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Executives

Jeff Feller - VP & CFO

Jim Baumgardner - President and CEO

Steve Welling - SVP, Sales and Marketing

Simon Bell - VP, Operations

Analysts

Rich Wesolowski - Sidoti & Company

Ted Kundtz - Needham

Al Kaschalk - Wedbush Securities

Tim Petrycki - Jesup & Lamont

Eric Prouty - Canaccord

Mike Salinsky - RBC Capital Markets

Michael Hoffman - WSI

Alan Brochstein - AB Analytical Services

Rich Wesolowski - Sidoti & Company

US Ecology, Inc. (ECOL) Q1 2010 Earnings Call April 27, 2010 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 US Ecology, Inc. earnings conference call. My name is Heather and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to your host for today’s presentation Mr. Jeff Feeler, Vice President and Chief Financial Officer. Please proceed.

Jeff Feller

Good morning. Joining me today is President and Chief Executive Officer, Jim Baumgardner; Senior Vice President of Sales and Marketing, Steve Welling; and 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 by 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 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 obtain a copy of today's presentation on our website at www.americanecology.com.

I will now turn the call over to Jim Baumgardner.

Jim Baumgardner

Thank you Jeff and good morning everyone. As outlined on slide four of our webcast PowerPoint presentation, I will start this morning’s call with an overview of the quarterly results released earlier today. After which time I’ll turn the call back to Jeff will provide some more detailed information on the financials. I’ll then turn the over to Steve Welling who will provide an update of our current sales and marketing initiatives and finally turn it back to Simon Bell to provide brief overview of our 2010 capital spending and operating initiatives.

I'll close out our prepared remarks with a discussion of our outlook for the remainder of the year and after than will invite questions. As expected the first quarter continued to be sluggish. Our recurring business was down 8% as compared to the first quarter of last year and with flat on a sequential basis when compared with the fourth quarter of 2009. Our event business including the completed Honeywell Jersey City project was down 32% during the quarter were compared with the first quarter of last year. However with fourth quarter was also flat with the first quarter. So we saw was very little sequentially change quarter-to-quarter.

However, in the revenue contribution from the Honeywell project is excluded from the first quarter of ’09 our event business actually showed an increase of almost 18% year-over-year. It is our general believe that well sluggish the markets where we operate are not deteriorating further. That been said we’ve not seen any real size of rebound item and the base or event business as evidence by they relatively flat sequential performance of the business. Thermoal recycling volumes increase 10% during the quarter as compared to the first quarter last year. However increase competition continue to pressure on pricing.

The net effect was 10% reduction in thermal recycling revenue during the quarter as compared to the same quarter last year. Despite these higher volumes quite simply we continue to use aggressive pricing to a track volumes furthering efforts to increase market share penetration in anticipation of improving market conditions. Also notably during the quarter we took a charge of $423,000 related to compliance issues at our Beatty Nevada facility. We are in discussions with the US EPA Region 9 on a final settlement associated with 2005 and 2007 or 2008 compliance inspections.

We are fully collaborating with the investigation; we responded rapidly to all concern raise in a fully addressed all the alleged regulatory deficiencies and believe the matter will be reserve shortly. Although we are talking the matter very seriously we do not believe that these allocations represented any tread to human health are the environment. For the first quarter of 2010 net income was 1.8 million are $0.10 per diluted share as compared to $3.6 million or $0.20 per diluted share in the first quarter of 2009, but the help put those are in the perspective we estimate that Honeywell, the Honeywell Jersey City project, contributed approximately $0.06 to the earnings in the first quarter of 2009. Now I would give you some more detail on the financials I will turn the call back to Jeff.

Jeff Feller

Thank you. Jim. As you can see on slide six of today’s presentation. First quarter 2010 revenues were $19.5 million as compared to $35 million in the first quarter of last year. This decline reflects in 83% quarter-over-quarter decline in transportation service revenue and 17% decline in treatment and disposal revenue.

Declines and total revenue was primarily the result of the completion of the Honeywell Jersey City project in October 2009. Honeywell contributed to $15.4 million in total revenue or 44% of total revenue in the first quarter of 2009, excluding the Honeywell revenue contribution from the first quarter of 2009, total revenue in the first quarter of 2010 was essentially flat with the same quarter last year.

Treatment and disposal revenue from requiring customers or base business decreased 8% in the first quarter of 2010 and over the same quarter last year and reduced shipments from our refinery and other industrial customers. Event business was 32% lower in the first quarter of 2010 then the same quarter last year. This decrease reflects the competition or the completion of the Honeywell project and to lesser extent to chevron molecular project.

Excluding the Honeywell project as we mentioned Event business was up 18% during the quarter. Average selling price for treatment and disposal services excluding transportation services was 42% higher than the same quarter last year. This increase was the result of the completion Honeywell projects normal service mix partially offset by lower thermal recycling pricing.

I will now break down treatment and disposal revenue for Base and Event business by customer category. For those following along with the presentation please refer to slide seven. Our other industry customers include electric utilities, fuel mill, chemical and technology manufactures and other non-brokered industry. Treatment and disposal revenue from this category increased 33% in the first quarter of 2010 over the same quarter last year. This increase reflects a remedial cleanup project with aluminum manufacturer that began in mid 2009 and was competed during the quarter.

