Clean Harbors Inc (CLH) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to Clean Harbors' third quarter 2008 conference call. Today's call is being recorded.

(OPERATOR INSTRUCTIONS)

At this time, for opening remarks and introductions I would like to turn the call over to Mr. Bill Geary, Executive Vice President and General Counsel of Clean Harbors.

Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us 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 third 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, November 5, 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 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 you that today's discussion will include references to 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 non-GAAP financial measures to the most directly comparable GAAP measures is available in Clean Harbors' third quarter news release. A copy of this release can be found on our website, CleanHarbors.com. A copy has also been furnished as an 8-K with the Securities and Exchange Commission.

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

Alan?

Great. Thanks, Bill, and good morning, everyone.

Clean Harbors delivered another record quarter in Q3. Our incineration business continued its strong performance. We benefited from some emergency response revenue, and the acquisitions we've made in the past year performed well. We achieved our guidance for the quarter, despite some challenges presented by an extended hurricane-related shutdown at our largest incineration facility and the costs related to a major M&A transaction that we ultimately walked away from, which I'll talk about later in the call.

We set a new quarterly revenue record of $273.2 million, which is up 11% over last year. We also had a strong quarter from a profitability point of view. Despite the two items I just mentioned, our EBITDA growth still far outpaced our revenue, increasing 18% year over year, to a record $45.4 million.

Let me start by taking you through our business and how each performed in the quarter.

Technical Services extended the momentum it has demonstrated throughout 2008 with another outstanding quarter. We continued to succeed at winning a variety of projects, generating a steady stream of clients into our network of disposal facilities. Overall utilization at our incinerators, which reflects the 21,000 tons of capacity we added in the first six months of the year, was approximately 93% for the quarter. This number is significant for two reasons.

First, the investments we've made to enhance some of our Canadian facilities, including a $2 million upgrade we completed in Q2, are paying off. In fact, for the first time in many quarters utilization at our Canadian locations exceeded their US counterparts. Utilization in Canada was 96% in the third quarter, with the US achieving 91%.

The second major factor influencing our incineration business in Q3 was the shutdown of our Deer Park facility for five days as a result of Hurricane Ike. We estimate that the business interruption created by the hurricane cost us between $5 million and $7 million in revenue and between $1.5 million and $2 million in EBITDA. These figures include the weather-related slowdown that also has affected many of our customers in the region during the hurricane. Despite the interruption at Deer Park, our continued high level of overall utilization allowed us to better manage our mix of materials and optimize our profits.

In addition to the 21,000 tons of incineration capacity we brought online in the first half of the year, we added 7,000 tons in new capacity to our incinerators during the third quarter. We remain on schedule to meet our previously stated goal of adding at least 50,000 tons of incineration capacity to our network by mid-2009. We expect to have approximately 42,000 tons online by the end of this year, and the remainder will come online by the middle of next year.

Turning to landfills, our performance was somewhat mixed in the quarter. As we predicted on our last conference call, volumes were up sequentially, rising 16% in Q3 from Q2. On the flip side, we were down 36% compared to what was a very strong period for our landfill business in Q3 of '07. This business has historically been lumpy due to our reliance on large projects to drive significant amounts of volume. In the third quarter, we continued to experience some softness as a result of ongoing delays with some large projects that have been pushed back further than we originally anticipated. While some of these large projects may face further delays, we remain confident about the prospects for our landfills and the pipeline we see for that line of business.

In terms of our storm recovery business, just a quick update. The Chicago and Hebron facilities that we acquired earlier this year continued to perform on plan in the third quarter. At our El Dorado plant, operations continued to run smoothly. Overall, this business remains a promising opportunity for Clean Harbors, and we are pleased with its contributions to date.

Turning to our Site Service group, for the third quarter we achieved a revenue increase of approximately $23.5 million, based on continued growth within our key verticals, contributions from the Universal Environmental acquisition we completed earlier this year and emergency response related to two primary events. We saw strong Site Service contributions from clients within the petrochemical, specialty chemical and utility industries. The Universal Environmental acquisition has greatly strengthened our West Coast presence by providing us with a significant presence in the Northern California markets, and we're pleased with how that group has performed since joining the Clean Harbors team.

