US Ecology, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Good morning, and welcome to the Fourth Quarter 2020 US Ecology, Inc. Earnings Conference Call. All participants will be in listen-only mode . Please note, this event is being recorded. I would now like to turn the conference over to Eric Gerratt, Chief Financial Officer. Please go ahead.

[Eric Gerratt:]

Good morning, and thank you for joining us today. Joining me on the call this morning are Chairman, President and Chief Executive Officer, Jeff Feeler; Executive Vice President and Chief Operating Officer, Simon Bell; and Executive Vice President of Sales and Marketing, Steve Welling. Before we begin, please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Since forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. Factors that could cause results to differ materially from those expressed include, but are not limited to, those discussed in the company's filings with the Securities and Exchange Commission.

[Jeff Feeler:]

Thank you, Eric and good morning, everyone. It is with gratitude for the tireless work of our US Ecology team members and their flexibility across our organization that I share the results of a solid quarter for the company despite the challenges faced. For those that are following the webcast presentation, I want to direct your attention to Slide 6. Our business continued on its path to recovery as evidenced by strong trends in the fourth quarter that have continued into early 2021. Total company revenue for the fourth quarter of 2020 was up 4% year-over-year and up 1% sequentially from the third quarter of 2020. Our field services segment led that way with double digit growth in revenue, which drove 57% improvement in segment EBITDA. The growth was particularly strong in our legacy US Ecology field services segment, which grew revenue by 16% in the fourth quarter and drove adjusted EBITDA up by 46%. Our base business revenue in our waste solutions segment saw 7% sequential improvement compared to the third quarter of 2020. Looking more specifically at trends in our base business, the month of December was the strongest month of the quarter, and resulted in a return to positive year-over-year growth compared to December 2019. The overall resiliency of our business augmented by the capital preservation and cost saving initiatives implemented earlier in the year resulted in 31% improvement in year-over-year adjusted free cash flow during the quarter. Overall, the company delivered adjusted EBITDA of $42.8 million in the fourth quarter of 2020 and would have been in the top half of our guidance range when factoring in the $2.7 million incentive plan adjustment we gave to our frontline workers and non-executive team members. Looking at the full year for 2020, the company achieved $934 million of revenue, adjusted EBITDA of $170.2 million and adjusted free cash flow of $68.8 million, up 45% from 2019 levels. Considering the difficult operating conditions that the pandemic created, our legacy US Ecology business had a solid year with 2020 revenue flat with that of 2019 levels, which was a record year for the company. Based business was down 7% on the lower industrial activity but was substantially made up by 20% increase in our event business. Adjusted EBITDA was down approximately 4% reflecting higher revenues in our field services segment as compared to our waste solutions segment. Legacy NRC was significantly impacted by the operating conditions the pandemic created in 2020. This was most felt in our energy exposed businesses for revenue was 50% below our initial 2020 plan, and down 40% from the prior year under NRC's ownership. Our energy waste segment, which operates in the Permian and Eagle Ford basins, delivered $1 million in adjusted EBITDA for 2020, down from our original plan of $40 million. We have seen sequential improvement in this segment and expect this to continue as we see continued stability and recovery in oil prices. Legacy NRC was also impacted by lower overall industrial activity, which resulted in fewer land and marine industrial related spills and cleanings. And there were limited large clean-ups from industrial accidents or weather events like we have experienced in the past. We did experience increased business from COVID-19 decontamination work where we generated $29 million of revenue and on over 5,100 events for all of 2020.

[Eric Gerratt:]

Thanks, Jeff. Starting with consolidated results on Slide 10. Revenue for the fourth quarter of 2020 was $241.1 million. Revenue for the waste solutions segment was $105.7 million for the fourth quarter of 2020, down 7% compared to $113.2 million in the fourth quarter of 2019. The decrease was due to 13% decline in transportation revenue and 5% decrease in treatment and disposal revenue. The decline in our treatment and disposal revenue was due to an 8% decrease in base business and 3% decline in event business in the fourth quarter of 2020 compared to the fourth quarter last year. Base business increased 7% and event business declined 23% sequentially when compared to the third quarter of 2020. Field services segment delivered revenue of $130.5 million in the fourth quarter of 2020 compared to $105.5 million in the fourth quarter of 2019. NRC contributed $75.2 million of segment revenue in the fourth quarter compared to $57.7 million for our two months of ownership in the fourth quarter of 2019. Excluding NRC, the field services segment revenue increased 16% in the fourth quarter of 2020 compared to the fourth quarter of 2019, driven by increases in our emergency response, small quantity generation and transportation service lines. Total gross margin contracted approximately 200 basis points to 28% in the fourth quarter of 2020 compared to the same period last year. This was a result of lower waste volumes in both our waste solutions and energy waste segments, and the impact of a business interruption insurance claim of $2.1 million recognized in the fourth quarter of 2019, partially offset by 470 basis point expansion in our field services segment margin.

