Charah Solutions, Inc.
Q4 2018 Earnings Call Transcript

Published: 27 Mar 2019

[Operator:]

Good morning ladies and gentlemen, and welcome to Charah Solutions fourth quarter and full year 2018 earnings conference call. At this time, all participants are in a listen-only mode. After today’s presentation, we will conduct a question and answer session and instructions will be given at that time if you would like to ask a question. I would now like to hand the conference call over to Steve Brehm, in-house counsel of Charah Solutions. Please go ahead.

[Steve Brehm:]

Thank you, Operator. Good morning and thank you for joining us. We hope you’ve had a chance to review the press release we issued early this morning. The press release as well as a supplemental investor presentation is available on the Investors section of our website at www.charah.com. Today on our call, we have Scott Sewell, President and Chief Executive Officer, and Nick Jacoby, interim Chief Financial Officer and Treasurer. Following their prepared remarks, we will be available to answer your questions. Before we begin, I would like to remind you that our remarks regarding Charah Solutions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls. Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the Securities and Exchange Commission, including our prospectus and our annual report on Form 10-K. We disclaim any obligation to update these forward-looking statements. During this conference call, we will make reference to non-GAAP financial measures. Reconciliations to the applicable GAAP measures can be found in our earnings release, supplemental presentation, and on our website. With that, I would like to turn the call over to Scott, our President and CEO.

[Scott Sewell:]

