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US Ecology, Inc. (NASDAQ:ECOL)

Q2 2010 Earnings Conference Call

July 27, 2010 10:00 AM ET

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 and Company

Jamie Sullivan – RBC Capital Markets

Al Kaschalk – Wedbush Securities

Patt Mclaughlin – UBS

Eric Prouty – Canaccord

Michael Hoffman – Wonder League Securities

Operator

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

I would now like to turn the conference over to our 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 and Senior Vice President of Sales and Marketing, Steve Welling.

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 at our website at www.usecology.com.

Now I’ll turn the call over to Jim.

Jim Baumgardner

Thank you, Jeff and good morning, everyone. As outlined on our agenda on slide four of our webcast PowerPoint presentation. I’ll start this morning’s call with a quick overview of the quarter results released earlier today. After which time I’ll turn the call back to Jeff to provide a more detailed view on the financial results. Then I’ll let Steve Welling provide a general market update including an overview of our recent award announcement with General Electric.

I mean, I’ll close today’s call and our prepared remarks with an update on the outlook for the balance of 2010. As noted on Slide 5, and as expected, the second quarter continued to be sluggish. But it did show signs of improvement. Our recurring business was up 7% as compared to the second quarter of last year and up 3% on a sequential basis when compared to the first quarter of 2010. However, our event business was down 48% during the quarter when compared to the second quarter of last year primarily due to completed Honeywell project in 2009.

When the revenue contribution from the Honeywell is excluded from the second quarter of 2009, our event business was only down about 1% in the second quarter. Sequentially, the event business was down 12% compared to the first quarter of 2010 due to the completion of a project in Q1 that was not fully replaced in Q2. Despite the softness in the event business during the quarter, our Q2 2010 pipeline is robust. Several deferred projects are expected to shift in the second half as is the recently announced GE as an inert project.

For the second quarter of 2010, net income was $2.3 million or $0.13 per diluted share as compared to $3.5 million or $0.19 per diluted share in the same quarter last year. To help with this quarter’s earnings in perspective, we estimate that Honeywell contributed $0.09 per share for the second quarter of 2009. So our core business excluding Honeywell generated $0.13 per share which was actually 30% better than the EPS generated in the same quarter last year excluding Honeywell again.

Q2 2010 was also better than Q1 of 2010. When we posted $0.10 per share compared to the $0.13 in Q2. With that quick overview, I’ll turn the call back to Jeff to provide a more detailed overview of the financial results released earlier today.

Jeff Feller

Thank you. Jim. As you can see on slide six of today’s presentation, second quarter 2010 revenue was $19.8 million as compared to $36.4 million in the same quarter last year. This reflects an 83% quarter-over-quarter decline in transportation service revenue and a 19% decline in treatment and disposal revenue.

Declines in total revenue were primarily a result of the completion of the Honeywell in in October 2009. Honeywell contribute to $18.5 million in total revenue or 51% of total revenue in the second quarter of 2009. Excluding the Honeywell revenue contribution from the second quarter of 2009, total revenue in the second quarter of 2010 was up 11% from the same quarter last year.

As Jim noted, treatment and disposal revenue from recurring customers or base business increased 7% in the second quarter of 2010 over the same quarter last year. An increased shipments from our refinery, other industry, government and broker paid customers. Event business was 48% lower in the second quarter of 2010 than the same quarter last year reflecting the completion of the Honeywell project.

Excluding the Honeywell project, Event business was down 1% with that of the prior year. Average selling price for treatment and disposal services which excludes transportation services was 53% higher than the same quarter last year. This increase was the result of the completion of the low-priced Honeywell projects in normal service mix partially offset by lower thermal recycling pricing.

On Slide 6, you can also see that our Base business has been trending upward for the last six quarters and represented 68% of revenue in the second quarter of 2010, the highest level we’ve seen since tracking this metric. This compares to 50% in the second quarter last year. Event business which has been more significantly impacted by the adverse economic conditions decreased to just 32% of treatment and disposal revenue in the second quarter of 2010. Slide seven breaks down treatment and disposal revenue for both Base and Events business by customer category.

