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Executives

Bill Geary – EVP and General Counsel

Alan McKim – Chairman, President and CEO

Jim Rutledge – EVP and CFO

Analysts

Larry Solow – CJS Securities

Kyle O'Meara – Robert W. Baird

Jonathan Ellis – Merrill Lynch

Jamie Sullivan – RBC Capital Markets

Rich Wesolowski – Sidoti & Company

Ted Kundtz – Needham & Co.

Clean Harbors, Inc. (CLHB) Q3 2008 Earnings Call Transcript November 5, 2008 9:00 AM ET

Operator

Good day everyone and welcome to Clean Harbors’ third quarter 2008 conference call. Today's call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. (Operator instructions).

At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Bill Geary, Executive Vice President and General Counsel of Clean Harbors. Please go ahead, sir.

Bill Geary

Thank you operator and good morning everyone. Thank you for joining us this morning. On the call with me today are Chairman and Chief Executive Officer, Alan S McKim, and Executive Vice President and Chief Financial Officer, Jim Rutledge.

Before we get started, I would like to remind everyone that matters we are discussing this morning and the information contained in the press release issued by the company today announcing our third quarter 2008 financial results that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements including predictions, estimates, expectations, and other forward-looking statements generally identifiable by the use of the words believes, hopes, expects, anticipates, plans to, estimates, projects, or similar expressions, are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, participants in today's call are cautioned not to place undue reliance on these forward-looking statements which reflect management's opinions only as of this date, November 5th, 2008. Information on the potential factors and detailed risk that could affect the company's actual results of operations is included in the company’s filings with the SEC, including but not limited to our Form 10-K for the year ended December 31, 2007, which was filed with the SEC on March 11, and our Form S-3, which was filed April 17, 2008.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in our third quarter press release or this morning's conference call other than through the filings that will be made with the SEC concerning this reporting period. In addition, I would like to remind you that today's discussion will include references to EBITDA, which is earnings before interest, taxes, depreciation and amortization. EBITDA is a non-GAAP financial measure and is intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of the company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Clean Harbors’ third quarter news release. A copy of this release can be found on our web site, cleanharbors.com. A copy has also been furnished as an 8-K with the Securities and Exchange Commission.

And now I'd like to turn the call over to Alan McKim for our quarterly review. Alan?

Alan McKim

Thanks, Bill, and good morning, everyone. Clean Harbors delivered another record quarter in Q3.

Our incineration business continued their strong performance. We benefited from some emergency response revenue and the acquisitions we have made in the past year performed well. We achieved our guidance for the quarter despite some challenges presented by an extended hurricane related shutdown at our largest incineration facility and the costs related to a M&A transaction that we ultimately walked away from, which I will talk about later in the call.

We set a new quarterly revenue record of $273.2 million which is up 11% over last year. We also had a strong quarter from a profitability point of view. Despite the two items I just mentioned, our EBITDA growth still far outpaced our revenue increasing 18% year-over-year to a record $45.4 million. Let me start by taking you through our business and how each performed in the quarter.

Technical Services extended the momentum it has demonstrated throughout 2008 with another outstanding quarter. We continued to succeed at winning a variety of projects generating a steady stream of volumes into our network of disposal facilities. Overall utilization at our incinerators which reflects the 21,000 tons of capacity we added in the first 6 months of the year was approximately 93% for the quarter. This number is significant for two reasons. First, the investments we have made to enhance some of our Canadian facilities and include a $2 million upgrade that we completed in Q2 are paying off. In fact for the first time in many quarters utilization at our Canadian locations exceeded their U.S. counterparts. Utilization in Canada was 96% in the third quarter with the U.S. achieving 91%. The second major factor influencing our incineration business in Q3 was the shutdown of our Deer Park facility for five days as a result of hurricane Ike.

We estimate that the business interruption created by the hurricane cost us between $5 million and $7 million in revenue and between $1.5 million and $2 million in EBITDA. These figures include the weather-related slowdown that also has affected many of our customers in the region during the hurricane. Despite the interruption at Deer Park our continued high level of overall utilization allowed us to better manage our mix of materials and optimize our profits.

In addition to the 21,000 of incineration capacity, we brought online in the first half of the year we added 7,000 tons of new capacity to our incinerators during the third quarter.

We remain on schedule to meet our previously stated goal of adding at least 50,000 tons of incineration capacity to our network by mid 2009. We expect that to have approximately 42,000 tons online by the end of this year and the remainder will come online by the middle of next year.

