Clean Harbors Inc (CLH) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to Clean Harbors' second-quarter 2007 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 introduction, I would like to turn the call over to Mr. Bill Geary, Executive Vice President and General Counsel of Clean Harbors.

Thank you, operator. Good morning, everyone. Thank you for joining us today. On the call with me today are Chairman and Chief Executive Officer Alan S. McKim, Senior Vice President and Treasurer Steve Moynihan, 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 2007 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 opinions only as of this date, August 8, 2007. 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, 2006, which was filed with the SEC on March 16, and our subsequent 10-Qs.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in 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 complement to results provided in accordance with accounting principles generally accepted in the United States. Clean Harbors believes that such information provided 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' second-quarter news release. A copy of this release can be found our website, www.CleanHarbors.com. A copy has been furnished as an 8-K with the Securities and Exchange Commission.

And now, I would like to turn the call over to Mr. Alan McKim for our quarterly review.

Thanks, Bill. Good morning, everyone. Clean Harbors posted another record quarter in Q2. Revenues came in at an all-time high of $238.7 million, which is up 20% over Q2 of last year. We achieved EBITDA of $35.2 million, up 24% over last year. By continuing to drive substantial volumes into our disposal facilities and carefully managing our expenses, we exceeded our revenue guidance and came in at the high-end range of our EBITDA guidance.

Revenue in Q2 were driven by a combination of factors. First, we experienced a solid contribution from Teris, which we acquired in August of 2006. The Teris plants performed on plan and have been well assimilated into our disposal network. Nearly one year after completing the acquisition, we're very pleased where we are in terms of the integration of these assets and the potential we believe they hold for the future expansion. In May we completed a major turnaround and upgrade of our newly-acquired incinerator in Arkansas. We invested more than $5 million in new technology solutions to improve the operations and throughput of this former Teris site. We're seeing good results after coming out of this turnaround.

The second factor behind our performance was the strong utilization at our U.S. incinerators as we exited Q1, when we had six incinerators shut down for maintenance. U.S. incinerators ran at high-capacity, reaching 97% utilization in the quarter. Running at such a high level is optimal not only from a revenue perspective, but it enables us to improve the mix of materials we are incinerating and better manage margins.

The U.S. performance also was timely, as it offset our Canadian facilities, which had utilization of just over 76%. In Q2 we experienced lower throughput in Canada, primarily at one incinerator that processed above-average volumes of highly corrosive materials, which resulted in a much slower feed rate at this plant. As a result, overall utilization came in at approximately 90% for the second quarter for all incinerators.

Landfill volumes also rebounded nicely in the quarter, up 55% over Q1, but lower than the corresponding quarter of last year. This was mainly due to the uncommonly-high volumes processed by one of our landfills in Q2 of last year.

Site Service also was a strong contributor in Q2, particularly in our petro chemicals, specialty chemicals, and recycling business lines. There was little emergency response revenue in the quarter. As a reminder, last year in Q2 we had $3.6 million in emergency response work from a mix of smaller projects.

In the quarter, we continue the expansion of our Site Service locations, a move that is central to our strategy to further expand our presence in key markets across North America. We opened one branch in the state of Washington and another in Minnesota. We are well on our way to opening five or six branches in 2007, as initially planned.

Now let's shift gears and turn to our bottom-line performance. Our higher quarterly revenues and ongoing cost-cutting initiatives enabled us to generate EBITDA of $35.2 million and meet the high-end of our guidance. We continue to drive out significant costs from our operations, but we're still facing increased costs and pricing pressures for many goods and services to be purchase, as well as rising labor, healthcare, insurance costs. In the quarter we saw significantly higher year-over-year healthcare costs. We are self-insured for healthcare costs and sometimes we experienced spikes in our healthcare expenses in a particular quarter.

Beyond just the health-care cost increases, we saw some unexpected items hit EBITDA in the quarter. First, the stronger Canadian dollar had a negative impact on our operating results and caused a net foreign exchange loss of approximately $900,000. And second, we have fixed price drop during the quarter which negatively affected our EBITDA by approximately $1 million. In combination of the foreign exchange, higher healthcare costs, and this fixed price project, it totaled a negative of $3.4 million in the quarter.

We also continue to see higher costs relating to fuel in Q2, but by constantly applying surcharges and recovery fees to lessen the impact of rising fuel prices, we continue to effectively manage our overall fuel costs.

