US Ecology, Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Good morning, and welcome to the US Ecology Q3 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Eric Gerratt. Please go ahead.

[Eric Gerratt:]

Good morning, and thank you for joining us today. Joining me on the call this morning 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 disclosed 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, 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 are 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-KA 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’d like to turn the call over to Jeff.

[Jeff Feeler:]

Thank you, Eric, and morning, everyone. I’ll start off this morning’s call with an overview of the quarterly results we released yesterday. I’ll then turn the call back to Eric for more details on the financial review. I’ll conclude the call by reviewing current market conditions and our outlook for the remainder of the year before opening up the call for questions and comments. U.S. Ecology delivered total revenues of $148.4 million and generated $22.4 million of operating income and $33.8 million of adjusted EBITDA for the third quarter of 2015. This translated into free cash flow generation of $15.5 million during the quarter. These results were below our expectations. During the quarter, we encountered headwinds from project-based business already shipping to our facility. This lower than anticipated volume was compounded by a number of project deferrals during the quarter, as well as lower base business volumes in some key industries such as chemicals and metals manufacturing. These factors contributed to a 3% revenue shortfall from our expectations and resulted in adjusted EBITDA coming in approximately 14%, or $6 million below our expectations. The shortfall was primarily seen in our Environmental Services segment. Lower than expected volumes and unfavorable service mix predominately at our Idaho Plainville and Texas landfills led to much of the weakness. We also experienced a $1 million EBITDA shortfall in our recycling service line that was impacted by a 25% to 30% price decline for the recovered commodities during the quarter. Our Michigan landfill saw strong volumes and favorable service mix, despite a number of project deferrals that were expected to be – to benefit the third quarter and now will either benefit the fourth quarter or 2016. Our Field and Industrial Services segment also fell short of expectation, led by lower than anticipated project worked in the Northeast remediation market. In fact, we saw significantly fewer quality bidding opportunities to provide such remediation services, and those opportunities that were in the market were aggressively competed by multiple competitors with pricing below our risk tolerance. This resulted in over $1 million of EBITDA shortfall compared to our expectations. Further hampering the Field and Industrial Services segment’s third quarter performance was higher than anticipated cost of providing some of our retail LTL and HHW services. Despite the shortfall in our Field and Industrial Services segment, we continue to see positive traction on margin improvement, delivering over 250 basis points of margin improvement during the quarter. We are also continuing to leverage our national footprint, further expanding our services and securing additional work that will benefit us for future quarters. For example, we have won several major contracts with our managed services group to provide total waste management services to these customers. This is expected to translate into revenue enhancement opportunities in 2016 for this business unit in the range of almost 5%. We also continue to build out our retail account operations with both new and existing customers adding over 1,700 locations, a 24% increase over this – over 2014 levels. These are just a couple of examples of the kinds of opportunities ahead of us as we continue to integrate the two companies. Our Industrial Services business showed improvement during the quarter. The Allstate Power Vac business exceeded expectations by approximately 5%. As we announced in August, we’re in the process of divesting the Allstate business and expect the transaction to close on November 1. Our remaining in Industrial Services business showed strong improvement beating expectations by over 45% on a small level of EBITDA contribution. While the results were below expectations during the quarter, longer term we remain bullish on the business and the portfolio of assets that we have. Our business is inherently lumpy, and we are confident we can grow our Base business, while capitalizing on pending project work with our expanded footprint and geographic reach. We remain optimistic about the future and it’s hard not to be proud of the many accomplishments we continue to make each day, leveraging the combined businesses and positioning the company for long-term success. I will then turn the call back over to Eric.

[Eric Gerratt:]

