Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

William J. Geary - Executive Vice President and General Counsel

Alan S. McKim - President and Chief Executive Officer, and Chairman

James M. Rutledge - Executive Vice President and Chief Financial Officer

Analysts

Rich Wesolowski - Sidoti & Company

Ted Kundtz - Needham & Company

Jonathan Ellis - Merrill Lynch

Lawrence Solow - CJS Securities

Al Kaschalk – Wedbush Morgan

Jamie Sullivan - RBC Capital Markets

Vito Menza - Sandler Capital Management

Robert Littlehale - Bear Stearns

Clean Harbors, Inc. (CLHB) Q4 2007 Earnings Call February 27, 2008 9:00 AM ET

Operator

Good day everyone and welcome to Clean Harbors’ fourth quarter and year end 2007 conference call. (Operator Instructions) I would like to turn the call over to Mr. Bill Geary, Executive Vice President and General Counsel of Clean Harbors.

William J. Geary

Good morning, everyone. Thank you for joining us today. 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 I 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 fourth quarter and full year 2007 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 February 27, 2008. Information on the potential factors and the detailed risks 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 will be filed with the SEC no later than March 14, 2008.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in our fourth quarter and year-end 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 the acronym 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 today’s fourth quarter news release. A copy of this release can be found on our website www.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 Mr. Alan McKim for our quarterly review.

Alan S. McKim

Good morning everyone. 2007 proved to be another record year for Clean Harbors, as we carefully executed our growth strategy we built momentum as we moved through the year and capped it off with a strong performance in Q4. Since this is our year-end conference call, allow me to provide a quick recap of 2007.

During the year, we improved utilization at our extensive network of treatment disposal assets that generate strong sales growth and profit leverage. We continue to prudently manage our operating cost to deliver solid EBITDA growth. We implemented price increases across many of our service lines to better counter outside cost pressures we’re facing.

We expanded our large and diverse customer base as we continue to increase our brand recognition nationwide. We opened up eight new site service locations in the United States. We deepened the breadth of our management team with several key executive hires in areas such as human resources, business development and vertical markets.

We completed the acquisition of Ensco Caribe, an environmental services and emergency response company based in Puerto Rico, and we successfully integrated the Romic asset acquisition, a strategically important acquisition that gave us considerable presence in the drum and small container market on the West Coast.

And finally, we planned diligently for our future growth by launching several key capital projects including throughput capacity expansion at a number of our commercial incineration facilities as well as the construction of a new solvent recovery plant.

Clearly, 2007 was a busy time for all of us. We are proud of our accomplishments as an organization and none of those would have been possible without the exceptional team of people we have in place here at Clean Harbors. Once again, it was their hard work and dedication that ultimately translated into another year of record results for our company.

Turning back to Q4, quarterly revenues came in at a record $257.7 million, which is up 11% over Q4 of 2006. We delivered solid results across our operations with steady contributions from both our technical services and site services business segments this quarter. We generated strong EBITDA growth of 20%, bringing our EBITDA to $37.6 million this quarter.

Now let’s discuss some of the growth drivers for Q4. Tech services delivered strong year-over-year growth in Q4 as the overall demand environment for our disposal facilities remained healthy.

Overall utilization at our incinerators came in at 95% for the fourth quarter, despite scheduled downtime for maintenance that was performed at some of our facilities, and as most of you know, running at such high levels is optimal for both revenues and profits as it enables us to improve the mix of materials we are incinerating and increasing our margins.

Our U.S. incinerators ran at nearly full capacity and even in Canada where our incineration has slowed in recent quarters due to above average volumes of highly corrosive materials, we still produced utilization rates in the mid 80s. And I might add that we renegotiated higher prices for that corrosive material burned, thus allowing us to recover some of the margins we lost at that facility. All in all, it was a great quarter from an incinerations perspective.

Turning to our landfills, volumes reached seasonally low levels typical for the final quarter of the year and remains essentially flat year-over-year. Although, pricing remains fiercely competitive in the landfill sector, we continue to see a considerable pipeline of opportunities. We are continuing to strengthen our logistics capability to be even more competitive in the space.

Turning to Site Services. Our Site Service business generated close to $74 million in revenue in the quarter driven by growth in our core industrial cleaning and maintenance projects, as well as remediation and environmental construction services from our petrochemical chemical, specialty chemical and refinery clients.

For the quarter, approximately $4.5 million of our Site Service revenue was related to emergency response and project revenue. The majority of which was associated with the clean-up effort following the Cosco Busan’s oil spill in San Francisco Bay last November.

We frequently asked by investors about our emergency response projects. And I think it’s important to point out that most of our growth in Site Services is generated from our core industrial cleaning and maintenance work. With the emergency response and small events typically accounting for less than 10% of our total Site Service contribution in any given quarter. In Q4, it was about 6%, for 2007 in total it was only about 2.5%.

