Clean Harbors Inc (CLH) 2002 Q3 法說會逐字稿

Good day and welcome, everyone, to the Clean Harbors environmental services third quarter 2002 earnings results conference call. Today's call is being recorded. With us is the Chairman, President and Chief Executive Officer, Mr. Alan McKim; Senior Vice President and Chief Financial Officer, Mr. Roger Koenecke; and Executive Vice President and General Counsel, Mr. Bill Gary. At this time, I'd like to turn the call over to Mr. Bill Gary. Please go ahead.

Thank you very much. Welcome, everyone, and thank you for joining us this morning on our third quarter conference call. Joining me today as the moderators are Alan Kim and Roger Koenecke and Steve Moynihan, our Senior Vice President of Planning and Development.

Before I turn the call over to Alan McKim, I would like to read the Safe Harbor statement. Matters that we are discussing this morning 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 words: believes, 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 place undue reliance on these forward-looking statements which reflect management's opinions only as of this date, November 19, 2002.

Information on the potential factors and 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 annual report on Form 10-K for the fiscal year ended December 31, 2001 and, of course, the Form 10-Q which will be filed with the SEC today. The company under takes no obligation to revise or publicly release the results of any revision to the forward-looking statements made during today's conference call w that let me turn the call over to Alan.

Thank you, Bill. And thank you all for your patience with the delay of our Q3 results and conference call from last Thursday until today. We initiated the process to acquire Safety-Kleen's Chemical Services Division more than a year ago, and it has been a highly complex undertaking. In this instance, we simply required a few more days to complete the final review of recorded acquired balance sheet amounts and the consolidated third quarter financial results.

Since the transaction was completed with only three weeks left in the quarter, our finance department had to support Safety-Kleen with their August year end close, perform a beginning balance sheet seven days after that, and a final close for the end of the September, as well as all the integration transaction processing and documentation. With the complexity and share size of the CSD acquisition, the extra few days were necessary to finalize the quarterly results.

As you can well imagine the entire third quarter was a time of incredible activity for all of us here at Clean Harbors and at CDS we had to deal with the Safety-Kleen bankruptcy process, the planning for integration CSD and implementing the Clean Harbors business model throughout the CSD network, the closing of the financing, and ultimately the closing of the acquisition itself by early September. While we're still getting our arms around everything, I can honestly say that we are more excited today than we were when we began the acquisition process a year ago.

Our focus during the third quarter has been on delivering against the integration synergies and timetable we laid out prior to acquiring the Chemical Services Division of Safety-Kleen in September and we have done just that. We are on track to deliver the $50 million in synergies in 2003. As of today, we have had approximately two months under our belt as a combined company.

There are several important messages I'd like to convey on this call. First, we remain extremely confident in the quality of the valuable resources and assets we have acquired both in terms of people and facilities. Second, our integration process is on schedule. We have our entire US operations up and running on the Clean Harbors platform. And lastly, there have not been any major negative surprises in our first two months with CSD this is a direct reflecttion of the thoroughness of our year long due diligence process.

We have, however, experienced a number of positive surprises. We've been pleasantly surprised by the level of cultural similarities between our two companies. We believe that the fact that we're asimilar in so many ways will make our integration even easier particularly at the employee level. We have also found that the opportunities for dealing with the assets of the discontinued operations is more promising than we had originally anticipated.

We have assembled a highly sophisticated technical group capable of applying innovative techniques to deal with on-site contamination and we have become more confident that we'll be able to achieve significant economies over the approaches which have been previously budgeted for these facilities. Roger will walk you through the numbers and year-over-year comparisons in more detail.

So I'd like to put our third quarter results in context for you. Our base business performed well in the quarter particularly in light of the current spending environment and the fact that we did not experience any significant emergency services work. Equally as important is the fact that while our entire quarter was literally a frenzy of activity for the company from start to finish, thanks to our careful planning and communication and the hard work by our experienced team of account managers, we had had no significant customer losses as a result of integration. I'm proud of how our employees from both organizations performed when I look at the number of disruptions and distractions that could have derailed our momentum.