Turning to Landfills, our performance was somewhat mixed in the quarter. As we predicted on our last conference call volumes were up sequentially rising 16% in Q3 from Q2. On the flip side, we were down 36% compared to what was very strong period for our Landfills business in Q3 of ‘07. This business has historically been lumpy due to our reliance on large projects to drive significant amounts of volume. In the third quarter, we continued to experience some softness as a result of ongoing delays with some large projects that have been pushed back further than we were generally anticipated. While some of these large projects may face further delays, we remain confident about the prospects for our landfills and the pipeline we see for that line of business.

In terms of our solvent recovery business, just a quick update. The Chicago and Hebron facilities that we acquired earlier this year continued to perform on plan in the third quarter. At our El Dorado plant operations continue to run smoothly. Overall this business remains a promising opportunity for Clean Harbors and we’re pleased with these contributions to date.

Turning to our Site Services group, for the third quarter we achieved a revenue increase of approximately $23.5 million based on continued growth within our key verticals, contributions from the Universal Environmental acquisition we completed earlier this year and emergency response related to two primary events. We saw strong site service contributions from clients within the petrochemical, specialty chemical, and utility industries. The Universal Environmental acquisition has greatly strengthened our West Coast presence by providing us with a significant presence in the Northern California markets and we are pleased with how that group has performed since joining the Clean Harbors team.

Looking at emergency response, there were two events that combined to generate $9.1 million in Q3, a major oil spill on the Mississippi River and work in the Gulf region related to the hurricanes. The Mississippi spill, which we mentioned our Q2 call and was included in our Q3 guidance for $5 million ended up being $7.8 million and was essentially wrapped up by the quarter’s end. The work we received from the hurricanes amounted to $1.3 million. Based on where we are today we believe we can see an additional $3 million in Q4 in total the hurricane related revenue will not offset the Deer Park shutdown that occurred in September from hurricane Ike.

In addition it is important to understand that margins on incineration business particularly when the plants are running at high capacity is higher than the emergency response work that generally involves a lot of billable personnel.

Every quarter we provide you with an update on the expansion of our site service locations, a key component of our growth strategy for that business. Coming into Q3, we had opened branches in Milwaukee in Memphis and as well as two branches we added through Universal. During the third quarter, we opened a new branch in Raleigh and Alberta [ph] expanding our Canadian presence. With one additional branch opening planned for Q4, we will make the high end of our goals for 2008 of opening five to six new offices.

Now I would like to spend a few minutes to discussing the M&A transaction that we walked away from in the third quarter. While I’m sure some of you will have some questions about the transaction, we cannot get into any specifics since it is covered by a confidentiality agreement. Even though the acquisition did not take place, we thought it was prudent to notify the market a bit because it related to expenses were significant enough to offset affect our Q3 bottom line results and it commanded a lot of management’s time, energy, and resources in the quarter. While there are many positives for the potential acquisition, we ultimately walked away from the deal after extensive due diligence and negotiations. We estimate the transaction resulted in approximately $1.5 million in professional and legal expenses alone. We had been in discussions with this particular target for some time and had capitalized some costs related to the deal. As a result of not pursuing it, we absorbed the full $1.5 in the third quarter. In hindsight, it was a good decision as valuations have dramatically fallen since that time given the disarray in the equity markets. We see a lot of promising options still available to us. Our acquisition pipeline has attractive candidates both on the Tech and Site Services site. With more than $270 million in cash today, we continue to see excellent opportunities for us to apply our available capital.

Turning to our bottom line, we achieved our EBITDA guidance with a record $45.4 million which translates into a margin of 16.6%.

Given the lack of large projects in our landfills business and the external cost pressures we faced in the quarter we are happy with our strong performance. It is a credit to our entire team and proves how well our cost reduction and cost control initiatives are working. We continue to successfully combat higher fuel costs through pricing initiatives and our fuel surcharge program. Year-over-year our Q3 fuel costs rose 75%. We have been able to once again mitigate the majority of that multimillion dollar increase by passing much of it through to our customers.

Another example of how we are managing our costs is in our ongoing commitment to reduce our outside transportation expenses. Despite our 11% growth in revenue we lowered our total outside transportation expense by $2.9 million as we expanded our internal transportation fleet, made better use of our rail capabilities, and captured increased efficiencies. On a percentage basis outside transportation represented only 5.1% of revenues compared with 6.8% in the same period of 2007. We believe our internalization program has proven very effective and we expect these costs to trend down further. During the third quarter, we continue to aggressively hire drivers and add vehicles. And for the year we have now added approximately 50 drivers and tractors.