Looking at emergency response, there were two events that combined to generate $9.1 million in Q3, a major oil spill on the Mississippi River and work in the Gulf region related to the hurricanes. The Mississippi spill, which we mentioned on our Q2 call and was included in our Q3 guidance for $5 million, ended up being $7.8 million and was essentially wrapped up by the quarter's end. The work we received from the hurricanes amounted to $1.3 million. Based on where we are today, we believe we can see an additional $3 million in Q4. In total, the hurricane-related revenue will not offset the Deer Park shutdown that occurred in September from Hurricane Ike. In addition, it's important to understand that the margins on incineration business, particularly when the plants are running at high capacity, is higher than the emergency response work that generally involves a lot of billable personnel.

Every quarter we provide you with an update on the expansion of our Site Service locations, a key component of our growth strategy for that business. Coming into Q3 we had opened branches in Milwaukee and Memphis, as well as two branches we added through Universal. During the third quarter we opened a new branch in Ryley, Alberta, expanding our Canadian presence. With one additional branch opening planned for Q4, we'll meet the high end of our goals for 2008 of opening five to six new offices.

Now I'd like to spend a few minutes discussing the M&A transaction that we walked away from in the third quarter. While I'm sure some of you will have some questions about the transaction, we cannot get into any specifics, since it's covered by a confidentiality agreement. Even though the acquisition did not take place, we thought it was prudent to notify the market of it because it related to expenses were significant enough to affect our Q3 bottom-line results and it commanded a lot of management's time, energy and resources in the quarter.

While there were many positives to the potential acquisition, we ultimately walked away from the deal after extensive due diligence and negotiations. We estimate the transaction resulted in approximately $1.5 million in professional and legal expenses alone. We had been in discussions with this particular target for some time and had capitalized some costs related to the deal. As a result of not pursuing it we absorbed the full $1.5 million expense in the third quarter. In hindsight it was a good decision, as valuations have dramatically fallen since that time, given the disarray in the equity markets.

We see a lot of promising options still available to us. Our acquisition pipeline has attractive candidates both on the tech and Site Services side. With more than $270 million in cash today, we continue to see excellent opportunities for us to apply our available capital.

Turning to our bottom line, we achieved our EBITDA guidance, with a record $45.4 million, which translates into a margin of 16.6%. Given the lack of large projects in our landfill business and the external cost pressures we faced in the quarter, we're happy with our strong performance. It's a credit to our entire team and proves how well our cost reduction and cost control initiatives are working.

We continue to successfully combat higher fuel costs through pricing initiatives and our fuel surcharge program. Year over year, our Q3 fuel cost rose 75%. We have been able to once again mitigate the majority of that multimillion dollar increase by passing much of it through to our customers.

Another example of how we're managing our costs is in our ongoing commitment to reduce our outside transportation expense. Despite our 11% growth in revenue, we lowered our total outside transportation expense by $2.9 million as we expanded our internal transportation fleet, made better use of our rail capabilities and captured increased efficiencies. On a percentage basis, outside transportation represented only 5.1% of revenues, compared with 6.8% in the same period of 2007. We believe our internalization program has proven very effective, and we expect these costs to trend down further. During the third quarter we continue to aggressively hire drivers and add vehicles, and for the year we have now added approximately 50 drivers and tractors.

In terms of our overall head count, we ended the third quarter with 4,980 employees. In keeping with our efforts to lower our non-billable head count, we recently initiated a small workforce reduction that will further improve our efficiencies going forward. In recent weeks we eliminated approximately 200 non-billable positions, mostly through process improvements, system enhancements and organizational changes. As a result, we will incur roughly $2.2 million in severance expense in Q4, but we expect the cost savings to offset the charge during the quarter.

