US Ecology, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Feb 2017

[Operator:]

Good morning, and welcome to the Q4 2016 US Ecology, Inc. Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Eric Gerratt, Chief Financial Officer. Please go ahead.

[Eric Gerratt:]

Thank you. Good morning and thank you for joining us today. Joining me on the call this morning our 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 2016 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 up this morning’s call with a few comments on our results that we released yesterday before turning it back to over to Eric for additional comments on our financial results. I’ll then close out the call with the summary of our business outlook for 2017 and then I’ll open up the call for questions. For those that are following along in the webcast presentation, please direct your attention to Slide 5. As announced yesterday, US Ecology reported financial results reflecting continued sluggishness and challenging market dynamics in the industrial sector. Despite that the challenges we deliver results that were within our expectations. Our Environmental Services segment Base Business was softer than anticipated not only did we not see the typical year end surge from our customers in the fourth quarter, but we were hampered by a declining due to pockets of adverse winter conditions that created challenges for shipping and processing schedules. Our Environmental Services segment Event Business was down during the quarter as compared to the same quarter last year due to prior year project completions that were not for the replaced and the continuation of project delays. Sequentially Event Business was in the fourth quarter was down only marginally from the third quarter of 2016. One of our larger multi-year your projects that was supposed to start shipping in November is currently expected to start ramping up later this month. Our Field and Industrial Services segment saw reduced business activity during the quarter led by declines in our small quantity generator and Industrial Services business unit partially offset by growth in our managed services and remediation service line. This overall business lower business activity negatively impacted our operating leverage and margins and along with some year-end through up adjustments lead to weaker than expected results for the fourth quarter. Despite the challenging market conditions we faced throughout 2016. We did not slower capital deployment and instead continue to invest in our assets and drove initiatives throughout the organization will better position us for the long term. While controlling the amount of capital spend on - spent on maintenance activities, we accelerated our focus and identifying and deploying growth capital into our business. In addition we invest in our huming capital this past year expanding our talent pool with the goal of driving innovation throughout the organization. We've made significant accomplishments as an organization in 2016 that will enhance our market position and generate long term returns. Some examples of these accomplishments include successfully gaining our landfill permit expansion in Beatty, Nevada that secures us over 40 years of additional landfill capacity. Construction is underway on our newest landfill at that location. New permits at our Texas and Michigan landfill that expands and streams lines of types of waste streams that we can manage, we secured a new subpart X permit at our thermal desorption recycling service line in Texas that will open up new market opportunities for us in 2017 and beyond. We made significant progress on other permit modifications of multiple facilities throughout our network that will provide opportunities in coming years to secure more waste streams and strengthen our regional market presence. We completed two strategic acquisitions that leverage our existing disposal assets and strengthen our market presence in their respective regions. We've made significant progress on our multi-year information technology, development implementation and we continued to invest in our people through HR initiatives that are enabling us to attract and retain the best talent in the industry. Innovation throughout our workforce is the growth engine that will allow us to identify and expand our capabilities and will enable us to execute our vision of becoming the premier North American service provider in the environmental services. We believe that the challenging market conditions in the industry that we faced in 2016 are part of a normal and yet recurring industrial cycle. As with all cycles, we will eventually return to an expansion phase that predicting when this will happen is not a science. When this cycle does return whether that is in 2017 or 2018 we believe the initiatives underway today and in the future will enhance our market position and enable us to capture growth opportunities that they present themselves. I'll now turn the call back to Eric for some more detail review on the financial results.

[Eric Gerratt:]

