US Ecology, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good morning, and welcome to the US Ecology Second Quarter 2015 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, CFO. Please go ahead.

[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 and 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 EBITDA can be found on Slides 29 and 30 of the Investor Presentation, we furnished as an Exhibit to our Form 8-K/A filed on March 2, 2015. We believe these non-GAAP metrics are useful in evaluating our reported results and our 2015 guidance. With that, I would like to turn the call over to Jeff.

[Jeff Feeler:]

Thank you, Eric and good morning everyone. Before launching into our quarterly results, I’d like to take a few moments to provide some commentary on yesterday’s announcements regarding the company entering into a definitive agreement to sell Allstate Power Vac. I will then provide some highlights on the quarterly results before having Eric provide a more detailed financial review. I will conclude the call by reviewing the current market conditions and our business outlook before opening up the call to questions and comments. Slide 5 provides some background on the Allstate business we have agreed to divest. Allstate is a New Jersey-based industrial service provider that operates primarily in the Northeast markets. Allstate represents the majority of our industrial services business that we acquired with EQ last year. Its services include various industrial cleaning and maintenance activities and infrastructure support including hydro-excavation, sewer cleaning, sewer line inspection and rehabilitation services. Slide 6 of the presentation shows the relative size of Allstate’s operations being divested. Allstate operates in our Field and Industrial Services segment, comprising of about $31 million of approximately $94 million of revenues for the six months ended June 30, 2015. On this slide, you can also the see that the percentage breakdown of our total revenues and adjusted EBITDA for our operating segments excluding our corporate overhead function and the proposed divestiture of Allstate business. Despite the large revenue base, Allstate is a low margin business that contributed approximately 3% of adjusted EBITDA before corporate expense for the six months ended June 30. The business was also an employee-intensive business represented about 18% of our employee base. Moving on to Slide 7, the divestiture represents just a portion of our overall Field and Industrial Services that we acquired with the EQ acquisition. We will be retaining certain Industrial Services assets that operate in the Greater Michigan area and have more complimentary attributes than the Allstate business. We are also retaining the highly complementary Field Services business, which include collection and transportation of hazardous waste and transfer and processing services, such as retail and less-than-truck load, or LTL services, onsite managed services and remediation services. These Field Services have the unique ability to derive waste to our treatment and disposal network and are integral to our strategy of becoming the premier North American provider of environmental solutions. Moving on to Slide 8, consideration in the transaction is approximately $58 million in cash from the sale, which we expect to use to repay debt. As with most transactions, closing is to normal regulatory approvals and permit transfers. We expect the sale to close during the fourth quarter. Slide 9 highlights our divestiture rationale. When we acquired EQ last year, the primary assets that excited us for the strong treatment and disposal assets along with those Field Services that gave us increased customer interface while providing us the opportunities to internalize waste streams into our disposal network. We were less interested in the Industrial Services business and our intention was always to review whether it would ultimately fit into our overall strategy. Over the last year, we spent significant amount of time understanding the products, services and businesses we acquired. We found some of the services are more complementary than others. For Allstate, despite being a very good business with high-quality people, there was limited opportunity to cross-sell and few opportunities to direct waste into our facilities given the geographic proximity of the work and the underlying customer base. Therefore, waste internalization opportunities were limited and those waste opportunities that did occur often did not require hazardous waste solutions. We found that procurement practices also differed for Industrial Services and Environmental Services with different people being responsible for each. This created additional challenges on cross-selling. Growth opportunities in this business also required increased capital investment and equipment and manpower to penetrate newer markets. Oftentimes, capital was expensive with the slow ramp. With low barriers to entry, high competitive dynamics, high resource requirements combined with the recent