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American Ecology (NASDAQ:ECOL)

Q3 2008 Earnings Call

October 28, 2008 11 am ET

Executives

Stephen Romano – President and Chief Executive Officer

Jeff Feeler – Vice President and Chief Financial Officer

Steve Welling – Vice President of Sales and Marketing

Analysts

Rich Wesolowski – Sidoti & Co

Jamie Sullivan – RBC Capital Markets

[Will Bonavich – Price and Bauer]

Ed Kundtz – Needham & Company

David Yuschak – Sanders Morris Harris Capital

Al Kaschalk – Wedbush, Morgan Securities, Inc.

Operator

Good day, everyone and welcome to today's American Ecology third quarter 2008 investor conference call. (Operator Instructions) At this time I'd like to turn the conference over to our Vice President and Chief Financial Officer, Mr. Jeff Feeler. Please go ahead, sir.

Jeff Feeler

Good morning. Joining me today are Steve Romano, President and Chief Executive Officer, and Steve Welling, Vice President of Sales and Marketing. Before we begin, please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Since forward-looking statements include risks and uncertainties, actual results may differ from those expressed or implied by such statements. Factors that could cause results to differ materially from those expressed include but are not limited to those discussed in the Company's filing with the Securities and Exchange Commission.

Management cannot control or predict many factors that determine future results. Listeners should not place undue reliance on forward-looking statements ,which reflect management's views on the date that such statements are made. We undertake no obligation to revise or update any forward-looking statements or make other forward-looking statements, whether as a result of new information, future events or otherwise. Now I will turn the call over to Steve Romano to begin our remarks.

Stephen Romano

Good morning and welcome. For those joining by webcast, you can follow today's presentation during the webcast. For those listening by phone, you can follow the presentation on our website, at www.americanecology.com. I'll begin with an overview of our quarterly financial results which were publicly released this morning. Jeff will then offer a more detailed explanation of these results, our current financial position at quarter end, and our October 17 dividend payment following the 20% quarterly increase approved by our Board of Directors in May 2008.

After Jeff's remarks I'll update you on our new thermal absorption recycling service in Texas, year-to-date capital spending, and our updated earnings guidance for 2008. We'll then open up the call to questions and comments.

Third quarter 2008 revenue reached $41.1 million, up from $39.4 million in the third quarter of 2007. This increase reflects higher transportation revenue on bundled rail and disposal contracts. Operating income for the third quarter 2008 grew 3% to 6.8 million. This is up from 6.6 million in the third quarter of 2007.

All four of our disposal operations continued to be profitable. We disposed of 263,000 tons of waste in the third quarter 2008, or 2% less than the volume disposed in the third quarter last year. Volumes at our Texas and Nevada facilities increased quarter-over-quarter on the strength of higher revenue from recurring base business customers.

Lines disposed in Idaho declined, however, on reduced shipments under our Army Corps of Engineers contract and from the still-ongoing Molycorp Cleanup project in Pennsylvania. Moving to the fourth quarter, shipments from the Army Corps of Engineers have increased to more normal levels. Shipments from the Molycorp project are also picking up as that project winds down towards completion.

Net income for the third quarter of 2008 was $4.3 million, or $0.23 per diluted share, down from $0.25 per diluted share in the third quarter of 2007. I'll now turn the call back to Jeff to provide additional detail on these results and our financial position at quarter end. Jeff?

Jeff Feeler

Thank you, Steve. Total revenue for the third quarter of 2008 increased 4% over the same quarter last year to $41.1 million. This is due to increased revenue under our bundled transportation and disposal contract. Disposal revenue in the third quarter of 2008 was flat with the third quarter of 2007. On the positive side, base business from recurring customers grew 7% in the third quarter over the same quarter last year. This reflects continued growth of our business with weight brokers combined with strong contribution from other industrial and government-based business.

Growth in these categories was partially offset by lower revenue from refinery and steel no (ph 00:08:45) customers. This increase in recurring base business was balanced out by a 16% quarter-over-quarter reduction in our Advanced Clean-up business. This decrease was due to delayed shipment from the Army Corps of Engineers clean-up site and reduced shipments from the ongoing Molycorp project.

We understand that the Corps of Engineer delays were driven by project timing and funding out reallocation from excavation and disposal work to cover increased energy costs on transportation. Put differently, individual cleanup projects had less money available for digging up and disposing of wastes as fuel costs to ship the waste climbed.

With overall Army Corps budget levels generally stable, the disposal work is being spread out over a longer period. Similarly, similar to the Army Corps timing impact we have experienced in other quarters, the Company has not lost any Army Corps projects to competitors and we are not aware of any material change in the total volume of waste to be disposed or future appropriation levels.

Revenue from privately-funded cleanup projects also decreased in the quarter. This reflects lower shipments from the Molycorp cleanup project and other small cleanup jobs that were not fully replaced. Average selling prices for treatment and disposal services, which exclude transportation, was 8% higher in the same quarter last year. This reflects a change in our service mix, primarily a higher percentage of waste requiring treatment prior to disposal.

I will now break down treatment and disposal revenue for both base and event business by customer category. For those joining by webcast, see slide 9. Our waste broker business continued to grow impressively during the quarter, up 27% over the third quarter last year. Our steel mill business was down 6% in the third quarter of 2008 from the same quarter last year.

As noted on our first and second quarter investor calls of this year, this reflects completion of a Midwestern steel mill contract last December.

During the quarter treatment and disposal revenue from private cleanup customers declined 10%. This decline reflected delayed shipments from our ongoing Molycorp project and multiple smaller private cleanup jobs in the prior year that were not fully replaced. Molycorp contributed $1 million or 2% of total revenue, which includes transportation in the third quarter of 2008. this was well below the $3.2 million or 8% of total revenues in the third quarter last year.

The Honeywell contract contributed $21.7 million or 52% of total revenue in the third quarter of 2008, up from 17.9 million, or 45% of total revenues in the same quarter last year. This increase primarily reflects higher path through fuel surcharges in the third quarter of 2008 compared with last year. Some second quarter Honeywell shipments were pushed into the third quarter of this year, due to rail delays, I should say railroad delays caused by the June flooding events in the upper Midwest.