Thanks Jeff. As shown on Slide 7 of the presentation, revenue for the fourth quarter of 2016 was $117.2 million down from $138.3 million in the fourth quarter of 2015. Revenue for the Environmental Services segment for the fourth quarter was $85.7 million compared to $92.7 million in the fourth quarter last year. This decrease was driven by a 4% decline in treatment and disposal revenue and a 24% decline in transportation service revenue in the fourth quarter of this year. Base Business for the Environmental Services segment was down 4% compared to the fourth quarter last year, and represented 80% of treatment and disposal revenue. Event Business for the Environmental Services segment decreased 17% from the fourth quarter last year and represented 20% of treatment and disposal revenue. The Field and Industrial Services segment delivered revenue of $31.5 million in the fourth quarter of 2016. This was down from $45.5 million in the fourth quarter of 2015 which included $8.1 million from the divested Allstate business. Excluding divested Allstate business, Field and Industrial Services revenue was down 16% compared to the fourth quarter last year. Slide 8, breaks down our Environmental Services treatment and disposal revenue for both Base and Event Business by industry verticals. Base Business decreased primarily in the general manufacturing and chemical manufacturing verticals. These decreases were partially offset by increases in the utilities, transportation and refining verticals during the quarter. The decline in Event Business was primarily driven by decreases in the government, metal manufacturing and utilities vertical. Turning to Slide 9, gross profit was $36.1 million in the quarter down from $44.2 million in the same quarter last year. Our Environmental Services segment contributed gross profit of $32.1 million in the fourth quarter of 2016 compared to $36.3 million in the same quarter last year. This decrease was due primarily to lower treatment and disposal volumes. Treatment and disposal margins were 41% in the fourth quarter of 2016 compared to 44% in the fourth quarter of 2015. Gross profit for the Field and Industrial Services segment was $4 million in the fourth quarter of 2016 compared to $7.8 million in the fourth quarter last year. The decline was partially due to the divested Allstate business which contributed gross profit of $1.6 million in the fourth quarter of 2015. Excluding the Allstate business Field and Industrial Services gross profit decreased approximately 36% in the fourth quarter of 2016 due to the reduction in revenue as well as higher year-end accrual and reserve adjustments. Selling general and administrative spending or SG&A was $19.9 million in the fourth quarter of 2016. This was down 10% from $22 million in the fourth quarter of last year, which included $1 million of SG&A from Allstate. Excluding the divested Allstate business SG&A decreased approximately 5% due to lower labor incentive compensation costs, lower consulting and professional services and lower bad debt expenses in the fourth quarter of 2016 compared to the same period in 2015. Operating income was $16.2 million in the fourth quarter of 2016 down 27% from operating income of $22.2 million in the same quarter last year. Excluding the divested Allstate business in the fourth quarter of 2015 operating income was down 25% in the fourth quarter of 2016. Interest expense for the fourth quarter decreased to $4.2 million compared to $7.2 million in the same quarter last year. The decrease was primarily the result of a $2.4 million charge in the prior year related to deferred financing costs as well as lower overall debt levels in the fourth quarter of 2016. Turning to Slide 10, the Company's effective income tax rate for the fourth quarter of 2016 was 35.5% down from 45.5% in the fourth quarter of last year. The higher rate in the fourth quarter last year reflects the non-recurring capital loss as a result of the sale of Allstate, which increased our U.S. effective state tax rate. The fourth quarter of 2016 benefited from changes in our apportionment between various states in which we operate, as well as a higher proportion of earnings from our Canadian operations which are taxed at a lower corporate rate. We reported net income of $7.7 million and diluted earnings per share of $0.35 in the fourth quarter of 2016 consistent with the fourth quarter of 2015. Adjusted earnings per share was $0.36 in the fourth quarters of both 2016 and 2015. Adjusted EBITDA for the fourth quarter was $27.3 million down from $33 million in the fourth quarter of last year. Pro Forma adjusted EBITDA which excludes the divested Allstate business and business development expenses was $27.4 million in the fourth quarter of 2016 compared to $32.6 million in the fourth quarter of 2015. Turning to results for the full year ended December 31, 2016 on Slide 11. Total revenue was $477.7 million in 2016 compared to $563.1 million in 2015. The divested Allstate business contributed $59.1 million of revenue in 2015. Revenue for the Environmental Services segment for 2016 was $337.8 million compared to $359 million in 2015. The Field and Industrial Services segment delivered revenue of $139.9 million in 2016 compared to $204 million in 2015 which included Allstate. Net income was $34.3 million or $1.57 per diluted share compared to $25.6 million or $1.18 per diluted share for 2015. Adjusted earnings per share which excludes gains and losses on the sale of divested businesses, goodwill and impairment charges, the divested Allstate business, foreign currency translation gains or losses and business development expenses was $1.53 for 2016 compared to $1.57 for 2015. Pro Forma adjusted EBITDA which excluded the divested Allstate business development expenses was $113.4 million for 2016 compared to $122.6 million in 2015. Turning to Slide 12, we generated $74.6 million of cash from operations in 2016. We also invested $35.7 million in capital projects paid down to $18.1 million on our long term debt and paid out $15.7 million in dividends to our stockholders. Our balance sheet continues to improve with net borrowings of $277.5 million at December 31, 2016. Return on invested capital for the 12 months ended December 31, 2016 was 6.1%, return on assets was 4.4$% and return on equity for the same period was 12.8%. With that I'll turn the call back to Jeff.

