US Ecology, Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good morning. And welcome to the Third Quarter US Ecology Incorporated 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 this event is being recorded. I would now like to turn the conference over to Eric Gerratt. 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 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 and 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’d like to turn the call over to Jeff.

[Jeff Feeler:]

Thank you, Eric, and good morning, everyone. I’ll start this morning’s call with an overview of our third quarter results release yesterday, before turning it back to Eric for a detailed financial report. I will then close out with an update on our business outlook for the balance of the year and then give some early indications on 2018, before opening up the call for questions. For those following the webcast presentation, please direct your attention to slide five. Yesterday, US Ecology reported third quarter 2017 financial results delivering $134.1 million of revenue and $27.1 million of adjusted EBITDA. These results did not meet our expectations due to a number of uncontrollable factors and unexpected costs. I want to spend a few moments on the quarters challenges right upfront as they altar the results and mapped many positive and the underlying growth in the business. The first major impact in the quarter was this year’s hurricane season and in particular Hurricane Harvey. Thank our employees are safe and our facilities do not suffer significant damage from these storms. Unfortunately our customers in the broader Gulf Coast market were hit much harder than we were. Hurricane Harvey’s unprecedented rainfall and devastation in the Greater Houston area impacted our volumes and revenue, increased our operational cost and hurt our efficiencies during the quarter. Many of our customers and waste generators are still not back to full production, in fact their operations are likely to have challenges throughout the fourth quarter, as well as they deal with the aftermath of the storms and focus on returning to normal production levels, while dealing with thousands of impacted employees. For some perspective, the Gulf Coast market is one of our largest Base Business markets, given the significant industrial activity in that region. Base Business for our Texas facility declined over 16% in the quarter compared to the same quarter last year. The majority of this decline was associated with the impact of the hurricane. Looking at our business on a nationwide level, we estimate Hurricane Harvey impacted our total company Base Business growth by 2 percentage points, 4 percentage points during the quarter, have the hurricane not that region we believe Base Business growth would have been closer to 3% or even better. Event Business in this region was also impacted, given the significant downtime, customers priorities are focused on returning to the normal production levels as opposed to investing in maintenance and expansion opportunity that tend to drive our project-based volumes. As per future benefits from the storm cleanup it is not yet clear what incremental volumes we will receive or when. We have received some small jobs and inquiries but nothing significant to report at this time. On the operational side, the increase precipitation from Hurricane Harvey had a significant impact on our cost during the quarter. We estimated that we incurred in access of the million dollars of direct cost to rent takes and other equipment just to contain and manage the storm water from the storm. In addition, reagents used to treat waste were not as effective due to high concentrations of moisture. This resulted in increased usage in reagent cost. The $1 million estimate does not take into account other non-quantifiable operational inefficiencies which there were many. Overall, our Texas facility delivered less than half of this anticipated EBITDA contribution for the third quarter of 2017. We do expect significant sequential improvement in our Texas business in the fourth quarter as normal production levels start to resume. But it will not make up for the challenges we face in the third quarter. Our rate regulated business which is typically very predictable quarter-to-quarter was also below expectations. During the quarter our largest customer for that business was placed under regulatory restrictions and precluded them from shipping waste. This unusual occurrence resulted in over $750,000 of loss EBITDA during the quarter. While the shipments have recommenced in the fourth quarter is unlikely it will make up the full amount by the end of the year and will likely carryover into 2018. As we mentioned in the press release, we’ve had several unusual charges during the quarter. We were hit with an unanticipated tax assessment for $1.1 million related to the BSS property value at our Michigan landfill associated with our 2014 purchase of EQ. We are rigorously appealing this assessment. Unfortunately we do not expect resolution this year. Lastly, our business interruption claim associated with the treatment -- treatment facility damage in the winter storm this past March was not received in the third quarter as anticipated. As previously Steve stated, we anticipated receiving $2.5 million to $3.5 million in our third quarter. On the positive note, we have successfully reached an agreement with our insurance carriers and will be recognizing $2.6 million of recoveries in our fourth quarter. When you back up the above mentioned factors and mask out the underlying strength in our business, our quarter perform relatively in line with expectations. Our ES business continues to be strong, generating positive Base Business growth. Our Event Business continued to improve, driven by a regulatory enforcement project and more opportunities in the market. Those are have been positive growth. As we referenced last quarter, we have been concerned with projects pushing out into the fourth quarter. This trend continued and as a result performance in our Event Business was a little light relative to target. We also yet have seen -- we also have yet to see many opportunities from the 2015 different projects move this year. We have over half of the $50 million of projects from 2016 now expected to move in 2018 or beyond. Our Field Services business continued to have success in the market, replacing lost revenue from the contract that was not renewed last year. Excluding the non-renewed contract, we saw double-digit revenue growth in our small quantity generation services. We have also seen double-digit growth in our total waste management group. We continue to win new retail and total waste management contracts that will start to benefit us in 2018. On areas -- other areas of Field and Industrial Services continue to face certain headwinds in our third quarter, including a remediation, industrial and terminal services group. However, these trends were anticipated to improve in 2018. While the bottomline result is not what we expected it to be, I’m very encouraged by the fact we continue to see improving -- improvement in the underlying business conditions and we continue to make traction in our core services that will provide opportunities for future growth. The current quarter is a setback, but underlying fundamentals are in positive territory and improving. With that, I’ll turn it back to Eric for more financials.