Our waste brokers business increased 3% in the first quarter of 2010 over the same quarter last year. This increase was despite fewer thermal recycling jobs being filled by waste brokers during the quarter than in the first quarter of 2009. When we exclude the impact of thermal recycling services, our broker business increased 7% in the first quarter of 2010, as compared with the first quarter of 2009. These increases reflect higher shipment levels from our national account brokers along with slight increases in the number of smaller brokers that we serve.

Our Rate Regulated business at our Richland, Washington is 2% lower in the first quarter of this year than the same quarter last year. The decrease reflects the timing of revenue recognition for Rate Regulated portion of the business. Our government cleanup business decreased 9% during the first quarter of 2010 over the same quarter last year. This reflects decreased shipments from two departments of deferred cleanup projects partially offset by higher disposal revenue from the US Army Corps of Engineers FUSRAP program.

Total revenue from the Army Corps including transportation services increased $1.5 million to $3.7 million or 19% of total revenue in the first quarter of 2010. This compares to $2.2 million or 6% of total revenue in the same quarter last year. The increase in total revenue from the Army Corps is due to the transportation services that we began offering on one of the Army Corps projects we serve as well as increased disposal revenue. Backing our transportation related services, treatment and disposal revenue from the Army Corps was 14% higher in the first quarter of 2010, compared to the same period last year.

Our refinery business declined 13% in the first quarter of 2010 over the same quarter last year. This reduction reflects the lower average selling price for thermal recycling services, partially offset by increase volume. Treatment and disposal revenue from private cleanup event decrease 97% in the first quarter at 2010, over the same quarter last year. This largely reflects the completion of Honeywell Jersey City cleanup site and, to a lesser degree, the completion of the Chevron Molycorp project that shipped in the first quarter of 2009.

Continuing onto slide nine, gross profit was $6.6 million in the first quarter of 2010 and $9.5 million in the first quarter of 2009. Gross margin was 34% in the first quarter of 2010 up from 27% in the same quarter last year. The quarter-over-quarter gross margin improvement was due to lower primarily lithotomic transportation service revenue, partially offset by low railcar utilization.

Treatment and disposal margin for the first quarter of 2010 was 40% down from 46% in the first quarter last year. This margin decline reflects the 44% decrease in disposal volume in the first quarter of 2010, compared to same quarter last year and lower contribution from our thermal recycling service. In the first quarter of 2010, we disposed of 119 tons of waste, as compared to 213,000 in the first quarter of 2009, of which 87,000 tons came from Honeywell.

Selling, general and administrative or SG&A was $3.6 million in the first quarter of 2010 and 2009. SG&A expense for the first quarter of 2010 includes the $423,000 charge related to the pending regulatory matter that Jim discussed earlier. Excluding this charge from our first quarter results, the 12%, decrease in SG&A reflects the lower sales commission, labor and benefits costs, and benefits from our on going cost control initiatives. Excluding the charge, SG&A was 16% of total revenue.

Our effective income tax rate for the first quarter 2010 was 41.5% up from 39.8% in the first quarter of last year. This increase primarily reflects the charge related to the regulatory matter that Jim noted earlier, which is not deductible for tax purposes.

Net income was $1.8 million or $0.10 per diluted share for the first quarter of 2010, as compared to $3.6 million or $0.20 per diluted share for the first quarter of 2009. Five to 11 summarizes our financial position and return metrics.

At March 31, 2010, working capital was $36.4 million, we exited the quarter with $34.1 in cash in short term investments and continued to have no term debt. Our return on invested capital for the 12 months ended March 31, 2010, with 13.2% and our return on total assets was 9.6%.

We have $15 million line of credit with $11 million available the remaining $4 million is pledged as collateral for a closure and post closure financial assurance obligation. Our credit facility expires in June of this year, and we are actively negotiating in renewal of existing line. As summarized on slide 12, we continued our quarterly dividend program on April 23, distributing $0.18 per share or $3.3 million to our stockholders.

With that, I’ll turn the call back to, Jim.

Jim Baumgardner

Thank you, Jeff. I’d like to now I’ll turn the call over to Steve Welling, Senior Vice President of Sales to provide a bit color surrounding the current sales and marketing initiatives and an update on the markets in which we operate. Steve.

Steve Welling

Thank you, Jim. If you turn to slide 13, you’ll see that US Ecology sales force is currently working diligently on a number of initiatives we fully expect will lead to increased revenues. First we are currently adding new offsite disposal and recycling options that will enhance service for our existing customers. This includes new alliances with (Inaudible), fuel vendors, catalysts smelters, and other providers of waste services, which were not performed our US Ecology site. We’ve recently established until the new off-site services management position to provide a dedicated resource and focused on this new service area.

Secondly, we are continuing to aggressively market US Ecology’s redundant over rail fleet, this includes bundled transportation and disposal services and some new auctions into non-US Ecology own disposal sites. We’re selling both our logistics expertise and high-quality rail equipment where it makes sense.

We’re also implementing new projects lead services to identify and potentially contract refinery turnaround opportunities much earlier in the selling cycle. We add a benefit here as that we also gain more visibility to the project pipeline much earlier in the process.