Our focus within Site Service is on geographic expansion. In Q4, we opened a new service center in Phoenix, Arizona bringing our tally of new service locations opened this year to eight and exceeding our goal of five to six service centers in 2007. We continue to expand our reach nationwide and we’re now far beyond our traditional stronghold in the Northeast corridor. This year, we entered previously under-penetrated markets in the Pacific Northwest and in the Southwest. Our Site Service strategy is paying off.

New branch locations not only generated field service and clean up work in 2007, but more locations afforded us the opportunity to cross-sell our Tech Services and generated more volumes for our disposal facilities. We will further broaden our presence across North America in 2008, by opening additional Site Service offices.

While growth continues to be a paramount to our success, Clean Harbors is an organization that is as focused on the bottom line as it is on the top line. We’re still facing increased expenses and pricing pressures from many goods and services we purchase, as well as rising labor, healthcare and insurance cost.

We sent to all our customers a price increase letter this past month and intend to increase our prices across many of our lines of business on average of 4.5%, effective April 1. We continually closely manage our operating cost and have many initiatives underway to help in this area. But a price increase is necessary for us to offset our cost pressures and improve on our margins.

An example of driving costs out of our business is outside transportation. We continue to hire drivers and expand our fleet of vehicles. We saw the fourth quarter outside transportation spend at 6% of sales and we can expect to improve in this area in 2008. We’ve also talked in prior calls about our success in addressing the rise in cost of fuel with surcharges and we’re continuing to push forward with that program.

Allow me to switch gears at this point and share with you some more detail on the acquisition that we announced this morning in conjunction with our earnings release. We signed a definitive agreement to acquire two solvent recycling facilities and the businesses associated with those facilities in Chicago, Illinois and Hebron, Ohio for $12.5 million in cash, plus the assumption of approximately $3 million of environmental liabilities.

We are acquiring these sites from Safety-Kleen Systems and as a result have formed two new entities within our organization, Clean Harbors Recycling Services of Ohio and Clean Harbors Recycling Services of Chicago. In 2007, these two solvent recovery facilities generated positive EBITDA and approximately $16 million in revenue. The closing of the acquisition is subject to certain conditions, including the receipt of certain government approvals.

We anticipate receiving these government approvals and closing the acquisition by the end of March. So, why the emphasis on solvent recycling. Simply put, we believe that solvent recovery services will provide a good source of growth in the coming years. As the costs of solvents continue to rise, companies who use solvents are turning to recycling spent solvents for reuse.

In acquiring these two recycling facilities, by constructing our own solvent recovery plant at our El Dorado location, we are now better positioned on a national basis to offer our customers a broad spectrum of choices for addressing their solvent waste streams, thus enabling us to capture the growth we are seeing in this marketplace. We currently expect the transaction to be accretive to earnings during 2008.

Before I turn the call over to Jim, here is a quick update on where we stand on the incineration capacity enhancements and the construction of the solvent recovery plant that we announced last quarter.

We are on track with the expansion of our throughput capacity at a number of our hazardous waste incineration facilities. As we highlighted on our Q3 call, we’re planning to add approximately 10% of our total incineration capacity or 50,000 tons to our network. Approximately 7,000 tons of capacity came online in January of this year.

We will begin to see the increased capacity effect on our incineration rates beginning in the second quarter of this year. We expect to phase in an additional 14,000 tons of capacity during the second and third quarters of this year, with the remaining 29,000 tons coming online sometime during the final quarter of this year and into mid 2009.

This increase will provide us with the capacity we need to better handle the growth that we are experiencing in our markets and address the clients who are planning to shutdown their captive incinerators or outsource certain waste streams. We expect the capital cost necessary to add this capacity will be approximately $15 to $20 million and will be funded through operational cash flow.

Regarding the El Dorado solvent recovery plant, we’re on track with its construction and we expect the first phase of this to be completed at the end of March with the whole plant coming online by year’s end

We are excited about our prospects for 2008. With significant momentum, favorable industry trends and our established position as a leader in the environmental service sector, we are confident that 2008 will be another year of strong growth for Clean Harbors.

So, with that I’ll turn the call over to Jim Rutledge, so he can take you through the Q4 financials and provide our financial outlook for Q1 and full year 2008.

James M. Rutledge

Good morning everyone. Before we discuss our results for the quarter and the year, I wanted to mention the filing extension we announced in our press release.

As you know, this is the first year Clean Harbors is classified as a large accelerated filer, and therefore we’re now required to file our annual report on Form 10-K within 60 rather than 75 days after the end of the year. Together with our auditors we have agreed that we’ll be unable to file our 10-K by February 29, and have therefore decided to file for a permitted extension on Form 12b-25 with the SEC. We expect to file our Form 10-K no later than March 14, 2008.

In Q4, Clean Harbors achieved another record quarter, generating revenue of $257.7 million, this is an 11% increase from the $231.8 million we recorded in the year ago quarter. As Alan outlined, we benefited from solid operating excellence in both our Tech and Site Services businesses in Q4.

Gross profit for the quarter grew to $79.1 million, translating into a gross margin of 30.7%. This compares with 28.4% in the same quarter last year.

