Clean Harbors Inc (CLH) 2006 Q2 法說會逐字稿

Good day everyone and welcome to Clean Harbors second quarter 2006 conference call. Today's call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. [OPERATOR INSTRUCTIONS] At this time for opening remarks and introductions, I would like to turn the call over to Mr. Bill Geary, Executive Vice President and General Counsel of Clean Harbors. Please go ahead sir.

Thank you operator, and good morning everyone. Thank you for joining us. On the call with me today are Chairman and a Chief Executive Officer, Alan S McKim Senior Vice President and Treasurer, Steve Moynihan; and Executive Vice President 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 second quarter 2006 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, 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, August 8, 2006. Information on the potential factors and detailed risk that could affect the Company's actual results of operations is including in the Company's filings with the SEC including but not limited to our form 10K for the year ended December 31, 2005, and our subsequent form10Q's. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made our second 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 compliment to results provided in accordance with the 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 today's second quarter news release which can be found on our website. A copy has been furnished as an 8 K with the Securities and Exchange Commission.

So, with that said, I'd like to turn the call over to Alan McKim for our quarterly review. Alan.

Thanks Bill, and good morning everyone. I would like to start today by congratulating the entire Clean Harbors team on an outstanding second quarter. It's because of the focus and dedication of our employees that we were able to deliver record top line growth. Our growth strategies continue to show good results. We nearly posted the first $200 million quarter in our history. We substantially exceeded our Q2 guidance of 182 to 185 million, posting 199.6 million in revenue.

Each segment of our business played an important role in our success this quarter. In particular, our Tech Services group was a key growth driver. The overall demand environment for our disposal facilities continue to be robust in the quarter. Large scale projects which have been a focus of our business development teams fueled much of our growth in Tech Services. As we discussed in the past, these projects are a good compliment to our core T&D business because they often times feed significant volumes into our disposal facilities which increases utilization and greatly enhances our profitability.

Utilization at our incinerators in Q2 was 91.8%. This compares with 85.4% in Q2 of 2005. As a reminder, we expanded our available capacity by an additional 20,000 tons due to the investments we made in our incinerators, particularly at Deer Park. For a true apples to apples comparison, our utilization in the second quarter would have been 96.2% using last year's capacity level. Our incinerator results are even more impressive when you consider that the quarter also included several planned maintenance days at a number of our facilities.

Our land fill business in Q2 was equally as impressive. This was extremely encouraging to us as this business has experienced softness in the past several years but now has registered three healthy quarters in a row. In terms of volumes, our land fill business increased 76% over the second quarter of 2005. And on a sequential basis land fill volumes were up 80% over the first quarter some of which is seasonal.

Turning to Site Services. Let me first touch base on the Gulf Coast and our emergency response business. Our ongoing cleanup efforts in the Gulf Coast generated less than $1 million of hurricane related revenue in the second quarter as many of our projects and contracts scaled down. However, we are currently anticipating that revenues will trend back up in the second half of the year. We have been awarded a contract that we expect to generate revenues of approximately $5 million in the next six to 12 months. Within our Emergency response business our reputation as the vendor of choice for rapid and comprehensive services continues to grow. In the second quarter, there were no large scale emergency response events, but a mix of smaller projects which generated approximately $3.8 million of revenue.

In terms of our core Site Services, this business delivered another strong performance in Q2. Our Site Services business consistent top performer in recent quarters and we continue to expand our network of locations. Opening new offices a is a fundamental component of our growth strategy. In addition to the clean up work produce more locations afford us the opportunity to cross sell to our Tech Services accounts and generate more volumes for our disposal facilities. We opened two new branch office locations for Site Services in the second quarter and we are on track to open eight to ten offices by the year-end of this year. We remain confident in the potential for growth in Site Services considering the large and fragmented multi-billion dollar market in which we operate.

In talking about the branch locations it also presents the opportunity to discuss another important accomplishment that doesn't necessarily appear in our numbers. In order to more efficiently manage the growth of our organization we relocated our corporate headquarters and consolidated two preexisting corporate locations into one centralized location. I considered our move to our new headquarters here in Norwell was a success. To post the results we did in Q2 while in the midst of a corporate relocation speaks volumes about the talented people we have here. Our new headquarters provides us with the facilities and the infrastructure necessary to accommodate our next stage of growth. Clean Harbors has always prided itself on it's commitment to the technological innovation, and I think our state of the art facility is a testament to that ongoing vision.

