US Ecology, Inc.
Q4 2017 Earnings Call Transcript

Published: 16 Feb 2018

[Operator:]

Good morning, ladies and gentlemen and welcome to the Fourth Quarter US Ecology Inc Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the conference over to Eric Gerratt, Chief Financial Officer. Please go ahead sir.

[Eric Gerratt:]

Good morning and thank you for joining us today. Joining me on the call this morning are Chairman and Chief Executive Officer, Jeff Feeler; Executive Vice President of Sales and Marketing, Steve Welling; and Executive Vice President and Chief Operating Officer, Simon Bell. Before we begin, please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Since forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. Factors that could cause results to differ materially from those expressed include, but are not limited to, those discussed in the company's filings with the Securities and Exchange Commission. Management cannot control or predict many factors that determine future results. Listeners should not place undue reliance on forward-looking statements, which reflect management's view 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 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 fourth quarter released yesterday before turning the call back to Eric for additional details on our financial results. I'll then close out the call with our business outlook for 2018 before opening up the call for questions and comments. For those of you joining by the webcast presentation, please direct your attention to Slide 5. As announced yesterday, US Ecology reported strong financial results delivering a $133.7 million of revenue and adjusted EBITDA of $35.7 million, both in line with our expectation, adjusted earnings per share for the fourth quarter was $0.73 per share. Our Environmental Services segment saw strong year-over-year revenue growth of 14%. Our Base Business was much stronger than anticipated growing 11% over the previous year. This growth benefited in part from the post Hurricane Harvey recovery in Texas where we saw customers return to normal operations and resume waste shipments including some catch up volumes. Even without Texas, our Base Business showed strong 8% growth benefiting from high volumes laid in the fourth quarter which is typical of a year-end surge. Our Environmental Services segment Event Business showed strong growth at 36% over a soft fourth quarter last year. Sequentially Event Business is down approximately 7% from the third quarter of 2017, slightly below what we had anticipated as some of the volume shifted into future periods. Our Field and Industrial Services segment generated 14% revenue growth, driven by our total waste management service line and an up tick in our industrial and remediation services business units. Our small quantity generation services, which includes our retail business showed low single digit growth despite not fully cycling a non-renewed contract in the prior year. In a year that was full of challenges including an idle treatment facility to hurricane, a large rate regulated customer [precluded] [ph] from shipping to one of our facilities and out of period tax assessments remains under appeal. We still delivered 6% revenue growth and positive EBITDA growth. Even with these distractions, we never strayed from our focus of continuous improvement and reinvesting in our business. Some of our organization’s most significant 2017 accomplishments that should enhance our market position and generate long-term return include successfully permitting our Nevada landfill and completing construction of the first phase adding up to 40 years of additional capacity. Securing 20 years plus of new capacity in Robstown, Texas through permitting of a new landfill on adjacent property for which we received approval already in 2018. Obtaining program modifications at multiple facilities enabling us to enhance our network and better service our customers and successfully refinancing our term debt, adding capacity lowering our overall effective interest rate, while creating about $20 million of cash interest savings over the term. We also continue to invest our business and our people. We invested about $10 million of new growth capital that we expect to start contributing in 2018 through additional revenue sources and cost savings. We also added seasoned veterans in several growth areas, invested in our compensation packages and medical benefits and other human capital initiatives to enable us to retain the best-in-class workforce and recruit new talent to support the growth. And we made significant progress on our multi-year informational technology development setting the stage for implementation beginning in 2018. All considering, we believe the event in 2017 have laid the ground work for what we believe will be solid performance in the years ahead. While we did report growth in 2017, industry fundamentals continue to build throughout the year. The fourth quarter was a highlight with the strong financial results and multiple contract wins across service lines that will support growth in 2018 and 2019. With that, I'll let Eric give you a more detailed financial review.