Our government clean-up business increased 32% during the second quarter of 2010 over the same quarter last year. This reflects a field services contract or we provide a logistics and project management oversight, broker and disposal services to an alternative disposal facility. Total revenue from the Army Corps including transportation services increased to $3 million 17% of total revenue in the second quarter of 2010 compared to $2.6 million or 7% of total revenue in the same quarter last year. The increase in total revenue from the Army Corps is due to the transportation services we began offering on one of the Army Corps projects partially offset by lowered disposal revenue. Backing our transportation related services, treatment and disposal revenue from the Army Corps was 7% lower in the second quarter of 2010, compared to the same period last year which we believe reflects timing.

Despite the slow start to the Army Corps business in 2010, we remain confident that we will see growth in our Army Corps business in 2010 over that of last year. Our other industry customers include electric utilities, steel mills, chemical and technology manufacturers, and non-broker industry. Second quarter 2010 treatment and disposal revenue for our other industry customers increased 16% over that of last year. This increase reflects higher shipments across a broad range of industrial-based customers, including higher steel mill business.

Our waste broker business increased 3% in the second quarter of 2010 over the same quarter last year. This increase was a result of more thermal recycling jobs being sold through waste brokers during the quarter and in the second quarter of 2009. Excluding the brokerage thermal recycling projects, our broker business was up 1% in the second quarter of 2010 compared to that of last year.

Our rate-regulated business in Richmond, Washington was 3% higher in the second quarter of this year than the same quarter last year. This reflects the timing of revenue recognition. Our refinery business declined 20% in the second quarter of 2010 over the same quarter last year. This reduction reflects the lower average selling price of our thermal recycling services as well as lower volume.

Treatment and disposal revenue from private cleanup events decreased 95% in the second quarter of 2010 over the same quarter last year. This large reflects the completion of the Honeywell cleanup site.

Continuing onto slide nine, gross profit was $7.1 million in the second quarter of 2010 compared to $9.1 million in the second quarter of 2009. Gross margin was 36% in the second quarter of 2010, up from 25% in the same quarter last year. This quarter-over-quarter gross margin improvement was due to lower levels of hazard transportation service revenue and service mix.

Treatment and disposal margin for the second quarter of 2010 and 2009 was 44%. Treatment and disposal margin for the second quarter was negatively impacted by our thermal recycling service which continued to see declines in average selling price. In the second quarter of 2010, we disposed of a 118,000 tons of waste as compared to 228,000 tons in the second quarter of 2009. The second quarter of 2009 waste disposal from Honeywell was approximately 105,000 tons.

Selling general and administrative expenses or SG&A was $3.3 million in the second quarter of 2010 compared to $3.4 million on the second quarter last year. SG&A expense for the second quarter of 2010 included an additional $74,000 charge related to the pending regulatory matter with the US Environmental Protection Agency discussed last quarter. But quarter over quarter improvement in SG&A was partially upset by increases in employee medical benefit cost, business development expenses, and higher board of directors cost.

Our effective income tax rate for the second quarter of 2010 was 39.9% up slightly from 39.8% in the same quarter last year. Net income was $2.3 million or $0.13 per diluted share for the second quarter of 2010 as compared to $3.5 million or $0.19 per diluted share for the second quarter of 2009.

Turning to year to date results on slide 10 revenue for the first half of 2010 was $39.4 million down from $71.3 million on the first half of 2009. Revenue contribution from the completed Honeywell project represented $33.9 million in the first half of 2009. Excluding the Honeywell contribution, total revenue was up 5% in the first half of 2009 over the same period last year. Base business was flat in the first half of 2010 when compared to the same period last year. Event business which includes the Honeywell project declined 41%. Excluding Honeywell, event business was up 8% with growth in our government refinery and other industry customers.

Slide 11 breaks down base and event business by customer category. Our other industry category grew 26% reflecting the remedial cleanup project with an aluminum manufacturer that was completed in the first quarter of 2010 and increased from numerous industrial customers. Revenue from our government customers increased 12% as a result of the field services job we discussed earlier year to date 2010 treatment and disposal revenue from the army corps was flat with that of 2009. Our broker and regulated businesses increased slightly in the first half of 2010 up 3% and 1% respectively. Revenue from our refinery based customers was down 15% in the first half of 2010 as compared to the same period in the prior year. This decline reflects the continued pricing pressure on our thermal recycling services partially offset by increased volume. Our private clean up customer category was down 96% reflecting the completion of the Honeywell contract last year.

