't done as well as we should have been in that space.

Okay. That's helpful. And my follow-up I guess will be like more of a numbers question. You highlighted the large project impact on a pricing perspective and I guess obviously it impacted revenue. Can you just call that out just to help us in modeling what the impact was in the quarter? Thanks.

Jeff, I don't have that handy. I think that there were a couple of smaller projects that kind of added together along with a couple of large ones. So it's really hard for me to put a real, real number on it. I would say that growth and pricing for the year was consistent throughout the year and it was just being diluted a bit by the level of projects.

And I think we saw that in January. We had a very strong January and so the trends both on top-line and margin were well above our budget going into January now. We got an extra day this quarter. And so that'll help us a little bit. But I think just the weather has been good for us. Our volumes are really strong and I think that large projects, obviously we had to get that in the door, but the backlog is certainly there as well.

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

Hi. Thank you. Good morning. Just question on, I'm interested in some of the commentary event, the e-commerce initiatives you have underway should we think about these as gradual. But what I'm wondering is if, as you roll these through and expand this, if there's the potential for this also to help leverage some of your costs going forward.

Absolutely. We've expanded to 23 distribution centers and those were assets that we had already owned. And so we expanded those distribution centers to move more of our, what we call our ally product sales, as well as all of our lube packaged and drum product sales. But what we really found is that to be competitive, we need to be able to deliver next day in some cases to meet customer's expectations. And so as we roll out this whole e-commerce initiative, it's all going to be designed around not only trying to leverage the existing trucks that are going out there and providing those routes, but also to make sure that we're not missing that service where that customer calls up and needs that service next day. And we have historically, at least for delivering products have not been sort of a next day delivery company. And now we're going to move to that model. And I think from a cost standpoint, it'd be relatively minor just putting in the supply change system to basically handle that. And so that'll be launched in the second quarter. And we think that'll help both on the direct side. Safety-Kleen has had very good success selling $60 million, $70 million a year of a whole variety of branded products around safety and absorbance and drums and all kinds of things that the automotive industry needs. Clean Harbors customers will benefit a lot from those same kind of purchases and we can leverage our transportation to get those delivered to them at a real low cost. So we're leveraging that for sure.

Got it. And it sounds like in general, the business looks strong pretty much across the board, but you did I think comment a little bit about some struggles in the industrial services area. And it sounds like you're not assuming a whole lot of growth there. I'm just wondering what you're seeing there, if you could be a little bit more specific and if there's -- if you feel that that has the potential to solve and further or we kind of bottoming out there.

Hey Jim, this is Mike. I'll take and Alan, feel free to jump in. And we looked at our turnaround schedule for 2020, both in the U.S. and Canada and we feel that it's flat to up. And so we're hopeful that the level of turnarounds that are happening in both the U.S. and Canada as we look at the schedule of planned turnarounds and the size of the turnarounds, we're hopeful that we can hold the line. We have put the new leadership in place in industrial services and we're really hopeful that a better focus of that business is warranted. As you can see, we'll issue our financial statements here in a few minutes, industrial services as we break out the lines of businesses down a bit, kind of year-over-year. And so that's something that we just need to continue to focus on it. We did it for the right reasons. We're walking away from unprofitable clients, we're trying to raise price and as such, the revenue is down a bit. I'm hoping to put the margins are up and that's hopefully continues with better revenue.

I would just say that with the Veolia acquisition, as we get our arms around some of the contracts that we inherited, the margins were not anywhere near where we believe from a risk and investment standpoint that we have to make to do a good job on those contracts with. So we've been going back in some cases losing some of those contracts because, we realize that they're not as profitable as we need them to be. And so there's been a little bit of shifting going on as a result of the acquisition we made there.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. McKim for any final comments.

Excellent. So thanks for joining us today. We're presenting at the Raymond James conference next week and participating in several other events later in March. And we look forward to speaking with many of you at these and other investor events. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.