[Eric Gerratt:]

Thanks Jeff. As shown on Slide 8, revenue for the fourth quarter of 2017 was $133.7 million up 14% from $117.2 million in the fourth quarter of 2016. Revenue for the Environmental Services segment for the fourth quarter was $97.8 million compared to $85.7 million in the fourth quarter last year. An increase is driven by a 15% increase in treatment and disposal revenue and an 11% increase in transportation service revenue in the fourth quarter this year. Base Business for the Environmental Services segment was up 11% compared to the fourth quarter of last year and represented 77% of treatment and disposal revenue. Event Business for the Environmental Services segment increased 36% from the fourth quarter of last year and represented 23% of treatment and disposal revenue. The Field and Industrial Services segment delivered revenue of $35.9 million in the fourth quarter up 14% from $31.5 million in the fourth quarter of last year. Slide 9 breaks down our Environmental Services treatment and disposal revenue for both Base and Event Business by industry vertical. Base Business increased primarily in the refining, chemical manufacturing and general manufacturing verticals. These increases were partially offset by decreases in the broker TSDF and transportation verticals during the quarter. The increase in Event Business was primarily driven by the chemicals manufacturing and metal manufacturing verticals. Turning to Slide 10. Gross profit was $47.6 million in the quarter, up from $36.1 million in the same quarter last year. Our Environmental Services segment contributed gross profit of $42.5 million in the fourth quarter compared to $32.1 million in the same quarter last year. Treatment and disposal margins were 47% in the fourth quarter of 2017 and reflected the collection of $2.6 million in business interruption insurance proceeds. This compared to 41% in the fourth quarter of 2016. Excluding the business interruption insurance proceeds, treatment and disposal margins were 44% in the fourth quarter up over 250 basis points compared to the fourth quarter of 2016 on increased volumes and a more favorable service mix. Gross profit for the Field and Industrial Services segment was $5.2 million in the fourth quarter of 2017 up 29% compared to a $4 million in the fourth quarter of last year. Gross margin for the Field and Industrial Services segment was 14.4% in the fourth quarter of 2017 compared to 12.7% in the fourth quarter of 2016 on increased revenue and a more favorable service mix. Selling, general and administrative spending or SG&A was $22.3 million in the fourth quarter of 2017. This was up 12% from $19.9 million in the fourth quarter of last year. This increase is primarily due to higher labor and incentive compensation cost, as well as higher consulting and professional services in the fourth quarter of 2017, compared to the same period in 2016. In connection with our annual goodwill impairment assessment, we performed an evaluation of the recoverability of the assets associated with our airport recovery business. This business services airports collecting deicing fluid and then recycle the solvent to use. As a result of this evaluation and based on the continued unfavorable winter weather condition which resulted in reduced collection of deicing fluid as well as depressed commodity prices for the recovered solvent, we recorded an impairment charge of $8.9 million in the fourth quarter of 2017. Operating income was $16.4 million in the fourth quarter of 2017 up from operating income of $16.2 million in the same quarter of last year. Excluding the impairment charge of $8.9 million, operating income increased 56% compared to the fourth quarter of 2016. Interest expense for the fourth quarter decreased to $2.8 million compared to $4.2 million in the same quarter of last year. This decrease is primarily the result of a lower interest rate on our new credit facility as well as low overall debt levels in the fourth quarter of 2017. The company's effective income tax rate when excluding the non-deductible impairment charge and the impact of recently passed tax reform was 36% for the fourth quarter of 2017. This was up slightly from 35.5% in the fourth quarter of last year. The increase in the effective rate was primarily due to a higher U.S. effective rate partially offset by a higher proportion of earnings from our Canadian operations, which in 2017 are tax, the lower corporate tax rate. Turning to Slide 11, we reported net income of $30.8 million and diluted earnings per share of $1.40 in the fourth quarter of 2017, which included the tax benefit of $23.8 million or $1.08 per diluted share related to tax reform. This compares to net income of $7.7 million or 35% per diluted share for the fourth quarter of 2016. Adjusted earnings per share was $0.73 in the fourth quarter of 2017 compared to $0.36 in the fourth quarter of 2016. Adjusted EBITDA for the fourth quarter was $35.7 million up 31% from $27.3 million in the fourth quarter last year. Turning to results for the full year ended December 31, 2017 on Slide 12. Total revenue increased 6% to $501 million for 2017, compared to $477.7 million in 2016. Revenue for the Environmental Services segment was $366.3 million up 8% from $337.8 million in 2016. The Field and Industrial Services segment delivered revenue of $137.7 million in 2017 compared to $139.9 million in 2016. 2017 net income was $49.4 million or $2.25 per diluted share, compared to $34.3 million or $1.57 per diluted share for 2016. Adjusted earnings per share which excludes the non-cash impairment charge, the impact of tax reform foreign currency gains and losses, the gain on sale of divested businesses in the prior year, as well as the non-cash write-off of deferred financing fees and business development expenses was $1.72 for 2017 is compared to $1.53 for 2016. Pro forma adjusted EBITDA which excluded business development expenses was $114.3 million for 2017, compared to $113.4 million in 2016. Turning to Slide 13, we generated $81 million of cash from operations in 2017, we also invested $36.2 million in capital projects paid down $10.9 million on long-term debt and paid up $15.7 million in dividends to our stock holders. Our balance sheet continues to improve with net borrowings of $250 million at December 31, 2017. With that, I'll turn the call back to Jeff.