[Jeff Feeler:]

Turning to our business outlook on Slide 13; we expect to return to growth in 2017. The positive trends emerging from the industrial economy along with improving outlook for many of our customers has increased our confidence for the year ahead. Many generators are telling us that they are more bullish today than they've been in the recent past. The hazardous waste business tends to lag industrial cycles. So these positive trends bode well for our future results. Supporting our optimism is a growing pipeline of Event Business opportunities that will supplement those projects that were deferred last year. Despite our improving outlook we remain cautious of the rate of growth we can expect in 2017. Based on the current conditions, we expect our adjusted EBITDA to range from $120 million to $130 million in 2017 representing growth between 6% to 15% over 2016 Pro Forma adjusted EBITDA. Earnings per share is estimated to range from $1.69 to $1.93 per diluted share and represents growth ranging from 10% to 26% over 2016 adjusted earnings per share. We anticipate revenue to range from $495 million to $533 million, breaking this revenue - these revenue estimates down by segment. We expect our Environmental Services segment revenue to range between $357 million to $389 million. Our Field and Industrial Services segment revenue is expected to range between $138 million and $144 million. Moving to Slide 14, we expect our Environmental Services Base Business to improve in 2017 with growth ranging from 3% to 5%. Our Event Business pipeline continues to improve with both new and existing opportunities, which we believe will translate into growth in 2017. We expect to see flight improvement in our Field and Industrial Services segment. Growth will be constrained in this segment as a result of cycling some larger contracts on our industrial services at our industrial services group they were completed in 2016 and cycling a large field services contract that was not renewed. Though we are seeing new contract opportunities, we are using caution and currently presume that we will not - we may not be able to fully replace several of these completed projects in 2017. With regard to seasonality on Slide 15; we believe our first quarter of 2017 will likely be the lowest quarter of the year. This is typical seasonality in our business. Base Business tends to slow in our first quarter relative to the fourth quarter and we will also be cycling a strong comparative period of our Base Business. Additionally many Event Projects do not get started until after the winter conditions have subsided and as another headwind this year given how we exited 2016. Because of these factors we expect the first quarter of 2017 to be lower than the first quarter last year. Turning to capital expenditures; we expect to invest between $34 and $37 million into the business. The bulk of these capital expenditures are tied to maintenance activities including an additional $7.2 million in new landfill construction. We expect to make additional investments of $7 million to $9 million on growth capital projects, our team is currently evaluating over $20 million in potential project and deployment of this capital we dependent on the associated returns. Looking back at 2016, I'm extremely proud of our accomplishment. Our team's execution on the strategic initiatives and our focus on our core environmental services assets have allowed us to strengthen our market position and expand our growth opportunities. Our strong cash flow generation has enabled us to further pay down bad debt and improve our already strong balance sheet. And looking forward, we believe 2017 will be a turning point for the industry and as the industrial base recovers and investment in the United States strengthen. I’m either more bullish on what we're going as an organization. We remain committed to our culture of operational excellence. We continue to be strategically focused on growing our Base Business through adding increased capabilities or complimentary service offerings. Strengthening our disposal network remains a key priority for us through the addition of strategic high quality assets or services. Our strong cash flow generation should allow us to continue our organic investment plans, strategic acquisitions and position the company to return capital to our stockholders through our current dividend. Our authorized stock repurchase program provides an additional vehicle to return capital albeit opportunistically. In closing, we remain bullish on our ability to deliver value to our stockholders over the long term. And with that, operator, we’d like to open up the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Michael Hoffman with Stifel. Please go ahead.

[Michael Hoffman:]

Hey, Jeff, Eric, Simon, Steve hope everybody is well out there.

[Jeff Feeler:]

Yes, Michael.

[Eric Gerratt:]

Good morning Michael.

[Michael Hoffman:]

Can we talk about a little more detail about your thoughts about the progression through the year, I have a sense as you alluded to it in your commentary and then have the numbers are frames that maybe the first half is - 1Q is down 2Q is up slightly and in 3Q and 4Q ramp significantly, that’s sort of the way it feels?

[Jeff Feeler:]

Michael that typical progression you’d expect. We’re actually seeing opportunities in the second quarter right now that gives me hope that we’re going to see a stronger second quarter, a number of the projects that we have been deferred, we’re getting indications are going to be ramping up in the second quarter of the year, and so that may be towards the back half of the second quarter, so your assessments pretty accurate.

[Michael Hoffman:]

Okay. And then the range is pretty wide in your guidance, it’s a wider than you normally give. So would - when you mean often companies trying to think about a midpoint and then have an up and down. How are you thinking about sort of the profile of your guidance in the risks within it and the positives?

[Jeff Feeler:]

Yeah. So that’s a good question. We did widen our range slightly, and I’ll focus on the EBITDA range. And the reason for that is we are optimistic on what we’re seeing for 2017. But there is still lingering uncertainty. We were optimistic a year ago that we’d be able to back fill some projects in 2016 didn’t really materialize and so because of that uncertainty we widened our range. As far as where we’re kind of focused on is really at the midpoint, and things that can go good such as project work being better than expected or the industrial economy recovering gets you towards the upper end of that range, if things continue to be a lot of sluggish, and we continue to see some project deferment you get down towards the bottom and that’s the reason why we expanded it.

