Clean Harbors Inc (CLH) 2007 Q3 法說會逐字稿

Good day everyone and welcome to the Clean Harbors' third quarter 2007 conference call. Today's call is being recorded. There will be an opportunity for questions after the prepared remarks. (OPERATOR INSTRUCTIONS) At this time for opening remarks and introductions I'd like to turn the call to Mr. Bill Geary, EVP and General Counsel of Clean Harbors. Please go ahead, sir.

Thank you, Operator and good morning everyone. Thank you for joining us today. On the call with me today are Chairman and Chief Executive Officer, Alan S. McKim and EVP 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 third 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 on today's call are cautioned not to place undue reliance on these forward-looking statements which reflect managements opinions only as of this date, November 7, 2007. Information on the potential factors and detailed risk that could affect the Company's actual results of operations is included in the Companies 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(Q)s. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in our third 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 that you today's discussion will include references to the acronym EBITDA, which is Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is nonGAAP financial measure is intended to serve as a complement to results provided in accordance with Accounting Principles Generally Accepted in the United States. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of the Company's performance. A reconciliation of the nonGAAP financial measures to the most directly comparable GAAP measure is available in Clean Harbors' third quarter news release. A copy of this release can be found on our Web site, www.CleanHarbors.com, a copy has also been furnished as an 8(K) with the Securities and Exchange Commission. Now I'd like to turn the call over to Mr. Alan McKim for our quarterly review. Alan?

Thanks, Bill, and good morning everyone. Because I know that many of our employees listen to our quarterly conference call I'd like to start our call today by congratulating the entire company for an outstanding third quarter. Our teams combination of hard work, industry expertise and exceptional customer service translated into another quarter of record growth for Clean Harbors. Quarterly revenues came in at an all time high of $245.5 million, which is up 15% over Q3 of last year. Our revenue for the third quarter of the year demonstrates the strength of our business model and the diversity of our business. We generated solid results across our operations with strong contributions primarily from our technical services business segment this quarter.

Now let's discuss some of the growth drivers for Q3. Tech Service delivered strong year-over-year growth in Q3, as the overall demand environment for our disposal facilities remain healthy. Overall utilization in our incinerators came in at approximately 87% for the third quarter despite scheduled maintenance that was performed at a number of our facilities. U.S. incinerators ran at had a high capacity, achieving 95% utilization. And as most of you know running at such high levels is optimal for both revenue and profits as it enables us to improve the mix and materials were are incinerating and our margins. Strong incineration levels at our U.S. facilities were somewhat offset by decline in Canada. Similar to our second quarter utilization in Canada continued to be negatively affected by lower incineration rates at one of our facilities which continued to experience lower throughput while processing above average quantities of highly corrosive materials that resulted in much slower feed rate. As a result of these two factors, utilization in our Canadian incinerators was 70% for the quarter. Landfill volumes increased steadily in the quarter up by 16% over last year and on a sequential basis landfill volumes were up 15% over Q2. We continue to see a considerable pipeline of opportunities for our land fills. We are continuing to strengthen our logistics capabilities to be more competitive in this area.

Moving on to site services, our core sight service business grew by approximately 5 million in the quarter driven by notable growth in industrial cleaning and maintenance projects, remediation environmental construction services from our petrochemical, specialty chemical and refinery clients. This growth nearly offset the absence of any substantial emergency response revenue in what is frequently a busier season for us due to hurricane and other weather related incidents. In fact, in Q3 '06 we recorded approximately 8 million in emergency response work.

The Clean Harbors brands continues to grow on a national level on our Site Service business, in our Site Service business has been a consistent top performer in recent quarters. As we mentioned on prior calls, opening new offices is a fundamental component of our growth strategy. In addition to the field service and clean-up work they produce, more locations afford us the opportunity to cross-sell to our Tech Service accounts and generate more volume for our disposal facilities. This quarter was important for Site Services in terms of expansion as well. As expected the Romic acquisition enabled us to increase our presence in certain under penetrated markets on the West Coast. In Q3 we opened three new branches, one of which was a former Romic location in Oregon. Year -to-date, we have opened seven new branches already surpassing our annual goal of opening five to six offices in 2007.

