Clean Harbors Inc (CLH) 2004 Q4 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Clean Harbors fourth quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [Operator Instructions] I would now like to turn call over to Mr. Bill Geary, Executive Vice President and General Counsel. Please go ahead, sir.

Thank you, Crystal. Good morning, everyone, and thank you for joining us. On the call today with me are Alan McKim, our Chief Executive Officer, Mark Burgess, our Chief Financial Officer, Gene Cookson, President of our Site Services Group, and Steve Moynihan Senior Vice President of Planning and Development.

Before we get started I would like to remind everyone that matters we are discussing this morning and information contained in the press release issued by the Company today announcing our fourth quarter and year-end 2004 financial results 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, hopes, 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, March 15, 2005.

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-K for the year ended December 31, 2003 and our subsequent 10-Qs and the Form 10-K we plan to file on March 31, 2005 for the year ended December 31, 2004. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's press release or conference call other than through the filings that 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 commonly known by the acronym, EBITDA. EBITDA is a non-GAAP financial measure and is intended to serve as a complement to results provided in according 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' news release dated today. A copy of this can be found at the Company's website, cleanharbors.com. A copy also has been furnished as an 8-K with the Securities and Exchange Commission.

And, now I would like to turn the call over to our CFO, Mark Burgess, for our financial review. Mark.

Thanks, Bill, and good morning, everyone. Clean Harbors continues to deliver improved financial performance in Q4. Our revenues grew 21 percent year-over-year; slightly above our updated guidance. Gross margins improved both sequentially and year-over-year. We generate EBITDA of 23.9 million at the high end of our revised guidance. We also delivered net income of $7.5 million, and our cash and marketable security balance is approximated $48 million at the end of the year, up by more than $23 million from our balances at the end of Q3.

Prior to further discussing the financial results for the quarter and year in detail, I would like to provide clarity for the earnings restatement that was referred to in this morning's press release. Over the last 12 years we have utilized a case-specific methodology in estimating our self-insurance reserves associated with workers' compensation and motor vehicle liability claims. On a monthly basis our risk management group reviews all open claims of significance, and with the help of our insurance carriers, establishes reserve for what we believe to be the ultimate settlement cost associated with that claim.

We reviewed this methodology in Q4 of this year and determined that since many of these claims tend to have a very long lag period before they get settled, the ultimate obligation associated with these claims tend to trend higher than our case specific methodology might predict. Based on this data and a more thorough analysis, we decided to embrace an actuarial based methodology which accounts for these types of increases more accurately on a go-forward basis. As a result of this change, we will accrue additional expense in 2002 and 2003 of 256,000 and $255,000 respectively. The impact on earnings per share for each of these years approximates $0.02. We will also record a $1.1 million adjustment to retain earnings to account for the cumulative adjustments associated by making this change.

By making this restatement we believe both proper expense has been accrued, and our balance sheet obligation will more accurately reflect the ultimate settlement of these claims. We'll also file an extension notification with the SEC for our Form 10-K until March 31, 2005. This extension is being made to provide us with additional time to finalize the Company's financial statements for 2004 and the restatement previously outlined.

Moving on to the numbers for Q4; our Q4 revenues of $176.2 million increased 21 percent compared with 145.5 million the year ago quarter. Approximately 10 million of this total in Q4 is generated through significant emergency response event businesses that Alan will speak to later on. Landfill volumes in the quarter were roughly 2 percent greater than Q4 '03 but down on a sequential basis as a result of seasonal factors. Capacity utilization in our incinerators climbed to 94 percent versus 85 percent in the previous quarter and 89 percent in Q4 '03. Waste water volumes were up roughly 10 percent year-over-year as well.

Gross profit of Q4 grew to 51.5 million or 29.2 percent of sales from 39.4 million or 27.1 percent of sales in Q4 2003. We achieved this growth in margins despite a competitive pricing environment and a product mix oriented towards lower price bulk streams in Q4 as a result of improved volumes in throughput and a positive impact associated with our cost reduction efforts. In particular we realized a 50 basis point reduction in outside transportation costs as a percentage of sales as a result of our internalization efforts, as well as similar improvements in direct labor costs as a percentage of sales as a result of head count reduction and leveraging our head count against higher revenue levels.

SG&A for Q4 was 27.3 million or approximately 15.5 percent of sales versus 23.7 million or 16.3 percent of sales in Q4 '03. While we achieved operating leverage in the quarter from higher volumes, Q4 expense was adversely impacted by $3 million in higher bonus and expense and sales commissions and over $1 million in higher professional expenses primarily associated with Sarbanes-Oxley. These were offset by lower payroll costs in the quarter.

