US Ecology Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: US Ecology, (ECOL)

US Ecology (NASDAQ:ECOL)

Q3 2013 Earnings Call

October 29, 2013 9:00 am ET

Executives

Eric L. Gerratt - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer

Jeffrey R. Feeler - Chief Executive Officer, President and Director

Steven D. Welling - Executive Vice President of Sales and Marketing

Analysts

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Robert W. Stone - Cowen and Company, LLC, Research Division

Barbara Noverini - Morningstar Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2013 US Ecology, Inc. Earnings Conference Call. My name is Glen, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Eric Gerratt, Executive Vice President and Chief Financial Officer. Please proceed, sir.

Eric L. Gerratt

Good morning, and thank you for joining us today. Joining me on the call today is President and Chief Executive Officer, Jeff Feeler. Also on the line are Executive Vice President of Sales and Marketing, Steve Welling; and Executive Vice President of Operations, Simon Bell.

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 today, and yesterday's earnings release, we refer to adjusted EBITDA and adjusted earnings per share. Both adjusted EBITDA and adjusted earnings per share 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 each can be found in Exhibit A of our earnings release. We believe these 2 non-GAAP metrics are useful in evaluating our reported results.

Now I'll turn the call over to Jeff.

Jeffrey R. Feeler

Thank you, Eric, and good morning, everyone. I'll start this morning's call with a few highlights on the record results released yesterday. I'll then turn the call back to Eric who will provide more details on the financials.

I'll close off the call with comments regarding our business outlook for the balance of 2013, including our revised earnings guidance. After that, we'll open up the call for questions and comments. For those following the webcast presentation, please see Slide 5.

This was another quarter of solid execution for the company with record financial results posted for a second consecutive quarter. We saw Treatment and Disposal revenue grow at 10% over prior year levels on continued strength of our project-based work or Event Business. Our Event Business grew 23% during the quarter, led by growth in the commercial sector, which more than offset our expected softness in the government sector. Our Base Business was up 6% during the quarter and was in line with our expectation after adjusting for the lost Safety-Kleen business after it was acquired by a competitor and a multi-year broker project that was completed in 2012.

Not only were we able to show impressive top line growth, we delivered significant expansion in our Treatment and Disposal gross margin. Our Treatment and Disposal gross margin was an impressive 51% as a result of a favorable service mix and continued operational improvements across our facilities. While all our facilities contributed to these record results, regionally, we continue to see the strongest year-over-year performance in our-- in the Northeast and also in our Gold Coast thermal recycling services. The combination of these factors helped deliver record operating income of $15.5 million during the quarter. Adjusted EBITDA also grew an impressive 20% over the same quarter last year.

Adjusted earnings per share, which excludes foreign currency and translation gains and business development expenses, grew an impressive 10% to 20% to $0.53 per diluted share.

So far for the first 9 months of 2013, adjusted earnings per share has grown to $1.29 per share, up 24% from the $1.04 per share in the same quarter -- same period last year.

Our key financial metrics that we track remain at or near industry-leading levels, with us delivering almost a 17% return on invested capital, 13% return on total assets and 24% return on shareholders' equity. Overall, I continue to be pleased with our execution, companywide. Our end markets continue to be healthy and our project pipeline remained solid moving into the fourth quarter, which should translate into a strong finish for the year.

With that, I'll turn the call back to Eric to provide more specifics on the financial results.

Eric L. Gerratt

Thank you, Jeff. As shown on Slide 7, revenue for the third quarter of 2013 was up 16% to $53.1 million. This was driven by higher Treatment and Disposal revenue, which was up 10% over the third quarter of 2012, and higher Transportation revenue. We disposed of 266,000 tons in the third quarter of 2013, which was consistent with the tons disposed in the third quarter last year. Excluding US Ecology Michigan, volumes declined 3% in the third quarter of 2013 compared to the third quarter of last year.