Now turning to the cost side of our business. We're continuing to make further progress in this area. We've completed another full quarter with our entire North American operations on the [WIN] operating system, which enables us to more efficiently manage our entire operation and to more effectively deploy our resources. We believe we will continue to incrementally improve our profitability throughout our North American operations.

As a result of our growth in the quarter we did not reduce our reliance on outside transportation in terms of absolute dollars. However, on a percentage of revenue basis, our outside transportation numbers have improved. Also, investors regularly ask us about our fuel costs. By continuing to apply appropriate surcharges and recovery fees to lesson the impact on rising fuel prices we've been able to effectively manage our fuel costs. And that situation really was no different in Q2.

Before turning the call over to Jim, let me speak to the Teris acquisition. As you know, we announced the definitive agreement in May to acquire Teris from a subsidiary of the Suez Group for $52.7 million which includes 10 million in networking capital. We previously had indicated that had we expected the acquisition would close within the third quarter and that remains our expectation at this time. As we mentioned in our Q1 call, we view Teris as a strategically important acquisition for us. It's presence in the drum and smaller con -- container market complements our existing portfolio of business. As a reminder, Teris operates an incineration facility in El Dorado, Arkansas which processes approximately 30,000 drums of containerized waste per month. It also operates a [TSD] facility in Wilmington, California. Teris generated around $95 million in revenue in 2005. Based on some expected customer attrition we currently anticipate that it will contribute approximately $90 million in annual revenue to Clean Harbors. Based on the opportunity for synergies particular in the area of out sourced transportation, we expect the transaction to be accretive by year-end.

So in closing we remain confident in the ability of our Company to continue generating strong results. Our exceptional Q2 performance and really for the first half of two six is -- 2006 is further proof of our ability to capitalize on our unique array of diverse environmental services. We expect to continue to deliver top line growth and improve profitability in the quarters ahead. With that said, I'll now turn the call over to Jim Rutledge so he can walk you through the Q2 financials and provide our guidance for Q3. Jim.

Thanks Alan, and good morning everyone. Let me start by echoing Alan's comments that we turned in an outstanding performance this quarter. The Company generated a record 199.6 million in revenue, 15% above the 173.9 million we reported in the year ago quarter. We benefited during the quarter from solid operating excellent in both our tech and Site Services businesses as well as some emergency response business and favorable weather conditions. Gross profit for the quarter was 63.6 million, translating into a gross margin percentage of 31.9% compared with the gross margin percentage of 28.4% in Q2 of '05. This sharp increase is indicative of the improved operating leverage from higher revenues as well as continued progress in cost reduction. Selling general and administrative expenses were 35.3 million or 17.7% of revenue in Q2, 2006. This is up quite a bit on a percentage basis from Q2, '05 when we recorded SG&A of 25.3 million or 14.6 of revenue. This percentage increase in SG&A is primarily due to costs associated with the Teris acquisition, expenses related to the relocation of our corporate headquarters, higher accrued incentive compensation costs given the improved profitability in the quarter, and stock based compensation costs recorded in accordance with financial accounting standard 123R. Excluding these incremental costs, SG&A would have been approximately 16% of revenues during the quarter. It should also be noted that last year's second quarter included a $3.4 million gain from a change in environmental estimates with no comparable adjustment in this quarter's second quarter -- this year's second quarter.

Accretion of environmental liabilities was 2.5 million in the quarter, down slightly from the 2.6 million incurred in Q2, 2005. Depreciation and amortization expense was eight million in Q2 of 2006, which is slightly above last year's figure of 7.1 million. This quarter's depreciation includes a one time charge of nearly $400,000 related to the write off of lease hold improvements at our former office buildings before the move to new head quarters. Q2, '06 operating income was 17.8 million, up 24% from the second quarter last year. EBITDA for Q2, '06 was approximately 28.3 million, or 14.2% of revenue. This compares with 24.2 million or 13.9% of revenue in Q2 of 2005. Our growth in EBITDA looks even larger when you consider that last year's Q2 EBITDA included the 3.5 mil -- $3.4 million benefit which I mentioned a moment ago, from changes in environmental liability estimates versus only a $200,000 benefit recorded in Q2 of this year. Net interest expense in the quarter was 2.9 million, down from 5.9 million in the comparable quarter of '05, reflecting the favorable effect of our debt refinancing earlier this year and to a lesser degree higher interest income. Our provision for income taxes was 3.5 million which represents a 23% effective tax rate for the quarter. This increase in our effective tax rate from prior quarters was mainly effected by alternative minimum tax in the U.S. and higher Canadian taxes given our higher earnings in several provinces there. Net income available to common shareholders was 11.3 million or $0.55 per diluted share, based on 20.5 million average common shares outstanding during the quar -- second quarter of '06. In Q2 of 2005 we reported net income of 7.3 million or $0.43 per diluted share.