[Michael Hoffman:]

Okay. And underlying that your view about the Base Business and the sort of general industrial economy, I mean in the middle we had a positive industrial production in the fourth quarter that tend to have a forward impact for you. And so as we think about the messaging you’re hearing from your customers when you balance between maybe we’ll do some of these projects we’ve been waiting for versus what we think our level of production is, how can you - help us frame that in sort of the trend for the year?

[Jeff Feeler:]

Yeah. So from the Base Business perspective we are really monitoring what others in this space for monitoring. We’re seeing great ISMs statistics coming out for the last four months for almost for the two year high at the end of January and that is the forward look. So if you kind of look back at our history, and how that correlates as we would expect to see some increase volumes on the Base Business which is really promoting our view that we’re going to have higher growth there, if that trend continues, that’s going to be a positive. As it goes through the year, mentioned that we’re going to have a difficult comp period on Base Business in the first quarter from the first quarter of 2016. So we might have lower growth could be a little bit negative, but as we move through the year, I would expect to see the comparables getting better, and seeing that growth so that the full year would be culture to that 3% to 5% range.

[Michael Hoffman:]

Okay. And then last year you thought you’d be sort of those three and it ended up blending down slightly below that given the dip in the fourth quarter. Do you think there’s some pent up activity that’s helping that improve that outlook for 2017?

[Jeff Feeler:]

I think that there’s potential there. And I think clarification is a year ago when we were providing guidance. We were guiding to low single digit. So three would have been a pretty good rate, which is where basically we came in for the year. So our expectations for the full year we’re in line with what we thought it was going to be, and we have pockets of volatility each quarter depending on shipment. So as we look out to 2017, what we’re seeing improved conditions and we see higher growth rates on the Base Business.

[Michael Hoffman:]

Okay. And then shifting gears into the field and industrial, what can you do quickly versus steadily to get the margins up into that - middle teens versus the lower teens given some of the puts and takes that occurred in 2016?

[Jeff Feeler:]

Yeah. Well, that’s good question. I mean there’s not a lot of low hanging food, it takes a lot of initiatives, we got to go win some more business. And drive some operating leverage to get that up in there. Fourth quarter was down for a number of different reasons, but we were right around 11% to 12% for the full year on that business, and that’s kind of where we’re going to be for 2017.

[Michael Hoffman:]

Okay. All right. And then as you look at the deal environment are things better or worse giving you opportunities to fill in the network and continue to capture incremental volume?

[Jeff Feeler:]

We’re continuing to look at opportunities that are out there. I wouldn’t say it’s better or worse. There’s a lot of businesses that are out there that are I’ll call it ten gentle and maybe not core that we’ve seen in the marketplace that we’ve passed on. But with regard to others that are in the space we’ll continue to look at and it meets our criteria and has the right valuation that something that want to get on.

[Michael Hoffman:]

And then last one from me. If that proved walks back the enforcement lever in club that EPA we yield it for the last eight years. Are you hearing from your customers side any sort of thoughts about how they would view particularly project work, if you’re going to have four years of maybe an easier to get along regulator not to delivering the standards just - it’s easier to get along with them maybe they do more work faster, what’s your - what are you hearing from the customer?

[Simon Bell:]

Michael, this is Simon here. When it comes to the EPA as you know it’s not an agency that moves very fast. I think it’s important to remember that most of our state they actually have their own repro programs, and regardless of whether EPAs for some enforcement up or not. The states I expect them to continue managing their programs as they have in the past, and I think it’ll provide some stability. Whether there’s some how far reaching through it impacts are going to be, I think we’re all eager to watch that is certainly something we watching closely. But no, I don’t expect large fluctuations, I don’t think that many of our customers are not just sending us waste, because enforcement the part of long established compliance programs. But certainly if the changes when the EPA go deeper than some of this impact it could have both positive and negative, but at a higher level, I’m not expecting and it’s similar comments receiving from our customers, and I think there’s a bit of a wait and see. But I think that we’ve seen this in the past where the Feds were various administrations of high - try to make changes with the EPA, and I think people realize it’s a very large agency that moves very slowly.

[Michael Hoffman:]

Okay. Thanks for your help and good luck.

[Jeff Feeler:]

Thanks, Michael.

[Simon Bell:]

Thank you, Michael.

[Operator:]

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

[Joe Box:]

Hey, good morning, guys.

[Jeff Feeler:]

Good morning, Joe.

