Clean Harbors Inc (CLH) 2005 Q4 法說會逐字稿

Good morning everyone and welcome to the Clean Harbors fourth quarter and year end 2005 conference call. Today's call is being recorded and webcast. [OPERATOR INSTRUCTIONS] Now, for opening remarks I would like to turn the call over to Mr. Bill Geary, Executive Vice President and General Counsel of Clean Harbors. Sir, please go ahead.

Thank you very much and good morning everyone. Thank you for joining us this morning. On the call with me today are Chairman and Chief Executive Officer Alan S. McKim; Senior Vice President and Treasurer, Steve Moynihan; and Chief Financial Officer, Jim Rutledge.

Before we get started I would like to remind everyone that matters we are discussing this morning and the information contained in the press release issued by the Company today announcing our fourth quarter 2005 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 7, 2006.

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, 2005, which will be filed with the SEC on March 16, and any subsequent Form 10-Qs issued throughout the year. The Company undertakes no obligation to revises or publicly release the results of any revision to the forward-looking statements made in our fourth quarter press release or this morning's 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 the acronym EBITDA, which is earnings before interest, taxes, depreciation, and amortization. EBITDA is a non-GAAP financial measure and is intended to serve as a complement to results provided in accordance with the accounting principals 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' fourth quarter news release. A copy of this release can be found on our website Cleanharbors.com. A copy has also been furnished as an 8-K with the Securities and Exchange Commission. And now I'd like to turn the call over to Alan McKim for our quarterly review. Alan.

Thanks, Bill, and good morning. 2005 was Clean Harbors 25th year in business and financially it proved to be a record year for us. We built momentum throughout the year and capped it off with a strong performance in Q4. I'm extremely proud of the work our 4,000 employees are doing. As a result of their efforts, the Clean Harbors brand has been -- become synonymous with leadership in the environmental services and hazardous waste management marketplace. Before we get into our discussions of Q4 I'd like to take a few moments to reflect on the tremendous progress we've made here over the past couple of years. It's something we're really proud of as a management team.

Clean Harbors has grown its annual revenue by $100 million, or more than 16%, from full-year 2003 until full-year 2005. And all of this growth has been organic. In a marketplace where GDP growth and pricing pressures tend to be the norm this is an impressive statistic for us. Our progress in improving our profitability and cash flow over that same time frame has also been impressive. As a result of carefully managing our costs and our environmental liabilities our EBITDA for full-year 2005 was $90.3 million. That 90.3 million is up from 50.5 million we recorded in 2003. So on $100 million in additional revenue we generated about 40 million in incremental EBITDA. Of that 40 million, about 11 million is related no noncash environmental liability benefits equating to an EBITDA margin of nearly 30% on that organic growth. That's where you can truly see the leverage that is inherent in our business model and the value of our nationwide network of disposal facilities and service centers. These numbers clearly demonstrate that Clean Harbors is performing better than ever. We're more efficiently utilizing our people and our assets, we've trimmed our cost structure, and we have successfully positioned the Company as a true industry leader.

Turning back to Q4 our success can be attributed to a few factors. The first of these is our emergency response work. Since September of 2005 Clean Harbors has been in the Gulf region assisting with the cleanup efforts on a number of different levels. The bulk of our initial projects in the region were outside of the usual scope of Clean Harbors services as we participated in search and rescue missions and fueling up first responder equipments. In recent months the work has shifted to our more traditional waste disposable and field service business. However the work we're doing there today remains anything but ordinary.

For instance, in western Louisiana, and eastern Texas, we have over 100 employees recovering drums and tanks of hazardous materials that were carried off into the bayous by the flood waters. In the New Orleans area we're working with utilities to clean manholes that have been contaminated during the floods and are needed to access critical electrical sewer mains. We're also working on residential demolition projects and of course our people are removing and incinerating various toxic waste in the Gulf area. Quite frankly, this oftentimes is thankless work but we owe our employees a debt of gratitude for the great job they're doing down there.