Before providing our outlook for the rest of 2007, let me touch upon another recent event, the Romic asset acquisition, which we recently closed. This acquisition expands our presence in certain under-penetrated markets on the West Coast and we believe we can create significant leverage from the former Romic locations to our existing infrastructure of landfills, incinerators, and wastewater treatment centers. We are looking forward to integrating these assets and will keep you updated on our progress.

In closing, we're confident about the prospect for our company. Our Q2 performance underscores our leading position in the industry. We are seeing signs that point to continued growth in our topline and signs that validate that our cost and price initiatives are working.

Our strategic priorities for the remainder of 2007 are to continue securing large-scale facility projects that supply strong volumes to our incinerators and landfills; integrate the business generated at Romic's seven service centers to further leverage our network of landfills, incinerators, and wastewater plants; expand the former Teris locations through additional capital improvements and permitting; streamline and enhance our back office systems to improve efficiencies on our billing and invoice process, which will drive our DSO below 70 days; continue to expand our Site Service through new office locations; and continue with our successful and ongoing cost reduction initiatives.

Now I'll turn the call over to Jim Rutledge so he can walk you through the Q2 financials and provide our guidance for Q3.

Thanks, Alan. Good morning, everyone. As Alan mentioned, Clean Harbors achieved a strong performance in Q2, generating record revenue of $238.7 million. This is an increase of 20% from the $199.6 million in the year-ago quarter. Gross profit for the quarter grew $273.4 million, translating into a gross margin of nearly 31%. This compares with a gross margin of nearly 32% in the same quarter last year when we benefited from some higher-margin emergency response work and landfill business, as Alan talked about. Also the fixed price job that Alan mentioned negatively affected gross profit this year.

Selling, general, and administrative expenses were higher in terms of absolute dollars, but lower on a percentage basis year-over-year. In Q2 2007, we recorded SG&A costs of $38.2 million, or 16% of revenue, compared with $35.3 million, or 18%, in the year-ago period. Lower relative SG&A is even more significant in light of the factors that Alan mentioned earlier, including the higher-than-expected healthcare costs and a net foreign exchange loss of approximately $900,000 related to the strength of the Canadian dollar.

Accretion of environmental liabilities was $2.6 million in the quarter, close to the $2.5 million incurred in Q2 2006. Depreciation and amortization expense of $9 million in Q2 of 2007 is up over last year's figure of $1 million mainly as a result of the additional depreciation associated with the Teris' facilities that we acquired in August of last year. Q2 '07 operating income was $23.6 million, up 32% from the second quarter last year.

As Alan talked about, we met the high-end of our EBITDA guidance for the quarter, with Q2 '07 EBITDA coming in at $35.2 million, or 15% of revenue. This compares with $28.3 million, or 14% of revenue, in Q2 of 2006. We are on track to meet our 15% EBITDA margin target for the year and we would have come in higher than that this quarter had it not been for the unexpected costs previously mentioned. Our EBITDA growth is continuing to far outpace our revenue growth, which demonstrates the true leverage within our business model.

Interest expense in Q2 was $3.7 million, up from $2.9 million in the comparable quarter of 2006. This increase is due to the financing of the Teris acquisition late last year. Our provision for income taxes was $8.7 million, compared to only $3.5 million in Q2 '06.

Our effective tax rate was 44% during the second quarter of this year, compared to 23% last year. This increase is due to our recognizing the full impact of U.S. federal taxes without NOLs this year, as well as the effect of implementing FIN 48, Accounting for Uncertainty in Income Taxes, in Q1 of this year.

Net income available to common shareholders for Q2 was $11.1 million, or $0.54 per diluted share based on 20.7 million average common shares outstanding. Net income for Q2 '06 was $11.3 million or $0.55 per share.

Turning to the balance sheet, our cash and marketable securities totaled $89 million at the end of the quarter. This was $20 million higher than our cash balance at the end of Q1. This sizable increase was mainly generated from the enhanced productivity in operations and working capital and careful management of our environment and capital spending.

Total accounts receivables stood at $179.1 million on June 30 and DSO was approximately 75 days for the quarter. As Alan mentioned, we're targeting lower DSOs going forward.

The line item properties held for sale on our balance sheet was reduced during the quarter by $6.2 million and reclassified back into property, plant, and equipment. Give that it is taking longer than the twelve months typically allowed for this accounting classification to sell a certain property we own, this is simply a reclassification with no cash or P&L impact.