[Joe Box:]

So, I was actually hoping to get a bit more granular on the bullish outlook. I certainly get there are lot of optimism is stemming from just better customer side and then better macro data. But I’m curious, are you actually seeing anything now in your business like in the Base Businesses you either reverting to growth in 1Q, I guess it’s a tough comp more you seeing the second derivative of the Base Business is getting better or folks are actually out there scheduling Event Business now. Ultimately I’m really just trying to see if there’s anything beyond just kind of sentiment at this point.

[Steve Welling:]

Hi, Joe, this is Steve Welling. Last year we had 40 to 50 larger event projects greater than 1000 tons that were heard into 2017. We’ve had multiple projects get kicked off handful, five or six kicked off in January and February, and we have information from many other customers of start dates in second quarter and third quarter. So we went through a pretty detailed exercise with our sales and our sales operations groups to update these deferred projects, and so we're pretty confident on that that there's a bent up demand will be - those projects will be moving this year. And then in addition, we've had some kickoff in activity on the new bids for where we've been getting calls in the first quarter for projects that should go in second and third quarter also. So we're confident that we're going to see increased activity on the event side. On the Base Business side, we just went through around price increases and the only reason we did that is we felt confident that the Base Business is strong and we're not seeing lots of issues with our customers where that would be a problem, and those are going into effect here in Q1. So if you forget about that too.

[Joe Box:]

Got it. Thanks for that Steve. And then actually maybe just a follow-up on the Base Business, that price increase, how does that factor into the 4% growth?

[Steve Welling:]

The price increase is on Base Business and we have Base Business divided a bit between what's truly based from ongoing production where you're producing a steel mill produces steel and then they have a byproduct that that's truly Based Business, so we also have smaller events that are part of our routine course. So the price increases is generally on what I call true Base Business and then about half of the event will be impacted by that, I don’t know if I could explain it any differently.

[Jeff Feeler:]

So Joe, this is Jeff, just adding a lot about a collar, yes it’s factored into our growth. So you know our 3% to 5% Base Business growth factors and pricing as well as volume.

[Joe Box:]

Got it, got it. Okay, switching gears move to the SG&A front. I know that there's some noise with Allstate coming out. But SG&A was down 15% on a 15% hit the revenues, so not really a bad performance there. I guess as we look forward to 2017 how should we think about the SG&A leverage that you guys can get. And maybe any onetime items that might be meaningfully different this year versus last like you know incentive comp?

[Eric Gerratt:]

Joe, this is Eric. I think for 2016, some of the decrease we saw versus 2015, lot of it was around incentive comp and some of the things that I mentioned in the prepared remarks. For 2017, I think what we're going to see from an SG&A perspective and kind of what we've modeled is in a similar range as a percent of sales. So around 80 to 87 I think is what's built into the guidance range from an SG&A perspective, which gets you right about that 16% of revenue range. One of the bigger drivers is for sure going to be incentive comp in the guidance range obviously we soon we hit targets, which puts incentive comp up a bit from where we were in 2016 relative to our target.

[Joe Box:]

Got it. Thank you. And then just lastly Jeff, we really haven't heard too much from other companies in terms of commentary around whether, I'm curious if there's something specific that impacted you guys in 4Q?

[Jeff Feeler:]

No, there is a stock [ph] of it you know especially in areas that normally are not impacted by weather. Idaho is a great example; Northwest has got pounded in December. The other weather wasn't necessarily how adverse that was there with more on timing and it factored into like December. So they hit mid-December right for the holidays so really precluded other shipments happening towards the back half of the year. So you know it’s kind of a compounding effect that we saw, as far as it impacting event and other things like that related impact that piece of the business.

[Joe Box:]

Got it. Thank you.

[Operator:]

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

[Tyler Brown:]

Hey good morning guys.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Good morning Tyler.

[Tyler Brown:]

Hey Jeff, I jumped on during your remarks, but did you say that you guys secured the expansion for that 2013 at ED?

[Jeff Feeler:]

That is correct. So that’s been in construction this year, we started it late summer, and it will be completed next year, but we got that all secured permits in hand, guess this at least 40 years of additional capacity going forward, a huge accomplishment for the team.

[Steve Welling:]

This is a correction that will be finished this year, Jeff. May, 2017 we’re in construction this is signing here and will be complete by May, June of this year.

[Tyler Brown:]

Okay, so 40 more years, okay, good deal. And then if I just start with the midpoint of EBITDA guidance say $125 million you take out the CapEx, cash interest, cash tax. I mean this $15 million of free cash flow seem unreasonable assuming no swings in working capital this year?

[Eric Gerratt:]

Tyler, this is Eric, yeah, that's about right. If you look at the low end versus the high end of guidance gives us free cash flow of $47 million, $48 million up to $50 million plus and that assumes the low end of CapEx on the low end of that and the high end of CapEx on the high end. So CapEx are just $34 million to $37 million.