Thanks, Jeff. Before I dive into the financial report, I’d like to remind listeners that the results for the first nine months of 2014 include only the third quarter of 2014 and 13 days of the second quarter of 2014 for the acquired EQ operations. As a result, there are significant variations in the nine-month year-over-year comparisons. The third quarters of both 2014 and 2015 include full quarter of results for the acquired EQ operations. I’d also like to spend a few minutes on our new industry group revenue disclosures for the Environmental Services or ES segment found on Slide 10, of the presentation. In conjunction with the integration of EQ and now that we’ve cycled the acquisition, we have changed and confirmed how we track and report our disposal revenues by industry group for the ES segment. Historically, legacy U.S. Ecology broke treatment and disposal revenue down into customer-based industry groups. In order to provide better insight into the generators that drive disposal volumes and revenues beginning this quarter we will track and report ES disposal revenues using generator-based industry groups. This breakdown is based on the North American Industry Classification System or NAICS codes of the generator and in some cases the specific waste stream. Additionally, as we integrate legacy EQ’s, ES business, we’ve changed and confirmed how we defined Base and Event business. Previously, US Ecology defined Event business as non-recurring projects regardless of size with recurring Base business, representing everything else. Beginning with this quarter and going forward, we now defined Event business as non-recurring projects that equal or exceed 1,000 tons with the remainder of being categorized as Base business. We believe that new definition is a better representation of Base and Event business, and we’ll provide better insight into the ES segment as a whole. As we report future quarters, prior periods presented will be recapped based on the new definitions. On Slide 9, we’ve included a summary of Event and Base business metrics for the legacy US Ecology ES business using the new definition versus what we have previously disclosed under the old methodology for the previous six quarters. With that, I’d like to now turn to the third quarter financial report. As shown on Slide 10, revenue for the third quarter of 2015 was $148.4 million, down from $170.9 million in the third quarter of 2014. Revenue for the Environmental Services segment for the third quarter was $96.3 million compared to $108 million in the third quarter last year. This was driven by lower treatment and disposal revenue, as well as lower transportation revenue. As a reminder, in the third quarter of 2014, we benefited from a significant backlog of work from EQ’s pre-ownership period, that was a result of the harsh winter conditions experienced in early 2014. As a result, we believe this deferment created a more difficult comparison to the third quarter of this year. Recurring Base business using the new definition I just described for the ES segment, including EQ contributed 76% of treatment and disposal revenue, and decreased 7% compared to the third quarter last year. Our Event business for the ES segment decreased 22% from the third quarter last year and represented 24% of treatment and disposal revenue in the quarter. Slide 10 also breakdowns treatment and disposal revenue for both Base and Event business by industry category. As you can see the most significant declines during the quarter, we’re in the chemical and metal manufacturing, mining and E&P, and waste management or remediation industry verticals. The largest change in the chemicals group stem from expected reductions in the volume from a large East Coast remedial cleanup project. We believe the other declines in the chemical group are related to lower overall business activity. The reduction in metal manufacturing primarily related to lower domestic production of metal-related products and services. The decline in mining E&P reflects lower business activity due to lower commodity prices. Though this group is down, it is important to highlight that it represents a small portion of our overall business ranging from 2% to 4%. These decreases were partially offset by increased revenues in the other refining and utilities industry groups. The Field and Industrial Services segment delivered revenue of $52.1 million in the third quarter of 2015, down from $62.8 million in the third quarter of 2014. This decrease is primarily the result of lower project work in the Northeast remediation market. Turning to Slide 11, gross profit was $45.9 million in the quarter, down from $52.3 million in the same quarter last year. The Environmental Services segment contributed $36.6 million in the third quarter of 2015, compared to $42.7 million in the same quarter last year. This decline was due primarily to a decrease in treatment and disposal margins from 45% in the third quarter of 2014 to 43% in the third quarter of 2015. Gross profit for the FIS segment was $9.4 million in the third quarter of 2015 compared to $9.6 million in the third quarter last year. This decline was due to the $10.7 million revenue shortfall, mentioned previously. However, the revenue shortfall was significantly offset by an over 250 basis point improvement in gross margin in the third quarter of 2015. Selling, general and administrative spending or SG&A was $23.5 million in the third quarter of 2015. This was down from $25.5 million in the third quarter last year, due primarily to lower depreciation and amortization, as well as lower labor and incentive compensation. The lower depreciation and amortization is partially due to the Allstate business being categorized as held for sale as of August 4, 2015. As a result of held for sale accounting, the fix in intangible asset sees depreciating and amortizing as of that date. Operating income was $22.4 million in the third quarter of 2015, down 16% from operating income of $26.8 million in the same quarter last year. We reported net income of $9.9 million and diluted earnings per share of $0.46 in the third quarter of 2015. This was down from $13.3 million and $0.61 per diluted share in the same quarter last year. Adjusted earnings per share was $0.50 in the third quarter, down from $0.65 per share in the third quarter last year. Adjusted EBITDA for the third quarter was $33.8 million, down from $40.5 million in the third quarter last year. Adjusted EBITDA was $39.2 million for the ES segment, $5.6 million for the FIS segment, and negative $11.1 million for our corporate function. The Allstate Power-Vac business contributed adjusted EBITDA of $2.3 million in the third quarter of 2015, compared to $2.1 million in the third quarter of 2014. Turning to Slide 12, we generated $57 million of cash from operating activities in the first nine months of 2015. We also invested $25.7 million in capital projects, paid down $34.8 million on our long-term debt, and paid down $11.7 million in dividends to our stockholders. As Jeff mentioned, we expect the divestiture of Allstate to occur on November 1. Shortly after the sale closes, we expect to use the proceeds from the sale to pay down our long-term debt by approximately $55 million. This will lower our debt to EBITDA leverage ratio to approximately 2.5 times. Return on invested capital for the 12 months ended September 30, 2015, excluding the impairment charge was 6%. Return on assets was 3.7%, and return on equity for the same period was 13.1%. With that, I’ll turn the call back to Jeff.

[Jeff Feeler:]

Thanks, Eric. Closing out our prepared remarks, I would like to spend a few moments on our outlook for the balance of 2015. We currently expect the headwinds experienced in the third quarter to continue in the fourth quarter. Industries such as chemical and metals manufacturing are likely to remain challenged, as demand for their products and services have softened, pressuring our Base business. This is overshadowing some strength that we’re seeing in other industries. We also believe the pressure on the Base business is short-term, reflecting slowing growth in 2015 by manufacturers and selected – select Base business customers, as production schedules are adjusted and inventories are optimized. On the Events side, despite the great opportunities in the marketplace, we continue to see projects being delayed or deferred and even put on hold. It is important to note that this is not last work, but rather deferment to future quarters. We conservatively expect that the net results of project deferral between the third and fourth quarters will be neutral to the fourth quarter, or said another way, we are anticipating fourth quarter results to be in line with our previously – previous expectations and consistent with that of the third quarter. Before I get into more specific guidance, I want to remind listeners that all guidance information excludes business development expense, foreign currency translation gains and losses, goodwill impairment charges, and other non-recurring non-cash charges. Based on the trends in the market today, we now expect our full-year 2015 adjusted EBITDA to range between $122 million to $125 million. This is down from our previously issued guidance of $128 million to $132 million. Our adjusted EBITDA guidance excludes the full-year of the soon to be divested Allstate business. We do expect the Allstate business will generate approximately $5 million to $6 million of adjusted EBITDA for our 10 months of ownership. We also expect our full-year 2015 adjusted earnings per share to range between $1.73 and $1.80 per share. This new guidance range includes contribution of approximate $0.03 per diluted share from Allstate for our 10 months of ownership. Our previously issued adjusted earnings per share guidance was $1.76 to $1.92 per share and also included an expected contribution from Allstate. From a capital expenditure perspective, we are reaffirming our previously issued range of $34 million to $39 million for the full-year of 2015. Based on this guidance, we expect our full-year free cash flow, excluding Allstate will range between $48 million and $52 million, and that our expected EBITDA to debt leverage ratio were approximately 2.5 times after applying the proceeds from the Allstate divestiture to pay down debt. Though we are not providing 2016 guidance at this time, we do want to convey that we believe the current quarter challenges are short-term, reflecting adjustments to a changing business cycle and not reflective of long-term trends. We have expected some lumpiness in our Event business as we cycled through some of our larger projects. As we have discussed on previous quarterly conference calls, we are diligently working on backfilling those completed projects and we are well on our way with already secured work that we’ll begin to reload or otherwise replace the work for 2016. In addition, several of the deferred projects that were expected in 2015 will now likely benefit 2016 with some growing insights and scale. We believe we have a collection of the best disposal assets in the industry with some of the broadest permits that allow us to service our customers wide-ranging needs. We continue to make great strides at integrating the company and are better positioned today than we’ve ever been in the past, securing US Ecology position as the premier provider of Environmental Services and making me and the team extremely optimistic for the future. With that, operator, we’ll open up the call for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Hoffman of Stifel. Please go ahead.