Continuing on to slide 13 gross profit was $13.7 million in the first half of 2010 compared to $18.7 million in the first half of 2009. Gross margin was 35% in the first half of 2010 up from 26% in the same quarter last year. This improvement was due to lower paths through transportation service revenue. Treatment and disposal margin for the first half of 2010 was 42% compared to 45% in the first half in 2009. This declined in treatment and disposal margin for the first half of 2010 was primarily due to the decline in the average selling price for our thermal recycling services. In the first half of 2010 we disposed of 237,000 tons of waste as compared to 441,000 tons in the first half of 2009.

In 2009, the first half waste disposal from Honeywell approximated 192,000 tons. SG&A was $6.9 million in the first half of 2010 compared to $7 million in the first half last year. SG&A for the first half of 2010 includes accumulate $497,000 charge related to the pending regulatory matter with the EPA discussed last quarter. Excluding this charge from the first half result, SG&A would have been 8% lower reflecting lower sales commission, labor cost, and other corporate administrative activity although partially offset by increases in business development expenses as we continue to allocate resources to identifying, evaluating, and attempting to acquire additional assets.

Our expected income tax rate for the first half of 2010 was 40.6% up from 39.8% in the same period last year. This increase reflects the regulatory find that is not deductible for income taxes. Net income was $4.1 million or $0.23 per diluted share for the first half of 2010 as compared to $7.2 million or $0.39 per diluted share in the first half of 2009.

Slide 14 summarizes our financial position and return metrics. At June 30th we had working capital of $33.2 million. We excited the quarter with $32.3 million in cash and short-term investments. They continue to have no term debt. Our return on investment capital for the trailing 12 months ended June 30, 2010 with 12.8% and our return on total assets was 8.7%. During the quarter we renewed our revolving credit facility for an additional three years increasing our capacity from $15 million to $20 million. At June 30th we had $16 million available under this line of credit with the remaining $4 million being pledged as collateral for closure and post-closure insurance obligations.

As summarized on slide 15 we continued our quarterly dividend program on July 23rd distributing the $0.18 per share or $3.3 million to our stockholders. With that I will turn the call back to Jim.

Jim Baumgardner

Great, thank you, Jeff. Now, I turn the call over to Steve Welling Senior Vice President for Sales and Marketing and Steve’s going to provide a brief general market update and an overview of our recently awarded contract with General Electric, Steve.

Steve Welling

Thank you, Jim. General market conditions appear to be improving albeit slowly during the second quarter of 2010 we saw an uptake on base business which is consistent with US Industrial production trends. Remedial project work or what we call event business remains soft as you heard but definitely appears to be improving. We continue to receive bidding opportunities in this quarter that we are confident will materialize into landfill receipts later this year. Despite not seeing increase volume during the second quarter, our pipeline is improving and we believe disposal volumes will increase in the second half. We have also entered the seasonally low period for thermal recycling services as refineries generally focus on production instead of maintenance activities during the busy summer months. Thermal recycling service pricing continued to be weak in the second quarter and we did not expect to see significant improvement in this area for 2010. The landfill business remains competitive. However, pricing does remain stable. Now I would like just to spend a couple of minutes discussing the recent award US Ecology received from General Electric.

If you turn to slide 16 on June 30th we announced that our company signed a contract with GE to provide disposal services for its upper Hudson River clean-up project. This contract runs through December 31, 2010 and is specific to the stock-piled material left over from the pilot phase of the dredging project which was completed in 2009. Public documents have estimated there is approximately 240,000 tons material stock-piled at the Hudson River clean-up site. Our company is one of the three disposal facilities selected to receive this stock-piled material. Our contractors per landfill disposal services only and we are not providing transportation and logistics services. Currently, we anticipate shipments to commence in August potentially continuing in to the fourth quarter.

While we are unable to precisely estimate the volume we can expect to receive under the contract, GE has indicated the planned to ship our facility approximately 100,000 tons or more. The ultimate line will be dependent of GE shipment plan, our performance under the contract, and other factors so really there is no guarantee of volume that we can make at this time. We are however very pleased to be working with GE on this important project and we believe that the successful completion of our large Honeywell project and our robust waste handling infrastructure contributed to US Ecology selection by GE is one of the key disposal sites and with that I will turn it back to Jim.