business underperformance, we determined that this business was not a core fit. We continue to evaluate the long-term fit at the remaining Industrial Services business. These assets are in markets that have more complementary attributes than to support our core Environmental Services customers. This is due to the geographic proximity to our Michigan Environmental Services asset, joint business activities and customers operating in key industries, such as steel and automotive that have significant Environmental Services needs. Moving on to Slide 10, after paying down debt with proceeds, the transaction is expected to be slightly accretive on a pro forma basis for the fourth quarter of this year as well as on a full year basis. In addition, the divestiture is expected to improve our free cash flow. As outlined in our press release, during the second quarter, we recorded a non-cash goodwill impairment charge of $6.7 million or approximately $0.31 per diluted share related to the transaction and consistent with the underperformance of the other business units. We believe the divestiture will free up resources, both management and financial, to allow us to concentrate on our core Environmental Services business as well as our complementary Field Services business that leverages our treatment and disposal network. We continue to be extremely pleased with the Environmental and Field Services asset we acquired with EQ. They have performed better than expectations and fully support our long-term strategy. With that, I am going to turn to the quarterly results that we released yesterday. For those following on the web presentation, we are on Slide 11. U.S. Ecology reported solid financial results for the second quarter of 2015. Total revenues were at $139.7 million, up from the same period last year as a result of the EQ acquisition. We generated $31.4 million in adjusted EBITDA, up 84% from the prior year. Adjusted EPS for the second quarter was $0.40 per diluted share. Overall, the quarter was again hampered by lingering effects of weather conditions in the first quarter of this year as well as some additional weather impacts in our Texas operation due to the major flooding in that region. Similar to last year, we are expecting work to be pushed into our third and fourth quarters. Moving on to Slide 12, the strong results were led by our Environmental Services business. Overall, our landfill business continues to be strong led by growth at our acquired Michigan landfill as well as year-over-year improvement in our Idaho landfill, both of which offset the expected declines in our – at our Canadian facility as well as our Texas facility. As anticipated, event projects were also down to – due to tough prior year comparisons as certain larger events are winding down and certain large low price cleanup events in Texas were not fully replaced. A bright spot with our thermal recycling business, which continues to be strong with a 92% year-over-year growth in volume as a result of the capacity expansion, that completed at the end of 2014. Partially offsetting the strong environmental services performance was our Texas facility, which battled through significant weather issues in May resulting from the Texas floods. This caused a brief slowdown in receipts and increased operating costs. Our Field and Industrial – our field services business produced solid results, but came in below our expectations due to project delays on existing contracts. This group continues to win new contracts, expanding its services and offerings to new customers. This includes recent success on the West Coast that leverages our nationwide footprint. The Field and Industrial Services group continues to focus on revenue quality and optimization strategies, which are yielding positive results. Our industrial services business continued to fall short of expectations, due in part to the lingering weather conditions. Starting in May, we began to see increased activity with some newer opportunities that benefited this group. However, business mix skewed to generally lower margin work for our customers. Moving on to Slide 13, the legacy U.S. Ecology business produced solid results during the quarter. Adjusted EBITDA grew 13% over the second quarter of last year as a result of lower business development expenses. Excluding business development expenses, the legacy U.S. Ecology operations saw an expected decline in adjusted EBITDA of approximately 15% as a result of the lower event business and other service mix. The legacy EQ business saw tremendous improvement year-over-year for the pre-ownership period during the second quarter of 2014 with pro forma adjusted EBITDA growth of approximately 96%. The legacy EQ business saw approximately $0.06 per share of accretion as compared to $0.08 of dilution for the same time period last year. Overall, I am satisfied with the quarter’s performance and as I’ll discuss in our business outlook the third and fourth quarters are shaping up to be much stronger than the first half of the year. With that, I will turn it back to Eric.