[Jeff Feeler:]

Thank you, Eric. We're encouraged by the trends we see and have seen in the fourth quarter and the continued momentum we're seeing in early 2021. With industrial production metrics continuing to strengthen and early signs of increased business activity levels, we are optimistic for what lies ahead. We are even more encouraged by the fact that we are seeing these positive signs across most of our service offerings. Moving to our outlook on Slide 13. Overall, we expect to see these positive trends drive growth in revenue, adjusted EBITDA and adjusted earnings per share across all of our businesses. We also expect to report growth in our adjusted free cash flow despite 50% increase in our planned capital expenditures as we return to our regular capital deployment programs. Our expected return to growth in 2021 also assumes that certain of our capital preservation initiatives of last year are lifted and more normal business activities and associated costs resume. All in, we expect that our 2021 full year performance to produce total revenue between $940 million and $990 million, adjusted EBITDA between $175 million and $185 million, adjusted free cash flow between $60 million and $77 million, adjusted EPS should be between $0.65 to $0.88 per diluted share, cash EPS between $1.46 to $1.69 per share and capital spending between $85 million and $90 million. With regard to capital spending, we are expecting to return to more normalized levels with elevated capital spending levels in 2021 on landfill. In addition, we are continuing to grow our company organically by investing in businesses and new technologies, and investing in up to $21 million into new and ongoing projects. As we sit here today, this guidance reflects our expectations that we will return to growth in 2021 with increases of up to 6% in revenue and up to 9% in adjusted EBITDA. For the next several slides, I'm going to have Eric walk you through our adjusted EBITDA bridge getting you from 2020 actual results to 2021.

[Eric Gerratt:]

Thanks, Jeff. On Slide 14, you can see an adjusted EBITDA bridge for our 2020 results to the midpoint of our 2021 adjusted EBITDA guidance range. Included in our actual results for 2020, we have a number of favorable one time benefits that are not expected to repeat in 2021. These favorable adjustments accounted for just over $9 million of adjusted EBITDA in 2020 that we will grow through operationally in 2021. The favorable adjustments included a cash medical insurance settlement dating back to the mid 90s, a Canadian government COVID related grant and several favorable true ups related to earnouts on acquisitions made by the legacy NRC organization. As shown on this bridge, our growth starts with improving results in our waste solutions segment where we expect growth in 2021 on the back of an improving industrial economy. We expect base business to return to growth ranging from 5% to 7% in 2021, with much of this recovery expected to occur starting in the second quarter of 2021 through the balance of the year, as the first quarter 2020 included strong pre pandemic trends. We continue to see positive trends in our business pipeline and expect heathy year of activity. Given the strong comparative period in 2020 and with several larger projects completing, we are currently expecting our event business to be flat to up slightly in 2021. We also expect to see solid growth in our field services segment through a combination of improved industrial activity, increased business investment and services, implementation of contracts won in 2020 in our SQG and total waste management service lines and further benefits from additional NRC integration activities. Our energy waste segment is expecting moderate growth in dollar terms. Despite the positive recovery in oil prices and increased activity levels, we are expecting limited contributions from the business unit with most of the recovery commencing in the back half of 2021 and accelerating in 2022. Our corporate segment is increasing primarily as a result of a shift of support related costs from operating segments to the corporate segment as a result of integration and regionalization activities. To assist with your modeling, we've summarized these regional overhead cost shifts by segment to the corporate segment in the appendix of today's presentation. In addition, we are expecting cost to return to more normal levels in compensation, incentive compensation plans and a higher level of business activity such as travel that did not occur in 2020. As Jeff mentioned, we expect EBITDA growth of up to 9% in 2021 over 2020 levels and up to 15% growth when factoring out the favorable 2020 adjusted EBITDA benefits. With that, I'll turn it back to Jeff.

