American Ecology Corporation Q2 2008 Earnings Call Transcript

Aug.25.08 | About: US Ecology, (ECOL)

American Ecology Corporation (NASDAQ:ECOL)

Q2 2008 Earnings Call Transcript

July 31, 2008 11:00 pm ET

Executives

Jeff Feeler – VP and CFO

Steve Romano – President and CEO

Steve Welling – VP of Sales and Marketing

Analysts

Rich Wesolowski – Sidoti & Co.

Tyson Bauer – Wealth Monitors

David Yuschak – Sanders Morris Harris Capital

Jamie Sullivan – RBC Capital Markets

Debra Fiakas – Crystal Equity Research

Ted Kundtz – Needham & Company

Al Kaschalk – Wedbush Morgan

Edward Waldridge [ph] – RAA Inc. [ph]

Operator

Good day, everyone, and welcome to today's American Ecology Corporation Second-Quarter 2008 Investor Conference Call. Just as a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Jeff Feeler, Vice President and Chief Financial Officer, for opening remarks. Please go ahead, sir.

Jeff Feeler

Good morning. Joining me today are Steve Romano, President and Chief Executive Officer, and Steve Welling, Vice President of Sales and Marketing.

Before we begin, please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Since forward-looking statements include risks and uncertainties, actual results may differ 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 the date such statements are made. We undertake no obligation to revise or update any forward-looking statement, or make other forward-looking statements whether a result of new information, future events or otherwise.

Now, I will turn the call over to Steve Romano to begin our remarks.

Steve Romano

Good morning and welcome.

For those joining by webcast, you can follow today's presentation during the webcast. For those listening by phone, you can follow the presentation on our Web site at www.americanecology.com.

I will begin with an overview of our record quarterly financial results, which were publicly released this morning. Jeff will then offer a more detailed explanation of these results and our current financial position. After Jeff's remarks, I will comment on our business outlook for the rest of 2008, including capital spending. We will then open up the call to questions and comments.

Second-quarter 2008 revenues reached $44.5 million, up from $41.3 million in the second quarter of 2007. Operating income for the second quarter of 2008 grew 20% to $9.8 million, a second consecutive quarterly record. This was up from $8.2 million in the second quarter of 2007. All four of our disposal operations continue to be profitable. These record operating results were fueled by another quarter of very strong event cleanup business performance, continuing growth of our broker business, and the favorable operating leverage delivered by increased wage throughput by high-wage volumes.

More specifically, we disposed of 325,000 tons of waste in the second quarter of 2008. This was an 18% volume increase over the same quarter last year. We are particularly pleased to note that this volume increase was led by our Texas and Nevada facilities. This underscores the timeliness of recent capital investments that have allowed both the Nevada and Texas operations to emerge as significant contributors in what is now a stronger, more diversified company.

Net income for the second quarter of 2008 was $6.1 million or $0.33 per diluted share. This is a healthy 20% increase over the $5.1 million or $0.28 per diluted share earned in the second quarter of 2007. This excellent performance was achieved with the Molycorp Pennsylvania Project ramping down and with no meaningful contribution from our new thermal desorption operation in Texas. This new service offering for petroleum refineries was launched in late June, on schedule.

I will now turn it back to Jeff to provide additional detail on these results and our current financial position. Jeff?

Jeff Feeler

Thank you, Steve.

Total revenue for the second quarter of 2008 increased 8% over the same period last year to $44.5 million. This increase reflects strong disposal revenue growth, partially offset by a reduction in transportation-related revenue. Transportation revenue decreased due to lower shipment volumes on our bundled transportation and disposal contract with Molycorp which began winding down, as expected, during the quarter.

Average selling price for treatment and disposal services, excluding transportation, was 2% higher than the same quarter last year. This reflects a more favorable service mix.

Event business in the second quarter of 2008 grew 37% over the same quarter last year. This increase reflects growth in both government and private cleanup project business. Recurring base business revenue grew 3% in the second quarter of 2008 over the same quarter last year on strong broker business growth, partially offset by declines in refinery and steel mill services.

I will now break down treatment and disposal revenue, for both base and event business, by customer category. For those joining by webcast, please see Slide 8. Our government cleanup business was up 102% in the second quarter of 2008 from the second quarter of 2007. This exceptional growth was driven by a state-funded cleanup project shipping to our Texas facility, and a US Army remediation project shipping to our Idaho facility from an overseas military base.