[Eric Gerratt:]

Thanks, Jeff. As shown on slide eight, total revenue was $134.1 million in the third quarter of 2017 compared to $124.8 million in the third quarter of 2016. Revenue for the Environmental Services segment for the third quarter was $97.7 million, up 11% compared to $87.8 million in the third quarter last year. This increase was driven by a 9% increase in treatment and disposal revenue, as well as a 21% increase in transportation service revenue. Base Business for the Environmental Services segment was up 1% compared to the third quarter last year and represented 74% of treatment and disposal revenue. As Jeff mentioned, we estimate that Base Business grew approximately 3% when excluding the hurricane impacts. Event Business for the Environmental Services segment was also up increasing 40% from the third quarter last year and represented 26% of treatment and disposal revenue. The Field and Industrial Services segment delivered revenue of $36.4 million in the third quarter of 2017, while down from $37 million in the third quarter of 2016, we have been successful at winning new business to replace the revenue from the expiration of a contract that was not renewed in late 2016. Softer market conditions for industrial and remediation services remain a drag on revenue for the Field and Industrial Services segment during the quarter. 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 chemical manufacturing and general manufacturing verticals. These increases were partially offset by decreases in the refining and Broker/TSDF verticals during the quarter. The increase in Event Business was primarily driven by the chemical manufacturing and government vertical, partially offset by decreases in the general manufacturing verticals. Turning to slide 10, gross profit was $37.7 million in the third quarter of 2017, down from $39.4 million in the same quarter last year. Treatment and disposal margins in our Environmental Services segment were 38% in the third quarter of 2017, compared to 43% in the third quarter last year. This decrease was primarily due to a less favorable service mix and the incremental costs associated with the impact from Hurricane Harvey on our Robstown, Texas facility, which we estimate had a negative impact on T&D margins in the third quarter of approximately 130 basis points. The decline was also partially attributable to the decline in our rate regulated revenue, continued recovery of our damage treatment facility and negative contribution from our airport recycling services. Gross margin for the Field and Industrial Services segment was 13% in the third quarter of 2017, compared to 15% in the third quarter last year. This decline was due to lower route density in our smaller quantity generation services as we rebuild and replace lost business from the prior year, as well as the less favorable service mix in our industrial services and remediation businesses in the third quarter of 2017. Selling, general and administrative spending or SG&A was $22.4 million in the third quarter of 2017. This was up 22% from $18.4 in the third quarter last year. The increase is primarily due to higher labor and incentive compensation, and approximately $1.1 million for property tax assessment-related to our acquisition of EQ Holdings. This assessment for the 2015, ‘16 and ‘17 tax years is being appealed by the company. Operating income was $15.3 million in the third quarter of 2017, down 27% from operating income of $20.9 million in the same quarter last year. We reported net income of $8.4 million and diluted earnings per share of $0.38 in the third quarter of 2017, compared to net income of $10.1 million and diluted earnings per share $0.46 in the third quarter last year. Adjusted earnings per share were $0.37 in the third quarter of 2017, compared to $0.47 in the third quarter of 2016. Adjusted EBITDA for the third quarter was $27.1 million, down 15% from $31.7 million in the third quarter last year. Turning to results for the first nine months of 2017 on slide 12, total revenue was $370.3 million, compared to $360.5 million in the first month -- first nine months of 2016. Revenue for the Environmental Services segment for the first nine months of 2017 was $268.6 million, up 7% compared to $252.1 million in the first nine months of 2016. The Field and Industrial Services segment delivered revenue of $101.8 million in the first nine months of 2017, down 6% compared to $108.4 million in the same period of 2016. Net income for the first nine months of 2017 was $18.6 million or $0.85 per diluted share, compared to $26.6 million or $1.22 per diluted share for the first nine months of 2016. Adjusted earnings per share was $0.99 for the first nine months of 2017, compared to $1.16 for the same period of 2016. Adjusted EBITDA was $78.1 million for the first nine months of 2017, compared $85.5 million in the first nine months of 2016. Turning to slide 13, we generated $49.4 million of cash from operations in the first nine months of 2017. We also invested $26.4 million in capital projects, paid down $10.9 million on our long-term debt and paid out $11.8 million in dividends to our stockholders. Our balance sheet continues to improve with net borrowings of $267.8 million at September 30, 2017. With that, I’ll turn the call back to Jeff.