In terms of our overall headcount we ended the third quarter with 4980 employees. In keeping with our efforts to lower our non billable headcount we recently initiated a small workforce reduction that will further improve our efficiencies going forward. In recent weeks, we eliminated approximately 200 nonbillable positions mostly through process improvements, system enhancements, and organizational changes. As a result we will incur a roughly $2.2 million in severance expense in Q4 but we expect the cost savings to offset the charge during the quarter.

We see an opportunity for us to be more aggressive in terms of sales penetration and we will be hiding in the areas of sales and marketing. Our plan is to hire 40 additional sales and marketing personnel. We believe that with our well known brand, an outstanding reputation, our vertical market expertise and a strong balance sheet that we have an opportunity to gain market share during this time of economic uncertainty.

Going forward the net effect of the workforce reduction combined with the added sales and marketing personnel costs will result in annualized cost savings of approximately $8 million. With that said let me close by saying that we’re very pleased with our Q3 performance particularly in light of the number of factors that affected our results in the quarter. Going forward we remain confident that we can extend our momentum, continue generating strong results.. In addition we remain well capitalized in an extremely tight credit market providing us with yet another competitive advantage. Our record performance in the first nine months of the year demonstrates our ability to leverage our leadership position in the unique array of diverse environmental services. We expect to conclude the year by capturing our stated goal of $1 billion in annual revenue. I’ll now turn the call over to Jim so he can walk you through the financials in more detail and provide our outlook for the fourth quarter and the full year. Jim.

Jim Rutledge

Thank you Alan and good morning everyone. As Alan mentioned, Clean Harbors completed a strong quarter generating record results in a number of categories beginning with revenue. Q3 revenue increased 11% to $273.2 million compared with $245.5 million in the year ago quarter. Gross profit for the quarter grew to $86.1 million translating into a gross margin percentage of 32%. This compares favorably with a gross profit of $76.5 million and gross margin of 31% in the year-ago quarter.

Selling, general and administrative expenses in the quarter totaled $40.7 million, up $2.6 million or 7% from the third quarter of 2007. Two items of note under SG&A this quarter. As Alan mentioned there was $1.5 million charge in professional fees and legal expenses related to the M&A that we decided not to pursue. Partly offsetting this we benefited from an $1.3 million environmental credit during the quarter. Our SG&A as a percentage of sales was 15% of revenue compared with 15.5% of revenue in Q3 of 2007. Accretion of environmental liabilities was $2.7 million in Q3 of 2008 which was flat against Q3 of 2007.

Depreciation and amortization expense rose to $11.4 million from $9.8 million in Q3 of ‘07 mainly due to acquisitions we completed in the last 12 months.

Q3 '08 operating income increased 20.8% to $31.3 million from $25.9 million in the third quarter last year. Our growth in operating income was driven by the combination of higher revenue and higher margin product mix. We achieved record EBITDA of approximately $45.4 million, or 16.6% of revenue. This compares with $38.4 million or 15.6% of revenue in Q3 of 2007. As we continue to grow revenues at a far greater rate than our operating expenses we’re expanding our EBITDA margin based on the leverage in our network.

Net interest expense in Q3 was $1.9 million, which was lower than last year's figure of $3 million, reflecting interest earned on the proceeds from our follow-on offering and the $50 million reduction in debt that we did mid quarter. In connection with the $50 million redemption, we recorded of $4.3 million charged below the EBITDA line consisting of a $2.8 million prepayment penalty for calling the notes and $1.5 million for the unamortized discount and financing costs related to these notes which is a non-cash expense. The annual reduction in interest expense from this redemption will be approximately $5.6 million.

Our provision for income taxes was $10.4 million compared to $10 million in Q3 '07. Our effective tax rate for Q3 was 41.5%. FIN 48 related interest charges amounted to $1.2 million during the quarter representing about 5% of our effective tax rate. We anticipate our overall effective tax rate to be between 42% and 43% for the year.

Third quarter net income available to common shareholders was $14.6 million or $0.61 per diluted share based on 23.8 million average common shares outstanding. Net income for Q3 '07 was $12.9 million, or $0.63 per diluted share which was based on 20.7 million average common shares outstanding. Our Q3 2008 net income includes the pretax charge of $4.3 million related to the early extinguishment of debt. If you tax effect that change it lowered our EPS for the quarter by approximately $0.11 per share.

