Clean Harbors Inc (CLH) 2003 Q3 法說會逐字稿

Good day and welcome, everyone, to the Clean Harbors Environmental Services third-quarter 2003 results conference call. Today's call is being recorded.

With us today is the Chairman, President and Chief Executive Officer, Mr. Alan McKim, and Executive Vice President of Administration and Chief Financial officer, Mr. Mark Burgess.

At this time, I would like to turn the call over to the General Counsel, Mr. Bill Geary. Please go ahead sir.

Good morning. In addition to Alan McKim, our CEO, and Mark Burgess, our CFO, we have joining us this morning Steve Moynihan, our Senior Vice President of Planning and Development.

Before turning the call over to Mark Burgess, our CFO, I'd like to read the Safe Harbor passage. 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 use of 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, 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, November 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 September 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 which will be made with the SEC concerning this reporting period.

In addition, I would like to remind you that today's discussion will include references to earnings before interest, taxes, depreciation and amortization, or EBITDA, commonly referred to by the acronym EBITDA. EBITDA is a non-GAAP financial measure and is intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of the Company's performance.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Clean Harbors' Q3, 2003 financial results news release dated today, November 14, 2003. A copy of this release can be found at the Company's Web site, www.CleanHarbors.com. A copy has been furnished as an 8-K with the Securities and Exchange Commission.

With that said, I'd like to turn the meeting over to Mark Burgess, our CFO.

Thank you, Bill, and good morning. Revenue in Q3 was a 151.1 million versus revenue in Q2 of 172 million. When adjusting for the impact of the Buzzards Bay spill in Q2, revenue was essentially a flat on a quarter-over-quarter basis.

Site Service revenue was up slightly in the quarter and technical service revenue was down slightly.

With the exception of landfill volumes, all other waste volumes were flat to slightly off in the quarter. Incineration volumes were down approximately two percent in Q3 versus Q2 as a result of more scheduled downtime. Our wastewater volumes were also down slightly in Q3 relative to Q2.

Landfill volumes were up in the quarter, resulting in approximately $1 million in incremental EBITDA. Broker volumes were off slightly in the quarter as well, as we totally cut off one of our major competitors after their bankruptcy filing in Canada.

In addition, volumes from Safety-Kleen continue to be running lower than forecast.

Large facility project volumes are still weak and did not positively impact revenue in the quarter versus forecast. That being said, we're currently quoting a number of facility projects which we believe will add additional revenue in 2004.

Gross profit as a percentage of sales increased by over 440 basis points in the quarter. Improvement was realized because of implementation of various cost-reduction initiatives, including the following -- headcount reductions; continued internalization of waste; reduction in outside transportation and internalization of transportation; and in general improved utilization at our landfills.

We believe that we can further realize improvement in cost reduction by the continued implementations of the existing strategies I just described.

Increase in the environmental liabilities in the quarter was $2.7 million versus 2.8 million in Q2 and in line with our expectations.

SG&A expense was 26.4 million in the quarter, versus 31 million in Q2, or a decrease of 15.3 percent. The Company achieved its goal of reducing SG&A and was below the $27 million target that we had established in the quarter. We expect to be inclined or below this target in the future.

The Company also implemented a new healthcare program that will help it cost avoid $7 million, going forward.

EBITDA in the quarter was $16 million, versus 9.2 million in quarter two. EBITDA as a percentage of sales was 10.6 percent in Q3 versus 5.3 percent in Q2. EBITDA also included a charge of over $300,000 in severance costs associated with the Company's recent downsizing efforts as well.

Interest expense in the quarter was 6.0 million. Cash interest expense was 5.3 million.

The Company also recorded, in the quarter, $8.7 million gain in Other Income. This was a byproduct of the Company's utilizing the Black-Scholes valuation model and valuing the embedded derivative on its preferred stock. It will continue to use the Black-Scholes method in valuing this item on a go-forward basis, which will result in earnings volatility, based on the movement of our stock.

In general, stock price increases will result in non-cash charges to earnings and stock price decreases will result in non-cash gains to income.

Earnings before tax for the quarter was 9.2 million, including the gain from the embedded derivative. Excused me -- the pretax income would otherwise -- excuse me, the pretax income otherwise would have been approximately $420,000.

Net income for the quarter was 7.4 million in Q3. Earnings per share was 48 cents in Q3 and on a fully diluted basis, earnings per share was a negative 9 cents because accounting rules suggest that the embedded derivative gain needs to be contracted out of your earnings when calculating fully diluted earnings per share.

