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American Ecology Corporation (NASDAQ:ECOL)

Q4 2008 Earnings Call

February 11, 2009 11:00 AM ET

Executives

Jeff Feller - Vice President and Chief Financial Officer

Stephen Romano - Chairman and Chief Executive Officer

Analysts

Richard Wesolowski - Sidoti & Co

Theodore Kundtz - Needham

Jamie Sullivan - RBC Capital Markets

Steve Welling - Vice President of Sales and Marketing

David Yuschak - Sanders Morris Harris Capital

Tyson Bauer - Wealth Monitors

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Pat McLauchlin - UBS

Operator

Good morning and welcome to the American Ecology Corporation's Fourth Quarter and Full Year 2008 Investor Conference Call. Today's call is being recorded. At this time, I'll like to turn the conference over to Mr. Jeff Feeler, Vice President and Chief Financial Officer. Please go ahead sir.

Jeff Feller

Good morning. Joining me today is Chairman and Chief Executive Officer, Steve Romano; President and Chief Operating Officer, Jim Baumgardner; and Vice President of Sales and Marketing, Steve Welling.

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 materially 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 filings 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 only on such date the 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.

For those joining by webcast, you can follow along with today's presentation. For those listening by phone, you can obtain a copy of today's presentation on our website at www.americanecology.com.

I will begin with an overview of our quarterly and year-end financial results, which were publicly released earlier this morning. After my remarks, Steve will discuss the company's 2009 earnings guidance and capital spending outlook. We will then open the call up for questions and comments.

Overall the fourth quarter of 2008 was more profitable than the same quarter last year despite challenging macro economic conditions. We also posted our fourth consecutive year of record revenue, operating income, and waste volumes disclosed.

I will now turn to specifics. Earlier this morning we reported fourth quarter revenue of $44 million down from $44.5 million in the fourth quarter last year. This decrease reflects lower transportation revenue under our bundled transportation and disposal contract for the Chevron Molycorp project.

Decreased transportation revenue was partially offset by increased treatment and disposal revenue in the fourth quarter of 2008 over the same quarter last year. Base business from recurring customers grew 1% in the fourth quarter of 2008 over the same quarter last year. This reflects continued growth in our waste broker business and strong contributions from other industrial, government, and refinery based business customers.

Growth in these customer categories was partially offset by lower revenue from steel mills and rate regulating customers. Our event business cleanup grew 5% quarter-over-quarter. This increase reflects a continue ramp up of our thermal desorption recycling service in Texas. These events projects are sourced directly from refinery customers and indirectly from third party waste brokers.

Revenue from our thermal desorption recycling service more than offset declines in our private clean-up business. Private cleanup business was down 19% in the fourth quarter compared to the same quarter last year. This reflects reduced shipments from the Molycorp project, which was initially scheduled to be completed this past summer and fewer small cleanup opportunities.

Average selling price for treatment and disposal services excluding transportation was 25% higher than the same quarter last year due to increased thermal processing and service mix variabilities.

I will now break down treatment and disposal revenue for both base and event business by customer categories. For those following the presentation please refer to slide 9. Our refinery business grew an impressive 156% in the fourth quarter of 2008 over the same quarter last year. This growth reflects ramp up of our Texas thermal desorption service, which recycled approximately 4100 tons of refinery waste during the quarter. We also benefited from a refinery soil cleanup project shift to our Idaho facility from Montana.

Our waste broker business continued to grow impressively during the quarter up 27% over the fourth quarter last year. This growth was also primarily driven by the Texas thermal desorption service. Excluding thermal revenue our broker based business grew 3.9% in fourth quarter of 2008 over the same quarter last year. On a sequential basis however, our non-thermal broker business was 2% lower in the fourth quarter of 2008 compared to the third quarter.

Our other industry category includes electric utilities, chemical manufactures, and industrial customers. Treatment and disposal revenue from this category grew 5% in the fourth quarter of 2008 over the same quarter last year, on increased waste shipments from a number of waste business customers.

Our government cleanup business was up 2% for the fourth quarter of 2008, from the fourth quarter last year. Increased shipments under our Army Corps of Engineers contract, accounted for this growth. More specifically Army Corps revenue was $2.4 million, or 5.4% of total revenue in the fourth quarter of 2008 up from $2.1 million or 4.6% of total revenue in the same quarter last year.

During the quarter treatment and disposal revenue from private cleanup event customers declined 19%. This decline reflected reduced shipments from our Molycorp project, the Honeywell project, and fewer small cleanup opportunities.

Molycorp contributed $2.7 million or 6% of total revenue including transportation in the fourth quarter of 2008. This was well below the $6.5 million or 14.2% of total revenue in the fourth quarter last year.

The Honeywell contract contributed $19.7 million or 44.7% of total revenue in the fourth quarter of 2008 up from $19.4 million of 42.4% of total revenue in the same quarter last year.

While revenue was up a greater portion of the revenue was devoted to rail transportation services with lower tons disposed during the quarter. At the end -- at year end Honeywell had shipped approximately 1 million tons.

As disclosed previously up to 75% of the revenue under the Honeywell contract had passed through rail transportation expense. The treatment and disposal component of the Honeywell contract is low margin metals treatment business. Our rate-regulated Richmond, Washington business was down 30% in the fourth quarter of 2008 over the same quarter last year. This reflects a lower approved 2008 revenue base by the State of Washington.

