US Ecology, Inc.
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Good morning and welcome to the US Ecology First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Eric Gerratt, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

[Eric Gerratt:]

Good morning and thank you for joining us today. Joining me on the call this morning are Chairman and Chief Executive Officer, Jeff Feeler; Executive Vice President of Sales and Marketing, Steve Welling; and Executive Vice President and Chief Operating Officer, Simon Bell. 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. Management cannot control or predict many factors that determine future results. Listeners should not place undue reliance on forward-looking statements, which reflect management’s views only on the date such statements are made. We undertake no obligation to revise or update any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise. For those joining by webcast, you can follow along with today’s presentation. For those listening by phone, you can access today’s presentation on our website at www.usecology.com. Throughout yesterday’s earnings release and our call and presentation today, we refer to adjusted EBITDA, pro forma adjusted EBITDA, and adjusted earnings per share. These metrics are not determined in accordance with generally accepted accounting principles and are therefore susceptible to varying calculations. A definition calculation and reconciliation to the financial statements of adjusted earnings per share, adjusted EBITDA, and pro forma adjusted EBITDA can be found in Exhibit A of our earnings release. We believe these non-GAAP metrics are useful in evaluating our reported results and our 2018 guidance. With that, I'd like to turn the call over to Jeff.

[Jeff Feeler:]

Thank you, Eric, and good morning, everybody. I'll start this morning’s call with a few summary comments on our first quarter results released yesterday before turning it back over to Eric for additional details on our financials. I’ll then close out the call with an update on our 2018 business outlook before opening up the call to questions. For those that are following the webcast presentation, please direct your attention to slide 5. Yesterday, we reported solid first quarter 2018 financial results that were in line with our own expectations. Revenues were up about 9% to $120.1 million, and adjusted EBITDA was $24.5 million, up 4% over the same quarter last year. Our adjusted earnings per share was $0.36 per share, up 57% from the same period last year on an 11% increase in operating income, lower interest expense, and lower taxes. Environmental Services segment revenue grew 6% during the quarter on strong EBIT business growth of 8% and continued Base Business growth of 2%. Based Business growth was in line with our expectations particularly when compared to the strong first quarter last year and factoring in the stronger-than-expected fourth quarter of 2017. As discussed in our year-end conference call, we saw a surge in volume in the fourth quarter of 2017 resulting from a typical year-end push. Reporting a 2% growth in our first quarter of Base Business on top of these recent trends supports the ongoing momentum we're seeing in the business. Event Business was particularly strong in the quarter in the southwest and eastern portions of the United States which offset generally lower seasonal volumes flowing into our Canadian operation. Our Field and Industrial Services business saw strong revenue growth up 16% over the same quarter last year led by increased business in our total waste management and small quantity generation services which helped drive a 20% gain on our Field Services side. This growth was partially offset by lower remediation revenues which is typical for winter conditions. Our Industrial Services business continues to be softer than our expectations when coming into the year further revenue quality suffered in the quarter as business opportunities for a lower margin. Overall the first quarter was on track down very pleased with the progress we continue to make. We continue to see strengthening indicators of business activity that should support our growth expectations for the year. With that, I'll turn it back to Eric.

[Eric Gerratt:]