As discussed on earlier investor calls, two-thirds to three-fourths of the total revenue generated under the Honeywell contract is transportation-related. In addition, the disposal component of the Honeywell contract is low margin metal treatment business.

Our other industry category is a diverse mix of electrical, utilities, chemical manufacturers and other industries. Treatment and disposal revenue from this category declined 11% in the third quarter of 2008 over the same quarter last year. This decline reflects a large project we brokered into our Richland, Washington facility in the third quarter of 2007 that was not fully replaced this year.

Our government cleanup business was down 15% in the third quarter of 2008, from the third quarter last year. As Steve noted, this was largely due to reduced shipment under our Army Corps of Engineers contract. Army Corps contract revenue was $1.9 million, or 5% of total revenue for the third quarter of 2008. This was down from $2.9 or 7% of total revenue in the same quarter last year.

Our rate-regulated business in Richmond, Washington was down 20% in the third quarter of 2008 over the same quarter last year. This reflects timing on the rate regulated portion of our Washington site business, as well as lower state-approved revenue requirements in 2008 than 2007.

Our refinery business was down 32% in the third quarter of 2008 over the same quarter last year. This reflects decreased volume on a large, one-time refinery cleanup project in 2007 that was not fully replaced this year. In addition, the thermal unit at our Beatty, Nevada facility deliver lower throughput in the third quarter of 2008 due to maintenance scheduling.

Going forward we expect our business with both refineries and brokers to grow, with our new thermal desorption recycling service in Texas. Steve will revisit this later in the discussion, when updating our 2008 outlook. Gross profit declined 2% to $10 million for the third quarter of 2008, compared to 10.3 in the same quarter last year.

Gross margin was 24% in the third quarter of 2008, down from 26% in the third quarter last year. Treatment and disposal margins for the third quarter of 2008 was 49%, down from 51% in the third quarter last year. Gross margin benefited during the third quarter of 2008 from a $797,000 net reduction in our closure and post-closure obligation. This net amount includes an $857,000 reduction in our Beatty, Nevada facility.

Based on confirmation by the state of Nevada, the cash contributed by the company to a dedicated fund maintained by the state to satisfy closure and post-closure care can be used to fund interim closure work. We expected this confirmation and incorporated the gain in our 2008 earnings guidance issued in February.

Partially reducing the Nevada facility gain was a $60,000 closure charge for costs incurred to properly abandon the remaining deep well at our non-operating Winona Tech (inaudible 00:15:19) during the quarter.

Excluding the net gain on these two non-recurring items, the declining growth margin reflects lower disposal volume and a higher percentage of waste requiring treatment prior to disposal.

Selling general and administrative expense, our SG&A, was 7.8% of total revenue for the third quarter of 2008, down from 9.3% in the third quarter of last year. This 12% quarter-over-quarter decrease in SG&A spending reflects lower engineering and consulting costs, performance based compensation, and insurance costs.

Our effective income tax rate for the quarter was 39.2%, up from 33.9% in the same quarter last year. This lower effective income tax rate for the third quarter last year reflects realization of state investment tax credits of $325,000 on tax returns filed in 2007 as well as a reduction in our estimated annual effective tax rate.

Looking forward, we expect our annual estimated effective income tax rate for the fourth quarter and for the year ended 2008 to be 39.2%. As Steve noted, debt income for the third quarter of 2008 was $4.3 million or $0.23 per diluted share.

Turning to our year-to-date results, revenue for the first nine months of 2008 grew 10% to $131.8 million. This reflects growth in both disposal and transportation revenue. Disposal revenue growth was driven by a 12% increase in our event business and a 9% increase in our base business. Breaking disposal revenue down by customer category for the first nine months of 2008 versus the same period last year, we delivered a 41% growth in our other industry category, a 19% and a 19% growth in our waste broker business.

Government cleanup revenue is up 16% year-to-date, placing the third quarter decline in perspective and highlighting the timing related nature of this (inaudible 00:17:24) part of the business. Growth profit for the nine months of 2008 increased 11% to $37 million up from $33.4 million for the first nine months of last year.

Gross margin was 28% of total revenue for both the first nine months of 2008 and 2007. Disposal gross margins for the first nine months of 2008 were 53%, up slightly from 52% in the first nine months of 2007.

SG&A expense was 8.2% of total revenue for the first nine months of 2008, down from 8.9% in the first nine months last year. This is a 1% period-over-period dollar increase in SG&A spending spread over much higher revenue. SG&A expense for the first nine months also includes a write-down of $156,000 in business development costs for an acquisition that we are no longer pursuing. Excluding this $156,000 write-down, SG&A dollar expense for the first nine months of 2008 would also have been lower than the same period of 2007.

Operating income for the first nine months of 2008 grew 15% to $26.2 million, up from $22.7 million for the first nine months last year. Net income for the first nine months this year was $16.2 million, or $0.89 per diluted share. This exceeded net income of $14.5 million or $0.80 per diluted share in the same period last year.

At September 30, 2008 working capital was $35 million, up 42% from $25 million at September 30, 2007. This healthy increase was driven by a higher operating income and lower capital spending. From a financial metric standpoint, American Ecology continues to be a waste industry leader. Our return on invested capital for 12 months ended September 30, 2008 was 18.8% and our return on total assets was an equally solid 17.5%.

At September 30, 2008 we have cash of $19.2 million and we continue to have no term debt. We have a $15 million line of credit which $11 million is available. The remaining 4 million is pledged as collateral for closure and post-closure financial insurance obligations.

On October 17th we paid an $0.18 per share quarterly dividend to our stock holders. As Steve mentioned, this quarterly dividend reflects a 20% increase that was approved in May of this year. With that, I’ll turn it back to Steve.

Steve Romano

Thanks, Jeff. I’ll first update you on our new thermal desorption recycling service in Texas. For those of you who participated in our last conference call, you’ll recall that the thermal desorption unit in Texas went into operation in June. It explained at that time, our primary initial objective has been to optimize technology performance for a broad spectrum of recyclable petroleum based materials.