Another important factor that puts our quarter in context is our decision to perform maintenance on CSD incinerators at all four locations. We took the pro-active step of immediately conducting maintenance turnarounds at four CSD incinerators in September. We thought this was prudent planning approach to take to maximize the efficiencies of these facilities for the future. It resulted in those locations being down for a combined total of 38 days and consisted of our Deer Park Facility being down 14 days, our Utah facility being down 10 days and our Canadian incinerators for a combined 14 days. That meant that the associated deferred revenue of three to four million all fell on that 20-day period in Q3.

This maintenance which needs to happen several times a year is generally distributed throughout the year. The good news is that all these locations are back up and running for Q4.

On our September 13 conference call, I outlined integration synergies in the following areas. Reduction of personnel and corporate overhead, elimination of redundant facilities, internalization of waste disposal, and purchasing. I'll now review our progress on each of these initiatives.

Upon closing the CSD acquisition, we had a total head count of approximately 4,400 employees. As I mentioned on September 13 conference call and in today's press release, we are confident we selected leaders from both organizations to manage our larger company going forward. Also, we have gone out and aggressively recruited individuals where we felt it was appropriate to fill specific needs.

With the synergies realized to date and the additional positions added to the company, the net result is as of November 15, we have reduced our head count to 4150 employees which is on plan and getting closer to our long-term goal of 4,000 representing a total head count reduction of approximately 10 percent. We anticipate that this will result in total annual savings for 2003 of $20 million.

Looking at the second area of synergies, we have taken steps to cease waste handling operations at four redundant facilities including Lawrence, Massachusetts, Pecatonica, Illinois, Laurel, Maryland, and Greenbriar, Tennessee. With the existing Clean Harbors facilities and the use of our systems throughout waste efficiency, these facilities were considered redundant. The ceasing of waste handling operations at these four facilities is expected to result in an annual savings of $4 million.

The third area of synergies is the internalization of waste disposal. One of the most exciting realizations we have come to in the integration process is that we believe we'll be able to internalize virtually all of the waste streams of the combined company. This will take some time as we move customer restrictions on some of the combined locations. It is our belief that in the long term, our ability to efficiently internalize waste disposal will result in greater cost savings and a real strategic advantage for Clean Harbors.

And finally in purchasing, we have already taken a number of steps to begin our strategic sourcing initiative with the increased volume of our purchasing power we expect to secure $4 million in savings in 2003. Coupled with the $17 million savings in corporate allocations, these four synergy pieces I just outlined combine to represent $50 million in cost savings we still anticipate for 2003.

On a personal note, one of my most rewarding experiences since the acquisition closed has been to get out on the road and meet with our customers and new employees. With our newly achieved status as North America's largest provider of hazardous waste services, we felt it was important to take a real grassroots approach, to reach out to as many of our customers as possible.

We are undertaking an ambitious schedule to meet with several hundred of our top accounts through a series of 10 regional customer days nationwide. With that I'll turn the call over to Roger for a quick review of the financial results.

Thanks, Alan. As reported in our press release, revenue for the third quarter of 2002 was $83.4 million, compared to $61.7 in the third quarter of 2001. Clean Harbors contributed approximately $63 million of that $38.4 leaving the CSD contribution to the quarter at $21 million. As of the acquisition we anticipated that the CSD monthly run rate will be approximately twice that somewhere 38 to $40 million range. At this time, we are comfortable that those estimates considering the following factors are in fact what we expected.

Again, remember that CSD was included in our results really for only three of the four weeks of the month of September. Second, the first few weeks had the normal transitional disruptions would you expect with an acquisition of the scope and complexity that we undertook. As people learned their new role in the Clean Harbors business model, as well as their various systems procedures to perform those roles, it took some time to get the initial week off and running.

Third, as Alan mentioned, all acquired incinerators were taken down for turnaround checks and maintenance. Not only is the revenue deferred when the incineraters are not burning, but much of that turnaround cost flows through the operating expenses. In the month of September, that amounted to $900,000. I mentioned deferred revenue. The increase between the acquisition date and September 30 was approximately $7 million.

As the operation flows get back to normal levels that deferred revenue should reduce benefitting a future period. Likewise the year-to-date revenue changed from $175.8 million to $196.8 million, reflects that same CSD impact that I just discussed.

Although the CSD contributed revenue effectively for only a couple weeks of the quarter, many of the selling general administrative expenses as well as many of the operating expense line items were high (indiscernible) all hands on deck since beginning early in the quarter preparing for day one and even more intense in these initial weeks after the closing.

In addition to those temporary elevated operating expenses, the ones would you think of overtime, travel, et cetera that I just alluded to, there are two additional nonrecurring items mentioned in the press release contributing to the loss from operations for this quarter. One was the restructuring charge which breaks out as $250,000 for severance paid to former old Clean Harbor employees, and $500,000 for costs associated with closing old Clean Harbor's sales offices and plant processes that became redundant after the acquisition. The other acquisitions costs for the quarter and year-to-date were 3.5 million and 4.6 million, respectively. These relate primarily to outside consultant fees and their expenses for integration planning and transition execution.

In summary, if you allow for all the items I mentioned, we are comfortable as we enter the fourth quarter generating income from operations and anticipated revenue contribution for CSD operations are in line with our anticipated amounts.

A couple of other quick notes. One, the valuation analysis we performed on the net assets required and the projected cash flow streams confirmed the bargain purchase price, there will be no goodwill recorded as a result of the acquisition. And second, the environmental liabilities recorded as of September 30, '02, are 168 million, close to the numbers that we had been anticipating as we approach this acquisition. With that, I'd like to turn the call back to Alan.

Thanks, Roger. The fourth quarter will be our first full quarter as a combined company and management is highly focused on executing the integration needed to fully realize all the synergies. We're anticipating fourth quarter revenues of $175 million to $180 million, with an EBITDA of 19 to 20 million and a bottom line assuming a fully converted share count of approximately 17 million shares of 6 cents to 21 cents per share. We are still committed to achieving the projected 115 million in EBITDA for 2003 that we laid out on the September call.

We're anticipating full-year revenues of 730 to 750 million with a bottom line of $2.00 to $2.06 per share, again assuming a full conversion of all shares in 2003. Part of this is about achieving our cost targets and here we'll be focused on the four areas of integration synergies I discussed earlier.

In addition to the cost initiatives I have already highlighted, we'll be starting the process of selling various properties or assets that are being underutilized. We anticipate in selling $10 million of assets in '03. Not only will we be selling assets but we have been investigating new and innovative technologies to clean up the environmental liabilities at some of the acquired sites. I'm very encouraged by some initial due diligence we had done in this area.

We had originally forecasted spending $32 million next year, and we now believe we'll now be spending approximately $24 million in '03 on environmental spending. There are some promising alternatives available to us for site clean-up that have not been previously applied to these sites. These have the potential to have a dramatic impact on further reducing the cost of environmental liabilities to Clean Harbors. It is in the early process, but we'll keep you posted on our progress in this area and the quarters ahead.

But reducing our costs is only part of the story. The other part of improving our profitability is to make sure we're achieving an adequate return on our investments and to this end, we have recently launched a significant pricing initiative and which we'll be looking at returns by customer and waste stream and identifying where we need to change our pricing to achieve adequate returns. In particular, we'll be focusing on incineration streams due to two factors.

First, due to a series of industrywide plant closures over the past five years, we have seen capacity come much closer in line with demand. According to "EI Digest", as an industry, we're now operating at more than 80% utilization compared to 60% as recently as 1996. So, the days of rapid price declines driven by overcapacity are probably gone.

Second, like everyone in the industry, we are facing considerable investments to comply with the new max standards and our customers undertstand that to cover these investments and to continue to provide them with the high level of service that they have come to expect, we will need to increase prices. We will be implementing these price increases in 2003 and will be taking a fades approach as we look across waste streams and access costs in various regions It is too early to predict exactly what the price increase will be for any given region or waste stream, in particular we expect commercial incineration utilization to rise even higher in coming years as private incinerators cease operation in light of the new MAC requirements.

So to review, our base business performed well in Q3 despite the incredible level of activity associated with the integration. We have made great progress in a short period of time with CSD, we'll continue to work during the fourth quarter and into '03 to complete the integration and improve our pricing performance, and realize the full benefits of this acquisition. That concludes our prepared remarks. We'll now be happy to take any questions you might have. Dave, if you could take it from here?

Certainly. And thank you. Today's question-and-answer session will be conducted electronically. If you would like to signal to ask a question, we do ask that you press Star 1 on your touch-tone telephone.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment and we do ask that in the interests of time you limit your questions to one question with one follow up. Once again, that's Star 1 to for a question. And we'll take our first question from Michael Roesler from CJS Securities.

Sounds like you guys are doing a great job right now. Alan maybe to follow up one question from the last conference call. You mentioned getting out to see the customers and you had mentioned on a previous conference call about customer overlap? What do you see right now and what sort of opportunities are you seeing with your customers right now and maybe reaction to a price increase?

Well, as we've gone out and met with our customers in these regional meetings, I think we've done seven of them or six of them at this point. We're -- we'll be doing some more tomorrow and the next two weeks. We have been communicating to the customers the level of investment that the customer is making to get the facilities up to MAC standards as well as other cap investments as well as the environmental spending.

So I think we have up front in trying to communicate this with our customer base. We haven't spoken specifically in the in these open forums because I think it's still premature but I think we have at least communicated to them the additional costs that the company is going to be incurring. I think the sense that we get in these meetings depending on what region of the country is from our customers is a lot of opportunity to cross sell, particularly in our field services business and for the new customer base that we now have. But quite frankly, we don't really see a tremendous amount of overlap and we didn't see that through our initial analysis prior to the acquisition.

And I guess to follow up in terms of the price increases, any of that built into your estimates for '03 right now?

No. They're not.

Okay. Thank you.

We'll take our next question from Howard Rosencranz with Boast. Please go ahead.

Hi, guys. Congratulations. Good job with the guidance, really, hats off. In terms of your guidance, first of all, just to clear that up, you -- the EBITDA numbers stayed the same, but the D&A I couldn't get it that quickly to flow through. The D&A numbers lower or the provisional tax rate is lower?

The depreciation and amortization is probably a little bit lower than what you were using.

Okay. And in terms of the '04, you had previously suggested there was an additional $35 million in synergies that you anticipated in '04. A, do you still anticipate that? And is there any reason $35 million after tax is something like $20 million in provisional after -- in pretaxes, $20 million after or over a dollar a share in diluted EPS.

Is there any reason why '04 EPS -- and that doesn't assume any growth, is there any reason why '04 EPS should not be a dollar higher than '03? Assuming you are getting an incremental $35 million in savings?

Howard, this is Roger. I think for purposes of all the fine details that we probably stick to the estimates we used for 2003. But it is fair to say that we're still comfortable that we'll get those additional synergies in the year 2004 that you mentioned of $35 million.

Okay. Thank you. I'll get back in queue.

We'll take our next question from Ari Koel from Eaton Vance. Please go ahead.

Good afternoon, gentlemen. Two questions. One, can you be a little more specific on the earlier comments regarding the potential savings if you achieve, you know, 90 or 100 percent utilization of waste disposal over, you know, one, two, three-year time frame?

You mean on the internalization question?

Correct.

This is from a prior call?

No, no. This is from when you mentioned the first four areas of synergies.

Okay.

You didn't quantify the potential savings from internal waste disposal, uhm... waste disposal being internalize.

Yeah, Steve. Maybe you can take this question, if you don't mind.

Sure. Yeah, the number that was missing there was 5 million for 2003. And a total of another 5 million going through 2004.

Okay. And would that achieve near 100 percent internalization or is there still more to come if you can go further?

I think that would be pretty much 100 percent. The only time we would be sending waste off site is if we have a technology or, I'm sorry, don't have a technology or if there was some customer restriction that had us go outside.

Okay.

And that really is the anticipated timing issue there of internalization. It's really moving more internally after customers approve the use of the facilities both Clean Harbors' facilities as well as CSD facilities in the coming months.

Okay. And then on a reporting basis, I believe the financials have all been crossed over to the PeopleSoft Financial System you have at Clean Harbors.

Can you kind of explain on a go-forward basis to what degree there are other systems for either financial reporting for billing or other things that need to be integrated in the months to come, please?

Okay. In the US, essentially, everything at this point is now integrated on the financial systems which is primarily PeopleSoft as well as our waste information systems that Alan has talked about in the past. In Canada, the essentially the waste handling logistics and billing piece remains on their systems. Other than that, most of the others have at this point been at least partially integrated into our systems and the remainder of that is on the horizon here.

So the Canadian switch over will happen over how many months?

We will probably continue to run the Canadian operations independent from a systems standpoint for the foreseeable future, really. They are on our PeopleSoft system from a financial standpoint but their invoicing and their waste management systems that currently exist today are adequate, and their business model is quite close to the Clean Harbors' model. So it will be some time in '03 when we begin that planning process but that is not currently planned at this point.

And a way of looking at it is sort of the cash in the revenue generating piece is on their system. The cash out the payables, et cetera, has been integrated into our financial systems. Ledgers on our systems. And payroll is on a third party processor that will be interfaced in the coming months into our ledger directly.

Thank you. And just the last thing, on the contractual side with your customers, you currently have a mix of small businesses and large national accounts. Can you kind of give us a sense for what portion of your contracts are on, you know, one year or very extended pricing and contracts with other terms vis-a-vis ones that are more kind of monthly or so?

Well, any account particularly on the national account is really more of an evergreen for contract language or -- or contracts terms and conditions. Pricing varies, quite frankly, even within those accounts. Depending on the customer, there could be a annual, uhm, pricing and purchase order system put in, or there could be a three-year with pricing terms and conditions laid out or it could be more on a per shipment basis.

So we have the legal component and then we have the pricing component that is very different and quite frankly very variable.

So, I'm just trying to get a sense, though, for what portion of your revenues derive from contracts or relationships where it's more combined kind of evergreen or -- or -- or situation somewhere -- where things are really written down in stone versus ones where the pricing and the terms are very much concrete over a certain period of time and can't be revised.

You know, I think on our next call we'll probably be able to give you a little bit more clarity on this we are in the processes of going through budget account by account and looking at the issues like restrictions so that we can further internalize waste as well as the terms and conditions of these combined companies now.

So I think we would only be giving a guess at this point exactly what that percentage was and how it is going to impact the future. But maybe on our next call I think we'll be able to give you more exact information.

And we'll take our next question from Dan Brady from Presidio Management. Please go ahead.

Yeah. I wonder if you could take your 115 million in EBITDA and take us through the assumptions regarding the other line items that get us to $2 to $2.06 after taxes.

Steve, would you like -- do you have your sheet, Steve? And would you like to go through that?

That's fine. As Roger mentioned the biggest change I think from what we had talked about previously was the finalization of the valuation of the assets and the depreciation and the amortization that goes along with those assets. Plus the capital spending for next year and the depreciation, you know, hit that that takes.

So what would that figure be?

We are looking at about 35 to $35 million on depreciation.

Okay. And then interest?

Net interest expense of about $22 million, that includes any interest income and about $2.4 million of amortization of, you know, financing costs.

Okay. Then so pre-tax would be, uhm....

You know, it would be 57, 58 million.

Okay. And what kind of a tax rate?

Well, for this purpose, we are still using a 40 percent tax rate. We may get a benefit next year from a valuation allowance, but for these purposes we are talking about the --

So that gives us 34 million after taxes? Is that what you come up with?

Then it will be a net $2 million total of preferred dividends although those don't get deducted from net income on that calculation.

You say they don't?

They don't if you assume conversion.

And you're assuming that in the number of shares?

Yes.

Okay. So how many shares are we talking about?

We're looking at 17 million right now. Of course that depends on the stock price and so forth, with options and all that.

That gives you $2. Now, I'm not an observer of the industry. When we talk about raising prices, I'm not sure what kind of range is possible. But could you -- do you raise prices over your whole customer base by as much as 1 percent, would than a possibility?

I think we would only be guessing. We've really taken on a very -- uhm, methodical approach. We have actually engaged a firm to help us with this, to help us analyze contracts on both companies to look at the investments we need to make, to look at those -- excess those costs on a regional basis and those future costs. I think we would be guess We try to go down that path.

Well, I mean, is there any possible range? I mean, I'm not sure how significant a price increase is. Uhm... would we be talking customers about just it a -- upping it a quarter percent or --

I don't think it would be appropriate for to us guess at this point. I think that what we have seen is that, you know, in some areas, maybe a price for particular streams, a price increase may not be warranted. But in other areas for other customers, there could be a significant price increase. And so I think that we are analyzing all of that.

We're putting a tremendous effort into this area to analyze the costs and the current pricing to those clients and we are going to be working through that very quickly here and moving out in the first quarter the expected changes we want to make.

At any rate, it's not included in the guidance?

That's right.

It would obviously fall right to pre-tax, is that a safe assumption? Would there be any necessary costs associated with that or --

Not necessarily. We may anticipate a little revenue leakage as you would expect because maybe some of your -- your, uhm, lowest-priced customers may go away for some period of time.

So you know, uhm, that's a possibility here and that's one of the reasons why we have not made any modifications to that minimum 115 EBITDA.

And once again, to our listening audience if you would like to signal for a question, it's Star 1 on your touch-tone telephone. And once again, we do ask that you limit your question to one question and one follow-up question. And we'll take our next question from Alan Metrani from Copper Beach Capital. Please go ahead.

Hey, guys. Thanks for putting the information out. Question for you as relates, can you just give us some balance sheet items? I haven't seen the Q yet, what debt was, what Cap Ex spending was and what cash was at the end of the quarter?

Alan, if we can, other than the raw balance sheet which is attached to the press release, if we can wait when you look and see the Q this afternoon, we have a -- you know, obviously the full Q, but also greatly expanded disclosure, uhm, without getting everybody kind of confused on the call I think it's best if we just let you walk through the Q.

And if you have questions, please call us.

Yup, that's fair. On your capital spending plan, any reason to think that it will be any different than you originally laid out?

Actually, I think if anything, we're maybe a little bit more on the modest size. Alan mentioned on the environment spending front, we are looking at that 20 to 25 range. On the Cap Ex side, something in the low 30s, call it 30 to 35 million range.

But we had talked earlier about 38 million. We're lowering that down a little bit.

Okay. Uhm, also, can you speak -- just to understand, in prior calls I think just to follow up on the previous question, I think it was a one -- you had talked about a pricing goal of one percent change of pricing you think impacts your pre-tax of a certain level. Do you feel any comfort in reiterating that here?

I don't recall, Alan, exactly the point there that maybe you are referencing.

I know sometimes, Alan, we have talked about the impact, and again this was the old Clean Harbors, like raising incineration a penny a pound and what that would translate to and I believe the number we threw out, a penny a pound on a new expanded waste business and incineration, something like $8 million.

Right. We will manage about 800 million pounds of material next year. And so, you know, a penny a pound has a significant impact on profitability obviously.

Excellent. Uhm, any -- I'm reading in the news about the tanker that's off of Spain that's breaking and there's oil spilling and they say that maybe if all the oil were to come in, it could be twice the size of the Exxon Valdez. Do you do any business in Europe?

Not at this time, no. The only thing that we would be called for something like that would be to supply specialized equipment that we have.

Have you been contacted for that?

I don't know personally on that but maybe there would be a call going into our emergency response center. I don't know right now.

Okay. Can you tell us what volumes were this quarter, how much of the business you think was volume versus price either for your own business or for CSD?

It's really just extremely difficult to kind of break the components out. You have to remember we have this things commingled now where all of the divisions are operating as one and to separate it is -- two weeks of composite data in a quarter just would be not meaningful right now.

Okay. And then one last question for Steven just sort of housekeeping. Just a comment, you talked about the convert dividend, the after tax convert dividend. I thought in the first year it's a cash pay.

It's a cash pay but when you do the fully diluted calculation, once you assume the preferred shares are converted, you do not deduct the dividends from net income.

So if I'm using 17 million shares in my model I should not pull off a million and a half for the convert for next year?

Correct.

Perfect. Thanks a lot, guys.

Okay.

We'll take our next question from Peter Cirrus from Gorilla Capital. Please go ahead.

Hi, Peter Cyrus I have a couple of sort of confusing questions because I'm confused on it because you are. Uhm... you were talking about the earnings with the $2 and 17 million shares and said it depend on the on the stock price because I know there's all these converts and there are options and things like that.

So is there some way for an ignoramus like me to figure out if the stock at its current price up $3, what earnings would be or if stock what the at 15, what the -- in other words, where the dilution points are?

Steve, you want to take a shot at that one?

Well, there is an answer. It's -- I can't do it on the phone here but there is a calculation that you go through really only for options because all the preferred stock has strike prices, you know, that they knew 25 million is a 1050 and I believe the old preferred we had was at 15. So those are pretty simple. Then the options really just range based on the stock price. So there is a formula that you can put in different prices.

But, for example, let's say the stock was at $13 a share. I'm just picking a number. It is -- just -- does that make the earnings instead of $2.05, $1.90? Is that the kind of dilution we're talking about?

You know, I -- I -- I just don't think so. It a little hard for me to answer on a call like this.

At 13, nearly everything would be in the money.

Fine. So what I would do is I'd figure 22 million shares, right? That would be the fully diluted number?

No. That's the 17 million that Steve is using, correct me if I'm wrong, Steve....

Yeah. I think the 17's a pretty safe number.

Fine.

Those are the max -- that's the maximum outstanding share calculations.

Okay. Uhm... so that there's not a -- so I can stick with the 17 number?

I think the 17's a safe number.

The second question I have is and I know this is a tough question to answer, it's a moving target, but... have you guys stopped to sort of ask -- look at what, you know, sort of given a normal economic environment, what -- what the -- after you get everything integrated, what the earnings potential, say, two years, three years down the road -- I'm not asking for an estimate.

You know, I'm asking when -- you know, assuming you are not making any more acquisitions, when everything just sort of settles down,....

We -- we wouldn't -- with everything that we have going on and integrating the two businesses and particularly getting them all up on one platform, that's probably something that we won't have prepared for a while quite frankly, and I think it would be a guess, and it wouldn't be prudent for us to make any guesses.

But it is reasonable to say that next year's numbers still have integration costs and other things in it, that those -- those aren't -- in your mind, those aren't the peak kind of numbers you can make?

We certainly went into this with the thought that, you know, we could take our leadership position in the marketplace and we could expand with the services that we currently offer our existing customers across the CSD customer base to continually grow this business. You know, we certainly have a goal of building a billion-dollar business here. And with that, hopefully, significant profitability.

But, you know, first things first. We have a lot of work to do to integrate our businesses together and to get, you know, a solid foundation here built for the future.

Thank you very much.

And once again, that's Star 1 for questions. We'll take our next question from Stuart Goldberg from PSD Capital. Please go ahead.

Good morning, gentlemen. Congratulations. Quick question for you all. Everybody is talking about pricing. What have you built into the budget for next year for labor and health care, workers' compensation increases, et cetera? So company wide, what are your expenses increased by?

Stu, as you can imagine, we're just starting the detailed 2003 budget as we speak. Most of the worker comp type charges on the insurance programs we have gone through the renewals. New renewals are coming up. We built those into some of the projections that Steve and Alan have alluded to for next year.

But at a very specific line item detail. That's the process we have actually just kicked off. They are working on the sales budgets as we speak. -- with the remainder of the detail to follow. We'll have more information if I if you ask that, I think, on the next call.

I would tell you though, just to add that, though, is the way we have historically been dealing with the significant changes in costs, particularly as it relates to fuel and insurance, is surcharging our customers based on national fuel cost averages and since 9/11 when insurance costs have skyrocketed, we began a insurance surcharge. So we try to deal with some of those types of costs with a little bit more flexibility with our customers because they tend to go with wild swings here.

Okay. And what about labor? What do you think -- if you had -- if the labor pool was X, what percentage do you think you are going to have to raise X in totality next year?

I don't think other than just a sort of a normal inflationary type of increase.

The low single digits?

Oh, yes. Yeah.

Okay.

And we have -- as Alan mentioned, some synergy costs to go on the labor line, as well. Just as we become more efficient as we get these operations melded. So....

Okay. Great. Thank you, gentlemen.

Okay.

We'll now take a follow-up question from Michael Roesler from CJS Securities. Please go ahead.

Yeah. You mentioned a couple of items in terms of free cash that are going to make some improvements on to maybe sort of fill in the rest of the blanks to get to the bottom line if there is any other changes, say, in accrual for future closure costs or severance and facility closure costs.

Steve, would you like to take that or --

Yeah, uhm, I will if you want.

Sure. Go ahead.

Yeah. The, uhm -- from the 115, Mike --

Yup.

-- the first thing you do is add back the increase in the environmental reserve accrual.

Mm-hm

And that is really primarily for the landfill issue that you continue to approve for those things. It's a noncash expense. Then as Alan mentioned we are still looking at --

That number I had at 13 million.

Yeah. I think it's going to be more like 10 at this point.

Okay.

Based on all the review we did on the environmental liabilities.

Sure.

On the sale of assets and working capital, it's still really the same $20 million we have been talking about. The cash interest would be about 20 and that's net and again all that does is exclude the amortization of the deferred financing costs. At this point, because we will have the NOL carry-forwards from the $20 million write-off in the third quarter the cash tax would be more like in the ballpark of 14 million.

Okay.

Then between any severance costs and any other acquisition type costs like severance or facility closures, things like that would be about 8 million.

Okay. So actually --

And those are accrued for us so those are already in the balance sheet as of September. Then if you assume all the dividends are in cash for next year is two million... the environmental liabilities I'm just using $24 million here. Capital spending will be below 35, so I'm just using 34 just so you can put these things down.

Okay.

We came to about $43 million.

$43 million in free cash flow. Okay, thank you.

And we'll now take our next follow-up question from Howard Rosencranz. Please go ahead.

Yeah. Hi. I just want to make sure that there was some clarity in terms of for starters on the -- on that increase in -- what you previously said was that every one cent increase in incineration pricing translates to $8 million pre-tax. One cent if I'm not mistaken the going price is 22, 23 cents on incineration, so that's about a 4 percent-ish increase? Do those numbers jive?

That's what one cent per pound would probably equate to on a percentage basis, that's right.

Okay. And the $8 million is the -- is 8 million tons, etc...?

That is 800 million pounds of material that would be handled annually.

Right. So it's $8 million.

Right. Roughly 400,000 tons of capacity that we currently are running at right now.

Okay, maybe I'm not very bright. Could you do the simple math for me? What does that translate to in -- in -- in incremental pre-tax?

Well, a penny a pound on 800 million is --

Is 800,000, am I --

No, it's 8 million.

That's what I said. 8 million. Am I missing something? And then you threw in the 400,000 so I don't --

No, I'm just saying I'm converting the 800 million pounds is 400,000 tons if you were trying to just understand what our --

But simplistically, it's $8 million in incremental pre-tax, right?

Yes, it is.

Okay. To jump to the free cash flow, to jump into '04 and just to again work with just the guidance you have given us, you have the -- what -- that you previously given us anyway in terms of environmental, you have reduced your environmental expectation for '03.

Now, I'm not really clear exactly what this implies as to what your environmental -- you had initially said a hundred million dollars over the first five. Is that number now lower, is your entire nut expected to be lower you? And also you threw in $168 million earlier in the call. I don't know what that was exactly.

No, that was 268 that Roger mentioned.

That was the environmental liability then. It was 268. That makes sense. Okay.

And I think we have just gone through a first pass budget at a very detailed level on both capital and environmental spending for the fourth quarter and for next year.

We haven't gone through '04 or '05 so it would be premature, Howard, to touch on the overall guidance that we had given you in the past but I think as we get further into the analysis of site by site and again looking at some of the alternative strategies that we believe we can employ at those sites, that we could manage these sites more efficiently both working with the regulatory community, the local community, and the, you know, the current engineering firms that are handling those searches. I think we have some plans that can help further reduce our costs.

Okay, so it's premature at this juncture --

I believe it is.

Okay. Fair enough. Thank you very much.

Okay.

And our next follow-up question will come from Alan from Copper Beach Capital. Please go ahead.

Have you factored in any lost revenue from those four sites that you have closed down?

We have not, and our sense at this point from those ceasing waste handling is -- is one thing. But, you know, we continually service the customers that are utilizing those facilities. And Clean Harbors has a facility very close by to those ones that were shut down. So there really -- outside of customer restrictions, really should be no interruption in service.

Okay. Do you plan on selling those facilities or selling the equipment from those facilities?

Uhm, we will take a look at those. Those are not on our early list of selling properties right now. We have a number of other under utilize add sets that are not part of that group after sets.

Okay. Thanks.

Yup.

And Mr. McKim, it appears there are no further questions. Therefore, I'd like to turn the call over to you for any additional comments.

Well, thank you very much for your questions on behalf of Clean Harbors. We appreciate you participating with the call this morning. We look forward to speaking with you at our next call on our year end results. Thank you.

And ladies and gentlemen, this does conclude our conference today. We do thank you for your participation. You may now disconnect.