Good morning and thank you everyone for joining us today. I’m pleased to be speaking with all of you today as CEO, and I’m even more excited about the future for Charah Solutions today than I was when I started with the company in 2008. I’m honored to be taking on this new role and I look forward to building upon a strong foundation and executing on the strategy to deliver value to all of our shareholders by realizing our robust pipeline of opportunities. Another member of our Charah team has also taken on a new role. Nick Jacoby, who has been our Vice President of Finance since 2017, assumed the role of interim Chief Financial Officer and Treasurer in late January. We are pleased to have someone with his finance and public company experience in this role. Nick will address our 2018 financial results and 2019 guidance in more detail. Before we review our 2018 results and business developments, I’d like to start with why we believe there has never been a better time to be in this business. Regulatory and public policy trends are increasingly driving customer needs for creative remediation solutions, including those where beneficiation or ash recycling plays a significant role. Our ability to bundle our proprietary technologies with more traditional remediation approaches puts us in a uniquely competitive position to develop these creative and cost effective solutions. Virginia, for example, recently enacted legislation that requires at least 25% of the affected ash to be beneficiated. Growing concerns about potential groundwater contamination could stimulate actions in other states and require clean closure. Also, approaching regulatory deadlines are likely to increase utilities’ focus on developing their compliance plans. These developments have been key drivers of our expanding pipeline of opportunities. On the maintenance and technical services side of our business, we recently added coal, gas and biomass plant customers in different geographic regions, providing some valuable diversity to our traditional nuclear maintenance business. We think there are additional opportunities to further expand our footprint in this arena. 2018 was a year of significant accomplishments for Charah, which included launching our initial public offering on the New York Stock Exchange in June, making significant gains in market share for our environmental solutions and maintenance and technical services businesses as we took on more remediation projects and nuclear and coal plant maintenance work and increased byproduct sales, successfully integrating the acquisition of SCB, which demonstrated our ability to execute strategic transactions and has expanded our portfolio and beneficiation capabilities, rolling our proprietary ash recycling and slag grinding technologies at two facilities that are already attracting strong customer interest, expanding our robust pipeline of opportunities which includes more than $3 billion of outstanding bids, including several large scale remediation projects, some of which we believe will convert in the second half of 2019, refinancing our debt on improved terms which reduces our interest cost and improves our financial flexibility, finishing the year with an outstanding safety record, recruiting proven and exceptional talent to our company, and achieving record revenues and adjusted EBITDA that exceeded our expectations at the time of our IPO despite the unusually high levels of precipitation in key regions that adversely affected our businesses. With respect to weather, North Carolina and West Virginia, where we have significant operations, had their wettest years on record, while Kentucky, another key state for our operations, had its second wettest. Most of the impact was in the final third of the year, beginning with Hurricane Florence in September. Our maintenance and technical services businesses are generally not affected by weather conditions; however, sustained periods of heavy rain can delay work on remediation or pond excavation contracts. In our byproduct sales business, sales are affected by weather as a result of reduced customer demand, although typically these are made up in future periods. Before reviewing our other business, I’d like to provide an update on the Brickhaven contract and the River Bend pond closure. As we indicated in November, our customer, Duke Energy, elected to discontinue supplying ash to the Brickhaven site once the Riverbend closure by removal project was complete. This was strictly a business decision for Duke resulting from a change in law in North Carolina, and we continue to have a strong relationship with Duke. We had expected the completion of the Riverbend project to occur in December, but Duke continued supplying ash until earlier this month. With the project now completed, we are in the process of finalizing our costs and expect to receive a substantial cash payment from Duke for unrecovered project development costs in the second half of 2019. The payment will also fund site closure costs, and we expect to close the site over the following 12 to 18 months. I would like to make one other point on this development. As I’d noted, our 2018 results exceeded our initial expectations. This morning we introduced 2019 guidance that is below expectations; however, we think it’s more appropriate to look at the years together. 2018 results were better for the same reason the 2019 results are lower. We expected the Brickhaven contract would produce revenues and EBITDA over several years; instead, the contract was completed early because of a decision by the customer. We accelerated the earnings into 2018, but this left a gap in 2019 relative to what we have expected. Nick will cover the details, but at a high level this is what occurred. Next, I’ll provide an update on our other businesses, and I’ll begin with our technology initiatives. Since we spoke with you in November, we have opened our first slag grinding facility outside of Albany, New York which uses new patented technologies for grinding granulated blast furnace slag to create supplementary cementitious materials for SCMs. Facilities such as this one allow us to ensure a steady and reliable supply of fly ash and other SCMs for ready-mix concrete producers with relatively low cost profiles and the ability to scale up or down production quickly, based on market demand. We can be up and running within a few months and produce as little as 30,000 tons or more than 100,000 tons profitably. We believe there are compelling opportunities across both large and small markets where supply of fly ash is constrained. We recently began construction on two additional slag grinding facilities on the Gulf Coast and the west