Our steel mill business was down 45% in the fourth quarter of 2008 from the same quarter last year. This reflects a loss of a Midwestern steel mill contract to a zinc recycler in December 2007 and reduced fuel production and waste generation by the remaining mills there.

Gross profit increased 3% to $12.4 million in the fourth quarter of 2008 up from $12.1 million in the same quarter last year. Gross margin was 28.2% in the fourth quarter of 2008, up from 26.3% in the same quarter last year, reflecting lower transportation services.

Treatment and disposal margin for the fourth quarter of 2008 was 50.8%, down from 53.3% in the fourth quarter last year. Gross margin for the fourth quarter of 2008 was boosted by a $230,000 net reduction in our closure post-closure obligation. This net amount includes reduction for Idaho operation as well as our non operating facilities in Sheffield, Illinois and Winona, Texas. Excluding the net gain on these non-recurring closure and post-closure adjustments, the decline in disposable growth margin reflects lower volume and service mix variability

We disposed 260,000 tons of waste in the fourth quarter of 2008 or 13% less than the volume disposed in the fourth quarter last year. This decline was primarily due to the volume disposed in Idaho from Molycorp and Honeywell cleanup projects.

Selling, general, and administrative expenses or SG&A was 9.2% of total revenue for the fourth quarter of 2008 up from 8.7% in the fourth quarter of last year. This 3% quarter-over-quarter increase in SG&A reflects bad debt expense for chapter 11 bankruptcy filings by three of our customers, increased permit and licensing fees, and higher professional services fees partially offset by lower stock and performance based compensation expenses.

Operating income for the fourth quarter of 2008 grew 2% to $8.3 million. This was up from $8.1 million in the fourth quarter of 2007. Our effective tax rate for the fourth quarter was 38.3% down from 42% in the same quarter last year. The lower income tax rate in the fourth quarter of 2008 reflects a reduction in non-tax deductible expenses with larger year end tax provision adjustments in 2007. Net income for the fourth quarter of 2008 was 5.2 million or $0.29 per diluted share, up from $0.27 in the fourth quarter of 2007.

Turning to full year results, 2008 was a record year for revenue, operating income, and volumes disclosed. Revenue for 2008 was 6% to $175 million. This reflects growth in both disposal and transportation service revenue.

Disposal revenue was driven by 10% increase in event business and an 8% increase in base business. Year-over-year revenue growth reflects the continued diversification in our customer base. We grew our waste broker business by 23% or other industry category by 22% year-over-year. Our refinery business rose 19% and our government cleanup business rose by 17%.

Gross profit in 2008 increased 9% to $49.4 million up from $45.5 million in 2007. Gross margin was 28.1% of total revenue for 2008 up from 27.5% in 2007. Disposal gross margin for 2008 was 52.4% down slightly from the 52.6% in 2007. SG&A was 8.5% of total revenue for 2008 down from 8.8% in 2007. This reflects a 2% year-over-year dollar increase in SG&A spending spread over higher revenue. SG&A expenses for 2008 also includes a 129,000 write down in business development cost for an acquisition opportunity that we discontinued during the year.

Operating income in 2008 grew 12% to a record $34.5 million up from $30.9 million in 2007. 2008 net income was $21.5 million or $1.18 per diluted share. This exceeded net income of $19.4 million or $1.06 per diluted share in 2007.

At December 31, 2008 working capital was $37.2 million up from $30 million at December 31, 2007. This 25% increase was driven by a higher operating income and lower capital spending. During the quarter we acquired $2.6 million worth of our common stock under a Board approved stock repurchase program. We exited the quarter with $18.5 million in cash.

From a financial metric standpoint, American Ecology continues to be a waste industry leader. Our return on invested capital for 2008 was 18.7% and our return on assets was an equally solid 17.4%. And we continue to have no term debt. We have a $15 million line of credit with $11 million available. The remaining 4 million is pledged as collateral for a closure and post closure financial insurance obligation. On January 23rd, we continued our quarterly dividend program paying a dividend of $0.18 per share to our stockholders.

With that I turn the call over to Steve.

Stephen Romano

Thank you, Jeff. Delivering a four consecutive year of double-digit operating income growth is an accomplishment of the people who work at all levels of American Ecology can be proud of. This achievement is notable given the macro economic headwinds that we've developed in recent months.

For 2009 we are currently projecting earnings per share of $1.14 to $1.22 per diluted share. This represent up to 6% growth in earnings per share over the 2008 results and operating income growth also up to 6% over last year backing out the one time $0.03 per share benefit to 2008 earnings from reduced closure, post closure reserves.

Our 2009 guidance reflects consideration of current economic uncertainties in both positive and adverse factors affecting our business. In general, we entered 2009 with much greater forecasting uncertainty than we've historically experienced.

From an adverse factor standpoint, we were anticipating decreased near term demand from industrial production and manufacturing. We also project reduced spending on Brownfield redevelopment projects and other discretionary private sector cleanup work based on trends emerging in late 2008 that appear likely to continue for some period. With respect to specific customers, we have not received revised volume estimates from Honeywell on a SA-7 project or awards on other vicinity properties in New Jersey city area.