We see an opportunity for us to be more aggressive in terms of sales penetration and will be hiring in the areas of sales and marketing. Our plan is to hire 40 additional sales and marketing personnel. We believe that with a well-known brand, an outstanding reputation, our vertical market expertise and a strong balance sheet that we have an opportunity to gain market share during this time of economic uncertainty. Going forward, the net effect of the workforce reduction combined with the added sales and marketing personnel cost will result in annualized cost savings of approximately $8 million.

With that said, let me close by saying that we're very pleased with our Q3 performance, particularly in light of the number of factors that affected our results in the quarter. Going forward, we remain confident that we can extend our momentum, continue to generating strong results. In addition, we remain well capitalized in an extremely tight credit market, providing us with yet another competitive advantage.

Our record performance in the first nine months of the year demonstrates our ability to leverage our leadership position in a unique array of diverse environmental services. We expect to conclude the year by capturing our stated goal of $1 billion in annual revenue.

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

Jim?

Thank you, Alan, and good morning, everyone.

As Alan mentioned, Clean Harbors completed a strong quarter, generating record results in a number of categories, beginning with revenue. Q3 revenue increased 11%, to $273.2 million, compared with $245.5 million in the year-ago quarter. Gross profit for the quarter grew to $86.1 million, translating into a gross margin percentage of 32%. This compares favorably with a gross profit of $76.5 million and gross margin of 31% in the year-ago quarter.

Selling, general and administrative expenses in the quarter totaled $40.7 million, up $2.6 million, or 7%, from the third quarter of 2007. Two items of note under SG&A this quarter. As Alan mentioned, there was a $1.5 million charge in professional fees and legal expenses related to the M&A transaction that we decided not to pursue. Partly offsetting this, we benefited from a $1.3 million environmental credit during the quarter. Our SG&A as a percentage of sales was 15% of revenue, compared with 15.5% of revenue in Q3 of 2007.

Accretion of environmental liabilities was $2.7 million in Q3 of 2008, which was flat against Q3 of 2007.

Depreciation and amortization expense rose to $11.4 million, from $9.8 million in Q3 of '07, mainly due to the acquisitions we completed in the last 12 months.

Q3 '08 operating income increased 20.8%, to $31.3 million, from $25.9 million in the third quarter last year. Our growth in operating income was driven by the combination of higher revenue and higher margin product mix.

We achieved record EBITDA of approximately $45.4 million, or 16.6% of revenue. This compares with $38.4 million, or 15.6% of revenue, in Q3 of 2007. As we continue to grow revenues at a far greater rate than our operating expenses, we are expanding our EBITDA margin based on the leverage in our network.

Net interest expense in Q3 was $1.9 million, which was lower than last year's figure of $3 million, reflecting interest earned on the proceeds from our follow-on offering and the $50 million reduction in debt that we did mid-quarter. In connection with the $50 million redemption, we recorded a $4.3 million charge below the EBITDA line consisting of a $2.8 million prepayment penalty for calling the notes and $1.5 million for the unamortized discount and financing costs related to these notes, which is a non-cash expense. The annual reduction in interest expense from this redemption will be approximately $5.6 million.

Our provision for income taxes was $10.4 million, compared to $10 million in Q3 '07. Our effective tax rate for Q3 was 41.5%. FIN 48-related interest charges amounted to $1.2 million during the quarter, representing about 5% of our effective tax rate. We anticipate our overall effective tax rate to be between 42% and 43% for the year.

Third quarter net income available to common shareholders was $14.6 million, or $0.61 per diluted share, based on 23.8 million average common shares outstanding. Net income for Q3 '07 was $12.9 million, or $0.63 per diluted share, which was based on 20.7 million average common shares outstanding. Our Q3 2008 net income includes the pretax charge of $4.3 million related to the early extinguishment of debt. If you tax-affect that change, it lowered our EPS for the quarter by approximately $0.11 per share.

Turning to the balance sheet, we have a very strong cash position. Our balance of cash and marketable securities at the end of Q3 was $253.4 million. This compares with $282.3 million cash balance at the end of Q2, reflecting the $50 million debt payment in the quarter as well as our solid cash flow generation.