Our average selling price, or ASP, increased 10% in the third quarter of 2013 over the same period last year as a result of a more favorable service mix.

Slide 8 breaks down our Base and Event Business over the last 6 quarters, excluding US Ecology Michigan. Recurring Base Business contributed 58% of Treatment and Disposal revenue during the third quarter of 2013.

Base Business revenue was flat compared to the third quarter of last year. Although as Jeff mentioned, after adjusting for the lost Safety-Kleen business after it was acquired by a competitor and the completed multi-year broker project in late 2012, Base Business grew approximately 6%. Event Business was 42% of Treatment and Disposal revenue, up 23% from the third quarter last year.

Slide 9 breaks down Treatment and Disposal revenue for both Base and Event Business by customer category. As with the previous slide, US Ecology Michigan is excluded. Treatment and Disposal revenue from Private Cleanup events increased 297% in the third quarter of 2013, compared to the same period last year. This increase, primarily reflects shipments from a nuclear fuel fabrication decommissioning project and an East Coast cleanup project in the third quarter of 2013.

Our Refinery business was up 35% quarter-over-quarter. This increase reflects higher landfill disposal volumes and improved pricing on thermal recycling project sourced directly from Refinery customers.

Treatment and Disposal revenue from our Other Industry customer group decreased 2% over the same quarter last year, reflecting decreased shipments from a broad group of industrial customers. Treatment and Disposal revenue from third-party waste brokers was down 4% in the third quarter 2013 over the third quarter of 2012. This reflects decreased shipments across the diverse range of waste generators directly served by our multiple broker customers, including lower volumes of brokered thermal recycling projects. This also reflects lost Safety-Kleen business, which when adjusted out, results in flat third-party broker business quarter-over-quarter.

Thermal recycling business may be included in our Refinery, broker or Other Industry category depending on who our customer is. Thermal recycling revenue increased 4% to $4.1 million in the third quarter of 2013. This was driven by an 8% increase in ASP, which was partially offset by a 6% decline in volume. The volume decrease was a direct result of product mix and demand for this service line remains strong.

Our Government Cleanup business decreased 46% in the third quarter of 2013. This decline was anticipated and primarily due to lower volumes from the U.S. Army Corps of Engineers. Treatment and Disposal revenue from the Army Corps was 48% lower in the third quarter of 2013 than the same period last year.

Continuing to Slide 10, gross profit was $21.6 million in the third quarter of 2013. This was up 16% from $18.6 million in the third quarter last year. Overall gross margin was 40.7% in the third quarter of 2013, up from 40.6% in the same quarter last year.

Treatment and Disposal gross margin for the third quarter of 2013 was 50.8% up from 48.4% in the same quarter last year. This gross margin improvement reflects a more favorable service mix in the third quarter this year.

Selling, general and administrative spending, or SG&A, was $6.1 million in the third quarter of 2013. This was down slightly from $6.2 million in the third quarter last year and down as a percentage of sales from 14% to 12%.

Operating income grew 25% to a quarterly record of $15.5 million for the third quarter of 2013, up from $12.4 million in the same quarter last year.

Adjusted EBITDA for the third quarter of 2013 was $20.1 million, also a quarterly record and an increase of 20% from $16.7 million in the same period last year. We realized $683,000 of noncash net foreign currency gain in the third quarter of 2013 on a stronger Canadian dollar. This compared to a noncash net foreign currency gain of $1.6 million in the third quarter last year.

Net income was $10.3 million or $0.56 per diluted share. Adjusted earnings per share, which excludes a foreign currency gain of $0.03 per diluted share, was $0.53. This was up 20% from adjusted earnings per share of $0.44 for the third quarter last year.

Now turning to year-to-date results on Slide 13. Revenue for the first 9 months of 2013 was $141.8 million. This was up from $118.7 million in the first 9 months of 2012.

Treatment and Disposal revenue was up 13% in the first 9 months of 2013 over the same period of 2012.