[Michael Hoffman:]

Hi, Jeff, Eric, thank you for – I appreciate the – you give us a ton of data, and I’m not sure I have observed all of the, what is or not is in things. So I’m asking a direction question. Based on the third quarter performance at the EBITDA line. If you could, you gave us Allstate for that net of Allstate either done $31.5 million, is that correct on your adjusted EBITDA?

[Jeff Feeler:]

That’s about right.

[Michael Hoffman:]

Right. So what I’m trying to understand is direction. And my – and what I’m hearing you say is that all things being equal, where all of us sort of differ fourth quarter benefit walk back whatever the Mitt metals mining and chemicals might impact. Are we flat down or up sequentially versus that $31.5 million?

[Jeff Feeler:]

Yes. Sequentially, we’re expecting it to be flat, very consistent with what we had in the third quarter.

[Michael Hoffman:]

Okay. All right. That’s great help. And then when you look forward, I’m asking for a direction issue, not absolute numbers per se. But based on all the puts and takes of when a PPG goes or Westinghouse goes or main comes or other ones that you know of that lumpiness issue, is the right place to start is, you’re flat on EBITDA, but clearly better on earnings because of deleveraging issue?

[Jeff Feeler:]

I’m trying to follow your question in more detail. I – based upon where it’s interpreting your question is, as we look for replacement projects, we would expect that we would be recapturing some of that loss to EBITDA from the completion, and what the objective of growing upon that. That would translate into as we delever the business increased earnings levels on the bottom line for an EPS perspective.

[Michael Hoffman:]

Okay, I got it. That’s why I assume that had to be the case given the amount of leverage you are coming out. Let me ask you slightly differently. Given what you can see, there is no reason why the EBITDA is down and it could grow, but given what you know about the things that can replace stuff that’s going away on the project side and your own comfort about where this base business settles relative to the slower rate of growth, you wouldn’t contemplate it down 16, you’d contemplate, at least, be flat in the prospect of growth?

[Jeff Feeler:]

Yes. And as I talked in my prepared remarks, we’re not given detailed guidance on 2016. But as I’m looking out right now, despite kind of the current quarter challenges we have, we think that are temporary. We’ve really not change – seen a change in the fundamental business. And so when I look to opportunities that we’ve already secured, opportunities that we have in the pipeline, we’re seeing some positive developments that gives me more confidence of backfilling some of those completed project. There’s still a lot of work to be done there, but it’s also early in the timeframe. Typically, you don’t see a lot of opportunities that develop towards, I’ll call it the summer time Event business season until you get into the February, March timeframe when bidding opportunities come. We have though quite a bit already under our radar screen in our backlog to be able to secure and kind of leverage upon.

[Michael Hoffman:]

Okay. And if you flip back on the third quarter and take a perspective of this time in 2Q when you were talking to us about the outlook and now what you know, what surprised you?

[Jeff Feeler:]

Yes, probably the bigger surprise, and it would have been nice if the quarter would have been one particular item that caused the underperformance, but there was a multiple of different things. I think the biggest surprise as we rolled update and looked at it was the softness in the Base business. And as we dived in and looked at that, it was in markets that when you look at the end codes and who the generators those waste streams were, it really didn’t become a surprise. When you think about metals manufacturing and what’s happening to the steel companies and the headwinds that they’re facing and them idling some plants and things like that and trying to optimize their own business performance, that’s just one example. And so when you kind of look at that, it kind of reflects, but you don’t see that coming in day-in and day-out as the volumes are coming into the facilities. And so that was a little bit of surprise. We also were a little bit surprised as the continued delays in certain projects. That’s very typical in our business. I mean, we experienced it every single quarter to a certain degree. But it’s kind of been a trend that we’ve seen from Q1 to Q2 to Q3, and it’s kind of made us believe that it’s going to continue in Q4. And, again, we don’t get terribly troubled with the deferral on it if it’s not last work and it’s not last work that we have right now. But it becomes a difficult when projects are delayed, it becomes hard to kind of predict where you’re going to ultimately end any given quarter or given year. And so that – those were kind of the bigger items. I will say that the remediation market in the Northeast was a surprise. The opportunities that we have, we were surprised to how aggressively competed they were. And so that created a shortfall in our overall numbers too. So there are combination of factors there. And nothing that was extremely, I’ll call it, troubling to think that there are long-term trends developing. But it also delivered underperformance in the third quarter that we’re not really seeing the opportunities to make up for the balance of this year.