coast, and completion is expected in third quarter this year. We have another two sites in the planning stages and we expect to start construction within several months. At our terminal in Sulphur, Louisiana, we have installed MD618, our fly ash beneficiation technology which improves the quality of fly ash and increases the supply of marketable fly ash to concrete producers nationwide. We have had both existing and potential customers to Louisiana to see this technology demonstrated. Interest has been strong and we are currently negotiating with several prospective customers to begin deploying this technology in their businesses. We expect these initiatives to be growth drivers for our byproduct sales business as the launch of additional facilities is expected to generate incremental volume and revenue beginning this year, but more significantly in 2020 and beyond. In our byproduct sales business, we recently added a contract to market and manage coal combustion byproducts, or CCPs, for an AEP plant in Oklahoma. Since the beginning of the year, we are marketing fly ash in parts of Oklahoma and Arkansas. As we continue to expand our footprint west, we will further strengthen our multi-source materials network of more than 30 sourcing locations nationwide. In our remediation business, we signed several new remediation contracts with southeastern utilities, including one that began in the beginning of 2019 and another with a new customer that we expect to commence shortly. Within our fossils services business, we signed a five-year contract with East Kentucky Power Cooperative that will become effective on April 1 of this year. We also made significant progress in marketing our comprehensive suite of services to a broad mix of customers and power plants. Our Allied Power subsidiary, which to date has specialized in maintenance outages for nuclear plants, in January entered into a three-year maintenance modification and outages service contract with Arizona Public Service, the largest utility in Arizona and a new customer for us. The APS contract is an example of how we can take our proven capabilities in nuclear services and win similar types of work at fossil plants. Allied Power will perform a broad suite of maintenance, modification and outage services for six natural gas and two coal power plants in Arizona and New Mexico. This represents a new geographic region for us as well and we’ll be actively marketing our broad range of services with other plants in the region. We are also focused on strengthening our relationships with customers as a single trusted partner and expanding the range of our services to them. In January, we began work under a new three-year contract with Exelon, our nuclear services customer, to provide similar facilities maintenance work for four of the company’s gas fired plants in Texas and Alabama and a biomass plant in Georgia. This extension of our relationship with Exelon diversifies our business with them and gains us a geographic presence we did not previously have. Turning to our pending bids, in November we indicated we had more than $3 billion of bids outstanding. Since then, we have converted several bids into significant contracts and won several other small projects. While winning some bids and losing others, we have continued to grow the amount of pending bids, which is well in excess of $3 billion split roughly in half between our two segments. As we noted in November, some of the bids on the environmental remediation side are for larger, more complex, multi-year projects. We also have bids pending that if successful would bring some customer diversity to our nuclear services business. With respect to several of these projects, we could begin recognizing revenues in the second half of 2019 with a more significant contribution in 2020. Although we do not have complete visibility to the timing of the awards, we are confident that we are well positioned to capitalize on the significant opportunities before us and expect to have more to report on this front over the remainder of the year. Next, I’ll provide a brief update on regulatory developments. Legislation recently enacted in Virginia provides clarity to Dominion Energy regarding the planned closure process for their CCR facilities. The law provides for beneficiation of at least 25% of the ash and construction of new landfills to house the remaining removed CCRs. Dominion, one of our existing customers, can now move forward with plans for closure by removal of more than 27 million tons of ash in its CCR lagoons for four power plants. We see significant opportunities for our remediation business as well as our byproduct sales business over the next 15-plus years as a result of the legislation. We believe our MP618 technology positions us competitively with respect to new beneficiation business. Here and in other places, we see opportunities to bundle these capabilities to our competitive advantage. Earlier this month in an appeal involving the CCR rule, the DC Circuit Court of Appeals decided in the EPA’s favor, allowing the regulations issued by the EPA last summer to remain in place while the EPA reconsiders and issues final regulations. These regulations are required in order to conform the CCR rule with an earlier court ruling that expanded our addressable market by treating clay-lined units as unlined units and including legacy inactive ponds under the rules. We believe that the pending October 2020 deadline and the expanded universe of affected units are likely to focus utilities earlier than planned on developing and implementing plans for closure and in some cases construction of new landfill capacity. Additionally, we wanted to share our perspective on the recent utility data highlighted in numerous industry reports indicating potential groundwater contamination at or near coal plants and CCR disposal sites. The CCR rules requiring utilities to collect this data and also address the follow-up actions required by the utility owners of any pond or landfill that is statistically significant increase in a detected contaminant in the groundwater. The widespread reporting on this issue is another example of growing environmental concerns being raised about potential groundwater contamination which could result in remediation plans that create opportunities for Charah to provide environmental solutions. As I noted earlier, regulatory developments at both the federal and state levels are expanding and accelerating our business opportunities, which is one of the reasons that I am very excited about our prospects for growth. With that, Nick Jacoby will now provide more detail on our 2018 financial results and our 2019 guidance.