[Jeff Feeler:]

Thank you, ERIC. As discussed the unexpected charges and challenging business conditions experienced in the third quarter have created headwind for our full year outlook in 2017. We expect to see substantial improvement in our fourth quarter results. However, we do not think it will be sufficient to make up from the third quarter challenges we outlined. Therefore, we are revising our adjusted EBITDA guidance for the full year of 2017 downward to $114 million to $119 million. Our previous guidance was at the lower end of $120 million to $130 million range. From an adjusted earnings per share standpoint, we are revising our range to $1.60 per share to $1.72 per share. This is down from our previous guidance range of $1.69 per share to $1.93 per share. The revised guidance reflects challenges faced in our third quarter and assumes we will continue to see challenging conditions in the Gulf Coast market for at least the remainder of 2017. Overall, we expect Base Business to grow in the 3% to 5% for the fourth quarter. Event Business is expected to improve over the third quarter levels and assume some volume pushed into the first quarter of 2019. Timing of Event Business volume remains a risk in our guidance as a result of shipments schedules, weather patterns and timing of holiday schedules at our customers. As we look to 2018 it is still too early to provide detailed guidance. However, directionally I see much improvement over this year’s level. We hope not to repeat many of the issues faced us in 2017. This includes our out of service treatment facility due to wind damage earlier this year, hurricane impact on our business and the unusual charges. Further, we have been stating all year that our pipeline of opportunities continues to be strong and looking sequentially throughout the year has been improving. Next year we will have to replace volume from a large regulatory cleanup but expect future phases of that same cleanup will significantly fill that void. All industrial trends continue in positive territory given us comfort that we will see continued Base Business growth likely in the mid-single digits. We believe that there is also pent-up demand for both Base Business as a result of the hurricane in the Gulf and for Event Business as cleanup opportunities continue to build. On the Field Services side we expect much stronger topline performance with contracts won in 2017 that will be executed in 2018. We have been successful winning new retail account that will increase our stop count and continue to help build our route density and efficiencies. We also are in the process of contract with the major industrial customer for a large total waste management program beginning in 2018 and serving over 800 plants. This is significant opportunity that allows us to leverage our Field Services expertise and knowledge, while being on the front-end of remediation opportunities that may leverage our Environmental Services assets. Our Industrial Services business should recover from a down year and grow as our industrial base customers resume maintenance and cleaning activities. These positive trends developing throughout most of our business lines that gives us confidence we will see much stronger revenue and profit growth in 2018, despite the obstacles, I continue to be energized and what we’re doing at US Ecology. Our teams are focused on delivering service excellence, executing on our strategy and winning in the marketplace. This position us for the long-term as we build our brand and build deficiencies in our business, while staying focused on our core competencies of Environmental Services. With that, Operator, please open up the call for questions and comments.

[Operator:]

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

[Michael Hoffman:]

Thank you very much. Good morning, everybody. Thanks for taking my questions.

[Jeff Feeler:]

Good morning.

[Michael Hoffman:]

So, Jeff, on the free cash flow where -- $32 million for the year where -- year-to-date, where do you think you end the year?

[Jeff Feeler:]

Michael, I think, we will end the year between somewhere a little north of $40 million to as high as about $42 million, $43 million, so between $40 million and $43 million.

[Michael Hoffman:]

Okay. And then, how do I think about capital spending going into ‘18, were other things that resolve all of this disruption or there -- is there -- is how do I think about the capital spending overall, I guess, way to ask question, ‘17, ‘18?

[Jeff Feeler:]

Sure. I will let Simon talk about ‘17 and I will give some color on ‘18.