Selling, general and administrative expenses were $41.5 million or 16.1% of revenue in Q4 2007. This compares with $34.5 million or 14.9% of revenue in Q4 2006. This quarter’s SG&A as a percentage of revenues would have been comparable with last year’s figure were it not for a $2.9 million charge we recorded this quarter related to an environmental liability in litigation.

In January 2008, we received an adverse court decision pertaining to one of the liabilities we took on from the CSD acquisition. Although we have appealed the decision, we booked the full charge during the fourth quarter.

Accretion of Environmental Liabilities was $2.7 million in the quarter compared to $2.6 million in Q4 of 2006. Depreciation and amortization expense was $9.8 million in Q4 2007, compared with last year’s figure of $9 million. Q4 ‘07 operating income was $25.1 million, up 27% from 19.8 million in the fourth quarter of 2006.

As Alan mentioned, Q4 ‘07 EBITDA came in at $37.6 million or about 14.6% of revenues, which exceeded last year’s fourth quarter EBITDA of $31.4 million, and in terms of guidance for this quarter, we were just below the range we provided of $38 to $39 million, but we would clearly have exceeded guidance were it not for the $2.9 million net charge in the environmental litigation matter, which I described a few moments ago.

Excluding this environmental charge, our EBITDA margin as a percent of revenues would have been 15.7% during the quarter. I should also point out that our incremental EBITDA margin in Q4 this year versus Q4 last year was 34% of revenues, excluding environmental charges.

Interest expense, net of interest income, in Q4 was $3.3 million, up from $3.1 million in the comparable quarter of ‘06.

Our provision for income taxes was $5.3 million this quarter, translating into an effective tax rate of 24% during the fourth quarter of this year, compared to 29% last year. Our lower effective tax rate this quarter was mainly due to favorable one-time tax adjustments recorded in Q4 and the favorable impact related to the recognition of certain landfill amortization deductions.

Our effective tax rate for the year 2007 was 39% compared to only 12% in 2006. The increase year-over-year in our effective tax rate is mostly due to our recognizing the full impact of US federal taxes without NOLs this year and the effect of our implementing the FIN 48 accounting standard this year as well.

Net income available to common shareholders for Q4 was $16.6 million or $0.81 per diluted share based on 20.6 million average common shares outstanding. Net income for Q4 ‘06 was $11.4 million or $0.56 per diluted share based on 20.6 million outstanding shares as well.

Looking briefly at our full year numbers, revenue in 2007 increased 14% to $947 million from $830 million in 2006. Operating income for the year was $85.3 million, or 9% of revenues. This compares with $74.4 million, or 9% of revenues, in 2006.

Looking at our earnings performance for 2007 really showcases the leverage within our extensive network of assets. EBITDA for 2007 was a $133 million, up 11% from $119.9 million for the full year 2006. I should point out that EBITDA in 2006 included a favorable environmental credit of $9.6 million, while this year in 2007, we had a net environmental charge of $600,000. If you exclude these environmental changes and estimates from both years’ figures, our EBITDA growth was 21% year-over-year.

Net income for full-year 2007 was $44 million, or $2.14 per diluted share, compared to net income of $46.4 million, or $2.26 per share for 2006.

From a balance sheet perspective, our cash and marketable securities totaled a $120.4 million at the end of the quarter. Our year-end cash balance was $37 million higher than our cash balance at the end of 2006. But this year’s growth in cash and investments was actually about $45 million higher than last year since we classified for accounting purposes $8.5 million of AAA investments in Auction Rate Securities, as a long-term investment on our balance sheet.

Our increased cash position was mainly generated from enhanced productivity and operations and careful management of our environmental and capital spending.

Total accounts receivable stood at $207.8 million on December 31, and our DSO was 74 days in the quarter. We are continuing to target lower DSOs going forward.

Capital expenditures approximated $12.7 million in Q4, compared to nearly $10.4 million in Q4 of last year. CapEx for 2007 was approximately $37 million, as we upgraded our facilities and invested in several growth projects in our landfills and transportation areas, as well as continued to improve our safety and service reliability.

In 2008, we would expect to raise our CapEx level to approximately $55 to $60 million, as we rollout our new solvent recovery facility and the 50,000-ton expansion of our throughput capacity at our incinerators, in addition to our usual capital expenditures.

During the fourth quarter, our accounts payable balance decreased by $2.1 million to $81.3 million and deferred revenue was marginally lower at $29.7 million on December 31, 2007.

We’re continuing to benefit from carefully managing our environmental liabilities. At December 31, our balance of environmental liabilities stood at $184.5 million, an increase of approximately $4 million during the quarter, which includes the charge for the environmental litigation matter I had mentioned earlier, which we accrued at year-end.

Managing these liabilities and reducing our exposure in this area remains a key focus for us. Environmental spending during the fourth quarter was $1.6 million, compared to $2.4 million in Q4 2006. For the year, our environmental spending was $6.5 million, versus $7.6 million in 2006.