Total accounts receivable stood at $196.7 million on September 30, and DSO came down once again, to 68 days, compared with 69 days in Q2 and 76 days in Q3 '07. We are pleased with this performance, which highlights the ongoing commitment across our entire organization to limit our collection period and further improve our cash flow. We continue to target DSO below 70 days going forward.

Capital expenditures came in as expected, at approximately $9.1 million for Q3. This compares with approximately $8 million a year ago and $10.9 million in Q2. For 2008 we continue to target CapEx of approximately $55 million to $60 million.

Accounts payable balances slightly increased, to $73.3 million from $72.3 million in the second quarter, as did our deferred revenue balance, to $25.8 million, compared with a balance of $23.5 million at the end of Q2.

We're continuing to carefully manage our environmental liabilities and steadily lowering our exposure in this area. At September 30, our balance of environmental liabilities stood at $179.8 million, compared with $187.3 million at the end of Q2. This decrease was mostly impacted by the final settlement of two previously reserved environmental liabilities during the quarter. Managing this area will remain a key focus for us going forward.

Reflecting $5.7 million in one-time payments related to the settlements I just referenced, environmental spending during the third quarter was $8.5 million, compared to $1.5 million in Q3 2007.

Before commenting on our guidance, I wanted to mention that we are pleased to see that our company was recently added to the S&P Midcap 400 Index, which is apparently reflective of our industry representation, market capitalization and liquidity.

Looking forward to our guidance, we currently expect revenue in Q4 to be in the range of $261 million to $263 million. We expect EBITDA in the range of $42 million to $44 million, which represents year-over-year growth of 12% to 17%.

Let me now turn the call back over to Alan for some thoughts on 2009.

Thanks, Jim.

I'd like to conclude with some thoughts on 2009. We are in the early stages of our budgeting process, but we're looking forward to continued growth in revenue and profitability next year. There are obviously general concerns about the economy, but we are diversified across many industries, and we provide a wide range of services. And, as I mentioned earlier, we are adding approximately 40 new sales and marketing positions over the next quarter, along with expanding our marketing effort. And, as we have during the past several years, we're planning to open five to seven new service locations in 2009.

Site Service remains a highly fragmented marketplace, and we believe we have the opportunity to gain market share in the years ahead. In addition, we expect to make some acquisitions to penetrate new geographic areas in both the US and Canada in 2009. Some issues that remain outside of our control are the price of crude that impacts our fuel cost and fuel surcharge revenue, the Canadian currency that has weakened over 20% in the past year, and, to a smaller extent, the commodities market that impacts the resale of our copper and other metals and re-refined oil from our transformer services business. These are some of the factors that we're considering as we finalize our 2009 budget and lay out our plans for next year.

Based on current market conditions and absent the effect of any acquisitions, we currently expect to grow revenues in 2009 in that 5% to 7% range and EBITDA in that 10% to 15% range. And that's our initial take, and we'll be updating that forecast when we announce our Q4 results early next year.

And with that, operator, would you please call -- open up the call for questions?

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Larry Solow, with CJ Securities. Please proceed with your question.

Hi. Good morning.

Good morning.

Good morning.

Could you maybe just discuss, Alan, a little bit more on Ike and maybe its impact on some of your customers in the Gulf region going into Q4, and I believe maybe some of your competitors also had some issues down there?

Yes. You know, we were fortunate with our Deer Park facility that we were down for just the five days. The team did a great job of taking the plant down and dealing with the storm and then getting the plant, quite frankly, back up. We had some damage, but we had about 500 employees in that area home for quite a few days as they tried to recover for themselves personally as well as we tried to help our customers recover.

I don't think the Gulf is really anywhere near back to its normal state, if you would. There's a lot of cleanup still going on. There's a lot of work still to be done. And certainly our customers are ramping up. And also some of our competitors, as you mentioned, had a more difficult time getting power, particularly, and dealing with the water damage, particularly the mixing of the salt and fresh water for some of the cooling systems, that impacted our competitors and also our customers. So it was quite a lot of devastation with Ike in the Houston ship channel area.