[Eric Gerratt:]

Thanks Jeff. Before I dive into the financial report, I would like to remind listeners that the results for the second quarter and first six months of 2014 included only 13 days of ownership from the acquired EQ operations. As a result, there are significant variations in year-over-year comparisons. Starting next quarter, we will have cycled the acquisition and expect more comparable results and simpler reporting. As shown on Slide 15, revenue for the second quarter of 2015 was $139.7 million, up from $66 million in the second quarter of 2014. The second quarter of 2015 included $89.2 million of revenue contributed by the legacy EQ business compared to $14.6 million in the second quarter of 2014. Revenue for the Environmental Services segment for the second quarter was $91.2 million compared to $57.2 million in the second quarter of last year. The Field and Industrial Services segment delivered revenue of $48.5 million, compared to $8.9 million in the second quarter of last year. Legacy US Ecology revenue for the second quarter decreased 2% to $50.5 million. This was driven by lower treatment and disposal revenue, partially offset by higher transportation revenue. Recurring base business for legacy US Ecology contributed 68% of treatment and disposal revenue and increased 3% compared to the second quarter of last year. Event business decreased 23% from the second quarter of last year and represented 32% of treatment and disposal revenue in the quarter. Slide 15 also breaks down treatment and 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 refinery, government and private cleanup categories. Treatment and disposal revenue from our refinery customer group increased 52% in the second quarter of 2015, compared to the same quarter last year. This increase is primarily the result of higher thermo recycling volumes as the new larger dryer was operational for the entire second quarter of 2015. Our government cleanup business increased 42% in the second quarter of 2015 primarily due to higher disposal revenues from the US Army Corps of Engineers. Treatment and disposal revenue from Army Corps increased approximately 104% in the second quarter of 2015 compared to the same period last year. This increase was partially offset by lower volumes from other government related cleanup projects. Treatment and disposal revenue from private cleanup customers decreased 47% in the second quarter of 2015, compared to the same period last year. This expected decrease is primarily the result of lower shipments from an East Coast cleanup project and other smaller remedial projects in the second quarter of 2015, compared to a very strong second quarter of 2014. Turning to Slide 16, gross profit was $41.5 million in the quarter, up from $25.1 million in the same quarter last year. EQ contributed $22.3 million in gross profit during the quarter, compared to $3.9 million in the second quarter of 2014. The ES segment contributed $33.4 million in gross profit while the FIS segment contributed $8.1 million in the second quarter of 2015. Selling, general and administrative spending or SG&A was $22.7 million in the second quarter of 2015, up from $14.1 million in the second quarter last year. EQ’s SG&A spending was $14.8 million in the quarter compared to $2.3 million in the second quarter of last year. SG&A for the second quarter of 2014, included $5.1 million of business development expenses associated with the EQ acquisition, compared to only $234,000 in the second quarter of this year. As announced yesterday, in conjunction with our evaluation of the industrial services business and the definitive agreement to sell Allstate Power Vac, we evaluated the recoverability of the assets associated with our industrial services business. Based on this evaluation, we recorded a non-cash goodwill impairment charge of $6.7 million or $0.31 per diluted share in the second quarter of 2015. We may record additional adjustments related to the divestiture of Allstate in the third quarters and fourth quarters of 2015. Operating income was $12.1 million in the second quarter of 2015 compared to $11 million in the same quarter last year. Excluding the $6.7 million non-cash impairment charge, operating income for the second quarter of 2015 was $18.8 million, a 70% increase from the second quarter of 2014. We reported net income of $2.1 million and diluted earnings per share of $0.10 in the second quarter of 2015. This was down from $6.9 million and $0.32 per diluted share in the same quarter last year. We delivered adjusted earnings per share of $0.40 in the second quarter of 2015, down from $0.47 per share in the second quarter of 2014. Adjusted EBITDA for the second quarter was $31.4 million, up from $17.1 million in the second quarter last year. Adjusted EBITDA was $36.5 million for the ES segment, $5 million for the FIS segment and negative $10.1 million for our corporate function. Legacy US Ecology operations delivered adjusted EBITDA of $16.1 million in the second quarter, compared to $14.3 million in the second quarter of 2014. Legacy EQ operations contributed adjusted EBITDA of $15.3 million in the second quarter of 2015. Now, turning to full year results on Slide 17, total revenue was $276.4 million in the first six months of 2015 compared to $119.4 million in the first six months of 2014. EQ contributed $173.8 million of revenue in the first six months of 2015, compared to $14.6 million in the first six months last year. Revenue for the ES segment for the first half of 2015 was $182.6 million compared to $110.5 million in the first half of 2014. The FIS segment delivered $93.8 million of revenue in the first six months of 2015 compared to $8.9 million in the first six months of 2014. Recurring base business for legacy US Ecology was 64% of treatment and disposal revenue for the first six months of 2015 and increased 5% compared to the same period in 2014. Event business decreased 20% and represented 36% of treatment and disposal revenue. Slide 17 also breaks down treatment and disposal revenue by customer category for legacy US Ecology. The most significant changes during the first six months of 2015 were in the government, refinery and private cleanup categories. Our government cleanup business increased 70% in the first six months of 2015 primarily due to higher disposal revenues from the U.S. Army Corps of Engineers. Treatment and disposal revenue from the Army Corps increased approximately 243% in the first six months of 2015 compared to the same period last year. This increase was partially offset by lower volumes from other government-related cleanup projects. Treatment and disposal revenue from our refinery customer group increased 50% in the first six months of 2015 compared to the same period last year. This increase was primarily the result of higher thermal recycling volumes as the new larger dryer was operational for the entire first half of 2015. Treatment and disposal revenue from private cleanup customers decreased 35% in the first six months of 2015 compared to the same period last year. This decrease is primarily the result of lower shipments from East Coast cleanup project, another smaller remedial project in the first six months of 2015, compared to the first six months last year. Turning to Slide 18, gross profit in the first six months of 2015 was $81.3 million, compared to $47.3 million in the first six months of 2014. The ES segment contributed $67.4 million of gross profit, while the FIS segment contributed $13.9 million. Operating income was $27 million for the first six months of 2015, up from $26.5 million in the first six months last year. Excluding the $6.7 million non-cash impairment charge, operating income for the first six months of 2015 was $33.7 million, a 27% increase from the first six months of 2014. Adjusted EBITDA was $58.7 million for the first half of 2015 compared to adjusted EBITDA of $37.4 million in the same period last year. Consolidated net income for the first half of 2015 was $8 million or $0.37 per diluted share compared to $16.2 million or $0.75 per diluted share in the first half of 2014. Adjusted earnings per share for the first six months of 2015 was $0.75, this was down 20% from adjusted earnings per share of $0.94 in the first six months of 2014. Turning to Slide 19, we generated $50.4 million of cash from operating activities in the first six months of 2015. We also invested $19.4 million in capital projects, paid down $33.9 million on our long-term debt and paid out $7.8 million in dividends to our stockholders. Pro forma return on invested capital for the 12 months ended June 30, 2015 assuming a full year of EQ and excluding the impairment charge was 6.5%. Pro forma return on assets was 4.3% and pro forma return on equity for the same period was 14.8%. With that, I will turn the call back to Jeff.

[Jeff Feeler:]