Moving on to our guidance. We expect Q1 will follow with seasonal pattern and be a slower period for us, compared with Q4. We expect first quarter revenue in the range of $225 million to $230 million, which represents a 10% to 12% growth year-over-year.

We expect Q1 EBITDA in the range of $27 to $29 million, which represents a 22% to 31% growth rate year-over-year. For the full year 2008, we expect revenue growth of 6% to 8%, allowing us to exceed the $1 billion benchmark in revenues, and we anticipate EBITDA growth in the range of 17% to 20%.

And with that operator, would you please open the call for questions?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Rich Wesolowski - Sidoti & Company.

Rich Wesolowski - Sidoti & Company

Alan, what type of contribution does the guidance anticipate for the capacity added throughout the year? It sounded like you were a little hazy towards the fourth quarter to mid-2009 on that last 29,000 tons?

Alan S. McKim

In regard to the expansion of the incineration capacity, the 29,000 well, we had mentioned that we’ve got 7,000 in now and we’ll have an additional 14 coming into the second quarter, and then the remaining 29 will be at the latter half of this year and into the midpoint of next year.

Rich Wesolowski - Sidoti & Company

I’m just wondering how you go about handicapping? How much that’s going to contribute 2008 versus 2009?

James M. Rutledge

Embedded in the guidance and our growth in revenues, is the capability to be able to process waste streams through our incinerators that includes this expansion, because we’re at – in the U.S. we are at a very high utilization level. So, I just wanted to make sure that I understood your question there, but that’s how we’re being able to satisfy our growth rate into 2008.

Rich Wesolowski - Sidoti & Company

Okay, and I gather from the EBITDA margin and the incremental EBITDA margin implied, in the first quarter guidance, that you will be spreading the maintenance shutdowns a little more evenly across the year than was the case in 2007?

Alan S. McKim

Well, we certainly have tried to do that but we did it once again run fairly strong into the end of the year, which is typically the generation cycle that our customers have and so we have been in a long outage in Texas right now, close to three weeks on one of our plants down there.

But that is in our guidance, but we are not going to see as many plants in the first quarter down as we did last year’s first quarter, but we did have an extended shutdown at one of our kilns that was due for a longer maintenance.

Rich Wesolowski - Sidoti & Company

Can you elaborate on the state of the landfill’s today versus the year ago how many are contributing up to your expectations, how many material low has there been a regulatory changes or at least the regulatory changes that you had sited in the last call are those panning out in extra business, etc.

Alan S. McKim

We received a permit expansion at our Texas facility at the end of last year, and we expect that to contribute positively this year and that will leave really one remaining landfill in Southern California that is a negative drain on our EBITDA of about $2 million a year. And that facility is still one that we are working on changing our permit and then we will be investing capital in the future, but at this point all of our landfills, save that one, are contributing positively and will be in ‘08.

Rich Wesolowski - Sidoti & Company

Could you elaborate on the pricing competitive trends in the landfill market?

Alan S. McKim

Our base business continues to be, fairly priced, I would say it has been relatively, consistently priced and then on large events or projects out there where we’re competing on a national basis. They are continually being aggressively priced in the marketplace and we would expect that to continue this year.

Operator

We’ll go next to Ted Kundtz - Needham & Company.

Ted Kundtz - Needham & Company

Could you comment a little bit more on the outlook for the captive marketplace, some of those guys coming off stream and you mentioned, I think, on the last call you thought that you had identified five that could positively come off market this year and turn their business over to the outsourcers like yourselves. Do you still feel that’s the correct number? And if so, is any of that built into your current forecast for ‘08?

Alan S. McKim

Yeah, clearly, some of it is because we have been notified at least by one client that they will be down by June and we also are seeing other business that’s being rerouted that was going to a captive facility where they are now looking for outlets across the U.S. for that waste stream.

So we are convinced that the cost that our customers are seeing for managing those wastes internally is much higher than if they send it off site to us. And we continue to have expectation that more volume is going to be coming into the commercial marketplace which is why we went down the path of expanding our plants last year.

So, I don’t think anything has changed and I would say that the additional capacity that we are bringing on this year is into our guidance for in ‘08.

Ted Kundtz - Needham & Company

I’m just wondering if the captive business could be greater than coming off market than what you are anticipating. I don’t know what you are anticipating, how much is coming off of market, how many tons that could be coming into the outsource market, but could that be a greater number than you are looking at? Are you hearing anything more about these captives, deciding at the threshold of making decisions to shut down their own facilities?

Alan S. McKim

Nothing since our call last time that you know it’s been pretty much consistent with that – as we are looking at where they are today.

Ted Kundtz - Needham & Company

So could you give us a little guidance on the tax rate that surprised me a little bit in the quarter? What your thoughts are for next year, for ‘08?

Alan S. McKim

Yes, we’re going through that now and obviously when we complete our K we will be going through our reconciliation of the effective tax rate, so you will see that. I mentioned during my comments that we had some one-time adjustments during the quarter and we also had the benefit of certain landfill amortization deductions in there and I think there will be some future benefit of these landfill amortization deductions to the tune of probably, 1% to 2%.

