Clean Harbors Inc (CLH) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome, everyone, to the Clean Harbors Environmental Services second-quarter 2003 conference call. Today's call is being recorded. This conference is scheduled for one hour and we do ask that you limit yourself to one question, followed by one follow-up question. With us is the Chairman, President and Chief Executive Officer, Mr. Alan McKim, and Executive Vice President and Chief Financial Officer, Mr. Mark Burgess. At this time, for opening remarks, I would like to turn the call over to Mr. Bill Geary, General Counsel.

Good morning. In addition to Mr. McKim and Mr. Burgess, joining us this morning will be Gene Cookson, the President of our Site Services Group, and Steve Moynihan, Senior Vice President of Planning and Development, as well as myself, Bill Geary, the General Counsel.

Before turning the call over to Alan, I'd like to read our Safe Harbor statement. Matters that we are discussing this morning 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, are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, in today's call, everyone is cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of this date, August 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 Form 10-Q for the quarter ended June 30, 2003. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made during today's conference call other than through the filings that will be made with the SEC concerning this reporting period. With that stated, let me turn the call over to Alan S. McKim.

Good morning, everyone. I'll start by giving you my thoughts on our second quarter before turning the call over to Mark Burgess, our new Chief Financial Officer, for his input on the financials. I will then return to provide our outlook for the remainder of 2003. Then we will be happy to take your questions.

As we outlined in this morning's news release, the second quarter represented a mixed bag of results. We exceeded our topline guidance in the quarter; at the same time, our bottom-line results were disappointing, as our landfill and incineration volumes from contaminated soils and dirt had a difficult overall environment. The highlight of the second quarter and what provided us with a big boost in revenues was our work on the Buzzards Bay oil spill, the largest project in our company's history. This event contributed approximately $20 million to our topline results. This response, along with other several high-profile events, illustrates our capabilities as the nation's premier environmental emergency response contractor. Our work on this project will go a long way towards reinforcing our brand name and underscores our position of strength in the industry as the go-to company for major event work. We expect that with our new network of facilities and service centers throughout North America that we will continue to play a leading role in future emergency events, such as the Cape spill.

While we exceeded our topline guidance in the second quarter, this was not reflected in our bottom-line results. There were several reasons for our disappointing bottom-line performance in Q2. First, the nature of the work on the Buzzards Bay project was labor-intensive, did not require the high margin equipment and supplies often found in a project of this size. Second and of greater significance is that our landfill and incineration volumes of contaminated soils continues to suffer from customers pushing off spending, the soft economy and a weak remediation business. If you read Waste Management Report or any other industry publication, you know the remediation numbers are lower than unexpected throughout the U.S.

At Clean Harbors, we've experienced lower than anticipated waste volumes throughout the first half of the year. Customers are either delaying their shipments of waste as a means to limit spending, or because the businesses are impacted by the economy; waste volumes have been reduced. In the same manner, customers are further managing their environmental spending by holding off on large projects that they may have already had on their calendar. Also within the industry, there is increased financial pressure on the distributors or brokers that feed waste to us. Because of this situation, we have (indiscernible) number of cases to be more conservative on the extension of credit to these customers. One key broker filed Chapter 11 in the quarter and another is in the process of selling off assets. They both have delivered significant volumes of waste in the past into our disposal sites.

Our landfills are heavily fixed cost operations. That means they are highly leverageable, very profitable when volumes reach certain thresholds. Unfortunately and as was the case in the second quarter, when volumes are down sharply, there's a direct impact on EBITDA and earnings. In the second quarter, the lower-than-expected volumes resulted in a significant multi-million dollar shortfall in our overall landfill volumes and a substantial reduction in our incineration business. We are reviewing all existing and future business quote by quote to drive volumes into our new sites.

To better align our business with recent market conditions, we're taking aggressive steps to streamline our organization and to increase efficiencies. Our plan is to quickly return the Company to profitability, to grow our core revenues and increase our EBITDA. To accomplish these steps, we will accelerate our plan to recognize the acquisition synergies that we've outlined previously but not expect to be recognized until 2004. In the coming months, our greatest focus will be on the internalization of transportation and waste-disposal. Our current spend rate of over $60 million on outside transportation is one area of particular focus. CSD had outsourced much of their transportation in the past and will reverse that trend, in most cases, to lower our overall costs and improve customer service to our clients. At four of our major landfills, we're hiring drivers and transferring our acquiring equipment to improve service and lower cost. We're looking at all areas of our business more closely to eliminate any further redundancies in light of our current run-rate.

The Company's EBITDA for the second quarter of 2003 was below the quarterly minimum required by certain covenants in the Company's loan agreements. We have a good relationship with our lending group, we've worked closely with them to revise our loan agreements and amend our covenants to reflect the reality of the industry's current market conditions and the depressed national economy. The original covenants were established well before the acquisition was consummated and with today's reality that our topline is not at the level we anticipated more than a year ago, our lenders agreed that we needed increased flexibility now and in the longer-term to support future growth. Mark will provide you with more detail on the terms of these new agreements in a few minutes.