[Nick Jacoby:]

Thanks Scott. Although I’ve spoken with many of you in the analyst and investor community before, I’d like to take a moment to briefly introduce myself. I joined Charah Solutions in 2017 as Vice President of Finance, and I’ve been honored to serve as the interim CFO and Treasurer since January. I look forward to meeting many more of you as we get back on the road. This morning, I’ll review our 2018 financial results and provide more detail in a few areas where I think some additional explanation may be helpful, particularly with regard to the Brickhaven contract. I’ll also cover our 2019 guidance. As Scott noted, our results for 2018 exceeded our expectations at the time of our IPO. Revenues for the full year increased 72% to a record $740 million, which was ahead of our November 2019 guidance range of $720 million to $730 million. The $15 million beat versus the midpoint of our guidance range was primarily due to some non-outage related work under our Exelon contract and additional tons of ash supplied from Riverbend, both of which occurred in December. Gross profit increased 16% to $98 million. We had a GAAP net loss for the year of $9 million or a loss of $0.33 per share primarily because of a $20 million litigation reserve recorded in the third quarter and several other non-recurring or transaction-related expenses aggregating to approximately $11 million. Adjusted net income for the year, which excludes these expenses on a tax-effective basis, was $24 million or $0.92 per diluted share. Adjusted EBITDA of $99 million was within our guidance range of $98 million to $105 million. As Scott noted, our remediation and byproduct sale businesses were affected by unusually adverse weather in the final month of the year. In addition, due to the continuing receipt of ash from Riverbend into 2019, we did not accelerate as much Brickhaven EBITDA into 2018 as we had anticipated when we provided guidance in November, although this EBITDA was booked in the first quarter of 2019. Absent these two factors, we would have been at the high end of our 2018 guidance range. Turning to a discussion of each of our two reporting segments, in our environmental solutions segment, we generated record revenue of $343 million, an increase of 43% from 2017, reflecting the acquisition of SCB in March 2018 with the remainder primarily attributable to the accelerated completion of the Brickhaven contract, partially offset by the roll-off of other remediation contracts. Gross profit increased 5% to $69 million while gross margin declined to 20.2% from 27.4% in 2017, primarily due to a change in the mix of remediation contracts, adverse weather, and the acquisition of SCB for which the base business carries lower margins than the new technologies being rolled out. In our maintenance and technical services segment, revenue more than doubled to a record $397 million and gross profit increased 54% to $28 million, primarily attributable to a full year of nuclear services offerings. Gross margin declined to 7.1% from 9.6% in 2017, again due to a full year of nuclear services offerings which carry a lower margin than our fossil services business. Next, I’ll provide a bit more color on how the Brickhaven accelerated completion affected our 2018 financial statements and why it is the most significant driver of our lower EBITDA guidance for 2019. As Scott noted, we think it’s useful to look at the two years together rather than separately because the Brickhaven early completion pulled earnings from 2019 into 2018. Brickhaven is very different from our other remediation projects because we own the site, which we purchased, developed and permitted several years ago. It required significant capital investment by us. This was done in conjunction with a contract under which our customer would supply ash that we would store at the Brickhaven site and an adjacent mine owned by us and we would then be reimbursed for our costs, including a return on a per-ton basis. Riverbend is a retired power plant that is one of two from which we source ash, but the contract contemplated follow-on sites aggregating to approximately 20 million tons of ash that would be supplied to these mines. As Scott noted, due to a change in North Carolina law, the customer determined that it would not supply ash to these mines once Riverbend was completed. Under the terms of the contract, we expect to receive a significant payment from the customer for unrecovered project development costs and expected site closing costs. The early completion of the Brickhaven contract affected our 2018 results and 2019 guidance in three significant ways. First, under percentage of completion accounting we accelerated revenues and expenses, including depreciation and amortization, related to this project from 2019 into the third and fourth quarters of 2018. This has a net benefit to gross profit, but the benefit to adjusted EBITDA was significantly greater because of the capital intensive nature of the Brickhaven asset and the acceleration of depreciation. Of the $49 million of depreciation expense we recorded in 2018, approximately $38 million was for Brickhaven and related equipment. Had we not had an early completion of the project, depreciation would have been significantly less. We also recorded $15 million of amortization of a purchase option liability related to Brickhaven, which reduced G&A expense. Net of this negative amortization, total depreciation and amortization associated with the Brickhaven project was $23 million. We also recorded revenues under the contract to cover this expense. Because the Riverbend project was completed in March 2019, the amount of revenues and depreciation associated with Brickhaven in 2019 will be substantially lower. Going forward, we expect that the cost of goods sold will be more closely aligned with cash costs consistent with the less capital intensive nature that is typical of most of our remediation projects. The second way that Brickhaven affected results is through the build-up of unbilled cost on our balance sheet, shown as costs and estimated earnings in excess of billings, or CIE. This reduced operating cash flow by $79 million, which resulted in operating cash flow for the year of negative $14 million. Nearly all the build-up in CIE Is associated with Brickhaven. As we substantially recover that amount later this year, these working capital balances will reverse, rendering us significantly cash flow positive. The third and final way that Brickhaven affected our 2018 results and our 2019 outlook is that we had expected additional revenues and gross profit associated with ash from additional sites that would have gone into Brickhaven beginning in the fall of 2018 and continuing through 2020. Given the timing of potential conversions for our outstanding bids, we were not able to offset this loss of expected revenues and EBITDA for 2019, but we expect to do so over time. I’ll close my discussion of our 2018 results with a review of our balance sheet and liquidity. At December 31, 2018, we had gross consolidated debt of $257 million. This was up from the September 30 level primarily because we drew $15 million on our revolver to fund litigation reserves and working capital needs. Our net leverage ratio was 2.5 times, unchanged from the previous quarter. Our liquidity was approximately $50 million. After we receive the Brickhaven-related payment later this year, we expect to repay a portion of our term loan and amounts outstanding under our revolver, which will strengthen our balance sheet and improve our financial flexibility; however, we expect our leverage ratio to increase over the course of the year because of lower expected EBITDA. Next, I’ll cover our 2019 guidance. We are providing guidance for revenues in the range of $650 million to $800 million. The guidance midpoint of $725 million is slightly lower than our 2018 revenues of $740 million but is generally in line with consensus estimates. At the segment level, we expect that environmental solutions revenues will be modestly lower in 2019 compared to 2018 due to the acceleration of the Brickhaven contract into 2018 and the timing of new business awards, partially offset by higher revenues in our byproduct sales business. We expect that maintenance and technical services revenues will be modestly higher in 2019 compared to 2018, with growth in fossil services offsetting the decline in nuclear services, which this year has only 10 scheduled outages as compared to 13 outages in 2018. Our 2019 adjusted EBITDA guidance is $50 million to $65 million. The decline from the 2018 level is primarily attributable to the early completion of the Brickhaven contract. As I noted earlier in my remarks, not only did this pull revenues and EBITDA from 2019 into 2018, it also resulted in the loss of revenues and EBITDA associated with the remaining 13 million tons of ash that we expected to receive in 2019 and 2020 from other sites. As a result, our revenue and EBITDA outlook for 2019 is lower than we had expected at the time of our IPO. I note that had the early completion of Brickhaven not occurred and instead we continued to receive ash from subsequent sites after Riverbend, the financial performance of the business would be in line with our projections at the time of the IPO. Relative to consensus expectations, our revenue guidance is in line but our adjusted EBITDA guidance is approximately $30 million lower; however, approximately two-thirds of that difference is due to depreciation and amortization expense, which we estimate will be approximately $20 million lower in 2019 compared to 2018, including the reduction in the amortization of the purchase option liability which is a credit to G&A expense. The remaining $10 million of the difference is due to lower gross profit than consensus estimates due to the mix of revenues between segments and their respective market profiles. As noted, we expect revenues in our higher margin environmental solutions segment to be modestly lower in 2019 compared to 2018, mostly offset by higher revenues in our maintenance and technical services segment. We expect that G&A expense after adjusting for non-recurring items and the amortization of the purchase option liability will be in the ballpark of the 2018 figure, or approximately $60 million. This is higher than consensus expectations which do not appear to reflect the significant reduction in the amortization credit. Please see the additional detail on depreciation and amortization and G&A expense included in our supplemental presentation. We expect interest expense to be significantly lower this year as a result of our 2018 term loan refinancing in the range of $13 million to $15 million, depending on the timing of debt repayment and the level of capital expenditures. As noted, we expect that operating cash flow will be significantly positive this year. Although we are not providing cash flow guidance at this time pending finalization of the Brickhaven-related payment, we plan to do so later this year. With respect to our capital expenditures, we typically group them into three buckets. First, we expect to invest approximately $12 million in replacement capex to replace or upgrade existing equipment as needed. The other two buckets, which account for most of our capital expenditures, are associated with new contracts and our technology initiatives. In terms of new contract capex or what we refer to as growth capex, what we spend is a function of the amount of new business we sign, thus it can be highly variable. We don’t purchase equipment on spec but only after signing the contract. Last year, our growth and replacement capex on a combined basis totaled approximately $32 million. We expect that 2019 will be moderately higher than that figure but it will be dependent on the timing of new contract awards. In the technology area, our current expectation is that we will invest $25 million to $30 million, but this estimate could increase or decrease over the course of the year as we continue the technology rollout. As noted, we are launching two additional slag grinding facilities this year with another two expected to start construction later this year. We expect these to provide incremental volume and revenue for our byproduct sales business with the full benefit in 2020. With that, I’ll turn the call back to Scott.