Transportation service revenue was up 70% over the same timeframe, reflecting more bundled Transportation and disposal services on our project-based work.

Base Business revenue increased 1% in the first 9 months of 2013 over the first 9 months of 2012, while Event Business was up 24% from the first 9 months of 2012.

Our average selling price was up 13% in the first 9 months of 2013, compared to the same period in 2012, and volumes were flat over that same period.

Slide 14 breaks down Treatment and Disposal revenue for both Base and Event Business by customer category. As with the earlier slide, this excludes US Ecology Michigan.

Our Private Cleanup business was up 187%, reflecting shipments from a nuclear fuel fabrication decommissioning project and an East Coast cleanup project in the first 9 months of 2013.

Treatment and Disposal revenue from our Refinery customer group increased 46%, reflecting higher landfill disposal volumes and improved pricing on thermal recycling projects sourced directly from Refinery customers.

Our Government Cleanup business decreased 36% in the first 9 months of 2013, compared to the same period of 2012. This decline was primarily due to lower volumes from the U.S. Army Corps of Engineers.

Treatment and Disposal gross margin for the first 9 months of 2013 was 47.5%, up from 46.3% in 2012, reflecting the more favorable service mix.

SG&A was $18.4 million in the first 9 months of 2013, which was up from $18.2 million in the first 9 months of 2012, but down as a percentage of sales from 15% to 13%.

Operating income grew 26% to $37.6 million in the first 9 months of 2013, compared to $29.8 million in the same period of 2012.

Adjusted EBITDA for the first 9 months of 2013 was $50.1 million, up 19% from $42.7 million in the first 9 months of 2012. Net income for the first 9 months of 2013 was $22.9 million or $1.24 per diluted share. This compares to net income of $19.5 million, or $1.07 per diluted share in the first 9 months of 2012.

Adjusted earnings per share grew 24% to $1.29 in the first 9 months of 2013, up from a $1.04 in the same period of 2012.

Slide 18 summarizes our financial position and return metrics. At September 30 2013, we had $4.4 million in cash. Borrowings on our credit agreement totaled $35.5 million. This left $47.2 million available under our credit facility for future borrowings.

During the first 9 months of 2013, we generated $32.2 million of cash from operating activities. We invested $15.6 million in capital projects, paid down a reducing revolving line of credit by $9.5 million and paid out $6.6 million in dividends to our stockholders.

As Jeff mentioned earlier, our return on invested capital for the 12 months ended September 30, 2013, was 16.6%. Our return on total assets was 12.8%, and return on equity for the same period was 24.1%.

With that, I'll turn the call back to Jeff.

Jeffrey R. Feeler

Thank you, Eric. For those following our presentation, I'll refer you to Slide 19.

As I indicated in my opening remarks, I'm very pleased with the performance during the quarter and for the first 9 months of 2013. Strong Event Business combined with steady Base Business, and continued operational excellence across our facilities resulted in a second consecutive quarter of record financial results and stronger-than-expected year-to-date results.

Our solid Event Business was driven by a combination of new project opportunities and accelerated shipments on longer-term projects. Our pipeline remains healthy, with projects running through the fourth quarter and into 2014.

Industrial production continues to grow, which we believe will translate into solid Base Business performance.

Demand for our thermal recycling services remain strong as we enter the seasonal Refinery turnaround period.

The combination of these factors puts the company on track for a strong finish in 2013. As a result and as announced yesterday, we increased our previously issued full year guidance for 2013 of $1.45 to $1.55 per diluted share to now $1.68 to $1.73 per diluted share. We also increased our adjusted EBITDA guidance to $67 million to $69 million for the full year.

As a reminder, our earnings and adjusted EBITDA guidance excludes any foreign currency translation gains or losses and business development expenses.

For modeling purposes, we now expect our full year Treatment and Disposal gross margin to approximate 47% to 48%, and we also expect our full year effective income tax rate to approximate 36%.