The first phase of the state-funded cleanup project in Texas is complete with future phases depending on state budget appropriations. The military base remediation project is complete. Revenue generated under our Army Corps of Engineers contract contributed $2.6 million or 6% of total revenue for the second quarter of 2008. This was down slightly from $3 million or 7% of total revenue in the same quarter last year.

Our Other Industry category is a diverse mix of electrical utilities, chemical manufacturers and other industries. Treatment and disposal revenue from this customer category grew 10% in the second quarter of 2008 over the same quarter last year.

Our Waste Broker business also continued to grow during the quarter, up 9% in the second quarter of 2008 over the same period last year. During the quarter, treatment and disposal revenue from private cleanup customers increased 5%, reflecting increased shipments from Honeywell and a number of smaller cleanup projects. This increase was partially offset by decreased volumes from the Molycorp project, which is on schedule to be completed in the third quarter.

The Molycorp cleanup contributed $2.5 million, or 6% of total revenues, including transportation, in the second quarter of 2008. This was down from $4.8 million or 12% of total revenues in the second quarter of 2007. The Honeywell contract contributed $17.9 million or 40% of total revenue in the second quarter of 2008, up from $16.4 million or 40% of total revenues in the same quarter last year.

Our rate-regulated business in Richland, Washington was up 4% in the second quarter over the same quarter last year. This reflects timing on our rate-regulated portion of our Washington sites business.

Our refinery business was down 16% in the second quarter of 2008 over the same quarter last year. This reflects a decrease in volume as a result of one customer implementing a new refining process. We expect refinery business to grow in the second half of 2007 with our new thermal desorption recycling service now operating in Texas.

Our steel mill business was down 19% in the second quarter of 2008 from the same quarter in the prior year. This reflects the exploration of a Midwestern steel mill contract last December that switched to a recycling service provider based on prevailing zinc prices.

Gross profit increased 17% to $13.6 million for the second quarter of 2008, up from $11.7 million in the same quarter last year. Gross margin was 31% in the second quarter of 2008, up from 28% in the second quarter last year. This increase reflects lower transportation revenue, which is generally provided as a value-added service with little or no margin.

Treatment and disposal margin remains steady at 54% for both the second quarter in 2007 and 2008. Gross profit during the second quarter of 2008 was reduced by a $104,000 charge to complete the grouting and closure of the deep well at our non-operating Winona, Texas facility.

SG&A expense was 8.4% of total revenue for the second quarter of 2008, down slightly from 8.5% in the second quarter last year. This reflects a 7% quarter-over-quarter increase in SG&A spending spread over higher revenue. The dollar increase reflects increased employee compensation and benefit expenses for sales commissions, performance incentive bonuses, and stock-based compensation, as well as higher administrative costs on increased business.

As Steve noted, net income for the second quarter was $6.1 million or $0.33 per diluted share. This exceeded net income of $5.1 million or $0.28 per diluted share in the same quarter last year.

Shifting gears to our year-to-date results, revenues for the first half of 2008 grew 13% to $90.7 million. This was up from $80.2 million for the first half of 2007. This reflects growth in both our disposal and transportation revenue. Disposal revenue growth was driven by a 21% increase in event business and 12% increase in base business.

Breaking disposal revenue down by customer category for the first half of 2008 versus the same period last year, we delivered 68% growth in our Other Industry category, 26% growth in our Government Cleanup category, 21% growth in our rate-regulated business, and 18% growth in our waste broker business.

Gross profit for the first half of 2008 increased 17% to $27 million, up from $23 million for the first half last year. Gross margins were 30% and 29% of total revenues for the first half of 2008 and 2007 respectively. This 100 basis point margin improvement reflects a 23% increase in disposal volumes, partially offset by increased transportation revenue. Disposal gross margins for the first half of 2008 were 54%, up slightly from 53% for the first half of 2007.

SG&A expense was 8.4% of total revenue for the first half of 2008, down from 8.8% in the first half of last year. This reflects an 8% period-over-period increase in SG&A spending spread over higher revenue. The dollar increase over last year is due to increased employee compensation and benefit expenses for sales commissions, performance-incentive bonuses, and stock-based compensation, as well as higher administrative costs on increased business. SG&A expenses for the first half of 2008 also include a write-down of $154,000 in business-development costs for an acquisition we are no longer pursuing.

Operating income in the first half of 2008 grew 20% to $19.4 million compared to $16.1 million in the first half of 2007. Net income for the first half of 2008 was $12 million or $0.66 per diluted share. This exceeded net income of $10 million or $0.55 per diluted share in the same period last year.