Capital expenditures approximated $10 million for Q2, which is about what we spent in Q2 of last year. We continue to expect CapEx for 2007 to be approximately $40 million as we upgrade our facilities and invest in several growth projects in our landfills and transportation areas, as well as continuing to improve our safety and service reliability.

During the second quarter, accounts receivable balances increased by $7 million to $76.7 million and deferred revenue was slightly higher at $30.6 million on June 30, 2007.

We are continuing to benefit from carefully managing our environmental liabilities. At June 30, our balance of environmental liabilities stood at $175.8 million, which increased approximately $2.4 million since the beginning of the year, which includes a $1.4 million foreign exchange effect associated with the strengthening of the Canadian dollar. Managing these liabilities and reducing our exposure in this area will remain a key focus for us in 2007. Environmental spending during the second quarter was $1.7 million compared to $1.8 million in Q2 2006.

Looking forward, we currently expect revenue in Q3 to be in the range of $235 million to $240 million, which represents a steady 10 to 12% rate of growth year-over-year. We expect EBITDA in the range of $35 million to $37 million. Although our EBITDA in last year's third quarter was also in this range at $35.4 million, I should point out that last year's third quarter included an $8.4 million benefit related to a favorable environmental settlement. Excluding that environmental benefit, our EBITDA guidance for this year's third quarter implies a 30 to 37% growth year-over-year.

As we noted in our press release announcing the Romic deal, we expect to generate approximately $25 million to $30 million of revenue from those assets in the first full year of operation and we are currently in the process of integrating those locations into our enterprisewide systems.

For the full year 2007, we are reiterating the guidance we provided in our Q1 call. We expect an annual revenue increase of eight to 9% and annual EBITDA growth in the range of 12 to 13% over 2006. Here, I would like to point out that when we originally set our annual guidance, we incorporated an assumption of $10 million to $15 million of emergency response events in 2007. To date, there has been a negligible amount of emergency response revenue, but we are heading into the time of the year when we typically are awarded emergency projects due to hurricanes and other weather-related events.

With that, operator, would you please open the call for questions?

(OPERATOR INSTRUCTIONS) Arnie Ursaner, CJS Securities.

I just want make sure I've got the math rate here on some of these unusual expenses. I know you indicated the total of these was $3.4 million. You indicated the fixed price drop was $1 million. You indicated that the strengthening of the Canadian dollar was $900,000. Is it that simplistic that I just add $1.5 million for usually high healthcare cost?

That is correct, Arnie.

Can you expand on that a little? That seems like quite a high number.

Yes, we do run into spikes, as Alan pointed out, typically, some quarters over another. There is some effect here for having Teris employees now part of our family here. But this we think is a little higher than that, so perhaps maybe one-third of that could be attributed to the Teris employees, but we will be analyzing this further. We are seeing a spike this quarter. Hopefully it won't stay that high as we go forward, but we are looking at.

The question I have is that since you are saying it is partially due to Teris, is that more than ongoing type of expense we should be thinking about?

A portion will be ongoing. I suspect probably one-third of it.

Got it.

But we certainly did not see it when we did the acquisition in the fourth quarter and the first quarter, so I think maybe there was a catch up in some cost there possibly, as well.

Yes, it could be that.

Alan, you went through some of the utilization rates faster than I can write them, so I want to make sure I absolutely have them right. In the hazardous waste incineration, I have a 97% number, but I want to make sure that is, in fact, correct, because later I heard a 90% number.

97 for U.S., 76 for Canada, and 90% for all incinerators combined.

Okay, and the landfill -- capacity, if you will?

Well, we talked about volumes rebounding and the fact that they were up above 55% over the Q1. We do not measure landfill from a utilization standpoint. More, we are looking at tonnage and we are trying to compare that quarter-over-quarter.

What was volume year-over-year please?

The volume was down somewhere in the mid-teen percentage, roughly 15% down from last year -- comparable quarter.

(multiple speakers) mainly because at one of our landfills in California we had an unusually large project that was going on in that second quarter last year.

Okay, and I guess I will cheat and as a real quick third question. Of the $25 million to $30 million of annualized revenue from Romic Environmental, what do you expect to contribute in Q3?

In Q3 that'll be roughly somewhere $3 million to $5 million, somewhere in there.

I look forward seeing you at our conference. I would jump back in queue. Thank you.

Mark Grzymski, RPC Capital Markets.