Customer estimates for the Honeywell SA-7 project consequently remained at 1.2 million tons. At year-end we disposed just over 1 million tons of waste from the site that Jeff mentioned. We are on track to complete the Honeywell project within the court ordered November deadline.

We've grown our third party waste broker base to approximately 30% of our total disposal revenue, primarily by taking market share from competitors. Anticipated decreases in industrial and manufacturing production present a risk to continued growth necessarily particularly for non-refinery waste sources, given the reduced broker business experience in the fourth quarter as noted earlier by Jeff. Sequentially broker business was down 2% from the third quarter moving to the fourth quarter. When you strip out the thermal recycling contribution.

While steel mills only represented 3% of our business in 2008, one of our remaining steel mill customers have switched to zinc recycler. All the steel mills we serve are estimating reduced production which track with national figures. Contribution from the steel industry will consequently be relatively minor in 2009.

On the positive side, we project significant growth in our Texas thermal desorption and recycling service. This new service contributed significantly in the fourth quarter 2008. Our Texas thermal units are on track for processing 2000 tons a month with our target range and we will be continuing to optimize our technology throughout 2009 and are targeting a solid contribution moving into the year.

While a large percentage of our business is represented by government spending, further up side potential clearly exists. We expect shipments from the Army Corps of Engineers program to increase in 2009 from 2008 levels purely as a result of lower fuel costs.

We are also closely watching the economic stimulus package now heading the Conference Committee on Capitol Hill. We understand that both the House and Senate stimulus packages include increased funding for the EPA Superfund program and the Army Corps of Engineers civil works budget which includes the Food Wrap (ph) program. If the law is passed with these measures intact, we would anticipate benefits in 2009 and hopefully beyond.

Finally, our guidance does not factor in any acquisitions. While we have no announcements to make at this time, the company continues to evaluate acquisition opportunities. We're delighted to have Jim Baumgardner back on our team; he is President and Chief Operating Officer. Jim's financial and strategic business management experience combined with his acquisitions background is a great asset for our team.

With no debt, a strong balance sheet, and a strengthened senior management team, we believe we're well positioned to evaluate and execute on acquisition opportunities that present themselves.

Looking longer-term, we're excited about growing our Texas Thermal Desorption and Recycling business and are actively evaluating placement of a similar unit in Nevada in 2010. We are also optimistic that the change in Federal Administrations and Congress will reinvigorate the nations commitment to the superfund and other cleanup programs including those that are driven by enforcement beyond the current and being considered stimulus package.

As the nation's economy recovers we believe American Ecology's comprehensive service offerings, rail assets, recent infrastructure upgrades, and unique permit capabilities will position us for expanded opportunities.

Moving to capital spending, we invested $13.6 million in 2008 in capital projects all using cash on hand. This provided new landfill capacity at our Nevada and Texas sites as well the infrastructure required house a thermal desorption unit in Texas.

We project 2009 capital spending to be in the $11 million to $12 million range primarily for expanded disposal capacity at our Idaho Texas and Washington sites to meet demand. In addition to ongoing equipment replacement, we also plan to upgrade waste storage capabilities at our Texas facility.

Regarding dividends, we intend to continue the $0.18 per share quarterly dividend through 2009 subject to applicable bank covenants and future Board review.

In closing 2008 was another record year for American Ecology. While we enter 2009 with more uncertainty than we have seen in previous years, we believe we can continue to grow in the current challenging economic environment, while also positioning ourselves well for future growth.

We'd now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take you first question from Rich Wesolowski with Sidoti & Company.

Richard Wesolowski - Sidoti & Co

Thanks, good morning.

Jeff Feller

Good morning Rich.

Stephen Romano

Good morning Rich.

Richard Wesolowski - Sidoti & Co

I have heard some of the broader waste companies talk about a big pull back in special waste volume, which I think is about the closest thing to what you do. By what degree has your outlook for the base business changed, since the third quarter call?

Stephen Romano

I think the best way to look at that is to look at some of the different sectors. Some things are looking positive, some things are looking likely down. If I can I'm going to ahead and go through it piece-by-piece. As I mentioned, the steel mill production is down. We recently saw a letter from the Steel Manufacturers Association to the President indicating a reduction in the range of 50% for national steel production. That's certainly going to effect us.

We talked with the broker business a little earlier. That is an area that we've grown substantially in recent years and I did note that we saw a 2% of sequential decline when you strip out the thermal desorption contribution.

So we did see some softness developing in the fourth quarter and we have seen that continuing into '09 so far this year. With limited visibility on the generators, because we are serving the broker as our customer, we are taking a conservative outlook on the broker business. The other area in general with reduced industrial production, chemical manufacturing, our other industry category is an area where we are projecting that base in the general economy, there maybe some softness.

On the refinery area, on the strength of our newly introduced thermal desorption service, we do see a solid pipeline there. We believe that that's an area we can continue to grow as mentioned during my remarks earlier.

There is a certain amount of government business, which is non-based, which is non-event. We believe that continue being solid. And our rate regulated business in Washington will be solid. So perhaps the best way to look at it is that on the base business side it depends on the kind of waste generator we're talking about.