As we move to the cost side of our business let me take a moment to welcome an important new addition to our team. This quarter we added a new Vice President of procurement and hired Jane Judd to fill our roll. Jane has extensive experience in procurement and oversaw all purchases ranging from components materials to third-party services and several billion dollars corporations. We are certain that expertise will help Clean Harbors further reduce costs, streamline business processes and enable the transformation of procurement from a center for cost reduction to one of strategic sourcing. We continue to keep a watchful eye on our cost but are still facing increased expenses and pricing pressures for many goods and services we purchase as well rising labor, healthcare and insurance costs. Despite these additional costs we generated record EBITDA of 38.4 million this quarter, up approximately 8.5% over the same period in 2006. This translates into an EBITDA margin of 15.6% this quarter.

Now let me take a minute to discuss our EBITDA growth. If we take a deeper look back to the third quarter of '06 we will see that last year's third quarter included an 8.4 million non-cash benefit related to changes in estimated environmental liabilities. For a true apples-to-apples comparison, if we strip that 8.4 million out of last year's EBITDA, our year-over-year EBITDA growth in Q3 is approximately 40%; which is more than twice our revenue growth in the quarter. We are extremely proud of achieving that level of true EBITDA growth which clearly demonstrates the leverage in our business.

Before I turning over to Jim for the financial review I want to share with you some of our strategic initiatives we are pursuing over the next 12 to 18 months that should help us better manage and capture the growth that we are seeing in the end markets we serve. First, we are planning to expand the throughput capacity at a number of our Commercial Hazardous Waste Incineration facilities. In total we plan to add 50,000 tons of capacity to our network. Through a number of permit changes and engineering enhancements that we've identified we expect to increase our total annual incineration capacity which is approximately 500,000 tons by about 10% by the end of 2008 to mid-2009. This increase will provide us with the capacity we need to handle the growth that we are experiencing in our markets and address clients who are planning to shut down the captive incinerators or outsource certain waste streams. The capital cost necessary to add this capacity is approximately 15 to $20 million and would be funded through operational cash flow.

The second major initiative is the construction of a new solvent recovery plant. This new facility is a result of demands we've seen from our customers looking for expanded recycling capabilities. In a sense the new plant is also an ancillary benefit of our Teris acquisition, to be located at the El Dorado, Arkansas site we acquired and we expect that construction to commence in early 2008 and be completed by years-end. This initiative seamlessly broadens Clean Harbors' service portfolio and establishes a presence for us in solvent recycling market. As the cost of solvents continue to rise, corporation are increasingly turning to recycling spense solvents for reuse. We believe this initiative will enable Clean Harbors to offer our customers a broader range of choices for addressing the solvent waste streams. Our El Dorado facility is an ideal location for this new plant because of its established infrastructure, experienced work force and central location in the United States. We estimate the capital cost for this new solvent recovery plant will be approximately $5 million. This also will be funded through our own cash flow. We expect that both of these strategic capital initiatives should deliver a rapid return on our invested capital.

Overall we head into the final quarter of 2007 with a solid pipeline of business and strong momentum. As you can tell we are confident about the prospect of our company for 2007 and beyond. We are very excited about what the future holds with Clean Harbors. So with that I will turn the call over to Jim Rutledge so you can walk you through the Q3 financials and provide our financial outlook for Q4 and full-year 2007. Jim?

Thank you, Alan and good morning everyone. As you likely saw in this morning's press release Clean Harbors achieved another record quarter in Q3, generating revenue of 245.5 million. This is an increase of 15% from the 213.9 million we recorded in the year ago quarter. As Alan outlined in his comments we benefited during the quarter from solid operating excellence in both our Tech and Site Service businesses as well as some incremental revenue from our Romic acquisition. Gross profit for the quarter grew to 76.5 million, translating into a gross margin of 31.1%. This is even more impressive when compared with the 29.1% in the same quarter last year during which we benefited from approximately 8 million in higher margin emergency response project work in contrast to this quarter, our emergency response contribution was about 2 million in small scale projects.