[Michael Hoffman:]

And on that Industrial – Field and Industrial Services side, the positive takeaways is that having allowed the business to be shrunk, you actually have better margins that clearly is – if it’s got to be smaller, at least, some more profitable?

[Jeff Feeler:]

Yes, the Field and Industrial Services team, I think Mario has pounded in their head, the revenue quality issue that we’ve talked about for 15 months now. And that’s really translating. They’re doing a great job at looking at the business, looking at mass margin enhancement opportunities we’ve seen good improvement there. Part of the success that we’ve had in that number as we didn’t – we’re in a successful on the remediation side of the business, which tends have a little bit lower margin. That being said, our challenge is going to be as we continue to grow that revenue profile is to keep those margins at high level and find for those revenue or those margin enhancing opportunities.

[Michael Hoffman:]

Okay. And then all things being equal was much less – cash interest going out the door even if everything was flat year-over-year, you will generate more cash next year. How do you think about how you’re going to allocate that cash?

[Eric Gerratt:]

Yes. Right now our capital allocation strategy really haven’t changed. And first and foremost it’s going to be investing in the business, driving organic growth, finding those opportunities to get higher ROI investments. Absent of that, we always be looking for high-quality assets from an acquisition perspective to deploy that capital to expand our footprint and expand our service offerings. Absent of that, we’ll be paying down debt or looking at other options to deploy capital back to shareholders.

[Michael Hoffman:]

Okay. Thank you very much.

[Eric Gerratt:]

All right. Thanks, Michael.

[Operator:]

The next question comes from Joe Box of KeyBanc Capital Markets. Please go ahead.

[Joe Box:]

Hey, good morning, guys.

[Jeff Feeler:]

Good morning, Joe.

[Eric Gerratt:]

Good morning, Joe.

[Joe Box:]

I just want to dig a little bit further into the shortfall on the Base business, I guess, I have always thought about that as growing at an IP type growth rate maybe plus a little some. I’m curious is that now different based on the recast definition? And then specifically, given what we’re seeing kind of happening within industrial America, why does the Base business not get sequentially worse in 4Q? Why does it stay steady?

[Jeff Feeler:]

Good question. So let me first start talking your first question about expected growth rate in Base business under the new recap definition. Given that we now have some of the more smaller project type base work that tends to have more recurring attributes very similar to Base business in our Base business definition. We do expect to have a little bit more volatility and growth rates with regard to that. We do believe that these smaller projects more track to what the health of the industrial economy is. And so we’re expecting low to mid single-digit growth in that business going forward. When you kind of breakdown your other questions with regard to areas of growth and into the fourth quarter really I just reading some of the more recent articles that have come out in the last 48 hours on some of the economic data on inventory shrinkage and other things like that. We’re thinking we have passed that point. And so we would expect that we’re going to still have some headwinds in the fourth quarter on Base business. It could be down a little bit more, but we’re also seeing some project deferrals from Q3 that’s gong to benefit Q4 on the Event side. And when you put all those together is what gives us the belief that we’re really going to be sequentially flat from that perspective.

[Joe Box:]

I appreciate that, Jeff. Let me just ask a little bit further. So, if you look at your business so far here in October, have you seen a flattening of Base business trends? Have you seen actually some sequential improvement, anything that you could point to that would suggest that force you for sure isn’t going to be down 10% year-over-year or 7% like it was?

[Eric Gerratt:]

Right. So, Joe, we don’t have visibility on a day-in and day-out basis on Base versus Event business. If you really just track volumes into the facilitates and the source of those are not down to that level and granularity. What I will say, as I look to trends in the business and I look over the quarter being – for starting from July up through to October, we have been seeing some sequential improvement. We haven’t closed October as you can imagine, but we’re seeing strong volumes come in, in October, probably stronger than what we saw in September. So, the trends are improving there, and now as a positive development, the challenge we always get into in the fourth quarter is what happens in November and December. And a lot of variables can happen in those two months. And it can happen on the Base business side, they can happen on the Event business side. And so we have taken a cautionary view in looking at the fourth quarter based off what we’ve experienced really the balance of this year, and that’s again what’s reflected in our guidance range.

[Joe Box:]

Got it. Thanks for the color there. Switching gears, Jeff, you mentioned earlier that you’re starting to pick up some aggressive pricing in the market. Is that getting better? Is it getting worse? Should we think about any impact to the average price per ton at the landfill, or is this much more kind of FIS related?

[Jeff Feeler:]

Yes. The aggressive pricing that we’ve experiences on selective service lines predominantly in the FIS group. And those are more on businesses that, I’ll say, it’s not our overall core competency per se, we tend to be a smaller player in those markets. And so, again, it’s a view of risk tolerance. Larger companies are willing to take on more risk than what we are. And so we’re not going to play the pricing game with regard to those services.

[Joe Box:]

Okay. I guess, when you laid out earlier some of the things that really surprised you in the quarter, why did the more aggressive pricing – why did that not come up on the list?

[Jeff Feeler:]

We weren’t seen it. I mean, we submitted our bids and we have those bids opportunities in and we ended up getting the end result and didn’t win that work. And as we investigated, we saw the pricing levels. And to be honest with you, I looked at what they traded for and there’s no way in heck, I would have ever secured that work for that level of return.

[Joe Box:]

But I guess, why wasn’t it a bigger concern to you that you started to see the price deteriorate? Was it just because it was in a market that you didn’t care that much about, or was there something more to it?

[Jeff Feeler:]

It’s timing, Joe. I mean, when we talked in August, we were just submitting the bids and then we didn’t get the results until later. I mean, we didn’t go and think you were going to lose the work.