From a balance sheet perspective, we also had many positive things to report. Accounts Receivable was $124 million at the end of Q3, versus 135 million at the end of Q2. Accounts Receivable over 60 days went down by almost 4 million in the quarter as the Company continued its efforts on collecting past due receivables.

Restricted cash for insurance and financial insurance requirements increased from 83.9 million to 88.8 million in the quarter. Under the terms of our 2002 program, this number could have been as high as $104 million. However, we worked very hard with our insurer and got them comfortable with the lower collateral requirements than what they had originally asked for. Under our current program, we will not need to post additional collateral requirements on financial assurance at least until 2005.

Accounts Payable was 60.2 million in Q3, versus 65 million in Q2 and 64 million at the end of 2002.

At the end of this quarter, we also completed our review of purchase accounting as it relates to the booking of all liabilities associated with the purchase of the CSD assets from Safety-Kleen. As a result of this review, total environmental liabilities increased from roughly 168 million at the end of Q2 to approximately 192 million at the end of Q3.

The major increases in the reserve resulted from the Company accruing significant liabilities on (indiscernible) in Québec Canada and the Marine Shale site in Louisiana. Previous to this quarter, we were unable to provide enough data that would allow us to reasonably estimate these liabilities, although they had been disclosed as potential liabilities in our filings.

Also, in finalizing our purchase accounting process, we determined that certain non-cash purchase accounting entries had been netted against capital [additions] in Q1 and Q2. This, in turn, resulted in the Company understating, in its cash flow statement, cash flow from operations and cash flow from investing activities in both Q1 in Q2.

The Company is re-filing its first and second-quarter 10-Qs to ensure that better year-over-year comparisons will be made in 2004 for investors on various line items in the cash flow statement. No changes to the balance sheet, no changes to the income statement, and no changes to EBITDA were made as part of this re-filing.

We also moved the definition of our fixed (indiscernible) credit agreement with our term loan A and B lenders to reflect the aforementioned adjustments in our previous 10-Qs.

Total funded debt at the end of Q3 was 187 million versus approximately 197 at the end of Q2. Revolver borrowings were $35.7 million versus 40.2 million at the end of Q2. Availability on revolver was approximately $35 million at quarter end and does not include approximately $5 million in cash balances.

Because of our good working capital management, roughly 1.5 million in asset sales and reduced financial assurance requirements, the Company was successful in driving down debt. I think we did a very good job is quarter from that perspective.

From a cash flow perspective in the quarter, EBITDA was $16 million; our cash interest expense was 5.2; our cash taxes were 900,000; our capital spending was approximately 7.4 million, so that we've now spent 25.8 million on a year-to-date basis. Our environmental spending was roughly 2.1 million.

Our Q4 expectations on cash interest expense are roughly 5.2 million, on cash taxes are $1 million, on capital spending would be at $7.5 million, and on environmental spending, $3 million.

We believe that significant opportunity to generate cash exists for better Accounts Payable and Accounts Receivable management in the future, continued asset sales, and continuing to find ways to reduce cash collateral requirements under our financial assurance needs.

Our goals on AP and AR would suggest in the long-term at least another 10 to $15 million in cash and in asset sales, 12 to 20 million long-term.

We were in compliance with our credit agreements at the end of the quarter. Next quarter, we will need to generate roughly 16.3 million in EBITDA in order to remain in compliance.

We did not fully realize the benefit of cost reduction efforts in the quarter due to timing associated with the implementation of them. We do expect to realize further benefits and cost reductions in Q4 versus those achieved in Q3.

With that being said, I'd like to turn over the call over to Alan McKim so he can discuss in detail the operational improvements that were achieved during the quarter.

Thanks, Mark, and good ,morning everyone. I'd like to focus on Q3 from an operational perspective. From that standpoint, it was a very good quarter for our company. We met or exceeded all of our operational objectives on the expense side. As Mark reported, we substantially improved on our EBITDA.

Meanwhile, despite the absence of major emergency response projects, revenues came in just under the low end of our guidance.

It's been a year since the CSD acquisition, and we've made tremendous changes in the organization over the past twelve months, and the market has changed as well. At this point, we have a much better understanding of our base revenue run-rate as a combined company and we have effectively right-sized the Clean Harbors organization for this environment.

We have both a lean organization and a much larger operational footprint and we believe we are in an excellent position to improve our profitability as landfill and waste disposal volumes increase.

As we've stated several times in the past, we now have a highly leverageable asset infrastructure, particularly as we continue to take more and more costs out of our business.