[Jeff Feeler:]

2020 was nothing short of a challenging year. The trends that we saw towards the end of the year and continuing on early in 2021 compounded with the steady vaccine rollout and declining COVID cases gives us optimism of a much better year than in 2020, especially in the second half of 2021 with solid momentum carrying us into 2022. I am so very proud of the entire US Ecology team and their ability to persevere and thrive during these times. As a result of the hard work of this past year, we are in excellent shape both strategically and financially and are positioned to continue to capitalize on opportunities ahead as the industrial economy continues to recover and we move the pandemic to the rearview mirror. This will allow us to continue to build upon our sustainable future for US Ecology’s team members and stockholders. And with that, operator, you can open up the call for questions or comments.

[Operator:]

We will now begin the question-and-answer session . And our first question will come from Michael Hoffman of Stifel.

[MichaelHoffman:]

And by the way, I love this presentation, a nice shift here, it’s been very transparent, so I appreciate that. Within the guidance, can you help us -- you framed $29 million of decontamination work. Is your assumption some of that rolls into the year early, but not all of it? And so not only are you overcoming one timers in the EBITDA but you're also overcoming that as well, right?

[JeffFeeler:]

Yes, I'll let Steve address those markets there.

[SteveWelling:]

Michael, we ended the fourth quarter very, very strong, and that also continued into January and the beginning of February. Trend is now down, orders are down, but we're still on pace to do as much as $10 million this year in COVID work. And what that does is it creates somewhat of an EBITDA headwind, maybe $5 million to $6 million. But we're very confident we're going to offset that with just regular ER business, Hazmat ER business recovering throughout the year. So gives you some idea where our gap would be.

[MichaelHoffman:]

And then Jeff, you framed the pandemic hit to revenues and if I think of a reopening angle, in your guidance, is there an assumption that we are fully reopened in the numbers relative to the things that got dislocated in '20. How do I think about that?

[JeffFeeler:]

I mean, we really don't know what reopening really looks like or how it's defined. But the way we're looking at 2021 is we're going to be facing some challenging conditions probably through the first half of the year as kind of our assumption. When we get into second quarter, we'll have a lot easier comparables and so we are expecting growth there and that go through the balance of the year. From a reopening perspective, what we're kind of seeing right now is that we're going to have a lot more availability of vaccines towards midyear for more than just select population and demographics. And so by then, hopefully, we'll see much more normalized activities on the back half of the year.

[MichaelHoffman:]

And in your guidance, have you just assumed the rate of base recovery off of a lower number or you've put back in the lost business and then the base recovery? That's what I'm trying to understand.

[JeffFeeler:]

It's going to be more growth off a lower number right now, but then continue to see improvement. I think as we get towards the fourth we're going to be seeing some more positive trends to maybe pre pandemic levels.

[MichaelHoffman:]

And then lastly, on free cash flow and the capital spending. Can you give us a normalized way to think about the percent of revenue capital spending beyond this catch up year in the big landfill investment that's being done? What's the right sort of percent ? Because you're approaching 10% this year, and I don't think that's probably the sustained number.

[JeffFeeler:]

Well, when you include our growth investments in there, that’s probably it because we're going to vary those growth investments up and down depending on opportunities that we have. So if you look at it, this year is a high landfill year. $38 million, $40 million of that, which is a high percentage of our capital spend on some landfill. And that's going to continue for a couple of years, as we've talked about previously, maintenance programs, there is a little bit of pent up maintenance activities in there from some of the capital preservation initiatives we put in, in 2020, but not much. I mean, it's kind of more of our normal programs. I would say that without growth, we're somewhere in that 6% to 7%. When you add growth in, that's pushing us up to that probably 9% of what you're seeing this year.

[MichaelHoffman:]

And then from a free cash flow target, say a conversion ratio, what do you think this business should be doing versus where it is right now? It’s low 30s in 2020 but it's going to be at the midpoint, say upper 30s of EBITDA. But where can it be? Can it be 45%, 50% of EBITDA?

[EricGerratt:]

If you look at 2020 and how we define free cash flow, it's in the deck and there's a calculation in there. Based on that definition, where it's operating cash flows less CapEx with some add backs for some contingent consideration payments and things like that. But based on that definition, we're at about 40% this year, we were just over 30% last year. And if you go back to 2018, pre NRC, we were in the low 30s. We feel pretty good about where we ended this year. I think on a longer term basis, that 40% range is about where I'd like to see us, but on a more consistent basis. Working capital is always the wild card that can swing it a bit quarter to quarter. But I think that that 40%, low 40s range is where we'd like to be on a consistent basis.

[MichaelHoffman:]

And then how do I translate that into sort of what's the leverage look like? You gave us a cheeky leverage of 4.3. I guess one of the questions would be, what is the EBITDA you used to calculate that based on the bank calculation? And then what is the target for exiting this year? What's your thoughts about that?