Richard Wesolowski - Sidoti & Co

Okay, thanks for that. I got a little turned around when you were giving your stats on the broker business with and without the refinery thermal. By my math, you had a 2.9 million increase sequentially in your broker T&D revenue, and yet you had $2 million of thermal contribution, is that correct?

Stephen Romano

I'm going to ask Jeff to go ahead and go through a number, a bit on the -- on our broker business and taking out the thermal piece of it.

Jeff Feller

So your numbers were going sequentially Rich.

Richard Wesolowski - Sidoti & Co

Right. I was saying you're up about $3 million, yet you had a $2 million increase in the refinery thermal?

Jeff Feller

That -- what we're showing on a numbers is that sequentially we're only up about $700,000, which 2 million of that is related to the thermal business.

Richard Wesolowski - Sidoti & Co

Okay. By my math if you have 1.2 million tons from Honeywell, that will leave about 40 million bucks in revenue left to be recognized. Is that reasonable?

Jeff Feller

That is reasonable. Based on what we know today, as mentioned during my -- in the remarks Rich, we do not have an updated number from Honeywell. So its an area, I'm going to put that in the uncertainty category.

Richard Wesolowski - Sidoti & Co

Right, okay. Oil storage, is that a big premium these days. Companies are leasing storage space even in offshore tankers. Does that mean that tanks are filled getting cleaning less often. Is that a positive or negative for your business?

Jeff Feller

I will ask Steve if he has any comment. You probably have better information than we have on some aspects of what people are storing. So we appreciate the comment, but Steve you want speak about it a little bit?

Stephen Romano

That something we're going to have to check into. We're basically dealing with the refineries and on tank cleanups, but I don't -- I haven't heard of the driver like that. So that's something we'll have to checkout.

Richard Wesolowski - Sidoti & Co

Okay.

Stephen Romano

If we have the opportunity we will check it out.

Richard Wesolowski - Sidoti & Co

And then lastly the installation of the centrifuges of the thermal facility, did that have any effect on the annual capacity?

Jeff Feller

Not really. We are targeting a 2000 ton a month range is what we hope to get to. We are currently processing in that range, and so we've not changed our estimates for target volume.

Richard Wesolowski - Sidoti & Co

Thanks a lot.

Jeff Feller

We'll continue to look to optimize the equipment moving forward, but that's our planning targeting for this year.

Richard Wesolowski - Sidoti & Co

Perfect.

Operator

Will take our next question from Ted Kundtz with Needham.

Theodore Kundtz - Needham

Good morning Steve and Jeff.

Jeff Feller

Good morning Ted.

Stephen Romano

Good morning Ted.

Theodore Kundtz - Needham

Could you comment a little bit on the pricing environment. Are you seeing any pressure there at all?

Stephen Romano

Not really, no. You can see in our numbers they are actually pricing average price per ton was up. So, --

Theodore Kundtz - Needham

Okay. That's good to hear. And could you talk a little bit about maybe some other potential new projects that you are seeing out there. I know we have talked a little bit about the GE project, Hudson River that might be back in play. Could you kind of give us an update on that one? Anything else you are seeing out there?

Jeff Feller

Well, with regard to the Hudson River project, we are not considering that in play necessarily. That contract was awarded to Waste Control which is basically high volume low margin quickly moving pilot project that will be going later this year. We have provided our price to the customer, General Electric as a back-up source. If that becomes something logistically where we can serve. Whether that opportunity comes up or not would be completely speculative. But we are positioned and provided that pricing if it is something for our services or value.

With regard to the other clean up projects, as you know we tend to stay away from being very granular about specific projects but I would like to comment in general, expand the comments of my remarks about the private and governmental cleanup. On the governmental clean up side we see opportunity for growth and potentially substantial growth depending on the stimulus package.

On the private side it's a different outlook. We have seen our softness in the number of opportunities that have come up new, short-term cleanup opportunities in the private sector side. We've also seen while the overall pipeline for private cleanups remain healthy with some solid large long-term projects, we've seen the delays from the projects that we thought might have started moving in late '08 or in '09. We've seen a number of projects move backwards. That falls within my general comment that where there is a discretion on the part of a company to delay a cleanup project we are seeing that.

We are also seeing that Brownfield redevelopment projects where presumably the cleanup would be driven by a real estate redevelopment project that given the current real state climate it's no great surprise to us if those kinds of projects are also tending to move backward.

So while the overall pipeline remains healthy and we tend to manage the business for the long term and we believe the long term pipeline is good and great opportunity across the industry, at least moving into the first half of 2009 we are recognize this postponement in a number of areas and that's reflected in our guidance.

Theodore Kundtz - Needham

Okay. And just final question on the desorption unit. You've mentioned you are at 2,000 tons per month on this right now?

Jeff Feller

We're right now operating in that range. That's correct.

Theodore Kundtz - Needham

Okay. Do you expect and that will be the range that's consistent, is that kind of full utilization, does that reflect where you think you will be at for the year?

Jeff Feller

That reflects our target net that's what is gone into our numbers. We will always challenge ourselves to do better. One general comment I will sort of make about the throughput capability is, we will be taking different kinds of waste streams, different levels of moisture content, different time frames are required to process material when you change from one waste stream to another that leads to some downtime. So when one looks at the capacity of the technology, it's a different number if you are considering multiple waste streams versus one heterogeneous waste stream that would be continuously throughput.