[Joe Box:]

Okay.

[Steve Welling:]

This is Steve Welling. But when we are talking about priding, these are Event jobs that we’re really we’re bidding on remediation work. This has nothing really to do with our treatment and disposal business. We were actually successful with in select markets taking some price increases on our treatment and disposal services during the quarter.

[Joe Box:]

Okay. That’s what I was thinking, but may have potentially been mix of what the service was that was being offered. Thank you for some of the clarification there. That’s it from me. I’ll turn it over. Thank you.

[Steve Welling:]

Thanks, Joe.

[Jeff Feeler:]

Thank you.

[Operator:]

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

[Tyler Brown:]

Hey, good morning, guys.

[Jeff Feeler:]

Good morning, Tyler.

[Steve Welling:]

Good morning.

[Tyler Brown:]

Hey, maybe for Jeff or Steve. But just a big picture question here. So what are kind of the KPIs that you look at when you think about your business? I mean, I assume that the KPI in your Base business is what we talked about with industrial production plus or minus. But what are some of those things that you look at when you assess that Event business and kind of the prospects there? I mean, is it like chemical, utilization, is it still no utilization, just anything, I’m just curious what you guys look at?

[Steve Welling:]

Okay. This is Steve Welling. On the Event work, it’s a combination of drivers that make that business go. I mean, we have projects that are from regulatory orders, court orders. We have industrial production, in some cases, chemical plants are building new facilities, and it could also be real estate development or a Brownfield type development. So we’re looking at a number of different things related to the Event that aren’t necessarily tied to industrial production. Does that answer?

[Eric Gerratt:]

Well, and Tyler, this is Eric. The other thing that we as we look about the history in some of the cycles, another indicator for our Event business is just overall economic condition. When the economy is stable or growing, we tend to see pretty stable to grow in the Event business, as the economy retracts things get less favorable, less stable. We typically see a similar trend in the Event business, there maybe a little bit of a lag. But that’s one of the big indicators as well.

[Tyler Brown:]

Okay, that’s helpful. I mean, again, I was kind of looking for what you guys kind of look at. But just looking ahead maybe to 2016, and if we just assume that the Base business is just that, I mean, if it’s Base, it’s going to move with IP kind of plus or minus. But at this point, how much of that quarter to a third of your business that Event business is already secured in the pipeline, and how much of it really doesn’t kind of get secured until, call it that that early spring type timeframe?

[Jeff Feeler:]

Yes, Tyler, we’re not in a position to really quantify how much is secured and what’s not. What I will say is that, the several of the larger projects that are scheduled to start shipping either later this year and into next year are fairly sizable, and will help us back feel quite a bit of that – at the larger projects that have been completed. Steve, do you have anything to add?

[Steve Welling:]

We can tell you that we do have multiple awards secured contract signed, projects scheduled to move, I can’t tell you exactly what that percent is in terms of the total. But feel pretty good about the number of awards we haven locked up already.

[Tyler Brown:]

Okay. That’s very helpful actually. And then Jeff, you mentioned in the total waste management side, that you’ve already won kind of 5% incremental growth in 2016. I’m just curious, how big is that revenue stream?

[Jeff Feeler:]

Yes, the service revenue stream is about $30 million today.

[Tyler Brown:]

Okay. All right. Perfect. And then Eric, just real quick on Allstate precedes, did you say, it was $55 million?

[Eric Gerratt:]

Yes. The total sale price is around $58 million. These’s is some expenses in these and things and then some estimate in working capital allowance of the deal. So we’re expecting to take, at least, $55 million of the $58 million and put against the long-term debt.

[Tyler Brown:]

Okay. So that is fully net of tax?

[Eric Gerratt:]

Yes.

[Tyler Brown:]

I mean, we need to pay a gain on the sale attached for that?

[Eric Gerratt:]

Correct. Correct. Yes.

[Tyler Brown:]

Okay. All right. Perfect. Thanks, guys.

[Jeff Feeler:]

Thanks, Tyler.

[Operator:]

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

[Justin Ward:]

Hey, good morning, guys.

[Jeff Feeler:]

Goo morning.

[Eric Gerratt:]

Hi, Justin.

[Justin Ward:]

You gave a lot of good commentary on the Event work, environment and market. I’m wondering for a lot of these remediation type projects that are being deferred, these really aren’t court-ordered type projects. These are more related to construction projects or industrial facility expansion type projects. Is that the right assumption to make?

[Jeff Feeler:]

Yes. That would be the case. I mean, if it’s under a court order, it’s typically shipping. What we’ve experienced on a couple of the projects that are shipping that would kind of meet under that definition they ship lower volumes. The positive on that is the volume is still there and it’s still coming. And it’s just their shipment cycle on how quickly they could estimate the material and get it in route and transport it was lower than what they had communicated to us previously.

[Justin Ward:]

Okay. And then I guess kind of in relation to that a bit more high level. As you look at your Event Business pipeline going into 2016, you guys, again, you’ve had good commentary on it. But do we to see really a substantial reversal of this environment of deferment of these remediation projects in order for you guys to fully offset the PPG and Westinghouse ramp down? Basically, do you just need to see, is it critical to really see a major reversal of that mentality of deferment here?

[Jeff Feeler:]

No. I wouldn’t say though. So it’s more of – the challenge we have on what we are trying to achieve and we’re all well on our way achieving that is landing some of the larger projects to backfill the ones that are completing. And as Steve mentioned, we have several already under contract that will be shipping, and we do see others that are great opportunities for next year that have not gone into contract and have not gone into bidding, and we’ve been working with them. And we think they will become opportunities as we get more visibility starting in the first quarter of 2016.