Thanks, Jeff. As shown on slide 7, revenue for the first quarter of 2018 was $120.1 million, up 9% from $110.2 million in the first quarter of 2017. Revenue for the Environmental Services segment for the first quarter was $86.5 million compared to $81.3 million in the first quarter last year. This increase was driven by a 5% increase in treatment and disposal revenue and a 12% increase in transportation service revenue. Base Business for the Environmental Services segment was up 2% compared to the first quarter last year and represented 83% of treatment and disposal revenue. Event Business for the Environmental Services segment increased 8% from the first quarter last year and represented 17% of treatment and disposal revenue. The Film Industrial Services segment delivered revenue of $33.6 million in the first quarter of 2018, up 16% from $28.9 million in the first quarter of 2017. Slide 8 breaks down our Environmental Services treatment and disposal revenue for both Base and Event Business by industry vertical. Base Business increased primarily in the chemical manufacturing, other and general manufacturing verticals. These increases were partially offset by decreases in the refining, broker/TSDF, and metals manufacturing verticals during the quarter. The increase in Event Business was primarily driven by increases in the other and waste management and remediation verticals partially offset by decreases in the general manufacturing and refining verticals. Turning to slide 9, gross profit was $35.7 million in the first quarter of 2018, up 12% from $31.9 million in the same quarter last year. Our Environmental Services segment contributed gross profit of $32.5 million in the first quarter compared to $28.7 million in the first quarter last year. Treatment and disposal margins were 40% in the first quarter of 2018 compared to 38% in the first quarter of 2017. This increase was due primarily to higher land fill volumes and a more favorable service mix. Gross profit for the Field and Industrial Services segment was $3.2 million, up slightly from the first quarter 2017. Gross margin was 10% in the first quarter, down from 11% in the first quarter last year. Field Service margins improve slightly over the first quarter of 2017 on higher revenues. However, we still face some headwinds on new investments as we roll out new retail contracts in the West, and recent total waste management contract wins. Gross margin for our Industrial Services business declined in the quarter, primarily due to lower quality revenue and harsh winter conditions during the quarter. Selling, general and administrative spending or SG&A was $22.2 million in the first quarter of 2018. This was up 13% from $19.7 million in the first quarter last year. The increase was primarily due to higher labor and incentive compensation, higher professional and consulting services, and higher property taxes. Operating income was $13.4 million in the first quarter of 2018, up 10% from operating income of $12.2 million in the same quarter last year. Net interest expense for the first quarter decreased to $2.8 million compared to $4.1 million in the same quarter last year. The decrease was primarily the result of a lower interest rate on our credit facility in the first quarter this year versus the first quarter of last year. The company's effective income tax rate for the first quarter was 27.6%, down from 37.3% in the first quarter last year. The decrease was primarily due to tax reform passed in the fourth quarter of 2017, which reduced the U.S. corporate tax rate from 35% to 21%. We reported net income of $9.2 million and diluted earnings per share of $0.42 in the first quarter of 2018 compared to net income of $5.2 million and diluted earnings per share of $0.24 in the first quarter last year. Adjusted earnings per share was $0.36 cents in the first quarter of 2018 compared to $0.23 in the first quarter of 2017. Adjusted earnings per share excludes a $2 million or $0.07 per diluted share gain related to the issuance of our property easement on a portion of unutilized land at one of our operating facilities. Adjusted EBITDA for the first quarter was $24.5 million, up 4% from $23.5 million in the first quarter last year. Turning to slide 10, we generated $28.8 million of cash from operations in the first quarter 2018. We also invested $7.6 million in capital projects and paid out $3.9 million in dividends to our stockholders. Our balance sheet continues to improve with net borrowings of $232.7 million at March 31, 2018. Additionally, we recently reached a milestone on our multi-year upgrade to our information systems. In April, we launched our new financial system, [ph] Microsoft AX 00

[Jeff Feeler:]

Thank you, Eric. As we look to the balance of 2018, we remain confident in our ability to deliver growth over 2017 results. We continue to see positive trends in the industrial sector that should benefit our various business lines. We continue to expect our base business to grow 3% to 5% for the full year. In addition, our Event Business pipeline remains strong and we have already seen improved activity in regions that were soft last year, leading to our expectations for single digit growth in our Event Business for 2018. Field Services continue to show strong revenue growth, driven by our Small Quantity Generation Services, as well as our Total Waste Management Services. We expect our Industrial Services businesses to begin seeing improvement in the second quarter continuing throughout 2018. Turning to slide 12. Taking into account our first quarter results and current conditions, we are reaffirming our guidance issued this past February. We still expect our adjusted EBITDA will range from $122 million to $128 million for 2018. We are also reaffirming our adjusted earnings per share guidance of $2.15 cents to $2.34 per share as well our capital expenditures are on track and we still expect them to range between $39 million to $42 million. Finally, we still anticipate normal seasonality in our business through sequential improvement in revenues and EBITDA from the first quarter through the third quarter of this year with the third quarter likely being the strongest of the year. With that, operator, would you please open up the call for questions and comments?

[Operator:]

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Michael Hoffman at Stifel. Please go ahead.

[Michael Hoffman:]

Thanks, Jeff and Eric, for taking the questions. Free cash flow outlook, how do you come out on that in reaffirming the guidance where – given the first quarter.

[Eric Gerratt:]

Yeah. Michael, we still think we're going to be in that $55 million, $56 million to $60 million range. So, no change at this point.

[Michael Hoffman:]

Okay. And then on G&A, help us with what you think there either absolute dollars or the percent of revenues are going to be for the year given that we had this pretty healthy lift relative to sales in the first quarter?

[Eric Gerratt:]

Yeah. I think in terms of absolute dollars, we still think we're going to be in that $90 million, $91 million range for the full year which I think puts us in that 16.5% to 17% range of revenue.