Just kind of looking at the incineration business, you're almost at a -- you have been at an inflection point now since you have such high utilization and your U.S. incineration utilization is even higher. Pricing is key for you. Now, looking at all and hearing about all these costs that are in-your-face, I am just curious is there more need now to really start passing on some price through the incineration channel?

We certainly are focused on that, Mark, no question about it. We're meeting on pricing regularly here and personally involved in that. I do not think there is anything more important that we could be doing to continue to focus on the market pricing, particularly in some waste streams that are very difficult to handle and caused some reduction in our process flows at our plants, as I mentioned, in Canada. We had much slower utilization of one of our incinerators because we're handling some very, very difficult materials that prior to us handling, quite frankly, was handled by a captive. So we really need to drive our pricing initiatives across all our lines of business.

What type of improvement did you get in the quarter? I know you talked about a 3.5% blended price increase across the business, but obviously a lot of that is going to come from your incineration business. How well did you pass on price -- or increase price in the quarter?

I do not have any measurements to speak to here statistically in front of us, but I can tell you that we're looking at individual contracts and quotes and waste streams in general, and looking at average prices per pound across various types of feeds, so we are seeing an improvement. There's no question about it, but it is not going fast enough and we're going to work even harder to make it successful for us.

Okay, Alan, just one more quickie here. Everyone is focused now on some cyclical markets. Could you just comment on how they are performing for you? Your cyclical end markets?

We have not seen any slowdown. Our business is very strong right now. We are hiring people, buying more equipment. We are anticipating continued growth. We're not seeing any slowdown in the markets. Our refinery business is very strong. The petro chemical business has been really strong out there.

I do not think we've seen any downturns from our end, Mark. We saw a nice pick up from the first quarter which, we were anticipating, and outside of the fact that we're not seen any real emergency response business this year, our business is very strong.

Thanks for the color and good quarter.

Ted Kundtz, Needham & Company.

A couple of questions for you. Regarding your guidance, you talked about EBITDA for the year being up the 12, 13%, which really takes you into that $134 million, $135 million range. If you do $35 million to $37 million this quarter, it looks like you got a fourth quarter that you've got hit somewhere around $41 million in EBITDA, $40 million to $41 million to make that target. Could you explain is that a doable number and how you would get there?

We absolutely think it is doable and that is why we reiterated that guidance, but I did point out when I was talking about our guidance that when we set up the annual guidance for the year, coming off 2006, when we had nearly $30 million of emergency response, we put maybe about $10 million, one-third to a half of that in our guidance range for 2007. So when we're looking at the annual guidance, maybe a perspective to take away here is that we're talking about the next six months and we are thinking coming into this time of the year, with weather-related events and so forth, that we might achieve that, because it has been negligible so far.

So between the increases that we've seen in base business that we have been seeing and the factor of -- last year I think we had $15 million of emergency response in the last six months. Maybe we'll have more this quarter, so definitely think it is doable.

Okay, so implies a lot of that hitting in the fourth quarter. Was that kind of where you are leaning it, or --?

Over the next six months it could be that we do better in the third quarter, depending upon -- that is the most volatile part of the emergency response, as you know. It just might be -- that is why I said six months. We might exceed third quarter if it's then and so forth.

We have had a very unusually slow nine months period for emergency business from what we typically have seen and it is not just been our company. I think it is really been across the board as an industry, so we are anticipating that to change.

Okay, but everything else looks -- if you get that, it is a solid number?

Absolutely.

One other question. Any change in the outlook for the captive market, moving anything more off-line going back to you guys? (multiple speakers) shutting down some facilities, can you give us a little update on what you see the environment like out there?

We are certainly seen volumes from captives that have since closed. We are bidding on business right now from one particular site that is looking to outsource and close down their units, so that continues to be a trend. We have essentially seen five close in the last two or three years now that we have been able to document. However, we're still seeing more right now that are interested in outsourcing. I think that is going to be a continued trend. We're down to about 79 captives today and I would anticipate that number to continue to decline.

Okay, the three more that are interested in closing would be -- any idea of timing -- or size of them?

I think one is within the next six months and I would suspect the other two would be next year. Less than 50,000 tons I think would be the total out of those three, would be a good estimate for you. We as an industry are handling around 750,000 tons a year, so 50,000 tons is a sizable amount of volume. I think that would just further push our capacity utilization.

