Q3 2019 Earnings Call

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And we'll come to these third quarter 2019, U.S. ecology Inc. earnings conference call.

Today's conference is being recorded.

After today's presentation, there will be an opportunity to ask questions.

Ask a question you May press star one on your telephone keypad to withdraw your question. Please press star too.

Let's now turn the conference over to Eric Gerratt. Please go ahead Sir.

Good morning, and thank you for joining us today.

Joining me on the call. This morning, our chairman and Chief Executive Officer, Jeff Feeler, Executive Vice President and Chief Operating Officer, Simon Bell and executive Vice President minimum sales and marketing Steve Welling.

Before we begin please note that certain statements contained in this conference call that do not described historical facts.

Our forward looking statements as defined in the private Securities Litigation Reform Act of 1995.

These 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 just closed 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 that 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 Dot us ecology Dot com.

Throughout yesterday's earnings release at our call and presentation today, we refer to adjusted EBITDA pro forma adjusted EBITDA and adjusted earnings per share.

These metrics are not determined in accordance with generally accepted accounting principles and are therefore susceptible to varying calculation.

A definition calculation and reconciliation to the financial statements of adjusted earnings per share adjusted EBITDA and pro forma adjusted EBITDA can be found third quarter results released yesterday.

At that point I'll turn it over to care Eric for some additional details on our financials and then close out the call with an update on our outlook for the remainder of 2019 and a few brief comments on 2020 before opening up the call for 2004 questions.

As we announced yesterday or actually as we announced our joint press release with NRC Group Holdings on October 20 Threerd.

Both sets of shareholders approve the pending merger and an overwhelming fashion and we anticipate closing.

The closing to occur Tomorrow November Onest, we're excited to bring these two companies together by harnessing the experience and expertise of each organization and believe will truly create a true leader in the environmental services industry as I will cover later in this call ended and discussed in our release yesterday.

We are providing us ecology view of what NRC could contribute in the final two months of 2019 cents since both companies have been operating separately as independently publicly traded companies. These statements reflect more limited financial and operating data that would normally that would normally.

Have have if companies have been already merged.

As a result, there will likely be questions that will be unable to address we have provided expanded reconciliations in our press release to be as transparent as we can with our assumptions.

Turning to U.S. Ecologies third quarter results yesterday.

We reported an impressive quarter delivering $167.4 million in revenue and 11% increase over the third quarter last year, driven by 7% organic growth and 4% from acquisitions.

This strong performance resulted from a 14% increase in revenue from our environmental services segment, driven by continued strength in both our base and event business.

Base business once again exceeded our internal expectations growing 11% over the same quarter last year.

As expected expected base business saw more volume going into our disposal network contributing to its 32% growth the second quarter in a row of 30 plus percent increases.

Our field and industrial services segment saw a 2% quarter over quarter growth, primarily reflecting recent acquisitions that have not yet cycled excluding the impact of these acquisitions revenue in our field and industrial services business was down from 5% from prior year.

We have seen some softness in our industrial services business, particularly in those markets aligned with metals industry vertical.

We also saw lower revenue from our total waste management business line as larger projects in 2018 have not re occurred at the same level in 2019.

Our remediation businesses down primarily due to timing of projects, but we still believe we will achieve our original outlook for the year.

With an expected strong fourth quarter. Nonetheless, these headwinds are masking the strong results in our small quantity generation business led by our retail lab pack and LTL service offerings, all of which grew in excess of 20% during the quarter as well as gains in our transportation logistics business.

Overall, we deliver pro forma adjusted EBITDA growth of 16% over the same quarter last year, we recognized approximately $2.6 million a business interruption recoveries associated with our Idaho facility during the quarter, reflecting claims submitted for the periods from the incident to to March 30, Onest two three.

It's a 19.

As we work through the complex negotiations to claim the additional business interruption recoveries due to US we now expect that these.

Recoveries anticipated for the remaining open periods are likely to be receive in 2020.

Overall I'm extremely pleased with our third quarter results and the trends that we're seeing in our business and we're on pace for a record year to us ecology with that I'll turn it back to Eric.

Thanks, Jeff.

As shown on slide eight revenue for the third quarter of 2019 was $167.4 million up 11% from $151.4 million of the third quarter of 2018.

Revenue for the environmental services segment for the third quarter was $122.2 million compared to $107.2 million in the third quarter last year.

This growth was driven by a 19% increase in treatment and disposal revenue, partially offset by a 2% decrease in transportation services revenue.

As Jeff mentioned based business for the environmental services segment was up 11% compared to the third quarter last year and represented 75% of treatment and disposal revenue.