Turning to the balance sheet, we have a very strong cash position. Our balance of cash and marketable securities at the end of Q3 was $253.4 million. This compares with $282.3 million cash balance at the end of Q2 reflecting the $50 million debt payment in the quarter as well as our solid cash flow generation.

Total accounts receivables stood at $196.7 million on September 30, and DSO came down once again to 68 days compared with 69 days in Q2 and 76 days in Q3 of ’07. We are very pleased with this performance which highlights the ongoing commitment across our entire organization to limit our collection period and further improve our cash flow. We continue to target DSO below 70 days going forward.

Capital expenditures came in as expected at approximately $9.1 million for Q3. This compares with approximately $8 million a year ago, and $10.9 million in Q2. For 2008, we continue to target CapEx of approximately $55 million to $60 million. Accounts payable balances slightly increased to $73.3 million from $72.3 million in the second quarter as did our deferred revenue balance to $25.8 million compared with a balance of $23.5 million at the end of Q2. We're continuing to carefully manage our environmental liabilities and steadily lowering our exposure in this area.

At September 30, our balance of environmental liabilities stood at $179.8 million compared with $187.3 million at the end of Q2. This decrease was mostly impacted by the final settlement of two previously preserved environmental liabilities during the quarter. Managing this area will remain a key focus for us going forward. Reflecting $5.7 million in one-time payments related to the settlements I just referenced, environmental spending during the third quarter was $8.5 million compared to $1.5 million in Q3 2007.

Before commenting on our guidance, I wanted to mention that we pleased to see that our company was recently added to the S&P 400 Midcap Index, which is apparently reflective of our industry representation, market capitalization, and liquidity.

Looking forward to our guidance, we currently expect revenue in Q4 to be in the range of $261 million to $263 million. We expect EBITDA in the range of $42 million to $44 million, which represents year-over-year growth of 12% to 17%.

Let me now turn the call back over to Allen for some thoughts on 2009.

Alan McKim

Thanks Jim. I would like to conclude with some thoughts on 2009. We’re in the early stages of our budgeting process but we’re looking forward to continued growth in revenue and profitability next year. There are obviously general concerns about the economy but we’re diversified across many industries and we provide a wide range of services. And as I mentioned earlier, we are adding approximately 40 new sales and marketing positions over the next quarter along with expanding our marketing efforts. And as we have during the past several years, we’re planning to open five to seven new service locations in 2009.

Site service remains a highly fragmented marketplace and we believe we have the opportunity to gain market share in the years ahead. In addition, we expect to make some acquisitions to penetrate new geographic areas in both the U.S. and Canada in 2009. Some issues that remain outside of our control are the price of crude that impacts our fuel costs and fuel surcharge revenue, the Canadians currency that has weakened over 20% in the past year and to a smaller extent the commodities market that impacts the resale of our copper and other metals and refined oil from our transformer services business. These are some of the factors that we’re considering as we finalize our 2009 budget and lay out our plans for next year.

Based on current market conditions and absent the effect of any acquisitions we currently expect to grow revenues in 2009 in that 5% to 7% range and EBITDA in that 10% to 15% range.. And that is our initial take and we will be updating that forecast when we announce our Q4 results early next year. And with that operator would you please call – open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Larry Solow with CJS Securities. Please proceed with your question.

Larry Solow – CJS Securities

Hi, good morning.

Alan McKim

Good morning.

Jim Rutledge

Good morning.

Larry Solow – CJS Securities

Could you may be just discuss Alan a little bit more on Ike and maybe its impact on some of your customers in the Gulf region going into Q4 and, I believe, some of your competitors also had some issues down there?

Alan McKim

Yes. We were fortunate with our Deer Park facility just we were down just for the 5 days. The team did a great job of taking the plant down and dealing with the storm and then getting the plant quite frankly back up. We had some damage but we had about 500 employees in that area home for quite a few days as they tried to recover for themselves personally as well as we tried to help our customers recover. I don’t think the Gulf is anywhere near back to it’s normal state if you would that there is a lot of clean-up still going on, there’s a lot of work still to be done and certainly our customers are ramping up. And also some of our competitors as you mentioned had a more difficult time getting power, particularly and dealing with the water damage, particularly the mixing of the salt in fresh water for some of the cooling systems that impacted our competitors and also our customers. So, it was a quite a lot of devastation with Ike in the Houston Ship Channel Area.

