Clean Harbors Inc (CLH) 2008 Q2 法說會逐字稿

Good day everyone and welcome to Clean Harbors second quarter 2008 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 very much, Operator. Good morning, everyone. Thank you for joining us this morning.

On the call with me today are Chairman and Chief Executive Officer, Alan S. McKim, 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 2008 financial results that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements including predictions, estimates, expectations, and other forward-looking statements generally identifiable by the use of the words believes, hopes, expects, anticipates, plans to, estimates, projects, or similar expressions, are subject to risks and uncertainties that could cause actual results to differ materially.

Accordingly, participants in today's call are cautioned not to place undue reliance on these forward-looking statements which reflect management's opinions only as of this date, August 6, 2008. Information on the potential factors and detailed risk 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, 2007, which was filed with the SEC on March 11, and our Form S-3, which was filed April 17, 2008.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in our first quarter press release or this morning's conference call other than through the filings that will be made with the SEC concerning this reporting period. In addition, I would like to remind you that today's discussion will include references to the acronym EBITDA, which is "Earnings Before Interest, Taxes, Depreciation and Amortization." EBITDA is a non-GAAP financial measure and is intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of the company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Clean Harbors second quarter news release. A copy of this release can be found on our web site, cleanharbors.com. A copy has also been furnished as an 8-K with the Securities and Exchange Commission.

And now I'd like to turn the call over to Alan, for our quarterly review. Alan?

Thanks, Bill, and good morning, everyone. Clean Harbors delivered another quarter of strong results in Q2 with solid contributions across nearly all of our operations including a particularly strong performance in our incineration business. Revenues for Q2 set a new quarterly record coming in at $265.3 million which is up 11% over last year. We also had a great quarter from a profitability point of view. Demonstrating the leverage of our network of assets, our EBITDA grew more than double our revenue growth increasing 23% year-over-year to $43.4 million and I will provide some more insight into our EBITDA performance in a bit, but first let's discuss some of our growth drivers for Q2.

Technical service delivered strong year-over-year growth in the quarter as more companies continued to turn to Clean Harbors for their waste disposal needs. Overall utilization at our incinerators which included the additional capacity rolled out in the first quarter of the year coming in at approximately 88% for the second quarter despite scheduled maintenance that was performed at several of our facilities. US incinerators ran at a high capacity achieving 94% utilization. As many of you know, running at that high level is optimal for both revenue and profits as it enables us to better manage the mix of materials we're incinerating and thereby further improving our margins.

Incineration levels at our Canadian facilities were not as strong coming in at approximately 75% for the quarter and this was primarily due to the comprehensive scheduled maintenance at one of our sites which resulted in a $2 million investment and the plant was basically closed for the month of June as I mentioned during our first quarter call.

In Q2, we made further progress on our plan to add at least 50,000 tons of incineration capacity to our network by mid 2009. As you may recall, we added the first 7,000 tons of new capacity in Q1 and in Q2 we brought on line an additional 14,000 tons of capacity and we're now well on our way of adding another 7,000 tons of new capacity to our Deer Park facility in the third quarter. We expect that the remaining capacity should come on line some time between year end and mid 2009 depending on the permitting process and the construction schedules.

Landfill volumes were down this quarter both sequentially and on a year-over-year basis. Volumes were down 37% from the same period in 2007 and 31% from Q1. This decline was primarily due to timing of projects and the typical lumpiness in the landfill business. Several large volume projects we expected to commence in the quarter were pushed back to Q3 and another factor for the lower volume was our strategic decision to selectively increase pricing which resulted in us passing on some less profitable businesses out there.

We continue to be encouraged about the landfill opportunities that we're seeing in Canada and we believe that our Q3 volumes will pick up in the North and that our US volumes will continue to be relatively strong throughout the remainder of the year.