During the third quarter, 1,300 tons of revenue producing material was processed through the unit. This modest through put reflects down time taken to install equipment modifications that were undertaken to increase through put rates for high moisture content, refinery tank bottoms, as well as industrial catalysts. Waste processing and equipment optimization was also impacted by two gulf coast hurricanes, Dolly and Ike. While no real damage was caused, the site was closed in preparation for both storm events. In addition, customer shipments were disrupted for some period before and after.

Overall, we are pleased in both the technology and the equipment operators selected and we expect this new service line to be a significant growth driver going forward. By the close of the fourth quarter we should have a solid understanding of equipment maintenance requirements and through put capacity, as well as market pricing for a wide array of recyclable materials. This experience, coupled with refined market analysis, will also help us reap decisions run to the end of the year on potential installations of additional units at our Beatty, Nevada site.

Turning to capital spending, capital spending for the first nine months of 2008 was $11 million, once again, funded entirely with cash on hand. Major capital projects includes construction of a new major landfill cell to our Nevada facility, support infrastructure for the Texas Thermal Desorption System, also a landfill space expansion in Texas which is ongoing, an additional track at our Idaho rail transfer station to allow us to hold more cars on our property to handle more and larger jobs efficiently.

We project total 2008 capital spending at about $14 million. This increase over an initial $12 million projection primarily reflects the acceleration of landfill space construction in Texas from 2009 into 2008 and responsible to higher disposal volumes realized in Texas.

Turning to our outlook for 2008, our initial earnings guidance for the year issued in February was $1.17 to $1.23 per share. On our last investor call, we had hopes of reaching or exceeding the upper end of this range if we were able to realize strong contributions from the Texas Thermal Desorption Unit and our event cleanup business remains strong through the second half, similar to what we were experiencing the first half.

Our focus in technology optimizations of thermal desorption service and the third quarter cleanup projects delayed noted earlier, again driven by the Core of Engineers, have led us to scale back our 2008 outlook to an earnings range of 1.17 to 1.20 per share. These results would represent a fourth consecutive year of record revenue, disposal volumes, and operating income in a challenging economic environment.

We look forward to a solid fourth quarter and continued growth in 2009 based on the continued strength of our recurring based business, the solid pipeline of cleanup projects, and a promising new thermal desorption and service now launched. We’d now like to open up the call to questions operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question would come Rich Wesolowski with Sidoti and Co.

Rich Wesolowski – Sidoti & Co.

Thanks, good morning. Jeff, how much did you say the Molycorp added?

Jeff Feeler

Molycorp was about $1 million of total revenue including transportation during the quarter.

Rich Wesolowski – Sidoti & Co.

Including transportation? So if you look at Honeywell, Molycorp, and I forget, is the Army Corp event or base?

Jeff Feeler

It’s event.

Rich Wesolowski – Sidoti & Co.

Okay, so when you put those two together, are those the overwhelming majority of your event driven treatment and disposal revenue?

Jeff Feeler

That’s correct.

Rich Wesolowski – Sidoti & Co.

Okay, with the railroads continuing to raise pricing, I know fuel costs or energy is coming down, would you expect that unfavorable trend with the Army Corp spending more money on transportation, less on disposal would continue past this quarter?

Jeff Feeler

I would say no. We are seeing some fuel prices dropping and we are seeing the Army Corp projects picking up moving into the fourth quarter. They already have picked up.

Rich Wesolowski – Sidoti & Co.

Okay, is there any sign that customers more broadly are pulling back on either base or event driven work based on the economy?

Stephen Romano

Not that we’re yet seeing. We are watching closely and carefully. We’ll continue to do that but based on what we’re seeing so far, the answer’s no. And we’ve been able to pretty much understand what the decrease was in the 3rd quarter, largely to the core of engineers. And the Molycorp Project – and this is not a typical, is a large cleanup job near its completion. There’s decisions that need to be made about the final excavation and this sometimes can lead to a bit of a lull period before winding things up. And that’s what we’re experiencing. And at the Molycorp site in Pennsylvania. We’d initially expected that job to be completed by September and at this point, it may or not be completed by year end. There does remain a material amount of waste to be removed from that site and that project has also picked up and is moving.

Rich Wesolowski – Sidoti & Co.

Okay and a lot has happened, you know, in the world since you guys have last spoken publicly. How significantly if at all has your internal expectation of how much money the company is going to earn in 2009 changed since the 2Q call?

Stephen Romano

We are still going through our budget evaluations for 2009. We’re really not prepared to share what our expectations are for next year, beyond saying that we do feel good about our ability to continue growing. As a management team we expect to continue delivering operating income growth that’s double digit and we’ll be able to provide more specific information on what those goals and objectives will be as we report our year end result and provide our guidance for ’09. But we feel very good about the gross of our base businesses. This is an indicator that if we’d seen that fall in the third quarter, that would’ve been something that gave us pause but it is not. It’s continued to grow substantially. We’ll continue to watch but so far, again, the slow downs we’ve had, Corps of Engineers, we’ve lost no projects. In fact, some additional projects are coming on and they look good for 2009. We feel positive of moving forward.

Stephen Romano

Great, thank you.

Operator

And our next question will come from Jamie Sullivan with RBC Capital Markets.

Jamie Sullivan – RBC Capital Markets

Hi, good morning.

Steve Welling

Good morning, Jamie.

Jamie Sullivan – RBC Capital Markets

Question on (inaudible 00:27:18) again, did that happen kind of evenly throughout the quarter? Was it toward the end? How did the timing work on that?

Stephen Romano

I’m going to start on that and ask Steve Welling here with me to add a little color. We had not frankly expected that the Corps of Engineers does not always give us the detail on when things are or are not going to move. Steve, any specific note on when it actually hit us during the quarter?

Steve Welling

Later in the quarter was a couple of different projects, actually later in the quarter we’re expecting additional funding which they did not get. And they had requested additional funding to cover the increased transportation cost. Funding was not available and those projects slowed down near the end of the quarter which we did not expect.

Stephen Romano

And it is worth nothing that the third quarter for us is the final and fourth quarter for the federal fiscal year. And so some of these projects that at one point we thought might’ve been seeing even possibly some additional funds, did not get it. And the budgets they did have were expended on the higher summer surge and fuel costs. Which we, of course, all of us are noticing there is some moderation downward on fuel prices which we all welcome.