We are in the midst of changing some of our permits at one of our sites. We think we can get another 7000 to 10,000 tons of throughput at one of our plants, so we have applied for permits to help us achieve that goal. We have already got the infrastructure to do it, but certainly with the Teris acquisition, we have two incinerators there. With the investment we made in May, we have really only seen their performance in the June results here, but having a strong third quarter at that site is -- I think will tell how well that investment that we made is really performing for us. And we will just continue to tweak that plant into next year, into '08. We would like to get that facility up to the same EBITDA margins as all of our other incinerators and it is nowhere near that yet, but it is performing on our plan.

Terrific, thanks very much.

Al Kaschalk, Wedbush Morgan.

I was wondered if you could give us maybe a little bit more macro breakdown on the revenues and, in particular, what you saw in pricing and what was more volume in terms of the growth?

First of all, maybe to just talk about the two components. In Tech Service, the total revenues was $169 million and that represents about 71% of the total. So that is up 22.6% from last year and Teris was a big piece of that. So calling that all volume, I would say that of that increase of 22% I would say three-quarters of it is volume and then perhaps pricing would be somewhere in the three to 5% range.

If you look at Site Service, we're up -- and that total was about $70 million. If you look the increase there, we're about 13% over last year and that is substantially volume, I would say, some pricing that has taken hold there, but substantially volume. Hopefully that helps, Al.

Yes. If I take a step back for a moment, gross margins were largely 31% and last year they were 32. Is there mix impacting the business, namely the acquisitions, or what is impacting at that part of the equation?

I think the kind of things that Alan was talking about -- the higher healthcare costs that hit our gross profit. We had the one job there that probably depressed our margin a bit there by $1 million that he talked about. I think absent those factors, we would have been at or above the level we were at last year or right around that level.

What was contract or what issue related in the fixed-price charge? Is it just notched realization on product? Is there an overrun? Is there more to come? Could you elaborate on that?

Yes, the job is complete. It really was a job that turned into be a fixed-price job from what was at the time a material job and there has not been any approved change orders on there. We are certainly going after change orders, but at this point we do not have any in hand, and that is why we booked it as we did in the quarter.

It is unusual for us to have large fixed-price jobs. I would say in our 25 years I can remember, it is probably the first time having such a large fixed-price job that we did not manage the change order processes efficiently as we should have.

Okay, then does that mean -- just to clarify, does that mean that you have the opportunity, prospectively, to go in and recover that charge or no?

This is Bill Geary. We will certainly make a claim and try to negotiate the claim.

Okay, and then finally and I will hop back in queue, I take it that the comments related to the reclass of assets and why is it that you may not be selling that particular property held for sale at least in the near-term, or is it really due to more market conditions?

Is actually more the accounting than anything else. We continue to analyze the particular property that we're looking at because it is taking long to sell it, but the accounting standards says if you're not selling it in 12 months, you really should not have it classified as that. So we are taking it out of there, but we continue to evaluate it. We're still working to be able to sell it. It is just not moving that fast.

Thank you.

Rich Wesolowski, Sidoti & Co.

Alan, can you talk generally about the backlog of work in the incineration industry, the threat of some of this waste moving towards the landfill market, where you guys do not have as dominant a market share and how you plan to keep the waste within your umbrella?

Material that would go for incineration, unless it was a restriction on a customer's behalf, is really from a regulatory standpoint unable to go to a landfill. So it is required to be treated through thermal treatment. What we're trying to do it is certainly look at our mix. There are some streams that we can redistribute to other technologies, either within our own network, like our critical fluid system for treating some organic waters, or go outside of our own network into cement kilns or other industrial furnaces. So we're looking to make sure that we maximize our mix in our plants so we can get that highest price per pound.

So you're not all worry that there is enough work -- or too much work in the incineration market and you're going to lose out to some of that in the landfill market? You think regulations would prevent that?

I am not sure, Mark, if I understand your question in regard to the regulations. I would say from our standpoint, we certainly feel confident that we can handle the volumes that our customers are generating and we are making changes both from a permit and engineering standpoint to make sure that we are doing that.

Okay, and along the same lines, you mentioned the U.S. capacity utilization 97%. Can you review the longer-term steps that you can take at your various sites to increase the capacity?

Well, we have a couple of sites. One of our sites in Texas has a third incinerator that we're currently looking at expanding its throughput. That would require some minimal capital, but we anticipate that to be essentially complete by the end of the third quarter. Our acquisition of Teris in Arkansas has two incinerators at that site. We still have not gotten anywhere near where what we think will be the bottlenecks taken out of that plant. Although we have made a big investment on the back end in a lot of other process areas, there is a lot of front-end work. We're currently in the permitting stage of some modifications that we would like to have so we can improve our throughput In that particular facility.