At this point, I'd like to turn the call over to Mark Burgess. Mark joined Clean Harbors as a result of our efforts to strengthen our management team and not only have -- and lead our finance and administrations organizations -- but play a key role in the management of the Company, moving forward. We are delighted to have him with us. Mark, I will turn it over to you.

Thank you. First of all, I'd like to discuss the financials in more detail and provide a little more color on our results for the quarter. I will focus on really comparing Q1 and Q2 results, given the impact of the Safety Kleen acquisition and timing of that. Then finally, I will take you through our new loan agreements that we just recently negotiated with our lenders.

Q2 revenue was $172 million, versus $142.3 million in Q1. Sales in our Technical Service business increased from 102 million to $111 million in the quarter and sales in our Site Service segment increased from 38.7 million to $61 million. These were positively impacted by approximately $20 million as a result of the Buzzards Bay spill that Alan spoke about earlier. Despite overall strength in revenue during the quarter, sluggish economic conditions continue to hamper our core operations, particularly with our landfills. As Alan spoke about, the weak economy continues to impact overall volumes in other waste streams as well and discretionary project work that continues to be pushed out by our customers.

On a geographic basis, approximately 85 percent of revenue was generated in the U.S. in Q2 and 15 percent in Canada. Gross profit as a percentage of sales decreased from 25.1 percent in Q1 of this year to 23.4 percent in Q2. Margins in the quarter were impacted by competitive market conditions, lower volumes than projected, particularly in our high fixed cost landfill business, higher outside transportation costs than anticipated, the lower gross margins on the Buzzards Bay spill versus those normally experienced in our base business, and credits issued to Safety Kleen as an incentive to finalize our global settlement with them. Finally, continued high medical costs plagued the Company's overall profitability in the quarter as well.

SG&A in the quarter was $31 million, versus $27.1 million in Q1. As a percentage of sales, SG&A was 18 percent in Q2 versus 19 percent in Q1. SG&A was adversely impacted in the quarter by the settlement of a 1995 to 2001 state sales tax audit that was just completed. It was impacted by the strengthening Canadian dollar on U.S. dollar-denominated sales that we have in Canada, continued higher-than-expected medical costs, high professional fees and integration-related costs. Qualities again impacted us in the quarter. We believe the implementation of a redesigned health program that just began in June of this year will help constrain further medical inflation, going forward.

Going forward, we expect SG&A to be running at about a $27 million quarterly run-rate. We are aggressively pursuing other expense reduction programs to drive costs below this target. Depreciation and amortization expense in the quarter approximated $6.4 million versus 6.6 million in Q1, leading to operating profit in the quarter of $13,000, versus a $655,000 loss in Q1.

Interest expense approximated $6 million in the quarter versus $5.5 million in Q1. The increase in expense resulted from higher debt levels that were driven by the need for higher cash collateral requirements within our insurance program that were funded in Q2. Our tax provision was $1.2 million in the quarter, and our net loss was $6.8 million versus a $7.1 million loss in Q1, leading to earnings per share -- or loss per share of 57 cents in the quarter versus a 60 cents loss in Q1.

I also like to remind everyone that Clean Harbors reports EBITDA results which are non-GAAP. There is a complement to results provided in accordance with GAAP -- and believes such information provides an additional measurement of Company performance. You'll be able to find a reconciliation showing the differences between reported income and EBITDA in today's press release.

In summary, EBITDA for the quarter was $9.2 million versus $8.6 million in Q1 and was adversely impacted by those factors I previously outlined when describing gross profit and SG&A.

From a balance sheet perspective, our Accounts Receivable approximated $124 million at the end of Q2, versus 112 million at the end of Q1 and reflect the higher level of revenue in the quarter. While improvements have been made in overall collections, we believe that significant improvement can continue to be made as it relates to collections. Restricted cash increased $84 million in the quarter versus 60 million at the end of Q1 and reflects the higher cash collateral requirements under our insurance program. Accounts Receivable -- excuse me, Accounts Payable balance were 57 million at the end of Q2 compared to Q1 when they were around $55 million. Borrowings on our revolver increased from $15 million to 40 million in the quarter and again, were primarily driven by the higher cash collateral requirements under our insurance program. Capital spending approximated $6.3 million in the quarter, and availability under our revolver, plus cash equivalents, approximated $43 million at quarter end.