Jamie Sullivan – RBC Capital Markets

Sure. You mentioned a bit of smoothing out of that business due to the budget situation. Is that kind of a forward looking statement? Do you expect it to be more smooth going forward or can you comment there?

Stephen Romano

It’ll be subject again I suppose if there are perturbations in the energy cost market. It could cause future change. But in general, the Corps of Engineers projects have been – moved along at a stable pace in terms of appropriation levels. We’re seeing no change in the general appropriations available to the program. We’ve been successful in winning some additional projects that we hadn’t had in past years so we’re sort of seeing it on an annual basis, which is how we prefer to look at the Corps of Engineers business, as steady as she goes. From quarter to quarter things can move about. Projects and new ones are started. There are usually multiple task orders at an individual Corps of Engineers project site. And there’s sometimes gaps between funding of different task orders, even on projects that could be proceeding over a three, four, five year period. So, in general we see that it’s steady. Congress continues to fund it within a steady range and have for ten years. And we expect that to continue.

Jamie Sullivan – RBC Capital Markets

Sure, okay. And then one quick one on the thermal absorption unit in Texas. You mentioned there was some down time there. What was the financial impact of that?

Stephen Romano

The best way, perhaps, and Jeff may want to dive in with some further color here, is that – is noted that we only processed 1300 tons of waste during the quarter and we’re projecting doing much better than that in the fourth quarter. We’re hoping to do four to 5000 tons in the fourth quarter as we continue to ramp up and learn more about it. Really what the issue was was limited throughput because we did have downtime to install this additional equipment to increase our ability to handle a wider spectrum of waste. And then particular waste with a higher moisture content.

One of the things we’ve learned and we’ve responded to it and now we’re in a good position to move ahead and take this material is that the Texas market is offering more opportunity than we saw with our thermal units in Nevada, which of course have been operating for some years, handling these higher content materials. The west coast market, we were seeing more tank bottoms than had been centrifuged. They’re coming to us with lower moisture content. What we’re seeing in the Texas market is more opportunity, generally on some smaller jobs. But they can be larger too where higher moisture content materials are available.

In order to handle those it’s best to have a centrifuge. You can handle these higher moisture content materials in other ways. But the most efficient way is to have a centrifuge unit. The other thing that happened during the third quarter that’s of no – and it’s part of routine timing is we had more downtime at our Beatty Thermal Units based on normally scheduled maintenance that hit during that quarter and it was conducted then.

Jeff Feeler

Jamie, this is Jeff. To follow up on the financial impact for the Q3 for the Texas thermal units. Though we did process less volume than what we had hoped for, it still did contribute to our operating income during the quarter and we were not losing money on that investment.

Jamie Sullivan – RBC Capital Markets

Okay, but on the downtime. Minimal impact there or –

Jeff Feeler

Yeah, downtime would be included in that.

Stephen Romano

Yeah and in essence of the downtime says you’re not running revenue producing material through the units and so you’re not getting the contribution you would have if you were operating at higher throughput rates.

Jamie Sullivan – RBC Capital Markets

Okay, thanks.

Stephen Romano

So, we’re making money, just not as much as we’d hope for. Not as much as we’re projecting for the fourth quarter.

Operator

And our next question will come from Will Bonavich from Price and Bauer.

[Will Bonavich – Price and Bauer]

Good morning gentlemen. A couple of quick questions. Steve, now that we have a format here, I want you to address – we’ve seen some competitors in the past try to expand permits or open sites such as Atowas County. Now we are seeing the increased activity by WCS in Texas in their renewal or efforts to advance permit issues and expansions there. Can you address what that activity means to American Ecology here in the near term or as we get further down the road, if they are successful.

Stephen Romano

Very little. Primarily WCS is seeking to get a low over radio active waste permit for waste regulated by the nuclear regulatory commission and state agencies under the Atomic Energy Act. Essentially to put them in the position to compete with Energy Solutions who enjoys a basically monopoly situation in large portions of the country. Our Idaho site competes with WCS presently and has for some years taken low activity radio active material that is not regulated under the Atomic Energy Act by the Nuclear Regulatory Commission. That is the niche for our Idaho site, that’s our sweet spot. We’ve been competing with WCS for some years doing that. They’re an existing earnings provider to the Army Corps of Engineers just as we and Energy Solutions are. We enjoy a larger portion of that market. The new permits in Texas should not alter that competitive situation in any material way. Our Richland, Washington site is our low level radio active waste site that’s governed by the compact system. It is the designated facility for the Northwest compact region and also can accept waste from the Rocky Mountain compact region under a regulated environment and the WCS site does not change the economics of that facility or the revenue requirement that applies there.

[Will Bonavich – Price and Bauer]

Okay. So, even if they’re successful, it’s mainly targeted at waste streams that would not be what American Ecology is doing currently anyhow?

Stephen Romano

That is correct. And they’re also targeting the part – in addition to the commercial low level radio active waste regulated by the NRC, WCS as we understand candid based on their draft permit. (Inaudible 00:35:03) draft at this point. Excuse me, is targeting department of energy material that also goes to Energy Solutions and within the Department of Energy Complex itself. We take almost no Department of Energy Waste I’m – in fact I don’t think we took anything at all in the third quarter. I think the answer is zero. So, from time to time there might be a Department of Energy waste we accept but it’s not a major customer for us.

[Will Bonavich – Price and Bauer]

Okay, let’s jump to Jersey City. It seems like that process has been stalled the last few months. Any updates on revitalizing or more progress being made? Either by the city council or by Honeywell on the adjacent property?

Stephen Romano

We have no further specific news. As we’ve discussed on previous calls, there are additional properties in the Jersey City area beyond the Honeywell study area seven site that is the large cleanup we’re currently conducting. We are obviously interested in taking away some of the other sites also. There have been no schedule set by Honeywell for that material. We are hopeful that some of the areas, not the one jointly developed with Jersey City, will be moving in 2009.