Accretion in the expense was $2.6 million compared with $2.9 million in Q4 '03, and our depreciation and amortization expense was 6.6 million in Q4, flat with our Q4 '03 levels. Operating income was $14.7 million or 8.4 percent of sales for Q4, up significantly from the 5.5 million or 3.8 percent of sales achieved in Q4 last year. Interest expense in the quarter approximated $5.9 million which compared with $6.2 million in Q4 of '03.

Our net income for the fourth quarter was 7.5 million or $0.42 per diluted share. This compares with our restated net loss of $11 million or an $0.85 loss per share in the prior year quarter. Q4 '03 results were adversely impacted by a $9.6 million noncash charge associated with the embedded derivative on our Series C preferred stock. As a reminder, our Series C preferred stock was redeemed in June of 2004, and our financials are no longer impacted by it.

EBITDA for the quarter approximated $23.9 million, $8.3 million higher than the $15.6 million achieved in Q4 '03. On a year-over-year basis our 2004 revenue approximated $643 million versus $611 million for 2003. Our tech service segment increased by roughly $20 million as a result of volume, improvements in incineration of roughly 5 percent, and landfill volume improvements of 20 percent.

Our site service business also grew by over $10 million as a result of market share improvements in Canada, the Gulf and Western regions. The impact of currency fluctuations on revenues resulted in a stronger Canadian dollar positively impacted revenue by $5 million for the year as well. Operating income for the year of 2004 rose to 39.4 million from a restated 11.6 million in the prior year. Net income meanwhile rose to $2.6 million compared with the restated net loss of 17.6 million or $1.54 per share in 2003.

And EBITDA increased by 48 percent from a restated 50.5 million in 2003 to 74.7 million in 2004. This improvement was possibly impacted by our cost reduction and productivity initiatives that were implemented throughout the year.

Looking at our balance sheet, cash balance is approximated $48 million at the end of Q4 when you include marketable securities in that balance versus $6.3 million at the end of '03. Cash balances were positively impacted from strong cash flow from operations, improved collection on aged receivables, and constraint spending in line with our expectations on capital and environmental matters. Our accounts receivable balance is approximated 126 million at the end of the quarter, which compares with roughly 124 million at year end 2003 and 127 million at the end of Q3.

Receivable balances were up 2 percent versus sales growth of 5.2 percent illustrating our slow but steady improvement that is being realized in our collection activities. Properties held for sale approximated $8.9 million at the end of the year. We sold several properties of roughly -- for roughly 1.5 million in the quarter and reclassified one property from an asset held to sale to an asset that we're now going to hold on to.

Landfill and remediation obligations approximated $181 million at year end versus 183 million at the end of 2003. And, our spending on capital, environmental obligations approximated $36 million for the year.

Q4 was a solid quarter for us as a result of the continued cost reduction success in top line improvements. We hope to continue similar successes in 2005. For the first quarter, despite unfavorable weather patterns particularly that have been experienced in the Northeast and Canadian regions, we expect revenues to grow by 10 to 11 percent year-over-year. Approximately 6 to 7 percent of this improvement is associated with emergency spill related projects. We also expect to generate EBITDA in the range of 15.5 million to 17 million for Q1.

For 2005, total year, we expect interest expense to approximate $23 million, accretion expense to approximate $11 million, and depreciation and amortization expense to be in the $26 to $27 million range. Our combined capital and environmental spending budgets are projected to total 35 to 40 million in 2005 as well.

At this point I would like to turn the call back to Alan, who will give you greater guidance and color on the quarter.

Thanks, Mark. Well, it certainly was a great quarter for Clean Harbors; really the best in the Company's history. As Mark mentioned we set new Company records for revenue and EBITDA in Q4, exceeding the targets that we had originally set for the Company.

So, what was the key to our success in this quarter? First the Company executed really well in the fourth quarter. We increased our utilization in our landfills and our incinerators really to a good mix of business including some nice large facility-type projects.

Site service was also a strong contributor in Q4. We're seeing a number of cross-selling opportunities in the market right now between site services and tech services. As an example our Petro-Chemical and Specialty Chemical business segment is showing real strong revenue growth as a result of our cross-selling, and we believe this segment of our business could grow from -- by over 15 percent in 2005.

