US Ecology, Inc.
Q4 2014 Earnings Call Transcript

Published: 27 Feb 2015

[Operator:]

Good morning, and welcome to US Ecology Fourth Quarter and 2014 Year End Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Eric Gerratt, Executive Vice President and CFO. Please go ahead, sir.

[Eric Gerratt:]

Good morning and thank you for joining us today. Joining me on the call this morning is President and Chief Executive Officer, Jeff Feeler. Also on the line are Executive Vice President of Sales and Marketing, Steve Welling; Executive Vice President of Operations for Environmental Services, Simon Bell; and Executive Vice President of Operations for Field and Industrial Services, Mario Romero. 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 our call and presentation today and yesterday's earnings release, we refer to adjusted EBITDA, adjusted earnings per share, pro forma earnings per share and pro forma adjusted EBITDA. 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 EBITDA, adjusted earnings per share can be found on Exhibit A of our earnings release. A reconciliation of pro forma earnings per share and pro forma adjusted EBTIDA can be found on slides 20 to 30 in the investor presentation we found as an exhibit to our 8-K filed yesterday. We believe these non-GAAP metrics are useful in evaluating our reported results and our 2015 guidance. With that, I'd like to turn the call over to Jeff.

[Jeffrey Feeler:]

Thank you, Eric, and good morning, everyone. I'll start this morning's call with a few summary comments on the fourth quarter and full year results that we released yesterday. I will then turn the call over to Eric for some additional details on our new segment structure and our financial report including additional details on pro forma 2014 results. I'll then close out the call with comments regarding our outlook for 2015 and then open up the call for questions or comments. For those following along on the webcast presentation, please direct your attention to Slide five. US Ecology capped off a transformational year with a strong fourth quarter the results that exceeded our expectations. We delivered total revenue up $157.2 million, generated $19.1 million of operating income and had $31.2 million of adjusted EBITDA. Net income was $8.7 million with adjusted EPS of $0.42 per share. Our environmental services segment delivered strong results with $97.7 million of revenue and our field and industrial services segment generated $59.4 million of revenue. Eric will provide more details on our segment reporting a little later. Overall, the quarter was very strong and I cannot be more pleased with the team and the direction that we are heading. Delivering solid results while undertaking integration activities is a challenging endeavour, although challenges of course remain, the teams are working well together and we continue to make good progress rolling out programs to back office support. Functional area of realignment continues with the fourth quarter roll out of a new sales function to support each operating segment. Much more is planned in 2015 which I’ll cover in our outlook section. Moving on to slide six, 2014 was a successful year as measured by any number of metrics, financially we delivered $447.4 million of revenue, generated $72.5 million of operating income and adjusted EBITDA of $109 million. Net income was $38.2 million translating into adjusted EPS up $2.02 per share. Much of this growth can be attributed to the EQ acquisition which we closed in June 2014, however, when we look at just the legacy US Ecology business the operations team delivered record financial results including $219.2 million of revenue, operating income of $54 million and adjusted EBITDA $73.4 million. We also acquired a very strategic asset that expands the company both geographically by extending our North American footprint as well as strategically by adding complimentary services that better leverage our sales and go-to-market approach. I cannot be more pleased with the execution the team is involved and with that, I’ll turn it back to Eric.

[Eric Gerratt:]