At June 30, 2008, working capital was $33 million as compared to $25 million at June 30, 2007. This improvement was driven by higher operating income and reduced capital spending. At June 30, 2008, we had cash of $18.5 million and we continue to have no term debt.

During the quarter, we entered into a new $15 million unsecured revolving credit facility. We have $11 million available under this new line of credit, with the remaining $4 million pledged as collateral for closure/post-closure financial assurance obligations.

With that, I will turn it back to Steve.

Steve Romano

Thanks, Jeff.

Our new quarterly operating income record was a great follow-on to our prior record set in the first quarter of 2008. From a financial metric standpoint, American Ecology continues to be a waste industry leader. Our return on invested capital for the 12 months ended June 30, 2008, was 18.7%. Our return on total assets was an equally solid 18.1%.

Based on our record first-half, we currently expect to reach or potentially exceed the upper end of our 2008 annual earnings guidance range of $1.17 to $1.23 per diluted share, which was initially issued in February. Exceeding the upper end of our guidance range will be dependent on a strong second-half contribution for our thermal desorption recycling service in Texas, and continued solid event business performance. As has been our past practice, we plan to quantitatively refine our guidance when third-quarter results are released.

As noted earlier, our Texas thermal desorption recycling service was initiated in late June. We are now in the process of optimizing equipment performance during a 90-day ramp-up period. Our objective during this ramp-up period is to maximize operational efficiency for long-term performance. Overall, we are pleased with the technology and the operator selected, and look forward to a solid contribution going forward.

Capital spending for the first half of 2008 was $7.3 million, once again funded entirely with cash on hand. These investments were primarily for disposal capacity expansions and construction of support infrastructure for the Texas thermal desorption system, and additional track at our Idaho rail transfer station. Our Idaho rail station can now manage up to 140 railcars on site, on our property, at one time, which helps us to meet customer needs and minimize the merge [ph] expense risk.

We are also building new disposal capacity at our Nevada site, which is scheduled to be completed in the third quarter. We currently expect total 2008 capital spending at about $12 million. In May, American Ecology's Board of Directors approved a 20% increase in our quarterly dividend to $0.18 per share, based on the company's strong cash flow. As Jeff noted, we continue to have no debt.

With our business expanding in multiple customer categories, a promising new recycling service now in operation for petroleum refinery customers, and two highly qualified additions to our Board of Directors, we look forward to continued growth with an increasingly strong, diversified business platform.

We would now like to open the call for questions.

Question-and-Answer Session

Operator

And the question-and-answer session will be conducted electronically. (Operator instructions) And our first question will come from Rich Wesolowski.

Rich Wesolowski – Sidoti & Co.

Thanks, good morning.

Steve Romano

Good morning, Rich.

Rich Wesolowski – Sidoti & Co.

The portion of the revenue that was coming from transportation costs was the lowest since Honeywell really began to ramp up in early '06. Was that due solely to Molycorp, or was there a change in the transportation piece of some of your base work, or other event work aside from Molycorp?

Steve Romano

I will start, and Jeff may want to add. It basically reflects, primarily reflects Molycorp ramping down as expected. I would also note that, as we've discussed in the past, we maintain a combined railcar fleet of both owned railcars – we own 234 railcars – and the leased railcars, with the lease number fluctuating. We recently turned back 100 railcars and our fleet is right now, I believe, Jeff, 541 railcars total?

Jeff Feeler

That's correct.

Steve Romano

So, that's something that we did expect to ramp down as that project ramped down. I'm not sure we are in a position to break it down in a more granular basis for smaller projects, but primarily Molycorp.

Rich Wesolowski – Sidoti & Co.

So should we expect the transportation expense to decline on an absolute basis for the remainder of the year?

Jeff Feeler

You know, Rich, it's really going to be dependent on what event projects we win going forward. Assuming we don't get our fair share of bundled transportation and disposal projects, we would expect that to decline at this stage.

Rich Wesolowski – Sidoti & Co.

Okay. As I look past at the last couple of September quarter reports, your treatment and disposal margin, as we calculate it, assuming transportation is all pass-through, contracted a great deal versus the June quarter. Are we likely to see that again in '08?

Jeff Feeler

It's really hard to say, Rich. It's really going to be dependent on service mix and volumes that come through in the second half of the year. We are still expecting to have favorable margins, probably in the low 50 range. Whether that's north of our long-term average is really going to be dependent on the service mix that does come in.