[Steve Welling:]

Not all the firm, that means the project has been delayed in total. I mean, there are projects where we were told that the waste disposal would move and start in the third quarter. There is a contractor on site doing work, but the waste disposal just one of many pieces. So the other work prior to the waste disposal is currently going on. We just got our piece delayed you might say. So it doesn’t mean, the projects in total deferred.

[Justin Ward:]

Okay. That’s helpful. And then on the chemicals manufacturing piece of your ENS treatment and disposal, you guys had a good chart sliding your presentation deck, that was down 38%, a lot of that was impacted by the Event work, but it sounded like the Base business was down as well there. If we look at U.S. industrial production at chemical, is that still growing? Is that – can you help us understand the disconnect there? Is that more of the inventory destocking you guys mentioned, or is it a mix issue for you guys, or?

[Jeff Feeler:]

Yes. So, Justin, this is a hard part, is that category for Base that was down about 22%. When we look at all the generators in there, there’s over 600 generators during the quarter, which all have various different product streams and across the board. When you actually break down the 600 generators, there’s 57% of those were down during the quarter, and 43% were up. So it’s pretty hard to really put any fine point on what’s happening within that group. I understand your commentary about the overall chemical being up. But as we drill down into one in particular account, and we know this accounts pretty well. There – they were down quite a little bit and about 50% of their business, and the chemicals they sell are in build not drilling fluids. And we’re tied to the fracking side of things. And so that’s probably a big chunk of that, but they sell a whole bunch of other chemicals as well. But as we investigate and understood why their business was down year-over-year, that’s what they cited.

[Justin Ward:]

Okay. That’s very helpful. Thanks, guys.

[Jeff Feeler:]

Thanks, Justin.

[Operator:]

The next question is from Scott Levine of Imperial Capital. Please go ahead.

[Scott Levine:]

Hey, good morning, guys.

[Jeff Feeler:]

Hi, good morning.

[Scott Levine:]

I was hoping you might be able to approximate the – of the earnings downside relative to internal expectations in the quarter, what portion of that would you attribute to cyclical factors, or what I used to thinking of is more kind of base type factors versus not, whether it would be project deferrals or increased competition remediation or what have you, how would you roughly break out the downside, if you could?

[Jeff Feeler:]

Yes. So the downside when I break it down and I tried to in my prepared remarks that the shortfall is about the $6 million for the quarter was predominately in the ES and landfill volumes, and we were down about 9% on the landfill side of things. And a lot of that was deferment of work that we do anticipate to see in future quarters. There was a contribution for projects that we’re shipping that just didn’t ship at the same volume level. So that’s probably about $3 million of it, so about half of it. I talked about the remediation market in the Northeast was about 1 million. We did have one of our recycling service lines had some commodity – commodity pricing degradation that results in about 1 million from our expectation, which was a little it of surprise for us during the quarter. And that makes up the vast majority of it, so those are the three big contributors.

[Scott Levine:]

Got it. And I know you said with regard to the competition within the remediation market that you are somewhat surprised to see, but it’s not really core. Could you give a couple of examples of types of jobs you’re talking about? And the ones, I think that you said fall within your Field and Industrial Service business, and whether you lose interest in those types of opportunities based on what’s going on in the market or whether you consider that to still be our focus area for you?

[Jeff Feeler:]

So, good examples of project is where we would go in and bid on a long-term remediation that includes everything from building, demolition to digging out old pets of material and other types of ways that can be both construction debris that would not go to our facilities to not have material that wouldn’t go to our facilities. But on-site there’s likely opportunities for us to secure hazardous waste. And those are the types of jobs that we would be interested in and bidding because of the fact that we’re on-site and we have a value proposition by having internalization. Those are the types of jobs that we are interested in. What we have found, at least, in the recent months is that, that has just been more heavily competed. There’s less of those opportunities in the marketplace, and we’re having competition come in, that is more aggressive on the pricing front than we are. The good thing about that is who we’re losing them to don’t have disposal options. And so it’s not like we’re losing a disposal and we’re in a good position to still secure that work, we’re just missing the services component of it.

[Scott Levine:]

Got it. Thanks. One last one. With regard to your comments on 2016, I realize you don’t want to get too specific yet. But should we interpret your comments that these card based pressures are short-term in nature to imply that you would expect Base revenue growth to kind of accelerate to what you would consider to be kind of more normalized levels using the new definition in 2016, said again differently, the short-term meaning second-half of 2015 and by 2016, you would expect to be back in a kind of more of a normalized growth rate?

[Jeff Feeler:]

Yes. We’re not really prepared to provide detailed guidance on first-half versus second-half of 2016 on growth rates on Base Business. What I will say on that is that, the economic data we have seen on industrial production by a number of different economists have shown a decline and slowing growth in 2015, and we’re seeing that today, and it’s rebounding in 2016. And so that’s really what we’re seeing and what we’re expecting for next year.

[Scott Levine:]

Got it. Good enough. Thanks.

[Jeff Feeler:]

Thanks, Scott.

[Operator:]

The next question comes from Barbara Noverini of Morningstar. Please go ahead.

[Barbara Noverini:]

Hey, good morning, everyone.

[Jeff Feeler:]

Good morning.

[Eric Gerratt:]

Good morning.

[Barbara Noverini:]

So, I’m just trying to understand the rationale for changing the Base versus Event business definition. So to reiterate non-recurring projects for 7,000 tons are now classified into Base Business. So what percentage of new Base bucket is recurring in nature? And then also are we to imply that you experienced a regular cadence of small projects, maybe from established customers, even though these are not technically recurring on this earlier classifying them into Base Business now?