We are hoping we could see some market improvements in the third quarter, but that was not the case. The weak economy over the past two years has reduced the amount of material entering the waste stream, which continues to affect our landfill incinerator business.

In addition to generating less waste, the U.S. and Canadian industrial sector appears to be delaying environmental spending. We expect that this will continue until our customers are convinced that the economic recovery is real and feel they can finally resume some discretionary spending.

This marketplace weakness was magnified in Q3 by the complete absence of major emergency responses and large projects, such as the oil spill cleanup that we had in Q2.

At the same time, our distributors and broker business remains soft this quarter. Their volumes are affected by the same fundamentals as ours and many distributor brokers continue to face financial pressures as a result.

Driving revenue becomes a top priority in times of reduced demand and everyone at Clean Harbors is focused on generating strong topline results. The network of plants and facilities and extensive customer base we acquired from Safety-Kleen creates a broad North American footprint for Clean Harbors. Our strategy is to use those assets as a springboard for revenue growth across all segments of our business.

As we mentioned on previous calls, the EPA's new MACT (ph) standard became effective in September. We believe this bodes well for Clean Harbors over the long-term. We anticipate that MACT (ph) will lead to a reduction in capacity in the commercial incinerator market and that Clean Harbors is strongly positioned to take advantage of this market dynamic.

Our facilities will all be in compliance with the new MACT standards. To reach this milestone, we're making a $20 million investment at our largest facility in Deer Park Texas, most of which has been completed in 2003.

Another promising area for Clean Harbors is the emergency response business, where we are creating new opportunities for ourselves. Our expanded North American network of facilities and service centers will enable us to play a leading role in responding to future emergency events no matter where they occur across the continent.

We've worked to capture these growth opportunities in Q3 by realigning our sales organization and adding a number of professionals to our sales force and by enhancing our National Account program. Our National Account team is developing a pipeline of vertical market cross-selling opportunities that we expected to unfold when we acquired Safety-Kleen's CSD business.

To drive further performance improvements in this area, during the third quarter, we named Anthony Pucillo Executive Vice President of Sales, Marketing and Customer Service. Tony joined Clean Harbors in April of this year as Senior Vice President of Strategic Initiatives and since then has played a major role in our drive to optimize the Company's operations. We look forward to having Tony apply his considerable skills and high level of energy to the sales and customer service side of our business.

As Mark mentioned, we've made significant progress towards improving Clean Harbors' operating leverage by reducing SG&A expense during the quarter. When we acquired CSD, our combined staffing was 4,450 people. We were planning to reduce the total personnel to about 3,950 by the end of this year. Our streamlining initiatives have already exceeded this goal, reducing our total staff to 3,775 people during the third quarter. This represents a 15 percent reduction in overall headcount, the vast majority of which are non-billable personnel.

As Mark mentioned, SG&A declined to 26.4 million in the third quarter.

At the same time, we continued internalizing more of our waste disposal and transportation operations, which resulted in hiring 35 additional drivers, relocating equipment, reorganizing operations and making improvements in our purchasing and procurement process.

Although we remain cautious in our forecasting, there's no reason to believe that waste volumes and Site Service activities -- excuse me, there is reason to believe that waste volumes and Site Services activities are reaching a cyclical bottom and that the industry's response to MACT (ph) may begin driving demand in our direction. With our extensive incinerator and landfill infrastructure and our industry-leading reputation, we believe Clean Harbors stands to benefit from those positive trends.

We will be making a number of steps to leverage the Company's strong position during the fourth quarter. Our objective is not only to capitalize on a potentially positive trend in customer demand, but to further streamline the Company's operations and improve our performance. The steps will include further internalization of waste volumes and transportation services.

As I've mentioned, we've also gained a deeper understanding of our revenue potential now that Clean Harbors and CSD have been thoroughly integrated. Based on this understanding and reflecting our guarded assessment of the sales outlook, we are viewing Clean Harbors' core operations, excluding major emergency projects, as a base business that can be reasonably expected to generate revenues of approximately $150 million per quarter in the near-term.

Our efforts to right-size the Company had significantly improved Clean Harbors' operating leverage. In addition, some over current cost reduction initiatives were not completed until late into the third quarter. The impact of these measures on EBITDAR will be evident in the fourth quarter. As a result, even at a $150 million quarterly revenue run-rate, we expect to report a sequential increase in EBITDA for the fourth quarter of '03.

This concludes our prepared remarks, and we will now be happy to take any questions that you have.

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

Can you talk about some of the specific actions that were taken in the quarter to take out that cost in the SG&A line and what the savings would be on an annual basis as we look at '04?