[Jeff Feeler:]

Turning to our 2018 business outlook on Slide 14, we expect to capitalize on the positive macro trends that have been building since late 2016 and which contributed to the strong momentum we experienced in the fourth quarter. We believe that these trends should continue and translate into better outlook and improve business conditions for our customers, which in turn should materialize into stronger waste shipments and Environment Services revenue. Our project pipeline continues to build and we existed 2017 with several key contract wins across service lines that will benefit both 2018 and 2019. Based on the current market conditions, we expect our 2018 adjusted EBITDA to range from $122 million to $128 million, representing an increase between 7% and 12% over 2017 pro forma adjusted EBITDA. This strong growth reflects the positive fundamentals we are seeing that also considers that the 2017 challenges we experienced do not repeat. Earnings per share is estimated to range from $2.15 to $2.34 per diluted share and represents growth ranging from 25% to 36% over 2017 adjusted earnings per share. Approximately $0.26 of this per share growth is directly attributable to the lower tax rate on our U.S. earnings. We anticipate our effective tax rate for 2018 to approximate 27% and this is down from a historical rates ranging from 35% to 40%. 2018 revenue is expected to range from $530 million to $553 million or growth is much of up to 10%, breaking down our revenue guidance by segment, we expect our Environmental Services segment revenue to range between $385 million to $393 million in our Field and Industrial Services segment revenue to range between $145 million and $160 million. Moving on to Slide 15. We expect our Environment Services Base Business to grow in the 3% to 5% range in 2018. Our Event Business pipeline continues to improve with both new and existing opportunity, which we believe will translate into single-digit growth in 2018. We expected to show improvement in our Field and Industrial Services segment as we implement new contract one in 2017 and [indiscernible] conditions for industrial and remediation service offering. Growth in this segment will be led by our Total Waste Management Group as well as our small quantity generation services. With regard to seasonality as seen on Slide 16, we expect the first quarter of 2008 to be the lowest quarter of the year which is typical on our business. These business tends to slow in the first quarter relative to the fourth quarter and we will also be recycling a relatively strong comparative period in the [indiscernible] business in the first quarter of last year. Additionally many event projects do not get started until after the winter conditions subside, which is mirrored in our January result so far this year because of these factors as well as a strong finish last year in 2017, we expect the first quarter of 2018 to be flat to slightly improve over the first quarter of 2017. Turning to capital expenditures, we expect to invest between $39 million and $42 million into the business. Approximately $15 million to $17 million will be spent on new landfill construction and construction in Texas, Michigan and in our Canadian operations. We expect to deploy about $10 million in growth capital tied to revenue producing or cost savings activity. The rest will be spent on routine maintenance. The routine maintenance portion actually represents about 24% reduction over 2017 levels. Overall, capital expenditures are coming in $5 million to $10 million less than we had previously discussed last quarter as we now plan to defer landfill construction in our Idaho facility until 2019. This will means 2019 capital expenditures should be similar to those of 2018 as we've spread landfill construction more evenly over this year and next. I'm extremely proud of the team's accomplishments in 2017. Their continued execution on strategic initiatives and unwavering focus on the core -- on our core environmental services assets allowed us to strengthen our market position and expand our growth opportunities. This perseverance amidst the many challenges and set back [indiscernible] revenue and EBITDA growth is a true testament to the driving commitment to deliver an equal service excellence. With that, operator will you please open up the call for questions or comments.

[Operator:]

Yes. Thank you, sir. We will now begin the question-and answer-session. [Operator Instructions] Your first question will be from Michael Hoffman of Stifel. Please go ahead.

[Michael Hoffman:]

Hi, Jeff, Eric, thanks for taking my questions. So let me dig -- jump into the deep end on guidance. I'm sure no one was more frustrated than yourselves in having to revise guidance last year. So how do you think about the approach you took to your guidance that gives you confidence about the range, one and two, should we think about the guidance says it's built around the midpoint and then there's the low to highs and if that's the case what takes it down what takes it up from the midpoint?