[Steve Welling:]

Barbara, this is Steve Welling. What we were doing before was we were going by customer level. And so what you would see was over 50% of our business was showing up under the broker category. But it didn’t give us a good view as to what was really happening in the various industries and where we should be focused as much. So what we’ve done is now we’re looking at the generator level, and we start seeing customers. It’s just that now we’re able to see better where the waste is coming from, be other broker, which allows us to know better projection, better forecasting hopefully in the future, if we can tie that to the indexes that some of you folks on the phone are looking at.

[Jeff Feeler:]

I’ll just add, Barbara. In comparing and contrasting our old definition to the current definition, I think that to put in perspective is, as Steve mentioned, we’ve looked at the customer level. And when we went through and looked at Event business in the past, you take our thermal recycling operation. Most of that, if not almost all of that was categorized as Event business. And if you really look at the business drivers underneath to what drives that demand for service, it’s more routine in nature. I mean, every few years or every periods that – the refineries are cleaning up those tanks and having to service those tanks. And it’s more recurring in nature versus a true cleanup project that once you dig the dirt out all the way and turn it over into condos or whatever happens to the facility, it’s gone forever. And so we – when we’ve looked at this revised definition, we wanted to get to what was truly – what we believe is more of a Base business with more recurring attributes than true project based work. And that by looking at the generator level and doing that that’s the reason why we went down this direction.

[Barbara Noverini:]

Okay, got it. So, really we are supposed to look at this as really the composition of your recurring work has not changed, it’s just that you’re classifying everything a little bit differently now?

[Jeff Feeler:]

That’s right.

[Barbara Noverini:]

Okay, fine. And then you just mentioned the thermal recycling business and I’m assuming that is not the recycling business that you actually called out this quarter as being weak, is that a different business that you’re referring to maybe one that you’ve gotten along with that acquisition?

[Jeff Feeler:]

That is correct it’s not the thermal recycling business that we’re referring to.

[Barbara Noverini:]

Okay and can give just little bit more detail about this type of business how large is it and I seen that your expectations in the near-term include weaker pricing to continue over the coming quarters?

[Jeff Feeler:]

That is correct So the business line recovers deicing fluid from airports and recovers some of the solvent and chemicals from that and recycles that. And we’ve seen major decline in that commodity price that honestly is unprecedented. And so yes we’re expecting that to continue into fourth quarter, but we don’t think that’s a long-term a long-term price degradation.

[Barbara Noverini:]

Thank you. Can you call out it how large the business is, probably very small rate?

[Jeff Feeler:]

It is the small business and remember the million dollars was, compared to our expectations it’s not that they – we had we have higher expectations on product sales during the summer time season when they start selling that product.

[Barbara Noverini:]

Okay got it. Thanks a lot.

[Operator:]

The next question is a follow-up from Michael Hoffman’s of Stefel. Please go ahead.

[Michael Hoffman:]

Hey, Eric. Would you be willing to give us some high revenue numbers – there’s is couple of numbers missing, maybe you’ve said it and I missed it, but that Slide 9, what’s the Q3 column look like for how the new mix is, that’s one Q3 2015. And then two, would you tell us what the revenues look like under these new definition so we have starting places at the top line. I guess you’re not ready to give income statement details beyond that but can we at least get the revs?

[Eric Gerratt:]

You’re talking just the Base and November Event percentages and.

[Michael Hoffman:]

Well, so there’s two parts of this. So what’s the Base and Event percentage for 3Q 2015? And then could you give us Environmental Services numbers and field services the way you’re now projecting – showing the data going forward. Like the $62.8 million is a point of clarity on field services in 3Q 2014 that we didn’t have previously. So can we get that clarity of how those numbers look like historically? No way you are showing?

[Eric Gerratt:]

Well the first part of your question is up for third quarter for ES, Base was 76%, and Event was 24%.

[Michael Hoffman:]

Okay.

[Eric Gerratt:]

For Q3 2015 for ES.

[Michael Hoffman:]

Okay and then like ES for 4Q 2014 total revenues what was that?

[Eric Gerratt:]

Fourth quarter 2014.

[Michael Hoffman:]

Of 2014, yes, just we have the starting we have the starting place of what the comparison is

[Eric Gerratt:]

I’m not going to pull out that Michael.

[Michael Hoffman:]

Okay. That would be great data to have if you wanted to put some on the website or we’re – even if it’s just the revenue numbers of how you’re showing the data today, so we have and then if you do feel, so I’m assuming it going forward, you are going to do feel an Industrial Services net, when we see next year was you’ll show us net of Allstate. Is that – so could we get those sort of what’s the Allstate pullout for each of the quarters in 1Q 2015, 2Q 2015 you gave it to us in 3Q. So, it was $20.1 million?

[Eric Gerratt:]

Yes, I’ll off the call back up with you on that Michael.

[Michael Hoffman:]

Okay, last item is legacy U.S. Ecology, you just have transportation line and then your EQ had it embedded in it’s old data. Where does that transportation number fall inside Base versus Event?

[Eric Gerratt:]

On the ES side Michael it’s not in Base or Event we’re still talking kind of the more traditional treatment in disposal revenue side. So it is outside of Base and Event. And if you look at a kind of our segment breakdown in the 10-Q we’ll file next week in the segment footnote. There’s under ES there’s services line and that is predominantly transportation.

[Michael Hoffman:]

Got, it.

[Eric Gerratt:]

That is not included in the Base and Event.

[Michael Hoffman:]

Got, it. And that’s the transportation that you all traditionally did it’s typically the rail car worked and it’s basically a pass-through?

[Eric Gerratt:]

That’s correct, with the acquisition of EQ there is a – there we actually have some margin and some mark up on it on the ES side and obviously on the FIS side. But that’s largely true.

[Michael Hoffman:]

Okay, all right fair enough. Thank you.