[Scott Sewell:]

Thank you, Nick. As you have heard this morning, we made excellent progress during the quarter in rolling out our technology initiatives. Customer interest in our MP618 and grinding technologies has been strong. We have begun construction at two additional sites and we are confident that these investments will drive meaningful growth in revenue and results. We are the market leader in ash excavation and we believe we have the leading technology in ash beneficiation. We think the combination of these will create opportunities that would not otherwise be available to us. We also made progress in cross-selling our services to a broader mix of customers and plants and signing new business with both new and existing customers. We expect to capitalize on favorable market dynamics and regulatory trends driving customer demand for creative and cost-effective remediation solutions. We expect that some of our pending bids in this area will convert to awards in the second half of 2019, continuing into 2020 and beyond. Looking ahead to 2020, we expect revenue growth of at least 20% from our 2019 guidance range driven by the size of our outstanding bid pipeline and the prospects for conversion in the second half of 2019 and 2020. Favorable market and regulatory dynamics, including growing concerns about potential groundwater contamination that we see accelerating remediation projects into 2020, and market penetration of our technologies with the potential to bundle our remediation and ash beneficiation technologies to our competitive advantage. We also expect improvement in our adjusted EBITDA margin in 2020 due to the higher margin profile of the expected growth in revenues and the ability to grow revenues without materially scaling up our G&A expense. In closing, we have strong confidence in and enthusiasm for the growth potential of our business. We have the necessary experience and the expertise to deliver competitive and innovative solutions for customers, and we have the right team in place to deliver. Before we turn to Q&A, I want to thank you all for joining the call. In the nine months since our IPO, I’ve had the opportunity to meet many of our investors and analysts. Nick and I look forward to meeting many more of you in the near future. With that, Operator, let’s open it up to questions.