During the fourth quarter Clean Harbors generated approximately 17 million in revenue from work like this. We expect the Gulf cleanup effort to contribute more than 10 million in Q1 revenue and believe our work in the region will extend into the summer months.

Another factor in our top-line improvement in Q4 was derived from the improvements made on our sales process. On the sales side we've highlighted on past calls our vertical market approach. We have six target verticals and dedicated sales teams for each of these markets. This approach was successful in 2005 and these teams have done a commendable job of building our business pipeline going forward. Overall, excluding emergency response projects our site services grew by approximately 8% year-over-year in Q4. When you include the emergency response, this number is closer to 20%.

Also driving that growth in site service was the opening of eight offices during the year. New office locations are central to our growth strategy as they maximize our penetration of the North American market. For instance, we established our presence in the Gulf region just a few years ago by opening up some site service locations there. In doing so we set the stage for us to be well positioned from both a brand and operational perspective to handle the hurricane response work. It is a formula we hope to repeat going forward. In 2006 we currently plan to open another 10 to 12 site service offices. We have two to date thus far this year. In terms of efficiency enhancements I think our Deer Park facility is a prime example. Located just east of Houston in La Port, Texas, Deer Park is Clean Harbors largest incineration facility. In fact, it's the largest facility of its kind in the United States.

We manage a broad range of hazardous industrial waste at this site and up until now our practical annual capacity at Deer Park based on regulation and facility throughput was 120,000 tons. As many of you know we have made investments recently in virtually all of our facilities to ensure compliance with the new max standards that came into effect a few quarters ago. At Deer Park alone our investments totaled more than 25 million. As a result of the MAC work we did there as well as the installation of enhanced feed systems and new air control system, our efficiency and throughput at this facility is better than ever. As a result, utilization at Deer Park in Q4 was 126%. Companywide, our utilization rate for incineration was 99% in Q4. We are now raising our overall annual incineration capacity from 418,000 tons to 438,000 tons. This increase of 20,000 tons is the result of these investments. Utilization rates using the new annual tonnage would equate to 95%.

Our landfall business, which has been soft in recent quarters, also rebounded on a year-over-year basis in Q4. While pricing remains competitive in this area of our business we grew volumes by nearly 9% year-over-year, and we have built a pipeline of facility project business that we expect will be feeding these landfills in future quarters. On the cost side meanwhile, we are making further headway. During the close of Q3, we deployed our WIN operating system across Canada. This enabled to us identify areas where we had redundant costs in Q4 and is helping us more efficiently manage our entire North American operations. Our work to internalize transportation also had a noticeable bottom line impact on our 2005 results. For the year we paid 52 million to outside contractors for transportation services. This is down nearly 15% from 60 million for full year 2004. Were it not for all the fuel surcharges we incurred during the past year, our improvement would have been in excess of 20%. In 2005 we added approximately 50 new drivers to our force as we continue to pursue our long-term goal of reducing outside transportation to around $30 million.

So to sum up, it was a good Q4 for the Company, and an exceptional year overall. We're proud of the growth we've achieved here organically and we see plenty of opportunities to continue enhancing our performance in the quarters ahead. I will now turn the call over to Jim Rutledge so he can walk you through the financials and provide guidance for the first quarter of 2006. Jim.

Thank you, Alan. Good morning, everyone. Looking first at Q4, as Alan mentioned, Clean Harbors posted a new record in Q4, generating 193.7 million in revenue, this is an increase of 10% from 176.2 million in the year-ago quarter. Gross profit for the quarter was 55.1 million, translating into a gross margin percentage of 28.5%. This gross margin level was relatively flat year-over-year on a percentage basis. Selling, general, and administrative expenses were 31.2 million, or 16% of revenue in Q4, 2005. This also is flat on a percentage basis year-over-year. SG&A benefited from approximately 2.3 million of favorable changes in our environmental liability estimates, which were offset by severance costs related to our cost reduction program of approximately $1 million, and higher accrued incentive compensation costs during the quarter. For comparison purposes during the prior year's fourth quarter, we benefited from about 2 million of favorable changes in our environmental liability estimates.