We’re also containing to expand our geographic reach for thermal services by marketing bundled rail, packaging and recycling services, and we’re currently moving tight bottoms and refinery catalyst the rail from multiple projects in the North East and the West Coast to our Texas facility.

Lastly, we continued to aggressively market our expanded Idaho radio active liaison permit and it dissolve our capability fear in Idaho. The project pipeline appears to be strengthening and our sales team is responding to more bid opportunities, and we’re working very diligent with the close multiple mid facts remedial projects.

While we haven’t seen the increase received with landfills yet, we are definitely seeing increase bid activity in the markets we’ve served. Also few larger projects have recently pop back on to the Radar Stream and we are tracking them very closely.

With that, I’ll turn it back to Jim.

Jim Baumgardner

Thank you, Steve. I will now turn the call over to, Simon Bell, VP of operations for update on key initiatives for our operations and capital spending in 2010.

Simon Bell

Thank you, Jim. As you can see on slide 14, we have several key operational and business initiatives underway that will pay the way for increased waste throughputs and operating efficiencies at our operating sides. Our significance following on multiyear permitting process at our Texas facility, we secured approval of 15, which provides and additional 2.4 million cubic hours of landfill capacity.

Construction of the first phase of Cell 50 is nearing completion and is on track to be open for wages received by May of 2010 this important milestone secures landfill capacity in Texas for years to come. We are also beginning the process of designing permitting and ultimately constructing new aerospace that are Idaho and Nevada facilities to ensure continued uninterrupted disposal operations for years to come.

With the eminent opening of Cell 50, in Texas all sites of adequate landfill capacity to manage on going and anticipated future rates received. We are also preceding with some very important capital projects that will expand our treatment in the cycling capability, specifically, in Texas we recently initiated construction on the prospects 6.2 million state-of-the-art treatment facility that will expand our processing capabilities and more than double our current capacity to support the growing demands for our treatment business. This new facility is expected to be completed by Q4 of 2010.

We are also in the process of finalizing design work on our new catalyst handling system, which will greatly enhance our capabilities and capacity to process catalyst to our thermal recycling operations. We believe that this system will give us a real advantage in bidding, winning and efficiently processing catalysts going forward. We expect to have the new system online by the end of Q3 2010.

Finally, I wanted to update you on our capital spending plan. Our 2010 capital spending is currently close to between $13 million and $14 million, which is approximately 40% to 50% higher than our 2009 capital spending plans. In Q1 2010, we spent $2.1 million in new capital expenditures, which is generally consistent with our plan. The majority of the 2010 capital expenditures were spent on land for construction in Texas.

With that, I’ll turn the call back to the Jim.

Jim Baumgardner

Thank you, Simon. Well, the first quarter was largely as we would expected with both base and event business continued to be sluggish, but not sequentially deteriorating. We processed record volumes of thermal materials during the quarter and we’re pleased with the continued improvement in operating efficiencies, increased capabilities and increased market penetration with thermal services line. However, we were disappointed at the average selling price necessary to achieve these volumes, which degraded revenue and margins.

Overall, we are starting to see increased bid activity for all aspects of our business, and we have received bidding inquiries on a number of projects that had been previously deferred. Disposal revenue under our Army Corps contract was up 40% year-over-year was slightly below our expectation for the quarter, but better then last year. We are seeing indications increased activity in this area, especially as we approach the summer field season.

Government statistics reported an up tick in industrial production levels in the first quarter. This increased production activity supports the increased bid activity we’re seeing and supports our expectation of increased volumes for the balance of the year. These positive of the data points may indicate increase future waste stream and volume as we tend to lag industrial production, it have a slight seasonable aspect to our business.

Again we are cautiously optimistic that we see in the bottom on volume and pricing, but only time will tell. It is for these reasons that we believe we will achieve our previously issued guidance range of $0.57 to $0.67 per diluted share. As we indicated during the last call, our guidance was based on a strongest second half the year and was now seeing evidence to support this expectation.

With regard to acquisitions, we continue to actively pursue acquisition opportunities that we believe would strategically complement our business. We’ve begun seeing increased activity in the number of opportunities being marketed and the credit market solution and private capital flows improve.

Our acquisition philosophy remains unchanged. We are targeting acquisition that will either allow us to expand services to existing customer and/or extend existing services to new customer. We remain absolutely committed to a disciplined acquisition approach by not paying too much and not buying an asset to don’t fit within our vision or core competence.

Despite to continuing challenging economic environment, we have bullish on the outlook for our company. We believe we are uniquely position to take advantage of improving industrial production in a more normal flow cleanup projects that have driven operating income and earnings in the recent years.

Our expanded problems have broadened a type of waste we can compete for expanding the population and job opportunities more than ever. While we cannot control these macroeconomic or market trends we are focused on those things we can control such as first-rate customer service, controlling our cost, building our robust waste handling infrastructure and approving our service offerings.

With that, I’d like to now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rich Wesolowski with Sidoti & Company.

Rich Wesolowski - Sidoti & Company

Jim, I was a little confused by a pair of your statements, and I apologize if I'm misquoting you, but I think it's just the gist. On one hand, early on in the prepared remarks, you had noted no real signs of rebound in the base business or event business, but then later on you seemed a lot more optimistic and I was wondering, are you bullish based on activity that you expect will arise or is that something you're seeing already?