Event business for the segment increased 32% from the third quarter last year and represent a 25% of treatment and disposal revenue.

The field and industrial services segment delivered revenue of $45.2 million in the third quarter of 2019 up 2% from $44.2 million in the third quarter of 2018.

The increase primarily reflects our field industrial services group based on the Dallas and Midland, Texas.

Does that was acquired in the third quarter of 2018 as well as our film Industrial services group in Sarnia, Ontario acquired in August of 2019.

Excluding these acquisitions fast revenues were down 5% from the third quarter of 2018, driven primarily by lower total waste management remediation and industrial services activities in the third quarter of 2019.

As Jeff mentioned these declines were partially offset by increased revenue on our small quantity generation business.

Slide 10 breaks down our environmental services treatment and disposal revenue for both base and event business by industry verticals.

Base business increased across nearly all verticals with the largest increases occurring in the transportation broker t. SDF and chemical manufacturing verticals.

These increases were partially offset by a decrease in the metals manufacturing vertical.

The increase in the event business was primarily driven by increases in the transportation metal manufacturing and government industry verticals.

Turning to slide 11, gross profit was $56.5 million in the third quarter of 2019 up 20% from $47.3 million in the same quarter last year.

Our environmental services segment contributed gross profit of $49.4 million in the third quarter compared to $39.9 million in the same quarter last year.

Environmental services gross profit benefited from approximately $2.6 million in business interruption insurance recoveries related to the Idaho facility, which were recognized in the third quarter of 2019.

Treatment and disposal margins were 47% for the third quarter compared to 43% in the third quarter last year.

Gross profit for the field industrial services segment was $7.2 million down from $7.4 million in the third quarter of 2018.

Gross margin was 16% in the third quarter of 2019 compared to 17% in the third quarter last year.

Selling general and administrative spending arrest DNA was $33.3 million in the third quarter of 2019 compared to $23.6 million in the third quarter of 2018.

This increase was partially due to $4 million in business development expenses, primarily associated with the pending merger within our C. As well as increased labor and incentive compensation increased property taxes and higher intangible asset amortization.

Operating income was $23.2 million in the third quarter of 2019 compared to $20 million in the same quarter last year.

Operating income for the third quarter last year included a $3.7 million goodwill and intangible asset impairment charge on our mobile solvent recycling business.

Net interest expense for the third quarter was $3.7 million compared to $3 million in the same quarter last year. The increase was the result of higher outstanding debt levels in the third quarter of 2019 due to the acquisitions completed in 2018 and 2019.

The company's effective income tax rate for the third quarter was 33% up from 20.2% in the third quarter last year.

The increase is primarily the result of business development expenses in the third quarter. This year that are not deductible for income tax purposes.

Additionally, the effective rate for the third quarter of 2018 was favorably impacted by the implementation of tax planning strategies that resulted in onetime favorable adjustments to prior year income tax returns.

Excluding the business development expenses, our effective income tax rate for the third quarter would've been approximately 28%.

We reported net income of $13.1 million and diluted earnings per share of 59 cents than the third quarter of 2019 compared to net income of $13.4 million and diluted earnings per share of 61 cents in the third quarter last year.

Adjusted earnings per diluted share was 75 cents in the third quarter of 2019 compared to 71 cents in the third quarter of 2018.

Pro forma adjusted EBITDA, which excludes business development expenses was $41.5 million for the third quarter up 16% from $35.8 million in the third quarter last year.

Turning to results for the first nine months of 2019 on slide 12.

Total revenue was $454.2 million compared to $408.4 million in the first months of first nine months of 2018.

Revenue for the environmental services segment for the first nine months was $327.4 million, which was up 12% compared to $292.6 million in the first nine months of last year.

The field and industrial services segment delivered revenue of $126.9 million in the first nine months of 2019 up 10% compared to $115.8 million in the same period of 2018.

Net income for the first nine months of 2019 was $36.6 million or $1.65 cents per diluted share compared to $35.9 million for $1.63 cents per diluted share for the first nine months of last year.

Adjusted earnings per share was $1.64 cents for the first nine months of 2019 competitor compared to $1.67 cents for the first nine months of last year.

Pro forma adjusted EBITDA was $103.1 million for the first nine months this year compared to $92 million for the first nine months of 2018.

Our free cash flow was $35.6 million for the first nine months of 2019 and includes $10 million of property insurance recoveries as well as approximately $2.3 million related to the Idaho facility rebuild.

Free cash flow for the first nine months of 2019 also reflects the $6.7 million and business development expenses, primarily related to the NRC acquisition.

