US Ecology, Inc.
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Operator:]

Good morning and welcome to the first quarter 2017 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 note that this event is being recorded. I would like to now 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 on 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 are 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 2017 guidance. With that, I would like to turn the call over to Jeff.

[Jeff Feeler:]

Thank you Eric and good morning everybody. I will start up this morning's call with a few summary comments on our first quarter results that we released yesterday before turning the call back to over to Eric for some additional details on the financial results. I will then close out the call with an update on our 2017 business outlook before opening up the call for questions or comments. For those that are following the webcast presentation, please direct your attention to slide five. Yesterday, US Ecology reported first quarter results that were in line of slightly better than our expectations. As we discussed back in February, we projected this year's first quarter results to be down from the same period last year. This is due to project deferrals from 2016 that are not expected to benefit 2017 results until the summer time construction season as well as headwinds in our field services group resulting from a contract that was not renewed into last year. This comes on top of normal seasonality and seasonal softness that typically expect our first quarter results. Our environmental services segment was in line with overall expectations. We saw positive momentum in our base business with a growth of 3% over the same period last year and sequential growth of 2% over the fourth quarter of 2016. Our year-over-year growth in base business was impressive when considering that it came on top of the strong growth that we saw in last year's first quarter. The positive trends in the base business continued to support our view of an improving industrial economy. The strength in the base business helped to offset the weakness in our event business, which was down 9% over the same period last year. Project deferrals that we experienced last year resulted in less year-end carryover volume into the first quarter that we would normally anticipate. Additionally, the majority of the deferred projects are likely to begin shipping in 2017 in the second and third quarters consistent with the construction season. Finally, the large multiyear cleanup project that has been experiencing delays has start excavation in areas that will require shipments to our facilities and we expect these shipments to begin sometime in the second quarter. Our in line environmental services also came in line despite some significant wind damage from a winter storm that has temporarily closed one of our larger treatment studies. Fortunately our strong treatment and disposal network has allowed us to continue servicing customers with minimal interruption. This is the benefit of having built such a large substantial network. We are currently in process of repairing the treatment facility and should resume full operations by the end of the second quarter. While this setback did hamper our financial results in the first quarter, we are pleased with our team's response to this challenge and anticipate receiving business interruption insurance proceeds later this year. Our field services segment performed as expected for the quarter with reduced business activity due to a contract that was not renewed in the prior year. The negative impacts of the operating leverage as well as equipment lease termination charges put pressure on our margins for the quarter. We do however continue to see positive momentum in this business segment with increased business activity and bidding activity that puts us in a position to replace lost revenue during the year. Our industrial services business delivered lower than expected results in the quarter on softness in industrial maintenance and cleaning services. Timing also impacted this business as certain projects did not start as planned. When looking at the business overall, I continue to be pleased with our progress. I continue to see positive indications of a stronger industrial economy and increased bidding activity consistent with our 2017 outlook. With that, I will the call back to Eric.

[Eric Gerratt:]