Interest accretion was 2.5 million in the quarter, down slightly from 2.6 million incurred in Q4, 2004. Depreciation and amortization expense was 7.1 million in Q4 of 2005. This compares with 6.6 million in Q4 of 2004. The higher depreciation expense was primarily the result of the capital improvements at our Deer Park incineration facility last year as Alan talked about, as well as depreciation on expanded landfill sell construction and other capital projects. Q4 '05 operating income was 14.3 million, relatively flat with the year-ago quarter. EBITDA for Q4 '05 was approximately 23.9 million, or 12.3% of revenue. This compares with 23.9 million or 13.6% of revenue in Q4, 2004.

The decline on a percentage basis stems from two factors. First, there were lower margins on some of the work we are doing in the Gulf region versus the emergency response work at the Delaware river spill in the year-ago quarter. Then also this quarter's margin was affected by the severance costs and the higher incentive compensation costs I just described. We are targeting a 15% EBITDA margin in the not-too-distant future as we progress on our cost savings initiatives and increase margins from the three underperforming landfills that we are in the process of turning around. Interest expense in Q4 was 5 million, down from 5.9 million in the comparable quarter of 2004. Our tax expense for the quarter was 1.6 million, bringing our effective tax rate for the full year to 12%. For the full year 2006, we believe our tax rate will be in the 10 to 15% range.

Net income available to common shareholders was another company record at 7.9 million, or $0.43 per diluted share, based on 18.6 million average common shares outstanding during the fourth quarter of 2005. This is up from the year-ago's quarter's net income of 7.4 million, or $0.42 per diluted share, which was based on 17.9 million average common shares outstanding during the fourth quarter of 2004.

Looking briefly at our full-year numbers, revenue in 2005 increased 11% to 711 million, from 643 million in 2004. As Alan noted this growth was all organic within Clean Harbors. Operating income for the year was 51.3 million, or 7% of revenue. This is up from 39.4 million, or 6% of revenue in 2004. EBITDA for 2005 was 90.3 million, up 21% from 74.7 million for the full year 2004, and net income for the full year 2005 was 25.3 million, or $1.45 per diluted share. This exceeds our previous record by a wide margin, and compares with a net loss of 9.2 million, or $0.65 per share for 2004. It is worth noting that our bottom line in 2004 was negatively impacted by costs related to the redemption of preferred stock and the loss on refinancing.

Looking at the balance sheet, our cash position on December 31, 2005, stood at about 136 million this is a significant increase from 48 million the year prior, resulting from the Company's positive cash flow as well as our December equity offering. Since the end of the year, about 61 million was used to redeem 35% of our outstanding 11.25% senior secured notes due in 2012, and to pay the prepayment penalty and accrued interest related to the redemption. When compared with the amendment -- when combined with the amendment of our credit facilities in early December, this redemption is expected to save us about $8.7 million in annual cash interest expense in 2006.

In the first quarter, we anticipate taking a one-time charge of approximately 8.3 million as a result of the redemption of the senior secured notes in early January. Total accounts receivable stood at 147.6 million on December 31, and DSO was 72 days for the quarter. For the full year, our DSO averaged 71 days, which was about flat with last year.

Capital expenditures approximated 5.7 million for Q4 for the full year Clean Harbors invested 19 million in CapEx. This compares with 26 million a year ago. In 2006, we would expect CapEx to be in the range of 25 million to 30 million as we continue to upgrade our facilities and invest in several growth projects in our landfill and transportation areas. Environmental spending approximated $7.2 million in 2005. Accounts payable balances remained essentially flat year-over-year at 71.4 million. Deferred revenue was also relatively flat at 21.8 million on December 31, 2005.