Before I turn to our site services segment, I wanted to update you on another area of expansion within Technical Services namely our solvent recovery business. With three solvent recovery plants now on our network including our El Dorado, Arkansas site, Chicago, Illinois, and Hebron, Ohio, we're confident about our long-term prospects for growth in this business. The Chicago and Hebron facilities which we purchased in March performed on plan in the quarter. The El Dorado plant is now up and running and is now heading into the second phase of construction. There were some minor delays this past quarter in purchasing some of the necessary equipment for that plant, but this has been resolved and we're expecting a good Q3 and Q4 performance from really all of these facilities.

Moving on to site services, our site service business continued to increase by approximately $10 million in the quarter as we saw a continued growth within our core services. In particular, we saw strong contributions from our petrochemical, specialty chemical and refinery clients. Similar to recent quarters, we continue to see limited emergency response revenues in Q2. For the quarter we recorded approximately $2 million in revenue from small scale emergency response projects about half of which was from flood related clean up projects in the Mid West. We continued the expansion of our site service locations in Q2, a move that is central to our strategy to further extend our presence in key markets across North America with the opening of a branch in Memphis, Tennessee. With the two branches locations we picked up from Universal Environmental acquisition, the branch we opened in Milwaukee in Q1 and now the Memphis location we opened this quarter, we're well on our way to meeting our annual goal of opening 5 to 6 new site service locations this year.

Let's turn to our bottom line performance. In recent months, Jim and I have routinely fielded questions concerning how the economy and rising gas prices are affecting our business and I'd like to address these two points now. First as it relates to the overall economy, we continue to see solid growth across our operations despite the economic slowdown. We have seen some government-sponsored projects being pushed out to later quarters. However, demand from our direct customers continues and we have not seen any significant sales delays or declines in any of the main verticals that we serve. Our verticals are fairly well-diversified and fortunately for Clean Harbors, the industries where we are concentrated such us utilities, refineries, petrochemical and specialty chemical are not experiencing the slowdown seen in some other sectors.

Now turning to oil prices, with record prices at the pump, fuel costs are top of mind for all companies and we're no exception. This quarter we realized exceptionally high fuel costs. At our incinerators, our fuel costs rose by more than 150% as the price of natural gas doubled year--over-year and we're burning higher volumes of material. Within our transportation fleet, we experienced significant increases in fuel costs amounting to several million dollars. Even our corporate travel expense rose by nearly $700,000 in the quarter. So we're also feeling the pinch of high fuel prices.

However, we have been able to effectively mitigate most of these added expenses through price increases and fuel surcharges. As we've outline on our last call, we implemented price increases April 1 that averaged 4.5%. While we're still in the process of fully rolling out that entire program, we've been pleased with the customer response to the initial rounds of increases. We've also continued to be consistent with our fuel surcharge program and our ability to pass these added fuel expenses onto customers. In fact, we pegged our fuel surcharge program to the national average price for a gallon of diesel as set by the Department of Transportation and this has ensured that we keep up with the many fluctuations we're seeing in the price of diesel.

As I mentioned earlier, our EBITDA for the quarter reached a record $43.4 million which translates into an EBITDA margin of 16.4%. Our Q2 '08 EBITDA margin was 160 basis points higher than Q2 '07 and 270 basis points higher than Q1 '08. Our entire team should be commended for this accomplishment especially in a quarter where we saw some weakness in our landfill volumes and also faced some external cost pressures.

Let me just conclude my comments by reiterating that we are very pleased with our Q2 results. In the first half of 2008, we have extended our business and operational momentum as we've marched toward our stated goal of a billion dollars in annual revenues.

With that, I'll now turn the call over to Jim Rutledge, so he can walk you through the financials in more detail, and provide our outlook for the third quarter and the year.

Thank you, Alan, and good morning, everyone. As Alan mentioned, Clean Harbors completed another excellent performance this quarter generating record Q2 revenue of $265.3 million. This is an increase of 11% from $238.7 million in the year ago quarter. Gross profit for the quarter grew to $86.9 million translating into a gross margin of 33%. This compares with a gross profit of $73.4 million and margin of nearly 31% in the year ago quarter.