Thanks Jeff. As shown on slide 8, revenue for the first quarter of 2017 was $110.2 million, down from $113.3 million in the first quarter of 2016. Revenue for the environmental services segment for the first quarter was $81.3 million compared to $81.5 million in the first quarter last year. The small decrease was driven by a 17% decline in transportation service revenue mostly offset by a 3% increase in treatment and disposal revenue. Base business for the environmental services segment was up 3% compared to the first quarter last year and represented 84% of treatment and disposal revenue. Event business for the environmental services segment decreased 9% from the first quarter last year and represented 16% of treatment and disposal revenue. The field and industrial services segment delivered revenue of $28.9 million in the first quarter of 2017. This was down from $31.8 million in the first quarter of 2016, primarily reflecting the expiration of a contract that was not renewed and softer overall market conditions. Slide nine 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, general manufacturing and other industry verticals. These increases were partially offset by decreases in the transportation and metals manufacturing verticals during the quarter. The decline in event business was primarily driven by decreases in the chemical manufacturing and utilities verticals. Turning to slide 10. Gross profit was $31.9 million in the first quarter of 2017, down from $35.2 million in the same quarter last year. Our environmental services segment contributed gross profit of $28.7 million in the first quarter of 2017 compared to $30.5 million in the same quarter last year. This decrease was primarily due to a less favorable service mix and lower landfill treatment and disposal volumes. Treatment and disposal margins were 38% in the first quarter of 2017 compared to 41% in the first quarter last year. Gross profit for the film industrial services segment was $3.2 million in the first quarter of 2017 compared to $4.8 million in the first quarter of 2016. The decline was due to the reduced revenue as well as one-time charges in the first quarter of 2017. Selling, general and administrative spending or SG&A was $19.7 million in the first quarter of 2017, up 1% from $19.4 million in the first quarter last year. The increase is due primarily to higher labor, professional and consulting as well as higher insurance costs, which were partially offset by lower bad debt expenses in the first quarter this year. Operating income was $12.2 million in the first quarter of 2017, down 23% from operating income of $15.8 million in the same quarter last year. Net interest expense for the first quarter decreased to $4.1 million compared to $4.5 million in the same quarter last year. The decrease was primarily the result of lower overall debt levels in the first quarter of 2017. Turning to slide 11. The company's effective income tax rate for the first quarter was 37.3%, down from 38.4% in the first quarter last year. The decrease reflects a higher proportion of earnings from our Canadian operations which are taxed at a lower corporate tax rate which was partially offset by a higher U.S. effective state income tax rate. We reported net income of $5.2 million and diluted earnings per share of $0.24 in the first quarter of 2017 compared to net income of $7.5 million and diluted earnings per share of $0.35 in the first quarter last year. Adjusted earnings per share was $0.23 in the first quarter 2017 compared to $0.32 in the first quarter of 2016. Adjusted EBITDA for the first quarter was $23.5 million, down 10% from $26.1 million in the first quarter last year. Turning to slide 12. We generated $20.9 million of cash from operations in the first quarter of 2017. We also invested $7.2 million in capital projects, paid down $6.9 million on our long-term debt and paid out $3.9 million in dividends to our stockholders. Our balance sheet continues to improve with net borrowings of $267.4 million at March 31, 2017. Additionally, on April 18, 2017 we entered into a new $500 million five-year senior revolving credit facility with a syndicate of banks to refinance the company's former credit facility. The interest rate under the new credit agreement is initially set at LIBOR plus 1.5%, which represents 150 basis point improvement over the interest rate from our previous credit facility. Additional details and terms, including a copy the new credit agreement, can be found in the Form 8-K filed by the company on April 20, 2017. The reduced interest rates and fees on the new credit agreement are expected to generate cash interest savings of approximately $15 million over the five-year term. Additionally, in connection with the termination of the former credit agreement, the company expects to write off approximately $5.4 million of unamortized deferred financing costs related to fees paid on the former credit facility. This non-cash charge will be recognized as additional interest expense in our second quarter 2017 results. We also expect estimated annual interest savings under the new credit agreement of approximately $0.08 per diluted share in 2017. Return on invested capital for the 12 months ended March 31, 2017 was 5.7%. Return on assets was 4.2% and return on equity for the same period was 11.7%. With that, I will turn the call back to Jeff.

[Jeff Feeler:]

Thank you Eric. As we look to the balance of 2017, we remain confident in our ability to deliver growth over 2016 results. We continue to see positive trends in the industrial sector that should benefit our base business. Additionally, we see emerging opportunities on the event business side that contribute to increase volumes in coming quarters. Our first quarter performance has served to reinforce these views. Turning to slide 14. We are reaffirming our guidance issued this past February. We still expect that our adjusted EBITDA will range from $120 million to $130 million for 2017. We also are reaffirming our adjusted earnings per share guidance of $1.69 to $1.93 per share. This reaffirmation includes the impact of our recent debt refinancing that Eric talked about earlier. As a result of the refinancing, we anticipate taking an approximate $0.15 per share charge in the second quarter for the non-cash write-off of deferred financing fees and expect to realize an approximate $0.08 per share favorable impact as a result of lower cash interest expense recognized through the balance of the year. We still are expecting that our base business will grow 3% to 5% for the full year. Event business is expected to return to growth as we see emerging and deferred projects starting in coming quarters. We still expect to see normal seasonality in our business with sequential improvement from the first quarter through the third quarter of the year with the third quarter likely being the strongest of the year. As is typical at this stage, event business start dates are skewing to our third quarter, which is the peak of the construction season. Capital expenditures are on track to range between $34 million to $37 million in 2017. And at this point, we will likely be on the high side of that range. With that, operator, I would like to open up the call for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Michael Hoffman with Stifel. Please go ahead.

[Michael Hoffman:]

Hi Jeff, Eric.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Good morning Michael.

[Michael Hoffman:]

How are you all?

[Jeff Feeler:]

Good.

[Michael Hoffman:]

Thanks for taking the questions. No place particular, remind me on page nine, where would you look for your turnaround activity to show up in any of those customer industry groups, particularly? So if things start to come back, what groups are particularly going to reflect that? And will it be base or event is how you count it at this point?