Now, I believe (inaudible) was actually down for quite a while. And did that maybe help you capture some new business, or maybe when things normalize a little bit that'll show up more?

You know, we certainly try to help each other. While they were down, they had some clients that we could certainly help with them on, but they're back up and running, and from what I understand running fine. And we did not see any particular windfall at all from their shutdown.

Got you. And then just on the capacity, it looks like as the capacity rolls in, I assume that's mostly coming in on the US side. Is that correct, on your new capacity incinerator?

Yes, approximately. We did do some upgrades in Canada, as we mentioned.

Right. Right.

And we're seeing some nice improvements in flow in that plant up there now.

Right. So just a slight downturn, I would imagine, that would be in the overall capacity, but you're adding -- I mean, excuse me, in utilization -- but you're adding -- you added 20 million, so I would imagine that could actually start rising back into the mid-90s, from the 90% range you hit.

20 million or 21,000 tons?

21,000, I'm sorry, (inaudible).

Yes. That's true.

Right. That's correct, and certainly that's reflected in our utilization numbers. But, to your point, as we increase our volume there we'll see the utilization come back up. But we are including this utilization, this new capacity into our utilization figures as we're reporting them.

Got you. And then just a last question and then I'll get back in the queue. On landfill, I know you guys have talked about the Alberta project up and running. Was that one of the things that's been delayed, and then also how is pricing looking?

Yes, I think the delay we've seen in the oil sands business has been probably a six-month delay, from what we've seen. We're starting to get some business now with that project that we invested quite a bit in. We're hoping that that project continues and is successful. As the price of crude has been cut in half in six months, it's certainly setting tremors throughout the oil patch, if you would, and we're hoping that we don't get impacted in the long term, but it's something that we need to keep an eye on in the oil sands area.

Okay. And then I know you guys have mentioned kind of you're turning away some business or just increasing prices, and I see some of your competitors from their reports over the last couple weeks, that pricing still remains pretty good on the landfill side?

Yes, I think our pricing in landfill has been good. We mentioned, I think, on the Q2 call that we've been more aggressive in taking business that -- at a higher price. We -- I think we've been successful winning some business out there, particularly where we have a strategic advantage from a logistic standpoint. But overall it's still a very competitive business on the landfills.

Right. Okay, great. Thanks, guys.

Yes.

Thank you, Larry.

Our next question comes from David Manthey, with Robert W. Baird. Please proceed with your question.

Hi. This is Kyle O'Meara on the line for David Manthey. You mentioned that you'd seen some strength across your petrochem, speciality chem, utility customers, etc. I was wondering what you were seeing across maybe some of your other end markets -- sterile manufacturing, chemical education, what -- if you were seeing any signs of any weakness there or those are holding in pretty well, as well.

You know, we did see some slowdown in our refinery client spending in the quarter. We don't think that that's going to be a continuation of that slowdown. But it was -- you tend to do some shutdown work more in this time year. But I think we saw some real strength, quite frankly, in our -- our pharmaceutical business is doing quite well. Our hospital and university business is doing good. On the manufacturing side, some on the large, like aerospace and some of those we saw are kind of flat volumes because of some of the -- the strike that was going on, for example, and some of the impacts of that, labor issues. So I think overall manufacturing is kind of probably the most concerning for us as we look forward.

Okay. And then some nice savings on the transportation during the quarter. Could you give us an update on some of your cost reduction initiatives and facility efficiency procurement (inaudible) and if that kind of savings is in your 2009 guidance, as well? Thanks.

Well, I think each year we always try to target some key initiatives that will drive some cost out, and part of our head count reduction was part of that effort for next year. And I think on the procurement side, as we know, over the past year a significant amount of cost increases we've incurred because of fuel cost, whether it's in our chemicals and consumables, the fuel surcharge that we're seeing from our transporters, utility costs and the fuel surcharge we're seeing there. So we're certainly looking very closely at how we can now reverse that trend now that fuel has come down and try to go out on a procurement basis and really try to lower our cost of purchasing some of those things.

