Clean Harbors (ticker: CLH): $7.8bln market cap; $9.7bln EV; Trades @ 8.6x '24 EV/EBITDA; 1.9x Net Debt/2023 EBITDA

Background:

• A leader in Environment Services with top industry positions in hazardous waste disposal (Largest in North America), field services (clean up services), industrial services (plant turnarounds). CLH is also the largest re-refiner of used motor oil (UMO) in North America (60% share):
  • Technical Services (TS) (~$1.5bln rev) includes the collection and disposal of hazardous waste via incineration, landfill or water treatment:
  • 70% market share in commercial incineration (7 of 10 facilities)
  • Top 2 player in hazardous landfills (competes with RSG/WM)
  • #1 player in Treatment, Storage and Disposal facilities (TSDFs)
  • Highest margin business within ES -- estimated in the mid 30s
  • Highest barriers to entry given required permits/infrastructure
  • Field Services (FS) (~$600mm rev) includes emergency response as well as regular tank cleaning and vacuum services:
  • #1 player with ~20% share (RSG #2)
  • Higher margins than Industrial Services (see below) given episodic nature
  • Business can be lumpy
  • Industrial Services (IS) (~$1.3bln rev) includes plant maintenance and turnarounds:
  • Lowest margin business  
  • Critically, management sees path from mid-teens to high teens low 20s
  • SK Environmental (~$750mm rev) is parts washing, containerized waste services and vacuum truck services:
  • Far and away the largest player here (30% share) in a fragmented space
  • Margins estimated in the low 20s
  • SK Bulk Products and Services (~$200mm of revenue) includes waste oil, antifreeze and oil filter collection:
  • Similar low 20s margins in line with SK Environmental within ES
  • SK Oil (~$800mm of revenue) includes the re-refined base oil products, packaging and blending operations
  • This is by far the most commodity sensitive part of CLH's business
  • Interesting, while autos are the overwhelming producer of UMO into the refining network, only 36% of the re-refined base oil sold goes into autos
• Environmental Services or ES is ~80% of company revenues and ~80% of EBITDA:
• Safety Kleen Sustainability Solutions (SKSS) comprises ~20% of revenue and ~20% of EBITDA:
• Those interested in learning more should please refer to March '23 investor day Deck Here

 What’s The Thesis?

• Over the last decade, CLH has been perceived as a cyclical, commodity sensitive business that bears little resemblance to large cap solid waste players
• In our view, industry consolidation, rapid increases in inflation and a major captive incinerator closure will spur favorable price/cost, leading to further margin expansion
• Inflection Point:
  • US Ecology in particular was a distressed asset and did not price for value (its main businesses are haz waste collection, haz landfills and field services)
  • We understand that since the acquisition, RSG has taken two 10% price increases
  • RSG has been on record saying that the haz waste industry is where the solid waste industry was 10+ years ago in terms of future margin opportunity
  • Separately, CLH has taken price every year in haz waste incineration (US Ecology has no incineration assets)
  • We estimate that IS (ex. Hydrochem) grew organically in the mid-teens over the past 2 years
  • CLH subcontracted with 3M to absorb all of the 30K tons previously collected and disposed of on-site
  • Critically, no new haz waste incineration or landfill permits have been granted in over 20 years in North America
  • In the future, it is unlikely that producers of hazardous waste will want to risk being exposed to waste disposal -- increasing outsourcing opportunities
  • Of note, CLH has roughly 6mo of hazardous waste in 'backlog' waiting to be disposed
  • PFAS contaminated soil is a meaningful potential opportunity
• CLH's acquisition of Hydrochem (2021) and Republic Services acquisition of US Ecology (2022) has resulted in meaningful gains in pricing in TS (Landfills and Collection), FS and IS:
• Rise in inflation has helped CLH strengthen its pricing muscle, particularly in the IS space:
• Closure of 3M captive incinerator in 2021 is a precursor to future captive incineration closures, leading to an even tighter disposal market:
• Continual stringency around potential hazardous waste substances to drive even more volume through a capacity constrained disposal system:
• What It Translates To?
  • This organic growth trajectory would lead to ~$1.4bln in 2027 EBITDA with a net cash balance sheet (target is sub 2.5x)
  • FCF currently converts (from EBITDA) in the low 30s given the Kimball incinerator project, but otherwise expected to be in the high 30s/low 40s:
  • Despite lower capex requirements (~5.5% versus 10%), CLH converts FCF at a lower level than SW plays (mid-high 40s
  • This growth trajectory could lead to ~$2bln in 2027 EBITDA with 2x leverage
  • In our view, executing $4bln in M&A will likely be a challenge -- if we assume CLH can do half of this (base case), we would estimate ~$1.7bln in 2027 EBITDA
• Per CLH's very recent investor day, L-MSD organic revenue growth with EBITDA growth 200-300bps higher:
• Potential for nearly $4bln of additional M&A to round out CLH's geographic and industry vertical exposure for its existing businesses:
• Future material captive capacity closures as well as increased volumes related to PFAS provide attractive upside 

Why Does This Opportunity Exist?