As Alan previously discussed, we were successful in amending our bank agreement. Both the Bank Group, led by Congress, and our term loan lenders, led by Abel (ph) Co., were very, very supportive of us during this process, as we discussed in detail, the Company's short-term financial situation and our longer-term outlook. We believe we've put together a future covenant pact that protects and compensates the Bank Group while at the same time gives the Company operating flexibility required to work its way through the current issue that it faces. EBITDA covenants have been instructed so that as long as the Company generates slightly over $15 million per quarter over the next four quarters and in excess of $60 million over the next four quarters, we will remain in compliance. Our fixed charge coverage ratio has also been amended and ramps up to a one-time coverage ratio over the next four quarters. This concept reflects the revised EBIT-- (technical difficulty) -- expectations as well as our cash spending requirements for capital, especially under the MACT clause that is part of our industry and various remediation spending programs.

Finally, in addition to a more aggressive approach to cost reduction, our Company remains extremely focused on cash flow management, going forward. Subsequent to quarter end, we've sold our (indiscernible) facility and used the proceeds to pay down debt. We were successful in collecting an outstanding Receivable with Safety Kleen associated with our global settlement, which is roughly $7.8 million. We've established aggressive goals to reduce our Accounts Receivable Days on Hand; we are extremely focused on capital and environmental spending; we believe that our spend for the second half of this year will be in the 20 to $25 million range on these two categories. We funded an additional $10 million to support our insurance program, but are in the advanced stages of negotiating a program which will reduce the amount of collateral that currently is tied up supporting that at this point. We believe that an additional $10 million that was required under our current program will no longer be required and in fact, we are hopeful of potentially decreasing again in the collateral requirements later this year. With that, I will turn the call back to Alan to conclude our comments.

Thanks, Mark. As I mentioned earlier today and as we've mentioned on previous calls, one of our ongoing initiatives at Clean Harbors is to broaden our executive team. Before I discuss our outlook, I want to mention the recent appointment to John Barr to the Board of Directors, which I think is a major addition for the Company. John joins us with more than 30 years of industrial sector management experience. Currently, he serves as the present CEO of Automotive Performance Industries, a private California company that provides a range of logistics services to the major automotive manufacturers. Previously, he directed long-term growth as an executive of a two billion dollar companies, Quaker State and Valvoline. At Valvoline, as President and CEO, he started as Environmental Service division, so we really look forward to benefiting from John's experience and counsel. With his addition, our Board now consists of eight members, seven of whom are independent.

Turning to our outlook, we expect the challenging environment to continue in the second half of the year. Further, we do not anticipate an immediate turnaround in volumes for our landfills or even our incinerators. With that said, however, there are a number of factors that give us reason for optimism. We are excited about opportunities we've identified in certain vertical markets. Our sales pipeline for our facilities projects currently exceeds $300 million. We are aggressively pursuing this pipeline and looking to expand it. To take advantage of these opportunities and to drive volumes to our incinerators and landfills and other disposal sites, we are in the process of hiring additional salespeople to target these specific markets.

On another front, our National Account Program is showing very positive results. During the first half of this year, the program performed at over 113 percent of budget. We are beginning to develop the pipeline of cross-selling opportunities that we expected when we made the CSD acquisition. Another reason we're optimistic is the fact that there are some big projects still out there for us to compete and win for. We have been advised by the Army Corps of Engineers that the multi-million federal (indiscernible) Superfund project located in New Jersey is in the process of being re-bid, a new bidding process has been announced and we expect a decision will be made sometime in the third quarter, as an example.

Also, the long anticipated MACT standards that the U.S. government had established in the early '90s will become effective in September. This should result in removing some of the current excess capacity in the North American incineration market. At least one of our competitors may be forced to shut down facilities or face millions of dollars and years of permitting to build new ones. In addition, large corporations that have been incinerating their own waste internally may also decide to shut their captive incinerators. This places Clean Harbors in an enviable position. With seven incinerator facilities, we feel that the waste volumes redirected from these noncompliant locations will have a positive impact on our incinerators and the overall incineration market. The enforcement of the new MACT standards will take time but already, we're beginning to see the effects of the approaching September deadline. We are fielding inquiries from several companies looking for us to handle certain waste streams.

We are excited about the long-term potential for our business. Overall, we remain highly confident in the benefits of our CSD acquisition; the unparalleled asset infrastructure and broad geographic reach give us a distinct advantage in the marketplace. With the challenges that are facing our industry, we will work to leverage our advantages into long-term growth. That concludes our prepared remarks. We will now take your questions. Pam?

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR GIVES CALLER INSTRUCTIONS). Michael Roesler with CJS Securities.

Alan, (indiscernible) a lot of ground to cover here. Maybe we could start -- it's just -- (technical difficulty) -- trends that we've seen in the last two quarters and maybe even three in terms of what's happened on the gross margin line and gross SG&A. How can we look at the next couple of quarters and have comfort that there's going to be improvement in what's going on in those two lines?

Mark, do you want to field the SG&A question?