As we’ve mentioned before, we have no guarantees on receiving those projects but we believe the excellent service, on time, on schedule work we’ve done for the larger Honeywell project now ongoing will put us in a good position to compete for the new work. But we have no further news type on the exact timing of that Jersey City property that also involves the municipal government.

[Will Bonavich – Price and Bauer]

Last topic for me is rail car utilization during the quarter. Give us a quick status on those, the quantity owned and leased and when you expect going forward at least on that lease portion, of some of those falling off and what you’re going to need going forward.

Jeff Feeler

This is Jeff. We currently own the 234 rail cars and we have a total fleet of 541 rail cars with the difference being leased. Rail car utilization was down a little bit during the quarter. But overall for the first nine months of the year it’s been at high utilization. We anticipate utilizing those – our existing rail fleet, to a high utilization in the fourth quarter and we’ll determine how that impacts next year as new projects come up. As far as the lease situation, our leases are on a laddered lease system with a number of the leases falling off next year. You know, kind of in connection with the timing of the Honeywell project. If need be, we can go and always get additional leased cars without an issue. We, at this time, we don’t have any anticipation of buying any additional leased cars or rail cars.

Stephen Romano

I would also note that in terms of the fourth quarter, it’s possible we may actually be adding cars. There’s no anticipation of a subtraction based on the volumes we’re currently looking at through the fourth quarter. It’d be an increase rather than a decrease if anything.

[Will Bonavich – Price and Bauer]

Sounds very well. Thank you.

Operator

And our next question will come from Ed Kundtz from Needham & Company.

Ed Kundtz – Needham & Company

Hi guys, couple questions for you. Could you talk a little bit more about the thermal desorption of plans for next year? I guess the questions I have would be where is your current capacity that you anticipate it this year at and also the pricing environment for that. Is it still in this four to 500 dollar per ton range?

Steve Welling

We’re seeing pricing from four to actually 650 per ton depending on the waste stream and the location. In terms of capacity issues, right now we’re looking at about 2,000 tons a month. And we’ll be reassessing that near the end of the year.

Ed Kundtz – Needham & Company

Okay so you can do 2,000 tons a month at your – with your current capacity? Or you’d need to build into that?

Steve Welling

Currently we can do it 2,000 tons a month. We’ll reassess at the end of the year whether we can do more than that.

Ed Kundtz – Needham & Company

Okay. Okay. You haven’t shared any plans with any of us for what you hope to do next year in that area.

Stephen Romano

We have not. We’ve added the extra equipment during the third quarter and so the fourth quarter’s really going to be our quarter to understand what ongoing throughput rates are going to look like. There’s also very different throughput rates for different kinds of material. We’re still assessing the market to get a feel for either how much tank bottoms will be there. How much industrial catalyst will be handled? Very different throughput rates depending on what material going through it is and we’re still assessing the market to see where we’re going to be, where the emphasis is and where the demand is.

Ed Kundtz – Needham & Company

And your best guess on the Army Corps of Engineer business? Run rate is ten million to 11 million per year kind of range?

Jeff Feeler

Yeah, that’s a good estimate.

Ed Kundtz – Needham & Company

And you expect that to be the same next year as well? Sounds like.

Stephen Romano

Well again, there can be additional projects in there. At this point you know, I would say we don’t know anything now but we would change it but we will update you on that after the fourth quarter. Cause we’ll know more than about what the quarter’s doing moving into the New Year.

Ed Kundtz – Needham & Company

And did some Honeywell business, the current business, not the new or potential, but the current business, has that site job expanded at all yet or is it still running, expected to be finished when, I guess November of next year or so right?

Stephen Romano

It’s still under the court order to be completed by November, you know, sometime in November of next year. We will be assessing working with the customer at year end what the additional remaining volume is. We respect their estimates on the material remaining to be excavated and we’re expecting that there will be a year end re-evaluation of that.

Ed Kundtz – Needham & Company

Okay. But right now, no change to the program. It hasn’t expanded?

Stephen Romano

That’s correct. There’s nothing we can announce in that regard.

Ed Kundtz – Needham & Company

Okay. And just going back to thermal desorption in the quarter. You said it was below plan and I think you gave the reasons why. There was more related to, there’s nothing technically an issue was there in terms of ramping up your capacity there or…

Stephen Romano

I guess I’d answer that in a couple ways, ways Ted that there were technical modifications to the equipment made to expand the kinds of ways we could accept. The equipment works, it works very well for some material, less well for other materials but we learned early on. And so as a result of that, there were some things we did to the equipment that will allow us to more efficiently process material. The centrifuge is the best example, it’s something that allows you to very efficiently separate solids and liquids as you know, it’s a more efficient way to do it than decanting or using filter presses which are also ways to do it but not as efficient.

So, the equipment works over all. The basic dryer unit, which is what you’re using to – that’s what the thermal desorbed is, has worked very well. And a lot of the modifications we’ve made have been the some of the things, the feed systems, some of the other materials, some of the other equipment we would use for processing material we take both in the feed system and then also on the backend.

Ed Kundtz – Needham & Company

Okay, is there anything – what kind of visibility do you have to these 4 to 5,000 ton target that you have in the fourth quarter there?

Stephen Romano

Other than to say that’s our target. We feel confident that we can, that the equipment is capable of doing that and I have tasked myself with delivering it and I believe we can do it.

Ed Kundtz – Needham & Company

Okay. Thanks very much.

Stephen Romano

You bet.

Operator

And our next question will come from David Yuschak with Sanders Morris Harris Capital

David Yuschak – Sanders Morris Harris Capital

Yeah, good morning gentlemen. On the thermal unit in your expectations for the year in your guidance, what percent of that change in guidance would you represent from – would you kind of characterize as being the unit did not come on as quickly as you thought? What percentage of that changed in your guidance would you say accounted for that?

Stephen Romano

I’m not sure we really sliced it on that granular a basis, Dave. The reduced guidance is a couple of things. It’s a combination of the some of the cleanup work, particularly the Army Corps work pushing back to later time frames and spreading into next year. A contribution also is a lesser contribution to thermals. We really haven’t put a pencil to think precisely what the percentage would’ve been.

David Yuschak – Sanders Morris Harris Capital

Okay. Then you said some of this also was the Corps pushing into next year instead of getting it all in this year.