And I would say in every single one of our facilities, we're doing process design reviews and looking at ways that we can improve our throughput at our plants, with a particular focus, really, on the higher -- more difficult materials, the higher cost streams.

Okay, how about actually adding an incinerator at a site, maybe like El Dorado, that you have a lot of land? Has there been any talk about building a new incinerator or buying one that is not really utilized from a captive?

We have looked at that. We're looking out over the next three to five years and trying to anticipate the captive market and really staying very close to that. And there will be a point when we will have to add some capacity here. Clearly we will do that if we see out over the next three years or so not having the capabilities to service the market that we have. We would build a plant at one of our existing sites. It would not be a greenfield facility. We do not think it would be possible in this day to build a new site.

Okay, then finally, can you just comment generally on how the landfill backlog looks and if you expect your volume to rebound on a year-over-year basis?

Our project business in our landfill has its peaks and valleys, as we've seen over the last several years. We've seen some nice project that we have won that have provided some nice steady volume, particularly here in the second quarter, so we did see that nice pickup. We have a pretty strong third quarter. Our Canadian landfills were soft, quite frankly, in the second quarter, one of them was. We're making a $4 million investment at one of our Canadian landfills right now to meet the new land ban regulations and that investment should be done within the next 60 to 90 days. So we are anticipating to be able to open up the types of waste that we can handle what that investment, but I think, overall, our volumes are pretty strong landfill in the side of our business right now.

Great come and just a final confirmation that the income statement did not have any material effects from changes to environment liabilities.

No, we did not. In fact, we had a small charge of $300,000 during the quarter.

Great, thanks a lot.

Vito Menza, Sandler Capital Management.

Just a quick question on the $35 million to $37 million EBITDA guidance. You are closing the Romic acquisition I believe in Q3. Should we -- are there some costs associated with that factored into the guide or are they not factored into the guidance?

Yes, the costs were factored into the guidance.

Okay, I mean, is it -- are we talking on the order of a couple hundred thousand or north of $1 million? Is there some ballpark figure you can give us?

A ballpark I can give you, Vito, would be in the 500, probably $500 million range -- $500,000 range. I'm thinking ahead with all this great growth that we're talking about here. Sorry.

Great, I appreciate it. Nice quarter. Keep it up.

Charlie Park, Findlay Park.

I have got a couple of questions, please. The first one is can you reminds me how much of your business when you enter a quarter is contractual, roughly?

We typically have evergreen annual contracts out there with the majority of our customers, so other than projects and emergency response work, which is more short-term contract duration, the bulk of our business really is evergreen and that is just what works. Does that answer your question?

Well, it was really on pricing, because I thought if it was evergreen it is going to be harder to sort of the back into it and raise prices, but that is not you're saying. You're saying you can put in a 3.5% increase or 4% increase of these evergreen contracts.

Yes, we can, but typically it varies all over the lot, but several of the contracts have 90-day advance notice on prices and terms like that that you deal with, so it is a little bit -- it varies by customer, but generally, we do have some latitude there to affect price increases.

Just this one question on the fixed-price contract that you say cost you $1 million. Can you just explain why that was? Was the cost too high or you priced it wrong, or what was that?

Essentially, it started out as a timed material project that turned to be a fixed-price job, quite frankly, with costs significantly higher than what that fixed-price amount was. It really had to do with how it was procured and what the purchase order ended up being for. And so we completed the job successfully. We did everything that was required on the project, but we did not administer the change order requirements within the quarter to basically get reimbursed for the substantial amount of extra work we did to complete the job. We are hopeful that we can recoup that, but right now, it was reported in the quarter as a loss.

If I could just ask one quick question, the Site Services, five to seven this year. If they're in area were you do not already offered the service, can you remind me what the profit profile is on a startup bid? Did you lose money for the first six months and then it starts making money or how does that work?

Typically within the first 12 months, we anticipate making a small profit. When we have a startup satellite location, it is roughly $1 million in revenue is our expectation within that first month and our costs -- excuse me, within that first year. Our costs typically are a couple hundred thousand dollars of cost to open up that office from a fixed cost standpoint, with resources and equipment and things like that. So we tend to be profitable in the first 12 months of opening up a small satellite like that.