Our balance sheet remains strong with net borrowings of 30 $334.5 million as of September Thirtyth 2019, and a leverage ratio of approximately 2.4 times based on the low end of our revised 2019 guidance range.

With that I'd like turn the call back to Jeff. Thank you are as we look to the final quarter of 2019, we continued to see positive momentum and underlying business and expect to end the year on a very strong note I.

Im going to address our outlook by separating into two components us ecology, Standalone operations and the expected contribution from NRC looking at US ecology on a standalone basis as you can see on slide 15, we are raising the bottom end of our EBITDA guidance range and now expect the core business.

As to deliver pro forma adjusted EBITDA from 140 million to $145 million. This strong performance will be led by continued strengthen our environmental services segment in both based in event business. We now expect base business to finished the year with growth ranging from 7% to nine.

Percent for the full year.

Above our previous guidance range of 5% to 7%.

Our event business is expected to grow approximately 20% for the full year.

Our field and industrial services business is expected to see similar headwinds to those experienced in the third quarter of 2019.

With the metals and auto auto industry verticals masking strength and other areas of the business.

Our guidance also takes into account some cost headwinds with regard to increased costs of our property and casualty insurance programs reduce business interruption recoveries hitting in 2019 from what was anticipated earlier in the year and increased incentive compensation as our internal financial targets are expected to be exceeded.

Revenues for US ecology are now expected to range from 621 million to $643 million.

When combining USA technologies business outlook with the expected contribution from NRC, we expect pro forma adjusted EBITDA will range between 153 million and 150 58 million for the full year, a benefit of approximately $13 million from from NRC.

Revenue is expected to range between $691 million and $713 million.

We are revising our adjusted earnings per share guidance for the full year of 2019 to reflect the increased operating performance of us ecology.

The addition of NRC and the dilutive impact of the incremental 9.3 million common shares.

And the assumed warrants and other equity instruments expected to be issued in connection with the merger.

The newly issued common shares and the dilutive impact of the assume warrants and other equity instruments are expected to result in approximately 1.5 million additional dilutive shares for the two months in which they will be outstanding in 2019.

As a result, we now expect our adjusted earnings per share for the combined company will range from $2.12 to $2.26 per share for 2019, which reflects a dilutive effect of approximately 15 cents per share for equity issued and assumed and connect connection with.

The merger this compares to our previous guidance range of $2.09 to $2.41 per share.

Given the number of moving parts impacting adjusted earnings per share guidance I refer those interested parties to the reconciliation is included in our earnings release to see the components of this guidance and the assumptions made for preliminary depreciation and intangible amortization interest cost and share counts to arrive at the into.

As stated guidance.

Shifting gears to capital expenditures, we expect total capital spending for the merged company to range between 62 million and $67 million for 2019.

Newest ecologies capital expenditures are to approximate 52 million to $57 million a reduction from our previous guidance of 55 million to $60 million as several projects will move into 2020.

As we look to 2020, we continued to see positive signs for growth for the US ecology business, we're still working through our budgeting process and completing our strategic plans, but we continue to look look for growth in 2020 pending any major shifts to the macro economy.

This factors and headwinds we are again, we are expect to see on the cost side with insurance labor and and the lingering impacts of our Idaho facilities as we continue to rebuild.

As we look to Nrcs business, we continue to see growth opportunities in the domestic environmental services business standby business and international operations.

Sprint segment, which operates in the oil and gas markets will likely be most challenged.

And challenging to predict given the early stage of ramp of the two recently constructed and opened Permian base landfills that are not ramping as quickly as expected when we announced the deal back in June and also to at due to what appears to be the onset of softer market conditions and business activities in the region.

While we have learned a great deal about Nrcs business since we announced the transaction we continue to operate as two independent companies.

Therefore, understandably there were limitations and what could be shared.

And reviewed between the two companies following the completion the merger we look forward to taking a deeper dive into all aspects of the business and strategy. We remain bullish on the business and the underlying assets and the long term return potential we plan to provide more guidance on nrcs overall contribution as we can and complete our budgeting.

Project process and create our detailed guidance plant for February 2020.

In conclusion, I can't be more excited about where us ecology is positioned and the future potential for our company. Our core assets are delivering what should be a record year for us ecology in terms of revenue pro forma adjusted EBITDA and adjusted earnings per share.

And with this at this without country, a considering the contribution from NRC.

We continue to see strength, we continue to strengthen our strategic position of the company with tuck in acquisitions that enhance our geographic regions and through our deployment of high return on capital growth projects, such as our smarter Sodini investment that will bring artificial intelligence and automation to the classification of retail waste provide.

Biting us with a true differentiation in the retail service line.