Turning to the balance sheet. Our balance of cash and marketable securities was approximately 91.7 million at the end of the quarter compared to 77.6 million at the beginning of the quarter. Total accounts receivable stood at 154.8 million on June 30, and DSO was slightly less than 70 days for the quarter which is an improvement of approximately two days since the beginning of the year. Accounts payable balances slightly increased from year-end to 74.3 million while deferred revenue was up slightly at 23.2 million on June 30, 2006. Capital expenditures approximated 10 million for Q2. This compares with four million a year ago. We expect CapEx for 2006 to be in the range of 30 to 35 million as we continue to upgrade our if facilities and accelerate our investment in several growth projects in our land fill and transportation areas. We are continuing to benefit from carefully managing our environmental liabilities and reducing our exposure in this area. June 30th our balance of environmental liabilities stood at 172 million which is down from 175 million for the comparable quarter in 2005. This remains a key focus for us in 2006. Environmental spending during the second quarter was 1.8 million.

Moving onto to our guidance. We currently expect revenue in Q3 to be in the range of 190 million to 195 million, which represents a steady 6% to 9% rate of growth year-over-year. We expect EBITDA in the range of 28 million to 30 million. Also it's important to note that this guidance precludes any contribution from the Teris acquisition. With that operator, would you please open the call for questions.

[OPERATOR INSTRUCTIONS] Mark Grzymski, Needham & Co.

Good -- good morning guys.

Good morning.

Great, fantastic quarter. Wondering if could you give us a little insight into the pricing environment that you saw in the incineration and the land fill market during the quarter? Especially with gross margins being very robust.

I think pricing continues to be competitive in the -- particularly in some of the larger type land fill projects and incineration projects, quite frankly where the customer has still a lot of options, pricing continues to be a challenge out there. We have tried to improve our competitiveness, as you know, by improving on our logistics capabilities, investing in a fleet of gondola cars, opening up new rail facilities and really putting in a renewed focus on rail. So our rail spending is up. As Jim mentioned total dollars spend on rail is up. But on a percentage basis our outside transportation is down. So we're really working hard on the transportation side in that area. We have really tried to focus particularly on those customers who have have not been receiving any fuel surcharges. We still have a number of accounts out there that do not get our fuel surcharges due to contractual issues. With the price of fuel up over the last 12 months that has been a real focus of our efforts to try to convince those customers to -- to accept a price increase, if -- if -- if not a fuel surcharge.

And is the trend that you talked about last quarter, in the incineration market, regarding your ability to get higher margin waste and turn down lower margin waste, is that also very impactful during the quarter?

Well again, we're really trying to effectively improve our pricing there by changing the mix and improving on our mix. We've been still certainly handling all of our customers' needs by using other disposal technologies if need be. But I think our effective way of improving price per pound is more -- more than on execution on the transportation side and improving the mix of our facilities and clearly improving the throughput. When you -- when you see the fact that we ran at 91% utilization in the second quarter, coupled with the fact that we had a number of if facilities down for their routine maintenance, I think we did a great job with our incineration in the second quarter.

Okay. Thanks. Thank you. Is there -- could you give a percentage of revenue that landfill gave you this quarter, just since -- with the volumes much higher? Was it obviously a larger portion of the top line?

I would say it's not a larger portion over all. I guess on a percentage basis we haven't really put that out there.

I think we'd probably be guessing right here.

Yes, it would be.

Okay. Okay. And, Jim, just wondering if you could elaborate on the SG&A? The one time items you mentioned, Teris, the relocation, and the [accrued] -- the incentive cost. How much would -- is there anyway to break down how much the relocation was and if there's any additional expenses related to that that we'll see in the third quarter?