Larry Solow – CJS Securities

And also, I believe Veolia was actually down for quite a while and that maybe helped you capture some new business or maybe when things normalize a little bit that will show up more?

Alan McKim

You know, we certainly try to help each other. While they were down they had some clients that we could certainly help with them on, but they are back up and running and from what I understand running fine and, you know, we did not see any particular windfall at all from their shutdown.

Larry Solow – CJS Securities

Got you. And then just on the capacity, it looks like – as the capacity rolls, I assume that is mostly coming in on the U.S. side. Is that correct on your new capacity incinerator?

Alan McKim

Yes approximately. We did do some upgrades in Canada as we mentioned and we’re seeing some nice improvements in flow in that plant up there now.

Larry Solow – CJS Securities

Right. So just a slight downturn I would imagine that would be in overall capacity that you are adding – I mean, excuse me, in utilization but you are adding, you added $20 million. So, I would imagine that could actually start rising into the mid 90s from the 90% range you hit?

Alan McKim

$20 million or 21,000 –

Larry Solow – CJS Securities

21,000. Sorry. I confused the numbers.

Alan McKim

Yes, it is true.

Jim Rutledge

Right, that is correct and certainly that is reflected in our utilization numbers but to your point as we increase our volume there we will see the utilization come back up. But we’re including these utilization, this new capacity into our utilization figures as we are importing them.

Larry Solow – CJS Securities

Got you. And then just last question you know, I get back in the queue. On landfill, I know you guys have talked about the Alberta project up and running, was that one of the things that has been delayed and then also is pricing looking?

Jim Rutledge

Yes I think the delay we have seen in the oil sands business has been probably a six- month delay from what we have seen. We’re starting to get some business now with that project we invested quite a bit and we’re hoping that that project continues and is successful as the price of crude has been cut in half right now in six months. It is certainly sending tremors throughout the oil patch, if you would, and we are hoping that we don’t get impacted in the long-term but it is something that we maybe keep an eye on in the oil sands area.

Larry Solow – CJS Securities

Okay, and then I know you guys had mentioned kind of you were turning away some business or just increasing prices and I see some of your competitors in their reports over the last couple of weeks said pricing still remains pretty good on the landfill side?

Jim Rutledge

I think our pricing in landfills has been good. We mentioned I think on the Q2 call that we had been more aggressive in taking business you know that had a higher price. We – I think have been successful winning some business out there particularly where we have a strategic advantage from a logistic standpoint but overall it is still a very competitive business on the landfills.

Larry Solow – CJS Securities

Okay good. Thanks guys.

Alan McKim

Thank you Larry.

Operator

Our next question comes from David Manthey with Robert W. Baird. Please proceed with your question?

Kyle O'Meara – Robert W. Baird

Hi, this is Kyle O'Meara on the line for David Manthey. You mentioned you are seeing some strengthening across your petrochemical, specialty, chemical utilities, cosmetics [ph] et cetera. I was wondering what you were seeing across maybe some of your other end markets, general manufacturing, chemical education, if you are seeing any signs of any weakness there. Those were holding in pretty well as well?

Alan McKim

You know, we did see some slowdown in our refineries client spending in the quarter. We don’t think that this is going to be a continuation of that slowdown, but we intend to do some shutdown work more in this time of the year. But I think we saw some real strength quite frankly in our – our pharmaceutical business is doing quite well, our hospital and university business is doing good. On the manufacturing side, some on the large like aerospace and some of those we saw kind of flat volumes because of some of the strike that was going on for example and some of the impacts of that labor issue. So, I think overall manufacturing is kind of probably the most concerning for us as we look forward.

Kyle O'Meara – Robert W. Baird

Okay, and then some nice savings on the transportation during the quarter. Could you give us an update on some of your other cost reduction initiatives and facility efficiency procurement and I expect that kind of savings is in your 2009 guidance as well. Thanks.

Alan McKim

Well, I think each year we always try to target some key initiatives that will drive some costs out and part of our headcount reduction was part of that effort for next year. And I think on the procurement side as we know over the past year, a significant amount of cost increases we have incurred because of fuel cost, whether it is in our chemicals and consumables, the fuel surcharge that we are seeing from our transporters utility costs and the fuel surcharges we are seeing there. So, we are certainly looking very closely at how we can now reverse that trend now that fuel has come down and try to go out on a procurement basis and really try to lower our cost of purchasing some of those things.