Thank, Jeff. As a result of our acquisition of EQ on June 17, 2014 we have reorganised our business into two operating segments which you can see on slide eight of the presentation. They are the environmental services or ES segments build on industrial services or FIS segment. Going forward we will be speaking to and reporting on the business in terms of these two segments as well as corporate which represents functions and costs that are not tied directly to one of the operating segments. These operating segments are based on how we view manage and evaluate the company. The environmental services segment includes all of US Ecology’s legacy operations and the legacy EQ treatment and disposal facility. This segment provides diversified waste services including transportation, recycling and treatment and disposals hazardous and non-hazardous materials at company owned land fill, waste water and other treatment facilities. The Field and Industrial Services segments include all of the legacy EQ field and industrial services business. It provides waste packaging, collection and total waste management solutions at customer sites and through our 10-day transfer facilities. Services include on-side management, waste characterisation, transportation and disposal of hazardous and non-hazardous waste. This segment also provides speciality services such as high pressure and chemical cleaning, centrifuge and materials processing, tank cleaning, decontamination or mediation, emergency response as well as other services to commercial and industrial facilities and government entities. To give some perspective of the relative size of each segment in 2014 the ES segment represented approximately 70% of total revenue and an adjusted EBITDA margin of 37% while the FIS segment represented approximately 30% of total revenue and an adjusted EBITDA margin of 12%. Turning to fourth quarter results, please refer to slide nine. Revenue for the fourth quarter of 2014 was $157.2 million up from $59.4 million in the fourth quarter of 2013. The fourth quarter of 2014 included $102.4 million of revenue contributed by EQ. Revenue for the environmental services segment for the fourth quarter was $97.7 million compared to $59.4 million in the fourth quarter last year. The Field and Industrial Services segment delivered $59.5 million in revenue for the fourth quarter of 2014. Legacy US Ecology revenue for the fourth quarter decreased 80% to $54.8 million; this was driven by lower treatment and disposal revenue and lower transportation revenue. Recurring base business for legacy US Ecology contributed 61% of treatment in disposal revenue and increased 3% compared to the fourth quarter last year. Event business decreased 13% from the fourth quarter last year and represented 39% of treatment and disposal revenue in the quarter. Slide nine breaks down treatment in disposal revenue for both base and event business by customer category for legacy US Ecology. As you can see the most significant changes during the quarter were in the government, private cleanup and refinery customer categories. Our government cleanup business increased 55% in the fourth quarter of 2014 primarily due to higher disposal revenues from the U.S. Army Corp of Engineers. Treatment and disposal revenue from the Army Corps was 53% higher in the fourth quarter of 2014 versus the fourth quarter of 2013. This was a result of a 61% increase in volumes. Treatment and disposal revenue from private cleanup customers decreased 23% in the fourth quarter of 2014. This decrease is primarily the result of lower shipments from a nuclear fuels fabrication decommissioning project and lower shipments from an East Coast cleanup project in the fourth quarter of 2014. Treatment and disposal revenue from our refinery customer group decreased 26% in the fourth quarter compared to the same quarter last year. This decrease is primarily the result of lower landfill disposal volumes due to a large spill cleanup project in the fourth quarter last year that didn’t recur. The decrease is also partially attributable to lower thermal recycling volumes in the fourth quarter of 2014 due to downtime on the thermal unit as the new larger dryer was installed. Turning to slide 10, gross profit was $46.2 million in the quarter up from $23.1 million in the same quarter last year. EQ contributed $25.2 million in gross profit during the quarter. The ES segment contributed $34.2 million in gross profit while the FIS segment contributed $12 million in the fourth quarter. Selling, general and administrative spending or SG&A was $27.1 million in the fourth quarter of 2014. This was up from $7.7 million in the fourth quarter last year. EQ SG&A spending was $18.7 million in the fourth quarter of 2014 with the remaining increase due to higher labour, higher professional and fees and expense and higher business development expenses. Operating income was $19.1 million in the fourth quarter of 20104 compared to $15.4 million in the same quarter last year and included $6.5 million of operating income from EQ. We reported net income of $8.7 million in diluted earnings per share of $0.40 in the fourth quarter