Stephen Romano

That’s correct.

David Yuschak – Sanders Morris Harris Capital

What percentage of that would you say is getting pushed into 2009 instated of 2008 on course?

Steve Welling

Well, we’re talking fiscal year so when we say next year, that means the government’s pushing it into their fiscal year which starts October 1st.

David Yuschak – Sanders Morris Harris Capital

Okay. So, in your guidance, that push to next year is their fiscal year going into your fourth quarter?

Steve Welling

Right. We’re starting new projects now for fourth quarter, which when we say government’s fiscal year, that’s their first quarter. So, they have funding now for six months and while the final budgets are resolved.

David Yuschak – Sanders Morris Harris Capital

So, most of your variance then would show up in having a better fourth quarter on the Army Corps, not being pushed to the year first quarter?

Steve Welling

Well, I do expect for the Army Corps work to push into next year also. Again, it just slows the job down.

David Yuschak – Sanders Morris Harris Capital

Now as far as you think about expansion of that kind of technology, what kind of characteristics would you have to think you need in your first unit here to make you feel comfortable that you’d want to bring one of these on sooner than later. What would the characteristics that make this successful to you so that you make a decision sooner rather than later?

Stephen Romano

I think a lot of it David depends on our understanding of the market out on the West coast, there isn’t actually currently material moving from the West coast to competitor incinerators, other facilities and competitor desorber units that are in the Midwest and in Texas. So one of the evaluations is going to be what is the size of the Texas market, what throughput do we have in Texas, what does the West coast market look like?

The equipment does work; we’re satisfied with that, and we’re happy with the equipment operator, they know how to ruin the equipment. So a lot of it’s going to be based on our market analyses and continuing to understand some of the economics of serving some of the different kinds of waste.

David Yuschak – Sanders Morris Harris Capital

Now, just going back to your issue with techs, there. As you started thinking about getting that up in the third quarter, you said earlier that you started seeing some additional markets that you could go after with this unit compared maybe to what your initial thoughts were. Is that what your primary reason for you need to rethink the technology and how that equipment’s been utilized?

Stephen Romano

Well, and again, I go back to the comment it’s a fairly focused refinement which was adding the centrifuge unit to be able to handle the high moisture content tank bottoms.

David Yuschak – Sanders Morris Harris Capital

Okay. So that was maybe a market that you weren’t thinking was there before?

Stephen Romano

Well, we knew it was there. In many cases refineries will utilize a service where an outside contractor will come in and they will do the centrifuging work. And so when the refinery is offering the project to us or our competitors, it is an already centrifuged, drier product. And that was what we tended to see more of at our Nevada site over the years we’ve operated there.

What we’re learning is there’s more opportunity apparently for that kind of work in the Gulf Coast region, and so it made sense for us to go ahead and expand our capability to at this point be excited about taking those high moisture materials, whereas before, it would have slowed us down in throughput.

David Yuschak – Sanders Morris Harris Capital

So that’s basically just trying to capture more of the job coming in compared to what you had?

Stephen Romano

And reflecting knowledge of what the market environment and what the demand is in that part of the country.

David Yuschak – Sanders Morris Harris Capital

Okay. Let me just talk a little bit more about your Texas expansion, because you did indicate you’re spending more for landfill development down there. How much of that is maybe the success you’re having with the rail system plugging in to getting more in there, or is it just Texas markets themselves are that much stronger there, that you need an expansion in your sales?

Stephen Romano

Two things I’d note. It’s reflected in our results, our base business with brokers continues to grow. Our partnerships working with small broker companies that aggregate waste from multiple smaller waste producers is a strong business for it, so we’re committed to trying to deliver the best possible service to those customers, and that business has done well for us, both in Texas and Nevada. That’s a piece of the growth.

And we had some good cleanup projects in Texas this year, and the combination led us to accelerate the landfill space construction into 2008 to keep place with the work as it continues.

David Yuschak – Sanders Morris Harris Capital

Okay. That’s all I’ve got for now. Thanks.

Stephen Romano

You bet.

Operator

And our next question will come from Al Kaschalk with Wedbush, Morgan.

Stephen Romano

Good morning, Al.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

Good morning Steve. On the Texas facility landfill expansion, could you give us a sense of size, of the percentage or volume what that entails, regardless of how small the dollar amount is?

Stephen Romano

We really don’t put out that level of granularity in the space, and in general, Al, is we want to have the landfill space built so we feel we have enough capacity. We build in phases so we feel we have a comfort level that we have space available moving forward. So we don’t tend to build – particularly in Texas, these are not large landfill expansions. It’s more of an ongoing phase expansion. That’s what we’ve constructed.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

All right. So should we read that as an expansion of your service capabilities to some of your customers or there’s local waste there that now can be better suited to going through Texas versus, say, Idaho.

Stephen Romano

Neither. It’s simply that all of our landfills we want to make sure that we have enough landfill space built for the business as we move forward. We’re periodically building landfill space, particularly at our Idaho, Texas and Nevada facilities. This year we were building landfill space in Texas and Nevada. Next year we expect to be building landfill space in Idaho.

It’s simply a matter of – the way I think about it is, we continue to move ahead and grow the business. We use up the landfill space. It’s our inventory and we need to make sure that we have that space available for customer use and that’s what we’re doing. So, it doesn’t reflect any change in the business. It’s simply having the landfill space available to meet the growth.

Steve Welling

And to serve our existing customers.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

All right. As I look at the volume in terms of tonnage being down as a percent of the absolute, did I hear correctly that the majority of that was due to the Army Corps?

Steve Welling

Yes.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

All right. As we look out here and try to balance off an earlier question, are you seeing any – you’re not seeing any change in your customer interest and sending waste your way so that we should see a recovery of that volume to the 325 – 350,000 level of Q4 in the next year per quarter?