Selling, general and administrative expenses were higher than anticipated in the quarter coming in at $43.5 million or 16.4% of revenue. This compares with 16% of revenue in Q2 of 2007. We had expected it to be closer to the 15.5% level. In Q2, we exceeded our internal targets for sales and as a result we accrued higher commissions and bonuses. Other factors behind our SG&A expenses in the quarter were higher legal costs primarily related to two legal matters one of which we settled during the quarter as well as higher professional fees and costs associated with acquisition review work during the quarter.

Accretion of environmental liabilities was $2.7 million in the quarter compared with $2.6 million in Q2 of 2007. Depreciation and amortization expense rose to $10.8 million from $9 million in Q2 of '07 mainly due to acquisition related additions.

Q2 '08 operating income was $29.8 million, up 26% from the $23.6 million we reported in the second quarter last year. This was driven by our revenue growth along with a continued healthy mix of higher margin business in the quarter. We exceeded our EBITDA guidance for the quarter with Q2 '08 EBITDA coming in at approximately $43.4 million or 16% of revenue. This compares with $35.2 million or 15% of revenue in Q2 of 2007. Despite higher operating expenses, our expanded growth this quarter enabled us to leverage our network of assets and drive increased profitability.

Net interest expense in Q2 was $2.5 million which was lower than last year's figure of $3.7 million mainly reflecting interest earned on the proceeds from our recent follow on offering. Our provision for income taxes was $11.4 million compared to $8.7 million in Q2 '07. Our effective tax rate for Q2 was 42%. And 48 related interest charges amounted to $1.4 million during the quarter, representing about 5% of our effective tax rate. We anticipate our overall effective tax rate to be approximately 43% for the balance of the year.

Second quarter net income available to common shareholders grew substantially to $16 million or $0.70 per diluted share based on 22.9 million average common shares outstanding. Net income for Q2 '07 was $11.1 million or $0.54 per diluted share based on 20.7 million average common shares outstanding.

Turning to the balance sheet, our balance of cash and marketable securities at the end of Q2 was approximately $282.3 million. This was significantly higher than the $87.7 million cash balance at the end of Q1 primarily as a result of the proceeds from our recent capital raise as well as our solid cash generation in the quarter.

Total accounts receivables that had a $195.5 million on June 30 and DSO came down once again to 69 days compared with 72 days in Q1 and 75 days in Q2 of '07. We are very pleased with this improvement which underscores the commitment across our organization to decrease our collection period and further improve our cash flow.

Capital expenditures approximated $10.9 for Q2. This compares with approximately $10 million a year ago and $19.2 million in Q1. For 2008, we continue to target CapEx of approximately $55 million to $60 million.

Accounts payable balances declined to $72.3 million from $74.5 during the quarter and we decreased our deferred revenue balance to $23.5 million during the quarter from the Q1 balance of $25.1 million. We are continuing to carefully manage our environmental liabilities and we are steadily reducing our exposure in this area. At June 30, our balance of environmental liabilities stood at $187.3 million compared with $186.5 million at the end of Q1. This increase was mostly impacted by the effect of foreign exchange and asset retirement obligations during the quarter. Managing this area will remain a key focus for us in 2008. Environmental spending during the second quarter was $2.2 million compared to $1.7 million in Q2 of '07.

Looking forward to our guidance, we currently expect revenue in Q3 to be in the range of $270 million to $275 million which represents a 10% to 12% rate of growth year-over-year. We expect EBITDA in the range of $45 million to $47 million which represents year-over-year growth of 17% to 22%. For the full year, we now expect 2008 revenues to grow at the high end of our previously announced range of 8% to 10% and EBITDA to grow at the high end of our announced range of 20% to 22%.

Before we open this call up for questions, I wanted to update you on the status of our financing arrangements. As most of you know, we had the ability under our credit agreement to call $50 million of the $91.5 million of our 11.25% senior secured notes that we had outstanding. Based on the proceeds from our offering and after an in-depth review of our financing needs, we exercised this redemption and paid off that $50 million portion of our senior notes at the end of July. In connection with this redemption, we will record a $4.3 million charge below the EBITDA line in Q3 consisting of the $2.8 million prepayment penalty which we paid in cash to call the notes and 1.5 million in non-cash expense for the unamortized discount and unamortized financing costs related to these notes. The annual reduction in interest expense from this redemption will be about $5.6 million.