Rich Wesolowski – Sidoti & Co.

Okay. Lastly, on Honeywell here, can you talk about the schedule of excavation, if you have any visibility to that? By my estimate, you have a little less than $90 million on the original contract to recognize. If that is the case – and I'm not asking you to confirm that specific number – but would that come in these high teens quarterly rates until it goes to zero, or are we more likely see it leveling off at a lower rate as it moves towards November '09?

Steve Romano

It's really going to depend on how the activation proceeds as we near the river and the job winds up, and it's too early to say. There's substantial activation remaining. As you know, the project is to run through November of 2009 under court order. That is something that's looked at as the project proceeds. We respect the estimates provided by our customer, Honeywell. They continue to estimate 1.2 million tons, total project. We will report additional information as we learn it, but at this point, there's no better information to give you than we've provided in the past.

Rich Wesolowski – Sidoti & Co.

Okay. Are there any ancillary sites that you expect to bid? And if so, can you give a sense of how meaningful those projects could be?

Steve Romano

There are ancillary sites to bid. We have no guarantees of being awarded that work, but we like to believe that the excellent performance we've provided routinely and successfully moving in the range of 1,500 tons a day on this initial project will position us well for future work. There are multiple vicinity properties. The timing of those properties is not known, but we do expect some of those to be performed during 2009, at least partially, with out-year opportunities a potential, but again, no guarantees.

Rich Wesolowski – Sidoti & Co.

Great, thank you.

Steve Romano

You bet.

Operator

And next we will hear from Tyson Bauer with Wealth Monitors.

Tyson Bauer – Wealth Monitors

Good morning, gentlemen. Another excellent quarter.

Steve Romano

Good morning, Tyson.

Tyson Bauer – Wealth Monitors

A couple of quick questions for you, by the sum of the statements that you've made, it would appear that we are going to be heavily weighted upon Q4, where you ultimately end up for the year-end results. Is that a sense that you're getting also that that's kind of what tips the balance, whether we are at the high end of the range or possibly could be – is going to be dependent on that Q4 quarter?

Steve Romano

I think that's fair, yes.

Tyson Bauer – Wealth Monitors

In the second half of the year, any prognostication on how that's going to be split between base and event business? Are we moving back toward more of event-weighted overall revenues?

Steve Romano

It's hard to say because, again, we're in the season now where there are jobs being awarded now for summer work. The pipeline remains solid. It's going to depend on a couple of things, on the one side, how many of the event jobs we are able to win that are out there, the smaller ones that tend to be – the seasonal smaller jobs completed in the summer of 2008 construction season. And then it's also going to depend on the ramp-up on our thermal units in Texas. The market is there, we are satisfied with that, but we are managing for the long term, and I told my team to really focus on making sure this equipment is running optimally – is a more important near-term goal than pushing as much waste through the door as we can possibly push through near-term. We want this to be something that's a solid, long-term contributor.

So, how quickly that goes, everything has been going well so far. But any time you go with a new technology application, there will be some shakedown work and ramp-up work, and that's factored in. How quickly we move through that is going to determine whether how much of a contribution we have as we complete the year.

Tyson Bauer – Wealth Monitors

Okay. Regards to the Army Corps contract you have in service, in years past, that's kind of cut both ways sometimes as we get to the end of the federal fiscal year. Any insight, this year of excess funds which may mean additional materials for you, or as we've seen in some years, not having that funding there until the new fiscal year starts up in October?

Steve Romano

This year is looking to be more on the side of there being some excess funds. We have received some additional awards under existing task orders for existing projects that are moving, so we do not expect any repetition of the situation several years ago where the Corps had essentially run out of money at the end of their third quarter, which would be basically the quarter we are moving into here. So, we expect the Corps business to remain steady and, if anything, on the upside compared with past experience.

Tyson Bauer – Wealth Monitors

Okay. Last question from me is, given the new permits you received earlier this year for disposal of material in Idaho, no real mention to this point of having great success there. Are you facing greater headwinds from maybe some of the existing competitors in that area that are maybe a little stronger than you first thought?

Steve Romano

No. The additional permit abilities we have in Idaho to take additional waste tend to be long-term projects. We are serving electric utilities, nuclear fuel fabrication facilities, decommissioning projects primarily, clean-up projects. It's not base business; it's event business. That tends to be long lead-time work and those customers tend to work these projects well in advance. So, we continue to view that as more of an opportunity as we look to 2009. If there is any contribution this year, we would be delighted, but our plans have never been that this would be something that would contribute meaningfully before the out years.