Jim Baumgardner

Thank you, Steve. Now I will turn your attention to slide 17 that discusses our outlook for the remainder of 2010. The first half of 2010 is largely gone as we had expected with sequential improvement quarter over quarter but an overall continued sluggishness for both base and event business. While reported results for the first half had been slightly less than we had planned, as certain projects continue to be delayed we are continuing to see increase bid activity and have received bidding queries on a number of projects that are either new or previously deferred.

The pipeline looks very healthy and scheduled shipments have created increased confidence in a stronger second half. Based on the factors discussed above plus the planned GE second half shipments, we believe that we will achieve our previously issued guidance range between $0.57 and $0.67 per diluted share. Train quickly to capital spending. We had previously issued capital spending guides of between $13 and $14 million. However the direct result of the increasing pipeline and number of potential projects, we are accelerating construction of additional landfill capacity at our Beatty, Nevada facility which will add $2.6 million to our 2010 capital spending. Therefore, we now expect 2010 capital spending to be between $15.6 and $16.6 million. Year to date we spent $4.9 million on capital spending.

Our planned landfill expansion in Texas will be complete in the third quarter and the new Texas treatment stabilization building is on schedule and will be complete early in the fourth quarter. Despite the lackluster of economic environment, we remain bullish on the long-term outlook for our company. With the announcement of our new contract with GE and the increased activity in the number of key markets in which we are operate, we believe our gross strategy is taking whole. We believe that we are uniquely positioned to take advantage of the improving market conditions that we are starting to see.

Our expanded permits have broadened the types of wastes we compete for, government spending on the environment is expected to increase and there appears to be a renewed commitment by the federal government to clean up contaminated sites. While we cannot control many of these macro economic factors or market conditions, we are focused on controlling those things that we can such as customer service, our cost, building a robust and strong waste handling infrastructure and improving our service offering at each of the sites. All of these factors lead us to conclude that we will have a strong second half and deliver our previously issued guidance of $0.57 to $0.67 per share. With that, Jeff I would like to open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Rich Wesolowski, please proceed.

Rich Wesolowski – Sidoti & Company

On the quarter, you posted the same volume in June that you had in March and even just about the same treatment and disposal revenues we calculated and yet $0.13 here and $0.10 in March what was the difference?

Jeff Feller

Well there is the difference in the earnings is predominantly the increasing gross margin that we add from service net in the second quarter over that of the comparable first quarter. Also in the first quarter, we had accrued $423,000 fine related to the EPA matter that was not reflected in the second quarter results. There was only $74,000 in the second quarter.

Rich Wesolowski – Sidoti & Company

But above the gross profit and above, it was service mix that gave you the better margin?

Jeff Feller

Yes.

Rich Wesolowski – Sidoti & Company

Okay, was there any accrual for incentive pay out in the June quarter SG&A?

Jeff Feller

There was not.

Rich Wesolowski – Sidoti & Company

Okay, would you mind giving us an update on the NRC process with regards to the potential Westinghouse contract?

Jim Baumgardner

Yeah Rich, this is Jim. That process continues to be underway. We have continued to support Westinghouse on their application for exception to use our facility. It is in the hands of the NRC at this point as these things move through the regulatory process timing just cannot be predicted. You know things have taken longer than I think we have originally anticipated but we do not at this point have reason to believe that Westinghouse application would not ultimately move to the process successfully.

Rich Wesolowski – Sidoti & Company

Is this NRC process something that holds for future bidding or would you be required to go through this every time with the NRC that you’re considered for this type of contract?

Jim Baumgardner

It depends when you say contracts we’re talking about waste stream individual waste streams is what we’re looking at and the waste stream will drive what kind of regulatory process it will to to but I can tell you that we expect that our sale cycle on these waste streams that require the NRC exception will take longer than I believe we originally anticipated a year, eighteen months ago.

Rich Wesolowski – Sidoti & Company

Okay and then lastly Jim, could you maybe comment on the chance that the board decides to change the dividend payout given at market demand and also on the other side your acquisition on.

Jim Baumgardner

I would not speculate on what the board will do, I will tell you that the board is closely monitoring the dividend on a quarterly basis. They re-affirmed for this quarter the dividend. I do not have reason to believe that based on what we know today, there’s factors that would drive the board a different direction but they are going to be different by facts and circumstances. They are going to be looking closely given our current cash position and our earnings profile as well as where we are on the use of cash in terms of (inaudible) for acquisitions. So today, what I will tell you is that the board continues to support the dividend. I really cannot speculate on where they might be one or two or three quarters from now.