[Simon Bell:]

Yes. As we look at ‘17, there was a -- as we are trending to the upper end of our forecast, we had some unexpected costs with our deepwell. I think we mentioned earlier the stabilization building of the damage we had wind damage in Detroit. We also took -- purchase some property adjacent to some of our facility was an opportunistic purchase and I think long-term provide some growth vehicle. So we had a couple of items that we didn’t expect that came round, but generally in line with our forecast for ‘17.

[Michael Hoffman:]

So that with…

[Jeff Feeler:]

And I will…

[Michael Hoffman:]

Go ahead, Jeff.

[Jeff Feeler:]

Good ahead Michael.

[Michael Hoffman:]

Well, that -- and that puts me where then for the full year number?

[Simon Bell:]

We believe about $37 million.

[Michael Hoffman:]

$37 million, okay. Okay. Sorry, Jeff, to intrupt.

[Jeff Feeler:]

And that -- and Michael that kind of what’s baked into the free cash flow guidance…

[Michael Hoffman:]

Okay.

[Jeff Feeler:]

$37 million.

[Michael Hoffman:]

Okay.

[Simon Bell:]

Yeah.

[Michael Hoffman:]

Okay.

[Jeff Feeler:]

And I was just going to add, Michael, as related to the storms, there was actually not a lot of physical damage down in either of our facilities whether it’s in Florida, Texas, Texas that’s cause in change CapEx. There’s always a little bit you get with that but we were very fortunate on that front.

[Michael Hoffman:]

Okay.

[Jeff Feeler:]

When we start looking at ‘18, ‘18 is going to be a higher capital spend year and the reason for that is really driven by our landfill cost and so we have many of our landfill facilities that are going to be expansion, we are going to be in Texas hopefully building out brand new future landfill and unfortunately when you start building out those you have upfront costs that will benefit future years. And so, we’ll have to break this in part where we do anticipate it will have a much higher capital spend next year when you look and break it down our maintenance and growth is going to be very consistent to what is this year.

[Michael Hoffman:]

Okay. And if I think about much higher is that $50 million or $45 million?

[Jeff Feeler:]

It’s probably in that $45 million to $50 million.

[Michael Hoffman:]

Okay.

[Jeff Feeler:]

And this is early numbers, we are still working through all of what we are planning to next year.

[Michael Hoffman:]

Okay.

[Jeff Feeler:]

And as -- you worked with us long enough to know, you know we differ as much as we can on the landfill construction, but the worst thing we could be is be in a position that we are out of space.

[Michael Hoffman:]

Right.

[Jeff Feeler:]

And so we want to make sure we have ample space build.

[Michael Hoffman:]

Okay. So as I think about the patterns here 3 to 5 and Base get, you had actually, because it’s off of a low base, very good year-over-year growth in Event. Does that settle down to a still double-digit but lower rate or do you think it stays at these high, I mean, you have been running 20% or 30% year-over-year changes. What -- how do we think about the -- what the pipeline is telling you about year-over-year change in ‘18?

[Jeff Feeler:]

Yeah. I think for the next couple quarters you still going to see fairly high EBIT business growth. As we start cycling 2018, it’s going to -- the growth percentage should moderate. Now if we see some of this pent-up demand and we see some positives there. We could maintain a pretty high opportunity on the Event Business. Again that’s the wildcard that we just don’t know when all the timing factors involved.

[Michael Hoffman:]

Okay. So the weather -- one of the things I am struggling with is, there’s been this a pattern of expectation, clearly must be a dialogue with the customer about scheduling and validating a contract and then slippage now, you throw in the middle of this two major hurricanes and how do you read through how much of that is causing this versus a repeat of the delays that we saw through ‘16. How do you feel about the psyche of your customer about, I know I need to spend this, but I don’t, I can’t do it right now, busy trying to get back up and running versus, I am not sure I want to spend it right now?

[Jeff Feeler:]

Yeah. Well, and honestly, Michael, I know where the frustration is coming from with -- it seems like every quarter we talked about some form of delay or differ -- a deferral and I would like to paint it a little bit differently this year. And when you compare and contrast ‘17 to ‘16. I mean, last year’s delays were much different than what we are seeing today, is our customers were delaying projects multiple quarters or not given a lot of certainty of movement. This year we are actually just seeing volume pushing one month, two months, there’s a higher confidence level of movement. There’s a lot of opportunities in the pipeline that we believe are going to move and start moving. The important part of the business and it’s not just us, it’s anybody to operates in this space is delays are just inherent to the business and I think that that goes without being said. And so I think the hurricane impacted that region. It’s going to cause some additional challenges. We also have seen customers that have just gotten a later start this year, but they are starting to move which is starting to trickle volume into January and February of next year, and so that’s kind of the tone we are see in this year as opposed to what we are seeing last year, and we continue to land new opportunities out there that that are going to be positive for next year and beyond.