Selling, general , and administrative expenses were 38.1 million, or 15.5% of revenues in Q3, 2007. This compares with 26.9 million, or 12.6% of revenue in Q3, 2006, which includes an $8.4 million benefit related to the environmental change in estimates. Excluding this environmental credit or benefit, SG&A last year would have been 35.1 million, or 16.4% of revenues in Q3, 2006. Accretion of environmental liabilities was 2.7 million in the quarter compared to 2.6 million in Q3 of 2006. Depreciation and amortization expense was 9.8 million in Q3, 2007, compared with last year's figure of 11.1 million. In Q3 of 2006 depreciation expense included 2.5 million related to the write down of the Company's Plaquemine, Louisiana facility. Q3, '07 operating income was 25.9 million, up 19% from 21.8 million in the third quarter of 2006.

As Alan mentioned, we exceeded our EBITDA guidance during the quarter with Q3 '07 EBITDA coming in at 38.4 million, or 15.6% of revenue, which exceeded last year's third quarter EBITDA of 35.4 million. But this year-over-year improvement is actually greater than it appears if you consider the 8.4 million benefit in last year's third quarter related to changes in environmental liabilities. Clearly, our EBITDA growth continues to far outpace our revenue growth which demonstrates the true leverage within our business model. Interest expense net of interest income in Q3 was 3 million, down slightly from the 3.3 million in the comparable quarter of '06. Our provision for income taxes was 10 million this quarter, compared to a credit of 2.6 million in Q3 '06. Last year's third quarter tax provision included a $7.4 million tax benefit associated with the reversal of evaluation allowance on our deferred tax assets. Our effective tax rate was 44% during the third quarter of this year, compared to 26% last year excluding the effect of this tax benefit in last year's figures. The remaining year-over-year increase in our effective tax rate is due to 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, earlier in 2007. Net income available to common shareholders for Q3 was 12.9 million, or $0.63 per diluted share, based on 20.7 million average common shares outstanding. Net income for Q3 '06 was 20.9 million or $1.02 per diluted share based on 20.6 million outstanding shares.

As a reminder last year's income benefited from the two significant adjustments mentioned, specifically the environmental credit of 8.4 million the $7.4 million credit in our tax provision related to the reduction in our valuation allowance. From a balance sheet perspective our cash and marketable securities totaled 103 million at the end of the quarter. This was approximately 15 million higher than our cash balance at the end of Q2. This increase was mainly generated from enhanced productivities and operations and working capital and careful management of our environmental and capital spending. This increase in cash incorporates the, also the effect of approximately 6 million spent in the quarter for the Romic acquisition. Total accounts receivable stood at 207 million on September 30 and our DSO was 76 days in the quarter. We are continuing to target lower DSOs going forward. Capital expenditures approximated 8 million for Q3 compared to nearly 10 million in Q3 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 continue to improve our safety and service reliability.

During the third quarter accounts payable balances increased by 6.7 million to 83.4 million and deferred revenue was marginally lower at 30.1 million on September 30, 2007. We are continuing to benefit from carefully managing our environmental liabilities at September 30, our balance of environmental liabilities stood at 180.1 million, an increase of approximately 6.7 million since the beginning of the year, but that includes $3 million of foreign exchange effect associated with the strengthening of the Canadian dollar. Managing these liabilities and reducing our exposure in this area remains a key focus for us. Environmental spending during the quarter was 1.5 million compared to 1.8 million in Q3 of 2006.

As a result of our third quarter performance and the growth drivers in our markets we are raising our annual revenue guidance. We now expect an annual revenue growth of 12 to 13% compared with our previous guidance of 8.9-- I'm sorry, 8 to 9% and annual EBITDA growth in line with our initial projections of 12 to 13%. For Q4 that translates into revenue in the range of 240 million to 245 million, and EBITDA in the range of 38 million to 39 million.

In closing, please let me echo Alans congratulations to the entire Clean Harbors' team for these excellent results. With that, operator, would you please open the call for

(OPERATOR INSTRUCTIONS) Rich Wesolowski with Sidoti.

Good morning. Jim, could you just clarify the guidance? I guess I'm having a tough time, if you look at 12% EBITDA growth from 2006 of $120 million you get towards 134 million plus and there's about a 2 to $3 million gap between what that's implied and what's implied by the 38 to 39 million.

No, if you take, it was 119.9 million last year in 2006, so that's a little lower than what you had said. And if you take our actual results from nine months and add the quarter guidance on the EBITDA, the low-end and the high-end, you come up with, I think it's 11.6% rounded to 12% and then you come up with almost 12.5%. So we are right in that range of the 12 to 13. So that's pretty much how it calculates. Is that what you come up with?