Rich Wesolowski – Sidoti & Company

Thank you.

Operator

Our next question comes from the line of Ted Kundtz of Needham and Company. Please proceed.

Ted Kundtz – Needham and Company

Yes, good morning everyone, can you comment anymore on the GE business. Can you give us any metrics there in terms of pricing of what you’re getting for the landfill?

Jim Baumgardner

Well I’ll let Steve talk about business in general but Ted we’re not going to, for competitive reasons and the fact that we’re bound by confidentiality agreement, we’re not going to give specific pricing on the GE contract or any specific project but Steve I don’t know if you want to add a little color to what you meant. Whatever you feel you can add on our relationship with GE and this particular contract.

Steve Welling

Well keep in mind this is strictly the pilot phase and so this has nothing to do with the larger phase which may or may not go later so one of the concerns about pricing information is obviously bidding phase two if that comes about. So I can tell you that is direct disposal material that we are not doing treatment like we did on Honeywell this is a direct disposal material and we are not handling transportation strictly disposal.

Ted Kundtz – Needham and Company

Okay. Okay got that and when do you think the EPA, I guess EPA and GE are reviewing whether they are going to proceed with this or not. Any idea how those negotiations are going and what is a likely time for another decision?

Steve Welling

No not really you’re welcome to contact GE directly and they do have a public relations department that is answering those types of questions but I don’t believe we can really speak on their behalf related to timing. It was originally scheduled for 2011 for the phase two however the pilot phase has been delayed. We’re just now finishing that so I can’t tell you for sure whether this would be a 2011, 2012 or if it’s going to go at all.

Ted Kundtz – Needham and Company

Okay. Terrific, thank you. Jim could you talk a little more about the acquisition strategy and how that’s going, are you closer to anything or can you give us added color on that?

Jim Baumgardner

Yeah, the strategy remains unchanged in terms of our strategy. It remains a focus. I think you heard during Jeff’s remarks during the quarter some of the improvements that SG&A were offset by additional cost for corporate development work. We are actively engaged with more than one party right now looking at acquisitions that are consistent with our long-term strategy and our core competencies. Whether those discussions will ultimately materialize on acquisition and the nature -- whether those things will ever result in acquisitions I cannot predict. I can tell you that we are diligently working on it and we have been as a management team for the last, certainly the last six to eight months, have been highly focused on this as a key area. We are committed to adding assets to our business. We want to make sure we had the right assets at the right price.

Unfortunately for buyers the markets have improved for sellers with I think valuations were seen pick up. Access to credit has increased. But we continue to be and were in the second quarter engaged with more than one party on the potential purchase of facilities.

Ted Kundtz – Needham and Company

Okay. Great. Thank you. And Steve maybe one question for you. My last question would be, Could you comment on the some of the specific-industry trends that you were saying. You mentioned kind of generally but maybe you could be a little more specific, maybe with the refinery business or some specific other industries or maybe some of the government cleanup work, what is the outlook for those specifically?

Steve Welling

Outlook I am not exactly sure we have seen increases in some of the heavy industry like steel industry for example, definitely not tick (ph) there. Government cleanup. Part of the backlog or the increase we are expecting for the second half includes government cleanup work so we are seeing an increase in government spending. Other industries I cannot really comment. I have not noticed anything specific.

Ted Kundtz – Needham and Company

How about refinery?

Steve Welling

Refinery seems somewhat business as usual, right now at this time of year is somewhat of a slower season because…

Ted Kundtz – Needham and Company

You mentioned that, right.

Steve Welling

What happens is when the people are traveling on vacation the airplanes are busy and folks are traveling by car refineries are busy and therefore they do not do as much maintenance during the summer so that is kind of a normal seasonality to that business.

Ted Kundtz – Needham and Company

Okay. How about the chemical side, are you seeing anything there, especially chemical side?

Steve Welling

No, I have not really noticed any major trend.

Operator

Our next question comes from the line of Jamie Sullivan of RBC Capital Markets. Please proceed.

Jamie Sullivan – RBC Capital Markets

Hi, good morning.

Jim Baumgardner

Good morning.

Jamie Sullivan – RBC Capital Markets

What are your expectations for treatment and disposal margins would be for the remainder of the year?

Jim Baumgardner

Well, for the entire year we do anticipate that we will still be at our threshold on the mid 40s so for the first half we are about 42% but we would expect to see some improvement in the second half.