Several things -- as you can appreciate, there's always a time lag from the time that a company initiates cost reduction efforts to the time that those actually are realized on the bottom line. There's been a significant amount of work in identifying these areas of cost reduction, and I think on a go-forward basis that we will start realizing some of the benefit associated with that. In addition, you know, we think that there is stability on the top line and as Alan talked about, there is incredible fixed leverage in this business, so to the extent volumes increase, the gross margins will expand accordingly.

But in terms of -- I look at the -- think about the revenue guidance for Q3 and where we were in margins in Q2, what would change -- based on your current outlook, in terms of volumes -- to get gross margins back up?

I think, certainly, our overall staffing has continued to come down. We are at about 3,919 people today, Mike, which is basically at the headcount level we would have expected to be at at the end of the year, based on the synergy numbers that we had originally gone off of, the $50 million synergy number. But I think also that we are continuing to focus on a lot of the other internalization programs. For example, internalizing waste -- we've recently been able to internalize more material through lifting of customer restrictions, so that is going to lower our outside disposal costs and further improve volumes going into our own network. We are also working very hard at putting our own resources in place to eliminate those outside disposal and transportation costs, I should say, in the landfill side of the business. All of that is going to show, we believe, some improvement in our margins.

What was the percentage of waste that was not internalized in the quarter?

I don't have the percent here; I know it will be in our Q. Steve is going to look through it here. We should have that for you here in a second. It continues to come down, but we still are sending quite a bit of material outside. Some of it makes sense because it may be some local landfill nonhaz business, but anything that is hazardous type of materials, that makes sense, we should be internalizing it. The only thing that's restricting us from doing that is getting customers to approve the use of those facilities -- our facilities.

Kevin Denney (ph) with HD Brown (ph).

Could I get a sense for the future guidance? With the majority of factors, it seems to me we are part of last quarter's miss. So you talked about the Canadian dollar and higher healthcare and landfill volumes being an industrywide phenomenon. What I'm trying to get a sense for is what's baked into this future guidance, and how we can have confidence in the guidance.

Mark, do you want talk about -- (MULTIPLE SPEAKERS)?

Yes. As the press release describes, our guidance in Q3 is 155 million to $170 million in revenue. If you take out the impact of the Buzzards Bay spill in Q2, we were roughly running at a $152 million run-rate. Looking at the seasonality in the business and looking at what the current volumes are in the business, you know, we feel comfortable, especially understanding what the run-rate of the Company has been over the last nine months, that the range we've provided is appropriate.

I guess speaking to the EBITDA, the 60 million, is it fair just to split that in fours so we can expect 15 million next quarter in EBITDA?

Again, the covenants have been set at the levels that we negotiated with our bank group that reflect -- that really reflect what our expectations for the business are. So, I'm asking you just really to refer to that as it relates to what we're expecting out of EBITDA, going forward.

I guess my final question -- a lot of what you've used in the past as kind of a carrot for us is this pricing power in the incineration business. Now, it seems after saying that you've been somewhat successful in implementing those pricing increases that all of a sudden, the incineration business and the landfill business have fallen off a cliff. So what I'm trying to get a sense for is, what is going on in those businesses and what is your ability to price in those businesses?

Let me comment on that. If we look at our average price per container for hazardous waste going into incineration, it has increased since January for the first six months. So certainly, what we have said about our pricing on incineration is that we're going to be competitive in certain markets and certain types of streams, but for those types of businesses where we know we have a competitive advantage, we're going to be raising prices; we have been doing that and continue to do that today. I've been personally involved in that initiative. The incinerators ran at 89 percent in the quarter. The miss that we had in the incinerators is in the soils business, and that particularly hurts our Kimball incinerator and our Oreganite (ph) facility in Utah -- but basically ran at about 89 percent. Our landfills, however, were off approximately 35 percent combined, so we look across all our landfills. That 35 percent comparison is quarter-over-quarter, year-over-year.

Drilling down a little bit further, 50 percent in our landfill business here in the U.S. is off -- excuse me, our landfill business (inaudible) 50 here in the U.S. and about 30 percent at our major site in Canada, year-over-year quarterly comparisons. So we have a lot of business going into our landfills. We have a tremendous amount of opportunities, and we had expected several of those opportunities to continue to come through in the second quarter that would feed both our incinerators and our landfills, and they just have not been materialized and they've been pushed off.

One more final -- just on the cash crunch potential here -- could you just be to some of these things, like asset sales? Have any of those occurred? Have you gotten any benefits due to increases in receivables to your revolver? I know you got the settlement with Safety Kleen. Then just come to give us a sense for what those changes were as far as the cash outlays in the future.