There's 2.2 million in the environmental liability in the first half. Is that included?

I'm sorry, the 2.2 environmental liability, yes. But the 119.9 that you have for last year includes 9.6 million of environmental credit. So really we built on top of that.

Okay. Perfect. The incremental EBITDA margin in the 4Q guidance is about 60% versus, what is a pretty strong run rate that I consider, about 30% that you posted in the third quarter. Why would there be such a big jump there?

Yes, I think we were looking actually even in the third quarter, if you take the environmental out I think it came out to about 35% incremental and just looking at the strength of the business of what's coming through in the mix, we see good potential for EBITDA on that revenue base. So that's kind of where we see it coming out.

Can you discuss the 50,000 tons that you mentioned, the 10%? What are the assumptions? How much is that an estimate versus it's pretty sure you are going to come out, the assumptions that go into it and maybe a little bit on which sites specifically you are investing in?

We won't get into the specifics of what sites but basically our engineering group and our compliance folks working with operations have been analyzing our facilities because of the demands that we are having on incineration particularly here in the States and we have identified without expanding our overall permits at those sites to improve production at those facilities to take more advantage of the current premise that we have.

Some of those are already in place as far as the permitting process and we should expect by the end of this year to increase 7,000 tons at one of our plants because we recently got the permit and now we are investing the capital. But these capital investments include up front processing capabilities to further drive the mix and our feed systems to improve our feeds and in some cases include back end plant adjustments to improve our throughput from our air pollution control systems. And so we really look at those investments as real true growth projects for us. And we think that demand is there for us to make those kind of growth investments now.

You mentioned the domestic incineration capacity utilization.

Yes, we did, it was 95%.

Which of your business segment end markets would you say is economically sensitive and how have you seen it change in the last 1 or 2 quarters?

We really haven't seen any impact. I think when you look at our key end markets, our refinery business is very strong, our chemical business and petrochemical business is very strong. Our utility business is strong. Pharmaceutical biotech is doing very well for us. We always have manufacturing that's been relatively flat over the last four, five years, so we are not seeing anything different there from their outsourcing just to overall flatness of that as a percent of revenue. But I would say that the industries that we are targeting and the growth areas that we are going after are for industries that are here to stay and don't seem to be as impacted by economic slow downs.

Thanks a lot.

Thank you.

Our next question will come from Mark Grzymski with RBC Capital Markets.

Good morning. Congratulations. If we can just talk about pricing. I mean had you great gross margins and volumes were very strong so that obviously helps. But, Alan, pricing is helping to offset the higher costs that you're mentioning, correct?

I would like to think so, yes. We are seeing higher healthcare costs and other inflation near costs as all businesses do, absolutely.

Do you think that some of the pricing issues that you've undertaken earlier in the year, is should we continue to see benefit in the forward quarters given the mix of business, et cetera?

Well, I'd like to think so. We are really concerned about the price of energy, the price of crude oil is certainly impacting all of our customers and certainly impacting us and we are working hard to keep up with that ever changing cost. But there is no question that we continue to focus on the pricing of our services and making sure that we are basically trying to do everything to maximize our profitability here for the risks and the investments that we are making in our business.

It paid off there. Alan, last year in the fourth quarter you guys ran really hot in the incineration and then in Q1 of this year obviously with the shutdowns you kind of got hurt. And I know you had planned to do shutdowns in the third quarter. You don't expect to have that same issue come up with the strength of business right now? Do you expect continued maintenance shutdowns in the fourth quarter even with demand being strong?

We just have to take our plants down. It's not really one of a choice but whether it's refractory work that has to get done or annual air pollution control testing that needs to take place, we have to and we'll be taking down some plants in this quarter as well and certainly we will in the first quarter. We hope that it won't be to the extent that we had in the first quarter last year. We are hoping that we'll have a couple of plants pushed out to April if we can get those completed with a turnaround this quarter.

Okay.

Our demand is so high that it's tough to take a plant down because it's not a lot of room there.