of 2014. This was down from $9.2 million or $0.48 per diluted share in the same quarter last year. We delivered adjusted earnings per share of $0.42 in the fourth quarter of 2014 up from $0.52 per share in the fourth quarter last year. Our fourth quarter 2014 earnings per share calculation reflects three million shares issued in December of 2013. Adjusted EBITDA for the fourth quarter of 2014 was $31.2 million, up from $20.2 million in the same quarter last year. Adjusted EBITDA was $31.5 million for the ES segment, $6.7 million for the FIS segment and negative adjusted EBITDA of $7.1 million for our corporate function. Legacy US Ecology operations delivered adjusted EBIDA of $17.6 million in the fourth quarter of 2014 compared to $20.2 million in the fourth quarter of 2013. EQ contributed $13.6 million during the quarter. Turning to full year results on slide 11, total 2014 revenue was $447.7 million compared to $201.1 million in 2013. EQ contributed $228.2 million of revenue since the acquisition in June. Revenue for the environmental services segment for 2014 was $311.8 million compared to $201.1 million in 2013. The Field and Industrial Services segment delivered $135.6 million in revenue in 2014. Legacy US Ecology revenue increased 9% to $219.2 million in 2014 driven by higher treatment and disposal revenue as well as higher transportation revenue. Recurring base business for legacy US Ecology was 59% of treatment and disposal revenue from 2014 and increased 5% compared to 2013. The Event business increased 16% in 2014 compared to 2013 and represented 41% of treatment in disposal revenue. Slide 11 also breaks down treatment and disposal revenue by customer category for legacy US Ecology. The most significant changes during the year were in the private cleanup other industry and refinery customer categories. Treatment and disposal revenue from private cleanup customers increased 31% in 2014. This increase was primarily the result of increased shipment from an East Coast cleanup project and other smaller remedial project. This was partially offset by lower shipments from a nuclear fuels fabrication decommissioning project in 2014. Treatment and disposal revenue from our other industry customer group increased [ph] 17% reflecting increased shipments from a broad group of industrial customers. Treatment and disposal revenue from our refinery customer group decreased 13% in 2014 compared to 2013. This decrease is the result of lower landfill disposal volumes due to fewer cleanup projects. The decrease is also partially attributable to the lower volumes from thermal recycling projects sourced directly from our refinery customers. Turning to slide 12, 2014 gross profit was $145.8 million compared to $79 million in 2013. The ES segment contributed $117.5 million of gross profit or the FIS segment contributed $28.3 million. Operating income was $72.5 million for 2014, up from $52.9 million in 2013. EQ contributed $18.5 million of operating income in 2014. Adjusted EBITDA was $109 million and included $6.4 million of business development expenses. This compared to adjusted EBITDA of $71.2 million in 2013. EQ contributed $35.6 million of adjusted EBITDA since the acquisition in June. Consolidate d net income was $38.2 million or $1.77 per diluted share compared to $32.2 million or $1.72 per diluted share in 2013. Adjusted earnings per share for 2014 was $2.02. This includes approximately $0.20 of earnings per share from EQ and excludes $0.22 of business development costs and $0.03 of non-cash foreign currency losses. This was up 11% from 2013 adjusted earnings per share of $1.82. As we have discussed previously the first half of the year is seasonally lower for the legacy EQ business. That seasonality was significantly more pronounced in the first half of 2014 due to unusually severe weather conditions impacting the North Eastern United States. This deferred and pushed revenue as well as profitability into the second half of 2014. Slides 13 and 14 of the presentation show pro forma financial information as if EQ had been owned for all of 2014 and provides additional insight into full year results. On slide 14, this show a pro forma revenue would have been $615 million for 2014 with significant second half improvement over the first half. Similary pro forma profitability metrics also showed significant improvement in the second half of 2014 over the first half. From an earnings per share standpoint, pro forma EPS would have been $1.72 per share as compared to the adjusted earnings per share of $2.02. Pro forma 2014 adjusted EBITDA was $126.4 million again with significant second half improvement. Turning to slide 15 we generated $71.4 million of cash from operating activities in 2014. We also invested $28.4 million in capital projects, paid $19.4 million on our long term debt and paid out $15.5 million in dividends to our stock holders. Pro forma return on invested capital for the 12 months ended December 31, 2014 assuming a full year of EQ was 6.4%. Pro forma return on assets was 4.1% and pro forma return on equity for the same period was 15.5%. With that, I’ll turn the call back to Jeff.