[Tyler Brown:]

Okay, okay good deal. And then what are the priorities of cash is it still dividend want M&A to deleveraging three in the buyback four?

[Eric Gerratt:]

Yeah, our capital allocation approach really hasn’t change. So it's investing in ourselves first through organic investment opportunities will continue to look for strategic acquisitions and then any remaining discretionary cash will be either used to build it on the balance sheet repurchase shares or pay down debt.

[Tyler Brown:]

Okay and then Eric can you thought somewhere leverage might in 2017, I mean do you guys think you'll be below two times?

[Eric Gerratt:]

I think Tyler will be right about two on the high end of our range. On the low end it's about 2.2 times. What we were planning to pay down about $20 in 2017.

[Tyler Brown:]

Okay. So it's two times kind of a more optimal capital structure or how do you guys think about that?

[Eric Gerratt:]

Yeah, I think that's pretty optimal. We actually feel pretty good where we are today, given the market, given our credit facility. But absent any changes there, yeah I think two times still is pretty good.

[Tyler Brown:]

Okay, okay good. And then just lastly, I'm curious about the $20 million in growth projects that you guys noted. What kind of projects are those I’m just broadly curious?

[Simon Bell:]

Yeah, Tyler, this is Simon speaking here. It's pretty wide ranging everything from expanding more businesses and bolting on more opportunities with our thermal business to providing more internal treatments of some of our retail ways this could range from everything from air assault to recycling of batteries things of this nature. We’re also looking at some of the very challenging waste streams that we can treat. We think, we have - we've developed some unique processes that will be able to allow us to pursue some of the more higher ASP materials. And then finally a big part of that is we still think there's a lot of runway left and expanding the types of material we can treat at our existing network and so we have the technology in the know how we just may not have those permits at select facilities and we see a lot of opportunities to do that as well.

[Tyler Brown:]

Okay. So this is something - yeah, sorry go ahead Jeff, sorry.

[Jeff Feeler:]

I’m going to take couple things to add. We also see some expansion opportunities that our existing facility where we can acquire some additional land and property for future development. You know very similar to situations that we've had in the past that pay dividends as you can opportunistically purchase those areas and then build and expand our permits and business around that. We're also expanding some of our recycling efforts that are underway right now, that will recover certain metals out of waste streams and things like that that are great additions to our core business and servicing exact same customers.

[Tyler Brown:]

Okay. So something that you know hopefully through 2017 we get permits design engineer and then maybe something contributes financially more into the 2018 timeframe.

[Jeff Feeler:]

Yeah. Most all of the growth capital that we would deploy in 2017 will benefit 2018 and beyond.

[Tyler Brown:]

Okay.

[Jeff Feeler:]

It takes time to engineered, it takes time to do the analysis, it takes time to get the right returns on it and deploy it and get it put in place. But the key is, and I think the key point here is, we're really focused to invest organically, and we feel lot of opportunities in our existing facilities to expand our capabilities by deploying our own capital.

[Tyler Brown:]

Okay, good. Maybe just one last clarification on, the Base Business, I think you guys noted it was up one to three at the end of October, but you came in down four. I'm just curious can you bridge us I mean you called out December, but was December down like double digits in base?

[Jeff Feeler:]

Well Tyler, we don't break Base Business down by month, but why I will tell you is that as the fourth quarter went, October and November were really strong and we were tracking towards the midpoint of our guidance range in December was really soft.

[Tyler Brown:]

Okay.

[Jeff Feeler:]

So we did the collapse and it wasn't our project work, so volumes did dry up. Now the reality is, as I think that a lot of it had to do with businesses shutting down and not doing a lot in December plus the other impacts that we’ve seen, we didn’t see the year and push we normally do, which year-over-year is an impact. We thought a push in the prior year, as we look to first quarter January starting out a little soft, which is what we expect that we’re seem more bullish in February and March. So the first quarter is kind of track in, but it will most likely be lower than the first quarter last year.

[Tyler Brown:]

Okay.

[Steve Welling:]

This is Steve Welling, a lot of times when we have a great January, it’s usually due to carryover for projects that were in the fourth quarter that didn’t get finished even though they were scheduled to be finished by the end of the year. So the lack of events in Q4 there’s lack of carryover into January. So that’s why we’re expecting a lot of the kickoff in these event projects to be Q2, Q3.

[Tyler Brown:]

Okay. I see. Hi guys, appreciate the time.

[Jeff Feeler:]

Thanks, Tyler.

[Eric Gerratt:]

Thank you.

[Operator:]

Our next question comes from Tyson Bauer with KC Capital. Please go ahead.

[Tyson Bauer:]

Good morning, gentlemen.