Understood. Just two quickies to, first I assume the that the EBITDA guidance of 12 to 13% growth, Jim, really now just doesn't assume any event business, so any event business in the Q4 would probably be upside to that number, correct?

That's correct.

And lastly, Jim, on the tax rate, should we continue to assume about a 39% effective tax rate?

Yes, it's in that 37 to 39% but if you add the FIN 48 effect it's what brings you up to that 43 to 44%. So really if you wanted to look at what's going to come through on our financial statements it would be more in line with that 43 to 44% but the number that comes closer to our cash number because the FIN 48 is non-cash would be the 37 to 39%.

Okay. The 37 to 39, great. Thanks guys, great quarter.

Thank you.

We'll go next to Ted Kundtz with Needham & Company.

Hi, guys, a couple questions for you, just-- could you go back to the, this whole energy issue, the price of oil and the effect on the captives, their incineration expense has got to be sky rocketing. And I'm wondering if you could give us a little bit of sense of where that's going. You've often talked about the captives coming off market and turning some of that incineration needs over to you guys. Could you kind of address the economics of their business now as the price of oil just keeps sky rocketing here?

I think each one of them has probably their own cost model but overall I would say that we've seen in the last few years the captives shrink to 78 now from where it was just two or three years ago. So we have 78 captive plants. We think there are at least five more plants and I used five in the past but a number of them have closed and that's why we are down to 78. An additional number of plants should really be looking at outsourcing. When you look at their cost of energy and cost of operation on a per pound basis versus their outsource cost it's considerably cheaper for them to use commercial facilities and we've seen companies making that choice and we think that's good for our business and it's good for our customers, quite frankly. A lot of these captives were built in the late 80s and early 90s when pricing was substantially higher than it is today. And so we continue to see them make that decision and I think the other point is that we can somehow offset higher energy costs if we can use other people's waste to run our plants and we've got a team that's really focused on that. Most of our customers who have captives couldn't bring in other people's waste to offset their energy costs and so they are really held to whatever the cost of natural gas or diesel is to run their plants.

So your advantage is accelerating here? So do you get the sense that more of these captives are going to be making that decision? You mentioned five. Do you expect five to come off market in the next year, is that the number you there?

We don't necessarily control so to speak what they are doing.

I know that.

But we are assuming that that's what's going to be coming off-line based upon the inquiries that we are seeing and some of the request for proposals that we see out there.

How much volume would that represent? Do you know the tonnage associated with that?

Some of the material that they are currently incinerating is probably material that does not have to go to a commercial incinerator. And so I think it's save to say based on the five to we've identified there's about 50,000 tons of material that could go to a commercial incinerator . That's no say that we are going to win it all either but I think just overall that's about the

Okay. And I would say there would be upside to that number. I just have to believe with these energy prices.

Well, that's the whole issue with the volatility and energy prices that we are all facing whether it's motor fuel to run our trucks or the price of diesel is just sky rocketing.

Okay. Another question I had for you guys, do you have CapEx plans for next year in total? You mentioned the incremental ones.

Ted, we are working through the budgets now and we are going through that but I expect just a round, round figure to probably be at the level we are at this year of being about 40 million next year. But we are kind of going through that budget cycle right now and clearly the effect of some of the CapEx that Alan talked about with respect to the additional capacity and the solvent recovery plant will have an effect on that, it could drive it hire but I don't have an exact figure of how much it will affect next year.

And the incremental revenue from that, it really, you're really talking about completing these projects toward the end of next year, is that correct, or some of them could be completed sooner.

Some will be sooner that they will be throughout the year, quite frankly. But maybe some of the capital spending on some of our bigger projects because some of the equipment has to be ordered, it won't come in until the end of the year or the beginning of the following year.

Okay. So we shouldn't just add on-- -- add more of the excess capacity coming on towards the end of the year.

I would say, yes, we expect to get about 7,000 tons by the end of this year. We already have.

You mentioned that.

Yes. And then it will kind of come in through the end of next year and the beginning of the following year is our plan.

Okay.

We really want to accelerate that quite frankly. Some of those projects had been on the design phase for a couple of years and just had never been brought up to get the capital investment that they needed. So we are going to accelerate some of these projects that we've already identified.