All right. Thank you.

Okay.

Thanks.

Our next question comes from Jonathan Ellis, with Merrill Lynch. Please produce with your question.

Thanks, and good morning, guys.

Good morning.

Hi, Jon.

The outlook you provided for the fourth quarter does imply some modest sequential deceleration, and I guess I just, in light of obviously what's going on in the economy I can understand being somewhat cautious, but I'm also curious, to what extent are you perhaps shifting the timing of incinerator shutdowns this year vis-a-vis past years, given economic challenges? Maybe if you can just help us understand how you plan to bring incinerators offline over the next few quarters for annual maintenance.

You know, I don't have that schedule in front of me. I will tell you that we are extremely busy with our incinerators. We have a solid backlog at our plants, and looking out even beyond the first quarter of next year. We see some weakness in the Canadian dollar. The fuel surcharge revenues will be less now, with the price of crude where it's out and the price of diesel coming down, which is certainly good news for our cost side but also good news from our customer side. We certainly continue to see some lingering impacts in the Gulf to our clients. And I think those are some of the factors.

And then as you compare this Q4 to last year, we had a very large event out in California into one of our landfills, and couple that with the large San Francisco spill we had out there, we're not seeing that yet. As I mentioned in my note here, there's about $3 million, maybe, baked into our forecast in Q4. It's still early. We still have a couple more months. But we finished October relatively strong, and -- but we are being -- we're cautious, and like everybody else is in this market.

Okay. Great. And if you could talk a little bit about your outlook for next year. And I know this year you were able to initiate, I think, around a 4.5%, 4.6% price increase in April. I'm wondering, can you talk about what you're baking in at this point? And I realize you still may be preliminary stages here, but even if you can give us a range of what kind of price increases you're planning to implement next year?

We certainly have some clients that are coming up on contract. And, as I've mentioned in the past, our particular focus has been on those clients that don't receive any kind of fuel surcharge. And that is still right out in the forefront of our pricing team here, and we believe we can continue to either get customers to accept a surcharge or provide some modest price increase to cover these costs that we all know were taken on. So we haven't yet firmed up exactly what our pricing percentage will be, but that price improvement team is in place working today on that initiative, and we expect it to be in place throughout next year to do the same thing.

Okay, maybe just to clarify there, in light of what's going on in the economy and perhaps some volume weakness at the margin in certain of your end markets, would you, I guess, still expect that pricing would be -- would show a positive trajectory next year, i.e., that there would be some increase across the board even in the face of perhaps a little bit more volume weakness in 2009?

I don't think across the board, all lines of business is probably a safe bet at this point. But clearly some selective increases where we know we need to, and some contracts we know we have to raise. And what that ultimately comes out on a percentage basis across the Company is too soon to tell, because it's still early. And we tend to come out with that in March, and that would be our time frame to make that announcement again in '09.

Okay, great. And just my final question, Jim, in light of the fact that this M&A opportunity fell through, what are your intentions with the rest of that callable bond that exists?

Right at this point, clearly with the credit markets where they are right now, the limitation that we have in our credit agreement, it's probably -- we don't think it's a good idea right now to seek an amendment to be able to do the rest of the callable bonds. That being said, right now we have a mandatory cash flow tender offer out there in accordance with those bonds, and we're -- and that's $19 million that is presently out there. And we are hearing back from some holders of those notes that they are perhaps interested. And we're thinking that we might get maybe at least half, I would say, of them back through that mechanism. And that's at a call price of [$104], which isn't too much different from the call price that we could call the bonds at if we didn't have a limitation in the credit agreement.

And just to be clear, half of the remaining $40 million or half of that $19 million?

Half of the $19 million.

Okay. Great.

And it could be more than that. There is interest in it, clearly, in doing it.

Great. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question comes from Jamie Sullivan, with RBC Capital Markets. Please proceed with your question.