[Operator:]

Next is a follow-up from Joe Box of KeyBanc Capital Markets. Please go ahead.

[Joe Box:]

Yes, just one final up and I apologize if you went through this at all. What percent of your T&D business this quarter was really related to the mega projects like PPG and Westinghouse. And can you maybe just give us your typical update on start stop for some of these major projects?

[Jeff Feeler:]

Yes, from a concentration perspective we didn’t have any accounts over 5%, so they have all fallen below that level. And as far as updates go PPG is completed as of this month been October. Now there are all opportunities in the future and we think that we’re well positioned to help service that customer on down the road with regard to Westinghouse, it continues to shift that is one that’s continue to grow in size we now expect it to shift through the first quarter of 2016 at the current rates.

[Joe Box:]

I guess so is 4Q also going to be a sub 5% as a percent of sales through for T&D or first for these mega projects. And then as we get into 1Q, 2Q next year if we still have a little bit of Westinghouse then you also have main come on could we see a tick north of 5%?

[Jeff Feeler:]

For Q4 I’m not anticipating to have any projects greater than 5% I don’t know whether it’s a mega project or any concentration of a customer along that road. As far as how Q1, and Q2 goes I’m really not going to comment on what we anticipate for those outlook periods.

[Joe Box:]

Okay anything on Anadarko?

[Steve Welling:]

Yes, Joe this is Steve Welling, we’re working we have waste coming from one site right now it’s not large volumes and we have two other properties that are active, but again all in the initial stages. We’ve been talking to the trust that are actually managing the contractors of the sites. And I believe we’re on top of it it’s just that we haven’t seen huge activity at this point that’s going to be long-term effort and still feel positive about it, but nothing really big at.

[Joe Box:]

Got it. Thanks.

[Steve Welling:]

Thank you.

[Operator:]

And next is a follow-up from Tyler Brown of Raymond James. Please go ahead.

[Tyler Brown:]

Hey, guys. Thanks. Just a real quick one on SG&A Eric is there anything to think about in Q4 SG&A is there any reversal of maybe incentive comp or anything unusual there?

[Eric Gerratt:]

Yes, I think SG&A we’ll see the mix $20 million to $21 million range incentive comp will – there maybe some swing there, but it’s I don’t think it’s going to be a huge needle mover and it will be then another quarter that shakes out. But in that $20 million, to $21 million range.

[Tyler Brown:]

Okay, prefect. Thanks.

[Operator:]

[Operator Instructions] The next question comes from Matt Sullivan of Fiduciary Management

[Matt Sullivan:]

Hey, guys can you hear me.

[Jeff Feeler:]

Yes, hi, Matt.

[Eric Gerratt:]

Hi, Matt.

[Matt Sullivan:]

Hi, I was just wondering if you could give us a quick update on your IT systems and how the I know you started rolling out a financial system after the acquisition and then you decided to scrap that and go with something new. So I was just hoping we could get it a quick update on that?

[Jeff Feeler:]

Yes, Matt, we did implement or start our implementation of a new financial system back in about May timeframe the project as you can imagine is has a pretty long timeframe on it. But to-date, we’ve obviously selected that the platform are going to it’s a Microsoft product and the implementation is preceding as we speak. To this point we’re still relatively doing but to this point the projects are on track and we’re pretty excited to get on this platform. What we plan to go live hoping we can go live sometime in 2016 and run parallel. But the plan will be to cut over completely at the start of 2017. So projects are on track we feel better and better about the platform that we’ve selected and we’ll keep plugging away out over the next several months.

[Eric Gerratt:]

And Matt I just want to clarify one of your comments I think there might be a misunderstanding we didn’t start implementing a system and then scrapped it through another one. So that’s not the case we thought we’ll be able to converge onto a singular system with the EQ acquisition. And we learned shortly after completion that that the legacy EQ system was not robust enough to handle our future needs and where we were taking the company and opted to go this different route.

[Matt Sullivan:]

Okay and how about in terms of like a production system or waste management system, which I think is more like the traditional ERP. Do you have any plans there?

[Eric Gerratt:]

Yes, Matt we’re working on that as well that’s trailing the financial system implementation, but yes we’re looking at both the legacy kind of waste tracking production tracking systems for both legacy companies. In both cases it’s a older technology and needs work. We’re going to be working on a module, but not by module basis of customer service profiling waste approval things like that to integrate those over the next 18 to 24 month. So that that is in progress as well.

[Matt Sullivan:]

And so just last clarification does that – is that like you writing a new software system or is that just you picking, which one of the two businesses is best and migrating everything over to that?

[Jeff Feeler:]

Yes, we’re actually developing it internally we have some in-house developers that are developing that software internally.

[Matt Sullivan:]

Okay. Thanks guys.

[Jeff Feeler:]

Thank you.

[Operator:]

[Operator Instructions] The next question is a follow-up from Michael Hoffman of Stifel. Please go ahead.

[Michael Hoffman:]

There’s been some news out of Norfolk Southern that there may be some rails shipping delays issues material so that have consequences for you this beginning of the New Year. They’re sort of Giving the market a heads up about that you do most of your work for the UP don’t you?

[Jeff Feeler:]

We have CSX, UP Norfolk Southern have been involved, but we do have alternative so at this point don’t really have any reason to be concerned, but certainly we should follow-up on us?

[Michael Hoffman:]

Okay. All right. Thanks.

[Jeff Feeler:]

Thanks Michel.

[Operator:]

There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Feeler for any closing remarks.

[Jeff Feeler:]

I want to thank those participants for joining today. And we look forward to updating you on our progress in coming quarters.

[Operator:]

The conference has not concluded. Thank you for attending today’s presentation. You may now disconnect.