[Michael Hoffman:]

Okay. And then, things like main that that’s on plan. It started shipping and it’s doing what it supposed to be doing?

[Jeff Feeler:]

Yeah. That project is, it has been a good success for the company. It’s still going. We have completed kind of Phase 1 or more in the final stage of completing Phase 1 and there’s more phases next year that we will be able to assist the customer on.

[Michael Hoffman:]

Okay. And then we think the Field and Industrial Services, typically if we are in some path of normal activity, that business sort to be 2x to 3x a growth rate of your underlying Environmental Services business, well, margin but it’s a feeder in. Where do we -- put the visibility on the return of that to normalcy?

[Jeff Feeler:]

Yeah. So our Field and Industrial…

[Michael Hoffman:]

External tough comp, I guess, your tough comp.

[Jeff Feeler:]

Okay. So, Field and Industrial Services business is comprised with a whole bunch of different businesses. And so as we kind of talk about in our prepared comments, we are seeing much success on our small quantity generation services, on our total waste management programs, and we’ve seen really strong growth there in the double digit, which even over year-over-year some of that on some tougher comps last year to. So we are having great success there from that standpoint. The areas that we continue to have headwind, which is impacting our topline revenue numbers is our remediation and industrial services side. Last year there was a lot more opportunity that we saw in the marketplace especially on the Industrial Services side. This year it seems like our customers are holding back deferring controlling cost as opposed to the retooling, doing other things in their businesses. We don’t anticipate that to be a long-term trend. So we do anticipate growth again on that next year recovering and then all of those things that we talked about that we have won on the Field Services side will continue to contribute to topline performance next year.

[Michael Hoffman:]

Okay. And then, on G&A is, if I take out all of these one times the taxes above average investment in growth are we at $21 million a quarter?

[Eric Gerratt:]

Mike, I think that will be in that $20 million, $21 million fourth quarter. Going forward that’s probably pretty close or pretty good estimate is around $21 million.

[Michael Hoffman:]

So call it that plus whatever normal inflation would be is…

[Eric Gerratt:]

Yeah.

[Michael Hoffman:]

Is the way to think about it?

[Eric Gerratt:]

Yeah.

[Michael Hoffman:]

And then anything unusual in the taxes going forward?

[Eric Gerratt:]

No. I will tell you our tax rate for the quarter, obviously, the higher proportion coming out of Canada helped our rate come down, that got tampered a bit by our U.S. rate went up and that’s really more of a functional of lowering kind of our projected earnings for the year in relation to our permanent differences. So outside of that and kind of the earnings shrink for this year, nothing really to report there, that’s unusual.

[Michael Hoffman:]

$37 million for next year’s safe bet then we will see what the mix looks like.

[Eric Gerratt:]

That sounds right.

[Michael Hoffman:]

Okay. Thanks for taking my questions.

[Jeff Feeler:]

All right. Thanks, Michael.

[Eric Gerratt:]

Thanks, Michael.

[Operator:]

Next question comes from Joe Box with KeyBanc Capital Markets. Please go ahead.

[Joe Box:]

Good morning, everyone.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Hi, Joe.

[Joe Box:]

So I think I heard you mentioned that the Texas’ Base Business was down 16%, but did you actually say what the overall Base Business would have been down ex hurricane or including the hurricane?

[Eric Gerratt:]

So Base Business was down including the hurricane.

[Joe Box:]

Yes.

[Jeff Feeler:]

Up 1%.

[Eric Gerratt:]

I am sorry, it was up 1%. Sorry, apologies. Yeah, it was up 1%. Excluding the hurricane and that is up 1%, we expected it to be about 3% and if you further looked at the regulated business which is typically very predictable we would be closer to 5% during the quarter on Base Business growth.

[Joe Box:]

Got it. Okay. And then, I guess, as you kind of look into 4Q, are you starting to see any pent-up Base Business shipments that might start to materialize in the near-term. I guess maybe one way to look at it would be just color on tons per day or shipments or anything that would give us a sense of if there is pent-up Base Business and it starting to unlock?

