Long Term Targets Laid Out
CEO Alan McKim kicked off the day by laying out the long-term (three- to five-year) goals for the company. By the end of that time period, CLH is targeting revenues in excess of $5 billion, EBITDA of $1 billion (implying a 20-percent margin), free cash flow of $350 million, and return on invested capital (ROIC) of 13-14 percent. This would compare to 2013 guidance of $3.5 billion to $3.55 billion for revenues and $535 million to $545 million in EBITDA (implying margins of around 15 percent), a current “normalized” free cash flow of $100 million, and roughly 8 percent ROIC, which was characterized as “depressed” by the recent Safety-Kleen (SK) acquisition.
McKim stressed the company’s strengths, including the high barriers to entry, industry leading asset base (100+ disposal assets) and end-market diversification, while letting the various segment heads lay out in more detail the strategies and opportunities they see to move the company toward its long-term goals. The underlying assumptions of the revenue forecast include roughly 5 percent annual organic growth (versus recent levels of around 8 percent) and about $500 million in revenue from acquisitions. He also noted that customers’ consistent desire to improve or meet sustainability goals was playing into the combined CLH/SK strengths, and was proving to be a big growth area for the company.
Feeding the Facilities
Eric Gerstenberg, head of Technical Services, which primarily services the large quantity generators (LQG), noted that this segment generates more than $1 billion in annual revenues. He reiterated CLH’s strong asset positioning, noting that the company has 66 percent of the incineration capacity in North America, 24 percent market share in hazardous waste landfill volumes, 35 percent of the treatment storage and disposal facilities (TSDFs) and 32 percent of recycling facilities (including the SK assets). Given this huge fixed asset base, the key to growth and higher profitability is raising the volume throughput and getting higher pricing, in order to better leverage the facilities.
Volume opportunities included the potential closure of 10 on-site incinerators, the internalization of SK volumes and maximization of the cross-selling opportunities with SK, and on-site remediation and Superfund cleanup activities. He also noted that the domestic oil and natural gas boom and resultant lower price levels could eventually expand several of CLH’s key customer bases (chemicals and energy), as it is likely to drive more domestic investment in those industries. Over time, he also believes that incineration pricing could and should rise another 15 percent or so. The segment goal is to drive margins from percentages in the mid 20s to percentages in the high 20s.
Lower Base Oil Prices Have Overshadowed SK Synergies and Opportunities
Jerry Correll, head of the Safety-Kleen Environmental Services division, noted that the segment generated $1.2 billion in annual revenues, 50 percent from environmental services and 50 percent from the used oil business. CLH, with the acquisition of SK, is now number 1 in the small quantity generator (SQG) market. Base oil prices plummeted in the second quarter of 2012, while the price SK paid for used oil remained relatively high, squeezing margins, and thus hurting the re-refining business. This has overshadowed the fact that CLH remains on track to achieve $100 million in annualized cost savings from the SK transaction. Although not yet materially improved, base oil pricing seems to have stabilized, and SK is putting through price increases on the blended product and base oil side, while attempting to bring down what it pays for used oil. The recent purchase of Evergreen Oil is an example of the latter, as it gives the company access to some of the lowest cost used oil in the country.
The longer-term opportunity, however, from the SK purchase is to cross-sell CLH services to SK customers. CLH now has 250,000 customers, of which SK brought 200,000 of them into the fold. Emergency response, field service work and lab pack services were noted as cross-selling opportunities that SK had not done or outsourced. Conversely, SK will now have access to CLH’s traditional large quantity generator customer base as another source of used oil to feed the re-refineries.
Oilsands and Gulf Work to Drive Organic Growth in Industrial and Field Services
David Parry, head of the Industrial and Field Services pillar, noted that the division, which includes industrial and field services work and remediation, emergency response, oilsands and lodging, generates around $900 million in annual revenue. Expected growth in the oilsands and gulf region, aided by better access to the automotive market that SK provides, are forecast to drive organic growth in excess of 10 percent. This forecast does not include any assumption of a larger emergency response job, i.e. a major oil spill. With regard to margin enhancement opportunities, Parry noted that this was essentially a time and materials business, and the key to better profitability was asset utilization—moving people and equipment around more efficiently and shifting them to more active markets—all aided by the combined footprint of CLH and SK. Parry also believes that there will be consolidation opportunities in this sector as well as the potential to gain market share.
Higher Utilization Key to the Oil and Gas Business
Laura Schwinn, head of the Oil and Gas Field Services division, noted it generated about $400 million in annualized revenues. This area is also forecast to have organic growth in excess of 10 percent, stemming from the expected underlying growth in the unconventional oil and gas shale basins themselves, but also from CLH’s plan to expand the geographic footprint of this segment from Canada to other shale basins in the U.S., notably in Texas and Oklahoma, where CLH already has a strong presence in its other services.
Therein lies the big opportunity for margin improvement—shifting underutilized assets (seasonally and cyclically) to more active markets and increasing the service intensity at current locations. Schwinn wants to raise the overall utilization rate from roughly 50 percent currently to 75 percent, which would provide meaningful (at least several points) upside to current margins. Over the longer term, the likelihood of tighter regulations on fracking, and the resultant waste materials and water, should play directly into CLH’s core field service strength, as well as provide more volume to its disposal network.
M&A and Financials Round Things Out
Brian Weber, head of corporate planning and development, noted that CLH’s management still saw considerable consolidation opportunities in all four segments, though the near-term focus would be on smaller tuck-ins as the company fully digests SK, which is expected to be fully integrated by year’s end. CFO James Rutledge noted the strong balance sheet, which will allow CLH to take advantage of acquisition opportunities as they arise. Rutledge also noted that CLH will enter 2014 with base EBITDA of $600 million, and that the current “normalized” free cash flow of $100 million is impacted by very substantial investment and capex (capital expenditures). As a result, management is expecting a substantial rebound in ROIC and free cash flow from current levels, underpinning their long-term forecasts.