Mark, do you want to handle that?

It was actually through a number of initiatives. It was headcount reduction; it was through looking at professional fees and managing those more tightly; it was by implementing a new healthcare program in June of this year, which we started to see some benefits of in Q3. Then as I also said, we made subsequent changes, which should help us even more on go-forward basis. It was really those three line items.

I think the guidance that we're still providing on SG&A is at the $27 million run-rate, although I will tell you that we think we can beat that target in Q4.

I guess that's the sort of level you'd be looking at for 2004?

Correct.

Alan, in terms of where you are in terms of volume and the landfills -- you mentioned that there was some pick up there. Could you talk about specifically on pricing, particularly in California?

Well, the California market is a very price-competitive market out there, and you know, we really, I think, spent the first six months getting a better understanding of that market and how our two landfills out there can be more effective in competing in that market. So both from a transportation and logistics standpoint as well as disposal standpoint, I think we've really got a good plan in place now to move forward and drive a lot of volumes and be competitive in that market out there. But pricing is very competitive. We have some tax issues that we have to work around in that market as well. But I would say, probably no more competitive than probably in most of our landfill business at this point.

Mark, you ran through some of those numbers pretty quickly. Could you just give us again the cash in Accounts Receivable?

Cash at the end of the quarter was roughly $6 million, and our Accounts Receivable were actually 114 million. Our unbilled Accounts Receivable was roughly another $11 million, so total Receivables of about 125.

And the restricted cash balance?

Restricted cash balance was $88.8 million.

David Cohen with Midwood Capital.

Mark, could you reiterate some of the figures you provided on cash flow items? Then I have a follow-up question after I sort of hear the numbers again.

For the quarter?

For the quarter, yes, and what you think Q4 is going to be.

Okay, for the quarter, EBITDA was $16 million; cash interest was 5.2; cash taxes was about 900,000; capital spending was approximately 7.4 million; environmental spending was slightly over $2 million.

For Q4, the guidance that we've given on cash interest is 5.2 million, cash taxes about a million, capital spending about 7.5 million and environmental spending approximately $300,000.

300,000?

Excuse me, $3 million, excuse me! I can't read my own writing.

I have that problem all the time. Have you availed yourselves of the (indiscernible) feature on the subdebt in the past?

No.

Okay, so that just sort of came into play this quarter? Because I think you had -- about a $12 million number you had sort of guided to last quarter?

(multiple speakers).

I'm sorry, last quarter for the second half of the year, you were guided towards a $12 million number. I guess, what has been the source of the sort of savings, if you will, on the CapEx environmental spending? I think you had a range for the second half of the year of low 20s to mid-20s for those both combined items.

Again, all we've really been able to do is refine those as we've gone forward. We've been very, very cash flow sensitive and we're trying to manage both environmental and capital spending very tightly.

What is sort of the outlook on those items for 2004? I think, according to disclosures in your footnotes, the expectation is your environmental sort of requirements kind of ticks up significantly in 2004.

That will be disclosed in the Q. I don't know that we've really given any guidance on capital spending for next year other than, you know, we think it will be less than what we're spending this year.

You know, on the environmental side, there probably will be some increase in spending relative to this year, given the good job that we've done in keeping the environmental spending down. But when you look at the two together, I don't think that capital spending and environmental spending in '04 will be more than in '03. In fact, I think it will be less.

And the MACT (ph) spending -- is that largely done by the end of this year?

Yes, it is.

Just sort of adding up the items in the cash flow elements in the quarter, 16 million (indiscernible) EBITDA minus interest, taxes, CapEx and environmental gets me to sort of a net cash of 400. What are the other sources of cash that allows you to pay down debt? Can you sort of walk through those items?

Sure, I'd be glad to do that. Obviously, our receivables were down in the quarter. We collected the Safety-Kleen receivable in the quarter.

That was like 7.75 million or something?

About 7.5 million. You know, that was slightly offset by reduced AP. Those are really the major sources.

So the net bottom-line change in cash was how much? Or cash available for debt reduction -- was it 9 million, then?

Well, on revolver -- we paid down roughly $7 million in term loan debt. We paid down roughly 5 million in revolver borrowings. We incurred $7 million in capital leases, so when you net all those together, we were roughly 9, $9.5 million of debt reduction in the quarter.

Okay, good job with that. When might you guys start providing guidance for 2004?

We will go through our final budgeting process. After we go through that with the Board, we will determine really what, if any, guidance that we're going to provide next year.

All right, thanks.

Avi Dalphin (ph) with First Associates.