Tyson Bauer – Wealth Monitors

Okay. Thanks a lot, Steve.

Steve Romano

You bet.

Operator

(Operator instructions) Next we will hear from David Yuschak with SMH Capital.

David Yuschak – Sanders Morris Harris Capital

Hi.

Steve Romano

Good morning, Dave.

David Yuschak – Sanders Morris Harris Capital

Just a couple of things. When you said, Steve, on the solid event business for the second half, is that more of just a lot of smaller jobs or are you expecting anything in the way of something material in way of a larger sized project to help you out there? Could you give us some sense as to what kind of mix maybe you're talking about there?

Steve Romano

It's a mixture of small and medium jobs, a pretty good spread of those, no huge projects seen near-term, but a good, solid pipeline of small to medium – small and medium sized projects, and a good mix of high and lower margin. So, it's a good, solid pipeline.

David Yuschak – Sanders Morris Harris Capital

So, generally speaking then, the economy or anything shouldn't affect as much as just the stuff needs to get done, given that kind of mix, and that kind of outlook?

Steve Romano

We continue to monitor the general economic conditions, but we are, frankly, just not seeing the negative impact, at least to this point. As Jeff mentioned in his remarks, we have seen the growth of our broker business continue to be substantial. That was one area where we thought we might have seen some reduction since those waste aggregators and brokers are collecting small amounts of waste from small waste generators. Now, we've been aggressively seeking to capture additional market share, so that comes into it too, but we are seeing good, healthy business out there. We are just not really seeing any general economic effects that are adverse at this point. We'll keep watching, but so far, so good.

David Yuschak – Sanders Morris Harris Capital

Let's just talk a little bit about the thermal unit. I expect – from a timeline point of view, would you expect then, at the fourth quarter, given that you don't renovate glitches or anything, that the fourth quarter should be kind of getting you to a ramp level that begins to optimize that opportunity?

Steve Romano

It's too early to say whether it's fourth quarter or the first quarter next year. That's really the crux of what we are learning during this ramp down period – or this ramp up period that we are just getting into. So, I hesitate to say much more than that we've identified, from the outset, that we wanted to be going by July. We are going. We’ve identified that there would be a 90-day period where we assess the technology and look to optimize, and there are things to be done to optimize and we are addressing those things, and so far, so good. But during our next call, I'll be able to talk a lot more meaningfully about what we've learned.

David Yuschak – Sanders Morris Harris Capital

And then lastly, as you bring this thing online and see the potential success or lack of success, when would you want to make some decisions about doing this, doing another unit maybe someplace else?

Steve Romano

That's a great question, and we are going to be focusing on that as a potential to address the West Coast market. Also, we do have thermal desorption units in Nevada now, but they are low-throughput units. And depending on what we learn about the new technology, the higher-throughput technology we are employing in Texas and assessing the West Coast market, we would hope that, again, around the end of the third quarter, we ought to be in a position to have enough information to make some decisions in that regard.

David Yuschak – Sanders Morris Harris Capital

And one final question on Honeywell, is there potential of any additional new business that could come out of other projects, because of the problems we are seeing in the financial markets for construction, are you hearing or sensing anything coming out of Jersey City that could prevent the plans they've got there for development on adjacent properties?

Steve Romano

We really don't have any further information on the timing of the clean-ups of adjacent properties. So, one or the other, Dave, we really don't have anything material to say. We will be interested and anxious to learn as the information becomes available, but so far, there's no specific timing news.

David Yuschak – Sanders Morris Harris Capital

Okay, thanks. That's all I've got. Good quarter.

Steve Romano

Thanks.

Operator

And next we will hear from Jamie Sullivan with RBC Capital Markets.

Jamie Sullivan – RBC Capital Markets

Good morning, thanks. A quick question on the end-markets – if we just look at the mix, it looks like, again, the way that everything shaped out on the balance is that the diverse base trended positively. Just wondering if, overall, you could comment a little further on where, outside of, say, the one lost contract or lost work in refinery, if there are any other changes that you've seen over the last three, four months or so.

Steve Romano

Well, to clarify, the lost contract was a steel mill, a Midwestern steel mill that switched to a zinc recycler in December. Other than that, I'll ask Jeff if he wants to jump in, but basically, it's the normal variability of service mix and project event clean-up timing is what we are seeing in the business. We are not really seeing any trends particularly. Jeff, anything to add?