[Jeff Feeler:]

Yes. So Michael, what exactly are you referring to on turnaround? Are you just talking about project based work? Or are you talking about industrial maintenance type activities?

[Michael Hoffman:]

I am assuming that's what you meant when you said turnaround were light, meaning the normal maintenance cycles? That's certainly what we heard is, refining turnarounds. Some of those didn't happen as planned in the first quarter?

[Jeff Feeler:]

Yes. Our refinery business has been very solid and we are not seeing now, what we thought softness on the industrial services side with just industrial maintenance type activities. And in all fairness, we are concentrated in the Michigan type areas for our industrial service activities. And so not necessarily indicative of what it maybe in other geographies.

[SteveWelling:]

Gulf are work was strong in the first quarter.

[Michael Hoffman:]

Say that again, Steve?

[SteveWelling:]

Gulf area. So Texas business well refinery turnarounds, we had a strong first quarter in that area.

[Michael Hoffman:]

Okay. And using some of that issue you had was, I am missing that's the plant that you had really bad weather in March, that mega storm. So it's Michigan and it's auto related and blah, blah, blah.

[Jeff Feeler:]

Yes. No, actually no. Well, our industrial services group in the Michigan area is serving chemical and steel mills, other types of facilities. The facility that went down is actually on the environmental services side of the business and we have been able to redirect the vast majority of those to other treatment facilities within the area and service our customers.

[Michael Hoffman:]

Okay. And then last year, the 7% base business activity clearly was a pleasant surprise and it was somewhat offset by 2Q where you did zero and you kind blinked for 3.5. To some degree, we still had a milder winter. So is there activity that might not have come because there were maintenance turnarounds et cetera, et cetera that would have disrupted base. That didn't happen therefore, do I repeat last year to some degree? I am not necessarily suggesting a zero, but is three in 1Q to end up a bit two and change in 2Q and I blend for the two and three quarters for the first half kind of thing?

[Jeff Feeler:]

Michael, we did experience some delays in the Northeast due to rain and snow but I can't pinpoint any major projects that were delayed due to whether. It's possible there were base business that was impacted slightly, but it doesn't appear we had a major change there from prior years.

[SteveWelling:]

Yes. Michael. If you are talking about kind of the trend we saw last year in our base business with a really strong first quarter, a flat second quarter and a rebound kind of in the third quarter and if we anticipate that this year? Hard to say. We saw positive trends in the first quarter, which was a nice surprise. It also supports what we are seeing with regard to just the overall industrial sector, how I would expect that we would continue to see growth at that level, kind of gearing towards that 3% to 5% range for the entire year.

[Michael Hoffman:]

Okay. And then while the mix comments you made about both ES and field services are understandable just for seasonal issues. Is there anything in that mix that would cause you any pause?

[Jeff Feeler:]

No.

[Michael Hoffman:]

Okay.

[Jeff Feeler:]

It's typical. I mean that's the hard part in this business is different waste streams as well as different service lines generates a different profit profile along with it. As we look out to coming quarters and especially on some of the deferred projects and the project that start shifting, we actually see a more favorable mix on some of that business going into the second and third quarter.

[Michael Hoffman:]

And then last one for me. On the project side, the thing that was clearly evident in 2016 as we progress the year is sort of, I think it was an accordion in your project cycles, the accordion got wider and wider and wider. Have those cycle times or points of conversion from contract to doing work stopped lengthening at least, if not actually started to contract again?

[Jeff Feeler:]

Projects from last year that were deferred, we are kicking off a number of those. Some have already completed in the first quarter, but we have got quite a few starting here in the second quarter. And then on top of that, we have new work that we are bidding right now that we are expecting this summer. So one reason for confidence, we see increasing amount of event work over the next six months.

[Michael Hoffman:]

Okay. So to summarize, that backlog of deferred is starting to work down and is your sense the new work will go back to normal cycle times that it will bid and happen in a normal pattern as opposed to bid and then there is sort of prolonged wait to it?

[SteveWelling:]

Yes. Whatever normally is in event work. So I would say, yes.

[Michael Hoffman:]

Last year was a normal. Against last year, okay.

[Jeff Feeler:]

Yes. Last year, there was a lot of uncertainty for a variety of different reason which we pretty hashed out earlier in other calls. Because of that we re seeing less uncertainty right now. And if you take uncertainty out of the equation, you would expect to see a more normally of the cycle times that you are referring to.

[Michael Hoffman:]

Okay. And then $20 million still the goal to paydown in debt, Eric?