Kyle O'Meara – Robert W. Baird

All right thank you.

Alan McKim

Okay.

Operator

Our next question comes from Jonathan Ellis with Merrill Lynch. Please proceed with your question.

Jonathan Ellis – Merrill Lynch

Thanks and good morning guys.

Jim Rutledge

Good morning.

Alan McKim

Hi John.

Jonathan Ellis – Merrill Lynch

The outlook you provided for the fourth quarter does imply some modest sequential deceleration. And I guess I just in light of obviously what is going on in the economy I can understand become somewhat cautious, but I am also curious to what extent are you perhaps shifting the timing of incinerator shutdowns this year vis-à-vis past years given you know, economic challenges. Maybe if you can just help us understand how you plan to bring incinerators offline over the next few quarters for annual maintenance.

Alan McKim

You know, I don’t have that schedule in front of maintenance. I will tell you that we are extremely busy with our incinerators. We have a solid backlog at our plants and you know, looking out even beyond the first quarter of next year, you know we see some weakness in the Canadian dollar, the fuel surcharge revenues will be less now with the price of crude where it is at the price of diesel coming down, which is certainly good news for our cost side but also good news from our customers side. You know, we certainly continue to see some lingering impacts in the Gulf to our clients and I think those are some of the factors and then you know then as you compare this Q4 to last year, we had a very large event out in California into one of our landfills and coupled that with the large San Francisco spill we had out there, you know, we are not seeing that yet. As I mentioned in my note here there is about $3 million maybe baked into our forecast in Q4. It is still early. We still have a couple of more months but you know we finished October relatively strong and but we are being – we are cautious, and like everybody else is in this market.

Jonathan Ellis – Merrill Lynch

That is great and if you could talk a little bit about your outlook for next year and I know this year you are able to initiate I think you ran a 4.5%, 4.6% price increase in April. I’m wondering – can you talk about what you’re baking in at this point and I realize you still may be in preliminary stages here but even if you can give us a range of what kind of price increases you’re planning to implement next year?

Alan McKim

We certainly have some clients that are coming up on contracts and as I have mentioned in the past you know, our particular focus has been on those clients that don’t receive any kind of fuel surcharge. And you know that is still right out in the forefront of our pricing team here and we believe we can continue to either get customers to accept a surcharge or provide some modest price increase to cover these costs that we all know were taken on. So we haven’t yet firmed up exactly what our pricing percentage will be but that price improvement team is in place working today on that initiative and we expect it to be in place throughout next year to do the same thing.

Jonathan Ellis – Merrill Lynch

And just to clarify there, in light of what is going on in the economic and perhaps some volume weakness at margin in certain of your end markets, would you I guess still expect that pricing would be – would show a positive trajectory next year, i.e., that there would be some increase across the board even in the face of perhaps a little more volume weakness in 2009?

Alan McKim

I don’t think across the board all lines of business is a safe bet at this point but clearly some selective increases where we know we need to and some contracts we know we have to raise and you know, what that ultimately comes out on a percentage basis across the company is to tell because it is still early and we intend to come out with that in March and that would be our time frame to make that announcement again in ‘09.

Jonathan Ellis – Merrill Lynch

Okay great. And just my final question Jim, in light of the fact that the M&A opportunity fell through, what are your intentions with the rest of that callable bonds that exists?

Jim Rutledge

Yes, right at this point clearly with the credit markets where they are right now the limitation that we have in our credit agreement, it is probably we don’t think it’s a good idea right to seek an amendment to be able to do the rest of the callable bonds. That being said, right now we have a mandatory cash flow tender offer out there in accordance with those bonds and we’re and that is $19 million that is presently out there and we’re hearing back from some of holders of that notes that they are perhaps interested. And we are things that we might get maybe at least half, I would say, of them back through that mechanism and that is at a call price of 104, which isn’t too much different from the call price that we could call the bonds at it if we didn’t have the limitation in the credit agreement.

Jonathan Ellis – Merrill Lynch

It will be just half of the remaining $40 million or half of that $19 million?

Jim Rutledge

Half of that $19.

Alan McKim

And it could be more than that. There is interest in it clearly in doing it.

Jonathan Ellis – Merrill Lynch

Great. Thanks guys.

Alan McKim

Thank you.

Operator

(Operator instructions) Our next question comes from Jamie Sullivan with RBC Capital Markets. Please proceed with your question.

Jamie Sullivan – RBC Capital Markets

Hi guys, good morning.