On the capital expenditures side, 2013 capital spending will approximate $23 million and is consistent with our previously issued guidance. We have completed construction of additional landfill space in Texas and construction activities are near completion at our Nevada and Québec facilities.

We continue to invest in plant and equipment upgrades at all of our sites to maintain the services excellence that we're known for and to gain operational efficiencies we continue to expect.

Strategically, we remain focused on driving revenue and building the business through a combination of organic growth and targeted acquisitions. We continue to look for high-quality assets to expand our disposal network or our service offerings. The current deal flow for acquisitions continues to be strong, and we are dedicating resources to evaluate these opportunities. Supplementing our organic growth with acquisitive growth has been and continues to be a long-term strategy for us.

In closing, we are excited to continue the momentum into the fourth quarter and expect 2013 to be another record year for US Ecology. While 2013 has benefited from accelerated shipments initially planned for 2014, we believe, with our best-in-class assets and permits, and the premier sales team in the industry, we can continue to target and win business to generate growth in 2014 and beyond. Combined with our continued focused strategy, we have an excellent platform to deliver sustainable long-term shareholder value.

With that, I'll turn the call -- open the call for questions.

Question-and-Answer Session

Operator

Operator Instructions] And your first question comes from the line of Michael Hoffman, Wunderlich Securities.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

So, of course, the next question is, so what are you going to do for us next? As you think of your Base Business, and you look at your customer base and the mix of them, do you have any sense of sort of, either there's a consistency of contribution from each core base of customers that's around the base side? Now have there been any trends changing either sequentially or year-over-year as we think about base? And where that's going? If I listen to other industrial services providers, they generally feel that there's an underlying growth rate of about 5% in the kind of like-for-like business, very sort of comfortable with that, and I'm trying to figure out from your side where your comfort level is in a sort of a steady-state rate of organic growth in that base?

Steven D. Welling

Michael, this is Steve Welling. Our Base Business consists of not only the broker business, but multiple industries that are in that. Everything from steel to trading shops to forestry, you name it. It's filled with a number of different industry types, including the brokers. And what we were saying here is with the loss of the one broker, Safety-Kleen, and another very, very large multibillion-dollar contract that went away this last year, we're still up multi-to-single digits and that's across a wide variety of industries. So not seeing anything really changing on pricing, things seem very stable, and we believe we're growing the business at a good clip.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay, so are you comfortable with thinking about a 5% kind of steady-state organic growth at this juncture? That's less than what you're doing, it's on a same store basis.

Jeffrey R. Feeler

Mr. Michael I will address that. Assuming the economy is still growing around the 2% to 3% range, I think that, that's a fair assessment and we continue to see that. The one thing that doesn't factor into with this theory that with lower gas prices that you're going to have a resurgence in manufacturing back in the U.S., and we've really not factored that into any of our outlook until it starts materializing.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay, fair enough. And then as you think about the Event Business, given the level of strength, it would appear you've pulled some stuff out of '14 into '13 and so it makes it a little more challenged, I get that. But I don't think anybody would be looking for you to sustain double digits -- high double-digit organic growth. So what I'm trying to get a feel for is, is there enough work in the pipeline that if you had a normal conversion rate, sort of a normal win cycle, what's a logical way to think about what's the growth rate of that business organically?

Eric L. Gerratt

Well, that's a good question. As you have followed us for some time, and our business tends to have the lumps in it because of the project-based work. But also, even our Base Business has some lumpiness to it. With regard to '14, we're really just starting the planning cycle. So we don't have a lot of specifics, but our pipeline does look good, so if we continue to convert on our pipeline, and there will be other opportunities that will arise in '14 that we don't even have visibility to today, we're pretty confident that we're going to be able to convert at a clip that we've been able to convert out. And really, generate year-over-year growth. With regard to what percentage that's going to be, we're going to be in a cycle of difficult comps, so I think it's going to be lower than what we experienced for past couple of years.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then as we think about your mix, radioactive versus hazardous, land and industrial, and if I recall, when we were together at the end of August, you had talked about a sort of 80-20 hazardous industrial versus radioactive, how does that mix looks today in the third quarter and how do I think about that next year and then out 3 to 5 years?