Jim Baumgardner

I think we are not seeing the increase. As noted in our Q4 to Q1 performance were sequentially pretty flat, little change in which buckets things came in at quarter-to-quarter, but basically Q4 to Q1 was flat. We’re right now cautiously optimistic in seeing more activity is in the bid activity.

We’re seeing a number of projects that have been previously differed comeback now budgetary pricing. We’re seeing new projects that we hadn’t seeing in the past. We’ve seen this up tick in industrial production, which should in the next quarter or two resulting higher waster volume, the production level has increased, waste stream has increased. So I guess to say looking historically things seem to be bad little alone bottom. Looking forward, we’re actually seeing more activity in all the leading indicators that should drive our business in the future.

Rich Wesolowski - Sidoti & Company

Did you mention a change in the average selling price for the quarter?

Jeff Feeler

We did. This is Jeff. The blended average selling price increased 42% during the quarter, that’s predominantly because of the Honeywell project.

Rich Wesolowski - Sidoti & Company

Jeff, I had noted a surprising jump in your treatment and disposal revenue per ton since the year end 2008, even if I take out the results from thermal. The March quarter, for instance was about a third higher than what we're used to seeing from ecology throughout the past decade. First, does that trend directionally match what your figures say or is there a transportation piece that we can't see? Then, second, if it does accurately reflect the business, what exactly is going on there?

Jeff Feeler

Yes, Rich, it does reflect the business and again with the completion of Honeywell project, which was a lower per treatment revenue project. We’re going to see that increase just because -- how we cycle the Honeywell project.

Rich Wesolowski - Sidoti & Company

If we strip out the Honeywell transportation piece, the 25% or a third or whatever the number of T&D revenue, that was lower per ton, as well?

Jeff Feeler

Yes.

Rich Wesolowski - Sidoti & Company

Then if I look at the numbers I'm coming up with to say, for the first quarter versus what you have reported previous to Honeywell, that's just the ongoing inflation in the business?

Jeff Feeler

I can’t visualize exactly what it is you’re calculating, but that would be the general trend is that we’re not seeing overall AFP is increasing dramatically or decreasing pretty much holding flat outside of the thermal recycling business.

Operator

Your next question comes from the line of Ted Kundtz with Needham; please proceed.

Ted Kundtz - Needham

Could you give us a little more color on the outlook for the pricing in the thermal side? Is it starting to -- has it bottomed, and do you expect it to start improving again, or anytime soon or it's just going to be kind of a very gradual process here?

Steve Welling

At this point, I’m not sure we can predict, what’s going to happen six months from now, that the market has really been a spot market where were pricing each job at that moment as the opportunity arises and what we are seeing is basically been flat the last three or four months. We haven’t had an opportunity on the most recent bit to raise price.

Ted Kundtz - Needham

So right now it's just holding steady, which is still down from year ago levels, right?

Steve Welling

Correct.

Ted Kundtz - Needham

So, you’ll still have that adverse comparison in the next quarter?

Steve Welling

Yes.

Ted Kundtz - Needham

Could you talk a little more about the refining business? How is that starting to trend?

Steve Welling

As Jim reported earlier, we had a record volume quarter in the first quarter, that’s the most materially processed since we opened the units. We’re working diligently to try to maintain that level of volume, although again it’s a matter of seasonality and what available projects there are. Look we’re working to close as many base business streams as we can to even out the lumpiness of business, but we’re still going to be relaying on the projects to keep the units maximized.

Ted Kundtz - Needham

Yes, I was just wondering, are you seeing a share gain there, or you think the refining business is actually starting to turn up as a whole? Not just specifically for you, I'm just talking for the industry?

Steve Welling

Strictly in opinion, I would believe that there’ll be a share gain more than a general market increase.

Ted Kundtz - Needham

And, Jeff, on this regulatory charge, is this a one-time issue, the 423,000 in the quarter, is that a, it says for a proposed fine, is that complete or is that the total amount?

Jeff Feeler

We don’t know if it’s the total amount, but the amount of the charge that we accrued during the quarter is an estimate. We are having discussion ongoing with the EPA to finalize the matter. We would anticipate that it will be finalized in second quarter.

Ted Kundtz - Needham

Okay. Great. Thank you. And what's your expected tax rate for the balance of the year, then?

Jeff Feeler

Right now, we are estimating that we’ll be right around 41% for the year.

Ted Kundtz - Needham

For the year as an average?

Jeff Feeler

Yes.

Operator

Your next question comes from the line of Al Kaschalk with Wedbush Securities.

Al Kaschalk - Wedbush Securities

Just a clarification on the charge, are you excluding that for purposes of the guidance, or how should we think about that little detail?

Jeff Feeler

No, it's not excluded for purpose of the guidance.

Al Kaschalk - Wedbush Securities

Okay. Slide seven, you provided a pie chart on disposal revenue for the quarter versus the prior year. How do you anticipate that picture to change or pie components to change for 2010? Do you expect that to generally play out as it's laid out for the quarter, or what components of that, given your outlook and commentary, do you expect to be a larger piece?

Jim Baumgardner

Are you talking about the percentage of the disposal revenue Al, or are you talking about the change quarter-to-quarter by customer group?