Our vertical market approach really is helping us to gain market share in other segments as well. As you may recall, our sales efforts are focusing on six key verticals now. Last quarter we had reported that we hired three senior industry managers. We believe these new leaders will help to accelerate growth in these target verticals in the years ahead.

Second factor in Q4 performance was the positive weather conditions that we experienced. While these conditions took a turn for the worse, certainly after the close of the year, we had warmer weather in the fall and early winter, and that really benefited us across all our lines of business and enabled us, really, to keep our utilization quite high.

The final factor of our record Q4 results was emergency response projects. Clean Harbors was heavily involved in several emergency response projects in Q4. These emergency response projects contributed more than 10 million to our top line. And as we mentioned in today's release, we expect spill revenue to contribute more than 8 million to our first quarter results. While the revenues are not predictable, Clean Harbors's emergency response reputation on the east coast is really spreading across the U.S. and Canada, and we're really excited about opportunities to continue to expand our emergency response business now.

All in all, Q4 capped what was a very good year for Clean Harbors, but we have a lot more work to do to improve our results. Before talking about our outlook for 2005, I'd like to comment briefly on 2004 as a whole. On our Q4 conference call a year ago, I provided a list of objectives that we had set out for our business in '04. Each of these was aimed at improving the Company's bottom line results.

First we said we'd complete the integration of CSD. This required further reductions in head count and a tighter integration of our plants and staff in the new geographies that we had gained in the acquisition. This work was completed in early 2004, and the CSD assets contributed meaningfully to our business throughout this year. We remain North America's largest environmental hazardous waste management service company and our position in the marketplace continued to strengthen during the year.

We also began 2004 with the intent to take further costs out of off our business. One area we focused on was outsourced transportation. We added many new drivers and power units to support our internalization efforts, but we have a long way to go to reduce our reliance on external transport companies. While our work is far from done in this area, we believe internalization of our transportation costs will have an extremely positive effect on our financial performance on a go-forward basis.

Another area of focus in terms of costs was SG&A. As Mark mentioned we've kept SG&A costs relatively flat during the year while significantly increasing revenue. This is a result of our continued reduction in nonbillable head count and enhancements in our technology throughout the organization. We continue to believe that we can gain significant efficiencies with our new wireless systems and at the same time add more sales and service professionals to drive our top line without increasing our total SG&A expenditures.

And, finally, we discussed a year ago our intent to refinance our capital structure. We accomplished this in the middle of the year. In the process we added $20 million to our balance sheet while eliminating the embedded derivative which was distorting our quarterly results. We're very pleased where we are from a cash perspective now. It shows the overall health of our business and affords us a lot of flexibility in terms of acquisition opportunities or new business initiatives, and we continue to enjoy a good flow of acquisition opportunities but do not have any that are far enough along to mention on this call.

Looking back on the year, I'm really proud of just how much we did accomplish. We achieved the primary objectives that we set out for the Business in 2004. And certainly I'd like to extend our sincere thank you to all our employees for all their work in 2004. They really have put Clean Harbors in a very strong position really as a North America premiere provider of environmental services.

Our goals for 2005, our 25th year in business, are equally as high. We have a lot that we'd like to accomplish including many initiatives designed to drive down costs and increase revenues. We have approximately 20 operational excellent teams that are focused on these two specific goals, but we're also excited about several other programs that I'd like to mention.

We'll be completing the implementation of our proprietary software win across all of our Canadian operations. We'll be launching a new environmental compliance management software system to support our customers. We'll be rolling this new software out to a limited customer group in April and really should be full speed during the second half of this year, at which point we'll roll it out across all of North America. We'll continue to expand our footprint by opening site service offices in new geographic areas; and our work to internalize transportation and reduce other costs will continue. For example, we'll be adding 20 additional drivers and power units just in April alone.

So we've got a busy year ahead of us this year. We look forward to providing you with updates on our progress throughout the year. And now Crystal, we'd be happy to open it up for some questions.

[Operator Instructions] Your first question comes from Lionel Galeo with Goldman Sachs.

Good morning and congratulations on the quarter. Quick question on the '05 guidance. You gave some elements of guidance like interest expense, accretion, G&A. What do you expect in terms of revenues and EBITDA for '05?

Being consistent with our previous policy, Lionel, we're just giving guidance out on revenue and EBITDA for the subsequent quarter.