Stephen Romano

Well, then again, the Corps of Engineers was the primary cause for that. And as we noted a little earlier in the call, Al, the Corps of Engineers shipments have already picked up. So we think that’s already been accounted for. And we would expect the more normal higher volumes moving forward in the fourth quarter.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

I’m trying to get a handle on the comments that have been made and what we’ve heard you say previously, that the outlook is pretty strong and you believe that you can replace the operating profit both Molycorp and Honeywell over time. But I’m not sure that I’m hearing on the comments a follow through on a replacement projects to come through. And maybe explain a little bit more about maybe the shortfall from your own internal expectations. Just try to balance

Stephen Romano

Sure. What we expect to do that really in a number of different areas. We continue to, and I wouldn’t think about it in terms of when we replace landfill space; we just do it as we need it. We expect to be able to do that through a variety of things.

We have a strong pipeline moving into next year of both public and private cleanup projects. We do not disclose the individual projects for competitive reasons. But we do feel we have a strong pipeline moving forward both government and private, for cleanup.

Our broker business, which is private, continues to grow substantially. It’s grown this year over last year. We see it continuing to grow.

We’re excited about the thermal business, it’s good margin business. We’re just starting to ramp up this equipment to higher production levels. We’ve really seen no material contribution from the thermal units, and we will believe we will be seeing that. And we’re seeing the possibility of extending the service out to other parts of the country.

But we’ve also expanded our Idaho permits, to allow us to take materials that we could not take in the past with regard to some of the radioactive materials that can be handled as exempt from NRC regulation under the Atomic Energy Act. That has been a something that we really have led the way, in, and we think there’s continued upside as our permits continue to expand. And we continue to extend what we’ve done for the Army Corps of Engineers for many years into a broader capture of business from commercial radioactive materials producers, so that would be basically work that currently would be handled by Energy Solutions and we believe our ability to continue capturing additional market share there is a good likelihood for us, a good prospect.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

Then and finally, on the gross margins, if we normalize things and adjust for transportation costs, it looks like there was a little pressure there relative to last year. I wonder if that is more commodity cost ex transportation or a mix of business there. If you could shed some more color on that that would be great.

Jeff Feeler

Yes, it’s a combination of things. It’s definitely mix of business. We had a higher percentage of disposal volumes coming in this quarter that required treatment prior to disposal as opposed to direct disposal. A lot of that still ties directly to the Army Corps.

We have seen a slight increase in some of our reagent costs, which also go into treating the waste prior to disposal. But it’s been controllable; we’re not seeing a huge impact there.

And the other one is operating leverages. With the volumes going up we benefit; with the volumes going down, it works against us. So the combination of those three things have really put a pressure on the third quarter margin.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

In terms of the reagent, though, is that something in terms of procuring, is that a shorter term procurement or is that a longer 12 to 18 month cycle that you go through?

Jeff Feeler

It’s more a shorter term. There’s a few of our major reagents for our large contracts we have long term contracts with. And so those are capped and our exposure is limited. But for other reagents that are coming in, it’s dependent on the type of material that we expect to come in.

Stephen Romano

And we have seen increases in basic chemical prices, but our competitors see that also for use of treating waste. We like to believe that with the addition of our new laboratory in Texas for treating organic wastes, our ability to develop cost-effective recipes for treating the waste has been enhanced.

And it is something where we have to compete and be careful in our use of reagents so that we have a good, cost-effective mix of materials to treat the waste. But we have seen some increase in chemical prices, and that’s something that everybody experiences.

Al Kaschalk – Wedbush, Morgan Securities, Inc.

Thank you very much.

Stephen Romano

You bet.

Operator

And we have a follow-up question from Jamie Sullivan.

Jamie Sullivan – RBC Capital Markets

Hi, guys. Quick question on some of the smaller cleanups from commercial customers. Just wondering what your experience was there in the quarter.

Steve Welling

We had a number of cleanup projects. We haven’t noticed any major trend, up or down. It seems business as usual in terms of the bid opportunities.

Jamie Sullivan – RBC Capital Markets

Okay. So pretty steady there, no – flattish, no improvement one way or the other based on economy or budget or the credit situation?

Steve Welling

No. Again, cleanups are created by a number of different reasons. It could be regulatory pressure, it could be real estate transfer, it could be voluntary. So we’ve seen a combination of all of the above. We have projects starting in the fourth quarter that were not moving in the third quarter, that are looking better than we had. So no. not seeing a real change. Kind of business as usual as far as I’m concerned.

Jamie Sullivan – RBC Capital Markets

Sure. And just quickly, just a reminder – you said you’re not really seeing any economic weakness. Can you remind us how you would see that? If it did start to impact you?

Steve Welling

Probably the easiest way to spot that would be in our base business. And you can see that our base business is strong. And some of that is increasing market share, but if the market itself were dropping that dramatically, it would be pretty hard to increase market share and keep prices up.

So I think we’re not seeing a dramatic change there. And we also serve a wide variety of industries, so if one is impacted slightly, another could be up. So, don’t see a change there either.

Jamie Sullivan – RBC Capital Markets

Okay. Thanks.

Stephen Romano

I would add – this is Steve – that we’ll watch a cleanup project obviously one thing that you might see is that somebody had a groundfill redevelopment that was intended for redevelopment, either condominiums or commercial space or whatever, you could see projects being delayed. So that’s something we’ll continue to watch.

But at the current time, the pipeline for work looks pretty good. And as Steve mentioned, a lot of clean-up projects are driven by it can be enforcement actions by regulatory agencies, court proceedings, other things that are not voluntary.

But in a general sense, you could conclude that perhaps the development project, or real estate related projects, perhaps that slows down. And that’s something we’ll keep an eye on. There are things in our pipeline that are related to that. There’s one in New Jersey that’s moving forward.

Operator

Anything further Mr. Sullivan?

Jamie Sullivan – RBC Capital Markets

No, that’s it. Thanks.

Operator

Thank you. And we have a follow-up question from Rich Wesolowski.

Rich Wesolowski – Sidoti & Co.

Thanks. What is the cumulative Honeywell volume that you have processed or alternatively how much is left?

Jeff Feeler

Through the third quarter, we had processed about 80 % of the 1.2 million tons.

Rich Wesolowski – Sidoti & Co.

Okay.

Stephen Romano

This is Steve. I would note that that number, the total tonnage of 1.2 million toms is a – I’m just going to leave it to say it’s a soft number that will be evaluated at year end.

Rich Wesolowski – Sidoti & Co.