[Eric Gerratt:]

Yes. That's still what we have got built into the guidance.

[Michael Hoffman:]

Okay. All right. Great. Thank you very much.

[Jeff Feeler:]

Thanks Michael.

[Eric Gerratt:]

Thank you.

[Operator:]

Our next question comes from Joe Box with KeyBanc. Please go ahead.

[Joe Box:]

Hi. Good morning guys.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Hi Joe.

[Joe Box:]

So question on the guidance. I guess just so everybody is on the same page, are you guys excluding the $0.15 charge for the dead refi from guidance? Or are you including it in interest expense? Because it looks like you are including it.

[Eric Gerratt:]

Yes. So Joe, we are including it. So we looked at the range and even with the ancillary charges and the positive benefits we are going to see with the debt refi, we still believe that range is still good.

[Joe Box:]

Okay. So it looks like there is a $0.09 net drag if you add back the $0.06 interest tailwind. Obviously you just said you maintain the guidance. I guess I am curious why you maintained it then? Is it a function of 1Q being in line to better? Or you guys just have that much more conviction in any activity that you are starting to see pick up?

[Eric Gerratt:]

Yes. Because we feel like we are going to fall within that range, Joe. I mean, even with the large one-time charge and the favorable benefit and for us to go out and exclude a one-time charge that includes the benefits of the cash savings felt disingenuous. So we basically just left it as is and let you as analysts and other investors do the math to show that while we are probably going to be at the lower point of that range, but it's still within the range.

[Joe Box:]

Okay. I appreciate that and I do it's recognize only 1Q here. So just a couple of clarifications, I guess. When you look back to 2Q 2016, I believe that there was a little bit of Westinghouse that was still in there? Is that accurate? I am just trying to understand if there is still a little bit of tough of that comp from the prior year?

[Eric Gerratt:]

There was a tiny little bit of Westinghouse as they wrapped up in April of last year, but it's not going to be meaningful. So we have cycled the larger projects fully. So as far as a tough comp or not, it's not going to be tough comp. I just want to say that cautiously. But it's one that we expect that we are going to be able to start seeing growth as the project starts shipping as we anticipate for this quarter.

[Joe Box:]

Okay. And I guess maybe on that, to that point right there, on your main project, have you guys actually started Phase II month-to-date in April and you are actually receiving shipments now in April? Or is it still technically in front of you for the rest of the quarter?

[SteveWelling:]

No. They are loading material in, what we are going to call Phase II I guess and there are railcars headed towards our Canadian facility today.

[Joe Box:]

All right.

[Jeff Feeler:]

Just to add to Steve, Joe, but they are on the track.

[Joe Box:]

Okay. It's good to hear. And then lastly, I know direct energy for you guys is a pretty small component. When I say direct energy, I mean upstream. But you guys do have some indirect. I know you do some chemical work that goes into fraccing fluids. I am just curious if you are seeing anything percolate on the energy front?

[Jeff Feeler:]

Not materially different. We have been some growth in certain areas of that, but it's been pretty small. I think the takeaway is, it's not contracting any further. With regard to kind of the whole Gulf Coast area, they get benefited from the entire, I will call it, energy streams. That has been a very strong area as a country for us. And so we are seen that in a number of different areas. Our landfill volumes are up. Our thermal volumes are up. What the true cause and effect of all that is, not entirely sure. But we are starting to see a rebound in some of those areas.

[SteveWelling:]

There are some related industries in the Midwest like seamless tubing for wells where if we see further uptick, we will have increased business in the Midwest also.

[Joe Box:]

Okay. Great. I appreciate the color. Thank you.

[Jeff Feeler:]

Thank you Joe.

[Operator:]

[Operator Instructions]. Our next question comes from Charlie Wohlhuter with Raymond James. Please go ahead.

[Charlie Wohlhuter:]

Hi. Good morning guys.

[Jeff Feeler:]

Good morning Charlie.

[Charlie Wohlhuter:]

Hi Jeff. Based on the performance of the base business in the quarter and then following the kind of round of price increases you had mentioned last quarter in the business, can you breakdown that 3% on price versus what was on volume?

[Eric Gerratt:]

Yes. We really don't breakdown price and volume relationships because not all volume is equal type thing. We were successful last year pushing along pricing increases and we have pushed along again, locked the pricing increases this year that will benefit future quarters on that. Overall, the 3% is predominantly probably going to be more price than it is volume, but we don't really have any metrics to break that down specifically.