Okay. That's fine. And then, in terms of the market, it seems clearly that volumes are picking up. I guess that's what you're still seeing in the first quarter. You also mentioned that you're gaining market share. I was just wondering who is losing this market share. Is it some of the larger competitors, or are you stealing market share away from some of your minor or small competitors?

And the second thing. Do you see any changes in the competitive environment in the past 12 months?

I think we are gaining some market share. Some of it is related to regulatory initiatives. The new central waste treatment regulations that went into effect last year had a positive impact for us because our -- for example, our waste water volume in the quarter went from 13.7 million gallons to 18.1 million gallons. We believe that this increase in volume is a result of a lot of smaller mom and pop type waste water treatment plants not being able to meet the new CWT regulations. So I think that's an example of where we're picking up market share.

Okay. And then, in terms of pricing, in your comments you mentioned pricing was still challenging. Is it still the case, and do you expect any improvement in '05?

I think we've recognized that for some of the larger projects that we are pursuing, particularly to drive volume into our landfills that we need to be very competitive on an incremental basis, but, you know, we are also looking at very high utilization with certain types of waste streams going to our incinerators and recognize that we're trying to improve on our return in investment there. So, you know, we're being very competitive in the marketplace, quite frankly, on the pricing side but recognizing that our overall goal is to try to improve on our return on investment here.

Okay. And then can you give us an update on the situation at the [inaudible] lake side? And did you hear from the EPA since they required more information in October of '04 and what is the situation there?

I believe Bill and you might want to comment on this. Bill Geary.

We have not received additional inquiries from the EPA. We are presently in the process of responding to the initial EPA request for information that we received in the fall.

Okay. And what do you expect in terms of impact? What could be the next steps for the Company, and what could be the exposure for the Company?

It's too early to predict what the exposure for the Company will be. Obviously, there are other potentially responsible parties at that site, and as you know, there has to be an allocation. That's a lengthy process and quite honestly this is the beginning of that lengthy process.

Okay, and last thing. You ended '04 with a pretty large cash balance. And I believe you expect to be free debt for positive in '05. What do you expect to do with the cash basically? Is it just for acquisitions? Because you don't really have any prepayable debt on the balance sheet.

Really two focuses. Number one would be to complete both on acquisitions that would supplement our current business model, and secondly we want to be opportunistic in looking at new business opportunities to the extent that they may make sense and invest in those.

Okay. Thank you very much.

Okay. Thank you.

Your next question comes from James CaPella with Carin Capital.

Good morning guys. I just wanted to go over those numbers again for '05 that you gave. I have depreciation/amortization 26 to 27 million and interest expense at 23 million, and what were the other numbers you gave?

Interest accretion in the $11 million range.

Okay. And was that the only one I missed?

Capital environmental spending budget's $35 to $40 million.

Can you break those out?

We haven't at this point.

Okay. Thank you.

Okay.

[Operator Instructions] Your next question comes from John Rhymes with CJS Securities.

Good morning. Great quarter. Focusing on some of the benefits that you saw in the vertical market approach and cross selling, could you attempt to quantify? I know that's tough, but I am just -- these are some initiatives that you took late middle to late last year, and you're already starting to see some of the benefits?

I just think that we've established much better programs and in some cases dedicated sales people to specifically selling only to specific vertical markets. And you know, whether it's targeting those specific accounts with the types of services and solutions that they need going after major corporate accounts that fall within those verticals, it's really early in the game, but there is no question after meeting with the four leaders of those groups now that we've got some very nice plans and I think some great opportunities to expand across those very specific vertical markets.

And specifically you mentioned earlier in the Q&A about the new tougher MAC standards. Have you seen any benefit from that? That it went in place in September 2004?

I think we have to think that the volumes that we're enjoying and that we see our competitors enjoying is the result of MAC. We do know that some of our competitors are having to curtail certain types and feeds. Other customers are continuing to look at all alternatives versus running their own incinerators particularly with the high natural gas and energy costs many of the captive incinerators that continue to run are looking for alternatives and may be curtailing those operations. So we certainly have got to be seeing that in these increased volumes right now.

Focusing on the transportation, how many trucks did you buy in Q4? How many do you plan to -- tractors do you plan to purchase in Q1?

I think we did about 25 in Q4. We've got another 20 coming in April. Our spending last year was pretty consistent with a year ago, but that included the additional transportation related expense for the increase in revenue as well as some of the larger projects that are more heavy transportation orientated, but we have well over 900 CDL drivers now. We continue to add to the ranks, but we've got a long way to go to further internalize. But as Mark mentioned we picked up almost a half of basis point in improvement just on transportation alone last year. So we're excited about where we're going with that.

