Investing in the Eldorado Plant

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.