[EricGerratt:]

And there is some additional items in the calculation we do for the covenant under the credit agreement. Some of those relate to synergies and onetime costs and things like that. The good news is a lot of those start to fade away this year and come out of the calculation. So by the end of the year, it will be more of -- you'll be able to get much, much closer straight off the financials. That being said, we expect kind of based on the midpoint of our guidance range, we expect to be under 4 times at the end of this year. And then obviously, at the higher end of the range, we'd be even lower. And then as we get into 2022, you see that leverage really start to come down pretty quickly.

[MichaelHoffman:]

And then so the last question semi comment for me is the upside surprise in the model has to do with the scope and timing of any reopening. Otherwise, there's a fairly conservative view about the decon replacement and incremental underlying growth and timing of project business, that's both the question and a statement.

[EricGerratt:]

So I think the potential upside or the big areas to watch is what is the reopening, how does that translate into industrial waste volumes coming through the network. We have been seeing very positive ISM trends and we're continuing to expect to see those coming through the network like we did in the fourth quarter on there, and then event business is going to be. And the big wildcard is what the recovery is on the energy waste side, because we're not assuming much there. It's pretty much almost flat if you really look at about -- it's couple of million dollar improvement. So at the end of the day, we're seeing some real positive trends there. We don't know where it's going to translate to. And we're being cautious on that market just because of the unknowns. And I'd also add that -- and you know this. But Q1 historically is our seasonally lowest quarter. However, that will be even more prominent for the first quarter of 2021 since -- and we're comparing to Q1 of 2020, that was pre pandemic and it was actually a pretty strong quarter. So we expect Q1 to be down pretty significantly from Q1 last year. And then we start to pick up steam in the second and third quarters for 2021.

[MichaelHoffman:]

So having introduced that, would you care to give us a framing of at the midpoint EBITDA is 180 kind of proportioning, at least the first half. Are we in the the upper teens as a percentage of that number in the first quarter, then it pops in 2Q and then the rest is sort of the rest of the year? That's the way to think of it?

[EricGerratt:]

Yes, I think that's fair. I mean if you look at Q1 '21 compared to '20, I would expect in terms of EBITDA that we will probably be down from Q1 2020 in the 25% to 30% range.

[Operator:]

And our next question comes from Tyson Bauer of KC Capital.

[TysonBauer:]

Kind of touching a little bit on what Michael was talking about. You've now gone through an entire year that you're focused in on the cost structure, the incremental expenses. How would you view that contribution profile on the margin side as business picks up, volume picks up? Give us a degree of magnitude that you think that you've improved the cost structure of the business that once we do get to normalized levels, better volumes that we're going to see much better profitability as we go forward?

[EricGerratt:]

Tyson, I think if you look at 2020 in terms of margin, and I'll speak more in terms of EBITDA margin. We ended the year at about 18% total. As you look at next year, which, again, Q1 will be rough comparison and then we'll build throughout the year, and so it won't be a full year of recovery in 2021. At that level, in terms of EBITDA margin, we're still going to be in that high teens, possibly low 20% range. I think as we continue to buildout of the pandemic, as we continue down the integration path, which we've seen a lot of success on, I think we really start to see traction in those margins going into 2022 and beyond, that I would -- we've targeted for a long time to get back up into at least the low 20s and hopefully approaching mid 20s in terms of a consolidated EBITDA margin over the long term.

[TysonBauer:]

So a shift of the range approximately 300, 400 basis points?

[EricGerratt:]

Not yet. Once we get into 2022 and beyond, yes.

[TysonBauer:]

Well, that's going to -- if we looked at ecology on once you we this stuff behind us and what you've done, that's really what you view the company of being able to produce is in those low mid 20 range as we get more normalized operations.

[EricGerratt:]

Yes, that's correct.

[TysonBauer:]

And you're anticipating really the second half of '21 to have more or less the handcuffs come off of you and then we get into more economic drivers as opposed to some of these ancillary factors. So run rate of the second half of '21 would be a fairly good indication of what you think you'll be as you go into the out years?

[EricGerratt:]

Yes, I think that's fair, especially as you look at Q3 and beyond, I think we'll see some really strong improvement in Q2, but that's going to be as much a function of really low comp as anything. But Q3 and beyond definitely are going to be more indicative of kind of future performance.

[TysonBauer:]

Do you know what ESG score you have or have been receiving by the reporting companies? It would seem a hazardous waste company and involved with cleaning up, recycling, those kind of things, would be viewed more favorably. But is that what you're finding out in the marketplace?

