US Ecology, Inc.
Q3 2018 Earnings Call Transcript

Published: 2 Nov 2018

[Operator:]

Good morning, and welcome to the Third Quarter 2018 US Ecology, Inc. 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 also note today’s 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 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 third quarter results released yesterday, before turning the call back to Eric for additional details on our financials. I’ll then close out the call with an update on our outlook for the remainder of 2018 and an early look into 2019 before opening up the call for questions. For those following the webcast presentation please direct your attention to slide 5. Yesterday, we reported exceptionally strong third quarter results that slightly exceeded our own internal expectations. Revenue was up 13% to $151.4 million and adjusted EBITDA was up 32% to $35.6 million over the same quarter last year. Our adjusted earnings per share was $0.70 per diluted share, up 89% from the same period last year, on a 31% increase in operating income and lower taxes. Our Environmental Services segment saw revenue growth of 10%, led by strength in our Base Business, which increased 9% during the quarter. This strong growth was partially due to the impact Hurricane Harvey had on last year's results, when excluding the estimated impact of Hurricane Harvey on our prior your results, our Base Business still saw strong year-over-year growth of approximately 5%. The strong Base Business more than offset and 8% decline in our Event Business. This decline was attributable to lower shipments from a multi-year cleanup project as a transition between phases. Absent the singular project, our Event Business was down 1% for the quarter. Our field and industrial services business showed exceptional growth during the quarter, up 22% from a combination of organic and recently acquired operations. Organic growth was 13% about the same quarter last year, as a result of solid execution in our Remediation, Small Quantity Generation and Total Waste Management Service lines. Revenue from our industrial services group also saw an 8% increase over the prior year quarter on stronger industrial activity and industrial spending. As previously announced, we closed the purchase of ES&H Dallas on August 31st. ES&H now called US Ecology Dallas and US Ecology Midland, provides emergency and spill response, light industrial services and transportation and logistics for waste disposal and recycling. This is a strategic set of premier service and logistic network assets that supports our growing business in the Gulf region and will provide us with deeper penetration into emergency and spill response marketplace and extend our reach of the company's core waste disposal and recycling business. Texas is one of the fastest growing geographies in the United States, driven primarily by the energy market, as well as, a long list of new manufacturing facilities coming online. We see many opportunities to continue to expand our services and leveraging our core competencies and competitive advantage in this market. These new facilities and services help us accomplish that. Overall, I'm very pleased with the progress we're making. We continue to see strengthening indicators of business activity that should support our growth expectations for the remainder of 2018 and continue into 2019. With that, Eric, I'll turn the call back to you.

[Eric Gerratt:]