Thank you, Eric. I would like to close out the call discussing our outlook for the balance of the year. As we look to the third and fourth quarters, business conditions remain strong or improving for all of our services. Our Environmental Services business looks particularly robust with current shipping projects and contracted volume. We expect to see second half improvement from our field services group as the first half contract wins and increased business activity will benefit the back half. Activity for our Industrial Services business, including Allstate picked up beginning in May and finished the second quarter on a strong note. We expect this trend to continue as several turnaround projects are scheduled for the third quarter. As a result of our announcement to sell Allstate, we are adjusting our guidance to include only continuing operations and therefore exclude the full year results of Allstate. We expect the Allstate business to be reported as discontinued operations beginning with the third quarter of this year. Using this method of reporting, our originally issued adjusted EBITDA guidance released in February for the continuing operations would have ranged from $128 million to $138 million assuming no Allstate. We continue to be on track and are reaffirming this adjusted EBITDA range particularly as we look out to strengthening business in the back half of the year. This is consistent with the company’s previously issued 2015 adjusted EBITDA guidance of $137 million to $143 million that included a full year of Allstate’s operations. We are also reaffirming our previously issued full year adjusted earnings per share guidance of $1.76 to $1.92 per diluted share and currently believe we will now be on the upper end of that range as a result of lower anticipated taxes as well as the Allstate divestiture. We are now expecting our expected tax rate, excluding non-deductible goodwill impairment charge to approximately 37% down from our previous guidance of 39%. As a reminder, all guidance information excludes business development expenses, foreign currency gains and losses, goodwill impairment charges, and other non-cash non-recurring charges. From a capital expenditure perspective, we are revising our capital expenditure expectations down were to $34 million to $39 million. This is down from our previous guidance of $40 million to $45 million and is reflecting the anticipated divesture of Allstate. We continue to make great progress on our integration activities, including information systems and other fundamental back office activities. We are fortunate to have a highly motivated team working to get this accomplished. With that operator, we will turn the call open for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Joe Box, KeyBanc Capital Markets. Please go ahead.

[Joe Box:]

Hey, good morning everyone.

[Jeff Feeler:]

Good morning, Joe.

[Eric Gerratt:]

Good morning, Joe.

[Joe Box:]

So, Jeff thanks for running us through the rationale on the Allstate divestiture. I guess what I am trying to understand is what was more of a factor for selling off that asset? If it was the geographic disconnect that you are seeing or is it more of the margin and return profile? And then separately, do you think that EQ has the right business mix now or are there still some products that are maybe under review?

[Jeff Feeler:]

Sure, Joe. So, there were a number of factors that were involved in our rationale as I kind of highlighted there. I don’t think that there was any one that was more prominent than others. The bottom line is as we entered into the acquisition just over a year ago, the core assets we are interested in really were there any environmental services assets as well as those complimentary assets, we were always somewhat apprehensive on the industrial services side. I would say the geographic proximity of the Allstate business definitely was up in the top few reasons as to why we were not as interested in that business. Also, the customer mix was a little bit different, but didn’t have as many environmental services needs as what some of the other industrial service providers businesses in the EQ portfolio had. So, it was a combination of all of those factors that really – really factored in and the fact that we couldn’t really cross-sell or drive volume into our disposal network was probably the key determination.

[Joe Box:]

Got it. And then just on the mix rate now, do you think that this is the right mix going forward or is anything else under review?

[Jeff Feeler:]

As far as whether it’s under review or not, I mean, we constantly review our portfolio of assets. I mean, we don’t launch a formal strategic evaluation to announce to the public. What we do is we look at all of our business lines, what type of returns, what type of cash flows they can generate, how they fit in with our overall strategy. And at the point in time that we don’t see that fit, that’s when we will determine the best course of action. So, I think as of right now, yes, the business mix looks good. There are definitely certain aspects of our business tend to be on the smaller size that we constantly review and we are challenging our management teams to improve or we will figure out plans to move forward with it.

[Joe Box:]

And then switching gears, I just want to ask about your private cleanup bucket, it’s down 35% year-to-date. Given your expectations for the back half, how should we be thinking about the combined private cleanup growth rate in the back half? And I am curious too if you could also distinguish between what you are seeing on the large project side versus some of your smaller cleanups?

[Jeff Feeler:]

Well, Joe, I will start with kind of the private cleanup high level and then I’ll hop Steve to kind of jump in on some of the more details. As we are kind of looking to the back half, I would suspect that private cleanup is still going to be challenged. Couple of the larger projects that are winding down, we are going to be cycling those. So, we are going to be going up against some tough comps. We are, I would say, the pipeline is looking out that we are seeing some other replacements in there. So, I would expect it to be down in the back half with other aspects of the business kind of strengthening. Steve, any more details on that?

[Steve Welling:]

Sure, Joe. The large job that’s been winding down all year, we expect to be completed by the end of this year. It’s actually been a court-ordered cleanup with a deadline, so that’s why we are pretty confident that majority of the work will be done. However, we have been awarded another court-ordered cleanup that will kick off later this year, mostly impacting future years, not so much 2015. What we are seeing for the second half would be, what I would call midsized projects. There was a number of new awards in the radioactive arena and also the chemical and PCB service lines that are going to impact multiple facilities in the second half.

[Joe Box:]

Got it. So, probably not down as much as it was year-to-date or this quarter in particular, but also not flat or up?

[Jeff Feeler:]

Correct.

[Joe Box:]

Okay, I will leave it at that. Thank you, guys.

[Jeff Feeler:]

Thanks, Joe.

[Operator:]

Your next question comes from Michael Hoffman from Stifel. Please go ahead.

[Michael Hoffman:]

Hi, thanks, Jeff and team for taking the questions. On the subject of revenues, can you frame how you would think about the second half in the aggregate outlook ex all waste - Allstate, I mean?