Now we believe best often we are doing which is having the capability to serve multiple customers with different kinds of waste streams that would bring margins that gives us an opportunity to maximize the margins that are delivered. That point to a fact what the throughput is and we're still in a learning phase. We're comfortable with the 2000 ton a month target and we'll challenge ourselves and continue to report as we move through the year.

Theodore Kundtz - Needham

Okay. Can you quickly comment on pricing there Steve?

Stephen Romano

Pricing has generally been in the $400 ton plus range sometimes better than that, sometimes little lower than that. In order to win new customers we're not averse to competing aggressively.

Theodore Kundtz - Needham

Okay. Thanks very much.

Operator

We'll take our next question from Jamie Sullivan with RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

Hi, good morning.

Stephen Romano

Good morning Jamie.

Jamie Sullivan - RBC Capital Markets

Question on the discretionary cleanup projects and some of the comments there, just wondering if you could characterize the business today on how much is coming from what you would call discretionary and if you give a little bit more detail on that, does that mean that they have discretion on the timing and that they are expected to be done or this work could be cancelled altogether?

Stephen Romano

It really dependent on the individual project. In general the projects we are tracking our pipeline, these are project that will happen. It's a matter of when and the discretionary nature could be for a variety for reasons, it could be a commercial redevelopment, a Brownfield redevelopment where people are looking higher and better use of under utilized property. It could be something that is expected to be cleaned up overtime as part of the corporation managing its own balance sheet and managing its contingent liabilities that in the time of constrained cash flow. There, it maybe prudent for a company to decide that they know they are going to clean something up, but if they're not being told look you got to get it done this year, they might decide the cash flow is better directed elsewhere and it would be next year.

Those kinds of decisions that are made. To the extent thing are driven by court orders, regulatory enforcement actions, things of that nature or compliance orders with the administrative agencies. Those things tend to be in a timeline and are less likely to be pushed backwards. So it's a mixed bag, it depends on individual project, but there are -- there is a considerable portion of the private cleanup opportunity list that does involve discretion in many cases.

Jamie Sullivan - RBC Capital Markets

Okay and on the Brownfield redevelopment, I guess my understanding that was a relatively small piece of the business and expectations were pretty low. Are you seeing additional delays in cancellations there, it seems like those could be projects that are just put of altogether?

Stephen Romano

It really depends on the project and those can be substantial contributors. In the first quarter of 2007 for example, we had a very, very large Brownfield project that came up -- that came up rather suddenly. There was a property somebody wanted to develop, the owner was in no terrific hurry at that point to get it cleaned up but they had a buyer on hand and they turned to it and they got it cleaned up and it was a substantial contributor to our first quarter results in 2007.

I mean that kind of -- that is some times the nature of it. In other cases there were projects we are tracking where there were plans to put up -- to go to rather major real state redevelopment projects and those kind of things in this market are likely to be delayed.

It really again depends on the specific project. We at any one time following dozens and dozens of projects and so we are really not in a position to make any sort of more granular statements about the specific ones we're looking at, because they are across the board in terms of the nature of the opportunity.

Jamie Sullivan - RBC Capital Markets

Right, okay. Then on steel just wanted to clarify, was there -- there was a contract in late '07 that was lost, was there another contract that went to a competitor?

Stephen Romano

I'll have Steve Welling to clarify where we are on that.

Steve Welling - Vice President of Sales and Marketing

Not affecting any of the results you are looking at now but going-forward we do have one customer that has indicated they will be switching to recycling option later this quarter. And however the other mills that are currently shipping to us are reporting down as much as 50% and that's consistent pretty much nationwide in what we call the mini mill industry which are the steel mills that actually melt scrap and they have a furnace that collects bag house dust, which is what we get.

So, approximately 2% of steel production is what captured in the bag house service a direct correlation of how much waste we would get when production is down 50%, pretty much guarantee that the waste generation is down 50% also.

Jeff Feller

The other thing I would note to it, the customer that is utilizing zinc recycling, that there also its not an entire loss of customer. There will still be knock out chamber material and other waste that we would continue to get. And fluctuations in zinc prices where zinc get down substantially that could also result in changes. But as we currently are viewing the year reflected in our estimates is the decline based on the factors Steve's noted.

Jamie Sullivan - RBC Capital Markets

Okay. And then I'll just squeeze more and get back in the queue. On Honeywell, were those estimates reiterated from the client or the estimates that you were expected to be updated, you just haven't received the update yet?

Jeff Feller

We've not received an update. Essentially what they've done is, the customer has indicated that their numbers have not changed.

Jamie Sullivan - RBC Capital Markets

Okay.

Jeff Feller

And we'll be kept informed if the process moves forward. As in the past we respect our customers, we respect Honeywell as the proper source for new numbers.

Jamie Sullivan - RBC Capital Markets

Right. That's what they usually do in annual update for you guys, is that what happened?

Jeff Feller

They may or may not. This year there was not a year-end revision and we honestly do not know what the final number would be and that is reflected in the uncertainty in our numbers.

Jamie Sullivan - RBC Capital Markets

Okay. Thanks.