[Jeff Feeler:]

Yes. Good question Michael. As far as the approach I mean we've taken a very similar approach to our guidance this year as we have done in previous years. And it is centered around the midpoint range that is kind of the point that we think that we'll be able to deliver. The puts and takes on that, it's going to be the strength of the underlying business on the events side, the strength of the base business and can take it up. It can also take it down where we're going to be executing and implementing several contracts on the Field and Industrial Services side business into the margin improvement in there and really driving that through as we implement will also be some puts and takes on our guidance range.

[Michael Hoffman:]

So, as we think about event and you sit here and you look at sort of schedule work -- I apologize for the background, I'm in an airport -- for the scheduled work versus the pipeline. How do you feel about when you look out sort of 90 and 180 days versus the whole year at this point?

[Steve Welling:]

Michael, this is Steve Welling. We have a number of awards where we're moving empty cars mobilizing to start projects. The pipeline looks very similar to last year's pipeline in terms of the number of opportunities things we're planning to bid over the next few months. It's good overall.

[Jeff Feeler:]

I'll just add to that Michael is that when we really look at last year, the event business we thought some really good strong growth but that was over a pretty depressed 2016 level. We didn't have any really mega big project except for one that's under a multiyear and that's going to be continuing again this year. It's probably going to be a little bit less than last year and in the grand scheme of things, but there's opportunities there that could grow and actually build upon that. So we've built into a little bit last with the replacement in there. So overall we feel that we should be able to grow event business in single-digit range.

[Michael Hoffman:]

And when you think about some of the things that are coming out of the hurricane, has it triggered any incremental event work that you can point to like -- the San Jacinto Superfund landfill gets a lot of visibility, is that something that's on your radar and you have potential to participate in?

[Jeff Feeler:]

Yes. We are working on that particular project. However, I don't believe any waste will move in 2018, it's a long-term project, it’s very complicated, half the sites under water and it's -- they are doing remedial design right now and I think you may still be negotiating the settlement with the PRPs. So, it will be most likely a 2019 project [indiscernible].

[Michael Hoffman:]

And then, the last here for me, on the Field Industrial Services one of the things you've been doing for the last two years has been sort of improving the quality of this portfolio, the sale of Allstate sort of obvious and sort of shipping it into business with better repeatability as well as better quality margins. How do you think about that today as you enter 2018 that's sort of where you are in that because 14 -- margin is the best you've ever had in that business.

[Jeff Feeler:]

Yes. That has been a focus of ours is retooling that side of the business and being focused on the areas that really have complimentary attributes to our core environmental services out of there. And in the last couple of years, we have made tremendous progress in there and we're making great strides and we have good momentum. There's a ways to go there. Ultimately, we think that the wins that we've had in 2017 will help 2018. We see a lot of good bidding opportunities emerging for 2018 that will benefit 2019 and potentially outer years. And in building out that route density and that concentration throughout our network that will help improve those margins and to try to drive those up. We do anticipate some margin improvement in this segment in 2018 and it's going to be reliant on us executing on that to drive that forward. And that's built into our guidance.

[Michael Hoffman:]

And that improvement is over the full year, but is it sort of should be about what fourth quarter was for the whole year, is that the way to think about it?

[Eric Gerratt:]

Yes. Michael for that segment for the full year kind of what's built into that guidance, it's kind of in the same range as the fourth quarter.

[Michael Hoffman:]

Okay.

[Eric Gerratt:]

On the low end it's not 14% range on the high end it's more on the 15% range.

[Michael Hoffman:]

And then, the last thing the tax reform, has it triggered any incremental activity at the customer level that would start to spurn some of this discretionary event related business. Have you seen any early sort of green shoots around that?

[Jeff Feeler:]

Michael, we can't attribute to any of the activity we are seeing in the marketplace correlated to the tax reform. I'll just say, I'm a believer that if industrial companies with legacy cleanup project have extra cash this might be an opportunity they may deploy that. I know others that we've talked through our investments [indiscernible] may not agree with that. But the reality is that there continues to be enforcement, there continues to be pressure on this. And I think it creates an opportunity to deploy capital, improve balance sheet and move things off the book under this administration.

[Michael Hoffman:]

And just close the loop on that. This is the complicated bill and we're also learning bits and pieces. There aren't any oddities about the tax reform that would preclude some of that that would lose deductibility or anything like that. There's nothing gets in a way other than will they decide to.