[Jeff Feeler:]

Yes. So, Michael from that perspective, for the full year revenue as a clean Allstate, if you took kind of the midpoint of our guidance, EBITDA guidance range, we would expect something in $500 million to $525 million of revenues for the full year. Allstate provided about $31 million for the first half, so mathematically you can back into the rest of the numbers.

[Michael Hoffman:]

Okay. And then when you think about the business model, I mean, it’s almost more important to think about the margin and the EBITDA sales. So I know I have asked the sales question, but if I think about your private cleanup work down year-to-date as well as down in the quarter. Going into the second half, I am more interested about that replacement of EBITDA, so I might not have as much revenues for better mix. How do I think about that dip in comparison to the revenue dip?

[Jeff Feeler:]

Good question. I mean, what we are seeing is in the back half is the strength in the Environmental Services side. That’s where you are going to drive the margin. So, we are going to get more leverage in the business from the operating – operating leverage of our fixed facilities and so we would expect to see that bolstered from a margin perspective.

[Michael Hoffman:]

So, if I read through on that, then that where you may have a down revenue comparison, we could be in a flat to up EBITDA comparison?

[Jeff Feeler:]

Yes.

[Michael Hoffman:]

Right, okay. And then if I have done my math correctly, I think there is a couple of million dollars of EBITDA in the current unadjusted first half of a net bad out and get to the range, the new range – you all need to do sort of $72 million to $77 million, am I in the right ballpark in the second half?

[Jeff Feeler:]

Yes, you are in the right ballpark.

[Michael Hoffman:]

Okay. And free cash flow you thought you were going to do $45 million now I just add the $5 million plus whatever upside comes from mix to the second half some looking at a $50 million plus for free cash this year?

[Eric Gerratt:]

Yes, yes, Michael, this is Eric. We think that with the divestiture of Allstate, it’s going to be neutral to possibly slightly accretive to free cash flow. And our expectation for free cash flow is above the range you mentioned, about $48 million to $52 million.

[Michael Hoffman:]

Okay. And then as I think about the business if I look at Environmental Services and I go base versus event. You have always talked about in this economy kind of under those certain – the current environment of industrial production activity, it’s growing maybe growing slightly slower than it had historically, but it’s growing 3% to 5% organic growth in the base business is a very sustainable outlook. Do you feel confident about that still today?

[Eric Gerratt:]

Yes. Michael, we do feel confident about that. That’s – the 3% should be pretty sustainable, 5% needs to be growing and that would include not only what’s being generated out of just normal industrial production, but also pricing included in that. So, yes, we do feel comfortable on the base business that we can grow in that range. That’s why we challenge our sales force to go after and we are confident that we will be able to do that.

[Michael Hoffman:]

And then on the event side of this, I get that it’s lumpy that’s the nature of it and we all have to get used to that. But as you think about the characteristics of the pipeline, how would you frame that today versus in the last year as we look forward, not just second half, but sort of beyond ‘15 into ‘16/17, what’s the characteristics of that pipeline like?

[Steve Welling:]

This is Steve, Michael. Pipeline is still strong and we are actually seeing benefits of the synergies of like the East Coast projects moving to Michigan, where we might have bid those to Idaho in prior years, so should see margin improvement there.

[Michael Hoffman:]

Okay. So – and as I think about this and I look at it over multiyear, between the two pieces in Environmental Services, you – if I am drawing a line over multiyear, there is enough – there is growth – overall growth in sales and EBITDA as a result of the 3% to 5% plus, your view on the pipeline?

[Steve Welling:]

Yes. Michael, I would say yes, when you are looking at that over kind of the 3-year period.

[Michael Hoffman:]

Right.

[Steve Welling:]

And we definitely see revenue growth. And a lot of that has to do I mean you talked a little bit about the event projects and then the characteristics of that. I mean, when we really kind of look out, there has been a lot of focus on some of the larger projects that we have that are winding down. But I would say the characteristics that are more enticing to me is I am seeing the outlook has been a lot more of the smaller projects that are not as I will call prominent in the business mix, which it will backfill and potentially even have higher margins on them than those current projects that we have that are winding down.

[Michael Hoffman:]

Well, and then generally the bread and butter of the business anyway?

[Steve Welling:]

Yes.

[Michael Hoffman:]

Okay. Steve, you mentioned in the first quarter that you saw there might be some activity around tronics in the second half do you have an update on that view?

[Steve Welling:]

There actually should be some activity in the second half. We have one active – radioactive waste project in the Northeast that received funding and is kicking off after October 1. So, we know there is a couple of hundred million dollars that was sent to the EPA from the trust, which will benefit future years. I am not sure how much for this year, but we do know that waste is scheduled to move. We have some profiles at our Idaho facility from one of the Northwest mine sites. It’s not huge volume, but it is related to the settlement and then we are tracking three other projects that could kick off in 2016. So, we are seeing activity. Our marketing department spending time, working with sales, actually tracking the sites, we have talked to the trusts. And I think we have a pretty good handle on what might be moving in the next few years. It’s actually a multi-year, multi-decade effort. So, it will be ongoing.

[Michael Hoffman:]

Yes, this is one of those guess that looks like it will keep on giving once it hits.

[Steve Welling:]

Correct.