Operator

We'll take our next question from David Yuschak with SMH Capital.

David Yuschak - Sanders Morris Harris Capital

Hey, good morning guys. As far as your guidance for the year, I was kind of surprised it was as tight as it was given the kind of uncertainty you've had and the current first half difficulties compared to the first half last year. But I was kind of curious in your Honeywell, it seemed to me in your guidance, Honeywell contribution has been down from 2008, is it materially so or not?

Stephen Romano

It will definitely be down in 2009 depending -- based off the current estimate. Since its unknown as to what the ultimate volume is going to be. Its hard to say if we're going to be up or down with regard to 2008.

Jeff Feller

Perhaps a way to think about this is that every year as we enter our budgeting we generally have in the range of 25% of our overall businesses related to non-specific government and private sector events. This year that uncertainty is compounded by some remaining uncertainty about the Honeywell project as well as the factors that we talked about on the other private cleanup opportunities. So could we adopt a broader guidance range, I guess we could have. Its simply something its factored into the overall uncertainty and that's our best current guess as to where we'll wind up.

David Yuschak - Sanders Morris Harris Capital

But I think it also speaks to the confidence you have in, what other business you have out there, because the event business could be still variable in this economy as far as discretionary spending. That's kind of what I'm suggesting is that you got some major event business that will be down versus a year ago, profitability average down, but yet the underlying base business here is kind of suggesting is, acting as a very strong recession resistant component of your guidance. That's kind of -- is that a fair statement or not?

Jeff Feller

I'll take that as comment on our business Dave and we believe our guidance again is our best guess as to where we will wind up for the year.

David Yuschak - Sanders Morris Harris Capital

Okay.

Jeff Feller

Taking all factors into account.

David Yuschak - Sanders Morris Harris Capital

Now as far as the SG&A expenses, how much was the charges for the bad debt on the bankruptcy?

Stephen Romano

We had about a 140,000 that is typically reserved for those three customers.

David Yuschak - Sanders Morris Harris Capital

Okay. And are those customers that are relatively small then I guess, is that something that you would not expect them to be back doing business with you?

Stephen Romano

No, they actually intended to be a larger customers that claimed for Chapter 11 bankruptcy protection. NOIC is a larger customers that is more in their side of the business. For us they're good base business customers and we expect to continue to do business with them on a post bankruptcy protection level.

David Yuschak - Sanders Morris Harris Capital

Okay. As far as you mentioned your pipeline, business still looked very good. It has been stretched out. Can you give some senses as to these risk business isn't going to go away. You're not seeing any kind of cancellations of projects for whatever reason versus just a stretch out?

Jeff Feller

It's a stretch out. We are not seeing any projects of substantial magnitude simply coming off the table. We maintain our long-term and short-term tracking list for projects and what we do is we every month we look very carefully at the short-term opportunities and every quarter we look at the longer term opportunities and we've simply seen a number of the frankly sizable and exciting projects moving to the -- move into our longer term tracker and that's a part of what advised our guidance.

David Yuschak - Sanders Morris Harris Capital

Okay. That's all I got. Thanks

Operator: We'll take our next question from Tyson Bauer with Wealth Monitors Incorporated.

Tyson Bauer - Wealth Monitors

Good morning gentlemen.

Stephen Romano

Good morning.

Tyson Bauer - Wealth Monitors

A couple of quick questions. One, regarding Honeywell under what you know as of today, how many funds of the waste do you have left to dispose under that contract?

Jeff Feller

According to what the numbers Honeywell has released, there would 200,000 tons, 1.2 million as their last estimate minus the million we've disposed off.

Tyson Bauer - Wealth Monitors

Okay. So you did how much in '08 total?

Stephen Romano

We did approximately 400,000 tons in '08.

Tyson Bauer - Wealth Monitors

Okay. So what you announced today would be roughly half and you would have that done before November, are you anticipating completing that earlier or will it spread out all the way to the completion date in November.

Jeff Feller

If the number doesn't change it would likely move a pace to earlier days.

Tyson Bauer - Wealth Monitors

Okay. You obliviously got to have a gut feeling on this being on sight and looking at the, I would assume a hole in the ground. Is that your gut feel that there will be change, we may not know the magnitude but usually initial projections are fine tuned at some point in time

Jeff Feller

My gut feel is that Honeywell getting in to an airplane and coming out here and grabbing me by the throat and asking me to please respect their right to provide those numbers. And so I respectfully I'm going to stay clear of commenting on that.

Tyson Bauer - Wealth Monitors

Okay, that's fine. On January 14th, WCS got their final approval for permit expansion and license in Texas. For AB&C waste from Vermont in Texas which in itself doesn't really impact you directly, what is interesting is their agreement with URF, is this a step on their part in talking to their management where they are looking also to increase disposal sales to be more competitive and take more waste from the core business as they are one of handful of people who can do core business?

Jeff Feller

WCS has been competing for that same core business as long as we have so, we don't really see anything recent changing, anything. It's our company energy solutions and waste control especially if all have contracts and take those raw materials have been taking it for some period of time. Nothing in the new permits change that relationship that we can see. Primarily what those new permits do is put waste control specialists in a position to compete directly with energy solutions. We've being competing with them all along. These permits don't change that.