One last question, just on the landfill side, could you give us what percent of your revenue that represents now and where do you see that growing? It was a very nice quarter I guess in landfill this quarter, so--

Somewhere around 75 to 80 million that we are talking about in total landfill revenues on an annual basis, that is, of course.

How do you see that going next year?

Where he still have opportunity for growth there. We received our new permit in Texas for our Altair landfill and that was about a year after our plan, if would you. We just received that last month and putting forth a plan now to growth that business. We still see growth opportunities in Canada, particular up in the oilsands. We've got a brand new landfill being constructed at our existing sight in Alberta so we'd like to think we are grow because of the oilsands growth going on in that market. So I think overall if we could get our landfill revenues close to 100 million on an annual basis that's a good number to think about.

For next year.

Yes.

Thanks very much.

I would say that's our goal to get to that 100 million. I'm not sure whether we are going to get there next year, I would hate to run that down.

Maybe on a run rate basis you are talking more about buy end of next year.

We'd like to get there.

Yes.

We are going through those very budgets right now, Ted.

Thanks, nice job.

Thanks.

Al Kaschalk with Wedbush Morgan.

Good morning. I want to just follow up on the capital investments that you're making, maybe just get a little bit clarification and maybe a little bit more granular. Alan, is it contracts or projects that you're seeing out there coming up for proposal or bid opportunities that you want to make the investments over the next 12 months, or is it work that you've sort of won and got in the pipeline into on a timely basis getting this capacity added on .

I think it's the visibility that we are seeing with the volumes of our business from our repetitive waste generators and I also think that it's the result of the anticipated increased demands with the captives continuously looking for outsourcing and for them to wind down those plants. It makes no sense for those plants in some cases to continue to run at 40 to 50% with the cost of energy these days. I think it's two-fold, Al.

But there isn't a scheduled, for the five that you sort of drew a circle around there isn't a set time frame which they are planning to shut down, there's just expectations from your side or has there been communication in the marketplace that you've seen that say that these five are very probable? What I'm trying to get at is as you roll-out into '08 and you have the plant shutdowns, is that the time you are planning to do this capital investments? Or will we be going along at some point and you see something that's going to shut down in short order that you need to accelerate CapEx?

No, I think all of this, would be planned and required permits and major components being constructed. We typically make modifications to our plants during our normal shut down and it may add a weak shut down at a two-week turnaround that we might be doing in a particular plant to get this increased capacity in. I would further say that we are looking at not only increasing capacity but lowering our cost, lowering our handling cost at some of these plant by modifying our up front processing of some of the waste we are handling so we can be more efficient and process waist more efficiently. I guess I would say that this is sort of like the next step in improving the operations of our nine incinerators and some of them will see a benefit of this new capital investment project and some of them won't but we are constantly looking at taking those plants up a notch and that's what this capital investment is really all about.

Previously you had communicated cost efforts or sort of size of an effort to reduce cost over a cycle a couple of years, I know the hiring of Jane that's going to be one of her levels of focus but do you have a rough idea of what dollar value still sits out there where you think could be contributing to margin expansion over time?

Yes, we have, I would just mention,al, that we typically go through as part of our budget cycle enumerating all of the cost savings projects in all of our businesses. And generally what we've been targeting as roughly about 20 million we've been coming in about 15, $20 million range a year and clearly that's, we need to do that to offset increased costs that we have, all the things that Alan mentioned health care, the cost of chemicals and consumables that are affected by fuel price, et cetera, but some of that clearly goes to margin improvement. If I had to put an estimate on how much I would say half, probably helps our margin.

Very roughly. But clearly we need to keep doing this and the procurement area that you mentioned with bringing Jane on is clearly an area of focus for us where we have so many location that is have their own purchasing programs and so forth and we want to consolidate that and make use of national vendors and relationships with suppliers with suppliers so we see some good opportunity there.

Is that something that we should expect inside of 12 months on the procurement side specifically?

I definitely thing in the next 12 months we will see some great improvement there. Obviously we are going after some of the low hanging fruit but I think it goes beyond that in what we can do in the various areas ranging from transportation to materials and supplies right through our supply chain.

And then finally, sort of a two parted on the G&A side on the P&L, it looks like it was up a little bit more than I had expected anyhow. Is there, and with the weaker dollar, is that where we are seeing that recorded as relates to the environmental liability? How does that impact the dollar continues to sort of weakens or has hit an all time low here today? How do we see that going forward if it should strengthen do we get a benefit for that?