[Jeff Feeler:]

Well, Joe, that’s a great question. But we don’t track our volumes between Base and Event during the month. So we don’t have necessarily visibility in there. What we can say as volumes are tracking to what we are talking about here today with regard to our guidance for the fourth quarter. The one wildcard which always normally get asked and you didn’t ask it, but I will just fill in the question for you to say -- save some -- some time here is that often times we see a fourth quarter push on volumes, especially on the Base’s customers, empty their pads and other things like that, that’s really not factored in to our overall, so that could be a plus. We did see that last year, which gave the fourth quarter a pretty high Base Business growth and that’s not necessarily factored into our guidance range this year.

[Joe Box:]

Understood. So, I guess, just to be clear the 3% to 5% Base Business that you’re guiding for 4Q, is that an all in number, I mean, I would assume that the hurricane impact would be minimal, but just want to make sure we are talking apple-to-apple.

[Jeff Feeler:]

Yeah. Right. Now we believe that’s an all in number.

[Joe Box:]

Okay. Great. So -- then just switching over to the guidance. I want to make sure I understand this right. I think you guys earned $0.99 adjusted year-to-date. You’re guiding a $1.60 to a $1.72 for the full year and then I think you are going to have what about a $0.08 tailwind from the business interruption expense in 4Q. So ultimately we are talking about what $0.53 to $0.65 of recurring EPS that’s implied for 4Q, is that right?

[Jeff Feeler:]

That’s right.

[Eric Gerratt:]

Yeah.

[Joe Box:]

Okay. So this is backing into it then it implies about $21 million to $25 million of operating income for 4Q, which is up 30% to 55% year-over-year? I guess with the Base Business up only 3% to 5% with there still being some uncertainty around the Event pipeline, how do we get to that level?

[Eric Gerratt:]

One of the items that’s going to -- that we are going to have in Q4 that we expected in Q3 has been business interruption insurance recovery. So we will -- we’ve actually already agreed with insurance carrier and actually already have that in hand.

[Joe Box:]

Right.

[Eric Gerratt:]

So that will hit in Q4. There is $2.6 million right there that’s straight fall through.

[Joe Box:]

But, I get that, and I have added that back. So the $0.53 to $0.65 it’s implied for 4Q ex that $0.08 tailwind.

[Eric Gerratt:]

Right. So, I think, if you kind of look at it, it’s probably better to look at it from this quarter’s perspective. If you build up and take out the unusual cost that we had including the hurricane impact on that, you’re getting close to that level and we expect fourth quarter to be better than third quarter.

[Joe Box:]

Okay. And maybe looking at the FIS business, I guess, ex lost contract that that’s obviously very well known. What would the growth look like at FIS this quarter? And then based on the new wins that you guys kind of talk about, how should we be thinking about the growth there in 4Q?

[Jeff Feeler:]

Well, so, just to refresh people memory, that contract was not renewed in November forward. So we are going to have some residual effects in fourth quarter with regard to comparison. I don’t have the number of what Field and Industrial Services topline revenue would be ex that contract. I will say this, where those components hit we saw double-digit growth in our Base line, so we have been replacing that business and our other service lines have been growing double-digit and so we have been actually able to place a good portion of those -- that loss revenue.

[Joe Box:]

Got it. Okay. And I guess, to go back to Michael’s question and Jeff, you briefly mentioned this. I think you talked about a phase wrapping within one of your bigger projects. I assume that’s the main energy project but, I mean, will that fully back fill in 2018, are you talking about Phase 1 wrapping and moving into Phase 2, if you could maybe just talk to the timing and magnitude of that?

[Jeff Feeler:]

Yeah. Right now we think it will substantially fill what we did this year for that next phase in 2018.

[Joe Box:]

So, are you still on Phase 1 then, because I know Phase 2 is supposed to be the -- I think you will actually internalize all the waste, correct?

[Jeff Feeler:]

That -- we -- Phase 2 will have opportunities to internalize more waste and that -- we are just completing Phase 1 right now.

[Joe Box:]

Okay.

[Jeff Feeler:]

It’s all ultimately depending now what the characteristic of the waste is and how it’s classified.

[Joe Box:]

Okay. And you expect the smooth transition then from once Phase 1 wraps, it immediately moves into Phase 2?

[Jeff Feeler:]

Yes.

[Joe Box:]

Okay. All right. Thanks for the time guys.

[Jeff Feeler:]

All right. Thank you.

[Operator:]

Next question comes from Tyler Brown with Raymond James. Please go ahead.

[Tyler Brown:]

Good morning, guys.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Good morning.

[Simon Bell:]

Hi, Tyler.

[Tyler Brown:]

Hey, Jeff, you mentioned, Gulf Coast, I think, Base was down 16%, it’s one of your largest areas, but what percent of Base Business is that Gulf Coast?