Further we have fundamentally transformed the company again with the NRC assets. This will strengthen our market presence add complementary service offerings and open up new waste verticals that will provide our combined shareholders. Many growth opportunities I expect when we look back at 2019 several years down the road, we will see this.

As a pivotal year for us the colleges evolution with that operator will you. Please open up the call for questions.

Thank you at this time, we will open the floor for questions. If you would like to ask a question. Please signal by pressing star one on your telephone keypad now.

If you are using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment and began that was star. One if you would like to ask a question.

First question comes from Michael Hoffman with Stifel.

Jeff.

Eric Gang.

Happy Halloween nice trick instead of retreat nice treats and on track.

Based growth and how much of its organic how much of it was deal rollover.

So Michael when we view the basin event calculation. It is all organic so the the acquisitions don't come into that calculation until we've cycled them. So that 11% is all organic.

Okay. So.

Well, then that begs the sort of as it was a concentrated in end market Eri region.

Was there some they may and Thats just exceptional.

Yes. It was it was really fantastic and and as you look at it across the verticals.

Based business was up in in almost every vertical the only one that was significantly down was on the metal side of all the rest of them more up.

Okay.

And then do you think about.

The the underlying outlook into 20 are we.

More prudent about going back to a long term the three to five you usually talk about.

As a starting place from an interest.

Oh, well all the macro data I don't think we're going into an industrial recession, but there are pockets of industrial recession and the country, we're clearly going on a slower growth but.

It's hard to.

Hard to make yes, I think Michael we're we're early and we're in the middle of our budgeting process, but I would I would tell you that that yeah, we're going to probably be looking more to the normalized range in that 3% to 5% going into 20.

It is what I'm seeing at this point.

But.

More to come.

Okay, then Jeff on the NRC I get yes.

You do a deal you look at it set of data you can look at you put some numbers out there. So originally you talked about a potential 2020 contribution of 120 million of.

Adjusted EBITDA from them, how does that number changed relative to what.

You suggested.

Typically around MP.

Yes, so as the Michael lots of good question, we've learned a tremendous about amount about the NRC businesses, we've announced the deal.

A lot of our teams in the field working on integration plans all of that but again, we're we've only been able to trade so much financial and operational data back and forth and when we look at 20 to 2020 for NRC. We continue to see positive developments in the domestic environmental services business, the standby services business the international businesses.

Yes.

These are the businesses that you do the emergency response, thus the standby oil spill response in the light industrial cleaning in and activities. The headwinds that we are seeing right now going into 2020 is and what they called the sprint segment of which services the Permian and Eagle Ford.

Oil plays.

Construction delays the two new landfills that our operational now occurred during the year.

And you know given this current market conditions in the Permian Basin right now.

They havent ramped as quickly as that they had hoped on their overall market conditions are expected to be down and they have been trending down this year in that region as well as expected to be down next year. So when we look at it look at this this is the area that we see some headwinds going into it going into.

Post merger area of the hundred $20 million of EBITDA that we gave about 35% was expected to be generated from the three operating landfills.

And there is about 15% there was a set to be around services around the areas. So it's a large piece of it but it also is one that we think that we can strongly execute on and still deliver strong performance on.

In that area. So all in we are still remain extremely bullish with the deal.

We're going to just be entering a little bit new market dynamic on the onset of the transaction as we look to 2020.

Okay. So I mean, thats 47 million and.

The.

The original Karnes County was probably about 25 to 30 of that that was six expecting Reagan and pecos to ramp at a pace of something that look like.

Seven to 10 each.

So what is karnes coming down as well so the Eagle Ford soft as well as the Permian or the parent or it's just that the Permian site ramping.

Yes, both markets are down.

Well rigs are down.

Trending down and have been trending down throughout the year and are projected to be trend Ed to be down in 2020, Mboe and both fields are both basin.

Right. So so at this point the 120 is no longer than 120 at something less.

Or do you think you offset by strength in the other pieces.

Yes, we're expecting it's going to be less than the 120, okay. Okay.

All right that helps for now thanks.

And just a reminder that was the start followed by the one key to ask a question and our next question comes from Tyler Brown with Raymond James.

Hey, Good morning, guys can you hear me good morning.

Hey.

I just saw habit cleared so we're looking at the legacy US ecology business you raised the guidance to revenue 621 to 643, and EBITDA 140, 145 Thats right.

Correct.

Okay. So it sounds like you know based business really strong. It you obviously raised the revenue, but it isn't really point through to EBITDA My hunch is.

You are coming in a couple of million light on VI from this year that you versus what you expected and maybe incentive comp is a few million dollar had one.

