40 Years of Moat Building with Alan McKim, Founder and CEO of Clean Harbors (NYSE: CLH)
Compounders Podcast
How Do You Use Those Sit Ons as Learning Moments?
"We look at every single a notice violation or any a financial penalties. And, ah, what we have tried to do is build out the systems and processes so that we can do a better job of inspecting our facilities," he says. "So you're still going to get opportunities for a regulator to find something that they can write us up."
My guest on the show today is Alan McKim, the Founder, Chairman and CEO of Clean Harbors (NYSE: CLH). Clean Harbors is a 5.6 billion dollar market cap company that provides environmental and industrial services within North America. The company has two segments: Environmental Services and Safety-Kleen Sustainable Solutions. In the Environmental segment, Clean Harbors collects, treats and disposes of waste within its company-owned landfills and incinerators. In addition, the Safety-Kleen division provides cleaning and waste disposal services to customers such automotive repair shops. In fact, Clean Harbors is the largest recycler of used motor oil in North America.
Alan McKim founded the company in 1980 and took it public at $9 in 1987. Over that period of time, Clean Harbors has made a number of large acquisitions, including the transformational merger with Safety-Kleen in 2012. The company now produces over 3 billion dollars in revenue and its stock has risen to over $100 per share.
It is not often that I have a chance to talk to someone who has run a company for 40 years. So, I really enjoyed peaking with Alan about the following topics:
- The uniqueness of the Clean Harbors asset base and how that creates a moat;
- How the company decides to take big swings when it comes to M&A;
- Educating people about how Clean Harbors is a good actor in a world increasingly focused on ESG;
- The impact of further environmental regulation on the company; and
- Building a cohesive culture over 40 years
This episode of Compounders: The Anatomy of a Multibagger is sponsored by Tegus, an innovative and disruptive company that is changing the way professional investors work. For more information, please visit: https://www.tegus.co/
Key Takeaways:
- Moats that are developed in highly regulated industries can be quite durable
- Large acquisitions often take some time to get right but you have to be willing to periodically take big swings
- Regulators can be your allies: every inspection is an opportunity to learn new best practices and build a safer environment
- Even companies that don’t start with a focus on return on invested capital (ROIC) can develop that metric as a North Star—and shareholders can help with that process
- Creating a culture of safety is essential at company with thousands of field employees
Time stamps:
1:19 - Introduction
3:03 – Rationale for making the biggest acquisition in CLH’s history
5:23 – How familiarity with a business improves post-merger integration
7:12 – How environmental sustainability played a part in the acquisition of Safety-Kleen
9:10 – Are people actually putting used motor oil down the drain?
10:07 – Strategy behind keeping acquired brands alive
11:29 – Why take another $1 billion-plus swing at HydroChem now
14:05 – Integration learnings from 65 acquisitions
16:53 – Acquisition strategy learnings over a long career of acquisitions
18:54 – The virtual impossibility of green-fielding brand new incinerators in the US
20:30 – Why now is the time to expand incinerator capacity through brownfield development
23:07 – Building a culture and company that will accept short-term pain for long-term gain
24:45 – How CLH has suffered from acquiring assets outside of its core
26:23 – The advantage of having recently added a new incinerator to a facility
28:04 – Creating win-win relationships with diverse regulators
29:49 – Using regulatory fines as a learning moment
31:43 – How to position a company to benefit from future regulation
33:41 – The moat that comes from having a dense route network
34:55 – The impact of the electric vehicle revolution on used motor oil demand
36:52 – Challenges facing the re-refined oil business
38:36 – What’s being missed at Clean Harbors
41:21 – Building a sustainable and consistent culture through organic growth and acquisitions
43:40 – Career learnings around compensation
45:17 – Succession planning as a founder and CEO
46:57 – Empowering a board to give real feedback to the founder
48:58 – Building an adaptable organization in an ever-changing industry
51:04 – Improving internal ESG planning and participation
52:44 – How shareholder feedback has been helpful in the past
54:32 – Why insider selling of shares isn’t always a bad thing
55:48 – International M&A as a potential avenue
58:47 – Alan’s ideal legacy
60:38 – Focus as a tool for growth
62:12 – The origins of ROIC as an internal north star
63:54 – The least understood aspects of Clean Harbors
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All opinions expressed by your hosts and the podcast guests are solely their own opinions and do not reflect the opinion of Cove Street Capital or any affiliates. This podcast is for informational purposes only, it is not investment advice, and should not be relied upon for any investment decisions. We are not recommending the purchase or sale of any securities. The hosts and guests may be beneficial owners of the securities discussed. You should not assume that the securities discussed are or will be profitable.
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