Jeff Feeler

No. There's no trends that we believe that are indicative of the declines in a couple of customer categories that we had. All of that is timing-related. Both our refinery and our steel mill business represent less than 10% of our total business, so they are small categories. So there's going to be some quarter-to-quarter variations in those, just based on timing of mix coming in.

Jamie Sullivan – RBC Capital Markets

Okay, great. And then on the Texas facility, the thermal unit, can you talk about the pipeline there? Is it more – do you have pretty much customers ready to go and it's just a matter of refining the efficiency there, or are you still building up that pipeline now?

Steve Romano

Well, I'm going to address the efficiency for a second and then Steve Welling, our Vice President for Sales, I will ask to comment on the market and what we expect to serve. In terms of the efficiency, we do want to be careful, as we go through our optimization process, that we not overpromise in terms of when we can take in the material. When we tell a customer we can handle their waste, we want to be sure to take it and give them the excellent service they have a right to expect. And we don't want to be in a situation where we take in more waste than we can efficiently process near-term. So, we are going to err on the side of making sure the equipment is working well and that we can meet customer expectations. Don't overpromise; we want to over-deliver. Steve Welling, would you like to add your comments about the market we are seeking to serve there?

Steve Welling

Certainly. Over the last six months, we've had a number of refineries visit the facility along with corporate approvals folks to approve our site. So what's happening right now is we've been scheduling more on a week-by-week basis a lot to do with the optimization that Steve is talking about. So in terms of building the pipeline, yes, we're starting to get a number of projects lined up for the future. However, some of it is contingent on how this optimization works. Like Steve said, we don't want to over-commit and then fall flat and have to go back later with a revision. So, at this point, we are getting received quite well by various refineries for tank bottoms and sludges. We are also talking to various refineries about catalysts and other petrochemical facilities about different types of materials where we have some recycle value through our units. So, so far, so good.

Steve Romano

And I would add that we have been processing customer waste, and so the third quarter will include – we will be recognizing revenue and earnings from this service during the third quarter.

Steve Welling

We are doing multiple loads per day, multiple truckloads per day.

Jamie Sullivan – RBC Capital Markets

Okay. And again, you expect that, if everything is on schedule for that August timeline, that by the fourth quarter, you expect to be on 24,000 tons capacity on an annual run rate?

Steve Romano

That's our objective.

Jamie Sullivan – RBC Capital Markets

Okay, that's helpful. Then just one quick one on transportation – I'm wondering, outside of the large projects where transportation can be up to three quarters of that revenue, is there a general benchmark for how much all the other revenue has as transportation? So the non-large project, is it 15%, 20%, something like that?

Jeff Feeler

Anything that's brought in by rail for the most part, you know railcar costs are going to be the majority of the bundled price. So, it's all going to be probably north of 50%, and it's really going to be based on geographic distance of where the project is coming from.

Jamie Sullivan – RBC Capital Markets

Okay, thank you.

Steve Romano

Thank you, Jamie.

Operator

And our next question will come from Debra Fiakas with Crystal Equity Research.

Debra Fiakas – Crystal Equity Research

Thank you. You had an acquisition target in your sights and things did not work out. I wondered if you could give us an update on whether or not you've been looking since then, and what the prospects might be.

Steve Romano

We are always looking. There are a couple of specific things we're looking at right now, nothing that I'm able to share specifics on. Our criteria remain the same, that any acquisition we would want to close would be something that we would have confidence, would be no worse than neutral, and hopefully slightly accretive in the first year of acquisition. And then we would look for double-digit accretion to earnings in out years.

The acquisition that we discontinued work on earlier this year, we liked the business and the opportunity, but we were not able to come to agreement with the seller on value, and we were not able to satisfy ourselves that we would have confidence in that accretion to earnings criteria.

We've been able to achieve, we believe, some very good success expanding our business platform, growing our business, adding new service lines, investing in new technologies in ways that have led to some solid and continuing organic growth, and we continue to see opportunities there as well. So we will continue to look for acquisitions, but we don't feel it's something that we must do in order to continue growing this business at the rate we've been targeting and achieving.

Debra Fiakas – Crystal Equity Research

Have you seen a firming or a softening? Have you seen any changes in valuation metrics since that was something of a problem with the other targets that Steve mentioned?