Yes in terms of the BDI, you're correct, we aren't going to bring in as much as we expected this year, probably in the million to $2 million range.

So so that that is correct.

In terms of the BDI.

The incentive compensation Tyler year, you're very close it will be a couple of million dollars or so.

As of Q4 hit is part of it the other thing that's in there as we've renewed all of our property and casualty programs, which we saw fairly sizable increase that was partially driven to the claim that we havent, Idaho, but also just overall market conditions that that most carriers are experiencing on renewals and pass it along to their customers.

Okay and on the were you expecting something like five for 19.

Basically yet and now you're going to and have not so.

So year to date through the nine months, we've done little over over 4 million and VI claims related to Idaho.

So, yes coming into the year and when we when we did our guidance, we talked about the $3 million to $5 million EBITDA drag related to Idaho, which was net with what we estimated we were going to get and VI. So so yes, we're probably again a million into 2 million short of what we expect.

That coming into the year. So despite okay and I don't know other parts of the business have made that up in terms of what we're doing and got it with guidance.

Yes, I hate to split hairs, but so into 2020, though that can be a wash year to year, because you're likely going to receive than 2020.

Correct, we will okay definitely expect that for that shortfall this year to carry over into 2020 and likely we'll have additional claims as we go until we get back up to full full speed on on the facility.

Okay and I think.

Jeff you mentioned it somewhere in the press release, which I need to look around but Q4 share count and into 2020 share count just pro forma.

Yes, so so for.

For the full year 2019, working with issuing it's about nine 9.3 9.5 million shares for the NRC acquisition and when you do all the dilutive counts for the full year, it's about an additional 1.5 million shares for the year.

Yeah, it's around 6 million additional dilutive shares just for the Standalone fourth quarter.

But then as we go into into next year.

It will take the full year till we cycled the acquisition for the full dilutive effect to hit.

But it's about 6 million shares to Q4, Standalone and about 1 million and a half shares for the full year for 2019.

Okay, all right because we have good jumping off point.

And then I do apologize so in our C is still a bit of a black box to me, but I just want to be clear so.

The 120, you said at 35 was held in the landfills and basically 15% were in other services in the region is that right.

That's correct.

Okay I'm just curious what are those other services entailed generally.

There are some transportation there some rentals theres some other other oilfield type platform plays in those regions, but then the other services has to do with.

Treatment of biological waste.

That.

From from the various fields out there.

Okay, Okay, and then just.

Maybe as you think it's more on me.

Can you give any.

Idea for 2020, DNA and specifically how d. in a actually split.

Yes, it we're still working through that Tyler.

I would tell you that based on what we know today and we have a lot of work to do so on purchase accounting.

Related to the NRC acquisition, but if you look at at the guidance and right on the the the press release, we give the guidance range for EBITDA and you can see in there what the DNA in the amortization of intangibles for US ecology. Our I expect those are going to be pretty close for next year and that has a pro.

Oxy for NRC, you're seeing a cup only two months worth.

For the NRC business in 2019, and if you annualize that that's going to get you are pretty close based on what we've got today.

Okay and then similarly on Capex, just any I thought maybe NRC was going to have capex down into 2020.

To be wrong on that but just any.

Potential look at 2020, Capex combined right now we.

Right now Tyler we don't have a good overview of of 2020 Capex.

There's there's a lot of things that we're going to have to get ended just short of where we're going to make investments and more work on to we're going to deploy capital and it's a little too early to come up with a number on that.

Okay, and then my last one here probably likewise, the difficult question, but from a tax perspective.

So any idea on a normalized tax rate and were there any initial wells or anything.

In the deal, but that will change your cash tax position.

Just generally speaking.

Yes, so so.

NRC does have some ano wells, we've modeled in assumed and still doing studies and works around how many if any of those survived acquisition because a lot of those get wiped out.

With with change in ownership. So we've assumed that that none of those are going to carry over for for now.

But if you look out.

For what we think for the balance of this year, we're probably in that 29%.

Effective rate, including NRC business, which which frankly would be kind of my best guesstimate.

For next year as well.

Okay, and more or less a full cash taxpayer.

Correct.

Okay. Okay, I know lots of details to work out. So we will we'll be looking forward to those but I appreciate the time.

Sure.

And just a reminder that was the starkey followed by the one key to ask a question now.

And again that was star one for questions and or comments.

Okay.

And at this time I'm currently showing no questions in the Q.

Well great well. Thank you for all those that attended the conference call today, and we look forward to updating you on on future progress in the coming months. Thank you.

Thank you, ladies and gentlemen state that concludes today's teleconference. You may now disconnect.