[Michael Hoffman:]

Okay. And then, within the context of business, if I take all the data that was in the PowerPoint your comments today it feels like you're at the current pace of activity. The mix that's been sort of 70/30 Base to Event seems to be shifting more kind of 75/80 Base to Event versus Event ramping up. So how do I think about the operating leverage to the model at this point? What are you doing differently to still extract that kind of leverages, volume comes in but it's coming in more concentrated in Base versus Event on a mix basis?

[Jeff Feeler:]

Well, I think overall, Michael, in the first quarter typically tends to be a lower Event business season, so it tends to have lower volumes. We just saw a good year-over-year – where we've always been focused on trying to drive those recurring revenue streams and that's really been the core focus of our overall strategy. As far as leverage goes, we would expect to continue to see leverage as we see volume improvement on the ES side. And as we continue to execute on our Services side of the business we continue to see some operating leverage in that business going forward throughout the balance of the year.

[Michael Hoffman:]

So is it reasonable to expect low double-digit margins in the aggregate for Field and Industrial services?

[Eric Gerratt:]

I think, overall, we're going to be at that low double-digit range. First quarter is always a tough quarter on that and if you really look at those margins and I'm referring to EBITDA margins on our Field and Industrial services side we did see some margin enhancement year-over-year. But yeah. It's in the single digits and it's consistent with what we saw a year ago, but with a slight improvement. We did have some headwinds in that segment during the quarter as we rolled out some new contracts. Our IS business had some revenue quality issues as well some weather issues that hurt their margin profile there. So if you kind of strip those out, we probably be closer to that double digit range already. And so, as we continue to see that improve throughout the balance of the year, I would expect to get closer to that, at least, 10% range.

[Michael Hoffman:]

And we had an unusually cold winter in Canada, did that more adversely compress some of the margin that came out of there and as that's passed, you'll see the degree of that bounce back?

[Jeff Feeler:]

Yeah. I think that as we see spring conditions arrive, which I'm not entirely sure that they've fully arrived yet, up in Canada and on the East yet, but yeah we would see margins improve there. The team did a great job up in Canada controlling costs given the volumes and things that came through in the first quarter/

[Michael Hoffman:]

And in February when you gave guidance you had given a range on both ES and Field and Industrial, $385 million to $393 million on ES and then $145 million to $160 million, are those still stand or are you shifting the mix around a little bit?

[Jeff Feeler:]

No, I think -- I mean it's early, but I think at this point, Michael, we're still reaffirming that as well. We'll see as we get through Q2 if we need to just that, but right now, we think that's still our best estimate.

[Michael Hoffman:]

All right. Thank you very – one last one, if the economy and the industrial economy is so good, why do you think the industrial services piece is lagging, is this a secular shift in all of these companies or just trying to find ways to do this slower and longer cycles.

[Jeff Feeler:]

Yeah I think it's a combination. I think there's definitely pockets of US that you probably are seeing better industrial service business activity where we're at in Michigan right now and where is our core IS business is at. We just -- I mean we went through, like you said, the harsh winter conditions. We haven't seen a lot of the same bidding opportunities and it has been softer. Now it's already in the second quarter trending more positive and seem busier and the weather conditions have changed there a little bit. I don’t want to pull it all on to weather, but we're being cautious as we look at that business segment because we really haven't seen it turn fully yet.

[Michael Hoffman:]

Great. Thank you very much.

[Jeff Feeler:]

Thanks, Michael.

[Operator:]

And our next question comes from Charlie Wohlhuter of Raymond James. Please go ahead.

[Charlie Wohlhuter:]

Hey. Good morning, guys.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Hi, Charlie.

[Charlie Wohlhuter:]

Hey, Jeff and Eric. So, I have a few questions here on the SG&A side. So, first digging in a bit on the labor line. I think you employ a decent base of truck drivers. Can you kind of talk about the craft labor pool? Kind of specifically, are you seeing any significant pressures there?

[Simon Bell:]

Yeah. Charlie, this is Simon speaking here. I'll address that. Yeah. This remains a big challenge and I think a major challenge for everybody in the trucking industry and our competition. We're doing a lot of things to make sure we improve our retention of employees, getting very aggressive in our hiring and we are starting to see a bit of rate rising costs to address some of those challenges. So, certainly something we're concerned about, something we're tracking and trying to get ahead of, and we do believe that being proactive in trying to retain and keep some of that good skilled labor is going to be a key factor moving forward.

[Charlie Wohlhuter:]

And then, actually, on that kind of same thought there, Simon. Last quarter I believe, question came up about rail transportation and cycle times, and if I recall correctly, at that moment in time, you’d mentioned that you weren't seeing any sort of adverse effects from the rail service issues. Is that still the case or is anything changed there?