So, I had historically been mentioning to you that our tax rate has been in the 43% to 44%.It will probably be 1% to 2% less than that, because of these amortizations and that includes FIN 48.

Ted Kundtz - Needham & Company

FIN 48 was in the fourth quarter too, as well, right?

Alan S. McKim

Absolutely, there was almost $2 million of FIN 48 in the fourth quarter there.

Ted Kundtz - Needham & Company

Are there any areas out there that you see at risk from a recession, any of the specific customers that you do serve, that could be slowing down, if we do enter a recession or perhaps if we’re in one, what’s being affected, do you see any areas of weakness?

Alan S. McKim

We just had our National Corporate Account folks in two weeks ago and through our discussions, at least with them as it relates to the various industries that they manage, we are not seeing any slowdown at this point with our top vertical markets.

Ted Kundtz - Needham & Company

What would you say would possibly be at risk? Could you identify your top vertical markets for us and give us some sort of sizing?

Alan S. McKim

Sure, I mean, our chemical and petrochemical market is a strong market for us. Our refinery market has been very strong and actually growing. We had a very good year in ‘07 with our refinery business. Our utility market has picked up quite a bit in the last year and we are seeing, further growth opportunities there, because our share, particularly of the utility market, is relatively small. Manufacturing is probably one vertical that that could be more impacted than maybe the others that I just mentioned.

Ted Kundtz - Needham & Company

How big is that?

Alan S. McKim

About 11% of revenues. Yes, and we’ve really done an analysis across all of our key verticals to try and understand, what the sensitivity might be, based on a recession and how deep a recession might be, but whether it’s healthcare or colleges, universities, pharmaceutical companies, a lot of the industries we service, provide, critical products and services.

And so, I like to think that outside of probably manufacturing, we’ve got a pretty solid diverse customer base. That hopefully will not be that impacted by any significant recession, at this point.

Ted Kundtz - Needham & Company

And you are seeing no signs of it, any slowdown whatsoever right now?

Alan S. McKim

Not in our end at this point, when we put out our guidance for the first quarter this morning here, that was based on the visibility that we have looking out on our forecast call that we have on a weekly basis and we’re not seeing it.

Operator

We’ll go next to Jonathan Ellis - Merrill Lynch.

Jonathan Ellis - Merrill Lynch

I want to talk a little bit, just in during the quarter you mentioned the impact from landfill amortization revisions. Did that have any impact above the operating line, or did that just flow through the tax line?

Alan S. McKim

No, it was just through the tax line, basically. Yep.

Jonathan Ellis - Merrill Lynch

On SG&A I think if you look at 2006 in the fourth quarter, it looks like SG&A as a percentage of revenues came down a little bit more than what you saw in 2007. Just wondering if there is something this quarter that created a little bit more of a headwind from an SG&A standpoint, and then more importantly, how you think about SG&A going into 2008?

James M. Rutledge

During my comments, I had mentioned that the percentage as a percentage of revenues went up a little bit in the fourth quarter just due to that charge that we had, but you are right, if we exclude it, we have good, roughly 15% of revenues as our SG&A percentage.

And I would look out to the future. First of all, let me say that I think that that reflects the leverage that we have, that we are holding the line in SG&A, the fixed cost components of that. Looking out beyond this year, 2008, I would say that that 15%, that’s our target, to be at the 15%.

It might be a little bit more than that in certain quarters, perhaps in the first quarter. But I think that is our target, and I feel pretty good actually about that percentage.

Jonathan Ellis - Merrill Lynch

And then just on the solvent recovery plants you are acquiring are those factored into your guidance currently for 2008?

James M. Rutledge

Only to a minor, very minor degree, because we’re looking at implementing those into our facilities, and as Alan pointed out, during 2008 it will become accretive, so we were conservative in what we put into our guidance there.

Jonathan Ellis - Merrill Lynch

Okay, but it is included both in revenue and to the extent it contributes to EBITDA, in that line as well?

James M. Rutledge

Both only on a very low level, because we are talking about ranges in both the revenue and the EBITDA, so we felt that the range was okay, I mean clearly we haven’t closed on the facilities yet, although there is no doubt in my mind that we will close, but we wanted to be very conservative in there and with the range, I think that would cover it.

Jonathan Ellis - Merrill Lynch

And then maybe just more broadly speaking if you can talk about it, I know you mentioned in the past what you’re doing at El Dorado in terms of the solvent recovery facility, but more broadly about the solvent recovery market, how large it is, what you think you can accomplish from a market share standpoint or from a competitive standpoint over the next few years there?

Alan S. McKim

I mean, we think it’s larger than a $100 million market, I mean it’s not a huge market, but it does provide options for customers who have solvent streams, particularly our pharmaceutical clients. A5 lot of our chemical clients have large solvent streams and in some cases those have been used as fuel in cement kilns and even in some cases, we have been burning them, and as we displace those with higher margin hazardous waste that also gives us the same energy value, we want to have an alternative to recycle and reuse those streams.