Another key highlight for us in 2005 can be seen in environmental liabilities. At year end our balance of environmental liabilities stood at 170.7 million, which is down 11 million from 181.3 million at year-end 2004. We've been doing some extraordinary work at our sites to reduce our exposure in this area, and that will continue to be a focus for us in 2006. Moving to our guidance, we expect Q1 will follow its cyclical pattern and be a slower period for us compared to Q4. We expect quarterly revenue in the range of 175 to 180 million, which represents a 6% to 9% growth year-over-year. We expect EBITDA to be in the range of 20 to 22 million. And with that operator, would you please open the call for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Arnold Ursaner with CJS Securities.

I want to spend a moment on the landfill. You mentioned you -- finally we've seen a very nice pickup in volume, but you mentioned prices remained competitive. Can you walk us through a little bit of both volume trends and pricing trends in landfill? And your view in the upcoming year?

Arnie this is Alan. We have been certainly focused on improving a couple of key landfills that have been underutilized, and we were successful in receiving a new permit at our sight in Colorado in December, although that is currently under appeal, we have the authorization to build out that site and actually begin utilizing that site with our new permit while that appeal is being processed. We have a good solid book of business for this year, as we've discussed in past. Sometimes forecasting those within a quarter are difficult, depending on weather conditions and other logistics or just remediation activities. Projects can move from quarter to quarter. But overall, we feel that we're going into this year with the best backlog that we've ever had for our landfill business.

However, as we've mentioned in the call here, that when you're competing on some of these larger projects, these large remediation projects, we have seen some of our competitors very competitive in the marketplace on these large projects, and so we've had to be aggressive ourselves in winning some of these and also taking advantage of the logistics capabilities that we've built into the Company in the last year, particularly our rail capability. So I think overall we feel very confident that we're going to see a good improvement with our landfills this year between the permitting changes we're making and the focus on the logistics and the large projects.

You gave us utilization on the incinerator business. Can you also give us a similar number for the landfill business please?

We really have not been giving out any landfall utilization per se, as you would imagine when you have a large cell, you could essentially say that you could fill it up in a year, and that would be measured -- you'd be measuring utilization that way. But we know it's not realistic on some of these 600, 900,000-ton cells to do that. We really have been looking at our landfill business more on a revenue basis and trying to set some expectations internally as well as communicating that publicly. Our landfills right now are at about $75 million business for us and we believe that we have the capacity on an annual basis to get that up to $100 million. And by improving the three underutilized or nonperforming landfills, coupled with improving on some of the sites that we have operating where we can focus on some large projects, we think we can generate that kind of revenue.

Thank you.

Your next question comes from Rich Wesolowski with Sidoti and Company.

Thanks a lot. Good morning. Alan, you mentioned high utilization in 4Q with the -- excuse me, the incineration. Is this seasonal benefiting from the weather, or is there something else happening here?

The incinerator is typically not impacted by the weather. Although there is a waste generation cycle that does tend to benefit us at the end of every quarter. I think what we are seeing at our incinerators right now is very high utilization and we will expect to see that in the first quarter and beyond quite frankly. We are really pleased with the volumes going into our incinerators. We did benefit in the fourth quarter from some nice weather conditions, the way that the holidays fell this year helped our business, particularly our site services business. So there was some help there. But the incinerators do not necessarily benefit from that.

Okay. So the utilization is strong the fourth quarter, going to be strong at least in the first quarter or two in '06. At what point would you expect this to us boost the pricing on an across the board basis?

We're really looking at that hard right now. As we've said in the past, we're trying to improve our mix at these sites, so that we can get our overall price per pound improved. We're also targeting those customers who have not been paying any kind of fuel surcharge for the past 12 months, and targeting price increases in those areas, particularly on the incineration streams where we have such a high energy cost. And as we mentioned, improving our throughput, so we've gained this year 20,000 tons of throughput, and we're raising the bar for our team here, and we're up to that 438,000 tons, and quite frankly, there's still some additional bottlenecks. We're not prepared yet to raise it any further than that, but we still believe that we have room to improve our throughput at our plants.

Would you speculate that the rest of the industry is running at similar levels of utilization as you?

From our understanding, we believe that the industry is running at a pretty high level of utilization right now.