Sure. I can -- I can do that . And maybe just to back up for a moment, because it is a little bit of an apples and orange comparison when you look at it compared to last year.

Right.

Last year we had the 3.4 million of environmental credit in there, and there wasn't any this year.

Right.

So if you put -- put that aside for a moment, which by the way, would have made last year's rate at over 16%. It would have been 16.5 to 17% last year without the environmental.

Right.

The things that affected us this year, it's about 800 thousand that relates to the lease exit costs. And it was one of the locations -- it's actually -- there was the corporate head quarters and one other location, significant location, that was combined in here that we opened at the time of the aqc -- Safety Clean acquisition. And it had another year to go of lease costs, so basically under GAAP we accrued that -- the remaining lease cost currently. So that was about 800 thousand. Then if you look at the other items that we had in the quarter, the stock based compensation expense, the increased incentive compensation accruals, because of the higher earnings. And also we spent probably about 600 thousand in SG&A on acquisition related consulting costs as we worked through that. Once you go through that it brings you right to that 16% of revenues SG&A.

Okay. Okay. Okay. And finally, before I jump back, regarding the Denver landfill and the press release that was out regarding the court of appeals sort of opening up the path for you to -- to accept hazardous waste, curious what that might do for you on an EBITDA basis going forward if you start to dispose of that kind of waste?

At least in the third quarter, we don't have anything in the -- in our forecasts for volumes to Deer Trail. And Bill Geary, would you like to comment at all regarding the Deer Trail?

Yes, the release that was issued reported a Superior Court ruling in the Adam's County court which dismissed the counties appeal of the issuance of our radio [active] rated materials license. It is itself subject to appeal. So that's why we've taken the conservative approach that Alan mentioned and not booked anything for it in the forth coming quarter.

Okay. So it would be safe to assume that you probably -- if there's another appeal that you probably won't see anything this year? Hypothetically?

I don't know that that's the case.

Okay.

But we have had two court cases thus far, one in Denver on one aspect of the licence, the other in Adam's County. Both courts ruled with similar rulings denying and dismissing the county's appeal. The county has indicated they are going to appeal both of those adverse rulings.

Okay. Thank you, and congratulations on a fantastic quarter.

Great. Thank you.

Thank you.

[Arnie] Ursaner, CJS Securities

Hi. Good morning. First question I have is you tax rate's been jumping kind of all over the place. What is your best view of tax rates for the balance of the year please?

I would say that right now the rate that we put in the second quarter of 23% is probably where we'll be for the rest of the year. Obviously with the increased earnings -- you do know there's a valuation allowance on our NOL's. And we have NOL's in excess of 40 million. And one of the things that every quarter we'll be talking with our auditors about that valuation allowance staying on the books or not. At some point in the future we're -- we're going to be taking that off. But where -- from where we see right now, what we've gone through so far at this point we see this rate continuing.

Another quick question. Your capital spending plans that you disclosed, I assume that does not include anything for Teris or -- or do you expect incremental spending for -- for Teris?

There's some capitalized costs in there but it's not material to -- to the number at all.

Okay. Can you quantify your 123R expense in the quarter and on a go forward basis please or your best guess on it?

Sure, and during the quarter it was roughly $1 million. I expect it to be lower than that per quarter. During this period of time when we have stock options that are vesting and we've also -- we're making greater use of restricted stock, we're during a transition period where the, in this quarter in particular, we had higher stock option -- stock compensation expense than I think we will have in the future. If I -- if I -- would say probably 800,000, 700 to 800,000 a quarter would be the expense going for ward based upon the way our grants work investing.

Okay, my final question. I've known you guys a long time and I remember three years ago when you had your $100 million EBITDA goal. Looking at your reported number for the first half and your guidance for Q3 you're somewhere in the low 80s at this point. And typically you don't have that much seasonality in Q4 so it looks like we're -- we're getting well above the 100 million already on a run rate basis for this year. I guess my question is, when you complete Teris, assuming it has reasonable margins consistent with yours, our run rate EBITDA is probably in the 115 or higher range. And I'm not hearing anything that says next year shouldn't show some further growth. Are there any flaws in the way I'm trying to think of this?