[Jeff Feeler:]

Good morning, Tyson.

[Tyson Bauer:]

Couple of quick questions, just a follow-up on the base assumption as we go forward, midpoint 4% seems like a GDP growth plus your incremental pricing that you think you can push through. Is there any a mix component to that where one or two industries are skewing a little higher your ability to get those assumptions through such as refineries where we may see a more of an extended turnaround activity this year than maybe we’ve seen in years past anything peculiar that we should expect?

[Steve Welling:]

On the refinery side, this is Steve Welling. A lot of that work would be considered event work more so than Base Business, because of the turnaround work would be larger tank bottom project, so that type of thing, so no not really on one refinery, we’re pretty broad based in terms of our Base Business, so not seeing any one industry that will impact those results.

[Eric Gerratt:]

Yeah. I’ll just add our pricing and how we’ve increased it was pretty broad. We don’t do a broad based across every single waste stream, it’s more waste stream by waste stream, but there wasn’t any focus on one particular industry. So it was more broad based from that perspective.

[Tyson Bauer:]

There were basically taken a GDP assumption overall plus a pricing to get to your range?

[Eric Gerratt:]

Yeah. That’s pretty consistent.

[Tyson Bauer:]

Okay. Simon you brought up the event, if we kind of do a back in the napkin calculations, incremental $24 million to get to your midpoint gives us an additional 5% proportional to Event Business compared to that year we just had. How much of that is in hand this year as we’ve deferred some of these projects you mentioned some of these are already starting as opposed to and years past where we’ve had to win those businesses and start them up before the year end?

[Steve Welling:]

This is Steve Welling. The deferred projects that we referred to 40 or 50 projects, these have been contracted, totally awarded. These were not bids, these were actually projects that we thought we had an award and they were going to move in 2016. That’s what we’re tracking now because we believe we have that business.

[Tyson Bauer:]

Okay. When we talk about it, sorry it’s been a dangerous game to assume a catch up period when things move to the right on the calendar typically we don’t have the opportunity to make it up as just a functional grade of business activity that leads into the out quarters. Is that similar to what you’re saying this year, that don’t anticipate any kind of catch up quarters, it’s just a function that you were seeing more opportunities in general?

[Simon Bell:]

Tyson, that’s honestly the double dips in the details there that - that’s the challenge we have, right now what we’re seeing is Q2, Q3 and Q4 have great opportunities, and a lot of it is the deferred project. We’re seeing new opportunities come in to market, and more - where there’s a couple of enough warning on the radar screen that we’re pretty sizable that we’ve already secured and contracted will begin shipping. And so we are seeing some positive trends, but the risk out there is end up being shipped a quarter and all the sudden you’re shifting out of period. And that’s one of the reasons why we’ve broadened our range to try to factor in that not risk profile little bit.

[Tyson Bauer:]

Okay. And last question from me, in regards to pricing in the field services side. Are you seeing any greater competitions there where you are able to go to your ES business and have pricing increases, is a little bit of the opposite on the field side where you’ve got to be a little more protective of your share and get those contracts back?

[Steve Welling:]

This is Steve again, yes, the services side is more price sensitive there’s dramatically more - higher number of competitors. So that we have to be much more careful on that side on price increasing that we do on the treatment and disposal side.

[Tyson Bauer:]

All right. Thank you, gentlemen.

[Steve Welling:]

All right, thank you, Tyson.

[Jeff Feeler:]

Thank you, Tyson.

[Operator:]

[Operator Instructions] Our next question comes from Bobby Burleson with Canaccord. Please go ahead.

[Bobby Burleson:]

Hey, guys. Good morning.

[Jeff Feeler:]

Hi, Bobby.

[Eric Gerratt:]

Good morning.

[Bobby Burleson:]

Hi, so I guess just trying to understand what shifted from 2016 to 2017 in terms of EBITDA. EBITDA about business you guys talked about a $10 to $15 million kind of range last quarter. You have two years over kind of where do you think that shake out $10 million to $15 million was it kind of to the higher end of that range do you think in terms of what shifted?

[Jeff Feeler:]

Yeah. Bobby, it’s this is Jeff. It’s pretty consistent with what we thought, it’s somewhere around that $10 million, $10 million to $15 million of EBITDA that we believe shifted out of all those projects that Steve has talked about. Does that mean that all of that shift shows up in 2017, no, absolutely not. But in our outlook on the guidance we believe we can capture a good portion of that whether it’s through these deferred projects and then also new opportunities. If you kind of look at our Event Business over the last couple years directionally 2015 was about $70 million in revenue on Event Business, 2016 was about $48 million. So there’s a big gap there, and we’re seeing opportunities of replacement that we’re seeing opportunity - new opportunities coming up, and we see growth in that area going forward and that typically comes at a fairly high EBITDA margin because it’s incremental to the business.