Alan McKim

Good morning.

Jamie Sullivan – RBC Capital Markets

It is impressive that you gave 2009 guidance this early, you know, given the current environment. Just wondering if you could talk a little bit more about some of the moving parts maybe across the segments that make you comfortable with that 5 to 7 top line growth range?

Alan McKim

You know we have spent a lot of time looking at, you know, the impacts of our what a recession could do to our customers. We looked at the verticals we’re in. We took a very detailed approach by industry to look at where we were in ‘07 against ‘07 budget. Same thing with ‘08 and with the expansion that we have now planned for the number of verticals that we are now focusing on we believe we can now grow faster some of those smaller verticals that haven’t had the same kind of focus the seven top verticals we have, the chemical, the petrochemical, the manufacturing, utility, engineering, and consulting, transportation services piece. Those were the keys and so we’re looking at expanding into 12 full verticals and we really believe that you know that there is a lot of market share to be gained both in the U.S. and Canada and that we can – we have a lot of underutilized capacity in our plants. And one of the things quite frankly that we are as a management team looking is we want to be a leader in each one of the lines of business we’re in. So whether it is our clean pack business, or our household hazards waste business or our transformer services business. You know, the lines of business we’re in we want to be the number one player. And when we look at our share by line of business we have a lot of opportunity here and that is where we’re going to put a lot of focus over the next 3 years and I think that is why we feel that we could come out early because we know people are going to be concerned about ‘09 and so we wanted to be transpiring if you would and make sure everybody gets the information at the same time in regard to what our thinking is for ‘09. So I hope that answers your question in regard to what at least what we’re thinking about.

Jamie Sullivan – RBC Capital Markets

Right okay, that is helpful. And just I guess on the Site Services side as well, you still see that as a segment that can grow in the double-digit range?

Alan McKim

Absolutely, you know, there is a – it is a very fragmented market as I mentioned. There is dozens and dozens of small and regional competitors out there. The company has done a tremendous job on the health and safety side. We have now probably the lowest health and safety stats and the lowest EMEA [ph] rating in the industry and when you look at some of these large corporations, they look at that as one of the top decision points of who they do business with and we want to go out there and expand our relationships with our key clients with those great statistics if you would and the great programs we have.

Jamie Sullivan – RBC Capital Markets

Sure, if I could ask one more on the M&A front, if you could, you guys just talk about the one deal that you walked away from. Is that something that you could see coming back into the pipeline and if you can just comment on what the remaining pipeline looks like?

Alan McKim

Sure, I doubt on that one, but I would say that you know, we are in discussions with both small and larger companies out there, you know, valuations have come down. We were competing with some private equity firms in the past and some companies and competing at multiples of 9, 10, 11 times which were way over our price range for times EBITDA and so quite frankly we see opportunities out here at low multiples with a little bit less competition with the credit markets fee and the way they are and we want to take advantage of those, but that particular one is behind us.

Jamie Sullivan – RBC Capital Markets

Okay, thanks guys.

Alan McKim

Thank you.

Operator

Our next question comes from Rich Wesolowski from Sidoti & Company. Please proceed with your question.

Rich Wesolowski – Sidoti & Company

Thanks good morning.

Alan McKim

Good morning.

Jim Rutledge

Good morning.

Rich Wesolowski – Sidoti & Company

Alan or Jim I realize the ’09 guidance may not have been as precise a view as you normally provide early in the year but when you look at the more cyclical industries, the manufacturing, the chemicals, et cetera that you had mentioned, can you reach that guidance if the volume from those industries actually decline rather than a mere slowing of volume in those industries and is that involved in the expectation?

Jim Rutledge

It is – we are early in the budget process, but we know that the manufacturing area as Alan pointed out has been flat recently. So, we are not counting on any big increases in that particular vertical. In the chemical side, I think to the extent there are commodity chemical companies that we are dealing with, yes, we kind of took some of that into consideration that there could be flatness and maybe not as robust as we have seen in the past but again this – we are early in the budget process. We try to come to something as we typically do whenever we talk about guidance what we think is doable. We see a path to getting there. Alan pointed out some of the smaller verticals that we are adding to giving more attention than we have in the past. So, I think all things considered that is the range that we felt comfortable with. But clearly we will be giving a lot more color around that in March as Alan pointed out when we do come with a firm guidance that is post our budgeting period.

Rich Wesolowski – Sidoti & Company

Right, would you expect that you are now enlarged incineration fleet will stay fully utilized during the recession?