[Jeff Feeler:]

This quarter it was about 18%, which were…

[Tyler Brown:]

Thank you. Okay. Okay. What is the end markets, is it generally refining and chemicals?

[Jeff Feeler:]

That’s going to be a good portion. I don’t have that right in front of me, all breakdown, that’s the end vertical there. But a good chunk are going to be refinery, chemicals, other types of industry --and those industry…

[Tyler Brown:]

Okay.

[Jeff Feeler:]

Support those.

[Tyler Brown:]

Okay. Okay. Appreciate that. And then, Eric, you noted higher incentive comp here in Q3, but should we be assuming an incentive comp reversal in Q4?

[Eric Gerratt:]

One other things our incentive comp include the few things, one of those is commission, which we had higher commissions on, obviously, the higher revenue was part of that. Then it obviously includes kind of the bonus program, which that bonus program does include some discretion for one-time out of the ordinary type things like hurricanes. So we kind of assume some adjustments there that are kind of baked into what flows through Q3. And then the other component of incentive comp is stock-based pump, which is also up and the decent driver that for some of the grants we’ve done since the beginning of last year. So right now we’re not expecting a give back in Q4, but again Q4 results will dictate that.

[Tyler Brown:]

Yeah. Okay. But based on what you know now, would your incentive comp accrual be roughly 100% of what you would have expect -- expected?

[Eric Gerratt:]

No. No. Because we are not at the 100% of the targeted even with the adjustments. So I would -- and our guidance kind of contemplates what we expect to happen with incentive comp in the fourth quarter.

[Tyler Brown:]

Okay. And what I am really kind of pointing that is, so basically in ‘18 incentive comp assuming you hit just the normal budget, that would be headwind in ‘18?

[Eric Gerratt:]

Yes.

[Tyler Brown:]

Okay. On the insurance recoveries, you are expecting 2.5 to 3.5. It sounds like you recovered the low-end, should we expect more or is that completely settled?

[Eric Gerratt:]

I would say there is a bit of upside. There is some additional recoveries that we are working on and working with the insurance carrier on. I will tell you it’s not large.

[Tyler Brown:]

Okay.

[Eric Gerratt:]

So we are -- there is probably another $100,000 to a couple $100,000 that we will attempt to recover and have to insurance company on.

[Tyler Brown:]

Okay. Okay. That’s helpful. And then, Jeff, I think, you noted a regulatory cleanup sun setting this year, any idea on how much EBITDA revenue that represents?

[Jeff Feeler:]

My comment was, there is a first day that was going to -- we are going to not worry about back billing in that the earlier question on we believe the second phase our project will fill that void.

[Tyler Brown:]

Okay. All right. Perfect. That’s helpful. Okay. So, if you guys can bear with me for sec, but I’m just trying to understand kind of the moving pieces for next year, so let just take the midpoint of EBITDA, we give you back the lost EBITDA from the wind damage plant being back on line. You’ve got the lost EBITDA from the hurricane that hopefully won’t recur. We add back the property assessment that won’t recur that may even actually go positively, which assume it just doesn’t occur -- recur. You add back the rate regulated business that you may make up in ‘18, but then we take away the $2.5 million in settlements that you’re expecting to recognize in Q4, then we say add some Base Business growth and whatever we think on Event, is that basically the moving pieces to it? I know there is a lot there.

[Jeff Feeler:]

You got most of them.

[Tyler Brown:]

Okay.

[Jeff Feeler:]

I mean, that is a lot of moving pieces there, but that’s…

[Tyler Brown:]

Well, that’s part of the…

[Jeff Feeler:]

If I were to choose modeling this, that’s how I would start looking at it.

[Tyler Brown:]

Yeah. Is that…

[Jeff Feeler:]

We will be in position coming February to give more detailed guidance on where we are going to see 2018 would be.

[Tyler Brown:]

Right. Okay. Because there is just a lot of moving pieces this year and that’s -- I just wanted to kind of let us out. But I think all my other questions have been answered, I appreciate the time.

[Jeff Feeler:]

Hey, Tyler, appreciated.

[Eric Gerratt:]

Thanks, Tyler.

[Jeff Feeler:]

Thank you.

[Operator:]

[Operator Instructions] The next question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

[Jeff Silber:]

Thank so much. In your comments about potential benefits from the cleanup and recovery work, I realize it’s really difficult to quantify or estimate timing. But maybe we can go back to somewhat similar catastrophes, Katrina or something else along that magnitude, typically when do you start seeing the benefits and roughly over what time period?