Al Kaschalk - Wedbush Securities

The percent by disposal revenue, the actual pie chart there. So just trying to appreciate which component may be getting a little bit better throughout this year versus maybe another one that may be slowing down, so I know obviously this would be ex-Honeywell.

Jim Baumgardner

Right. Certainly another expectation and built into our plan that as we’ve stated in the last call that Event business will pick up throughout the year, so I could see private clean up and government clean up pieces of pie, the percent of the business increasing as we go forward and of course that will change the percentages of that, but on absolute basis I also expect some of our broker and other industry business to improve as well during the year. But I think fundamentally, I don’t Steve or Jeff you could add this comments, but I think the biggest change I think I would expect over the next three quarters is, we feel that Event business private and government cleanup is returning to better levels than '09, [shall I say now].

Al Kaschalk - Wedbush Securities

And are there other contracts or projects that are not repeating in 2010 that we should think about, because the broader question would be, how do you expect volumes to trend, given that they were down about $7 million for the quarter when you exclude Honeywell. So how do we think about 2010 volumes as we sit today?

Jim Baumgardner

Excluding Honeywell, I think we expect 2010 volumes to be higher then 2009 as a consequence of our expectation that the economy gets better through the year and the Event project come back online. I’m not sure if I answered the first part of your question, where there other projects expect to drop. The thing I would say about our business is, at any point in time you know discrete project cleanups are finishing up and new ones are starting and these would range in size from 200 tons to 15,000 tons. And they come in, and they come in at different rates, and they start and finish at different time period. So that you will always in state of things are dropping off and staring up and all that, but I don’t know that right now that we have a number of large projects that we expect to drop of given that --

Al Kaschalk - Wedbush Securities

I was just trying to get at, Jim is, Honeywell and Molycorp, and a couple of big contracts and more of a refresher if there were other contracts like that that were going (Inaudible)?

Simon Bell

No, there was nothing of that size, even close to that size, last year.

Al Kaschalk - Wedbush Securities

Okay, thanks. Then, finally, just what I hear you saying is that, are you very excited about the amount of bidding activity that's taking place, but things just haven't punched across the goal line to commence work. You anticipate that to occur, given the economy and the trends and maybe some additional dialog. But is that a fair recapture of what we're seeing here and hence the guidance left intact?

Jim Baumgardner

That is a fair representation.

Operator

And your next question comes from the line of Tim Petrycki with Jesup & Lamont.

Tim Petrycki - Jesup & Lamont

Just in terms of pricing, as your big products come back online, have you seen any change in pricing philosophy, either from yourself or from any of your competitors?

Jim Baumgardner

If we are talking about the Event, we’ve always been aggressively competed for 20 years so you do what you need to do to try to win the work so we haven’t seen anything different in terms of pricing on Event work, base business has been relatively flat and we’ve haven’t seen changes there over the last year.

Tim Petrycki - Jesup & Lamont

And then, in terms of, as Al just said, I mean, in terms of kind of coming off this bottom, to trying to feel the order of magnitude. I mean, is this -- are we creeping off the bottom or do you really see a nice progression of bidding activity from the beginning of the quarter through the year? I'm just trying to get a sense if this is really momentum or just one or two legacy things that will pop back up?

Jim Baumgardner

Yeah it is tough to quantify that, what I would tell you I mean we cannot predict with any precession law, bidding activity will turn to revenue at what scale and what period, but what we can tell you is that obviously in order force ultimately to get waste through the gate we got to be out there bidding work. The more work we bid the better chances that we are going to be able to increase volumes in the landfill, so I think as we said in our year-end call, we kind of expected our slow start as we did see in Q1 that was not fundamentally worse than Q4, we expected for that to improve in Q2 and strengthen in the second half.

I think we’re still stating behind that, I don't have reasonably today that there is a huge bounce back coming. I had one caveat, these projects are very difficult to predict, if you would have land the project that one of the moves dashed, well, guess what, if you moved 30 or 40 or 50 or 60,000 tons in a month, because the project had to move fast and it’s funny people have been at a, let's wait and see, wait and see, but the dynamic we often see is when they want to move, they want to move yesterday.

So fundamentally I think it's going to be, I don't think it’s a snapback as much as I think it's work out of it with the caveat of these projects as you guys know create the lumpiness in our business that is so difficult to predict. But that we love because of the operating leverage of the business, I don't know Steve, did you have any other additive?

Steve Welling

No, you had explanation to…

Tim Petrycki - Jesup & Lamont

Okay, on the Westinghouse front, any update?

Jim Baumgardner

No, we continued to -- the Westinghouse exceptions have been submitted to the NRC we supported Westinghouse and NRC questions and we continue to wait for the NRC to issue their decision and then if that decision is positive of course we’ll work with Westinghouse on a contract, we’ll propose the contract we don’t have a contract with Westinghouse yet. And we'll work with Idaho relative to their approval, so no real news, it’s just still in the works.

Tim Petrycki - Jesup & Lamont

In sense, I'm surprised no one's asked this yet, but any update on the acquisition front?

Jim Baumgardner

Yeah, I mean I think as we indicated in our prepared comments we are seeing more opportunities. We are engaged with several parities at a time in various levels of discussions nothing we can disclose today, but continue to be reasonably optimistic that there are deals out there to be done and we are actually allocating a fair amount of internal resources to it.