And with that, Operator, would you kindly open the call up for questions please?

(Operator Instructions). We will take our first question coming from Ted Kundtz of Needham & Co.

Hello, Alan and Jim that's a very strong quarter, good to see it.

Right. Thank you.

A couple of questions for you, if I got two. One, just on your EBITDA guidance for the year, if I look at what you have done so far and your forecast for Q3, it appears that the Q4 number would come down pretty decently to reach your guidance level. So I wonder if you'd comment on that. I assumed you're just being conservative here but I just wanted to see what you're thoughts on the Q4 implications are?

Hi Ted, its Jim. Again, as you know our forecasting process is robust. We go through and basically when we do our guidance we put out there what we know we can do and there might be an element of conservativism in that but again what we're saying is with our annual guidance that we definitely see ourselves at the high end of that.

Okay. But is there any reason why the fourth quarter would be coming down sort of significantly. It's seasonally it sort of down a little bit, I guess, over in the past but not that much.

Yeah. Usually with the winter months, there's a seasonal impact and it's tough to say just how the winter months which as you know affects our business, the timing of when that all starts and weather. So, perhaps there is the little bit of an element of conservativism but generally there is some seasonal impact in the fourth quarter. Absolutely, nothing like the seasonal impact that we see in the first quarter typically as you know but again there might be just a little bit of conservativism in there for that.

Okay. So nothing fundamental?

Nothing fundamental.

Okay. And then one other question, can you talk about you know what you're seeing with some of these captives? How is that evolving? Those captives, some of those captives coming off market and turning to you guys?

We continue to see opportunities with that Ted and I think the timing of adding the capacity in our plants is coinciding nicely with some of the bidding opportunities we see out there today so I think we're on track there.

Terrific! Thanks very much.

Yes.

Thank you. Our next question is coming from Larry Solow of CJS Securities.

Hi. Good morning guys.

Good morning.

Could you briefly discuss on the capacity, first of all the Canadian project. Is that some shut down? Is that now complete?

Yes. That was completed. It probably cost us about $900,000 in EBITDA, also. We had anticipated about $400,000 or $500,000 but it actually came in quite higher than that and that project took a little longer. We were expecting a little of more than three weeks and it ended up being a little bit more than four --.

Got it.

But we're in good shape up there now running and seeing the improvements that we had expected.

Okay. So I guess in the $2 million expense, was it capitalized expense that you referred to?

That $2 million was real assets that we added. We rebuilt our incinerator up there with brand new equipment. The $900,000 was purely P&L loss that we took.

Got you. And could you just give, I think, you said [site] services was up $10 million for the quarter? Was that a sequential number or year-over-year number?

That was year-over-year.

Year-over-year got you. And then lastly, your guidance, did you guys do any work on the oil spill on the Mississippi?

Yeah. We are actually in the middle of that right now and implied in our guidance, it's roughly $5 plus million for Q3 with that. But it's hard to predict what the total will be --

Okay.

Because it's under way right now but that's about where we're conservatively estimating right now for Q3.

Got you. Great, okay. We look forward to see you next week at our conference. Thanks.

Okay. Thank you.

Thank you. Our next question is coming from David Manthey of Robert W. Baird.

Hi. Good morning.

Good morning.

I was wondering if you could talk about the comment you had earlier about acquisition review work and professional services. Is that related to future acquisitions or is that sort of an ongoing expense? I hadn't heard you flag that before and I was wondering if that's an unusual event.

Yeah. That's related to future acquisitions when we did our equity offering, one of the key reasons for doing that were some opportunities that we see out there so we're in the throws of that kind of review right now.

Okay. And then in terms of paying down $50 million of the 11.25 notes, does this signal anything regarding the acquisition environment in terms of the size of potential targets out there or as you look at that, would you medium term, would you think about refinancing that anyway to try to get the rate down from where it was?