Okay. At year end 2008 or ’09?

Stephen Romano

At the end of 2008.

Rich Wesolowski – Sidoti & Co.

Okay. To ask a previous question maybe a little more directly, would your non-Honeywell business use up the 234 owned rail cars?

Stephen Romano

The question again, Rich?

Rich Wesolowski – Sidoti & Co.

Would the non-Honeywell business use up your owned railcars. If Honeywell went away completely, would you have to sell any rail cars?

Stephen Romano

No expectation of that, no. projects come and go, and we’d evaluate railcar utilization, but our current belief is we can keep those cars busy.

Rich Wesolowski – Sidoti & Co.

Right. As we move into a period where ex any big changes from Honeywell, I understand that the $1.2 million is a soft number, but we are a lot closer to the end than the beginning you’re likely to go through a period of lower revenue but higher income. Are there any other categories of costs that you would expect to reduce?

Steve Welling

Not that I can think of.

Stephen Romano

None that jumps out.

Rich Wesolowski – Sidoti & Co.

Okay. Looking at the treatment and disposal gross margin and how Honeywell throws a wrench into that, of course your gap gross margin would go up because a lot of that transportation fluff would go away. But would treatment and disposal gross margin go up because there’s less of the commoditized waste that requires treatment, or would you stick by that low 50s sort of best guess?

Jeff Feeler

We’ll probably stick by the low 50s best guess and in one of the benefits that we have from the Honeywell project is that even though it is low margin material, it does bring some volume in, which helps on the operating leverage side of it.

Rich Wesolowski – Sidoti & Co.

Mm-hmm.

Jeff Feeler

So with the operating leverage or the volumes not being there, you’re going to have some downward pressure form that, not having the operating leverage. But then you’re going to have an increased margin in our mix (ph 01:02:03).

Rich Wesolowski – Sidoti & Co.

So it might be a wash?

Jeff Feeler

Exactly. So we’re still targeting the low 50s from a disposal margin standpoint, and really that’s our internal target.

Rich Wesolowski – Sidoti & Co.

Okay. The SGA number was pretty low. Had you reversed any previous bonus accruals in that?

Jeff Feeler

There is some catch-up bonus accrual in there, just from the lower performance in the third quarter.

Rich Wesolowski – Sidoti & Co.

Okay.

Stephen Romano

To answer a different way, Rich, bonuses are accrued based on what we actually did for the quarter. So it sort of gets trued up as we move along.

Rich Wesolowski – Sidoti & Co.

And then finally, if my numbers are approximate what you guys do in 2009 you’ll finish the year with about 30 million bucks in cash. Would you expect to accelerate what now seems to be a dormant acquisition if we do see multiples for the targets come down in a recession?

Stephen Romano

We have been interested in acquisitions for some time. We continue to look at acquisitions. There are several, we have several nondisclosure agreements that have been entered and we are actively looking at opportunities.

I’m not prepared at this point to say that we have reached a meeting of the minds on value, and of course that’s the key question. If valuations were to moderate downward, that would be something of course positive. We’ve remarked in the past that we felt that there were some assets for sale that we were interested in but that the expectations from the sellers were, to us, unrealistic.

And we do maintain our discipline and we continue to that we believe any acquisitions we do make should be something that would be neutral to slightly accretive in the first year with a prospect of double digit accretion in year two and beyond, including whatever synergies could be realized.

But we are looking; there are some things that are interesting out there, and I’m not going to talk more specifically about that other than that they are things that relate to our existing core business.

Rich Wesolowski – Sidoti & Co.

Thanks again.

Stephen Romano

You bet.

Operator

And we have a follow-up question from David Yuschak.

David Yuschak – Sanders Morris Harris Capital

Hello!

Stephen Romano

Hello, yes David.

David Yuschak – Sanders Morris Harris Capital

Just to follow-up with you on that pipeline guys. Seeing some of the experience you’ve had with Molycorp, here, as you look at that pipeline it tends to be more smaller projects versus the bigger ones, because as you (inaudible 01:04:35) maybe some issues with (inaudible 01:04:36). Could you just give us a character – is it more, smaller stuff versus maybe bigger, elephant type of projects?

Stephen Romano

Right now we have 10 to 15 midsize projects that look viable for 2009 that would in total be much larger than a Molycorps, but there’s no single project of that size right now that I can think of.

David Yuschak – Sanders Morris Harris Capital

Okay. And then one other thing, on your rail car utilization in Texas. Could you give us some color on that as far as how that has helped bring the business versus where you were when you first started putting that together in your expectations for that?

Stephen Romano

Texas rail station is a nice asset to have; it does allow us to win cleanup projects from time to time that we can bring in that way. It’s not something we’ve really broken out to say a specific contribution is a certain number. It’s part of the asset base in Texas to the extent that geographic reach to handle materials from far away, and we’ve done that, we’ve taken projects in the upper Midwest into Texas, we’ve taken projects from elsewhere in the southeast and we’ll continue to do that.

David Yuschak – Sanders Morris Harris Capital

So is it fair to say then that it has at least met your objectives if not exceeded them?

Stephen Romano

We never really had a specific objective for the rail station; it was tied to a dollar amount I guess is how I’d place it. We are very pleased with the growth of our Texas side business and the rail services is part of the overall service that we offer there and the extension of our geographic reach to a broader area has definitely been positive.

David Yuschak – Sanders Morris Harris Capital

And then finally how much potential of further expansion could you have down the road, there? How many years of life do you suppose you have in the way of expansion, there?

Stephen Romano

Well, none of our sites have land that would put us in any shortage of space into the foreseeable future of some decades. We’ve bought an additional property in Texas, we of course have to permit new disposal space with our regulators. We’ve been successful at doing that in all of our sites. It is an accepted technology and we have the land to expand each of our sites.

David Yuschak – Sanders Morris Harris Capital

Okay, thanks. That’s all I’ve got.

Operator

And at this time there appears to be no further questions in the queue.

Stephen Romano

Well, I’d like to thank everybody for taking time to join us today and we’ll wish you a good day.

Operator

This concludes our teleconference for today. We would like to thank everyone for participating today and have a wonderful day.

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