Tim Petrycki - Jesup & Lamont

This has kind of been an ongoing statement out of you guys. I mean, is it a price issue? What seems to be the statement point? I mean, is it the same guys that you've been talking to for the past nine months, or is it just…?

Jim Baumgardner

Yeah, we from time-to-time we’ve reengaged people we’ve spoken to before and with regard to where deals are and why we walk away from a deal or the seller takes the asset off the market, it just varies so broadly it depends on a specific fact than any circumstances, I mean you can name the reason why deals though will get better, we’ve seen then not about the scope of what we have seen.

Tim Petrycki - Jesup & Lamont

Just finally, in terms of the CapEx, can you give a little detail into allocating that CapEx to each of the projects?

Jeff Feeler

Can you restate the question again?

Tim Petrycki - Jesup & Lamont

The $13 million to $14 million in CapEx, can you allocate that CapEx across the three or four products that you mentioned?

Jim Baumgardner

Maybe the building and landfill and construction and other equipment I guess.

Simon Bell

This is Simon Bell. The majority of the spending will be on treatment capacity, processing capacity and landfill capacity. So to break that down, I don’t have the exact numbers in front of me, but I think the treatment capacity, I think is around $7 million of the $13 million. I think landfill capacity might represent $3 million, so about $10 million of the $13 million is represented by the treatment and landfill capacity. Then there’s a whole host of replacement equipment, other processing equipment and specialty equipment that might represent the remaining $2 million or $3 million.

Tim Petrycki - Jesup & Lamont

And was treatment just as an expansion or is this a new treatment that you’ll be offering?

Simon Bell

This is an expansion. This is a new treatment building that will supplement our existing treatment capacity in Texas, effectively doubling our treatment capability.

Tim Petrycki - Jesup & Lamont

And currently you're running at what kind of utilization on the current capacity?

Simon Bell

It’s a lumpy business as Jim mentioned. We are running at the high utilization right now and not necessary we’re constantly running in a 100% utilization, but we want to be able to respond to those surges and business that occur and that can be a change with the current infrastructure, so certainly we’re running at a high capacity.

Jim Baumgardner

And I’d just add a comment is that, part of our justification for adding incremental treatment capacity in Texas is because we believe if we added not only can we take -- we believe there’s a market to support the addition of additional treatment capacity.

Tim Petrycki - Jesup & Lamont

Currently or on a rebound?

Steve Welling

Currently both, growth is the better answer that’s right.

Jim Baumgardner

Currently and we believe, Simon talked about, we’re all went to 100% everyday or every week, but when you run at high utilization rates and opportunity comes up to take up 10 loads of both liquids, but yeah, take up next week, we struggle with how do we respond to that right now that’s fine.

Operator

Your next question comes from Eric Prouty with Canaccord.

Eric Prouty - Canaccord

First some of the treatment gross margin, could you just describe the pressures on that and maybe a sign of a waiting on both the pricing impact in gross margin and kind of underutilization of asset impact in the gross margin?

Jeff Feller

Sure, Eric. Our disposal gross margin during the quarter was really impacted by three areas and that’s going to be the thermal pricing in related contribution to the thermal unit. Also service mix and landfill, more specifically we had less direct landfill during the quarter and more treatment and that’s going to have an impact on the gross margin percentage. We also had the slightly lower disposal volumes. I think, as we look at the disposal gross margin going forward, we’re still expecting for the balance of the year to be targeting that 45% mark for disposal gross margins as volumes do return.

Eric Prouty - Canaccord

Okay, great. And then on your SG&A, obviously if we take out the charge in there you held the number fairly steady during the low three per quarter, low $3 million per quarter. With all these new initiatives that you are articulating on, can we expect a creep up in SG&A through the remainder of the year?

Jeff Feller

I would say that, as we improve our financial performance, we will see some increase in there primarily from incentive compensation when it is not been included in this first quarter. As far as absence just normal SG&A spend we have cough controls on price and we are very cognizant on that I would expect it to be however right around that low 3 million.

Jim Baumgardner

With one added comment because of the way we account for some of the cooperate development initiatives too if those -- if a couple of cooperate development initiatives that we’re working on today get legs we could see charges later in the year so shooting with our merger and acquisition and cooperate development activities.

Eric Prouty - Canaccord

Okay, as they get expensed as incurred now?

Jim Baumgardner

Yes.

Eric Prouty - Canaccord

And then, finally, on your Event business, again, has there been any sort of consistency that you guys are tracking where, say we take the first quarter and the first month of this next quarter, I mean, have you seen better pricing or better margin to you through the quarter, or is it still been very competitive throughout this time period so far this year?

Steve Welling

It has remained relatively flat, like I said few minutes ago on the Event work, it depends on where the job that happens next is located and we look at the competitive analysis in terms of the other disposal sites, taxes in the states where it could go and transportation. So it’s each job being case-by-case.

Eric Prouty - Canaccord

Okay, great. And then just looking back, then, to the first question on the treatment gross margin, is the real driver there going to be increased utilization of your fixed assets to drive that gross margin? How much of that getting back to that 45%, are you expecting an increase in pricing or is it really just driven by better utilization with higher volumes?

Jeff Feeler

It’s going to be better utilization with higher volumes as well as the mix.