[Operator:]

[Operator instructions] Your first question comes from Hamzah Mazari from Macquarie. Your line is open.

[Mario Cortellaci:]

Hi, this is Mario Cortellaci filling in for Hamzah. You guys just signed new contracts in the maintenance and with coal and gas plants. I guess I’m just curious to know what the maintenance portion of the business looks like in, say, five years. Does the coal and gas portion get bigger than nuclear, or a lot bigger than nuclear? Are the margins on the coal and gas maintenance higher than nuclear? Does that kind of offset some of the outages that you--I’m sorry, the likeliness that you’ll have fewer outages on the nuclear side?

[Scott Sewell:]

Yes, good morning, Mario. Good question. Again, we don’t typically speak at kind of that sub-segment level and bifurcate fossil from nuclear, but what I can tell you is that we’re going to continue to grow the fossil side as well as the gas side. We see a significant amount of work to be gained there, and then same on nuclear, we have some inroads. We believe we’re going to grow both sides of that business, and very, very pleased with our team’s work over the last several months actually, gaining work. We’re going to continue to broaden that customer mix.

[Mario Cortellaci:]

Got you. Just a quick question on gross margin. I know you gave some color in the prepared remarks on some of the drivers and the impact of Brickhaven, but would you be able to break down the impact of, say, weather versus the mix of contracts, and should we expect some kind of rebound in Q1 or would there be catch-up--at least from a weather perspective, would there be increased costs in doing some catch-up work into Q1 and maybe even Q2?

[Scott Sewell:]

Yes, I think there will be a portion of catch-up. I think in the prepared remarks, we were kind of specific in both weather and mix having an effect on us. Some of that weather we will not be able to recoup, some we’ll push, so if you’re looking at it as far as how we fared with actually results versus a range, I think it was kind of a split on the mix as well as weather, more of a 50/50 split.

[Mario Cortellaci:]

Got you. All right, thank you so much.

[Operator:]

Your nest question comes from Toni Kaplan from Morgan Stanley. Your line is open.

[Jeff Goldstein:]

Hey guys, this is Jeff Goldstein on for Toni. Thanks for taking my questions. With understanding that Brickhaven and some contract award timing is impacting your 2019 revenue, can you just expand on your confidence in growing revenue in 2020 by 20%, given the largely flat year-over-year growth you’re guiding to in ’19? Maybe you could just help us understanding directionally speaking how much growth would be coming from remediation versus byproduct sales versus fossil versus nuclear. Just any extra color there would be helpful.

[Scott Sewell:]

Yes Jeff, I think you kind of nailed it there. I think if you exclude the noise of the accounting on the acceleration of the project and you just think about the business in general, the fundamentals of the business are still there and extremely strong. That’s what excites us and that’s what gives us confidence in that 20%, at least 20% revenue growth. We really point to the size and quality of our pipeline, the prospects and the timing of the conversion of what’s in our pipeline right now. Again, we do have a long sales cycle in some of these, and as I’ve noted on the last call, what we’re seeing is larger projects, more complex projects, which is a good thing for us. A lot of these have 10 to 15-year terms, so good, strong, large contracts to build the future on, and then you see some favorable regulatory and market dynamics. I spoke to it a little bit in the prepared remarks, but really some strong tailwinds around that, and then just the ability for us to bundle our new technology with our remediation experience to give us that competitive advantage. Really, as we roll out the technology in both the MP618 as well as the grinding, we just see lots of levers for us to pull that are going to start coming to fruition here in the back half of ’19 and then really 2020 and beyond. That’s what’s exciting--that’s what excites me about being in my new role right now. There are just so many opportunities for us, the likes I haven’t seen in the industry in the last 10 years.

[Jeff Goldstein:]

That was helpful, thank you. Then I know you had mentioned not providing specific guidance yet, but can you maybe help us frame the absolute level of free cash flow in ’19? I know you mentioned your CIE balance of $87 million is almost all associated with Brickhaven and you expect to collect most of this in ’19, so should we be thinking of free cash flow starting in the ballpark of this $87 million number and then maybe offset by negative free cash flow across the remainder of the business? How should we be thinking about that in broad strokes?

