Clean Harbors, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Clean Harbors is a leading provider of environmental and industrial services across North America, offering a broad range of solutions for waste management, site remediation, and emergency spill response.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Clean Harbors operates through two primary segments: Environmental Services and Safety-Kleen Sustainability Solutions. The Environmental Services segment handles hazardous and non-hazardous waste collection, treatment, and disposal, as well as remediation and industrial services. Safety-Kleen Sustainability Solutions provides oil collection, recycling, and re-refining, along with related environmental services.

Business Overview

Clean Harbors’ Environmental Services segment is very dependent on the volume of waste they receive, their facilities also are dependent on permits and regulations. Meanwhile, the Safety-Kleen Sustainability segment benefits from a closed loop system in the supply of oil and re-refining, making them more robust. Both of those divisions contribute similarly to revenues. The overall business has increased revenues consistently with new facilities and acquisition, and improved operational efficiencies.

Their revenue streams are diversified:

  • Environmental Services constitutes the bulk of the revenues, deriving from waste collection, treatment, and disposal, site remediation, and other specialized industrial services. These services cater to a wide range of industrial and governmental clients.
  • Safety-Kleen Sustainability Solutions generates revenue through the collection of used oil and related fluids, and its transformation into new products, along with the sales of cleaning solvents, and other sustainability solutions. This segment serves a range of customers, including automotive, manufacturing and industrial clients.

Industry Trends The environmental services industry is experiencing growth, due to heightened regulations, increasing waste generation, and corporations’ commitments to sustainability. The consolidation of smaller players through M&A and the push for specialized services with stronger environmental compliance are also prevailing trends in the industry. The Safety-Kleen business has an increasing demand as more and more states mandate or encourage used oil re-refining.

Competitive Landscape The environmental and industrial services sector is fragmented, with many local and regional players. The competitive landscape is shaped by factors such as regulatory compliance, specialized capabilities, technological innovation, and customer loyalty. Clean Harbors differentiates itself through its integrated service offerings, and having a national presence and scale in a highly fragmented industry. The Safety-Kleen division operates with a more oligopolistic structure because they have first-mover advantages in creating their re-refining technologies.

What Makes Clean Harbors Different

Clean Harbors’ integrated service offerings, extensive network of facilities, advanced technologies, long-term customer relationships, strong compliance track record, focus on sustainability (e.g. Safety-Kleen), and commitment to innovation gives it an edge against its competition. Another big differentiators is the fact that a lot of companies rely on the company’s emergency services unit to mitigate the risks involved in high hazardous material situations.

Financial Analysis

Clean Harbor has seen consistent growth over the years, driven by strong demand for its services and strategic acquisitions, as shown in their latest earnings call. The company’s 2022 annual revenues grew to $5.1 billion (compared to $3.8 billion in 2021), and adjusted EBITDA hit $894 million. However, the company also has a substantial amount of debt due to strategic acquisitions.

  • Revenue Growth: The company has been growing at an impressive rate; they grew 34% from FY21 to FY22, driven both from organic growth and their multiple acquisitions. A further revenue growth of 7 to 10% was expected for FY23 in their latest earnings call.
  • Margins: Gross margins are in the range of 34%, Operating margins are typically around 15%, these are mostly consistent due to a low-cost operation model and economies of scale. However, some fluctuations can occur based on the product mix.
  • Return on Invested Capital (ROIC): Clean Harbors’ ROIC is around 12 to 15% which reflects the good but not remarkable profitability, and that their capital investments are high, especially in the waste and re-refining facilities. However, their strategic acquisitions should increase future returns.
  • Liquidity and Debt: On the balance sheet, cash & cash equivalents stands at roughly $400M. Debt is higher than that and the company has about $2.4 billion in long-term debt, so the leverage ratio is about 5.7 times EBITDA. This is somewhat high and investors might see this as concerning, but it also gives a tax break which allows for higher equity growth. However, management is committed to reducing debt over the coming years. Debt is being used to buy more businesses and to reinvest in existing businesses, and that is very good if those strategies can help their moat strengthen.
  • Cash Flow: While the company’s CFO is usually around 12% of revenue, FCF is typically low due to high capital expenses, but overall they are managing to generate strong cash flows which are being used in acquisitions.

Recent Concerns / Controversies

The main concern in the latest earnings call was the underperformance in the fourth quarter, that was attributed to macroeconomic factors such as the effects of high inflation on companies. The company has lowered growth expectation for 2023, but the management stated it is only temporary as the contracts are long-term, and they expect growth in coming years. They are focusing on improving their operating margin. A large loss of goodwill was taken for a company they bought in 2022. There’s a lot of litigation, claims and settlement expenses in this company’s financials, and a huge amount of expenses in environmental liabilities, which might be a source of concern to investors.

Moat Rating: 2/5

While Clean Harbors benefits from several advantages, it does not have a wide moat. Its moat is narrow but sustainable because of following sources:

  1. Network Effects: This is present in their Safety-Kleen division, where a larger collection network increases the scale and the benefits of the re-refining business, locking in more clients. However, those clients will not have a huge incentive to switch if a similar and cheaper offering arrives.
  2. Intangible Assets: The company has a strong brand name built over 40+ years of operation. However, some competitors are also successful without similar branding.
  3. Switching Costs: Their recurring contracts with specialized and difficult to handle waste for industrial clients creates a stickiness factor.
  4. Cost Advantages: They are working on reducing costs and having economies of scale in their operations, this should allow them to further improve profits in coming years.

These points give it a narrow moat, but other players can also copy these strategies with great effort.

Understandability: 3 / 5

While the core business concepts of Clean Harbors are straightforward, there are some complexities due to its highly regulated nature, various business segments, and accounting of long term liabilities and goodwill. Understanding the intricacies of the company’s financials and its place in the competitive landscape requires some research and financial expertise.

Balance Sheet Health: 4 / 5

While Clean Harbors does carry a substantial amount of long term debt (roughly 5.7 times EBITDA), it is manageable in relation to its assets and ability to generate free cash flow, showing a history of good profitability. The company is also investing to expand their operations. This demonstrates that the company is stable, even with some risk, and has the financial muscle to endure downturns.

Conclusion

Clean Harbors’ strategic positioning as a leading environmental and industrial service provider puts it on track to benefit from increased regulation and growing demand for its services, however, it faces some challenges due to its debt level. The management’s focus on improving profitability and reducing debt also makes them an interesting investment. Investors should carefully look at its financials and its moat before making any decisions.