[Jeff Feeler:]

No Michael -- not that I'm aware of at this point. To your point we're still - everyone’s still kind of digesting pieces of it but I'm not aware of anything like that.

[Steve Welling:]

Michael, this is Steve Welling. I don't see that things have changed much in terms of voluntary cleanup has never been the biggest part of the market. It's usually EPA or government ordered cleanup or are there some type of a financial reason where the property is worth more money or they're building a new part of a chemical plant, they need to clean up an old section, but just voluntary clean up for clean up sake, a lot of those properties sit.

[Michael Hoffman:]

Okay. Thank you for taking the questions.

[Eric Gerratt:]

Thanks Michael.

[Operator:]

The next question will be from Tyler Brown of Raymond James. Please go ahead.

[Tyler Brown:]

Hey, good morning guys.

[Eric Gerratt:]

Good morning, Tyler.

[Tyler Brown:]

Hey, Jeff. There has been quite a few articles about Scott Pruitt and I guess you could call it urgency around some of the Superfund cleanup work. You talked a little bit about the Texas acid pits, but I'm just curious if that's more really talk at this point, are you seeing any RFPs in the market given some of these specific cleanup sites?

[Jeff Feeler:]

Nothing we can point to at this point that is specific to change in EPA. Now, usually when you read the news on those just be aware of that even if the EPA orders something like San Jacinto, it still could be a year or two way before that [wage] [ph] actually moves - a lot of work with remedial design work and reviews and approvals -- regulatory approvals that type of things.

[Tyler Brown:]

Okay. And then, maybe Steve on the Anadarko's settlement and that cleanup work have any funds been released out of that trust?

[Steve Welling:]

Yes. We have done some a few different sites, nothing large volume. There's a couple that we're still tracking that we expect could move as a radioactive site. And there's also chemical site in the southeast that we are tracking. But, a lot of that money was provided to trust on work that's already be done more of a settlement [indiscernible] versus natural cleanup work.

[Tyler Brown:]

Okay. And then, obviously there's been a lot of investment in the Gulf Coast on the petrochemical side. I think there is a handful of ethane crackers that maybe came online late last year maybe early this year. I'm just talk -- just curious if you can talk about how that might be impacting maybe both event or more likely based business?

[Jeff Feeler:]

Most of the waste streams from those particular plants are organics and they would be -- there's a few potential streams that are candidates for our thermal unit for the normal inorganic for landfill stabilization at [Rocktown] [ph] and not really not much out of those facilities, but we are tracking couple of things that could be opportunity for our thermal unit.

[Tyler Brown:]

Okay. Okay. That's helpful. And then, maybe some questions on transportation. So first off, rail velocity I guess you guys might call it cycle times seem to be down. I'm just curious if you're noting any notable issues on rail service currently?

[Simon Bell:]

This is Simon here. No, we haven't really noticed any different, I would say if anything I've seen some continuous improvement, but we've got some very well established routes and they're very consistent with prior years.

[Tyler Brown:]

Okay. And we're quite bullish on truckload and ultimately rail car load rates. So how does transportation work? Is it simply a pass through or do you bear some of the cost risk if transportation significantly rises maybe in the back half of 2018 and into 2019?

[Simon Bell:]

This is Simon again. We generally -- most of our contracts will put conditions in there that adjust our pricing for fuel, some of the smaller more short-term contracts we could have some exposure, but usually just a very short timeframe. So say in terms of long-term long term exposure, I don't think we have much.

[Jeff Feeler:]

The rail rate will stay constant it will be the fuel surcharge that varies and we almost always contracted that will pass along fuel surcharge at actual cost. So I don't see a risk there.

[Tyler Brown:]

Okay. That's helpful. And then, Jeff you talked about maintenance CapEx, I think $14 million to $15 million, but I think that sub maybe 3% of revenue D&A runs at almost 6. So do you feel that that $14 million to $15 million will pop back either maybe not 19 but 20 or at some point?

[Simon Bell:]

This is Simon here. A lot of our maintenance capital locked in have some very larger projects that tend to influence the numbers. I would expect that number to go up slightly in out of years. That being said, we are we are very focused on minimizing maintenance while maintaining our infrastructure and emphasizing the growth capital. But long-term I would expect this year is probably a slightly lower than the normal.