[Simon Bell:]

That is still the case. Our corridors, I've heard about some larger national issues but the corridors we’re using we have not seen any constraints on our side to date.

[Charlie Wohlhuter:]

Okay. And then, kind of looking at it holistically speaking, are you able to kind of quantify or what's kind of in the budget in terms of your transportation costs for this year versus last?

[Simon Bell:]

Are you talking like apples to apples, Charlie, as far as...

[Charlie Wohlhuter:]

Well…

[Simon Bell:]

Percent increase or…

[Charlie Wohlhuter:]

Yes, if that's possible.

[Jeff Feeler:]

I don't have that data. Certainly we're seeing some pressures on the wages side. But I wouldn’t say at this point I can point to anything that I could quantify where cost of – you think about the cost of running a truck. There's a lot involved. Everything from the fuel, the equipment and labor is certainly an important component. But at this point, I don't think it's had a major impact. But certainly, something we'll be looking at moving forward.

[Jeff Feeler:]

And I'll just add, Charlie, to that for larger jobs where we're bundling or we're managing whether it's truck or rail transportation only. We bid that in and it tends to be passed through to the customer. So, we're somewhat protected. Longer term projects, we've got to manage and we've got to work through on that. But we do have some protections in our contracts and it normally comes through surcharges and things that get passed on to us from transporters. And so, it's more the internal transport which is smaller dollars but more meaningful. And I think, your question is spot on. It’s for truck drivers and things like that that we're having. I mean, this is a national issue right now. There is a shortage countrywide and that's an area that we're constantly focused on to attract and retain the best talent there and while being competitive with market wages as well as benefits. And I think that that's going to be an ongoing initiative for the entire group to make sure that we can do that.

[Eric Gerratt:]

And if I could add, Jeff, the -- well obviously - well said now we’re fine.

[Charlie Wohlhuter:]

Okay. And then as you've kind of mentioned just increasing kind of the -- or focusing or promoting on the employee engagement outside of those craft labor pools. Are you making any sort of investments or incentives or changes on kind of the sales force or just kind of anything like that?

[Jeff Feeler:]

We're constantly relooking at our incentive plans and employee benefit plans. And we've been doing that not just recently. We've been doing that over the last probably two to three years and have made many millions of dollars in investments in there and again coming into having a very low unemployment environment that we've been operating in for some time now. We want to get our retention levels down. We want to attract and retain the best employees whether it's in operations, whether it's in sales, whether it's in support throughout the organization that's been a core focus of ours. And I think that we're making good traction there.

[Charlie Wohlhuter:]

Okay. And then shifting over to the balance sheet I noticed the cash balance kind of ticked up here at quarter end it seems a bit higher than usual specifically here in the first quarter. You're down to about 2 times leverage level. Has anything changed among your hierarchy of kind of capital uses or anything strategically speaking there?

[Jeff Feeler:]

Yeah, Charlie, no. There hasn't been. So, our first priority of capital is going to continue to be investing in capital projects that we can reinforce our great infrastructure we have and expand upon that and look at organic opportunities. We do -- we are going to constant -- continue to look at acquisition opportunities out there, and we're committed to the dividend level where we're at right now. So, we're going to continue to look longer term as to what may be potential acquisitions are out there in a three- to five-year period and make sure our capital structure is appropriate to be able to be in it well-positioned to be able to take advantage of that.

[Eric Gerratt:]

And, internally, I'll just add, we have built some cash. I would expect that we'll continue to do that for the foreseeable future. Our credit facility is – has very favorable terms. And so, we'll just continue to watch I, look at the pipeline, and look at our internal organic opportunities. And my prediction is we'll continue to build some cash for the next quarter or two.

[Charlie Wohlhuter:]

Okay. Got it. Thank you.

[Jeff Feeler:]

Thank you.

[Operator:]

And our next question today comes from Bobby Burleson of Canaccord. Please go ahead.

[Unidentified Analyst:]

Hey, guys. This is John [ph] on for Bobby. Congratulations on the quarter. I just wanted to follow up on some of the event business anticipated strength this year and good results in the first quarter. Kind of where is that coming from? Are you seeing that from customers utilizing tax savings or is it kind of finally the pushed-off event work coming to fruition?

[Steve Welling:]

This is Steve Welling. It's a combination like it's always been. We have court-ordered cleanups. We have real estate development where a company needs to clean up the property before they sell it to the – convert to condos or other more valuable real estate. But I don't think we can point to extra cash and voluntary cleanup. That's not a normal thing that we see.