And we’ve been successful in that using third party tollers and other recyclers over the last couple years, but we think we can have a lot more success by having our own capacity and tying it in within our whole collection and sales force network out there. And so, like I said, it’s over $100 million in market size, but obviously it’s not that big of a market in the whole scheme of things.

Jonathan Ellis - Merrill Lynch

And just on the guidance on revenue for 2008 of 6% to 8%, what does that factor in terms of acquisitions, meaning the carryover from what you have completed in 2007?

Alan S. McKim

It really doesn’t factor that much in outside of the solvent plants that we have announced which we have put some modest revenue numbers in our guidance for the year, it really doesn’t factor in other acquisitions that we see out there as a potential.

Jonathan Ellis - Merrill Lynch

That implies, given the 4.5% price increase you mentioned earlier, is that your guidance implies something on the order of 2% to 4% volume growth for the year, if I’m doing that correctly.

Alan S. McKim

I would say that roughly half of that price increase would be cost recovery somewhere in that range, Jon, and then the other half would generate margin.

Jonathan Ellis - Merrill Lynch

On the incremental EBITDA, and again, if I am doing the math correctly, it seems like you are assuming a $23 to $27 million of incremental EBITDA in ‘08. Wondering if you can talk, either quantitatively or qualitatively, about how that would be split up from a pricing versus a cost savings standpoint?

Alan S. McKim

Yeah, I don’t think I could give precise figures on that right here and now, I don’t have those parts of our budget in front of me. But, there certainly is both, clearly, as we have been talking about, but I just don’t have that breakdown at this point Jon.

Operator

We’ll go next to Lawrence Solow - CJS Securities.

Lawrence Solow - CJS Securities

The gross margin year-over-year improved nicely, but just sequentially, I thought maybe it might have improved considering you had $4.5 million in emergency response revenue, which is generally a much higher margin.

Alan S. McKim

I’d have to look at that, Larry, and to look at the puts and takes on that. But again, to be above that 30% – 30.5%, I think is a nice margin there. The event is pretty small. Even if it’s 10 points higher, it’s not a lot of money.

Lawrence Solow - CJS Securities

Okay, and then just on the Site Services, if I kind of back out that $4.5 million, it looks, you probably did about $70 million or so and then I don’t believe you did any emergency response last year. So that would put the segment down about 10%, is that just more a timing related issue on the year-over-year basis in the quarter?

Alan S. McKim

No, there was some event in last year’s figures and I can give you an idea of what that was last year in the fourth quarter. Give me just a second; we had event business last year in the fourth quarter of ‘06 of about $7 million.

Lawrence Solow - CJS Securities

And then that was about flat, then, ex-emergency response in both years.

Alan S. McKim

Yeah, the Site Service was, if you take out the emergency response, Site Service was flat year-over-year in the fourth quarter. And I think that, what that reflects, if you look across the regions that we have, the south region last year in the fourth quarter had some nice follow-on work from the hurricanes, so it was a little bit higher in the fourth quarter last year. And so that’s what makes it look kind of relatively flat.

Lawrence Solow - CJS Securities

So it’s almost like a continual emergency related to the emergency response in a sense.

Alan S. McKim

Well it was actually follow-on work at various facilities, not really part of the Americas.

Lawrence Solow - CJS Securities

Right, which is actually part of the business model and certainly a positive.

Alan S. McKim

Absolutely.

Lawrence Solow - CJS Securities

Could you just discuss a little bit more on the pricing outlook, you mentioned the 4.5% price increase, and that is an average number. Is that going to be kind of implemented across the board or is that just an average, meaning some are higher, some are lower? Like I would expect maybe incineration maybe would be a little higher than average?

Alan S. McKim

Yeah. Our communication to our clients were that there maybe some higher increases, whether it would be in certain regions for our labor and equipment, material, supplies or disposal or transportation. So, we really are looking at all of our selling components.

And particularly focusing on those clients that may not have been receiving a fuel energy surcharge, or have highly restricted routing that causes us to take on a lot more cost from a transportation standpoint. And so it’s probably a good average that we would like to just see this year.

Lawrence Solow - CJS Securities

Then the Teris facility is that pretty much now up to speed with the rest of your incinerators’ performance level?

Alan S. McKim

I think Teris had a wonderful year that was a great story for us in ‘07. The team out there did a great job. They did a big capital investment there in the second quarter. That plant ran very strong for the last two quarters, and we would like to continue to invest more into that facility.

We’ve got a great workforce there, a nice infrastructure; it’s one of the reasons why we chose that site for our solvent recovery plant. And from a margin standpoint, it was almost at the same level of margins as our other incinerators. There is still some room up there, we’ve got a couple of permit modifications that – that we’re waiting on that will allow us to eliminate some of our handling costs there and improve our processing costs, but I except 2008 to see continuing benefit from the Teris site.