Tyson Bauer - Wealth Monitors

Okay. And is there any further updates you can provide on your own permit expansions that you have received or going after in the current year?

Stephen Romano

I would comment in Idaho, we had expanded our permit capabilities in May of last year to increase the types of radio active materials we can take under the NRC exempt category. Those generally are private sector clean up jobs or some governmental opportunities but generally those are private sector and those would form a category of the greater uncertainty on timing with some of those likely being pushed back to out years.

Tyson Bauer - Wealth Monitors

Have you had success in garnering volumes from those permit expansions or is there still a conflict on how energy solutions has developed their contracts with their customers that is making it more difficult for you?

Jeff Feller

We have taken some waste not material volumes but we have taken some waste and I am not going to comment more than that because we continue to compete actively.

Tyson Bauer - Wealth Monitors

Okay, the potential obviously you must know some of the provisions in the stimulus bill from both the House and the Senate side. Can you bracket what that could or may mean for you maybe on the low-end or the high-end, just to try to quantify something?

Jeff Feller

I think its premature to say how much might come our way but what I can share is what the, what is in the bills right now. Some of these things have direct -- potentially direct effect on us, others would be more tangential and I will just walk through it.

And this is actually from last nights read of the bill, let see under the Army Corps of Engineers Food Wrap (ph) program there is a $100 million added for the Foods Wrap program in particular in the Senate bill. There is also a large increase in civil works budget for the Core of Engineers on the house side of non-specific to Foods Wrap but Foods Wrap is part of that.

On the superfund side for EPA the Senate version has $600 million in additional funding for the houses material superfund, the house version is $800 million. The EPA leaking underground storage tank program both version add $200 million. Those are programs that would be direct potential contributors to what we do and of course most directly Foods Wrap.

The intent in all of these is that the funding being directed to ongoing projects. There is instinct language also in EPA superfund addition that has limited the government program oversight and support to 2% of that additional $600 million showing up in the Senate bill. But what was interesting is that Congress was actually indicating how much could be reserve for overhead purposes if you will.

Department of Energy side, it has not been a significant business for us but there are substantial increases there and there maybe opportunities for us to all participate there. For the non-defense cleanup, the Senate version adds $483 million and on the department of Energy Defense cleanup, which is essentially nuclear weapons related to that adds $5.5 billion.

There is also some additional funding to other agencies that we've noted and highlighted, they are little more obscure and I am going to just keep those to my thoughts on the potential that are our fine competitors maybe looking at the unit today. I am sure they've seen the other ones.

Overall we see the Senate totals about little under $7 billion for this spending and we take that as a general indication that both the stimulus package and in general for the future of this administration and the current Congress and increased emphasis on internal restoration work and typically because we're at the end of the chain at the disposal side. And as in base closure work, and other kinds of clean project we're sort of at the end of the chain for the flow of the money. So, we're hopeful that this would represent opportunity in 2009 and beyond.

Tyson Bauer - Wealth Monitors

Okay, given the time table getting approved, getting appropriated, figure out where the money is going to go, where you are in that segment, and I'm guessing these numbers are over multiple years as it seems like a lot of the stimulus bill is, this isn't something that's going to have an immediate impact, its going to be certainly back late '09, more likely even in the out years?

Stephen Romano

I'm not sure that's right. I mean actually the wording of the bill, suggest that this is money they want to spend as soon as possible.

Tyson Bauer - Wealth Monitors

Okay, that would be your first. Thank you.

Operator

We'll take our next question from Al Kaschalk, Wedbush Morgan.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Thank you. Good morning guys.

Stephen Romano

Good morning, Al.

Jeff Feller

Good morning.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Steve, I was wondering first if you could give us a little bit of quantification around terms that you used to describing business activities. I think the words that you've used solid, softness, and weak, is it fair to say that plus 10, down 5, plus 5% range would describe softness and weak would be below 10%?

Stephen Romano

We really not going to zone it in that closely Al, we're going to sort of leave it to others to draw those kinds of conclusions. Now it's varies by category. We're just not going to get that granular.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Alright then based on your comments and guidance. It looks like your operating profit should be flat year-over-year based on the information you have provided on Honeywell. What are you thinking about in the first half '09, from operations given the number of railcars you have on the business?

Stephen Romano

We are projecting the upper end of our range up to 6% growth in operating income for the year. So that is our-- that is what we're targeting. We're basically targeting some essentially flat to a 6% growth within the range. I am sorry the other question about Honeywell.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

I didn't follow that, because if you back out, which is you get to 6%, but it sounded like you needed some events to happen to get to your targeted operating growth?

Stephen Romano

We do as we do every year. I mean every year we have about 25% of our business in general comes from event projects many of which emerged during the course of the year that aren't even known when we put together the budget. So that's simply an inevitable part of this business not just for our company, but for any hazardous waste disposal company. And the band of where we form that range reflects some of the uncertainty for Honeywell as well as other private sector cleanup jobs.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

I understand the 25%. I'm switching to Honeywell on the railcars. My question is if volumes are expected to be down you only have 2000 left based on what you know. What do you have on your guidance for Honeywell if its been 50% of forward historical numbers going forward? Secondly I understand railcars come off at least mid year 2009, what type of volume or utilization rates do you to expect in the first half of '09 to help us gauge the operating results of the business?