Yes. I guess, on a go-forward basis, our cash interest we expect to be sort of in the $11 million range for the balance of the year. You know, our CapEx and environmental spending would be sort of in that 20 to $25 million range, maybe a little more than that, for the balance of this year. You know, the EBITDA covenants have been structured, as I talked about earlier, and our cash taxes for the balance of this year sort of in the $3 million range. So I mean, we believe that we can remain cash flow neutral; that's certainly our objective. We believe that through either asset sales or ability to negotiate a more attractive program with our insurance carrier that we may be able to free up some liquidity there.

Then finally, again on the AR side, we are extremely focused on just collecting receivables quicker. Part of our high balances -- or higher than really where we would like balances -- are a function of just getting through this acquisition, getting the proper system set up so that we have good visibility and good management of those.

Alan Medtroni (ph) with Copper Beech Capital.

Hi. You are running through a lot of numbers pretty quickly and some of them aren't in the press release, so I'm going to ask you to repeat them if you can. What is your AR balance this quarter?

The AR balance is $124 million, I believe.

So it actually went up quarter-to-quarter as the sales increased?

That's correct.

You said post quarter, you collected -- you sold some businesses. Can you tell us what your cash position was, either right now or, I mean -- what was it at the end of the quarter? What is it right now? How much did you get for the native facility?

The cash balance at end of the quarter was $5.4 million. We received roughly $1 million for the (indiscernible) facility.

On our asset sales for this year, we've got either sales made or PNSs (ph) signed for about 4.5 now.

Michael Christadulu (ph) with Enwood capital Management.

Good morning. On the cost savings, you mentioned 60 million of transportation that's being outsourced. Is that part of your original 85 million in cost savings, or is this another layer of opportunity?

We had anticipated about $17 million cost savings next year as we move forward with reallocating equipment and hiring people. We only had about five million this year and we actually had about $17 million in our $85 million synergy number for next year, so that's really where there's a big focus right now.

Okay. On the MACT regulation, clearly September of '03 here (inaudible) deadline for either closure or submitting plans to deal with the regulation, but that seems to buy a lot of the operators an additional year. Can you quantify at all the number of facilities out there that may be subject to closure or who are buying some time that may present future opportunity for you?

Publicly, we are certainly following one of our competitors who operates a couple of incinerators and whether they have the wherewithal to get their plants modified and get an extension, is a big question mark, I guess, in our minds, but we can only go by what we read in the paper there. Our analysis shows about 15 captive incinerators going down. We've seen a couple already come off-line and you know, the capacity that those 15 could possibly bring into the market is in excess of 100,000 tons, so we are hopeful that maybe that will maybe improve the overall market for incineration.

Is your thought there that that's going to be weighted more towards September '04, given your comments about modest volume growth over the next few quarters?

Well, we certainly haven't put that into our forecast, but unless you actually have an ironclad proposal put forth and you're working closely with the states and the federal government on (inaudible), it's not our belief that you can just push it -- that you really have to have a plan and have had that plan in the works; it's not like you can wait until the last-minute and do it.

Michael McCormick (ph), Guilder Gagnon (ph).

Good morning. I was somewhat unclear on the gross margin. Could you walk me through the actual physical dollars? The cost of goods sold was on the line item? And maybe walk me through me through cost savings that you think you could generate regardless of pickup of utility or utilization?

Our revenues for the quarter again were $172 million. Our cost of revenues was 131.8 million. Our SG&A was 31 million. Our accretion of environmental liabilities was 2.8 million.

Okay, I just needed the gross margin number -- the cost of goods sold number. That's up significantly from the first quarter, correct?

Yes. I don't have the first-quarter number here but on a percentage of sales basis, our gross profit did go down. That is correct.

Could you kind of walk me through what happened to that line item and how that might change as you implement additional savings programs and tie them to those programs, please?

Well, clearly, we're looking at all of our waste-handling operations as one way of potentially looking at further reductions in the number of facilities that we have; that would be one area. The transportation cost that we've been talking about is certainly impacting our margins. But just our whole infrastructure -- we are looking at the whole infrastructure that we had sized and anticipated to be adequate to meet the base business that we had forecasted for this year. So, we're going to be very aggressive at looking at resizing the business, recognizing that our topline run-rate, for all the factors that we've talked about here this morning, it's just not where we expected it to be. That should certainly show up in an improvement in the gross margin.

Michael Roesler, CJS.

Alan, a couple of other follow-ups -- given the focus on internalization and integration, could you talk about the major account gain or losses over the last six months?

You know, as is the case always here, you're bidding jobs, you're bidding contracts and you do have some churning in that area but for the most part -- you know, I recently met with all of our regional sales VPs; our national account people spent three or four days reviewing all of their accounts and really going into a very detailed analysis, account by account. I can tell you our national account business is very strong. I think we probably have spent a tremendous amount of time, energy and effort in maintaining those relationships while we dealt through all the integration issues. There is still a lot of opportunity with those accounts to expand the business that we do with them, particularly with the expansion of our Site Services business. We've gotten approval to use the CSD facilities now that the financial insurance has been put in place, and we're getting a lot of our national accounts to approve the use of all of our sites.