[Tyler Brown:]

Okay. Okay. And then, Eric, you noted bad debt in the SG&A line was a help this year. What was the full year accrual and how much or how different is that than a normal accrual?

[Eric Gerratt:]

Yes. The accrual was pretty consistent year-over-year. Some of the upsides that we saw was -- we had to add some good experience on recovering in a couple of cases even on some bankruptcies and then recovering some things that we fully reserve that we've been working in some cases for multiple years. So it was more on that side versus a change or a bring down from an accrual perspective.

[Tyler Brown:]

Okay. So nothing super material. Maybe on the incentive comp side, the same type of question was it actually -- well let me put it this way. Would incentive comp be a good guy or a bad guy in 2018 if you hit your budget?

[Eric Gerratt:]

Well, the way the budget works and the way the guidance works is, we assume that we hit the target -- that it's a full target. So compared to 2017, it would be an incremental cost in SG&A line in 2018.

[Tyler Brown:]

Okay. Okay. So it will be slightly incremental. But, so am I thinking about this wrong, so this is kind of the big picture question. So you've got to get back from the wind that happened this summer. You've got the regulatory push out that impacted you in 2017. You've got a couple million dollars of lack of hurricane that presumably won't reoccur. You've got the property assessment that presumably won't reoccur. Then maybe you have to offset that by some of the insurance recoveries. But if I was to kind of add all of those little pieces up, would the bottom end of the guidance be effectively assuming very little in terms of organic growth. Is that the right way to think about that?

[Jeff Feeler:]

Tyler, I will take this. So, if you kind of look at where we think we would have ended 2017 if all of those anomaly fits from an EBITDA perspective, we think we would have been about $180 million to $190 million of EBITDA or growth than that. So, yes, that a shallower growth than what's being reported just because those events did happen in 2017. But it's still showing getting up on the top end of the range closer to that 7% range on the growth. And that's what we think is fair in the guidance that we are seeing.

[Tyler Brown:]

I was coming out more differently maybe it shows that there is some conservatism in the guide is more what I'm getting at.

[Jeff Feeler:]

Yes. As much as I'd love to say there's conservatism in the guidance. It's really where we believe is an accurate range what we're seeing right now. I mean there's always risk in this business. But, we do have to replace some of the event business that was strong last year. We feel confident we're going to be able to do that. We saw good trends in the base business, full year was about a 5% growth in that area. But, [indiscernible] compound that on top of that it takes some challenge and this is a very competitive market. So we're not just be handed business left and right we've got to go out and work for it. So I would hate to characterize it being conservatism, but we think it's a fair estimate what we will be able to deliver.

[Tyler Brown:]

Okay. Okay. That's helpful. Then on the tax rate guide, I'm still a little unclear why wouldn't it just be 21 plus maybe four for states. So why is it 27. I mean how much is candid of your overall profitability mix?

[Eric Gerratt:]

Well, the good news is, now where we are from a Canadian perspective versus the U.S. perspective is we're pretty close to the same, so not only things are little easier going forward. But in the U.S., yes, the corporate rate is 21%. But as you blend in the state rate which -- state rates have continued to go up. States are getting better at driving revenue and filling some of their shortfalls. So when you blend all that together that affected overall state rate is what makes up that difference and it is that 5% to 6% on top of the 21%.

[Tyler Brown:]

Okay. Okay. And then, maybe my last one, can you give any kind of guide of what are you expecting on interest expense this year?

[Eric Gerratt:]

Yes. We are expecting -- I think Q4 is a pretty good proxy for what we will expect here. We built into the guidance and our budget about $20 million of pay down.

[Tyler Brown:]

Yes.

[Eric Gerratt:]

We'll see how that year goes. I'm not sure that will do that much but that really doesn't move the needle a whole bunch. So I think Q4 is a pretty good proxy for what we expect at each quarter next year.

[Tyler Brown:]

Okay, perfect. Very good. Thank you guys.

[Jeff Feeler:]

Thanks Tyler.

[Operator:]

The next question will be from Bobby Burleson of Canaccord Genuity. Please go ahead.

[Unidentified Analyst:]

Hey guys. This is [indiscernible] on for Bobby. Congratulations on the quarter. Just a couple of questions as you guys given a lot of information already. First, I know you mentioned the large Texas project for hurricane restoration probably being a 2019 contributor. I was just curious on kind of the ongoing work that you've already reflected. Do you think that there could be any push to 2018 or is that pretty much completed and it's more of the event business worked for hurricane restoration contributions moving forward?