That was great. How much of your fleet do you plan to internalize over the course of 2005?

We certainly know that there's a lot of long-haul business in the advance side of our business that we'll probably always outsource. We've got three or four real solid partners in that side of our business. Our rolloff in tanker business, we need to expand or own internal capabilities but we'll once again have two or three long-haul vendors. So there's potentially a 50 percent reduction in outside spend that we could have on what we would consider sort of our ongoing transportation business versus the project side of our business. So there's some real benefits to internalizing on some lanes, but we also are going to have, you know, strong sourcing relationships with some key suppliers out there.

One last question, then. You mentioned about the new upgraded management information systems that you planned. Can you just also touch on the targeted telecommunications call savings and strategic source initiatives?

We really haven't given the specific guidance on what we expect to achieve from those two specific cost-reduction initiatives, but they roll into our total cost-reduction focus of 15 million plus over the next 18 months. And, they will be meaningful components of those reductions.

Great. Thank you very much.

Okay.

[Operator Instructions] Your next question comes from Michael McCormart with GGHC.

Good morning guys. What was the head count at the end of the year?

About 3740.

That still isn't growing very much. You guys containing (technical difficulty) with regard to the bonus in Sarbanes cost in the fourth quarter, could you give us an idea how much over budget both of those items were compared to kind of internal forecasting?

We updated those throughout the year, Mike. I think if you look at what our original projections are, they're double. But as I just alluded, we updated those throughout the year as we got our arms around what they were going to be.

So, there was a catch-up in the fourth quarter?

Well, a little bit. But in Q3, as you know, we accrued $800,000 or thereabouts as well. So Q4 was slightly more than that.

Mark, do you have the emergency response rev numbers for Q4 of last year and Q1 of this year?

Well, we gave guidance on what that was going to be for this year.

Right.

For last year I would have to go back in the coffers here, but I don't think there was a significant amount in Q1.

I think our overall emergency response business in '04 was down slightly from '03 because we had that very large 20-plus million dollar event down in Buzzards Bay. So if you look at it year-over-year, it was probably off a little bit and much more of our spill business came in in the fourth quarter.

Okay. Mark can you give us an idea about the synthetic and when those terms are expiring and potential for you to restructure that deal?

Well, we have a five-year credit agreement both on our revolver and on our synthetic LC facility. Synthetic LC facility has a one-year no-call provision which -- well, a prepayment penalty provision that expires in June of this year. So depending on a number of factors, we'll determine whether it makes sense to go to the bank group and see whether pricing on that facility is appropriate or not.

Can you give me an idea of kind of what other market opportunities are? Because you had a -- your economic situation is significantly better than it was when you wrote these deals.

I think it's too early to tell, and those are just conversations we'll need to have with our lenders and see what makes sense for both parties.

The payables -- you're able to stretch your payables by roughly 10 million sequentially. Is that an opportunity for you to continue to do that?

No. My sense is that we did a good job in cash management as it relates to where we were at year-end, and significant further opportunities to stretch the trade probably doesn't make sense. We want to be opportunistic, and if anything, to the extent that we can get discounts for paying quicker; we would look at that as well. And with our cash position, we want to be very opportunistic in all those situations.

Thanks again, guys.

You have a follow-up question from Lionel Galeo from Goldman Sachs.

Thank you. Regarding the 10-K, are you comfortable with the March 31st deadline, or could we have additional delays on the filing of the 10-K?

No. It’s our intent to have that filed by the 31st. We'd love to exceed that date, but given everything going on with the restatement and given the work associated with the 404, we thought it was prudent to extend that date so that we had enough time to get everything done the way it needs to be completed.

Okay. And then just on the incinerators, do you have any major maintenance at yield in '05 on any of your incinerators, and what should we keep in mind when we're building our quarterly projections for '05?

We don't have any major outages, other than our standard shutdown and cleanouts. I think no different -- I don't think Mark, than last year, as I recall.

From a seasonality perspective, we haven't given color on exactly when that's going to happen, but overall the number of down days this year should certainly be no more than last year and in fact probably be slightly less.

Okay great. Thank you very much.

Okay.

At this time we have no further questions. Gentlemen are there any closing remarks?

Well, thank you very much for participating in today's call, and we look forward to speaking you again in May on our Q1 call. Thanks very much.

This concludes today's Clean Harbors conference call. You may now disconnect.