Steve Romano

I hesitate to really give a personal opinion from a global perspective. I will leave that to others. From our standpoint, we look at it on an opportunity-specific basis. I think that's the best way to consider it.

Debra Fiakas – Crystal Equity Research

All right. Thank you.

Operator

We will hear next from Ted Kundtz with Needham.

Ted Kundtz – Needham & Company

Yes. Hello, Steve and Jeff. Questions for you on pricing, could you comment on what are you seeing on the pricing environment?

Steve Romano

I am going to ask Steve Welling, our Vice President of Sales, to jump in on that. I may add, but Steve, do you want to go ahead and respond to that?

Steve Welling

Generally, what we are seeing is increases in energy and fuel surcharges, but we have actually raised our energy surcharge, which will impact the third quarter. Most of our competitors, a lot of our customers, have increased surcharges on their invoices to customers. So at this point, we are not seeing any change other than upward.

Ted Kundtz – Needham & Company

Is it enough to offset the cost increases that you –?

Steve Romano

We believe it is.

Ted Kundtz – Needham & Company

Okay, so are you improving margins from this?

Jeff Feeler

They are probably not going to be improving. It's probably going to be just neutralizing the cost increases that we've been experiencing.

Steve Romano

Yes, our intent – and we've had open communication with our customers – is that we are not seeking to use the current fuel cost situation as something that we are going to – we want to enrich ourselves at the expense of our customers. We are really just hoping to approach it as a pass-through philosophy.

Ted Kundtz – Needham & Company

Okay, and that's sticking well?

Steve Romano

We think it is. We've not gotten any negative blowback of significance.

Ted Kundtz – Needham & Company

Okay. I think, Steve, you mentioned all of the sites were operating profitably. Are you satisfied with their levels of profitability? Could you comment, perhaps, a bit on that?

Steve Romano

Well, of course, I'm never satisfied. My staff will tell you that. You know, there's always things we can do to do better, and cost control is the name of the game around here, and we are trying to always look for new ways to improve. I'm pleased to see our treatment and disposal margins north of 50%. We like that, and we would like to stay above that level. So I'm not dissatisfied, but we can do better.

Ted Kundtz – Needham & Company

Okay. Any particular site that you'd like to see improved more than the others or –?

Steve Romano

No, I don't think – I mean, frankly, I think all of our sites have been doing a good job. One of the real challenges that I think we've been meeting well is that we've spent a lot of money. We've invested over $50 million doing our major capital spending campaign, which is now ramping down, adding the new treatment buildings in Texas and Nevada, the new drum shredder in Nevada, the thermal unit down in Texas.

The key challenge for our site operators and the rail station additions in Idaho, our key challenge is – to cite operational people, and they've been doing a good job for us – is to get these new infrastructure expansions operating smoothly and efficiently, completing capital projects on time, within budget, and we have succeeded at those things.

Ted Kundtz – Needham & Company

Terrific. Okay, thanks very much.

Steve Romano

Thank you.

Operator

Our next question will come from Al Kaschalk with Wedbush Morgan.

Steve Romano

Good morning, Al.

Al Kaschalk – Wedbush Morgan

Good morning, guys. Just to follow on on the price increases, is that transportation only, or is it a combination of commodity costs and procurement items?

Jeff Feeler

It's really the commodity costs and procurement items for fuel. The way we bundle – the way we price our transportation arrangement, all of the fuel surcharges that we get charged to us get passed onto our customers, so we are protected from that side of it. So, this is more to cover costs within our operations and cost increases there.

Steve Welling

The surcharge we are referring to is a surcharge on disposal pricing and not on – transportation is a separate surcharge. If the railroad or the trucking company charges a fuel surcharge, generally that's passed along to the customer. The pricing reference we are talking about here is a separate energy surcharge on our disposal to cover increased cost at the landfills.

Al Kaschalk – Wedbush Morgan

Okay. So, is that fair to say then, Steve, that you're just going after the costs related to – you're experiencing in disposal, not transportation?

Steve Romano

No, it's both. What we're really saying here is that, with regard to disposal charges, there's been a fuel surcharge added to those costs because of the added fuel cost to operate the landfills and the treatment equipment. In addition to that, our contracts for transportation provide for pass-throughs of increased energy surcharges on rail. So, if the railroad has an energy surcharge increase, that's separately passed along. So, under a bundle transportation contract, there could be increases in both areas.