Operator

We’ll go next to Al Kaschalk - Wedbush.

Al Kaschalk - Wedbush Morgan

Just to follow-up a couple of the questions have been already answered, but on the cost side, Alan, where do we stand in terms of your multi-year program to maybe internalize some of these costs and how much is still yet to maybe be recovered, if you will?

Alan S. McKim

We have our cost reduction initiatives on track again for ‘08. We saw some nice pick-ups in ‘07. I think, that was part of the drivers in our performance last year, but as the company has continued to grow as it has, outside transportation continues to be one area of spend that we just didn’t make the kind of progress that we wanted to.

On a total dollar standpoint, we’re still on that $60 million number. So, can we get that done on $30 million, we believe we can, but adding more drivers, getting more equipment out there is still the theme here on the transportation side.

We hired a new manager of our procurement, who is working with Jim, and through her initiatives, we think this year will be more successful on a lot of the strategic procurement initiatives regarding the purchasing of chemicals, materials, supplies, those things which really are several hundred million dollars in spend for us, so I think, Al, we have still have more to go in regard to being to more efficient in our purchasing.

Al Kaschalk - Wedbush Morgan

If I look at the guidance in terms of the full year EBITDA growth, it looks strong, and then I understand seasonally Q1 is weak. But if I could just ask, it looks like EBITDA margins in the quarter are expected to be closer in the low double-digits like 12 – 13%, and I’m just wondering if there’s either volumes expected to be down, costs up, what’s driving that, assuming my read is correct?

Alan S. McKim

The, Al, the regular seasonal slowdown that we have in the first quarter is the main driver of why that’s below the 15% range. If you compare it to last year, we were at 10% or 11% margin in the first quarter. And so what we’re thinking is that the growth that we’ve had, the cost savings that we’ve put in place and the effect of our price increase last year, I think, is going to show up in the first quarter that we’re seeing, and that’s why we are looking at that 13% range. So we’re a couple of hundred basis points over where we were last year.

Al Kaschalk - Wedbush Morgan

On utilization rates, you’ve had a very strong incineration level here over the last couple of quarters. Any reason to think that we have more than the norm on shutdowns and maintenance work in ‘08. And then secondly, on the labor front, are you seeing any cost increase just from a competitive standpoint?

Well, just given in the general industry that you operate in and the locations of the various facilities, I would expect some of your customers are certainly having pretty good business opportunities, and just if labor rates are going up or are you seeing that you have to pay people more money just to keep them, so to speak.

Alan S. McKim

I think, we are always under pressure for good people and our labor rates, at least internally here, have gone up quite a bit in the last year or two, and we have been investing a lot more in training and making more investments, I should say, in our workforce. So, yes we are obviously trying to hold on to all the people that we can. We’ve got a great organization here.

But I guess in regard to the utilization rates here, your first question there, I don’t see anything different this year from last year other than a steady improvement out of Teris and no major changes from a shutdown standpoint. As I mentioned, we had a long shutdown in February here at one of our plants. We also are going to take an extended shutdown at one of our Canadian incinerators where we’re investing about $3.5 million to rebuild that kiln, and that was planned for this year. And outside of those, I don’t see anything major different in the utilization rates.

Operator

We’ll go next to Jamie Sullivan - RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

Just a quick question on the guidance again, I guess just looking at the EBITDA growth and margin expansion. And wondering if you could give us a feel directionally, if the majority of that is coming from price standpoint or more on the cost side.

James M. Rutledge

Yes, I think it’s a combination of both Jamie, clearly the price increase that we’re looking at during 2008, about half of that roughly 4.5%, is cost recovery and the other half will be contributed to our margin. And then, I think in addition, I think the balance there is volume.

Jamie Sullivan - RBC Capital Markets

Did you give CapEx for ‘08?

James M. Rutledge

Yes, ‘08 CapEx will be in the $55 to $60 million and the reason why that’s higher than our spending in the past, is that we’re estimating $15 to $20 million for the 50,000-ton incineration expansion that we’re doing and also the solvent recovery facility in El Dorado is added in there too. So, we’re at a little higher, last year we were at about $37 million. So that is $55 to $60 million is what we are projecting for next year.

Jamie Sullivan - RBC Capital Markets

The issues on the Site Services side, can you talk about the pipeline for event business and how that looks?

James M. Rutledge

Well clearly we are always doing small-scale projects in all of our branches. The events are unpredictable in the ER area. We are very excited about the, although the ER work, event work that we did on the West Coast in the San Francisco Bay, in and off itself, was not, of a great magnitude, it was roughly $4 million.

It was the first largest event that we responded to in the West Coast and that is a targeted area of expansion for us. So, we believe there will be some nice follow-on work out there so we think that that is exciting for the Site Services business, which is not unlike what we experienced in the Gulf region when we responded to the hurricanes a couple of years ago. So that gives us an opportunity to really show how good we are at what we do in terms of emergency response, which leads to other work in the region.