Eric Prouty - Canaccord

Okay, as well as a better mix. Okay, great. Thank you very much.

Operator

Your next question comes from the line of Mike Salinsky with RBC Capital Markets.

Mike Salinsky - RBC Capital Markets

Just to follow-up on that last question or that last set of questions there, some of these new initiatives you've got planned, like offsite services, how quickly can we expect to see an impact on some of the cost side or on the top line to your results?

Jim Baumgardner

Steve, I’ll let you answer this question expect to say, my experience with new business initiatives seem to kind of take more time than you’ll think and they kind of fades in over time. So my guess and my thinking is it will vary in by a number of things, but my guess is that, I wouldn’t, you wouldn’t start to see things probably may be we start to see things in the second quarter, but the impact really start to show up in the second half.

Steve Welling

Right, three to six months our new service line manager just started that position (inaudible), just two weeks ago, so three or six months would be the best guess at this point.

Mike Salinsky - RBC Capital Markets

Can I also give us little bit of color as to maybe why some of the projects that were deferred are sort of coming back now? Is it just pent demand that cannot be relating long or is it too hazardous, or is it new construction, new electric projects or anything like that?

Steve Welling

I am not sure I can put a sharp point to that exactly and there some have come back and there’s been different reasons in every case. So I can't point you to any index or economic charge that would give you reason why these projects that were deferred are now back other than potentially companies feeling better about their future and now willing to spend the money.

Mike Salinsky - RBC Capital Markets

Guess I'll ask one -- no one has asked this one yet. Can you maybe tell us a little directionally or actually could you just tell us a little bit about how much Honeywell might mean to 2Q '09, so we can get a little preview there? Or is that not possible?

Jim Baumgardner

Yes, but I prefer to do, Eric, there is I mean I think as we go through the quarter and we have comparative information, we’ll talk about the impact of Honeywell in Q2 ’09 and Q2’10. So for the quarter it can be comparable. One thing we have to remember about the numbers we’re providing on Honeywell, those are estimates based on our management accounting systems and making certain decisions about where cost allocating would have been spent. So I think what we can say is, if I can do the math and Jeff help me, I think we said in 2009 Honeywell represented $0.23 per share and we can tell you that $0.06 of that was Q1, at least for the next two quarters you have the difference between six and 23 it’s being less than what happened last year.

Operator

And your next question comes from the line of Michael Hoffman with WSI.

Michael Hoffman - WSI

If I could follow back on the pricing of the thermal recycling side, who's the cart and the horse here, are you guys leading the price down in the market, or are there other players in the market taking price and you're holding share by having to follow?

Steve Welling

Some of both, what’s happened is we’ve did jobs and it’s been told by the Generator that we’re too high or we’re going to lose the work. So we’ve had to lower price in order travel awards. So that makes me to believe the other side, and potentially lowering the price first.

Jim Baumgardner

Likewise we have gone and taken the work away because the Generator said, look if you could do it for X stores and we’ve not been able to go and take work away. So I think it’s a combination of factors, I do think that we are at or near pricing level where people start thinking we are hard about, can you go below these levels. So while we’ve seen deterioration, I can’t say that across the Broad, we’ve seen the market acting irrationally.

Michael Hoffman - WSI

Who would be the principal players that are being aggressive on price as they take it down? Who are you up against?

Steve Welling

I can give you types of company, they prefer not to give you specific, but there is other company that operates well on disruption units. We also compute against as it is waste incinerator and also medal smelter recyclers. Those are really the categories that companies that we’re compete again.

Michael Hoffman - WSI

Is there one area that's been more aggressive than another?

Steve Welling

I would say that, no.

Michael Hoffman - WSI

Then just to clarify on the tax rate, I mean, if you pull the $423,000 out of G&A, since there is no tax effect, I can just drop it below the operating line that lowers your taxes into the sort of 36.5% range. Would that be the normalized tax rate for the rest of the year, or is it going to be up in the 40s?

Jeff Feeler

No, it’s going to be close to 41%.

Michael Hoffman - WSI

For 2Q, 3Q, 4Q?

Jeff Feeler

Yes

Michael Hoffman - WSI

Then on the guidance, actually before that I guess the industrial production sort of you’re being encouraged by industrial production, but is that more of an observation of early reporting of industrial companies as opposed to any incremental -- even if its a marginal positive slope in the direct of waste volumes, it’s more of an observation of activities. Railcar shipments are up 20%. They’re shipping raw materials. Someone’s going to start making something in that kind of thing?

Jim Baumgardner

Yes, it’s an observation on that waste to the date

Michael Hoffman - WSI

So as you think of your guidance, how much is in there that’s hopeful of that observation?

Jim Baumgardner

We can break it down like that, I mean what we’ve planned for our guidance was a slower start, which we saw basically Q4 to Q1 being flat as we projected getting improvement for the balance of the year with the second half, being stronger than none of the first half, but probably even Q2. We will have percentage broken out by and how much of it based on the increased of up tick and percentage in industrial. Production will just not detail with the forecast.

Operator

(Operator Instructions) Your next question from the line of Alan Brochstein with AB Analytical Services

Alan Brochstein - AB Analytical Services

I just wanted to follow-up on the last questioner's line of question regarding the competition, I guess. How fragmented is that market? You show that there are several different types of competitors, but what kind of market share generally do you guys have?