Yes. Absolutely. I think we are kind of hoping it's the ends of how much the comparison of the U.S. dollar to-- of the Canadian dollar to the U.S. dollar, how the Canadian dollar has strengthened. But clearly that has had an effect on us and we've had, although it's less than $1 million, probably somewhere around 700,000 in that area we saw in affect in the quarter where we were negatively impacted by the Canadian dollar strengthening during the quarter. But again not material, but nonetheless it was a factor in there.

Thank you. Strong execution.

Thank you.

Next question will question will come from Arnie Ursaner with CJS Securities.

Good morning. I did jump on your call late did you comment or can you speak to how the regulatory change in Ontario has affected your Canadian business so far?

At this point it hasn't -- we invested a little over $3 million to put in the pretreatment technologies to handle the pretreatment of inorganic materials going into our [Sonia] landfill and so that is operating efficiently and is supporting the needs of that plant. By 2010 we will be in a position to handle the organic materials which is another regulatory change that will be taking place at that site and don't anticipate any significant change, pricing certainly will be changing for both of those types of waste streams as we add more cost to pretreat those materials very much like what happened in the States back in the mid-80s when the LDIs were put into effect here.

The second question I have, again, I apologize if you covered this but I gather your guidance does not include any contribution for event activity, we had I guess, minimal activity in Q3 I don't think you quantified or mentioned any impact in Q3, given that we almost never had a quarter without any why are you being kind quite this conservative at this stage?

We typically when we give our for the quarter if we had an event going and had an estimate of what we thought that was going to be we would include that and at this point today we don't have any major events going and our emergency response business in the third quarter has been less than a couple million dollars. Is that right Jim?

That's right.

So we, there's just been a real slowness I think for us and in the market. There's been a few events out there that we haven't participated in but nothing anything of size. So at this point, Arnie, we are not anticipating in the fourth quarter and our guidance any event revenue.

And the good part of that, two, is that with the reduction in event kind of work our Sight Service business has been replacing that with nice core base business. So that's the trend we are seeing and continue to see.

You're not quite prepared to give out '08 guidance at this point but can you give us a feel for what sort of price increases you're targeting or hoping to achieve in '08 and remind us again of how sales force comp is driven by the ability to get cost relief or price relief?

We are in the budgeting stage now and our budgeting process is detail bottoms up, budget by account, by line of business and that is a on going process that we will have done probably by the first week in December and we will have a guidance for the Street when we do our year-end call. I think regarding pricing we see opportunities particularly in the incineration side of our business but in other parts of some of the geographies we are into improving our pricing particularly on those difficult to treat streams where we continuously are getting more cost, things like caustic and lime and some of the other chemical reagents particularly on our landfills have been increasing quite a bit and so we've been working hard to pass along those increasing costs to our customers to a form of price increase. So that is something that we are going to continue. We don't have a firm percentage to share with you today. But clearly that's an initiative that will be ongoing next year.

Final question for me, if I can you use-- fair amount of oil in running your business, obviously you have trucks that are out there. Can you-- with oil approaching $100 per barrel can you quantify the negative impact you have built in or you expect in Q4 from the higher oil prices?

Our fuel purchases are about 20 million on an annual basis right now and as you can imagine a big percentage of that has been diesel and even as diesel -- excuse me, even as gas trended down in the summertime here our diesel prices have continuously sky rocheted and really are at an all time high this morning. Crude will continually have a big impact obviously on that and now on gasoline as well. We run a large fleet of trucks, gas trucks and things. So we think just overall fuel is going to continuous will be an impact on our business. We've been pushing our fuel surcharges to try to offset that and customers have been very receptive and understanding about that.

Many of them are, in turn charge fuel surcharges. We still have a very large outsource transportation fleet and we've got a number of key partners in the transportation side of our business that are passing on fuel surcharges to us in that area. That's one of the reasons why I think our cost reductions and transportation haven't been as successful because their fuel surcharges have been going up consistently over the last couple of years. So it's something that we are really managing very closely and we think we have a good handle on.

Thank you very much.

Okay.

Our next question will come from Vito Mensa with Sandler Capital.