[Bobby Burleson:]

Okay. Are there any are the capacity constraints on capturing all of that work essentially days of work available to actually get work done that time how we should think about that?

[Jeff Feeler:]

Yeah. There’s not, it is from our perspective at our facility we don’t really have capacity restriction. We’re in most cases receiving no waste and you get scheduled in and we can add shifts if we need add shifts. And so it is - and it’s not all of these projects going by the same contractor outside of us, so they probably don’t have capacity issues on that. So one of the things we pride ourselves honest to make sure that we can take waste and when the customers are really ship it. And that’s why we continue to invest in our facilities and put and put good high quality equipment in place to make sure that we’re ready to go when they’re ready to ship it.

[Bobby Burleson:]

Okay. Great. And then just in terms of that December kind of year end push that you didn’t see this year. Is there, could there be any kind of tie in with the election and kind of this presidency that we’ve saw related to that could that be a factor or do you think it was something else.

[Jeff Feeler:]

Yeah, that’s actually question. I mean the whole election in the current stated administration that we’re in has created some uncertainty with regard to the Base Business and the yearend push. I don’t think much of that was impacted, I mean that you’re in normal recurring type waste streams. On the event side you don’t see a lot of event projects starting up in November, I mean they tend to be carried over from the summer and we didn’t have the best event year last year. So that that kind of transitioned as expected. So I don’t - I don’t really think the election was impacting December at all from my perspective.

[Bobby Burleson:]

Okay. And then just on the that kind of normal waste stream generation, if you look at the strong U.S. dollar is there any concern that the State is elevated activity could kind of slow down?

[Jeff Feeler:]

That probably the risk, and it really depends on how the high dollar impacts our exports for our customers, and how competitive they are globally. So from that perspective we’re not seen it. We’ve been fairly high for the last 18 months or so. So it depends how much it strengthens and what other aspects that we have, the other area of our business that a strong dollar actually helps us as our Canadian operations where we actually are taking waste in from the States, and we price that typically in the U.S. dollar. So we’ll see some positive margin expansion there in that case for those certain waste streams.

[Bobby Burleson:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Barbara Noverini with Morningstar. Please go ahead.

[Barbara Noverini:]

Hey good morning everybody. So acquiring EQ return on total capital continues to tick down and of course being in a weaker part of the cycle doesn't help, but can you remind us what your longer term targets for ROIC and maybe visit with us what parts of your strategic roadmap over the next few years are going to catch you there?

[Simon Bell:]

Yeah, so Barbara you know the challenging part of doing large acquisitions especially when you're measuring return on capital. We're not - we're not buying these assets for two to three year return. So this is a lifetime return for these assets and we are still confident that we're going to be able to grow that to a double digit. I still think that you know we're probably three to five years out and it's probably on the tail end of that to get those up. And it's really driving the operating leverage in the business and putting additional assets to work and doing a further integrating our systems, and doing all the items on our strategic roadmap that gets us there and it’s going to take time, it's going to take commitment where well underway. The softness since the acquisition hasn’t helped that effort, but as we're starting to see if we truly believe we're at whether it’s a trough or at the start of an expansion on the industrial cycle, we think we're poised to start capturing that going forward.

[Barbara Noverini:]

Okay, thanks. And then interested in your high level side, so you know the administration occasionally puts NAFTA and its crosshairs and you’ve talked about the benefits of NAFTA on your business. So you know in the event it is renegotiated done away with, how would you expect that's impact your business?

[Simon Bell:]

You know to be honest with you we don't anticipate much impact from NAFTA. I think that you know hearing and reading probably what others are reading is our trading relationship right now as a nation with Canada is very strong both directions, and I don't think that's under the radar screen of what the current administrations working on, it’s more south and we don't do it tremendous amount of business down and down in Mexico. And so what we're seeing here we’ll continue to monitor. We don't know ultimately what will happen, no one does, but where we’re sitting today as we don't see much impact there.

[Barbara Noverini:]

All right, great. Thanks so much.

[Simon Bell:]

Thank you.

[Jeff Feeler:]

Thank you.

[Operator:]

One last time. [Operator Instructions] It appears that we have no further questions. I would now like to conclude the Q&A session and turn the conference back over to Jeff Feeler for any closing remarks.

[Jeff Feeler:]

I want to thank all those that participate in the call today and we look forward to updating you as we progress through 2017. Have wonderful weekend. Thank you.

[Operator:]

Thank you. This concludes today's conference call. Thank you for attending the presentation. You may now disconnect. Last but now on France call. Thank you for attending the presentation. You may now disconnect.