[Eric Gerratt:]

So, if you are talking about the strength that we saw in the fourth quarter for Texas especially on the Base Business, a lot of that's pushed through. We are continuing to see a lot of strength in the Texas marketplace that continues to be active. Our Thermal Business down there is very strong right now, backlog got several months of work that we're managing through, and we're seeing increased volumes coming in certain areas. And so, we think that Gulf Coast is going to continue to be right for continued growth in 2018.

[Unidentified Analyst:]

Okay. That's really helpful. And then my other question was in terms of you mentioned in, that is in the release the Event Business was a little bit better this year than anticipated and there was less work pushed off to 2018. Can you give a little more color on, the type of work that was pushed off and kind of what you saw as the drivers of that was it just customer confidence or was there particular area that was focused. Any color?

[Eric Gerratt:]

Yes. That -- so let me make sure that my, we're clear on what the comments were. Event Business was strong for 2017, little bit less than what we kind of anticipated on them that and a lot of that, there is some deferrals, but comparing and contrasting where we were a year ago, I mean we've seen less deferrals overall, we're more to a normal state. I think the back-half of 2016 was an unprecedented level of what we thought. The positive we're seeing as a lot of those deferments from 2016, we probably early move as started seeing shipments on about half and there is still half that are probably going to benefit 2018 and beyond. And that's in addition to new opportunities that are coming up. So, I think we're more to a normal state on the Event, in the fourth quarter with a little bit less on the Event side, we did see some deferrals there were a lot of that more severe, but that's just pushing into 2018 as far as magnitude we really didn't quantify it for this purpose.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

[Operator Instructions] The next question will be from Jeff Silber of BMO Capital Markets. Please go ahead.

[Jeff Silber:]

Thank you so much. I wanted to go back to the tax reform impact, I don't think you ha1d discussed your plans in terms of what you are doing with the excess cash and can you just remind us what the cash tax savings are going to be for your company under tax reform? Thanks.

[Jeff Feeler:]

Yes, so I'll take this. That our capital allocation just because the tax reform really has not changed, it's going to be something we're going to continue watch and monitor and figure out what the best opportunities to deploy that cash. And that allocation is really looking at organic investment opportunities to be able to continue to grow our facilities continue to grow our services sides, continue to build out our networks to support the underlying growth that we see out there. We'll continue to look at acquisitions, but we're going to be disciplined on acquisitions. I mean just, we've already heard through the marketplace, such as because, the tax reform evaluation is still our expectations are going up. And so, we're going to remain disciplined in that area and be focused on getting those strategic assets that are fairly priced. And then outside of that, we'll just continue to monitor what we're going to do is the excess cash. We're really challenging the organization to find growth opportunities and trying to figure out how best to do it ourselves as oppose to go and necessarily acquiring it. And so we're really challenging that, I'd rather put some of that cash on the balance sheet right now for when those great opportunities come up that we can go and make sure that's adequately funded and we can get good returns to our shareholders.

[Eric Gerratt:]

And Jeff, just the other part of your question, so we think and kind of what's the guidance is that tax reform and that those changes are going to drive about $6 million of free cash flow in 2018.

[Jeff Silber:]

Okay great, that's helpful. And then getting back to the results in the fourth quarter, when you are talking about the SG&A and talking about higher labor cost, since wage inflation is on the minor most people on the Wall Street they honestly talk a little bit about that, pickup in the fourth quarter are you expecting that to continue to pickup in 2018? Thanks.

[Jeff Feeler:]

Yes, so I'll take this one. We've been making investments in our human capital over the last several years. And we're continuing to see the low unemployment environment causing challenges to recruit new positions to support growth and we're seeing some wage pressures on that. I would anticipate that to be continued into 2018 from that standpoint. But, we have made already a significant amount of investments to-date.

[Jeff Silber:]

Okay, I appreciate the color. Thank you so much.

[Jeff Feeler:]

Thank you.

[Operator:]

[Operator Instructions] And at this time, I'm showing no additional questions. So, we will conclude the question and answer session. I would like to hand the conference back to Jeff Feeler for any closing remarks.

[Jeff Feeler:]

I just want to thank those participants for joining today and we look forward to updating you on our Q1 results to be released sometime early May.

[Operator:]

Thank you, sir. And ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.