Stephen Romano

We expect good utilization for the railcars through the time period that they're currently under lease. We have a number of cars that do come off this summer. We're currently running the same 541 railcars in our fleet that we announced when we had our third quarter call. So there's been no change in that. We've had good utilization on railcars. We expect to continue to. There will be decisions that will need to be made this summer as to whether or not those railcars go back at the end of the lease period or if we win other event jobs or there is an increase in Honeywell volumes would lead us to hold on to those cars and the decision we made then. And perhaps the right general comment to make is that we'll continue to right size our rail fleet based on need and we'll track it very closely.

We also have been successful at putting our railcars to work on several Core of Engineers projects doing the past year. We've been commended for extra performance in providing that added service to the core where it's a while for us to get that opportunity to bundle projects to them. In fact it gives us another outlet to be able to keep those railcars busy. You're correct that the utilizations is important to us to reach our goals and it is something that (inaudible) sitting with us here today understands it's -- looked at things to be concerned about.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Can you give us how the first month of '09 has been in terms of that plan from what you commented on Q3 of '08?

Stephen Romano

No we'll talk to you about that beyond the general comments I've made. We'll talk more specifically at the end of the first quarter. I have mentioned and amplified that earlier, we have seen and this is a qualitative comment that we have seen a continuing trend for these discretionary clean up projects being pushed back a bit and first some softness on the industrial manufacture and production seen through brokers.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Is it possible to give us the number of shares bought back on an average price during the quarter?

Stephen Romano

We're not disclosing that, because we're still active in the trading program. As Jeff mentioned we've purchased the dollar amount. The $2.6 million has been expanded and that is essentially --

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Steve, I understand, but you'll have to disclose this in the K right?

Stephen Romano

That's correct and we'll file the K later this month.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

And you cannot provide that information right now?

Stephen Romano

We were choosing not to, because we're still active in the market we reported when we filed the K.

Al Kaschalk - Wedbush, Morgan Securities, Inc.

Thank you.

Operator

We'll go next to Pat McLauchlin with UBS.

Pat McLauchlin - UBS

My question has already been answered. Thank you.

Operator

We'll take a follow up from Rich Wesolowski, Sidoti And Company.

Richard Wesolowski - Sidoti & Co

I was on mute. If you decided to install another thermal unit in Nevada next year, would you plan to have an operating agreement similar to the one you have in Texas, or would you do it alone?

Jeff Feller

We still haven't made those kinds of decisions yet, Rich, it's something we're actively evaluating.

Richard Wesolowski - Sidoti & Co

Okay. Thanks again.

Operator: And we'll take a follow up from Jamie Sullivan, RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

Hi. Just wondering what assumptions should we for the rate regulated business should we expect flattish from now in '09?

Stephen Romano

Expect slightly up. We entered a new six year rate agreement in the State of Washington that began during 2008. It provided for, basically, inflation escalators moving up. So our rate base requirement is slightly up. So it'll be... I would generally view it as flat, but it will be a bit on the positive side.

Jamie Sullivan - RBC Capital Markets

Okay. And under the thermal where you're taking different kinds of waste, what are the lead times you get, what kind of visibility do you have for utilization of the...?

Steve Welling

A lot of the opportunities are 2 to 3 weeks out. I mean it is the short lead time. We're working with refineries trying to get better handle on when projects are upcoming. But what will happen is, we might know the project three months from now but most of the refineries will still put those out for bid on a short lead time. So in terms of actual awards and planning it's 2 to 4 weeks out.

Jamie Sullivan - RBC Capital Markets

Okay. Thanks. And then on, I guess just your general view on capital with over 80 million in cash, you have some room on the share repurchase program. It sounds like you're increasingly looking at acquisitions, is there a preference for where the cash gets used?

Stephen Romano

I guess, within the general answer which you will of course understand is where it best serves our shareholders. If we are keeping cash, we do have a cash balance now that could be productively used in acquisitions. So, we can find an accretive acquisition to pursue. It's a good use for the cash.

Jamie Sullivan - RBC Capital Markets

Okay. But you intend to execute the full repurchase program?

Stephen Romano

Not necessarily. It depends on pricing.

Jamie Sullivan - RBC Capital Markets

Alright. And how about on the M&A pipeline, is that getting better and if you can just remind us what types of things you are looking at, things that drive more volumes to existing assets, new waste streams, some color there would be good?

Jeff Feller

Sure. The kind of things that really interest starts and there are variety of things that we have looked at, some things -- things have a way sometimes of coming back. But we are looking at assets that could either be disposal facilities or things that re-dispose facilities or that are other kinds of waste treatments that fit with our adjusting customers base. So we're looking in there and have some radioactive waste area sticking to our core businesses is the area that we would look to expand through acquisition.

Jamie Sullivan - RBC Capital Markets

Okay. Thank you.

Operator

(Operator Instructions). And we have no further questions at this time. I would like to turn the conference over to Mr. Steve Romano for any additional or closing remarks.

Stephen Romano

I'll just thank everybody for taking time today to join us and wish you a good day. Thank you very much.

Operator

Ladies and gentlemen that does conclude today's conference. We appreciate your participation. You may disconnect at this time.

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