To answer your question earlier, Mike, our total outside disposal cost is running at about five percent of sales, and so that is still a significant amount. It will never be zero because it does make sense for us to work with some of our local disposal outlets to send business to them where it makes sense, where it doesn't make sense for us to internalize. But we still have a lot of room to improve in that area.

Maybe I missed this but, Mark, did you mention the cost of the covenant renegotiation?

I did not. The total amendment fees were $870,000. On our revolving credit line, the applicable interest rate margin has been increased by 25 basis points.

Alan Medtroni (ph), Copper Beech (ph).

Hi. We're getting cut off pretty quickly on the questions. I would appreciate if you guys can actually run through this because it's pretty important. Can you run through the cash availability right now of what you have and how it is you expect to increase EBITDA $50 million in the next couple of quarters? What tangible measures are you taking that are different from what you've taken this quarter, because every quarter, we seem to hear about cost cuts. Could you just walk us through some specific things that you are doing and where the cost savings are going to come from?

Let me first just talk about -- the original $50 million was broken down into six major buckets here. The workforce reduction was about $20 million, so the Company has reduced its headcount from about 4450 people to 3900 people. The workforce reduction -- forecast reduction -- was about $20 million, and we are ahead of that.

The corporate allocation was about $17 million; that was a reduction of corporate allocation from Safety Kleen to CSD. We probably have added some additional expense as it relates to the professional fees that we've talked about here, some of the work that we did with McKinsey this year. Some of it is in the one-time numbers that Mark talked about but clearly, the majority of that corporate allocation we did achieve. The internalization of waste and transportation was a $5 million reduction. We certainly have achieved that, but we have a lot of other opportunity. As we projected in '04, another $17 million in this area, so we knew that we had a big number here to work worth.

On the facility closures side, we projected $4 million of cost savings and on purchasing, $4 million. In both of those areas, we have met those goals and objectives. So that was really the $50 million.

In our '04 numbers, we had anticipated about an additional $14 million workforce reduction savings. Again, this was really through further rationalization of our facilities and as we got our arms around the business, again taking on this company that was twice our size (sic) -- we felt it was going to take a little bit of time to get some of the additional savings that we wanted to get out of the business, as well as deal with the whole internalization of waste (indiscernible) knowing that we need customer approval to achieve that. The next big number, obviously, is in the purchasing side; we had about $12 million of additional savings on the procurement side. So really, to accomplish the reductions in costs, we've got several different initiatives going on here. We've got a leader in Tony Pucillo, who is really driving a number of these programs and initiatives, and people are working very hard to put their plans in place and to further reduce those costs -- you know, after realizing ten months now where we are.

Okay, if I could just follow-up with one second? How much exactly do you have right now available on your revolver?

We don't have the number right now, but we just said it was approximately $40 million at the end of the quarter.

Your CapEx guidance -- have you cut it for this year?

Yes. Our CapEx is running less. We've been, I think, doing a very good job of managing both capital expenditures and environmental. On the environmental side, we had forecasted between 20 and $24 million for this year. The first six months is about $6 million, so we are considerably down there and we're working very hard with all stakeholders in regard to managing our environmental spending.

So in the second half, your expectations for environmental liabilities are what?

No more than $10 million, hopefully a little bit less than that.

Michael Christadulu (ph), Enwood Capital Management.

Just as a follow-up are all of your your Accounts Receivable considered qualifying under your Receivables facility?

We have the normal sort of provisions where receivables that are more than 90 days would be excluded. You know, there is a whole sort of set of ineligibility criteria that are very normal for companies like ourselves that wouldn't apply.

That percentage should drop, though, over time, or are you still trying to collect some of the old CSD receivables from a year ago?

We believe that those will decline over time because of the thing you just talked about and frankly because of just better credit and collection policies that have been implemented on a go-forward basis.

On the fees paid to renegotiate the bank agreement, the 870,000 -- is that just for the second quarter, or does that include the half a million that was paid in the first quarter?

These are incremental fees.

Okay. Lastly, there was some industry (indiscernible). Have there been any major accounts that you've lost in addition to just the weak economy? I guess there was some industry comments about some GE volumes and some other volumes. Anything you can talk about there?

No. I mean, we may lose a contract or a bid opportunity at a particular location. You know, we service, you know, hundreds of General Electric locations, and I'm sure that there is wins and losses (sic) going across the network here. You know, I guess, overall, we tried to do an analysis of all of the -- what we would consider base accounts, or ongoing revenue that was lost. It was in the 4.5 to $5 million run-rate for a year, so it really was not material. That certainly can be offset by other wins that we've been able to get. So you know -- and those losses are not necessarily losing the overall business, but maybe customers changing their processes. We've had one large account in Canada; it was about 2 million, another one down in Mexico which was approximately $2.5 million, so those are a couple of the two major accounts that I can recall, but nothing significant.