[Jeffrey Feeler:]

Thank you, Eric. Moving into 2015, market conditions and demand for our services remained strong. As we announced yesterday, we expect 2015 revenue will range between $585 million and $620 million. From a segment standpoint, we expect our environmental services segment to represent approximately 60% of total revenue and range from $345 million to $370 million. Our Field and Industrial Services segment revenue is expected to be between $240 million and $250 million. Our current expectations for 2015 call for adjusted EBITDA to range from $137 million to $143 million. This represents growth of upto 13% over 2014 pro forma adjusted EBITDA that Eric discussed earlier. Earnings per share is expected to range between $1.76 and $1.92 per share, this reflects growth of upto 12% over 2014 pro forma earnings per share. Our earnings guidance also reflects higher interest expense in 2015 as a result of an interest rate hedge that was effective on December 31. This effectively locks in approximately 63% of our term debt at a rate of 5.2%. As a result, we expect that cash interest and non interest or – non-cash amortization of debt issuance cost will total approximately $21 million in 2015. Our earnings guidance also reflects a higher anticipated tax rate of 39%. This is up from our tax rate of 37.4% in 2014 resulting from higher profits expected to be generated in the United States and higher effective state income tax rates. We expect capital expenditures to range between $40 million and $45 million in 2015. This is slightly higher than our earlier expectations as a result of capital not spend in 2014 in addition to investments in our financial information systems. Most of the capital will be spend on land fill development, infrastructure upgrades and equipment replacement at our operating facilities. From a business climate perspective, we continue to believe base business for our environmental services segment will grow in the mid-single digits. The pipeline for event work is strong and we are seeing solid bidding activity and we have recently won the major long term projects that will benefit not only 2015 but will carry us into the next several years. Like last year at this time, opportunities continue to emerge as we gain visibility to the summer time construction remedial season, that we believe will backfill our pipeline and replacing event that is expected to be completed midyear. The Field and Industrial Services segment is expecting solid growth as we leverage revenue producing assets that were purchased in 2014 and will be included in our capital plan in 2015. Supporting this anticipated revenue growth will be a dedicated field and industrial sales team that we discussed earlier. This new sales team and the operations group are very focussed on revenue quality and related profitability. Our key initiatives for 2015 center around continued integration of the two organizations. As we have discussed on previous calls, we anticipate that the full integration will take up to two years and while we have made significant progress we are only eight months into this two year plan. In 2014 we appointed the leadership team who was tapped to identify and roll out our operating structure and functional organisation. While we developed our business unit structure significant time was spent reviewing service lines and communicating expectations at the new organization. As we move into 2015, uniting the two organisations will take center stage in our integration efforts. In January, we rolled out new branding, celebrating our enhanced market position and expanded North American platform. Replacing each of the company’s legacy marketing materials with a fresh new look allows us to better unite under a new brand identity. The leadership team is working with team associates to further refine and streamline process and services, pushing down accountability to each team associate with the intention of enhancing the customers experience and increasing speed in execution. Another key focus on the sales front is our go-to-market approach. As we talked earlier in late 2014, we reorganised the sales team by segment to provide increased focus while our national accounts team continues to serve multi and location customers and assist with cross selling opportunities between the business units. A new customer relationship management or CRM system is being developed to improve communications tracking accountability within the new sales structure. A heightened focus on revenue quality by the sales and operating managers will continue on into 2015. Re-directing into playing current resources to bidding opportunities where we bring a value add or proposition or competitive advantage to the customer will in turn increase our success rate and ultimate profitability. Investing in production and financial systems is also a top priority in 2015. In addition to the CRM system, we are working to unify production data bases and leverage the best of breed applications for both of the legacy companies. The first of these modules was rolled out in the fourth quarter of 2014 and we have received rave reviews from our customers. Financial system selection is expected before the end of Q1 with the implementation commencing this summer. The ultimate goal is to go live on common platforms in 2016. Another key aspect to our integration is our continued work on optimization strategies for way streams as well as our logistics services throughout optimization. We have seen significant process here but there is more to do. Though we have not seen, that we do not see many opportunities for SG&A reductions in 2015 we continue to control cost and analyze process improvements for when we are on common platforms. 2015 is going to be a busy and exciting year for US Ecology. Our teams were energised and were moving in a unified direction to create the premier North American provider of environment and industrial services where the best people work delivering sustainable solutions for our customers and long term value for our stockholders. I look forward on reporting on our future results in the coming quarters. With that, we’ll open up the call for questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Scott Levine of Imperial Capital. Please go ahead.

[Scott Levine:]

Hey good morning guys.

[Jeffrey Feeler:]

Good morning, Scott.

[Scott Levine:]

So, kind of wrapping up the year with EQ it certainly sounds like the acquisition is performing better than you guys had initially anticipated. I was wondering if you could elaborate a bit more. I know you haven't given formal synergy targets or accretion, but would you say -- would you think it's fair to say you're expecting more than you were expecting when you closed the deal initially? And without giving specifics if you are unwilling to, should we be expecting maybe a step-up in synergy in 2015 versus 2014? And maybe a little bit of color on where you see those being most impactful on your business?

[Jeffrey Feeler:]

Yes, Scott this is Jeff. I’ll address that and I’ll have the team chime in other areas. But for when we look at 2015, yes we are seeing synergies. They are incorporated into our guidance. As we announced when we did the announcement of the acquisition we also expected to have to invest in resources during the integration period. And so, those are somewhat being offset by some of the synergies right now as we look towards when we get on common platforms and we get on common systems toward the end of 2015 into 2016 that’s where I think they will see more of the step up on the cost side of the synergies. From the cross selling opportunities we are seeing a lot of cross selling opportunities. You know our go-into-market stay as a combined company we are better positioned to win project based work and win customers on the base business side then the two companies were separately. And so we are seeing those, there should be more opportunities in 2015 than there were in 2014 and those have already been reflected in.

[Scott Levine:]

Got it. Thanks. And then I know this isn't the way -- or believe this isn't the way you really give guidance but you gave some pretty robust statistics on growth for your legacy business by customer category. How should we think about -- or how are you thinking about 2015 from that perspective? Any major deltas? And if you could also elaborate on the impact of the recent the energy markets, and how you expect that to impact your customer base, both on the downstream and upstream side, recognizing that upstream is a pretty small piece.