[Scott Sewell:]

Sure, Jeff. I think like we stated, one of the very large positives around ’19 is the cash flow story, so Nick, do you want to provide a little clarity on that?

[Nick Jacoby:]

Yes, absolutely. It’s Nick here. As you mentioned, 2019, we do believe will be a great free cash flow year primarily due to the conversion of the working capital and the CIE that you discussed and mentioned there a moment ago. I think when you look into 2020, as we talked about going forward, we think we’ll also not have as much of the CIE-related contracts, so the free cash flow story going forward should be much closer and more normalized without all that working capital build-up, and we feel pretty excited about the next couple of years from a free cash flow perspective.

[Jeff Goldstein:]

All right, thanks a lot.

[Operator:]

Your next question comes from Michael Hoffman from Stifel. Your line is open.

[Michael Hoffman:]

Hi, thanks for taking the questions. Brian’s also in the queue, so we may overlap here. When I look at the guidance, we knew we were going to be down year-over-year in revenue because of the way Brickhaven played out, but the guidance on the EBITDA would suggest fairly significant margin compression across some part of the business model, and I apologize - I’ve been in other meetings and walked into this call literally two minutes ago, so if you’ve answered this, I apologize if you’re repeating it. Where in the [indiscernible] side of the business are we seeing margin compression that’s resulting in the EBITDA guide as it is, because the revs came out where I thought they would but the EBITDA is clearly a lot less, so I’m trying to understand where the margin compression is coming.

[Scott Sewell:]

Yes Michael, thanks for joining us this morning. It’s a good question as well. A lot of that is pointed towards the depreciation changes year over year. Nick, do you want to touch on that?

[Nick Jacoby:]

Yes, so here’s a very simplified way to look at the Brickhaven impact on the guidance. Again, remember it’s important to think about 2018 and 2019 combined, like we mentioned, and I think at a very high level--you know, when we came out pre-IPO, we said we thought we’d do, call it $84 million to $85 million of EBITDA in 2018. We ended up closer to, call it $100 million, so let’s just call that $15 million higher than what we put out. The early completion of the Brickhaven contract happened and that pulls in, just round numbers, $25 million from the future into 2018, so the question is okay, why were you $15 million higher in ’18 and not $25 million, and the difference is the additional ash ponds that we projected to start later in ’18 didn’t occur. Then when you get into the 2019 guidance and how it impacts there, that $25 million gets pulled out into 2018, comes out of ’19, and then the full year impact of those additional feeder ponds comes out as well, and that’s why guidance is lower. Now, if the early completion doesn’t happen, the additional feeder ponds happen, 2018 and 2019 still look pretty close to what we put out there in the IPO. It’s not really margin compression, it’s more [indiscernible].

[Michael Hoffman:]

Well I’m--so this is all remediation is the pressure, byproduct sales are still running somewhere in the low 20s of segment EBITDA, fossil services are still running in the low to mid-20s, 23 to 24, so this is all remediation, the margin and remediation is not running at 19, it’s got to be running closer to 12 to 15?

[Nick Jacoby:]

Yes, what I’d say when you speak to the specific margin portion of that, there’s not really a big margin driver in the segments as far as the numbers you noted. I’d say that when you think about how the EBITDA guidance is out there versus what we’d call consensus, only about $10 million of the difference is really tied to the actual business and that’s really not a margin impact amongst the individual segments but a shift of revenue between the segments. So from a weighted average perspective, the margin is a little big lighter, but not when you look on a segment by segment basis. The other $20 million or so versus consensus again is driven by the fact of depreciation and amortization impacts from Brickhaven. We believe a lot of the models aren’t taking into consideration how much of that D&A from Brickhaven goes away in 2019. We do have a slide in our supplemental deck, Slide 14, that will help clarify a lot of this for you, a lot of these impacts we’re talking about here.

[Michael Hoffman:]

Okay, and then I assume somebody’s asked about the $3 billion pipeline. You referred to it in your press release, but when do we see some of the conversion of that $3 billion of bids that are out? There was some thought that it would happen in 1Q and obviously it’s not, so when are we getting some of that coming in? Clearly it’s not in your guidance yet, I’m going to presume.