Jeffrey R. Feeler

Sure. So for the third quarter, the mix is actually down year-over-year. So we did about 10% of our Treatment and Disposal revenue on the radioactive side. Part of that was because of the previous year, we had large shipments coming in from the Army Corps, which Eric had mentioned was down around 48% in the quarter. But then we also had another military base cleanup project that didn't repeat. I mean it's completed. So those types of things were down year-over-year. I think going forward, it's hard to say what the mix is going to be. We compete in both of these areas, which I think gives us a unique aspect to our business. And we're going to try to win whatever we can get with regards to the radioactive side, as well as hazardous side.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

So and if I'm -- correct me, if I'm wrong, the radioactive tends to be better margin, so if it’s down then there really was some pretty healthy cost controls here to continue what your margin and the trend it was?

Jeffrey R. Feeler

Yes, I mean the margin improvement wasn't from the radioactive side. The margin improvement was basically other operating facilities expanding their margins due to better pricing, which we talked about, but then also just continued operational excellence that we've had. We really focused on cost, that's the one thing that we can really control on -- in our organization. And that's what we take pride in across our organization to make sure we can deliver healthy margins.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. So -- and then touching on the core, we are in a new fiscal year, so do you think there's a change in their sort of spending behavior now that we're in a new fiscal year and not being hit by a sequester sort of partway through a year and two, there's chatter that the government shutdown leads to a revisiting of sequester on some levels in January. So any sort of thoughts about that in the core going into '14?

Steven D. Welling

This is Steve again, Michael. What we've been told is that the proposed budget for the FUSRAP program was $104 million, which will be actually an increase over what was spent or what is expected to be spent for 2013, which is approximately $89 million. So it's not exactly sure what will happen next year, but it looks like there could be additional funding for that particular program.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay, that's cool. And then Eric, on the G&A, I get you rounded to 11.5, it really is 12. I mean the good news is you're both down sequentially and year-over-year on both a dollar and percent basis. So how do I think about that one in the end of the fourth quarter, but kind of into '14? Is it -- can you manage the G&A to be flat on a dollar basis in '14?

Eric L. Gerratt

Yes, I think, Michael, I think it'll likely be up as we continue to grow, but at a slower pace than the growth, obviously, as we've seen in the past. I think we expect for the bulk of -- for the remainder of '13 it to be in that 16% of T&D revenue range, and I would expect kind of that same percentage of T&D revenue to continue into '14. As Jeff mentioned, we're in that cycle of budgeting now for '14, but I think that's a pretty good run rate to expect going forward.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay, and then last question for you, Jeff, I realize you can't talk about specific transactions, but talking about deals as part of the growth story, has been part of your presentation over the last 6 to 9 months, and so can you frame at least sort of a pipeline of -- I know you are looking at $10 million worth of deals, $100 million worth of deals? What do you feel about your sort of probability of pulling the trigger? Historically, ECOL has been somewhat of a slow buyer.

Jeffrey R. Feeler

Well, I think I would phrase it that we're a diligent buyer, with a very rigorous process. The one thing that we don't want to do is overpay for an asset. And we're very cautious and when we use the word targeted acquisitions, there's a reason why we're using targeted. It's that it's got to fit our core strategic vision. It's also got to be on the market, which sometimes can create a challenge, as well as it's got to be priced right. And I think that we've done a good job the last couple of acquisitions getting the right acquisition that are paying dividends today. Now this continues to be a strong part of our organic growth. I can't really comment at the things that we're looking at right now. But there is a robust pipeline of opportunities out there. We have a very healthy balance sheet that will allow us to do deals when they present themselves at the right valuation. And we also, as a public company, can always tap the equity markets if needed.