Earlier, you had mentioned that you're beginning to recognize liabilities for two environmental sites that previously -- I guess where you previously (indiscernible) any environmental liability. When it is the liability that is being set up for each of these two sites?

Basically, the Marine Shale site is a site that Clean Harbors never used. This is a facility that was shut down by the government in 1996. But the CSD operation used quite extensively. Through our acquisition of the Chemical Service division, we provided an identification to Safety-Kleen. So, based on our communications with the regulatory folks down there and visiting the site and working with our engineers and lawyers, we've determined that there is an estimable and probable exposure, potentially, at that site. However, we would expect to play a leading role in re-mediating that site and passing along to the original generators of the waste for that site cleanup. So, we did put a reserve there for cleanup, but it's very early in the game in determining what the ultimate exposure is going to be.

Regarding the Mercier site -- and that will be fully explained also in our filings -- but we have been discussing, with the regulatory community in Canada, over issues to do with a former facility there that is adjacent to our incinerator in Mercier that operated back in the late '60s that was really not a predecessor company and so there has been litigation going on for 20 years. Again, this is a CSD asset and so we hope to put aside that litigation and really work collectively together with the community and with the government to put a permanent solution in place to help clean up that site and certainly without admitting any responsibility to that site because you know, there's some real legal issues. But we also feel there's some responsibility that we have to the community to help move forward with the clean-up of that site, so we also put up some reserves there as well.

What was the amount of the reserves?

The overall reserves went up by roughly $24 million. Again, the majority of those were those two sites that Alan just talked about.

(OPERATOR INSTRUCTIONS). Michael McCormick (ph) with Guilder Gagnon (ph).

Could you highlight for me why you think that the run-rate for the third quarter was roughly $150 million on the core operations? We're working into the seasonally slower periods, and why you think that will be stable into that -- into this environment?

I think, when you look over the last 12 months, Mike, if you exclude the projects in some of the large events, basically, the Company every month has been doing consistently about 50, $51 million in revenue. We have no reason really to believe that that is going to change. But we also feel that we have a lot of projects and other opportunities that are in our pipeline, but those are outside of sort of our base business. So, I think we're just getting a real good feeling on what every month has been looking like here on the top line from our base business and have expectations that maybe we can deal with some of the softness, for example, in the first quarter, with some project business to offset that typical decline in base business.

The second part of that is, you made some comments about internalization of waste and internalization of transportation costs. Could you may be quantify the benefit that might be accrued by that into the fourth quarter and into next year, the dollar savings that might be?

You know, I don't think we have here in front of us the percentage reductions that would probably mean a lot to you at this point, but I would tell you that, across the entire organization, you know, that $60 million or so spending for transportation is a big focus of ours. There are substantial assets that the Company has today, both vehicle and rail assets, that are very underutilized and we expect to continue to make further improvements in the internalization of transportation, particularly.

Did you say $60 million dollars transportation?

Yes, that is one of our largest line items and that is total North American transportation expense.

How much of that is outsourced versus currently today?

That is all outsourced.

It is all outsourced today?

That's right. That is a big area for improvements and one that we are very much focused on for the reductions here.

We're not going to eliminate the use of outside contractors; we expect to continue to enjoy good relationships with them as we work on large projects, but for our base business, there's a tremendous amount of opportunity there.

Of that $60 million and assuming a certain proportion of it comes internalized on a rounding basis, could you save $10 million, let's say, of that 60 million?

We've been using 12 to 15 percent is what we believe is the additional cost there. You've got to remember that we have, right now, over about $20 million of rail and rail facility assets that are very, very underutilized that really could fit in very nicely. We have seventeen rail facilities at our own sites and just better utilizing of those facilities is an example that will help us lower that number down quite a bit.

That's just warehousing you're talking about?

It's not warehousing; these are offloading facilities that feed our incinerators that feed our landfills. You know, we have a national network with substantial owned rail assets that are not being anywhere near utilized to the level that they could be. So we're using a lot of outside trucking companies and other firms to manage some of our outside disposal and outside lane shipping, and we expect to have a big impact on that next year.

This does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Alan McKim.

Stephanie, was there any other -- because we have still got a couple of minutes left here. Was there other calls coming in, do you know?

Not at this point. (OPERATOR INSTRUCTIONS).

No, that's fine. I wanted to make sure that it wasn't an error on us closing up shop here too early.

Okay, well, thank you very much, everybody, for joining us today and we look forward to updating you on our progress on year-end results conference call. Thank you.

This does conclude today's teleconference. Thank you for your participation.