Okay. Moving on to landfills, just going a little bit more detail on the main points of the turn-around program you guys have for those three underperforming sites, and give us maybe an idea of the stage that we're at within that plan.

The three -- we have obtained the permit in one site. By June of this year, we believe that we'll have our second facility with a renewed permit, which will extend the life of that site by about ten years and about a million tons of capacity. That's one of our landfills in Texas. Our third facility is still not yet resolved at this point regarding constructing a new cell or getting that facility to a profit for us. So that is still one site that we have work to do this year. We are also in the process of looking at some of our other sites that we're running today to enhance their capabilities, even though they're profitable and they're doing quite well, we see there's other opportunities to go after different waste streams and put in new process technology to broaden our market capabilities there.

Do you think the landfills would represent the most significant risk to you guys not getting to that 15% EBITDA margin within the next couple of years? And if not what would be?

I don't think it would be the larger risk. This is Jim, by the way. How you doing, Rich?

Not too bad.

We have talked about the differential being about 5 million with respect to the landfills, but if you look at our cost reduction program, and that we've made a lot of progress in the latter part of 2005 and continuing into 2006, I think that if you combined both of those, the cost savings program and the landfill improvements, we should be at that run rate by the end of the year is what we're projecting.

At that 15%?

That run rate, so that you would see the benefit next year. That's what we're projecting at this point based upon the cost reduction program and the turn-around of the landfills.

Okay. That's helpful. Thank you.

That's one of the reasons why our capital spending is a little bit higher this year than last year. We're building out some new cell capacity, particularly at one site that has been dormant, and that will be kicking in in the mid part of the year, so we should see in the latter half of this year an improvement, a visible improvement in two of our three landfills.

Your next question comes from Mark Grzymski with Needham and Company.

Good morning, guys.

Good morning.

Just on the business in the Gulf region, could you kind of indicate where the -- what kind of margin business that is and is the 10 million that you're expecting in Q1, is that going to be similar in margin, or are you seeing higher margin business now?

Hi. Yes, the margin would be in the 20 to 25% range currently, and looking ahead into Q1 of 2006, it would probably be at the north end of that, and perhaps a bit higher. We're seeing some projects that are in excess of 25% right now.

And the site service business. The strength there in the quarter. Could you kind of give us a little more color there, where that's coming from and what kind of legs that has going into Q1 and Q2. I assume you're expecting ongoing strength there.

On site service business in general has been really strong. It does -- it did benefit in the fourth quarter, particularly with the unseasonably warm weather, and in the first quarter we expect that quite frankly to continue. We've had a relatively mild winter throughout the site services core area, if you would. But also with the expansion that Gene and Dave and the team have put forth in opening up these new offices and being able to leverage the relationships with our disposal customers, it's really been paying off for us. I would tell you that, and Gene's here -- the site services business really has been strong across really all lines of business there.

It's been across -- it's been strong across all regions, all areas, all job types. Pretty consistent throughout. The weather in Q1 has actually helped us and hurt us, in the sense that when we have major storms, obviously it's a big plus. So we've had the warmer weather that helped our normal base business, but where we haven't had major storms it's kind of hurt us a little on the emergency response side.

Right. Now, looking at a -- kind of a growth rate there on the site services business, or for the whole company in general, do you think, the 8% that you had quarter over quarter, I mean, can you, with a better and growing site services business, how quickly can you get closer to a double-digit rate organically?

I think overall our goal has been to grow our site service business more than 10% per year.

Right.

And that's -- that is our strategy that's been in place now and I think we've been achieving that pretty consistently, and I think we've deducted out this emergency response business, but, in fact, if you added it in, which is part of the site services revenue stream, it's 20%. So I think we're going to continue to benefit from the strategy of opening up new offices and leveraging our customers and whether the job types are emergency response, or our ongoing base business, we really believe we can keep above that 10% per year.

I guess if you believe what the scientists are saying these natural disasters are going to be more frequent. Okay. That's it for me. Thanks, guys.

Okay.