[Jeff Feeler:]

Oh! I love to go back to previous catastrophes, but fortunately our facilities have not been in those regions to really benefit much for us, the Katrina and things like that, we didn’t see a lot. There is other competing landfills there, much right in the heart of those areas. And the only upside is we can’t potentially for our retail side of the business be some emergency response assistance for those types of devastation. It probably be best to really think about, our business as opposed to our peers in the solid waste area when it comes to hurricanes. What we are seeing right now is a lot of the damage in lot of the infrastructure that’s being moved is going to those subtitled the landfills. I mean, that’s, it’s your household. It is not necessarily the industrial facility. And so now we are starting to see the industrial facilities coming up online. They are starting to look what the opportunities are with regard to getting up production back to normal and then they’re going to reassess their abilities and we think that there will probably be some upside. We are probably not going to see much this year. On the flipside, one other things that we have been asked a lot of questions, I’ll just bring it out here is. There has been a lot of media for us in the Houston area with regard to a number of Superfund cleanup sites that are there that were in the damage zone. And so those great opportunities and now you have media attention on it. The EPA focused on it. You have the citizens focused on it that they may decide to provide to move it. We have actually got notifications, there was a couple of that has been funded. So we are seeing opportunities that are going to be there. We just don’t know what it’s going to take at this stage and what the characteristics of the waste and what opportunities are ultimately going to be there. I don’t know, Steve or Simon, if you anything to add?

[Steve Welling:]

It’s a general rule what happens after emergency like that, it’s nonhazardous waste, a lot of it doesn’t get tested and it goes to local landfills and then the hazardous waste is a much longer process, you go and you have to characterize material and set a work plan, get approvals from various agencies and we are tracking a couple now, but it might be nine months, two-year away before we really know it’s going to happen.

[Simon Bell:]

Yeah. This is Simon here. Certainly, has raised the awareness. We’ve seen a lot of press about, I think, [ph] fluid (44

[Jeff Silber:]

All right. Great. That’s very helpful. You actually anticipated my follow-up about the Superfund cleanup so let me sneak in one more.

[Jeff Feeler:]

Sure.

[Jeff Silber:]

Just a more modeling issue, when you do receive the business insurance, [ph] advances in up here (44

[Jeff Feeler:]

So that’s going to -- Jeff, that’s going to go in go through margin. So it will go through gross margin, I should say, is word that will be recorded, because most of that recoveries related to lost profits on the gross profit line.

[Jeff Silber:]

I am sorry, is that look like contrary expense on the cost of services side?

[Jeff Feeler:]

Yes.

[Jeff Silber:]

Okay. Great. Thanks so much.

[Operator:]

[Operator Instructions] Next question comes from Barbara Noverini with MorningStar. Please go ahead.

[Barbara Noverini:]

Hey. Good morning, everybody. So double-digit growth in the SQ generator services is good news and I’m curious if you can provide a little additional color on what’s driving that, is that your sales strategy is gaining traction and is it just that underlying customer demand is improving, is there some kind of differentiating factor that sets you apart from your competitors, what gives you the confidence at this level improvement will continue?

[Steve Welling:]

Hi, Barbara. This is Steve Welling. We have a number of new awards that are kicking off right now and into ‘18 on the retail front that gives us confidence in that particular part of the Field Services, most of the retailers are considered small quantity generator, so we roll that into that particular service line. But we are kicking off a number of new contracts out in the West Coast and the route density is greater than other parts of the country, so we expect to see not only additional store pickups but higher margins to due to the fact that it’s a very high dense part of country for it stores.

[Jeff Feeler:]

Barbara, I will just add, as far as the strategy goes. This is new to US Ecology and when I say new, I mean, compared to our relative history. And so we’ve been working on continue to develop our platform, our go-to-market strategy since acquired EQ back in 2014 and this is where the success is starting to payoff is we continue to invest in this. We continue to invest in our systems. We continue to invest in our go-to-market and we are gaining traction in those areas. And so that’s what gives us confidence that we think that we are going to continue to win in the marketplace. Are we going to win everything? Absolutely not. But the idea is to be able to be out there, show what our capabilities, what our value proposition is and be able to deliver those capabilities to those customers.

[Barbara Noverini:]

Got you. Yeah. That’s great color. Thanks.

[Jeff Feeler:]

You’re welcome.

[Operator:]

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

[Jeff Feeler:]

All right. I want to thank those who join the conference call today and we look forward to update -- updating you in February for our full year 2017 results. Have a wonderful day.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.