[Michael Hoffman:]

And then Jeff, technical services has this about a $30 million room. I think if it is a retail containerized waste business and there are lots of players who are in that, Stericycle, CleanHarbors are looking at that as the sort of upside revenue opportunity, because it’s an area where there wasn’t a lot of enforcement, now there is. How do you characterize that growth potential of that and what that could like over the next two to three years?

[Jeff Feeler:]

Yes, Michael. We definitely see that there is opportunities in the retail sector. I mean, I think you hit it that there has been a significant amount of enforcement on the retailers to comply with the rule. The EPA and the states have been really focused on the large box retailers and they are moving down to the smaller, I will call regional players and market. So, we see opportunities. That’s where some of our field services have seen some recent successes using our national footprint moving out west and be more of a player. We see opportunities to grow that business. I am not going to throw numbers out on that, but where it is trending around $30 million on the services side only and from that we definitely can see some pretty good growth opportunities.

[Michael Hoffman:]

Would it be fair to characterize is it better than the overall corporate, because of the size of the potential?

[Jeff Feeler:]

I think that they – it’s in the top two or three areas that we see opportunities, yes.

[Michael Hoffman:]

Alright. And then last question, the broker volume numbers are down, is that a characterization you have now bought your own collection inside the EQ business and some brokers say you are competing with me. How am I reading through on the broker trend downs?

[Eric Gerratt:]

Yes, I will address the overall as no we are not seeing those brokers that are being apprehensive to doing business with us from that standpoint. I think that we had some unusual activity in the quarter that kind of gave the appearance that was down more than it was and we can give some more color on that if you are interested on it, but overall, I think that we have a very pro go-to-market approach on that and we are not seeing any real contraction in that business, because of the larger footprint in us and potentially going direct to the generator from time to time.

[Michael Hoffman:]

Okay, thank you for your questions and answers. I appreciate it.

[Jeff Feeler:]

You bet. Thanks, Michael.

[Operator:]

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

[Tyler Brown:]

Hey, good morning, guys.

[Jeff Feeler:]

Good Morning.

[Tyler Brown:]

Hey. So, it looks like post the divestiture and debt pay down that you are probably going to be around two, three levered on pro forma EBITDA, is that about right?

[Jeff Feeler:]

Yes. We should be somewhere under 2.5 times.

[Tyler Brown:]

Okay. So, kind of you are looking at generating $50 million, call it a steady state for cash, your leverage has come down quite a bit, I mean what are the capital priorities from here and kind of where do you feel comfortable on the leverage side?

[Jeff Feeler:]

Yes. I mean, what we have always said on the leverage side is we were always turning towards about two times and we are on that path. From a capital priority, it’s going to be first and foremost funding our capital project needs for organic growth opportunities within the businesses. Then we are going to be looking at potential complimentary acquisitions that always will remain the top priority. And then outside of that, we would probably look at other capital allocation approaches down the road.

[Tyler Brown:]

Okay, alright. That’s helpful. And then just a couple of quick housekeeping items, but do you have what a new kind of maintenance CapEx profile would be post-Allstate?

[Jeff Feeler:]

Yes. This year, I mean maintenance CapEx, let me think about that. Yes. So, I mean I think as we look in outer years, depending on just normal course of landfill build out, which is the predominant cash flow drain on the CapEx side, we would be in that $30 million to $35 million range absent Allstate. And that’s kind of a general aspect, that’s going to be primarily maintenance, with a little bit of growth in it. If we find major growth initiatives we would probably be outside of that range.

[Tyler Brown:]

Okay, alright. That’s helpful. And then Eric I am not sure, but what is the cash tax paying status, are you guys more or less of all cash tax payer?

[Eric Gerratt:]

Yes. Pretty close.

[Tyler Brown:]

Okay. That was just a quick question. And then I am not sure if Simon is on it, but you guys on the last call talked about obtaining a permit expansion at BD kind of mid-2015, I am just curious if there is any update there?

[Simon Bell:]

Yes. Tyler some very good news to report on that front, we completed the - I guess I will call the land exchange. The land was actually transferred from the BLM to the State of Nevada. That is complete and Nevada now owns the land. So now we are just in our routine course of business submitting our modification for the new landfill fully expect to be in construction in 2016 and feel very good about the current situation, in many ways I would say the challenges are primarily behind us.

[Tyler Brown:]

Okay, great. Good to hear. And then, Steve I am curious that you made some comments on the radioactive bid side, I am just curious specifically about the outlook in that segment in particular. I mean, it sounds like there could be some big West Coast decommissioning projects, over the next few years, is that safe to say or what’s the outlook there?

[Steve Welling:]

Well, there are definitely are some West Coast decommissioning projects that closed military bases. There is not much activity on those currently but they are there and they don’t go away. So, I would assume there are going to be future opportunities in the next couple of years. Majority of the projects that we are working on currently they are in the pipeline are primarily Midwest Northeast and not so much in the West Coast.

[Tyler Brown:]

Okay. But that would if you were to see kind of the radioactive side come back that’s obviously a positive mix so let’s just call it that?

[Steve Welling:]

Yes. So, it will be positive mix and the Army Corps we see ongoing with potentially some increases from outside funding and also working on some pretty sizable commercial jobs.