Your next question comes from Al Kaschalk with Wedbush Morgan.

Alan, can we drill down a little bit further on the incineration business as to why, which is a positive, I guess, the capacity is at the higher end of the range and what's driving that? I there's any specific projects or comments you can add, that would be helpful, whether it's volume or--?

Well, again, I believe that the industry itself is also running at a relatively good volume, but I would also think that we're getting a stronger market share out there. I think our focus on the verticals has enabled us to really target those key industries that tend to feed large volumes of waste into our disposal capabilities, and our incinerators are clearly a focus of ours, but there hasn't been any particular large project that has been driving incineration utilization that we can speak to. We have won recently some nice incineration projects out there, and that's what gives us optimism that the rest of this year is going to continue to be strong for us in that business.

Have the volumes continued in Q1 of '06, as we sit here today?

Yes, equally, if not greater than the fourth quarter.

Are you able to comment on, say -- maybe it's more macro -- landfill versus incineration, the volume you're seeing out of the Gulf, where the majority of that is going?

In the Gulf a lot of our revenues is labor and equipment related, some incineration volume that's feeding our Deer Park incinerator, but also other types of waste streams that is going into some of our other plants. It's not a huge volume of incineration, but that is part of the waste stream that's coming from that I would say the majority is labor and equipment resources doing the cleanup work.

Then just a clarification, the duration on this work, you largely see through the first half of '06, or do you see it continuing through the balance of '06?

I think it's safe to assume the first half of '06, but, we believe that as we -- obviously as we report the first quarter here in April, we'll have a better sense of how far out we have from the visibility standpoint into the summer months.

And the other point I'd add, Al, is that, having worked down there, the nature of the emergency work will turn into regular work for the offices that we've opened up down there over the last few years. So that will continue into the future.

Are these contracts, are there signed contracts with duration, or is it -- how do you know when -- or what type of signals are you getting to indicate that the volume may be slowing, or how should we think about data points that would indicate that it's slowing other than just the time elapsing here?

The majority of the work is being done right now for the Coast Guard out in the bayous, and what we're doing is basically a search mission as we continue to locate material, as long as the material is out there, the Coast Guard will keep us on this particular project. Obviously, as the waste goes away, which we don't necessarily know, nor does the Coast Guard know how much is out there, but we're going to assume that we're going to be there for the first half of the year. Things are starting to wind down a bit, and again, of course, we're getting back into the hurricane season, so this could be a full cycle, for all we know.

In terms of the historical emergency response work, which I think was 30 million per year, is the Katrina work over and above that, or are we seeing a little bit of reduction in the traditional ER work given the Katrina focus?

I think we're probably looking at more than $40 million, including Katrina and other emergency response work now, as sort of our norm. That 30 million had been our historical run rate for the past five, six years, but I think over the last couple of years, particularly we're seeing the -- that really getting close to that 40 million plus, including the Katrina type work. I mean, and certainly the hurricane related revenues are significant for us, but it does take away from some of our resources and other parts of our business because of the critical nature of what we're doing there. So I think 40 million is probably a good number.

Okay. And then two other -- first on the interest expense, cleanup item, the comment I think you had about 8.7 million reduction relative to '05 in '06, so that would imply kind of a 14, 15 million annual number on the interest expense.

Yes, that's correct, Al.

And then I was wondering, with the financing done, the strength in the business, the build in AR, it seems like you have quite a bit of cash now sitting on the balance sheet, or could be positive at the end of the first quarter. Are you able to comment at all on the deployment of that cash?

We're certainly looking at two areas from an acquisition standpoint. One is to strengthen our field service -- our site services business and to grow that maybe quicker in a particular market by partnering with a regional player, so we are looking at a number of opportunities out there, and also on the disposable side of our business, if we could add some additional capacity or technology for our waste disposal business that would be another target for us on the acquisition front.

Thank you and congratulations on a strong year. Few thanks, Al.

Your next question comes from Matt Vitterosa with Goldman Sachs.

Hi, guys. Appreciate it. Most of my questions have been answered. Could you give cash from ops during the quarter?