Al Kaschalk – Wedbush Morgan

Okay. Fair enough. If I may move onto Molycorp for a second, I guess the expectation of the drop-off was in line with your expectations, down to $2.5 million. Should we see that same level in the third quarter, or is there a step-down through this quarter?

Steve Romano

We are not sure what the total will be as we end it, but the project will – we expect it to be completed successfully, on schedule, during the third quarter. It will probably be a somewhat lesser number. All of that is built into our budget for 2008 and our guidance. So, it's essentially Molycorp's role in our 2008 budget and earnings guidance is tracking pretty much precisely to what we had expected.

Al Kaschalk – Wedbush Morgan

And I would say that $2.5 million in the quarter was in line with maybe what you have modeled internally?

Steve Romano

Generally, yes.

Al Kaschalk – Wedbush Morgan

Okay. Then if I could just try to drill further on Texas and the plant there on the thermal side, are you able to quantify a little or more refine for us what you expect the contribution to be in the back half of this year?

Steve Romano

Partially we can do that, Al. What we will share is the pricing is project-by-project, but in general we are seeing pricing in the $400 to $500 a ton range. In general, we are believing that we can process somewhere – we hope to work up to somewhere in the vicinity of 2,000 tons a month this year over the course of this year, but again this ramp-up period being a period for 90 days, we are really sort of saying we will sort of see how it goes. We believe, as we move into '09, that we believe there is – we can hopefully get to the point of achieving a 50,000-ton a year rate of throughput. That's sort of – those are the general parameters we are – the model is for the business is based on.

Al Kaschalk – Wedbush Morgan

And would this be through the [ph] other operating margins than the overall business?

Steve Romano

No, we are looking at it, but it is still healthy. We are looking in the 40% to 50% margin range.

Al Kaschalk – Wedbush Morgan

That's gross margin?

Steve Romano

It's operating margin.

Al Kaschalk – Wedbush Morgan

Contribution margin, I guess.

Steve Romano

Yes, you could call it that.

Al Kaschalk – Wedbush Morgan

All right, thank you very much.

Steve Romano

Thank you, Al.

Operator

And next we will hear from Edward Waldridge [ph] with RAA Incorporated [ph].

Steve Romano

Good morning, Ed.

Edward Waldridge – RAA Inc.

Good morning. Great numbers, congratulations.

Steve Romano

Thank you.

Edward Waldridge – RAA Inc.

You have in Idaho, the Idaho clean-up project that I believe is connected with the Idaho National Laboratory. And they have to get rid of a significant amount of waste, and I don't remember the numbers, but I thought they were pretty big when I read about it. Are they a potential customer?

Steve Romano

Ed, they are really not. The clean-up job for Idaho we completed was for the – was basically under the offices of the Department of Defense, was for an overseas military base clean-up that was an Army base. The Idaho National Engineering Laboratory is nuclear weapons related waste under the Department of Energy. They have their own disposal site, government-owned exclusively for the disposal of their own waste out there. And so we expect them to continue disposing of their own waste. We do some work for the Department of Energy, but it's very limited and it really is not something that we project as a growth area because, again, they have their own disposal site. The have approximately six around the country where they dispose off the nuclear weapons related waste, which again is really not part of our business portfolio.

Edward Waldridge – RAA Inc.

Thank you.

Steve Romano

You bet.

Operator

(Operator instructions) We will now take a follow up from Rich Wesolowski, Sidoti & Co.

Steve Romano

Go ahead, Rich.

Rich Wesolowski – Sidoti & Co.

I was on mute, sorry about that. Have you already begun to pursue waste contracts in the commercial utility space?

Steve Romano

Yes.

Rich Wesolowski – Sidoti & Co.

Okay. And secondly, to clarify the statement in the press release regarding the items necessary to beat the 123 top-end, does the current sales outlook for thermal in the bidding pipeline for the event driven business now suggest that you would come in ahead, provided you reach your typical hit rate for the work, or does the current outlook need to improve in order to best the 123? Does the status quo get you ahead?

Steve Romano

Well, I'm going to kind of point to how we do in the thermals. If the thermals perform to what we believe is possible, then we would be in a position to be ahead.

Rich Wesolowski – Sidoti & Co.

Great, thank you.

Operator

With no further questions in the queue, I would like to turn the conference back to our presenters for any additional or closing remarks.

Steve Romano

I'd like to thank everybody for taking the time to call in today, and we wish you a great day. Thank you very much.

Operator

That does conclude our teleconference for today. We would like to thank everyone for your participation and have a wonderful day.

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