[JeffFeeler:]

Actually, Tyson, we're not finding that. You would think that would be the case. So the ISS score that is out there, I have at the top of my head is, we're ranked at 7 on environmental. And for those that are not familiar with that, 1 out of 10 is good or excellent. So the areas that we are challenged by is there's a lot of measurement on greenhouse gases, and we are being compared with solid waste that emits those gases, and we're in inorganic facilities. So we're gathering that data right now, and we don't have anything published. And that is part of the initiatives for 2021 to get that published out there and I think that will dramatically improve our score into an acceptable range.

[TysonBauer:]

So to summarize, you think you're being unfairly categorized with the bigger waste management, the solid waste guys, and that's not necessarily indicative of what your business is?

[EricGerratt:]

Yes, that is a fair assessment. And it's the fact that we don't have data that the rating agencies are looking for because there's really not a need to have it in the past. So it's a matter of us getting our data together and putting it out there. As far as what we're doing and on our ESG scores, I think how you introduce the question is right. I mean we're the recipients from industrial customers on our byproducts to make sure that they are properly treated, recycled, managed and making sure that they are not harming human health and the environment. And that is what is in our DNA and it's what we do. And it's why we have the technologies and the capabilities in place is to do that. And so this will correct itself over time once we get everything pulled together.

[JeffFeeler:]

And Tyson, I think you're going to see us continue to talk more and more about this in our story, because I do think, and to the earlier point, there's a lot of of misconceptions, if you will, and some assumptions that kind of go into and, again, as you mentioned, when you hear hazardous waste and treatment and disposal and things like that. We really do view ourselves and many of the -- of some of our ESG investors that have spent time learning more about the company. Also understand we really are a key part of the solution and a sustainable solution, as well as all the things we do around recycling beneficial reuse. We're constantly looking at opportunities to do that as well. But we view ourselves as part of that sustainability solution and we'll continue to talk more and provide more information about that.

[TysonBauer:]

I'm glad you brought up that word recycling, it leads into my next question. We've seen a great focus of, as far as an investment community, on companies that have highlighted that and the benefits of doing that, especially given where the metals markets are and such. Is that something that has been kind of missed with US Ecology that you do do a great amount of recycling, whether it's petroleum, whether it's metals or others and being an accumulator that just doesn't draw that focus from the investment community and the multiple?

[SimonBell:]

I mean we're doing a lot really on the recycling side. I mean, recently, launching what's 100% recycling of aerosols, which is our largest stream that comes from our retail business. We already are very heavy in the oil cycling business with our thermal desorption facility in Texas that both recycles, catalysts and recovers the oil from that process. Previously, that would have been disposed of in landfills and the like. We're really focusing on expanding that thermal technology more doing thermal distillation. We do airport recycling. We hit it on multiple fronts. Our waste water treatment plants are diverting kind of the high metal content material where we're recovering the metals out of that. And these are really great businesses with good returns. We're really focusing on -- we process over probably approximately 1 million drums a year and finding ways to recover and reuse those drums and so we see these both as really good businesses. And we have a lot of other things in the works as we talk about on the growth investments we're making is really heavy on the recycling and the sustainability side. So we really see a lot of good things happening in that front. Whether we fully told the story to markets, I think that's an evolving thing, definitely something we're going to be focused on.

[TysonBauer:]

And Simon, since you answered here. On the event business being flat for this year, given the change in the EPA focus and what we've seen in previous administrations under this political regime. Would you not anticipate greater activity as we get into the back half of '21 and going into '22, and through these next couple of years of major event cleanup business?

[SimonBell:]

It's always something we think can talk a lot about. We certainly, I think with the current administration, will be more focused and probably we'd see enforcement activity expanding, which often translates into more cleanups. The timing of that can be sometimes hard to predict. But we're also seeing some strong headwinds on the PFAS side of the world, where you have -- under the 2020 NDAA, where the EPA was tasked with putting out guidance on disposal of PFAS. And certainly, when you look at that, they talk about some of the most proven technologies, if you will, would be deep well, permitted subtitle sea facilities, all assets that we have. So we certainly think and expect our customers to start getting more proactive on that side kind of in advance of what the EPA is trying to do. So short answer is, yes, I think you're going to see some headwinds there, though it can be sometimes difficult to predict and sometimes it takes some time to change the regulations. But certainly, we see that as a positive.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Jeff Feeler, for any closing remarks.

[Jeff Feeler:]

All right. I want to thank everybody, for those joining the call today, and look forward to updating you at coming conferences or with the first quarter results. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.