Hi, guys. Good morning.

Good morning.

Good morning.

It is impressive that you gave 2009 guidance this early, given the current environment. Just wondering if you could talk a little bit more about some of the moving parts maybe across the segments that make you comfortable with that 5% to 7% top-line growth range.

You know, we have spent a lot of time looking at the impacts of our -- what a recession could do to our customers. We looked at the verticals we're in. We took a very detailed approach by industry to look at where we were in '07 against '07 budget. Same thing with our '08. And with the expansion that we have now planned for the number of verticals that we're focusing on, we believe we can now grow faster some of those smaller verticals that haven't had the same kind of focus that the seven top verticals we have -- the chemical, the petrochemical, the manufacturing, utility, engineering and consulting, transportation services piece. Those were the keys. And so we are looking at expanding into 12 full verticals. And we really believe that there's a lot of market share to be gained, both in the US and Canada, and that we can -- we have a lot of underutilized capacity in our plants.

And one of the things, quite frankly, that we're, I think, as a management team, looking at, is we want to be a leader in each one of the lines of business we're in. So whether it's our CleanPack business or our household hazardous waste business or our transformer services businesses, the lines of business we're in we want to be the number one player. And when we look at our share by line of business, we have a lot of opportunity here, and that's where we're going to put a lot of our focus over the next three years. And I think that's why we feel that we could come out early, because we know people are going to be concerned about '09. And so we wanted to be transparent, if you would, and make sure everybody gets the information at the same time in regard to what our thinking is for '09. So I hope that answers your question in regard to at least what we're thinking about.

Right. Okay. That is helpful. And just, I guess, on the Site Services side, as well, you still see that as a segment that can grow in the double digit range?

Absolutely. You know, there's -- it's a very fragmented market, as I mentioned. There's dozens and dozens of small and regional competitors out there. The Company has done a tremendous job on the health and safety side. We have now probably the lowest health and safety stats and the lowest EMR rating in the industry. And when you look at some of these large corporations, they look at that as one of the top decision points of who they do business with. And we want to go out there and expand our relationships with our key clients with those great statistics, if you would, and the great programs we have.

Sure. And if I could ask one more, on the M&A front, if you could, I guess, just talk about the one deal that you walked away from. Is that something that you could see coming back into the pipeline? And if you can just comment on what the remaining pipeline looks like.

Sure. I doubt on that one, but I would say that we're in discussions with both small and larger companies out there. Valuations have come down. We were competing with some private equity firms in the past on some companies, and competing at multiples of 9, 10, 11 times, which were way over our price range for times EBITDA. And so, quite frankly, we see opportunities out there at low multiples, with a little bit less competition with the credit markets being the way they are, and we want to take advantage of those. But that particular one is behind us.

Okay. Thanks, guys.

Thank you.

Thank you.

Our next question comes from Rich Wesolowski, from Sidoti & Co. Please proceed with your question.

Thanks. Good morning.

Good morning.

Good morning.

Alan or Jim, I realize the '09 guidance may not have been as precise a view as you normally provide early in the year, but when you look at the more cyclical industries -- the manufacturing, the chemical, etc., that you had mentioned -- can you reach that guidance if the volume from those industries actually declines rather than a mere slowing of volume in those industries? And is that at all in the expectation?

Again, we're early in the budget process, but we know that the manufacturing area, as Alan pointed out, has been flat recently, so we're not counting on any big increases in that particular vertical. In the chemical side, I think to the extent there are commodity chemical companies that we're dealing with -- yes, we kind of took some of that into consideration, that there could be flatness, and maybe not as robust as we've seen in the past.

But, again, we're early in the budget process. We tried to come through something as we typically do whenever we talk about guidance, what we think is doable. We see a path to getting there. Alan pointed out some of the smaller verticals that we're adding to, giving more attention than we have in the past. So I think all things considered that's the range that we felt comfortable with. But clearly we'll be giving a lot more color around that in March, as Alan pointed out, when we do -- with a firm guidance that's post our budgeting period.