Thanks Jeff. As shown on slide 7, revenue for the third quarter of 2018 was $151.4 million, up 13% from $134.1 million in the third quarter of 2017. Revenue for the Environmental Services segment for the third quarter was $107.2 million compared to $97.7 million in the third quarter last year. This increase was driven by an 8% increase in treatment and disposal revenue, as well as, an 18% increase in transportation service revenue. As Jeff mentioned, Base Business for the Environmental Services segment was up 9% compared to the third quarter last year and represented 78% of treatment and disposal revenue. Event Business for the Environmental Services segment decreased 8% from the third quarter last year and represented 22% of treatment and disposal revenue. The Field and Industrial Services segment delivered revenue of $44.2 million in the third quarter. This was up 22% from $36.4 million in the third quarter last year, reflecting growth in our Remediation, Small Quantity Generation and Total Waste Management business lines. Our recently acquired field and industrial services group based out of Dallas, also contributed to FIS growth in the third quarter this year. Slide 8 breaks down our Environmental Services treatment and disposal revenue for both Base and Event Business by industry verticals. Base Business increased primarily in the refining, metal manufacturing and other industry verticals. The decrease in Event Business was primarily driven by decreases in the refining, mining and E&P and general manufacturing verticals, which was partially offset by increases in the other industry vertical. Turning to slide 9, gross profit was $47.3 million in the third quarter of 2018, up 25% from $37.7 million in the same quarter last year. Our Environmental Services segment contributed gross profit of $39.9 million in the third quarter compared to $33.1 million in the same quarter last year. Treatment and disposal margins were 43% in the third quarter of 2018 compared to 38% in the third quarter of 2017. The increase is primarily due to a more favorable service mix, as well as, the costs associated with the impacts from Hurricane Harvey incurred by our Robstown, Texas facility in the third quarter last year. Gross profit for the Field and Industrial Services segment was $7.4 million, up from $4.6 million in the third quarter 2017. Gross margin was 17% in the third quarter, up from 13% on a more favorable service mix and partially due to their recently acquired business out of Dallas. Selling, general and administrative spending or SG&A was $23.6 million in the third quarter of 2018. This was up 5% from $22.4 million in the third quarter last year. The increase was primarily due to higher labor and incentive compensation and higher professional and consulting services, partially offset by lower property taxes. As a reminder, in the third quarter of 2017, we recorded a charge of $1.1 million related to a property tax assessment for tax years 2015 through 2017, associated with the EQ acquisition. As a percent of revenue, SG&A was 15.6% in the third quarter, down from 15.9% in the third quarter of 2017, when excluding the $1.1 million property tax assessment. During the quarter, we recognized the $3.7 million goodwill and intangible asset impairment charge on our mobile solvent recycling business within our Environmental Services segment. The non-cash impairment charge resulted from deteriorating business performance and cash flows for that business unit. Operating income was $20 million in the third quarter of 2018, up 31% from operating income of $15.3 million in the same quarter last year. Excluding the goodwill and intangible asset impairment charge, operating income grew 55% compared to the third quarter last year. Net interest expense for the third quarter was $3 million compared to $2.8 million in the same quarter last year. The increase was the result of higher interest rates on the variable portion of our credit facility in the third quarter of 2018 compared to the third quarter of 2017. The company's effective income tax rate for the third quarter was 20.2% down from 35.8% in the third 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%. The decrease is also attributable to the implementation of tax planning strategies that resulted in one-time favorable adjustments to prior year income tax returns. We expect our effective income tax rate to be between 26% and 27% for the fourth quarter of 2018. We reported net income of $13.4 million and diluted earnings per share of $0.61 in the third quarter of 2018 compared to net income of $8.4 million and diluted earnings per share of $0.38 in the third quarter of last year. Adjusted earnings per share with $0.70 in the third quarter of 2018 compared to $0.37 in the third quarter of 2017. Adjusted EBITDA was $35.6 million up 32% from $27.1 million in the third quarter last year. Turning to results for the first nine months of 2018 on slide 10. Total revenue was $408.4 million compared to $370.3 million for the first nine months of 2017. Revenue for the Environmental Services segment was $292.6 million, up 9% compared to $268.6 million in the first nine months of 2017. The Field and Industrial Services segment delivered revenue of $115.8 million in the first nine months, up 14% compared to $101.8 million in the same period of 2017. Net income for the first nine months of 2018 was $35.9 million or $1.63 per diluted share compared to $18.6 million or $0.85 per diluted share for the first nine months of 2017. Adjusted earnings per share was $1.67 for the first nine months compared to $0.99 for the first nine months of 2017. Adjusted EBITDA was $91.8 million compared to $78.1 million in the first nine months of 2017. Turning to slide 11, we generated $55.5 million of cash from operations in the first nine months of 2018. We also invested $25.8 million in capital projects and paid out $11.8 million in dividends to our stockholders. Our balance sheet continues to remain strong with net borrowings of $250.9 million at September 30, 2018. With that, I'll turn the call back to Jeff.

[Jeff Feeler:]