Hey Alan, hey Jim. Really great quarter. I mean, the numbers speak for themselves especially that incremental margin you showed. Just a bookkeeping question, Jim, what was cash flow from operations this quarter?

Yes, the cash flow from operations I can, I want to say roughly -- wait, let me just get the right number for you here, so-- From operations that you'll see on the, for the quarter that you'll see as part of our cash flow statement in the Q, was 34.5 million. We are finishing that up right now. So it was a nice quarter from a cash flow from operations.

So all around guys congratulations. Great, great quarter.

Thank you.

Thank you.

We have a follow-up question from Rich Wesolowski with Sidoti.

Thanks a lot. Can you discuss what factored into the decision or maybe review, you mentioned earlier on the call I didn't catch it, the decision on El Dorado Wire investing in the recycling capabilities? I was under the impression that was one of the lower value-added services that you bring in the incineration portfolio?

The infrastructure they have, what's also exciting about the site we have a waste to energy boiler at that facility where we offer our customers recycling credits for handling their solvent streams to generate steam. So we have a tremendous amount of surplus steam. We have a major waste order treatment facility. We have rail at that site and we have a tremendous organization down there and I think now after acquiring that after a year we want to continually make investments in that location. We have hundreds of acres of site there that we can expand and it's in a great location.

How much of the Site Service growth that you have say this quarter, last quarter, so far in '07 is based on units that have been open during the last 18 months versus say like a same-store sales from your Heritage northeast operations?

I would be guessing, Rich, I think at this point on the call here at least. I know I have that data. I know Jane Perry and Gene Cookson track that. I know when you have the number of branches that we have you have the same stores that are doing quite well and some that would have a slow period if you would but the nice thing about it is with the number of branches that we now have we can ship resources from one location to another so we can continuously keep that utilization up high and support any real bubbles of growth that might be out there. But the new offices are doing well for us and we are optimistic that we can keep opening up additional branches.

Okay. Finally can you just confirm your intension to pay off the $90 million bucks and 11% plus debt in mid-'08?

That is the intension, Rich, absolutely.

Great. Thanks a lot.

Thank you.

Our final question will come from Mark Grzymski with RBC Capital Markets.

Hi again. Alan, the 50 million -- excuse me, the 50,000 in additional capacity, there's no correlation between that and the fact that you said the five incinerators that potentially are coming off-line, the captives that is, equates to about 50,000?

No, actually the capacity increases that I mention were there really a bottoms up detailed approach to maximize throughput of our facilities and so the 50,000 tons that I mentioned that could come out of the captive market is somewhat an estimate for the call here but I think it's a pretty good one.

Okay. Okay. And then just lastly acquisitions, I mean you've got a great balance sheet. You're paying down the 90 million. It's going to get stronger. For, and there's plenty of areas to grow. What are you targeting right now from an acquisition standpoint?

We continuously look at opportunities to help us either expand geographically or to add more disposal capabilities, to expand our Site Services business in a larger and more meaningful way than opening up some of the offices that we are doing sort of on a one up basis. And I think that we are trying to be selective. We've looked at a lot of opportunities out there and passed on quite a few of them quite frankly. And we want to be prudent. I think we are excited about paying off that high yield debt, getting that behind us and maybe releveraging the balance sheet to take advantage of some growth opportunities through acquisition next year. So I think we are, as you said we are well-positioned for that.

Would you expect something in the next 12 months from an acquisition standpoint? Do you think there's enough out there where something may pop up?

I don't say expect would probably be the right word but we will continuously pursue that. I think we are good at it. If we can find some partners out there where we could gain some management and leverage our infrastructure here, our systems and our plants I think it would be wonderful. I think Romic is a nice little deal for us and I think there are other opportunities like that out there but I wouldn't set any high expectation. I think we are going to continuously look at it prudently.

Great. Thanks, guys.

Okay.

At this time we have reached the end of the questions and answers. I will now turn the conference back over to Mr. Alan McKim for any additional or closing remarks.

Thanks very much for joining us today and for your questions. We look forward to talking with you at the end of our fourth quarter and share with you not only full year but also talk about our guidance for 2008. Thanks again.

That does conclude our call. We would like to thank everyone for their participation. Have a great day.