[Jeffrey Feeler:]

Yes, so this is Jeff again. So, as we look to the customer groupings you know that is really represented with the legacy US Ecology business as we start cycling through the EQ results will come out with some additional guidance with regard to year-over-year gross statistics to better convey what we are seeing. In the legacy US Ecology business, when we look at 2015 we do see some growth opportunities just in general and the industrial consistent with kind of the growth in the base business and we also see a continued solid performance in like the refining sector and the oil and gas markets. We are expanding our thermal unit down in Texas that system went into place in December and we’re seeing great opportunities there to grow volumes and revenue year-over-year in that sector. From a government perspective we actually expect year-over-year improvement in the government side of the business. That’s predominantly driven by the Army Corps of Engineers and we do expect to see some uptick there that from some project deferment that we shifted from2014 into 2015. And so we are seeing some very nice opportunities there. The private sector will continue to be potentially a challenge and year-over-year comps will be difficult as we cycle through and get through the back half of the year depending on what project opportunities we go into back fill will depend on whether or not that sector or that category sees additional growth in it or not.

[Scott Levine:]

Great. Thanks. I’ll turn it over.

[Operator:]

[Operator Instructions] Our next question comes from Barbara Noverini of Morningstar. Please go ahead.

[Barbara Noverini:]

Hey good morning, everybody.

[Jeffrey Feeler:]

Good morning.

[Barbara Noverini:]

So, pro forma return on total capital was given at 6.4%, which is obviously significantly lower than the midteens we've come to expect from the legacy business. I know that you haven't given any formal targets, but can you give us a sense for where you think you can get this number as you work through your integration? And maybe also just give your thoughts on what the key drivers of improvement for this metric might come from?

[Jeffrey Feeler:]

Sure. Barbara the metric the 6.4% is definitely not our goal and target. We knew that it was going to be lower than our legacy operations upon when we did the acquisition as we look to targets going forward we have not stated an official target. But we do believe that we can get back upto double digits over the course of the next probably three to five years.

[Barbara Noverini:]

Okay. Great. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Joe Box of KeyBanc Capital Markets. Please go ahead.

[Joe Box:]

Hey good morning, guys.

[Jeffrey Feeler:]

Good morning, Joe.

[Joe Box:]

Can you maybe just talk about the right mix of business at EQ; I know that they had some lower margin, lower returned businesses that were potentially up for review, just curious if you have given that any further thought and how we should be thinking about it in our models going forward?

[Jeffrey Feeler:]

Sure, Joe. From that standpoint I think the key message is we’ve been looking at revenue quality and profitability and all the services areas of the business and Mario has really led that charge as we’ve gone through our learning and communication. We’ve seen tremendous improvement especially when you compare it from first half to second half and many of those services. For some of the other service lines we are going to continue to evaluate all those in 2015 and to determine what the growth strategy is for from some of those lower end margin businesses.

[Joe Box:]

Okay. And so I apologize if you mentioned this earlier, but in terms of some of the long-term projects that you won, can you give us a sense on magnitude versus some of the past projects we've seen? And maybe some of the timing around this?

[Steven Welling:]

Oh sure, Joe, this is Steve Welling. First of all we have a number of carry over projects that are expected to go atleast through the middle of this year and some could go much longer as it depends on how much contamination is found but has a tendency to happen with these projects like sometimes they grow. But in addition to that we just in the last few weeks we picked up new awards in the 60,000 ton range just over the last six weeks of new projects which we’ll be starting some in Q2, some in Q3 and then would have a number of much larger projects on the horizon, just can’t give you certain dates, but we feel pretty confident. I know you had asked us before about Anadarko, some of those project sites that we just funded in January are actually locations that we’ve looked on in the past and one of them we’re currently working and money has just been given to EPA for those sites. So we feel pretty confident we’ll have good opportunities there too.

[Joe Box:]

So are we taking maybe late 2015 early 2016 and some of those you know Anadarko projects? Or is it too soon to say when we actually see the shovel hit the ground?

[Jeffrey Feeler:]

The settlement was in 2014 but the funding by the trust to the various I guess to the trust was in January just a few weeks ago. So our sales team was given the kind of the go-ahead this last week to start out making the calls now that we know where the money has gone and – but we are a little bit early to give you much more detail than that.

[Joe Box:]

Understood. Thank you guys.

[Jeffrey Feeler:]

Thanks.

[Operator:]

[Operator Instructions] At this time it seems that there are no further questions. I would like to turn the conference back over to Jeff Feeler for any closing remarks.

[Jeffrey Feeler:]

I want to thank all those who joined us today and we look forward to updating you in Q1 in late April.

[Operator:]

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