Cash from ops was 14.3 million.

14.3. That's all I've got. Thanks, guys.

Okay.

Your next question comes from Brian Delaney with EnTrust.

Quick question. In the quarter you said the environmental reserve reversal was 2.3 million, it was offset by severance and some other accruals. Where were those charged in the P&L?

It was in the SG&A line, Brian, so it was 2.3 of the environmental income and then offsetting that was a million in severance, then a million plus in higher commissions and incentive compensation in the quarter, with the good results for the year.

Okay. And then you mentioned early on in the call the full amount of noncash income in the 90.3 million was 11 million from environmental reserves?

That's correct.

And did that include the 1.9 million reversal in the first quarter of last year related to the legal reserves, or is that prior to that amount?

No, that includes it. We had -- that was in the first quarter, I believe, and that would include that.

Last year in the first quarter it was 1.9 million in legal reserves another 1.9 million in change and estimates, a total impact of 3.8 million. So that 11 million includes the 3.8 or only a component of the 3.8?

It's included. The 11 includes that, because that was related to environmental business, and we kind of spell that out in the 10-Q there, and it will also be expanded on in the 10-K that we will be issuing in a week or so.

Okay. When I turn to guidance, does your EBITDA guidance of 20 to 22 million assume any reserve reversals?

Actually, the way that works, Brian, is obviously it's event-driven, and there's a quarterly analysis that's done by the engineers, accountants and attorneys. There's a team that focuses on this, and they look at the end of the quarter, what the spending was, see if there are any changes in circumstances, were we able to make arrangements to be able to do less or cost savings or any legal issues or whatever, then once we know that project by project, we basically add it up and see what the effect is.

But currently in the 20 to 22 million are you forecasting any reserve reversals?

No, not at this time, no.

So that implies, if I look at last year's first quarter of 20.1 million in EBITDA, which had a $3.8 million benefit, it implies a pretty significant increase in underlying margin improvement, almost 190 basis points. When I scrub out the 3.8 benefit last year, underlying cash EBITDA dollar was 16.3 million. The guidance then going from 16.3 million to 20 to 22 million is anywhere between 23 to 35% growth in EBITDA on 6 to 9% sales growth. What are the biggest drivers causing that type of explosive growth in underlying EBITDA margins? Is.

I think it's the combination of the 6 to 9% growth that we're talking about in revenues, and there's nice leverage from that, and we're also seeing some of the benefit of the cost savings coming into the quarter.

Okay. So 6 to 9% sales growth should drive 23% to 35% EBITDA growth. That's the way the leverage works?

It wouldn't be that high, but there's two things going on here. We did some headcount reductions in the fourth quarter, and that's why Jim mentioned we took severance costs there. We will see the benefits of those headcount changes in the first quarter. The -- clearly, the margin that you get with the utilization going on in our incineration business is very strong, so you're seeing an improvement year-over-year with volumes going to our incinerator which is going to drive some good margin improvement there. So you can't just equate it to the one thing here.

Okay. And then just to be sure, the 15% EBITDA margin does not assume any benefit from environmental reserve reversal, so at some point you'll be at 15% EBITDA margin and any environmental reserve reversals would be over and above that.

No, the 15% is based on what we've been reporting for the last two or three years, which has been all-inclusive of environmental. If we can get to that 15% level, we're assuming that we're going to continue to see an improvement in our top line as we've shown over the last three years and also in our cost structure as we've -- as we've said that we have about $20 million of cost reduction improvements that we want to make. But we don't want to get ahead of ourselves here. We think that would be year-over-year improvement to get to that 15% level is a real strong improvement for us.

Right. But once again, it assumes no benefit from environmental reserves?

Well, we're confident that we can -- we had talked about at the time of the acquisition that the spending levels would be higher, and we're able to spend less, as you've seen. So we're confident that we can continue to do well in the environmental area into the future, but I don't have anything that I can book at this point, nor can I say that we're definitely going to be booking environmental reserve adjustments in the future, because if I knew that I would be booking them today, the way the accounting rules work.