Right. Would you expect that your now enlarged incineration fleet will stay fully utilized during a recession?

We're thinking that. I mean, clearly, in the project area, I mean, that's the area we're playing close attention to, to the reasons for delays. Most of the delays that we've seen now in our project business have been due to paperwork and approvals and things like that. But we kind of look at each one of them, because that's an area that could represent discretionary spending, to some degree. But, you know, you do have to do something with hazardous material, so -- customers in general that are producing them -- so we do believe that we'll still have good incineration capacity utilization figures going forward. It's part of the business, really.

Okay. And, finally, could you just give an estimate of your maintenance CapEx and a best guess of cash expenditures for environmental liabilities in an average year?

Yes, in an average year, our spending in the environmental area would be in the $8 million to $10 million range for the entire year. We had higher this last quarter because we did -- we finalized a couple of settlements that were in the reserve there. On the CapEx side, our maintenance CapEx is in the $25 million to $30 million range. We are anticipating next year being in the $55 million to $60 million range of spending again as we complete our incineration expansion and some other growth projects that we have planned for next year -- for example, cell construction and continuing to internalize our transportation fleet. So that's generally where we're at. I think beyond next year, absent the effect of any acquisitions, our spending could probably -- would probably come down overall to the more $40 million to $50 million range. But, of course, acquisitions are kind of -- we're acquisitive, and it's likely to change that formula a little bit there.

Great. Thanks a lot.

Thank you.

Our next question comes from Ted Kundtz, with Needham & Co. Please proceed with your question.

Yes, hello, Alan and Jim. A couple of questions for you. Have you guys quantified the impact of an oil price change on your business, like for every $10 change in the price of oil what that does for you one way or the other?

You know, one of the things that we -- with the fuel surcharge that we have, we -- that pretty much from an EBITDA standpoint covers us. So, in other words, we have, obviously, increases in our diesel usage during the quarter due to our transportation fleet, and the oil price works into our utility spending, our travel spending and some of the materials and supplies that we buy. So the way we look at this is that our recovery fee that we have as part of our revenues pretty much offsets that. So, really, to some degree we're indifferent right now, clearly, with these changes in the oil price.

Okay. So not much of a bottom-line impact one way or the other.

Yes, bottom line.

Yes.

I mean, clearly it affects revenues. I mean, on the invoices are surcharges, so clearly our revenues come down. But then we have the savings on the diesel usage, etc.

Right. Okay. (Inaudible). Does this affect the thoughts of these captives closing their facilities at all any sooner or later if their fuel charges are changing? One of the economic incentives there is for them to get out of the business, turn it over to you guys. Do you see any change in that thinking? And maybe you could update us a little bit on those captives out there.

Yes, we've seen -- I think we're at three now of the five that I had mentioned, and I still believe there's a couple more that are still on that decisionmaking process. And clearly, as natural gas is now down in that $6, $6.50 range, I think the pressure is not as great as when it was in the $10, $11. But fuel cost in general has a big impact on, certainly, their decisionmaking, as well as environmental expenditures on those sites. So we still think there's an opportunity there, both in the short term on those two and even on a longer term. And I think it's one of the reasons why our utilization is still pretty good this year even with the additional 21,000 or so tons that we've added.

Yes. Can you say what you've picked up from those folks in terms of capacity with tonnage?

You know, I know we've got one client, for example, 20 million pounds, so what's that? So it's quite a bit of material, a lower price material, a material that we're actually using as a fuel supplement, too, so it's lowering our energy cost. So that's one unit that went down that really helped us. I think probably overall maybe about 20,000 tons, I would say, is probably a good number to use.

Okay.

So we're getting some business.

Okay. Terrific. Thank you.

Yes.

Thank you, Ted.

There are no further questions in queue. I would like to turn the call back over to management for closing comments.

Well, thanks, everyone, for your call and your questions and for being on the call here, and we look forward to speaking with you at the end of the year and talk more about 2009 at that time. Thank you.

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