I don't see any flaws in the way you're thinking of it. Clearly with Teris you know their -- we have talked about that being a business that in and of itself probably does not have the profitability that we can have with it being part of our larger group. And there I 'm referring to the synergies that would come through that. We have said that by the end of the year we -- we would be creative. But beyond that we see it brin -- folding it in with our businesses and seeing ultimately the kind of profitability that we have. So I don't see any big flaws there.

[Great.] Look forward to seeing you next week at our conference. Thanks.

Al Kaschalk, Wedbush Morgan Securities, Inc.

Good morning guys.

Morning.

In terms of the guidance that you have out there in EBITDA numbers, it looks like you're at a 15% type of range. Is that -- my math -- simple math I guess is -- looks right. But could you comment on how that seems to get you sooner to your goal than by the end of this year?

I think we said that next year we'd like to -- to be at that 15% rate. We certainly would expect this year to -- to at least hit that in one of our stronger quarters. We still have some additional initiatives on going here, as you know, in reducing some further costs as we implement some systematic changes. So clearly that's our goal for next year as we've publicly stated and it would be nice to see that in a strong month -- strong quarter like the third quarter will be.

In terms of one of your comments about fuel charges, are you able to share what percentage of contracts or customers have seen the increase in terms of the contracts? And is -- is something like 75% a real goal? Or besides a 100 which may not be ideal.

Yes. We're -- we're over 75 right now. We are working really hard on that last 25% because as -- as we all know with our cost of fuel has been significant for both operations of our incineration facilities as well as transportation fleet in general. So that -- we -- we want to try to do everything we can to -- to get our customers to work with us on that on that increased cost.

Okay. And then on terms of the planned maintenance you had a couple of days in the Q2. What do you see in Q3 and the balance of this year?

The Q3 on the incineration, we only have one train coming down for one shut down in September, and the rest of the quarter is pretty strong. So we would anticipate higher utilization and one of the reasons why you're seeing a higher EBITDA margin in the -- in the third quarter guidance.

Okay. Is there any shut down or plan for Q4 or any -- or would there be likely any opportunities for shut down in that time frame?

I don't have the Q4 schedule. But clearly we do performance testing in some of our plants in Q4. We also do some typical outage work before we go into winter months. Kimball and the [New Tower], I'm sure must have some outage plan, but I don't have the schedule here, Al.

Okay. And then finally, I don't know if you're able to comment on this. But in terms of the 172 million that's on the balance sheet as of June 30, as we look out a couple years, are you able to share directionally besides down where that number should be heading to as you perform work?

We --we have a number of initiatives. The team has done a great job really focusing on this area. As you know we -- we were down to a million eight in this quarter. There are a lot of opportunities, as we said, over the last couple years in further reducing that number. I would be guessing if I told you where it would be. But I can just tell that you it is directionally down. We hope to continue to communicate on a quarterly basis with you further improvement here.

Okay. Then just one cleanup question. There was a charge I think Jim you mentioned of 400,000 in the quarter for a write off. Was -- was that the lease?

Yes, those were lease hold improvements at the two former office buildings.

Is that -- ?

That's in depreciation.

Okay. Great. Thank you very much, and congratulations on a good quarter.

[OPERATOR INSTRUCTIONS] Rich Wesolowski, Sidoti & Co.

Thanks a lot. Good morning.

Morning.

Hey Alan, just a broad question. Most of the small ones have been answered. But looking at the strength you guys are showing in the end of the line business past two or three quarters, is it there's a lot more projects out there to be had or are you getting a greater share of existing projects? And if it's former how much visibility do you guys have out into say 2007 if this will continue?

I'll ask Gene Cookson to answer that because he's been really driving a lot of the project initiatives here. Gene.

I think in general there's two things that are going on. One is that we have much more of a dedicated focus to go after these large scale remedial projects. I also think that there is a little bit more activity in the market space for large scale projects. So it would be a combination of the two has really positioned us not only throughout the first six months but we -- we do have some opportunities [not only in] business, won, but business opportunities in the pipeline that should be pretty consistent throughout the year.

Okay. Thank you.

Okay.

At this time we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Alan McKim for any closing or additional remarks.

Well thank you very much for participating in our conference call this morning, and we look forward to updating you in our third quarter. And thank you again.

Thank you.

And that does conclude today's conference. Again, thank you for your participation.