[Unidentified Analyst:]

Okay. And then on the Industrial Services side, what could we see as signs for kind of improvement to those softening conditions is it just a lag on more industrial manufacturing or is there anything else that we could kind of see there.

[Jeff Feeler:]

Yeah. So, I just want to make sure that this is clarified. When I talk about softening conditions and industrial services that's our business on industrial cleaning at factories and other things that's not macro conditions, we're continued to see very strong indicators on all of those. We're honestly where are located up in Michigan, they had they had a harsh winter condition and so we're starting to see those improving trends already and we anticipate that it will start recovering here for the balance of the year.

[Eric Gerratt:]

It's a very localized market IS business Industrial Services business in Michigan.

[Unidentified Analyst:]

Okay. Great. Thank you very much.

[Jeff Feeler:]

All right. Thank you.

[Eric Gerratt:]

Thanks, John.

[Operator:]

Today's next question comes from Jeff Silber of BMO Capital Markets. Please go ahead.

[Jeff Silber:]

Thank you so much. In your prepared remarks, you talked about the new Microsoft financial system that I guess went live last month. I know it's early but what kind of benefits are you seeing or you think might be seeing from the system and how would that impact your financial performance?

[Eric Gerratt:]

Yeah. Jeff this is Eric. So, it's pretty early for just about to start our first month and close on the new system as we speak. But I really think on the financial system and this is just purely the financial system that we've gone live with last month where we're going to see some benefits is likely to be more on the cost side as we're now on one common procurement and purchasing platform to which we will be able to better leverage kind of our North American presence and hopefully that will result or we expect that to result in some savings and some better pricing and purchasing power and decisions on that front. I think we'll see some things there, but it'll be around the edges in 2018 where I think we'll see the longer term bigger benefits as we roll out our new operating system which as I mentioned will start rolling that out in phases in 2019. That's a massive undertaking that we're a couple of years into already. What that's going to do for us is that's going to really – will be on one common operating system that runs our sites and our facilities and our trucks across the whole company. So, that's going to allow us to do a much better job at leveraging our network and our infrastructure, leveraging where the waste goes to make sure that it goes to the most efficient best bet location. So, I think that's where we'll really see a larger benefit as we roll out that new system on the operating side starting in late 2019.

[Jeff Silber:]

Great. And that was actually going to be my next question. Are there any financial targets that you built in for those benefits over the long term?

[Jeff Feeler:]

There are some that we've talked about internally, none that we've talked about externally and I would tell you they're hard to quantify, but there are some loosely that we're looking at in targeting internally but nothing we're prepared to talk about externally.

[Jeff Silber:]

Okay. Great. And on the cash flow guidance for the year, I know you've maintained that, but you had a pretty strong start to the first quarter. Was there anything specific that was going on in the first quarter from that perspective that may not continue for the rest of the year?

[Jeff Feeler:]

Yeah. But probably, we’re just on the working capital side that I think that will kind of normalize out a little bit as we go into the second and third quarter. So, I think we did have a pretty strong quarter, but we’ll level that out and still be in that mid-50 to 60 range from a free cash flow perspective.

[Jeff Silber:]

All right. Fantastic. Thanks so much.

[Jeff Feeler:]

All right. Thank you.

[Operator:]

And our next question today comes from Jon Windham of UBS. Please go ahead.

[Jon Windham:]

Hi. Thanks for taking my questions. Maybe just a follow up a little bit on the last question. Some of the increased professional services fees that you incurred in the first quarter, how should we think about those going forward for the rest of the year just sort of a new level for SG&A or should we think about it stepping down?

[Eric Gerratt:]

John, I think from just an overall SG&A level, we were at about $22.5 million for the quarter. I think that's probably a pretty good proxy for what we – about where we think we'll be for the rest of the year. What puts us right at that $90 million to $91 million range for the year. The professional services, it kind of ebbs and flows depending on what's going on. It could be everything from tax and accounting fees, which we've seen a lot of with tax reform and some of those things in the last six months to some consulting and engineering help at one of our facilities, so it varies. But I still think that that range, that level you saw in the first quarter is about the level we're expecting for each quarter the rest of the year.

[Jon Windham:]

Okay great. Thanks guys.

[Eric Gerratt:]

All right. Thank you.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I'd like to turn the conference back over to Jeff Feeler for any closing remarks.

[Jeff Feeler:]

I want to thank those that are participating in today's call and we look forward to updating you on our Q2 results early August of this year. Thank you.

[Operator:]

And thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.