[Scott Sewell:]

Yes Michael, if you think about that pipeline and the conversion, we spoke to this a little bit ago as well, we expect those projects to convert here in the back half of 2019, providing us with large growth in 2020 and beyond. I think we can point to some recent conversions. I think we highlighted the APS work as well and several others here in the southeast, but the major projects we believe are going to be coming online here in the back half of the year. Again, deep knowledge of our customer base right now and those tailwinds supporting that give us a lot of confidence in the 2020 guidance.

[Michael Hoffman:]

And there’s none of that in your guidance, right?

[Scott Sewell:]

Michael, can you help me understand the question a little bit better?

[Michael Hoffman:]

Yes, so you haven’t assumed any of that converts as far as the current guidance, right? This is--there’s not upside in the revs assumption because you get a big remediation award from a couple utilities or a new nuclear contract from a different utility?

[Scott Sewell:]

We are making some assumptions that a portion of that does convert in our guidance, but obviously if all of it were to convert, then that would all be upside.

[Operator:]

Your next question comes from Steve Schwartz from First Analysis. Your line is open.

[Steve Schwartz:]

Hi, good morning, gentlemen.

[Scott Sewell:]

Good morning.

[Steve Schwartz:]

I guess my first question, just with respect to the new facilities in byproducts, are you expecting a significant contribution once they come on? I mean, when they come on, do you immediately begin selling or is there a ramp period that carries into 2020?

[Scott Sewell:]

Yes Steve, there’s definitely a ramp period. As these units come online here midyear and beyond, there will be a ramp into 2020, so you won’t see a full year of revenue or EBITDA associated with them in 2019. But again, these are long term plays when we put these technologies into place, so you’ll see full-year recognition in 2020 and beyond and again we’re talking seven to 10 years on a lot of these sites when we put them in place.

[Steve Schwartz:]

Okay, got it. In your prepared remarks, you talked a bit about your use of cash from the Brickhaven closure and paying down debt, but you noted that your leverage ratio would go up. Do you have a number in mind from where you’re reporting today?

[Nick Jacoby:]

Hey, it’s Nick here. I think we ended 2018 at 2.5 times, down almost a full turn from the IPO. As we mentioned, that ratio will increase between now and the time we make that pay down from the Brickhaven proceeds, but we see it ending the year similar, say between where we are today and maybe where we were pre-IPO, and then obviously as the EBITDA grows based on the pipeline conversion we talked about towards the end of the year and into 2020, we see it moving down further from there.

[Steve Schwartz:]

Okay. My last question is just with respect to the number of new business awards that you noted and what will be starting in 2019. Is there a revenue surge at the beginning of these contracts, and if so, can you give us an idea on perhaps what the timing of revenue flow through 2019 will look like?

[Scott Sewell:]

Yes, I think a good way to think about that is there’s not a big surge at the beginning. It’s more of a level approach. The technology, kind of to your prior question, will ramp, but our other projects as we bring on remediation projects is typically a very level revenue approach. That’s all built into the guidance.

[Steve Schwartz:]

Okay, that’s it for me. Thank you.

[Scott Sewell:]

Thank you, Steve.

[Operator:]

Again, if anybody would like to ask a question, please press star, one on your telephone keypad. Your next question comes from Brian Butler from Stifel. Your line is open.

[Brian Butler:]

Good morning, thanks for taking my question.

[Scott Sewell:]

Morning Brian.

[Brian Butler:]

Just a quick one, just to clarify on the capex for ’19, you said there was about $12 million replacement if you kind of come in total, you said something around $20 million, I guess for new contract vary that can growth, but that’s it. Was there another $25 million to $30 million of technology, so your total is somewhere around $60 million?

[Nick Jacoby:]

That’s right.

[Brian Butler:]

Okay. That was the one question I had. Thank you very much.

[Scott Sewell:]

Thanks Brian.

[Operator:]

I have no further questions in queue. I turn the call back over to the presenters for closing remarks.

[Scott Sewell:]

Thank you, Operator. Again, I just want to highlight both my excitement about being in the role, I know Nick’s been a great support to us, but very excited about the business as we move forward. Just talked to the fundamentals of the business haven’t changed and our excitement and confidence around our 2019 and 2020 outlook, and look forward to meeting all of you guys on the road . Again, want to thank you for joining us today. We look forward to seeing many of you on the road soon and/or at our annual meeting with the shareholders on May 10 here in Louisville. That will end the call. Thank you, Operator/

[Operator:]

You’re very welcome. Thank you everyone. This will conclude today’s conference call. You may now disconnect.