Thank you.

(OPERATOR INSTRUCTIONS) Arnie Ursaner, CJS Securities.

Focusing on Romic for one more minute, can you remind us what you paid for it and what you anticipate the annual EBITDA contribution will be for that business?

Actually the payment on those -- that business is contingent upon our bringing the customers and revenues in-house, so basically the first six months' revenues, we will be paying roughly 40% on that. We also bought less than $1 million or $2 million of equipment related to that acquisition. The EBITDA margin we're thinking would be in line with ours, so we're thinking that in the vicinity of 15 to 20% EBITDA margin.

Okay, and just from a looking-forward point of view, do you have any major plant outages scheduled at this point that we should be building into our thinking?

In the guidance in the third quarter, we did have two units down in July for our typical shutdown work and I do not know exactly what the schedule is, but we have already seen that at a couple of our plants. That is in our guidance.

Okay, and two more follow-ons, if I can. In Canada, can you remind us why you have 76% utilization there? Why don't we start with that question? What holds it back?

We have been handling a very difficult stream at one of our plants up there. It requires us to really slow down our feed rates in that particular plant, so although we are -- we could argue that it was fully utilized. We do have a little bit more maintenance work to do with refractory and a much smaller or slower throughput at that plant because of the corosivity of the types of materials we're handling there. But I think all in all, we have more than adequate amount of volume to handle at our Canadian facilities. It is really a throughput issue at this point.

Staying on that for one more second, given the 97% utilization in the United States, are you more carefully selecting what business you take on, are you -- if you have a piece of business that you're not getting the appropriate price, are you walking away from it? It seems to me you should be in the driver's seat, given that utilization, you should dramatically more aggressive on pricing.

We're certainly taking care of our key accounts, realizing that the incineration might be only one need that they have and we're really trying to make sure that we address our major customers, our ongoing accounts.

On the spot market basis, you're absolutely right. We have turned away quite a bit of low-priced business because we are essentially full, or will try to find an alternative for that material. But right now, at least for the rest of this year, we see a very strong volume and mix of business for our incinerators.

And you mentioned you are obviously incurring higher costs and you mentioned that you need 90 days notice to increase prices on certain accounts. Given these higher costs and given your utilization, have you already notified people they should expect price increases? You mentioned 3.5% or so towards the end of Q1. What are you putting in in Q3 and what should we expected in Q4? It seems to me you have, again, a lot more flexibility to be more aggressive than you appear to be.

We're looking at very granular in some cases, if costs like caustic are going up significantly or lime, which is a high chemical cost at our incinerators, we are looking at those particular streams that need a lot of that reagent and going and trying to be aggressively pricing those in light of the increased costs we're seeing. So we're looking at it waste stream by waste stream, as well as looking at more of the broader costs like healthcare costs and other transportation costs and things that seem to be really out of whack for us right now. So I think we began our price increase initiatives in the first quarter, as you mentioned, but that is an ongoing effort that we have right now.

Perhaps asking the question in a different way, if you have to give 90 days notice to your customer to get price relief, have you given half your customers notice of price increases, two-thirds, three-quarters? What percent of your customer base has already been notified they will get price increases?

I do not had a percentage basis here in front of me, but I would tell you that we do have some contracts that require us to wait until the contract is renewed and that could be an annual basis. I think the 90 days with mentioned as another alternative or another barrier, but we do have some accounts that as our costs increase, we can immediately go out to those accounts and share with them that information and put forth a price increase. So it is being done really at that level right now.

(multiple speakers) I was just going to say and also the rates that we have, the various gate rates and lists of rates for our services, we have updated those as we quote as well. So I just added that one footnote to what Alan said.

Again, I just want to double check my math. You sort of indicated a $0.5 million or so hit from Romic in the current quarter as you absorb it. On the healthcare, the $1.5 million, you sort of said maybe $0.5 million of that will be ongoing, so embedded in your $35 million or $37 million EBITDA guidance, is at least $1 million of identifiable expenses disclosed on this call. Is that correct?

Yes, that is correct.

Okay come a thank you. Again, look forward to seeing you next week.

That is all the time we have for questions. At this point, gentleman, I will turn things back over to you for any additional or closing remarks.

Thanks, everybody, for joining us on our call this morning. We look forward to updating your again on our third quarter earnings conference call. Thank you.

That does conclude today's teleconference. Thank you all for joining. Have a wonderful day.