Steve Welling

We handled within the thermal service line. We called legacy call sub service lines. We handle take bottoms from oil refineries, which are basically oil bearing as its ways we recover the oil and then we saw the oil, and that’s market we compete against other thermal disruption units, steel blunders and the incinerators.

Then the second service volume within our thermal is just taking medal bearing catalyst from refineries and three time material and then we’re selling the material force medal value and that’s the different set of competitors then recycling incinerator would not take that, that would be a medal recycle or some sort of smelter.

Alan Brochstein - AB Analytical Services

So, I guess Clean Harbors would fall into like just the incinerator aspect, right?

Steve Welling

That’s correct.

Alan Brochstein - AB Analytical Services

I'm just trying to get a better understanding just in general, this pricing has comedown obviously a lot. I don't know obviously on the demand side, there's pricing issues due to the economy, but I'm wondering if there's anything going on the supply side. I know there's been a little bit of capacity added that -- what's your view on that?

Steve Welling

For the tank bottoms there’s been capacity that we’ve added with our new units, with our competitor. In Texas we added additional capacity for their thermal disruption units. So tank bottom is the capacity added in the last few years.

Jim Baumgardner

I think lease through later part of 2009, we saw both the combination of increase capacity as we had in the market, as our competitors increased their capacity. So we saw both supply side increase of capacity and at least through 2009 we saw week demand, which is force to bidding down the pricing curve now. Demand for our service did increase I think it Q1, certainly over Q1 last year and over Q4, but at these much lower prices.

Alan Brochstein - AB Analytical Services

I'm just not that familiar with this part of your business, but why was everybody adding capacity? Was it because it was tight before and pricing had been rising?

Jim Baumgardner

While the other capacity they gets added to is, comeback to -- why I think people, the capacity hits the market is, but wasn’t just adding capacity. We saw as the market because we believe that operated thermal recycling operation at the land field gives us some unique and distinct advantages.

So that was why we entered the market in 2008, but remember these are largely fixed cost operations and incinerator back in ’06 or ’07, whose run it at 96% utilization taking material that it would rather take with the high flammability or high burn and it was in term of Btu. They didn’t come in and look at a lot of his material because it not necessarily ideal for incineration per say, but I think as their utilizations were down, they’re looking to keep their incinerator in a high utilization.

So they come downstream if you will, recognizing that the incremental contribution. Some incremental contribution is better than none, so you saw us online, you saw one of our other competitors increase their capacity at their fixed facility as well as and adding mobile units out there in the marketplace and then you saw incinerators and even some cases he met killed, start to compete per waste they historically have it. There are lot supply adjacent that market that shrunk a little bit now it seems to be coming back a little bit, but a still a lot of supply chase in.

Alan Brochstein - AB Analytical Services

Where is pricing compared to two or three years ago?

Jim Baumgardner

It’s down I would at least 35%.

Alan Brochstein - AB Analytical Services

How much of your revenue, this $20 million you reported this quarter, approximately, would you say falls into this incineration type of thermal aspect, as opposed to other forms of disposal?

Jim Baumgardner

We had about $2.5 million in revenue.

Alan Brochstein - AB Analytical Services

Then one last question, Mr. Baumgardner, you obviously came back to the company last year, if I’m not mistaken, besides the name change, any other things that you’re (technical difficulty)?

Jim Baumgardner

Yes, Jeff, I’ve missed the last part of the question as part of the question, any other things on that,

Alan Brochstein - AB Analytical Services

What types of changes you are either contemplating or have already made that might not be visible to shareholders?

Jim Baumgardner

Yes, I think I’m fortunate in that US Ecology has historically made a very well done, very focused, good strategy company that the things we are doing today are kind of more what we’ve done, we’re focused on organic growth, adding infrastructure, expanding our permits, given the right people in the right job and those continue that continue to drive the efficiency of the side, and then I think the new part of the strategy and today I recognize it’s just been talked, but rest assure there is a lot of activity here, there has been I think a real renewed focus on acquisitions.

We have great assets. We’ve got great people running those assets, the legs of Steven and Simon and their respective teams. We know we are doing the landfills and operations we have today, there is not secret recipe I have for that, but what we have been focused on right now, half of the guys are shaking their head here, but we have been focused on acquisitions probably more in the last six to nine months than we were previously.

Operator

Your next question comes from line of Rich Wesolowski with Sidoti & Company.

Rich Wesolowski - Sidoti & Company

Steve, on the subject of selling transportation services, you had mentioned high quality rail assets, are you leasing rail equipment or are you actually selling part of your fleets?

Steve Romano

No, what we are doing is we are utilizing our gondola fleet on projects where it may make sense to go elsewhere within US Ecology un-disposal sites.

Rich Wesolowski - Sidoti & Company

Okay so you are selling the logistic, you are not actually selling the piece of equipment?

Steve Romano

Right, yes, correct.

Operator

(Operator Instructions) There are no further questions in queue at this time.

Steve Romano

Okay. Well, thank you all for attending.

Jeff Feller

Thank you

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation; you may now disconnect and have a great day.

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Source: US Ecology, Inc. Q1 2010 Earnings Call Transcript
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