Thank you, Eric. For the first nine months of 2018, we’ve seen a strengthening industrial economy and solid execution across our initiatives and business plans. Our Base Business has led the way delivering higher than expected growth and offsetting softer than expected Event Business that has been impacted by shipment timing and our self-imposed restriction in early 2018 in Canadian landfill that we discussed previously. Our pipeline of Event Business continues to be strong and we remain optimistic as we see opportunities developing for the fourth quarter of 2018 and into 2019. Base Business for the fourth quarter should remain strong, but at a lower growth rate than the first nine months of 2018. This is primarily due to the strong Base Business in the fourth quarter of 2017, as customers recovered from Hurricane Harvey. As a result, we expect Base Business to grow in the fourth quarter to be in the low single digits. We believe that for the full year Base Business growth will settle in between 5% to 7% range. Our Event Business is now expected to be down slightly for the full year 2018 from 2017. We expect the growth we are seeing in our Field and Industrial Services segment will continue into our fourth quarter of 2018 and into 2019. Solid execution in our Small Quantity Generation, Total Waste Management and Remediation services continue to drive new business opportunities. Our recently acquired field and industrial services business in Texas is also contributing to our expectations for growth. Factoring all this in, we now expect that our full year 2018 adjusted EBITDA will range from $125 million to $130 million. This is an increase from our previous 2018 adjusted EBITDA guidance of $122 million to $128 million and reflects four months of operating results from US Ecology Dallas and Midland acquisitions. Adjusted earnings per share is now expected to range from $2.28 to $2.44 per diluted share for 2018, up from our previous guidance of $2.15 to $2.34 per share. Total 2018 revenue is now expected to range from $550 million to $570 million, up from our previous guidance of $530 million to $553 million. Breaking this revenue down between our segments. We expect that our Environmental Services revenue to range from $395 million to $407 million and our Field and Industrial Services revenue to range from $155 million to $163 million for the full year of 2018. Turning to capital expenditures. For the full year 2018, we expect spending will range from $42 million to $45 million. This is an increase from our previous range of $39 million to $42 million, reflecting additional growth capital opportunities in capital invested into our newly acquired operations. Before we conclude the call, I'd like to turn your attention to slide 13 and say a few words about 2019 expectations. Though we are not prepared to give quantitative guidance today, I'd like to make some qualitative comments on where we are seeing the business heading. As we look out to 2019, we are not seeing a slowdown. All indications are for continued growth in the industrial sectors, driving continued growth in our Base Business. Given the strength of our 2018 Base Business, we are expecting growth rates to moderate in 2019 compared to 2018 and Base Business growth ranging from 3% to 5%. Our Event Business is more difficult to protect and predict at this stage of the year, however we're looking at projects that are already under contract. We expect that we'll be able to replace 2018 completed projects and grow slightly upon them in 2019 for a low single digit growth rate. Our field and industrial services group should continue to see high single to low double digit growth, as we begin executing on recently won retail awards and other service based contracts in 2018. Finally, we’ll benefit from additional eight months of operating results from our recently acquired US Ecology Dallas and Midland operations in 2019. As previously announced, we expect this acquisition to deliver about $20 million of revenue and $4 million of adjusted EBITDA for 2019. From a capital expenditures front, we spend increased capital in landfill development in 2019. In addition, as experienced in 2018, there have many opportunities to deploy additional growth capital and I expect this trend to continue into 2019. Our current estimates of capital expenditures for 2019 are between $50 million and $55 million. All in, we’re expected to see solid growth in 2019 over 2018 levels. With that operator, can you open up the call for questions and comments?

[Operator:]

[Operator Instructions] Today's first question comes from Michael Hoffman at Stifel. Please go ahead.

[Michael Hoffman:]

Hey Jeff, I'm trying to understand where we are in the sort of the cash conversion of the model. I may have misheard the number and I'm sitting here looking at my model quickly, your $55 million of cash flow from ops year-to-date is well below the normal sort of cash, that percent of revs. I mean, you're normally sort of high teens, low 20%. So, are we expecting a pretty healthy working capital swing or something in the fourth quarter that gets us cash flow from ops back up into the high teens as a percent of revenues and therefore supporting a good free cash flow number even on higher capital spending.

[Eric Gerratt:]

Hey Michael, it's Eric. I think we will. Part of what's driving that cash flow from ops is we have a pretty sizeable income tax receivable and it's continued to grow this year, which we’ll be working through that as we get into the fourth quarter into next year. So, that is part of the driver because that's a pretty big use of cash of that receivables grown. But I think we will see some working capital pick up in the fourth quarter, we typically do. So, I think that would be our expectation.

[Michael Hoffman:]

So, with that said, where do you think you come out on free cash flow for the year at this point, are we still in a $50 million to $60 million number?

[Eric Gerratt:]

Yeah, I think we're still and again based on how we've historically defined that which starts the calculation in the presentation. Yeah, I think we're still in that guidance range of $56 million to $60 million, despite kind of the list in guidance from EBITDA perspective. We also have the list in the CapEx, so I think we're still going to be in that $55 million to $60 million range.

[Michael Hoffman:]

Okay. And given the heightened level capital spending next year given you've some preliminary views of 2019. You would still expect free cash flow to grow at a healthy rate. We wouldn't see a compression in the cash conversion of the model in 2019. It would still improve in the 2019 even with the heightened level of spending.