[Tyler Brown:]

Okay, perfect. I will leave it at that. Thanks guys.

[Operator:]

The next question comes from Justin Ward of Wells Fargo. Please go ahead.

[Justin Ward:]

Hi, good morning guys.

[Jeff Feeler:]

Good morning, Justin.

[Eric Gerratt:]

Good morning.

[Justin Ward:]

Just – a lot was covered, just a couple of pinpoint questions here. Can you just update us on your capacity utilization under thermal recycling business, has that business been exceeding your expectations, does it make sense to do another capacity expansion there, what are the thoughts on that business?

[Simon Bell:]

Yes. Justin, this is Simon here. Yes, we have been very pleased with the performance of the thermal unit and it has met expectations. We have been at or near capacity for the last six months, first half of the year. I expect the strength to continue into the second half, there is typically some seasonal slowdown at this time of year. So I don’t think we are quite ready to start looking at an additional expansion at the Texas facility, but certainly we are looking at other thermal opportunities throughout the whole country and certainly we believe there is a strong demand for that business. And I think we are well positioned to be able to take advantage of that. But I don’t really have anything specific to report today, but it’s definitely on the radar screen.

[Justin Ward:]

Alright, it sounds good. And then while we are on the topic of Texas, you guys mentioned that was an area that was particularly impacted by weather in the quarter, is there any way to quantify that. And then, have you seen that snapback already here through the first week of August here?

[Jeff Feeler:]

I mean, there isn’t a way to quantify it. I mean the fact of the matter is, I think the Texas region went through some unprecedented flooding in the whole region. And so it not only impacted our operational sites, just being able to receive ways and dealing with the water management issues, but our customers and cleanup projects and everything from that effect. We did very, very great job from an operations perspective, not turning away customers waste while we were dealing with those issues, but there was definitely a slowdown in the region. We have not seen – or we have seen – it really snapped back since that point in time. So it’s the business as usual from that standpoint. From an increased cost perspective, I mean we are not talking orders of magnitude, it’s probably a couple of $100,000 of costs that we saw that were incremental on that. And that dealt with [indiscernible] boxes and other things like that to manage the water issues.

[Eric Gerratt:]

Yes. And Justin, just to tag on to it, if we would look at that how Texas did for the quarter relative to our expectations from a budget perspective they were still able to come in line with kind of those expectations.

[Justin Ward:]

Alright, it sounds good. And just wanted to dive a little bit more into the broker revenue a bit, is there any way to parse out I mean you touched on that, but is there any way to parse out how much of that headwind that slowdown is coming from the event work side versus the base business side. And then what are you guys expecting for growth rates in that business in the back half of the year?

[Jeff Feeler:]

Yes. Justin, from a broker perspective, there is some event work in the broker category, but it is predominantly base business and part of the decline this quarter, if you compare to last year’s, we actually had a decent sized broker customer that was actually acquired and we are still receiving the waste from that customer, it’s just coming through a different category. So that was also part of the decline. As far as the rest of the year kind of our outlook, we expect broker to kind of maintain and see what it is similar with the rest of the base business to slightly up. Absent some larger broker that’s coming through maybe for thermal or some of that effect, I would expect our broker business to kind of trend and consistent with the base business in that 3% to 5% range. There is going to always be timing quarter-to-quarter on that aspect of the business and when brokers ship but that’s kind of would be the general expectation for that category.

[Justin Ward:]

Alright. Thanks a lot guys.

[Operator:]

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

[Tyson Bauer:]

Good morning, gentlemen.

[Jeff Feeler:]

Good morning, Tyson.

[Eric Gerratt:]

Good morning, Tyson.

[Tyson Bauer:]

Should we take your actions with how if I go with EQ and now with the divestiture that your future M&A activity is going to be a little closer to your knitting [ph] and more of the tuck-ins on expanding your core business as we see it now?

[Jeff Feeler:]

I would categorize that and I will answer that as yes. I mean at the end of the day if large opportunities came up that were – with a strategic vision, then we definitely would pursue those, but those types of opportunities are rare. That being said, we are going to be focused on our core and our core strategy and looking for the complementary assets that can drive volume into our disposal network or if there are other good high quality disposal type assets that come to market, we would definitely be interested in those type of items as well.

[Tyson Bauer:]

Okay. And Simon, you have talked a lot about the Northeast prospects some sizeable projects that could be there, activity there, how does Stablex, especially now with the currency situation between the dollar and the loonie, how are you able to use that to your advantage and are there anything that precludes you from moving a lot of that waste north of the border?

[Simon Bell:]

It’s one of the larger project I mentioned earlier would benefit Stablex in future years. In terms of ongoing regular business, I mean definitely there would be a benefit for U.S. customers shipping into Canada due to the exchange. And we have seen some of that, although again it’s I would characterize our Stablex facility somewhat as a niche treatment facility. So if – and we have also looked at what we call waste optimization. So if it makes more sense to move some of that material to an EQ legacy facility, we have been doing that where we make more money than necessarily going into Canada. So going forward, most likely we are going to see those niche streams going into our Stablex facility, which the good news is those are the higher margin ones as a general rule.