It's really financing it; the 11.25% rate as you know obviously and implied by your question is quite high and so we just wanted to get out of that clearly. It doesn't threw any signal about the size of opportunities that we would be looking at because if it were large enough, we would definitely refinance it and still do a better rate than what we had.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Jonathan Ellis of Merrill Lynch

Thanks and good morning guys.

Good morning.

I'm wondering if you could talk a little about the landfill side of business and specifically you mention that you are trying to walk away from some projects that carry lower margins and instituting some pricing discipline. Can you talk a little bit about how your competitors are reacting to this move, whether they're starting to follow on the same path or are still pricing aggressively for market share?

You know I think where we see large projects historically is some real aggressive pricing and I don't think that's really changed. When we're looking at 30,000, 40,000, and 50,000 tons projects today, we have seen some really aggressive pricing out there and quite frankly our landfill space is valuable and it's really looking at you know how much of that air space do we want to use and what's a good return on our investment and so we try to do a good analysis of these projects as we bid them and in some cases, we have not been successful on some of these projects knowing that we are going in with a much higher price but realizing that our space is valuable and we want to have it available for the good projects and the profitable projects out there.

Okay. Great. And then just maybe since I only have one other question maybe combine two in one here. Can you talk a little about how the integration of Universal Environmental is going, what you may have learn from that experience given it is the first site services acquisition you completed in over a decade and then following on that the acquisition pipe line. Right now, what's the next between site services and tech services companies?

I think that universal environmental acquisition worked really well for us. We're enjoying some nice relationships, new relationships with some key clients in that market out there, the Northern California Market. We benefited from some recent spill activity in that market that we wouldn't have had in the past and I would think, overall, we're quite pleased with the team that we have out there and the work that they're doing. There are a lot of opportunities like Universal Environmental out there, but equally opportunities on the tech services side for us and our preference is to acquire some companies that can help drive some volumes into these fixed cost facilities that we have particularly our landfill incinerations. So our focus is much more on the collection side and for those site services types of companies who have good waste customers, waste generation customers that can help us fill our sites up.

Thanks guys.

Yeah.

Thank you.

Thank you. Our next question is coming from Rich Wesolowski of Sidoti & Co.

Thanks a lot. Good morning.

Hi. Good morning.

Is there any way you guys can quantify how much of the April price increase was reflected in this June quarter?

As you know, the price increase was effective in April but there are notice periods and contracts. So there certainly was some impact during the quarter but I think most of it we will see in the latter part of the year and into next year, because our notice periods run from 90 days, 120 days depending upon the contract. Certainly new business is at the new prices.

Okay, so at the very least you would expect at least whatever contribution you got in June in the subsequent quarters.

Absolutely.

Okay and then secondly, my understanding of the landfill business is that once you get to covering your fixed cost, any volume you drive through there, be it low margin business or high margin business really exploits the operating leverage and I am trying to reconcile that notion with the very volatile volume changes that you report quarter to quarter with your landfill business.

I think, Rich when you look at the landfill part of our disposal business you're really talking about a combination of base business and project business and it really is the project business which is somewhere around half but it depends upon which quarter are you talking about because it is lumpy. You get sometimes delays in projects and sometimes you get large inflows of waste streams during particular quarters. So it is a lumpy business and it is what causes that volatility, if you will, or lumpiness. It's not as volatile certainly like the emergency response which is not a big part of our business but there you see more volatile kind of activity where it is hard to predict and we tend to not even put that in our guidance unless we know about it, but on projects you will see a little bit of that lumpiness and as Alan pointed out it's an ROI decision for us. We look at our landfills and we run a return on investment for each of them and we make decisions about projects and the bidding that we do to make sure that we get a good ROI for each particular landfill. I don't know if that helps but that was just a little bit of background of the way we look at it.

No, it certainly helps. And then finally just to clarify on a previous point. Your actions to ditch lower margin projects in landfill is distinct from pricing increases that you have another projects or you're just getting higher prices because of the improved mix?

Well, when the base business is not there, that's part of our normal business coming through from customers destined for landfill. As you also see waste streams destined for incineration. So, there the pricing is with the normal increases that we've been talking about but the project business, we make individual decisions about projects as they come in at the pricing level that we will be at.