Alan Medtroni (ph).

I don't mean to keep coming back. I just want to try to understand your you uses and sources of cash for the second half. So however many times I've got to ask it, if you guys don't mind running through it. CapEx for the second half -- you're talking about something in the nature of $10 million -- or excuse me, $12 million. Is that correct? What's your CapEx number for the second half, your expectations?

It's approximately that.

Okay. Can you walk me through I guess what your new -- what you expect to be drawn down on the revolver, or how you are going to work the insurance relief? Can you give us some sort of timing or expectation (indiscernible) how much cash you could free up?

(indiscernible due to multiple speakers).

I'll try to go through this one more time.

Please.

The EBITDA numbers -- I think if you refer to what we talked about earlier, our covenant requirements are slightly over $15 million, on a quarterly basis, really for the next four quarters. That's sort of the starting point.

So it starts -- for this coming quarter, it starts at over 15 million?

That's correct.

So then it's really over $60 million is your covenant requirement the next four quarters?

It's roughly $60 million.

Okay, so a little over 15 a question, okay.

Second thing is we have cash interest expense. If you look at what our borrowing levels were the first half of the year and what our cash interest expense was the first half of the year, you know, we expect those numbers to remain relatively flat, relative to where we are today.

Okay, so roughly six million a quarter, call it.

Okay. Cash taxes, at this point in time, we expect to be roughly $3 million for the balance of this year.

The reason why you're paying cash taxes even though you keep generating losses is why?

Because of the way we are structured in Canada.

Okay.

Then our capital spending and environmental spending, as we talked about earlier, is really at the low-end, sort of in the low 20s; at the high-end, in the high 20s. That's for the balance of this year.

Thank you. Are there specific targets? Have you (indiscernible) management bonuses or targets based off of costs you're pulling out of the business?

We just got a Board approval two weeks ago to recalculate the (indiscernible) program, and we're going to be looking at that again because, clearly, we want to make sure that we have a team that's incentivized and driving towards the goals that we've said here.

Okay. Lastly, if I can, do you expect to benefit? I guess we haven't -- we've been focusing on some negatives. Can you talk about some of the benefits you think may accrue starting the fourth quarter or into next year, as some of these plants shut down or some of your competitors seem to keep going bankrupt or looking to get out of business. I think Suez was thinking about getting out of hazardous waste now domestically? Can you talk about that?

Well, you know, even in light of the very poor profit performance, the Company still has an excellent relationship with its customers. I think we've got a very strong customer base. As I mentioned, we just reviewed all of our accounts and met with all of our sales leadership here and spent quite a bit of time with them. I think, from a competitive standpoint, that the Company really has so much to offer to its clients with all of these assets that, you know, we basically have only owned for the last 10 or 11 months here. So I think we should be able to take advantage of some of the issues that are going on in the marketplace, but it is somewhat of a two-edged sword, as you know. Many of our competitors are good customers of ours and it's not good when they are wounded and they're hurting, so we really would love to see the industry do much better. We've been trying to provide that leadership across the business we are doing out there.

Thank you.

Michael Roesler, CJS Securities.

One of the keys to our investment thesis here has been that you had the systems that gave you the revenue and the profitability on a pretty detailed basis and that you'd sort of know what was going on on a real-time basis. How can we have confidence, going forward, given that you renegotiated that covenant in the middle of the quarter and came in about about half of that expectation? You know, an investor today would tell us, hey, these guys know what's going on now.

It's a very good question. We have been running the business on one platform here in the U.S. since Day One and there's certainly been some difficulties, particularly with some of the newer employees in managing the procurement systems and really understanding more, I would say, on the P&L side than on the billing side. I think we are seeing, every day, those key performance indicators that are so important for us; you know, what is our build amount? What's our unbilled? We are looking at order volumes, and we can see that real time because everyone is running on one system, and I think we've got good tools to see that. But it is taking time to get people, I think, acclimated to one common system.

I think, secondly, there are pieces of the business that we are acquired where our systems needed to be enhanced. We've spent a lot of effort here enhancing them to meet the needs of the landfills, for example, and the whole container-management side of the business, so we are improving and I think we need to do a lot better in forecasting both top and bottom-line, but I think as where we are today and how we're forecasting the business, moving forward, I feel better about it than I did a quarter ago, so I think it is improving.

May Mark comment on maybe specific things that maybe (inaudible) planning on doing? (inaudible) Company. Maybe there's things that he (inaudible) differently?

As Alan talked about, I think we need to continue to develop better systems that give us better visibility. We have initiated a more diligent forecasting process which is getting updated much more frequently than what we've necessarily done in the past. There's a lot more specifics that we are requiring to incorporate into these forecasts so that we really have our arms around the various cost drivers and cost elements. So, we're going to move more towards trying to work through a lot of key performance indicators, use those as tools again to help drive behavior and make changes to our business sooner instead of later. I think there's a lot of new tools that have been implemented and are being utilized today that will allow us to take quicker action in both down markets and/or up markets, depending on what's going on.