[Tyson Bauer:]

Great. Glad to hear that. Following up on a previous question Barack has gotten more attention at least in the rhetoric coming out of DC more so from the Pentagon leaders that if you want color budgets allow us to get rid of some of these excess spaces that are just eating into maintaining budgets for those things. You mentioned that you expect to see something in the coming years that will finally get action as opposed to rhetoric. Why do you believe that and would you anticipate that we may actually see more dollars put towards those activities, ahead of an election you like we have next year or does it actually delay it until after an election year?

[Simon Bell:]

Answer this, okay. I can answer this one. I don’t work for the federal governments. I am not sure how the budgets will be set. But I do know that what we have seen in the past is, it’s a lot like commercial real estate development. If there is an economic reason to clean-up the base, you will see funding go out, and I will give you an example right now. There is Treasure Island which is in San Francisco right between Oakland and San Francisco on the Bay Bridge. That – there are big plans to re-develop the island, put residences and restaurants and there is lot of future plans for that. If the government sees that there is an opportunity to quickly turn that into commercial use, you might see money go for that particular project. There is radioactive waste there. There is other chemicals waste that needs to be cleaned up. A property that is sitting in the middle of Kansas, most likely could get, where there is no encroachment to the public might get fenced off and managed for the next 10 years versus cleaned up. So, a lot of it has to do with the value of the property where they are going to build condos on the beach or whether it’s in the middle of a corn field. So, hopefully that answers your question.

[Tyson Bauer:]

Well, it does hit a little close to home, but I will let it pass. Last question for me, we are seeing tremendous amount of investment, new facilities, ethylene production, plastic growing in Texas, the Louisiana region really starting to pick up a lot of acceleration, between 2016 and 2018, are you positioned to take advantage of that growing base business opportunity of those waste streams or is there anything unique with that ethylene production that you would have to do changes to your existing facilities, where do you stand on being able to capitalize on that opportunity?

[Jeff Feeler:]

Some of that material may end up going through our thermal unit with the new RCRA permit that we are expecting. So, we fully expect to be positioned to take additional organic waste streams, which is what that material would be from ethylene plants. Anything else that could be landfill, but we are already positioned for that today. So, I think we are in a good position going forward.

[Tyson Bauer:]

So we should treat it as an ongoing petrochemical type waste stream?

[Jeff Feeler:]

Yes. That would be the way to look at it.

[Tyson Bauer:]

Alright. Thanks a lot, gentlemen.

[Eric Gerratt:]

Alright. Thanks Tyson.

[Operator:]

The next question comes from Brian Denes from Imperial Capital. Please go ahead.

[Brian Denes:]

Hey, good morning, guys. I am just filling in for Scott Levine.

[Jeff Feeler:]

Hi, Brian.

[Eric Gerratt:]

Hello, Brian.

[Brian Denes:]

A quick question, just on your current update for acquisitions, could you comment on how you guys are viewing that appetite and which team are focused on the integration of the EQ acquisition or more paying down debt?

[Jeff Feeler:]

Yes. So, I will answer it this way and it’s very consistent with the way we answered last quarter as that our primary focus today is integrating and extracting value out of the acquisition, we completed last year. I mean that’s first and foremost top priority. As we look for alternative acquisitions and we paid down debt to a leverage level that it’s kind of within the range of our targets. We definitely would look for those types of core assets that help complement and build out our network. Those would tend to be smaller in size. Absent any of those, we would probably pay down debt a little bit more and then we would probably look at other capital and allocation strategies going forward. We have not had a stock repurchase program put in place, since what 2008-ish, 2009, those are always alternatives if we get to the point where we don’t have a better use of cash or we would potentially look at the dividend.

[Brian Denes:]

Got it. Okay, that’s helpful. Just one more question, how are your efforts progressing regarding your margins within Field and Industrial Services is it improving those margins?

[Mario Romero:]

Yes. This is Mario. The margins over the last – compared to the prior period last year have improved significantly. A lot of this is reflective of the fact that since the – as part of integration we have placed a lot of emphasis on improving the quality of the revenue that we are managing, controlling our costs, controlling project execution and the results are showing. So we are driving accountability through at all levels and have improved those margins both in the Field and Industrial Services for the first half of the year compared to prior year.

[Brian Denes:]

Okay.

[Jeff Feeler:]

I will add to that. I think Mario has been a little – I can’t think of right word, modest. But we have seen tremendous improvements there. There has been a core messaging from day one and even prior to that we really wanted to focus on those types of services that really add value to our customer and leverage our overall strategy – long-term strategy with – being the environmental solutions provider. And so, we have been focused on that, the teams have been motivated, they have been looking at their entire process of how to improve margins there and we have seen some significant improvement in margin there and we see additional opportunity. So, it’s an area that we are focused on, it’s an area we are seeing positive trends and we see opportunity going forward.

[Brian Denes:]

Okay, great. Thanks, guys.

[Operator:]

[Operator Instructions] This concludes the question-and-answer session. I would now like to turn the conference over to Mr. Jeff Feeler for any closing remarks.

[Jeff Feeler:]

Alright. Well, I want to thank those participants for attending today. And we look forward to updating you in October on our third quarter results.

[Operator:]

This concludes the conference. Thank you for attending today’s presentation. You may now disconnect.