[Charlie Wohlhuter:]

Okay. All right. Great. And then on the event side, you noted that you expect the majority of the deferrals to come back this year. Can you quantify what kind of the "majority" is with respect to that, call it $10 million to $15 million deferred from last year? Is it 60% of that? Or is it closer to like 80%, 85%?

[Jeff Feeler:]

Yes. We haven't quantified that. As we look at the project pipeline and the best analogy I can give is that when we look at 2016 total events, it was around the $48 million to $50 million range and when we look at what the opportunities are out there, we pretty much have that same deferral amount right in that same range. Now some of those deferrals are going to be deferred into 2018, 2019, depending on the individual projects. But we are seeing it, a lot of the deferrals that a lot of are gearing up to start going here in the back half of the year. So still pretty confident. The wildcard we always have is, it comes down to what is normal deferrals that you have just routinely in this business, given that we are dealing with complex waste sites and cleanups. So we are seeing, continue to see emerging opportunities. We have seen pipeline and bidding opportunities and we feel comfortable that we are going to have growth in our event business this year.

[SteveWelling:]

We have also had delays in government work waiting for the federal budget which hopefully very soon. We will be able to kickoff work that's just waiting the budget process to be finalized.

[Jeff Feeler:]

Yes. And Charlie, the other thing that I will note on event in the first quarter is, if we did have headwind with cycling Westinghouse and if you strip that out of event business, event business was only down about 2%, Q1-over-Q1. So that gives a little more color there.

[Charlie Wohlhuter:]

Okay. All right. That's great. Thank you. And then actually Eric, with the recent debt refi, the kind of the interest expense run rate in 3Q, if my math is correct, is it going to be about $3.4 million or so? Just want to understand what that kind of the go forward run rate is going to be on the P&L?

[Eric Gerratt:]

You are talking for the third quarter specifically?

[Charlie Wohlhuter:]

Yes. So post the $5.4 million non-cash charge? Just kind of like the general run rate?

[Eric Gerratt:]

Yes. That's probably in the range. It's going to vary based on that paydown and what we do with free cash flow. But we expect it's about $0.08, which is around high $2 million to $3 million of savings for full year.

[Charlie Wohlhuter:]

Okay. And then my last question here, it's kind of seen from the proxy that the organization didn't really meet their goals last year. And can you kind of talk about what the incentive comp accrual differential would be this year if you hit your targets and reach about 100% payout versus what last year's payout was?

[Eric Gerratt:]

Yes. Well, so Charlie, you are right on that. We didn't hit our targets last year. Our very few at the targets that are part of our short-term incentive plans and if we hit full target this year, there will probably be about $3 million to $4 million of incremental that would be paid out. But that is reflected in our guidance. Our guidance assumes we hit targets.

[Charlie Wohlhuter:]

Okay. All right. Perfect. All right. That's all I had. Thank you.

[Operator:]

Our next question comes from Barbara Noverini of MorningStar. Please go ahead.

[Barbara Noverini:]

Hi. Good morning everybody.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Good morning.

[Barbara Noverini:]

You mentioned significant bidding activity in FIS. Can you give us any color on the competitive landscape there? How aggressive have players been in the bidding process now that the industrial economy seems to be strengthening? And are there any particular services in your portfolio that are resonating more with customers at this point?

[Jeff Feeler:]

Well, Barbara, in my mind the field industrial services is probably the most heavily competed part of our business. It's the lowest barriers to entry and I haven't seen a real change from prior years. We are bidding on a number of things in hopes of growing that business segment, but I don't think any change in strategy. We are not seeing anything different from our competitors that I could see.

[Barbara Noverini:]

Okay. Great. Are there any services in the portfolio that are sticking out that have been more in demand at the moment?

[Jeff Feeler:]

Honestly, there tends to be quite a bit of demand in all of the areas. If you look at first quarter, we are pretty much able to grow all the areas of our field services business with exception of retail which is where we had a setback last year with a contract that was not renewed. If you strip that out and looked at retail, absent that contract, we were up. So we have been able to grow all of that business. We continue to see opportunities across multiple fronts across most of those service lines.

[Barbara Noverini:]

Okay. Great. Thanks.

[Jeff Feeler:]

You bet.

[Operator:]

[Operator Instructions]. At this time it appears that we have no further questions. So I would like to conclude our question-and-answer session and turn the conference back over to Jeff Feeler for any closing remarks.

[Jeff Feeler:]

I want to thanks those for joining today for first quarter update. We look forward to giving you an update on second quarter towards the end of July. Thank you. Have a great weekend.

[Operator:]

The conference has now concluded. Thank you for joining on today's presentation. You may now disconnect.