Okay, thank you.

Kevin Denney (ph), HD Brown (ph).

Just a couple more follow-up questions -- so you renegotiated your covenants mid-quarter? Is there a reason that you didn't pre-announce, even though you knew that the numbers would be a lot lower?

No. This agreement was just entered into and finalized with the Bank several days ago.

Okay. Are there any uncashed checks at the end of the quarter?

I believe there is a -- if you look at the press release -- actually, I don't think that we have disclosed that yet, but that's in the 10-Q.

Okay. Just I guess to touch on the bonus awards, is that likely to be tied to that 60 million figure?

No, it would be a higher number than that.

Thank you.

Michael McCormick (ph), Guilder Gagnon (ph).

I got cut off. On the gross margin, on the cost of goods sold line, it was very unclear to me if you could walk me through the incremental dollar increase from Q1 to Q2. It looks like, in advance, somewhere in the area of 23 or $24 million. Obviously, there's some volume improvements that require that. But if you could talk to me about maybe additional costs that were incurred in the quarter and how that gets rectified.

When you look at some of those costs, it's a pretty detailed question for us to answer on this call here. If you look at some of the extra costs, we did have a $20 million event; we did subcontract some of that business, so you're going to see some noise in the cost of goods sold in that.

I think to break it down, we would have to really get into the details P&L by P&L to give you a real detailed answer, Mike. I guess -- are you trying to get some -- maybe you can just tell us what you're looking for here. You know, what are you trying to get to?

Well, I'm trying to figure out why you didn't have better leverage at the gross margin line.

The real leverage, as you know, in our business is clearly in the disposal side of our business. We have a lot of leverage at our incinerators and our landfills. In our incineration, you know, 60 to 65 percent is a good number there. So, when you miss on some of the volumes that we had anticipated to come in, that's really where you see a big miss.

But your utilization in incineration went to 89 percent.

Yes, 89 percent is -- I think our folks did a good job of working, keeping the plants full and at least at that level, but it's a real mix issue for us. When you have some of these other large projects -- we're very much like running a chemical plant. Although some of these contaminated soils are cheaper on a per-pound basis, our variable costs are very low, especially at our Kimball (ph) incinerator. So, it really helps to offset or improve our profitability, I should say.

Okay. It's still very unclear to me.

You know, when we are looking at such a gross number like that and if we can't sit down and go through -- of if we can't explain to you by product line, I think it would be hard to just give you one blank answer.

(indiscernible).

It would be helpful for, I think, everyone if you could be able to more clearly dictate the leverageability here. Because the revenue number was in line, I understand you have a $20 million event, but there was a significant shortfall in the way the costs were managed is the way I look at it. Right. Well, as we mentioned, some of the major reasons for the miss is really lower volumes that projected, particularly in those high fixed cost facilities, as Mark said, the higher transportation costs, the lower margin that we saw on the spill than we typically would see because it was much more of a labor-intensive job. We did issue some credits as a way of getting our global settlement done with Safety Kleen -- you know, some of our other higher medical costs and what have you; those were all sort of some of the reasons why the gross profit as a percentage of sales has decreased in the quarter.

Our final question from Adam Scotch (ph), Kramer Rosenthal.

I apologize if you guys have answered a few of these. I just have a couple of questions. What do you expect your working capital usage to be for the balance of the year?

It's our objective to keep that neutral.

Okay. What's the current total debt level?

The end of the quarter, our debt was roughly at $194 million.

Okay, 194. You said the cash in the balance sheet was three, I think?

Approximately five.

Five. What is the it amended fixed-charge ratio? How is it calculated?

That will be in the 10-Q, if you could just go through that. The calculation is slightly different, depending on the agreement.

Okay. I guess, given the guidance that you gave for spending in the back half of the year and cash flow, I guess, with the environmental and cash taxes working back from, say, a 30-ish million EBITDA number, you'll probably dip into the facility to the tune of a couple of million dollars, depending on the timing of the asset sales?

Again, as I said earlier, it's our objective to remain cash neutral for the balance of the year and hopefully then generate a little bit of cash, based on the renegotiation of this insurance program, based on asset sales, based on working capital management, based on improved EBITDA performance and based on controlled spending, both on environmental and on CapEx.

This does conclude the question-and-answer session today. At this time, I would like to turn the conference back over to you, gentlemen, for any additional or closing comments.

We would like to thank you all for joining us today. We look forward to updating you on our progress on our Q3 conference call. Thank you very much.

This does conclude the conference call. We do appreciate your participation. You may now disconnect. (CONFERENCE CALL CONCLUDED)