Thank you very much.

Thank you.

Thank you. Our next question is coming from Jamie Sullivan of RBC Capital Markets.

Good morning, thanks.

Hi Jamie.

Hi. Quick question on the M&A pipeline, can you just talk a little bit about some of that activity and how the opportunities are moving through and any changes there?

We continue to look at a number of opportunities. We've been spending quite a bit a time with our teams here doing due diligence on some key targets out there and we're optimistic that there will be some nice opportunities for us that will fit well with our business and our model here.

Sure. What's the pricing environment like for targets, are they reasonable?

It's really all over the place. As we said in the past we normally look at their historical profitability but how does putting the two companies together reduce costs across the two businesses and how do we really leverage again our infrastructure across our targets and so -- but I would say that since the credit crisis a year ago in August, we've seen less private equity involvement in our industry and maybe evaluation is coming down. And being more realistic, we did pass on quite a few at the end of last year simply because the expectations were much higher but we are seeing some things come back today that we think are a fair evaluation for us.

Okay. Great. Then on -- just a quick question on the solvent recovery plan, do you think about those in terms of capacity and if so just what the capacity is today?

Sure, I would say that all three of them are probably less than 50% if we looked at it from a capacity utilization. We have a lot of growth opportunity there. Although we've made some nice improvements but when we acquired them, they're profitable, they're doing well for us but we see a lot of upside in the solvent side.

Great. Thank you.

Yes.

(Operator Instructions). Our next question is coming from Rich Wesolowski of Sidoti & Co.

That was a pretty quick turn around. I just want to circle back and ask you what you are hearing on your weekly calls about the event-driven landfill market for the next 6 months or so or at least as far as your forecast relative to what it would have been, say two quarters ago.

I think it's up by -- we have a very strong pipeline of event business for our landfills. We got a great team in place that manages outside of our business for us and as Jim mentioned, sometimes the timing pushes from one quarter to the other but we have a good book of business right now and we're excited about it, both in US and Canada quite frankly.

Okay then finally, I know you had some atypical overhead or SG&A expenses in the quarter that propped it up a bit but it has been growing ahead of the sales rate for full year now, can you discuss how any of the cost containment efforts that you have going on and noted in the press release you've elected at that line item.

Yes. I guess if I were looking at the rest of the year I would say that we're probably going to be in about 16%, right at about that level as opposed to the 15.5% that we were previously talking about only because we do have activities going on, centered around acquisition review and so forth. I will note to you though that last year we had about a $1.5 million of a credit in environmental liability in the first quarter of last year and that kind of brought the SG&A rate down a little bit last year, so we're not -- we're bringing it down but not by as much as we had earlier guided because of some of the activities that we have going on here.

Thanks again.

Okay, you're welcome.

Thank you. Our next question is coming from Ted Kundtz of Needham & Co.

Jim, s question for you; is there any thoughts about paying down more of the debt?

This is Ted?

Yes it is.

Hi Ted. Yes, the intention is to first get more visibility around what we will be doing with the -- on the acquisition front here, rather than go straight out and do an amendment to our existing credit agreement to be able to go beyond that $50 million and do the other $41.5 million. We want to first see if we are going to be doing any refinancing of our entire credit agreement, say for example if we were involved in significant acquisition activity because it is expensive to do amendments these days and it just -- we think it's wiser right now to just give this a little more time but clearly we want to get out of the high yield debt that we have right now.

Right, okay and Alan just a follow up for you, can you give us any sense of the likelihood of some acquisitions before year end, is that putting you on the spot too much or?

Yes, I would, I certainly think that we have enough opportunities far enough down the pipeline here that we hope that we will be seeing something this year but we don't want to guarantee anything at this point until we know for sure.

I understand.

I mean that's certainly had been our goal. We've been spending a lot of time in this area and that was one of the reasons for the secondary stock offering we did as you know.

Right. 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 management for any closing or additional remarks.

Okay, thanks very much for participating on our call this morning and we look forward to speaking with you at the end of our third quarter and updating you on our progress. Thank you.

And that concludes our conference call. Thank you for joining us today.