• CLH's prior exposure to O&G Field Services as well as Lodging was a major headwind in the mid-2010s:
• CLH's O&G businesses were prominently featured at the prior (2013) investor day Deck Here
• CLH's O&G Field Services/Lodging did ~$600mm in 2013 revenue, generating $140mm in EBITDA -- today the business is sub $100mm with estimated low-mid teens EBITDA margins (so 1/10th the EBITDA)
• This was the primary factor that lead to CLH's revenues not hitting their prior 2013 peak levels until 2021
• Counterpoint: Since 2014, M&A/Capital Allocation has been focused on the remaining core businesses; These O&G businesses are just footnotes now
• SKSS business over earned in FY 22:
  • In 2019, the business did $467mm in revenue with ~21% margins whereas in 2022, the business did $822mm in revenue with ~32% margins
  • The absolute price level of base oils is linked to crude, which explains much of how revenue rose materially in 2022
  • IMO 2020 purportedly lead to lower demand for UMO, which therefore reduced the price re-refiners had to pay to buy feedstock
  • CLH made a strategic choice to decouple the pricing of UMO from other SKSS services (i.e. not bundle all services at the expense of paying too much for the feedstock)
  • CLH has been able to use more additives to create a higher margin product
  • Higher levels in additives in the UMO collected also makes for a better end product -- opportunity to eventually have re-refined product approach Base Oil 3 quality would give a nice pricing uplift
  • Despite a lot of investor speculation on base oil pricing/spreads, SK Oil only represents ~20% of overall EBITDA
• This is a factual statement -- supply and demand for UMO (feedstock) and re-refined base oil (end product) were favorable, leading to very strong spreads on materially higher revenue:
• Counterpoint: In our view, the sustainable margin for SKSS is somewhere in between 2019 and 2022 levels:
• CLH is perceived to be very economically sensitive:
  • Production of haz waste requiring disposal is tied to industries to like chemicals and manufacturing
  • Chemical/Refinery plants may defer turnarounds, which comprise ~50% of IS revenue
  • Reshoring of manufacturing/chemical plants to take advantage of tax incentives, regionalize supply chains and leverage low-cost nat gas
  • Increasing EPA scrutiny around questionable materials/substances/compounds that will require haz waste disposal
  • Lack of new supply/entrants in many of the spaces CLH plays in
• CLH revenues are tied to IP and does not have the predictability of a solid waste business:
• As discussed, CLH SKSS oil revenue is sensitive to oil prices
• Counterpoint: CLH is cyclical but we believe that there are secular dynamics that will result in higher highs and higher lows:
• Co-CEO structure sub-optimal:
• Historical precedent for this is what it is but with Alan McKim still heavily involved as Chairman, we don't believe the working dynamics of the C-Suite will materially change
• The co-CEOs own the LT (2027) guidance provided at the most recent investor day

Valuation:

• With no real public comps, triangulating fair value for CLH is an evolving process. Solid Waste players have higher margins, lower cyclicality, higher free cash flow conversion but do not necessarily have the same LT margin opportunity:
• Base Case:
• CLH achieves only half of the M&A EBITDA expected by 2027, yielding a 2027 EBITDA estimate of $1.7bln
• CLH trades at the upper end of its 5yr trading history or 10x
• Applying a 10x multiple on said 2027 EBITDA estimate and discounting back 3yrs gets us ~$190/share or ~32% upside
• Bear Case:
• CLH misses the lower end of its 2023 guide ($1bln of EBITDA) and sees a 5% EBITDA decline in 2024
• CLH trades at the lower end of its 5yr history of ~8x
• Applying a ~8x multiple on our bear case 2024 EBITDA estimate gets us ~$109/share or 24% downside
• Bull Case:
• CLH organic and inorganic growth projections hit, yielding a 2027 EBITDA estimate of $2bln
• CLH trades at 11x EBITDA or a 2x discount to solid waste heavyweight, WM
• Applying a ~11x multiple on our bull case 2027 EBITDA estimate gets us ~$249/share or 73% upside 

Risks:

• Industrial led economic slowdown to reduce pace of haz waste generation and regular facility turnarounds
• SK Oil profitability declines closer to pre-COVID levels when spreads were not as well managed