[Jeff Feeler:]

So, right now with Michael, we haven't formulated all of our budgeting exercises to get to that level of detail. But we are seeing a significant healthy lift in our capital spend next year and it’s predominantly geared towards some of our landfill construction that will probably continue for a couple of years from that. So, right now we could be flat next year on free cash flow.

[Michael Hoffman:]

Okay. And then, this cycle has been so different than all previous industrial cycles and normally at this point, the pace and activity of event work, all the little stuff that happens that creates the foundation of bigger things, can increase that incremental lever to. It seems to be better defined historically. But how do you feel about the likelihood of ever getting back to the last peak and event level revenues and within the company at this point, given how this has played out so far.

[Jeff Feeler:]

Well, from the overall health of the market and we're seeing a lot of strength in the marketplace. When you're really kind of narrowing the question down to our project based business. That's really the big projects are going to be driven by regulatory drivers and enforcement type actions. A lot of that’s timing; it doesn't necessarily be correlated to the health of the economy. We're seeing a lot of opportunities out there. We're seeing some big projects out in the next five years that will definitely move. But to get that back to a peak in any given year, it's hard to gauge that at this stage. Really what we're looking for is steady to increasing growth in our Base Business and continued opportunities on the Event Business, which we believe is growing over time. And you know we'll take advantage of those opportunities when the larger projects come to market to be well positioned to win those.

[Michael Hoffman:]

Okay. And then the event delays that have happened this year, basically roll into next year?

[Jeff Feeler:]

Yes.

[Michael Hoffman:]

Okay. And that's the foundation of low single digit and then anything incremental might be able to walk that up, but this idea of some of the smaller were activity that happens away from the bigger projects.

[Jeff Feeler:]

Exactly. And I think I’d remind the audience, when we entered the year, we thought we were going to be in the low single digit growth rate at our Event Business and there was two big factors that really has driven that difference. One is this timing on some of these larger projects that have shifted, which is just shifting into 2019. And then we put a self-imposed restriction on volume coming into our Canadian facility as we expanded our permit up there. And we got that permit expansion. It just took a little bit longer than we thought. So, we're well positioned in the future for that. Our Canadian operation has definitely recovered, since we lifted those restrictions. But we're not going to make up the ground. So, it's the combination of those factors that's making it be a little softer this year than expected. But the rest of our business is really strong and has more than made up for that, which actually is encouraging for the entire management team here because we're seeing the strength in the underlying business that we’re not seen any of this in the overall project market.

[Michael Hoffman:]

Okay. Then there's been something in the neighborhood of about $80 billion being invested in new capacity growth in refining and likes all through the Gulf and Houston and down to Corpus. How do you see that playing out to your benefit on this, improving sort of the scope of this base going forward, particularly your exposure in Corpus and maybe now with this investment in Dallas.

[Eric Gerratt:]

Yeah, honestly that's one of the real reasons and the drivers why we made this investment in Dallas. We’re very bullish on Texas right now and we see a lot of the investment being put in place. We have core assets there. We have some competitive advantage in core competencies we can bring to market. And so add new industrial facilities come online, that's going to give us more opportunities to continue to compete for business. And when you think that there's going to be higher growth levels in that region of the country than other marketplaces.

[Michael Hoffman:]

And then last question for me on the Field and Industrial Services, one of the challenges that you have been faced when you purchased it four years ago, low margin you had to improve the walk up and quality. It would appear you've managed to make that move. How do we think about the underlying trend line of those that the EBITDA margins of that business as you report them looking forward? Is this now structural or did I just have a really good quarter?

[Eric Gerratt:]

We had a really good quarter. I don't want to say we have made major improvements, but there's more to go there and the team is working really hard to capture that margin expansion in that business line. But we had a really good quarter. It was benefited from the recently acquired operations that uplifted that margin in that segment. But even when you strip that out, we saw year-over-year growth and we saw sequential growth. We're in that 10% to 15% range overall, as well as, when you strip out some of the higher margin jobs that we did, you know that's still in the between 10% to 15%. Pending is our EBITDA margins, by the way.

[Michael Hoffman:]

Yeah. All right. Thank you.

[Eric Gerratt:]

All right. Thanks, Michael.

[Operator:]

[Operator Instructions] Sorry no further questions. I would now like to turn the conference back over to the management team for any final remarks.

[Jeff Feeler:]

Great. Well, thank you for attending today's call and we look forward to updating you on Q4 results on February of 2019.

[Operator:]

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.