Operator

And your next question comes from the line of Rob Stone with Cowen and company.

Robert W. Stone - Cowen and Company, LLC, Research Division

I wonder if you could just provide any more color on -- you mentioned certain volumes that were spent [ph] for '14 that got pulled forward. Can you say where that came from or what triggered the change?

Jeffrey R. Feeler

Rob, we're not going to get into any contract specifics with regard to it. But the one thing to remember in our business is especially on the project side or Event Business, is we're really the recipient of the waste. So we don't control the front end and a lot of times, projects can accelerate, which we experienced this year. But then the reciprocal can -- has happened from time to time where they've gotten delayed, deferred. So that being said, where we had thought last quarter and even at the beginning of the year, certain volumes on projects that we're going to receive, were coming at a certain level and actually move into '14. What we saw is some of those volumes actually accelerated and they delivered in 2013. As far as the size of it, we really don't want to get into quantification of the size, but it was pretty significant from an earnings standpoint that was brought into 2013.

Robert W. Stone - Cowen and Company, LLC, Research Division

Sure. So on the sustainability concept for a minute, you mentioned a couple of drivers for the Event Business being so strong, the nuclear fuels cleanup, and East Coast cleanup. Over what period do those drivers for the Event Business go forward? What's the visibility for sustaining that demand?

Jeffrey R. Feeler

Yes, so the visibility of some of our multiyear projects, we have fairly good visibility. I mean some of them we're going to be completing in '14, and couple of others going to trickle into '15. With regards to other projects, we are seeing new opportunities develop every day that are going to be set up for 2014. Those tend to not really formulate themselves or get more confident until they get a little closer into the 2014. So we'll definitely have more intel and more color on that when we release guidance in February. But at this stage, the visibility isn't as clear as it was last year just because it's some longer-term projects that we've had last year in the pipeline already secured.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. Transportation revenue up quite a bit year-to-date, are you up against any capacity constraints in terms of your ability to bundle Transportation opportunistically?

Eric L. Gerratt

No, Rob. This is Eric. I -- you're right, and I think from a capacity and availability perspective, we still have capacity to continue to bundle on additional projects. And we're able to ramp up and ramp the fleet down through releases, if need be, but for now, we have enough capacity to continue to bundle.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. And finally, have you seen any changes in posture by your competitors lately? Or any comments you could make on the competitive environment.

Steven D. Welling

This is Steve Welling, again. No, not really. It is a competitive business, and we compete heavily for these event projects every year. I've been here for many, many years, and it's been the same every year, so I would say nothing that we can point to as a trend or major change.

Operator

[Operator Instructions] And your next question comes from the line of Barbara Noverini with Morningstar.

Barbara Noverini - Morningstar Inc., Research Division

Now that you have a wider geographic reach, I'd expect your ability to win these onetime cleanup events or projects has strengthened. So can we expect to see Event Business as a percentage of transfer and disposal revenues to creep up over time, similar to the mix we've seen this quarter? Or are you expecting to maintain a mix Base to Event Business that's similar to historical levels longer-term?

Jeffrey R. Feeler

So Barbara, that is somewhat of a difficult question to answer, just because the timing of Event Business. I think what we saw is just -- the last couple of quarters, outside the Q3, we were more 65-35 split. This quarter, where we were down below 60, I think on a long-term, we're probably going to be closer to that 60/40 split. But that's going to go up and down just based off the strength of the Event Business in the project-based work. The Base Business tends to be more predictable as that we -- the questions that have come out on the call today, growing at the mid-single digits going forward. So it's just really the strength of the project-based work that's going to drive that percentage up or down.

Operator

At this time, we have no further questions. I turn the call over to Mr. Jeff Feeler for closing remarks.

Jeffrey R. Feeler

Great. Well, thank you all for joining the call today and interest in the company and we look forward to delivering great news in February 2014.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

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