Alan McKim

We are thinking that. I mean clearly in the project area. I mean that is the area we are paying close attention to the reasons for delays. Most of the delays that have seen now in our project business have been due to paper work and approvals and things like that but we kind of look at each one of them because that is an area that could represent discretionary spending to some degree, but you know you do have to do some with hazardous material. So, customers in general that are producing them. So, we do – we do believe that we will still have good incineration capacity utilization figures going forward. It is part of the business really.

Rich Wesolowski – Sidoti & Company

Okay, finally could you just give an estimate of your maintenance CapEx and a best guess for cash expenditures for environmental liabilities in an average year?

Jim Rutledge

Yes, on an average year our spending in the environmental area would be in the $8 million to $10 million range for the entire year. We had higher this last quarter, because we did – we finalized a couple of settlements that were in the reserve there. On the CapEx side, our maintenance CapEx is in the $25 million to $30 million range. We are anticipating next year being in the $55 million to $60 million range of spending again as we complete our incineration expansion and some other growth projects that we have planned for next year, for example, cell construction and continuing to internalize our transportation fleet. So, that is generally where we are at. I think beyond next year absent the effect of any acquisitions our spending could probably – would probably come down overall to the more $40 to $50 million range, but of course acquisitions are kind of – we are acquisitive and it is likely to change that formula a little bit there.

Rich Wesolowski – Sidoti & Company

Great, thanks a lot.

Jim Rutledge

Thank you.

Operator

Our next question comes from Ted Kundtz with Needham & Co. Please proceed with your question.

Ted Kundtz – Needham & Co.

Hello Alan and Jim. A couple of questions for you. Have you guys quantified the impact of a oil price change on your business, you know for every $10 change in the price of oil, what that does for you one way or the other?

Alan McKim

You know one of the things that we – with he fuel surcharge that we have, we – that pretty much from an EBITDA standpoint covers us. So, in other words, we have obviously increases in our diesel usage during the quarter due to our transportation fleet and the oil price works into our utility spending, our travel spending, and some of the materials and supplies that we buy. So, the way we look at this is that our recovery fee that we have as part of our revenues, pretty much offsets that. So, really to some degree we are indifferent right now clearly with these changes in the oil price.

Ted Kundtz – Needham & Co.

Okay, so not much of a bottom line impact one way or the other?

Jim Rutledge

Yes, bottom line, I mean clearly it affects revenues, I mean, on the invoices or surcharges. So clearly our revenue has come down but then we have the savings on the diesel usage et cetera.

Ted Kundtz – Needham & Co.

Okay, (inaudible). Does this affect, you know, the thoughts of these captives closing their facilities at all any sooner or later if their fuel charges are changing. One of the economic incentives there is for them to get out of the business and turn it over to you guys. Do you see any change in that thinking and maybe you could update us a little bit on those captives out there?

Alan McKim

Yes, we have seen. I think we are three of the five that I have mentioned, and I still believe there is a couple more that are still on that decision-making process and clearly as natural gas is now down in that $600 to $650 range, I think the pressure is not as great as when it was on the $10 and $11, but fuel costs in general has a big impact on certainly their decision making as well as environmental expenditures on those sites. So, we still think there is an opportunity there both on the short-term on those two and even on a longer-term and I think it is one of the reasons why our utilization is still pretty good this year even with additional 21,000 or so tons that we have added.

Ted Kundtz – Needham & Co.

Can you say what you picked from those folks in terms of capacity or tonnage?

Jim Rutledge

You know, we got one client for example, 20 million pounds. So – so it is quite a bit of material, a lower price material that we are actually using as a fuel supplement too. So, it is lowering our energy cost. So that is one unit that went down that really helped us. I think probably overall maybe about 20,000 tons I would say is probably a good number to use.

Ted Kundtz – Needham & Co.

Okay.

Jim Rutledge

But, we are getting some business.

Ted Kundtz – Needham & Co.

Terrific thank you.

Jim Rutledge

Thank you Ted.

Operator

There are no further questions in queue. I like to turn the call back over to management for closing comments.

Bill Geary

Well, thanks everyone for your call and your questions and for being on the call here and we look forward to speaking with you at the end of the year and talk more about 2009 at that time. Thank you.

Operator

And that concludes our conference call. Thank you for joining us today.

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Source: Clean Harbors, Inc. Q3 2008 Earnings Call Transcript
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