Jamie Sullivan - RBC Capital Markets

How about on the larger cleanup side, how does the pipeline look there?

Alan S. McKim

You mean as far as like remediation projects?

Jamie Sullivan - RBC Capital Markets

Right.

Alan S. McKim

Yeah, we had a very strong year with our waste projects group in ‘07 and you know looking at the first quarter, volumes that they’re forecasting, they are ahead of plan from where they were last year. So, we see a nice steady flow of large projects and I am pretty excited about the work that that team continues to do out there.

Operator

We’ll go next to Vito Menza, Sandler Capital Management.

Vito Menza - Sandler Capital Management

It seems like something really is fundamentally changed in the incineration market in the last, call it one to three years. You had the Veolia Environmental for the first time, I’ve never seen them specifically call out the North American incineration market and obviously they are the number two player behind you through Onyx.

Just wondering and we’re also hearing anecdotally about prices that are approaching $0.30 per pound and just wondering, Alan if you can speak a little bit more about what’s actually driving that and where do you see that going to in the future?

Alan S. McKim

Well, clearly that the incineration market has been in a real depressed state for many years and a lot of investment that was put into that market, back in the late 80’s and even 90’s, was not getting a very good return, if you would.

And I think, since Safety-Kleen took some actions in shutting down four or five plants back in the late 90’s and subsequently, our acquisition, what we have tried to do is put in some discipline that, in our pricing strategy so that we could get a fair return on the investments that we continuously need to make in our incineration facilities, and so I think utilization has improved.

I think customers are willing to pay more because they realize to meet things like the new MACT standards and to meet their needs that we need to continue to invest more capital and get a good return on that capital, like any good business. People do. Well, Vito, I think really that’s really what’s happened. I mean which is, we are in a better position today than we were ten years ago for sure.

Vito Menza - Sandler Capital Management

Alan and Jim, if you could just speak quickly about the incremental margin on some of that capacity extension that you’re doing on some of your incinerators. Is that going to be north of 50%? Any idea where the range is going to be on that?

Alan S. McKim

Absolutely, it would be in excess of 50% because most of the expansion projects are de-bottlenecking, increasing permits and activities that are less a cost than if you were to build a facility on a Greenfield kind of basis, I mean to build a facility that would have 50,000 tons of capacity could be $100 million so, is a nice incremental margin here. This will pay for itself in a year-to-year and a half.

James M. Rutledge

Even at the current pricing, it does not support $100 million investment to build a new plant. So, you are still in a depressed pricing state.

Vito Menza - Sandler Capital Management

Alan, have you guys done any recent work on, I think you are now north of 550,000 tons of capacity. With this new addition, you’ll be well north of that but, have you done any study that show if somebody were to go ahead in you know, Greenfield that many tons. How much approximately it would cost?

Alan S. McKim

I think first just to clarify, we are at about 500,000 and we’re going to about 550 with this expansion. And certainly through our, looking at you know, out three, five and seven years and trying to predict what’s going to happen with the captives, because they still are 78 captives out there.

Trying to predict what needs our customers are going to have, we’ve looked at the overall capital investment to build a new plant and quite frankly with the pricing that it’s at today, it doesn’t make sense to do it. So, we still think that, we’ve got a long way to go to convince our customers that the pricing today that they are enjoying is still less than what really the cost of running these plants and reinvesting the capital that we constantly need to make.

Vito Menza - Sandler Capital Management

Alan, if I wanted to go out and build 550,000 tons of capacity, what would I have to pay today, approximately? I’m going to compete with you.

Alan S. McKim

It will take a long time. Okay, there hasn’t been a new plant; new incinerator built in 12 to 15 years. So, if you could get a permit, it is safe to say it would be about $100 million for 50 to 60,000 tons, would be a good rate.

Operator

And our last question will come from Robert Littlehale - Bear Stearns.

Robert Littlehale - Bear Stearns

I don’t know what you’d mentioned the number of Site Service Centers you plan to open in 2008 and will it be any particular geographic focus?

Alan S. McKim

Continuing in the Gulf, in the West as well as in Canada, particularly in Alberta, we just expanded our landfill in Alberta. And in the oil sands area of that province, we see some real nice opportunities to grow there. But right now, those are the expansion areas and I would say in the five to seven number is safe on the Site Services side.

I’d also like to say that we probably have a fair shot of making a couple of acquisitions this year. In the site services area, we’ve been looking at a lot of competitors out there; we’ve been talking to a lot of them. We’re enjoying a steady pipeline of opportunities for acquisitions and we haven’t really done anything in the site service area in probably close to 20 years. We did a very small one 20 years ago down in New Jersey. So, I think you will hear us expand more in the site services area this year with acquisitions.

Operator

At this time, we have reached the end of our question and answer session. I will now turn the call back over to Mr. Alan McKim for any closing or additional remarks.

Alan S. McKim

Well, thanks very much for participating in our call this morning and we look forward to updating you in our first quarter and thanks for your questions. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Clean Harbors, Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts