Clean Harbors Inc (CLH) 2003 Q1 法說會逐字稿

Please standby, we are about to begin. Good day and welcome everyone to the Clean Harbor Environmental Services' first quarter 2003 results conference call. Today's call is being recorded, with us is the Chairman, President and Chief Executive Officer, Mr. Alan McKim; and Senior Vice President and Chief Financial Officer, Mr. Roger Koenecke. At this time, I'd like to turn the call over to Mr. Bill Geary, Executive Vice President and General Counsel. Please go ahead, sir.

Thank you. Good morning. Matters 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 words `believes, ` `expects, ` `anticipates, ` `plans to, ` `estimates, ` `projects, ` or similar expressions.

These forward-looking statements 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 May 14, 2003. 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 12/31/2002 and the Form 10-Q which will be filed for this first quarter.

The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements that maybe made during today's conference call. With Regulation FD in effect, in the future, it will be our policy that any material comments concerning future results of operations will be communicated through pre-announced calls such as this one, press releases or other means that would constitute public disclosure for purposes of Regulation FD. With that stated, please let me turn the call over to our CEO, Alan S. McKim.

Thank you Bill. Good morning. The first quarter is typically our weakest quarter and this first quarter has been even more so as evident by announcement this morning. Our revenues exceeded the low end of guidance and our profitability was negatively impacted by several factors I'd like to explain in more detail. On the revenue side, we saw weakness across many areas of the business, due primarily to the severe winter we had on the East Coast of the United States and in Canada.

In addition, it was an unusually slow quarter for our site service segment since we do not see many emergency response events in the quarter. It was not that we lost out on these events; we just did not experience a number of events that typically would help offset the seasonal slow down that we usually see in the winter months.

Our large project business, which feeds our landfills and incinerators, was up significantly this quarter. We have several projects in the pipeline, but a number of them were pushed back due to the difficult weather and economic conditions. We expect to see these projects start moving forward in the second and third quarters.

In our Tech Services segment the decline in waste volumes were sharper than we had expected. We believe the economy is putting further downward pressure on this segment. We do not seem to be losing market share, we just believe that total waste volumes are being reduced by the slow economy.

On the cost side we encountered a considerable amount of added costs in managing the business through the severe winter. Transportation costs and utility costs were significantly higher than planned. Health care for employees also increased considerably during the quarter. We also incurred one-time expensing-expenses totaling $1.6 million related to professional fees associated with the CSD integration, as well as the pricing initiative that we have ongoing. We completed an expensive audit during the quarter that the - also completed an expensive audit during the quarter that pertained to last year's audit.

In addition, expenses associated with the accounting of our environmental liabilities FASB-143, [Inaudible] and other issues were significant. Finally we saw a stronger Canadian Dollar, which negatively impacted our US disposal into Canada, this currency swing alone cost us approximately $800,000 in the first quarter.

The short fall in EBITDA resulted in a violation of a covenant with some of our lenders, we have been in discussion with them and feel confident that we'll resolve this covenant by the filing of our 10-Q. I'm pleased to be able to report that our results for the second quarter are looking much stronger, midway through the quarter we are seeing a stronger pickup in activity across many of our businesses.

In our incineration business for example our facilities are already returning to a higher activity levels that we experienced in the fourth quarter of '02. We are also seeing strong activity in our events (ph) business including work associated with an oil spill recently occurred in Buzzards Bay near Cape Cod. This could prove to be one of the largest spill cleaner projects we've ever been involved in. We are also making good progress integrating the CSD operations. The integration is on track and as a result we are well on our way towards building a truly North American network of services for our customers.

Turning to our guidance, for the second quarter, we expect revenues of a $160 million to a $165 million based on our first quarter performance in current marketing conditions, we are revising our full year guidance. We are now anticipating revenues of $645 million to $670 million. Diluted earnings per share of $1.11 to a $1.32, which excludes the effect of a change in accounting principles related to FASB 143. Looking ahead we believe Clean Harbor is well positioned for growth. We are committed to closely managing our expenses while continuing to invest in the infrastructure necessary to capitalize on our growth initiatives. At this point I am going to turn the call over to Roger Koenecke, who can go into more details on the financials for the quarter.

Thank you Alan. Briefly a little additional information on the revenue and expense items in the P&L that was in the press release and a few balance sheet items. As far as the revenues, the break out by our segment were as follows:

Our TECH services was approximately a $102 million, site services $39 million and miscellaneous and others approximately $2 million for the total of the 143 reported, excuse me the, the 142 reported. The break out between the US and Canadian operations, in the US was approximately $120 million, $22 million in Canada. The cost of sales for the TECH services increased to 75.5% and in site services to 75.7%.

Alan mentioned on the SG&A, if you compare to the fourth quarter you will see that increased by a little less than $4 million, the two primary items as he mentioned, were approximately $1.6 million related to professional fee, that will be above the norm as well as the $800,000 coming from the foreign currency translation for the business that is done by our Canadian unit in the US dollars.

To the balance sheet, the cash and cash equivalent position at the end of the quarter would be approximately $7 million. On the accounts receivables, the currency will see some progress. The DSL will have decreased from year-end and will be approximately 82 days outstanding to something like 78. You will see improvements both in the unbilled and the bill receivables. The restricted cash and cash equivalents will essentially be unchanged, although that will be going out as additional letters or credits as posted in the second quarter. Again, it's unchanged at approximately $60.7 million.

Turning to the liability side, balance on the revolver at the end of the quarter is $15 million, availability is approximately $45 million. There is essentially no debt other than the accretion and amortization of debt issue cost on the other outstanding long-term obligations. In other words, they are essentially remaining at the issued price of the 115 for the senior notes and the 40 million for the mezzanine [ph] piece. Turning to some of the cash flow items, capital expenditure for the quarter was approximately $6 million, environmental spending was approximately $3 million. With that I will turn the call back to Alan.

Okay, Roger. Thank you. I think Lisa, at this point what we would like to do is open up the call and take questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit one on your touchtone telephone. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you limit yourself to one question and one follow-up question. Once again that's star, one to ask a question. We will go first to Michael Roesler with CJS Securities.

Good morning.

Good morning Mike.

Alan, in terms of the business, other than these sort of one-time expenses, could you may be take us through from, say February to March, April and now into May, sort of what's changed? What's improved? What's not improved? And, to get a sense of where the business is today, say in utilization and things like that.

Sure. And, certainly in February was our toughest month. We probably lost three or four days due to the winter. A number of our plants were shut down. I think throughout the first quarter, with the bitter winter we had, we had a lot of inventory in our facilities that basically could go unprocessed because a lot of our plants were frozen and that's another reason why we had significantly higher utility cost.

Just keeping the plants warm and keeping the facilities running, especially in the Mid-West and then in Canada was very expensive for us. And we weren't able to process a lot of waste. And that certainly has changed now. We are certainly getting our facilities back on track and moving waste more freely through them.

In the second quarter, we see a pick-up. And we have seen a pick-up certainly in, what we consider our Household Hazardous Waste business. We have approximately $10 million of planned contract work in the second quarter on our national program there, where we perform this service. That drives a lot of volumes into our incinerators and provides a lot of fields of opportunity.

We also have about $10 million of events ongoing right now that are somewhat incremental, if you would to what you saw in the run rate in the first quarter. But just, overall business is picking up. The incinerators are running ahead certainly through April, running ahead of that first quarter, but more in line with the fourth quarter of last year. We are certainly seeing some improvements there up about 10% and I think that is going to equate to some of the positives we have in the quarter.

Can you give a sense of what landfill volumes were in the quarter, where you, what the utilization at the incinerators were and how that might have changed into April, on that?

Yeah, in terms of the incinerators are, in the first quarter they ran about 86%, that compared to 93% in the fourth quarter. Michelle [ph] mentioned in the, in April, we are backward to that fourth quarter run rate, Mike, and in terms of volumes of the land fill, if you look back at the last nine months of 2002 in the first quarter we had gone about 13% from that run rate, that really reflects the lack of projects that we talked about.

In April, so far we are looking at those volumes, getting back, close to the last nine months of 2002. In my point, one of the point there I mentioned is, that we, we just had on industry group that is the Farthest Freckle [ph] conference last week and where many of the industry people come together and it is clear that the contaminated soils business is off, considerably. We saw numbers in the 70%-72% range of reduction in volumes of contaminated soil being discussed both in the engineering consulting side as well as from the hazards waste management side of the industry so.

This is not just a Clean Harbors issue from what we can see and what we've been talking to people. We have a number of projects that we are bidding on as there is a lot of opportunity coming out, but many of those projects just were pushed and I think people just didn't want to go out and start the costly excavation and removal of contaminated soil to feed our plant because of the weather.

I guess, this is the most difficult question and then, is that, given what we've seen in Q1, how can investors be comfortable and look at the numbers that you now have for the rest of the year that those numbers are doable and if anything conservative at this point?

Well, I think certainly on the system side, we are certainly getting a good picture every day of what our key performance indicators are in the business from a top line standpoint. We are looking at our business, on billings, we are looking at unbilled daily, we are looking at daily volumes into each and every one of our facilities. And so we would get a good, I think predictor there. We are looking at tons burnt per day across all our plants throughout the incinerators.

There clearly is a, I think some good performance indicators that we are looking at that is I think one of the values of having them all in one systems here. Some of these extraordinary cost of, you know, hurt us in the quarter certainly, but I think it also reflects the fact that we have a fixed cost business and what we need to do is, work a lot harder to reduce our fixed cost even further. So that when we do have these revenue shortfalls we are able to continue to show a profit here and because we are all certainly very disappointed with the results in the quarter.

But I think, the company this year moving forward, as we've touched on in the prior calls still have a lot of costs to take out of the businesses, which relates to our planning in the merger of the two businesses. This year, we actually believe we are ahead on the cost side of our business, but that was at a much higher run rate on a revenue basis, and so we need to go back to our cost structure and further reduce cost here so that we deliver on those numbers Mike that we are communicating to you.

In a follow-up question, in terms of the debt covenants, have your vendors indicated what they are going to ask for return in terms of adjusting the requirements or what is the update on that?

We do not have at this point any -- have not had any communication regarding what these are or cost that would be incurred in regard to the [Inaudible] . If you look at the -- if you add back in the one time hits in the quarter, which totaled about $3.4 million dollars on to existing EBITDA we missed that covenant by $1.5 million dollars or so, and I think that we are working closely with them. We are keeping them informed where the business is adding and we believe we will be able to resolve that issue.

Okay, thanks.

We go next to Kevin Denny with H.D. Brous.

Good morning guys, can you hear me?

Yes.

Okay, my main question is, you guys, I guess presented, some time around April 1, I think at the Deutsche Banc conference; and at that time you reaffirmed the top line 670 to 680 in the $115 million EBITDA number, so what I am trying to better understand is when did you know results would fall short and just get a sense of maybe why it took so long and understand, kind of the process there.

Yeah, I think going through this audit as you know was an enormous undertaking by the group here, and we certainly got behind in coming up with the -- our first quarter numbers as you can expect and also doing all the calculations for this FASB 143. This is by no means to minimize the amount of effort that has gone on by our finance department, legal department, and engineering group to basically deliver the numbers and to get the books in conditions to be audited not only for last year's full audit, but also for this year.

We bought this business out of bankruptcy. It did not have audited financials and it has been an enormous undertaking for us to do that. Certainly, we are looking at moving forward to be able to get into some normalized reporting for the people and the financial community. I mean, this second quarter will be the first time when we are going to actually have a chance to just be dealing with the second quarter.

We are not going to be dealing with another financial pronouncement or accounting change or an audit and what have you and I hope we have more timely information, but quite frankly this information was just coming available to us over the past week we've had our auditors in here until about 2 o' clock this morning and this has been an enormous undertaking for us, Kevin.

I might just add one comment, one of the biggest -- I guess -- call it frustrations with the numbers is that you have no benchmark to compare them against. We have a number of detailed P&L’s [ph] but because we haven't just had no audited prior to financial statement. So, we really didn't have a very good picture of the breakout at a operating unit level.

Yeah I mean each one surpasses. We develop track records for now and we get numbers you got a sense test. Do they make sense -- do they not make sense and you know where to go and what to fix. Until we got to that point everything is under extra scrutiny and going through it two and three and four time.

Okay. I get a sort of, our models proof of that. How much of the increased expense did you not expect with respect to the professional services? I mean because you were in the middle of these sizeable integration efforts so how much of the 1.6 and some of the other expenses had you not planned for?

Well, certainly part of the extra audit costs were over $600,000 dollars alone that hit the quarter. That - those were expenses that we incurred right up until when the actual claim [inaudible] was filed. And that is above the normal provision for the quarter, which we have made anticipation of a higher audit piece, and norms for even this year.

Okay and then this may be a couple more a -- an update on the synergies you would expect at about $60 million, where do you think that falls out now?

I think we are ahead of our synergy number. We continue to make progress on the head count side and quite frankly we have been -- really focused on the synergy one of the new hires that the company made was a gentleman named Tony Patello (ph) who is really taking the leadership in regard to driving the remaining cost reductions that the company identified as part of the integration planning. And we realize that we need to do more than even what we had originally planned. And particularly in the areas of transportation, which seems to be, a significant cost for us right now where we can further internalize or better manage that side of our business. I think may be even the configuration of some of our facilities we certainly are going to look at all the areas of costs and in light of the shortfall in the top line here?

Okay one last one. How much of your new revenue forecast is based on the safe services type projects that failed to materialize in the first quarter and is there any way to make those up over the balance of the year?

Yeah, I would say that it is very minimal in the number in the second quarter for the Site Services piece. We, certainly, anticipate that to hit in the third and fourth quarter. What we are trying to position ourselves with is a good book of business that we can depend on for the fourth and first quarter as well as next year. So that we have a steady flow of this kind of business, this contaminated soils and other types of projects, so that our incinerators can continue run at that level of efficiencies that they need to run at. So quite frankly in the second quarter there is not a lot outside of the event.

Okay, thanks guys.

Yeah.

Our next question comes from Bill Brady with Presciado Management.

Good morning Bill.

Mr. Brady, please pick up your handset or press your mute button.

Hello.

Yeah, good morning Bill.

Yeah, can you give us guidance for the second quarter?

At this point, we did not give guidance out for the second quarter, Bill. I think, if you look at the guidance that we give out for the year -- our census is that -- that was although it is significantly off to 115, we think that is an achievable number that the company can meet. At this point, we did not want to give out guidance in the second quarter, without having a visibility for at this point.

Yeah, okay. Well, then say, if with -- I guess, in the next three quarters the second quarter would be the smallest EBITDA number?

Yes, I would believe so.

Yeah.

I mean --

Okay, thanks.

We will go to Shannon Collins with Falcon Funds.

Hi, can you tell me what the uncashed check balance was at the end of the quarter?

Yes, this is Roger. It's approximately $5 million.

Okay, and when you say that your availability is $45 million, did I hear that right?

Correct.

Is that inclusive or exclusive of the $15 million that's drawn? So, guess my question is, is that --

Exclusive.

Exclusive. So you have 45 in addition to that?

Correct.

So, you've got $7 million of cash, $5 million of uncashed checks, you've got $45 million revolver and the cash LC’s that you have to put up, do I recall that was $43 million?

Approximately yes.

So, you'll have roughly $5 million -- $4 million dollars of liquidity once that's posted?

I think, you have to remember that we are in the final stages of the settlement of the Safety-Clean on the initial working capital settlement that’s due, which will add to that balance and it is also [Inaudible] is that with the seasonal low point of our receivables, which is the base -- as the business picks up and the receivables go with that pick up availability base picks up as well.

But won't that be a cash burn. I mean, as your receivables go -- I assume your advanced rate is only 80% or something like that, so the 20% of the receivables would be -- would be a cash burned.

Well, there is offsetting now with the payables, but they are now due day one, it matches the flow of the dollars and but as the overall business picks up our borrowing base picks up and our availability does improve and we expect to continue and reduce our DSO as we did in the first quarter.

Right. And on the environmental expenditures, you had $3 million in the quarter, but I thought that the target for the year was $30 million. Did you pull back on your expenditures due to liquidity issues or is that just?

No the, I think the numbers reverse the environmental spending is in that low 20's or less, it's the capital expenditures that we are looking at in that $30 million dollar range.

Right.

And likewise on the environmental spending in some ways it’s the reciprocal of what is hurting our business, but a lot of that is somewhere seasonal type of activity as well.

Okay, and then with regard to the covenants and the way, you know, borrowing any, let’s say they gave you a waiver for the existing default. It hit the third quarter, I'm sorry the second quarter covenant. It had to make $31 million in EBITDA in the second quarter. Is that correct?

That's correct, but I don't think that would be the scenario where we would head down to do just simple waiver and then have that in front, I mean both sides realize that they would do something to take care of that situation.

And then one last question, at the $90 million EBITDA target, you did 7.5 per so this quarter, that would mean if you're going to do $27 million per quarter, if you just leveled it out for the next three quarters, you said that the second quarter was looking more like the fourth quarter of last year what you did $18.3.

No, we no we didn't say that.

All I said was the incinerators are running at that level.

Yeah. We would expect certainly that second quarter would be stronger than the fourth quarter.

So, it's not unreasonable to think that the EBITDA goes sequentially 18.3 and 7.5 then above $27 million?

Well, I think we've really have tried to shy away from giving guidance in the second quarter in regards to what that EBITDA number is at this point, but --

But the second quarter is historically one of your two strongest quarters.

Absolutely.

So, if you are going to look at it in terms of seasonal basis, do you think the second and third quarters would be 30 plus million and in the fourth quarter may fall off to 20 something million to get to the $90 million?

You might think that but part of these savings is obviously for the additional synergies that will be coming in during the year or so. Yeah, the fourth quarter would be a little stronger than what you are assuming.

Right. Okay. Thanks guys.

Okay.

Next is Michael McCormick with Gilder Gagnon.

Good morning guys, could you give us the accounts receivable actual. Do you have the actual number what the account receivable was?

I don't have the exact, but I can give you an approximate, the March balance was approximately $110 million to $114 million, net of the allowance and the unbilled receivables was approximately 10 to 12, somewhere in that 125 or slightly less in combination.

Okay and the revenue guidance change that you gave, you had about $8 million reduction from the high-end but also your guidance going forward took as much as $35 million out. So, you are obviously seeing volumes below expectations for the second and maybe potentially for the third quarter as well. Could you kind of give us an idea about why the additional reduction in revenue?

I think, we are seeing the volumes in both the economic -- overall economic conditions here. We are seeing customer shipping, the same customer shipping waste to us but the volumes of the shipping, we are seeing down but I still say that the continuous weakness in the rent side of our business for projects we have planned, projects that drive contaminated soils into our landfills and our incinerators that's where we are seeing the greatest mess.

And when you see the amount of the restricted cash that you have to put up-- that $43 million that you spoke to earlier. Does that all have to be posted in the second quarter?

Some part of it does in the second quarter, most of it in the second quarter.

Most of it in the second quarter? So we should assume at least what, $35 million?

We can assume that, yes.

Well, could you give us an idea of how much is supposed to be posted?

It'll be an additional 42.

About $42 million from that standpoint. And could you also speak to what type of impact we are now talking about for 143 on a quarterly basis?

Yes. The 143 may be just real quickly, the biggest impact on the numbers than the reduction, as you will see in the liabilities. Essentially the liability that we report environmental go from that $200 million dollar range down to something like 160. And it's being driven by our credit-adjusted discount rate, which will be 14%. So obviously these liabilities now just discount down even further. There is some puts and takes though as you take a higher number against a smaller base. So the actual accretion did not change all that much in these near years. You can probably use something like the $2 million number of course for this year after, for, this quarter for this year.

And we’re using $8.5 million dollars right now, an incretion expense?

We are going next to Vince Pippia with H.D. Brous.

Good morning gentlemen. Can you tell us what tax rate the new guidance is based on?

30%.

And also with the transportation surcharge and the incineration pricing. Can you just tell us what success you are having? How is that sticking?

We are seeing on the incineration side. It is sticking. We've also seen one of our other largest competitors recently come out with a price increase. And that is reflective, I think, of their additional cost to meet these new mac [ph] standards as well. On the fuel surcharge and the other initiatives there we are seeing that stick.

Can you give us of fair percentage out?

We are not up to the company average which used to be about 70% on the surcharge but we are, every month we are seeing an improvement in that. I don't have the exact percentage right now. But we are anticipating to get back to that 70% across the entire customer base that we now have.

And then the oil prices were higher than anticipated in the quarter. But it was my understanding that the surcharge would offset that, the higher cost that you are incurring.

We did not increase our surcharge when we saw a huge increase in fuel. We did not increase it, which has been running at about 4%. It typically would have gone up to 5, and the reason why we didn't is that we were trying to implement that fuel surcharge across all the new customers. And so it was at a time when we were in the implementation phase of that to get the new customers base to buy in to that concept. And so we never actually increase it to offset the additional cost, because we were trying to get it over a broader sector of the group.

Okay, thank you.

Yeah.

We'll go next to the Alan Metrony with Copper Beach.

Hi, thank you. Just want to get some of these numbers straight, because they’re important. The accounts receivable balance below 90 days?

I don't have that Alan here in front of us.

Just unclear from that one -- in regards to the Shannon's questions as it relates to borrowing. My understanding was you guys were allowed to borrow 80% of receivables that are below 90 days, that there is a -- that your revolver is dependent on receivables and certain DSO levels. Is that correct?

The borrowing basis is based on such as 80% of eligible receivables, which are the receivables less than 90 days old that is how it primarily works.

So may be if you don't have this. I mean what was this the past quarter? I mean, I just want to get sense as to, you may face a cash transfer (ph)?

I think, I guess from the numbers, we kind of back up to it by taking what we have for the availability and now adding the revolver back and in those items but, I guess to the point of where the aging going the DSO went down and the aging did not deteriorate. So it is not - there is nothing happening and that over 90 other than, it is either stabilizing or coming down, that's what we've been working on.

I think the some of the over 90 receivables down is subject to a working capital adjustment that we’re finalizing as it relates to the acquisition and so they show up an over 90 days, but they really subject to adjustment.

So what so, if your DSO -- So if your DSOs you said were 78. What are they excluding this working capital adjustment?

That was excluding the remainder of the initial receivables that came over in the lower-term safety from when we bought the business.

Okay. I'm sorry to focus on this as much, but I'm asking if you can just to go through it again. I'm a little confused. You said you are $5 million in uncash check balance. Your availability as $45 million dollars right now on your revolver? Is that correct?

Yes. As of the end of the quarter.

What is that as of right now?

So we haven't, I mean as of today we have exposed to some additional letters of credit. So it's come down by the amount of additional posting. But as of the quarter end it was the $45 million.

And according to your K that was lined and then that you are needed to post 43 plus million and additional letters of credit. Will that all be posted this quarter?

That is the intent. We only did one of those. I'm sorry. We made one of those.

Okay. So under -- so just so I'm clear then. So, of the 45 as I just assume you pull it down by 43 plus, you're down to $2 million available on your revolver and you have $5 million of uncashed checks as well?

We also have the cash and cash equivalent balance, which was the seven and we have the settlement from Safety-Clean that are coming as well.

Yeah. Maybe a mistake we're making is talking about March as opposed to today. Today, we have approximately $40 million dollars of availability, Alan.

This is after having posted how much in letters of credit?

20 million, 20 or 22, I forget, 22, 22. So we posted 22 already basically on April 1.

Okay.

So, we have another $20 to go, that gives us $20 million dollars of availability and we still have this settlement with Safety-Clean that as Alan mentioned, my Alan, we are close to settling on.

And if I recall that was somewhere in like $15 million to $20 million amount roughly?

From a true cash stand point will be less than that, but until we settle that, we can’t give you the number.

Okay. I mean, your full year guidance assumes note on earnings. It's very confusing, obviously, because the tax rates move around. But is it part of, I prefer really to talk about EBIT or EBITDA that's because the bottom line is so strange, given the share base. Just let me walk you through that. How many -- the shares were 16.5 million this quarter. Can you walk us through how I get to the 16.5 million? I know there are 13.4 million basic shares? What's the additional 3 million plus shares and where is it going to be for the year?

To get to the 16 is -- there is biggest chunk that comes from the conversion of -- we assume conversion of the redeemable preferred that's about 2.4 million and the remainder is coming from the dilutive impact of the stock options in the unexercised warrant, those in combination with the other, approximately 900,000.

So you're now assuming, you're going to have 16.5 million shares outstanding at the end of the year?

I’d use 17 million, Alan.

Okay. Do you now -- should you now assume because you're not going to do 115 on EBITDA that your converts are going to reset and instead of using 2.5, 2.4 million shares, you should use a higher number or is it we have to see if you could still possibly do it and therefore, you can use the higher number of shares?

Yeah, right now we're still using 17 million, which does not assume the additional shares.

Okay. I'll ask - I'll ask another question about, and I’ll let someone else ask, when I walk through, I personally I would appreciate if you guys when you put out a release or if you can, maybe ahead of the call quantify the amount -- like Alan as you did this quarter of the one-time charges. When I walk through in terms of numbers, currency hit $0.05 audit fees, when I go through the proxy it looks like you spent $2.4 million in special fees and audit fees versus 0.5 million last year. I get to a number of $0.12 or more, in terms of extra-audit fees.

These fees are outside of current numbers. These are additional hits for the quarter.

That's an addition to the 2.4 million that was reported in the proxy?

I don't know exactly what --

Oh he’s just talking about the - some part of that is in the proxy number. There was some additional amount possibly with the late billing, [Inaudible] was reported in proxy a quarter ago.

All Right.

I mean, with these, this 3.0 roughly 3.4 million number in the quarter, that were one-time Alan, are which included about 630,000 for audit fees, which were above and beyond what we had anticipated to pay for the audit last year. And it really was to reflect about the effort that was put in on the environmental liability audit as well as the over all audit.

And how about the health care cost, I mean it seems to me when you fire people, I know from my experience, when people get fired or people leave the company, many people elect for Cobra [ph] cost; that some of these should be quantifiable and you should be able to take a one-time charge, because you could quantify it over the next 12 to 18 months, whatever it is. Why have you not done that and how much is health care cost in the quarter?

Healthcare cost for the quarter were significant on a run rate basis, they were $5.8 million dollars. You are absolutely right, because the company had reduced its staff after the acquisition, a number of people are on Cobra and because the company is self-insured, a lot of those costs flow through to P&L. We do not take a charge for that. So, on an annualized basis that health care number would reflect about $23 million dollars, which is about $5 million dollar higher than what we would anticipate to be our normal run rate for the number of people on our organizations.

Now when you say it's 5 million higher, you guys knew you were getting rid of the employees, did you not think the people would elect Cobra, did you not -- do you not want to quantify that in the charge. I mean it seems like these are costs that are going to run through your P&L for the next 12 to 18 months until Cobra runs out?

We are just going to re-characterize. The Cobra has an impact and I wish we are looking at, as we try to control our health care costs, looking at options we have on Cobra, Cobra is not the only driver, the primary drivers really were the older population basis on average and one was a larger family size. And if you also looked at the number of large shock claims those that were approached and exceeded the individual stop-loss amounts, there’s been an unusually higher proportion of those that are come over in the acquired employee base if you would.

So the whole thing has ratcheted up. And we are looking at now how to share those costs and pass some of those on to the employee base and else ways cut those. But it really was coming from the demographics and actual experience of the new group.

Once again that's star one to ask a question. We'll have a follow up from Kevin Denny with H.D. Brous.

Yes. Just a couple of follow ups. When can we expect you to get -- your Q out? Is it going to be another 30 days or can we start to see that come in a little bit?

This Q will be filed essentially as soon as we have the information from the amendment that we anticipate working out with the lender group. We obviously would like to get that information in Q when it's filed. It is important for everybody to have that information.

Okay. Are you expecting any decision on this federal creasode [ph] contract to come out in the next couple of weeks and if you could briefly just quantify what you see the opportunity as?

We will have to think of a project. There is something that we're -- we are very interested in and we know that there are the competitors also interested in that job. It is a $5 million or $6 million minimum-sized project, it could go $15 million to $20 million, but it is one of many projects dealt here -- that we are looking at. We are certainly hopeful that we will be able to win a piece of that business.

And then you had mentioned that you are going to close a couple of additional facilities. Where are you in that process?

You know, we are still involved in analyzing a lot of configuration of the plants. So I think we have got a good plan, but we certainly are not going to make any announcements prior to notifying our customers and employees in that regard, but there is no question in it if the volumes continue to be impacted. We will take further action.

In the quarter, we did decide not to rebuild the BBT facility that this is site in upstate New York, that was -- that have, acquired, prior to us acquiring it. We hope to be able to modify two of our other plans that handled those kinds of materials. That business is still out there for us, it is being stored in many cases and we are optimistic that in both the third and fourth quarter that we will be able to get back into handling those kinds of business again, which is both a high margin and a profitable business for us.

Could you detail the progress in rolling out some of these new site services locations and you still expect about 10% growth in that business this year?

Yeah, Gene Cookson -- in this area, if you would like to just touch on that, Gene?

Sure. It’s really a continuous process we have all those offices, I would say 14 out of the 16 offices virtually up and running. The process is continuing to hire available folks. We are well into dedicating a sales force to industry specific accounts. The activity levels are up, our utilization is up across the board. So we are progressing as planned.

Okay, and then I guess, finally, are you including any increase in incineration pricing and your new guidance?

No, we are not.

Okay, thank you.

Now we have a follow up question from Michael McCormick with Gilder Gadman.

Hi guys, could you possibly give us some idea on the range of the transportation price increases you implemented and your competitor just implemented as well?

Do you mean that the total prices?

Yes.

Again we -- we spend a tremendous amount of time analyzing the business and looking at it both from a regional standpoint and also looking at, you know, different types of materials that our plants tend to meet, you know, in regard to a proper mix and in some cases we decided not to raise prices on some streams into our incinerators -- in none of the cases we have raised them quite a bit and it has been, I think, overall a pretty good process.

I think, that our price increases are sticking. The feedback that I get from my counterparts is that they are seeing it in the market place. And in some cases we also know that some of our competitors are incurring additional costs, because of these new mac rules and they are taking similar initiatives. I think, everybody I would think at this point realizes that if you are going to make $10, $15, $20 million dollar capital investments into our plants to meet new mac standards that we need to charge higher rate to get a fair return on those investments and I think, it is working.

I understand, but I was wondering about what the blended price rate was? If you kind of looked at it.

Yeah, if you wanted to use a 9% to 10% number that's the percentage that we have been talking about internally here. And again you have to look at it. We are not charging an increase in some areas and then there is even much higher increase in others so that's not a bad number.

Okay and then lastly could you kind of walk us through kind of the boundaries or what's happening in the negotiation with the covenants and how you kind of assume that to be and why you wouldn't make the assumption today that you wouldn't be able to -- wouldn't be able to reset considering that you'll be missing the EBITDA covenants, with your lenders?

We probably really not getting into the details or raw conversations with our lenders, but I think, we've acquired this business. We've owned it now for two quarters, I think, we are making a lot of progress here, we've had a lot thrown at us regarding all different types of financial accounting, pronouncements in going through this audit. I think, our lenders are going to work with us. I would like to leave it at that.

Okay and one more question, if I might. The 3.4 million of one-time charges, you have already expressed a $1.8 million of it and 800,000 of it. Could you quantify the other components, of the 3.4 million?

Well, we -- I think, a modest number of a couple $100,000 in healthcare is probably a relatively modest number. I think, on the utility side, it's about $800,000 of extra cost based on what we thought our run rate would have been. And I think, much of the utility really goes into the cost of running our plants during this winter. We just went through a ton of fuel, a ton of power. Our costs were much higher, gas was significantly higher, particularly, during the couple of months of the quarter. So those make up the other changes.

Okay, thank you.

Yeah.

We'll go next to Shannon Collins with Falcon Funds.

The covenant default just under the bank debt and the senior and sub -- subordinated notes, I assume there is an intercreditor agreement. Can you tell me who is leading the negotiations on the bank side or on the debt side with regard to the covenants? Is that Congress or --?

Well, there is two really separate bank groups on the revolver, is Congress as you can imagine. And on the senior and subordinated side it is Service Partners or AbleCall [ph] they go by both names.

Right and they are not -- there is not one unified front there -- you are negotiating with both of them at the same time?

It is two separate debt instruments, yes.

Right, okay and they don't have an intercreditor agreement signed?

Yes, they did.

Okay, great.

We have another follow-up from Kevin Denny with H.D. Brous.

Just to make sure on the convertible preferred, what is -- how many additional shares, is that about a 750,000 if you don't make the 115 million in EBITDA?

Yes, it's approximately that Kevin.

And is there any timeframe you can give us to point to with some information regarding the restructuring of the debt?

Well, we certainly want to get it done as quickly as possible, so that we can get our Q filed and get this behind us. I think, we are reporting on numbers today, we are going to be working very hard over the next couple of days to resolve the issue, and we want to get them as quickly as we can, but it's out of our control to some extent.

Currently, we will work closely with our banks. We've been with Congress financials since 1994. We have a very good relationship with them. And Service has been a banker with us for a good number of years as well. So, we hope to work closely with them in getting this behind us.

Okay thanks. That’s it.

I mean, the bottom line here is that we had a bad first quarter. We set those covenants in these loan agreements based on what we thought we are going to see in the business, back in June of last year prior to the acquisition and we are working our way through some of these issues that we all were talking about here this morning, but in the end we've got a very nice business here. We are market leader, we are -- I think, running a very safe and compliant company here and so, we are going to do with this tough first quarter and get it behind us and move forward for the rest of this year.

Okay thanks.

Yeah.

We have a follow-up question from Vince Pippia with H.D. Brous.

There's always to get a little more clarification on, you missed EBITDA by about 7.5 million, you gave us the 800,000 in utility, 630,000 in audit cost, 800,000 in currency, 1.6 million in professional fees and health care. Can you give me the rest of you know, kind of where the miss came from, what are the other costs or we missing something?

I think, it's really just if you look at the top line, you know, you take $7 million dollars or so of the miss. You know, if you take that incremental margin. Now, this is, you know, many parts of our business is so fixed that you know, you get a much higher drop to that bottom line on those incremental dollars.

All right, thank you.

So, that's really the miss there. And I think it's also why, you know, you see the estimates based on a higher run rate, you know, for example, in the second quarter and beyond is that you've got a lot of leverage in this business, but they hurt you both ways.

We have a follow-up question from Alan Metrony with Copper Beach.

Hi. Thank you. Just so I’m clear, are you resetting bonuses this year or you guys all not going to get bonuses, because you are not coming close to 115?

At this point, we have not reset bonuses. I think it's a good question Mike. Alan, I mean there. We just had our top 180 managers in for a couple of day meeting. It was, I think a very productive session. We got a good sense of the people's buy ins to both our top line budget for this year and that $115 million EBITDA, but again we are starting out here in the whole in the first quarter.

So, I guess, it was we will -- I guess we should still wait, it's unclear, is the answer?

Could you ask it again, Alan? I'm sorry.

I'm just wondering, in the beginning of the year, I know you said 115 is your minimum. I don't mean to be a stickler or else no one get bonuses. Obviously, it's hard to have a whole organization still, you want to work very hard and not get bonuses when it's so early in the year. My question is this, is there had been any thought yet of whether you are going to pay, you reset the bonus pool based on a lower price or once you negotiate with your debt, with your lenders or are there no bonuses this year?

Certainly, I think that someday we will consider.

Okay.

Yeah. We certainly want to have a motivator organization, you know a 90 or 95 or $100 million EBITDA, company is a very strong company we think. We still deliver a fair earnings per share. Certainly not anything that we expected when we set out here. But in light of the things that we talked about, which impacted our business and continue to impact our business. You know, the economy, the winter, the war.

I mean, we had a number of government sites that will close down, that did not allow us to continue to do services in the quarter that we didn't mention. So, there are other facts this year that are impacting our business and the reason why we are lowering some of our targets on the top line. But we have got a tremendous organization here and you are absolutely right, we are going to want incentivise and motivate those people moving forward.

Okay, that's fine. One last question actually. You said, it could be proved to be among the largest projects in your history this project you are working on. Could you give us a sense of revenues or earnings or anything to what was the previous largest contract?

Our largest still prior to that was about a $7 million dollar spill in Puerto Rico and that happened about seven or eight years ago, maybe even more.

How, much 7 million or 8 million?

Yeah, may be even more in Puerto Rico. So, I don't think there is anything larger than that.

And then some of the issues that you've called one time or I guess, extraordinary this quarter, but you didn't expense it that way, that you talked about on the call. Are they, I mean it's seems like the Canadian dollar is still pretty strong in relative to the US dollar in this quarter, that's not going away, it actually strengthened I belief. Have you -- so that from that aspect, I assume you still are going to face that this quarter and going forward until you currency -- straightens out.

But, the utility cost or others, have those actually come down? I mean, one-time cost to me means one-time or have they come down from where they were running in the first quarter?

Well, they certainly should be. I mean, I don't know exactly where each one of the -- the plants are for April at this point. But certainly utility cost in general should come down because, you are not trying to thorough (ph)10,000 drums that are frozen in your warehouses and trying to keep your plants warm enough so that your people can work. We saw a tremendous amount of added cost as a result of the number of plants that we have and the weather conditions that were running in and you know, it's something that we are going to have to look at is, may be a way of reducing those cost moving forward.

Could you just run through a couple of your assumptions still that you have for the year in terms of CAPEX, depreciation, amortization and some of the components of cash flow? If you could, run through D&A, CAPEX, your current falls on it, environmental liabilities outflow as well as your asset sales and working capital improvement, will there be any asset sales?

Sure it is.

Thank you.

I'll just pick off few on you Alan, - in terms of asset sales, we are still looking at a $10 million. We have probably 10 properties right now that are in various stages of negotiations. We think, we feel pretty good about that issue. In terms of the reductions and receivables reflect to a $10 million and again we still feel pretty good about that. And as Roger mentioned, we are from December until March we will be into that number.

Capital spending even though this first quarter was only $6 million, but still have a budget of $34 million. Again that's lot of the mac issues down in Texas that would be more in the second or third quarter. The environmental spending we had talked about, $22 million. That's still our budget although, we would expect to below that for the full year. Cash interest is still at $22 million that we had talked about before. Cash taxes should be about $6 million. We will be picking up again something on the safety claim settlement. I just don't want to get into that number, there yet. Depreciation, we have now at about just under $28 million and the accretion that Alan, I mean, Roger mentioned before on the environmental assets is about 8.5 million.

That concludes today's question and answer session. Mr. McKim I'd like to turn the call back over to you for any additional or closing remarks.

Okay Lisa. Thank you very much everyone for joining our call this morning, and we look forward to talking to you on our next second quarter conference call.

This concludes today's conference call. We thank you for your participation. You may disconnect you line at this time.