But Brian, if you look at the total picture here, we're looking at an improvement in landfills that that could be upward in total of about $5 million improvement. We're talking about a cost savings program that we started last year during 2005, and we're going to see a nice incremental benefit this year as we progress all those cost savings throughout the year. But at the same time, obviously, you have incentive compensation going up, with the increase in revenues, you've got medical costs going up and all that. So if you look at all those factors, what we're saying, that after we get through this year, we're thinking that we could be at the run rate at the end of this year and looking at 2007 as being into that 15% range. There could be some environmental in there, but there might not be. There are enough initiatives that we're working on, that if you look at it in total, we can achieve that without it.

I just want to make sure though, that when we're looking and analyzing the first quarter results that if there are any environmental reserve reversals, it's going to be in addition to the 20 to 22 million range that you've put out there.

That's what we would hope, yes.

Okay. I appreciate it. Thank you guys.

Thanks, Brian.

Your next question comes from the line of Mark Coffman with Grady & Partners.

Congratulations on a terrific year turning the business around. I just have one question, some clarification on the CapEx number. Does that include, is that just purely for CapEx or does that also include for environmental remediation?

Oh, no, the cap -- the environmental was the 7.2 million that I talked about. That was the spending for the total year, and the CapEx at about 20 million that I said is excluding that.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of John Mezzer with UBS.

Good morning gentlemen. Question for you. With the increase in your business can you discuss the decline in your closure and post-closure liabilities please?

I'm not sure if I'm following you, John. Could you ask that one more time?

With the expansion of your business, your closure and post-closure liabilities have been decreasing.

Yes.

I would assume that they would be increasing if you're expanding your site business. You mentioned something about doing some interesting work to help in that area. Can you elaborate on that please?

The overall environmental number, which started out, I think, as Jim mentioned, roughly at $180 million, if I'm not mistaken here.

Right it's about 171 now, almost 171.

Right. When we first took on these liabilities, we had assumed we were going to spend approximately $20 million in cash a year, and by doing a lot more of that work, using internal labor, and also putting in different solutions, quite frankly, that were spelled out in those liabilities, we've been able to spend closer to that 8 to $10 million range per year, and so that in itself has enabled us to lower that overall number, as you look at that over a 20 or 30-year time frame, from a present value standpoint. And then the second thing I think, and most important thing, is we've been able to resolve a number of issues regarding those liabilities, which were, again, part of the purchase price that we pay for a lot of these assets. So as we resolve those and extinguish those liabilities, that total number will come down. On the other hand, as you mentioned, as your business grows and your landfills continue to expand, your closure and post-closure does increase. And we actually break that out in our K to show what the different buckets are within that $170 million number. So you can clearly see the growth in one area and reduction in other areas in more detail in the K.

Thank you very much.

You do have follow-up question from Rich Wesolowski with Sidoti & Company.

Okay.

My follow-up has been answered. Thanks.

Okay.

Your next question is a follow-up question from the line of Matt Vitterosa with Goldman Sachs.

Just was hoping I could get your quick thoughts on the remaining portion of the 11.25 notes outstanding, you've reduced your leverage considerably but these remain pretty expensive notes. Any thoughts on what you might do with these going forward in the near term?

Yes, Matt this is Jim. When we did the refinancing of the credit lines, we have a carve-out in there for, I believe it's 50 or 60 million that we can go out and repurchase those notes in the open market on an opportunistic basis, and as the price comes down, we would do that. Looking out to the First Call date, which is a couple of years from now, the premium is only 5.5%, I believe, and we suspect that the price would come down as we approach that date, so we would go out and buy opportunistically.

Great. Appreciate it.

Thanks a lot, Matt.

We have reached the allotted time for questions and answers. I will now turn the conference back over to Mr. McKim for closing remarks.

Well, thank you very much, everyone, for participating in the call this morning. We look forward to talking with you on our first quarter conference call.

That concludes today's conference call. You may now disconnect.