Jamie Sullivan – RBC Capital Markets

Okay. And then I guess just in general with maintaining the range, is it safe to say that with the first half coming a bit behind and the addition of GE that is kind of how we end at the same range?

Jim Baumgardner

Well, a couple of things on the range. Really our commitment to deliver our guidance range this year is predicated on three things. Certainly the GE contract is playing a role in our expectation for a stronger second half than first half but also we do expect to a see a pickup as Steve alluded to with our government work, specifically the Army Corps of Engineers we think will contribute additionally.

And then also as we mentioned and I think we mentioned now last quarter and this quarter we are seeing a fair amount of new activity. Now that bidding activity has been a little slow to convert to when then shipments but we do believe based on schedule we have in front us and the fact that we know that it is easier to excavate and ship material in summer than in the winter because people would like to pay for shipments of moisture and water. So we do expect that the third quarter we will get some winds on a number of projects where bids have been outstanding that will drive revenue.

It is also important to remember when you think about GE or even these other miscellaneous bidding opportunities we are working on that we expect that when we put out the range a certain amount of our expectation any given year that we are going to have some unidentified work that will manifest itself in projects later in the year.

When we put out the guides we do not know what project it will be but there will be projects. That happens every year although I think 2009 was one of the few years that it did not happen as prominently. So when you think about our range basically we take the factors that are in play right now are going to allow us to achieve our range and by the way the first half played out largely as we thought.

We are slightly behind plan, slightly behind our expectation but we knew that there would be a slow start. If you remember I think on our yearend call we talked about slower start, rapid, improving Q2 over Q1 and then about a stronger second half than first half. I think we have a lot of evidence to suggest that is going to be the case now as we wrap up the year and it gives us confidence in the range we are putting out there. I hope that helps a little.

Jamie Sullivan – RBC Capital Markets

Yeah. And I guess just to sum it up, it sounds like there is not any major change from, say, the last quarter in what you have seen, largely coming in planned maybe bit behind than first half but some of the assumptions like GE you typically get those on an annual basis and that was baked (ph) 649 into the range, before that was amount sort of coming–?

Jim Baumgardner

Well, I think that is exactly right and I think that I only had to comment predicting how much material we are going to get from GE is a very uncertain thing because of their shipment plans, their selection of two other landfill in addition to ours and our performance on this end, service that we control and expect to execute on but a number of factors will be coming into play so that is why we continue to say on GE specifically not exactly sure how much we are going to get.

They told us and others that they expect to ship approximately 100,000 tons and but again we do not know if that is going be something less than that or something more than that. But regardless is that we have got to think that if you just take a range of GE material and these other things and the Army Corps business and other government work we think we are going to deliver within the range that we put out there early in the year.

Jamie Sullivan – RBC Capital Markets

Okay. Great. And then on GE with it being directly sourced (ph) 810 that is typically higher margin business, right because there is no treatment cost?

Steve Welling

On a percentage basis that is an accurate statement.

Jamie Sullivan – RBC Capital Markets

Okay. And then on the thermal business, has there been additional price pressure? Can you give us a sense of what the volume growth is as well as what the pricing change has been?

Jim Baumgardner

It seems that we hit a bottom four to six months ago and we have just been floating along the bottom for the last few months. It has not further deteriorated this last quarter; it just has not improved.

Jamie Sullivan – RBC Capital Markets

Okay. All right. And what was the volume growth for that business?

Steve Welling

Jamie, the growth was actually a decline quarter over quarter from Q2 of 09 and it declined about just under 10%.

Jamie Sullivan – RBC Capital Markets

Okay. All right. Thanks and I guess the additional confidence in back half -- and correct me if I am wrong -- but you sound pretty confident on the back half with your GE and a couple of other things in the pipeline. Are you expecting 3Q which you have a little bit more visibility a pretty nice pickup in volumes sequentially as we go into 3Q here?

Steve Welling

I would rather not comment on actually the upcoming quarter because as we have seen our business can be a little – we can right now think of something and say, now that is going to move in September and all of a sudden three weeks late and it falls into October so predicting that – what I will tell you that we would not be sticking with the range if we really did not think we could achieve it.

Jamie Sullivan – RBC Capital Markets

Okay. Thanks a lot.

Operator

Out next question comes from the line of Al Kaschalk of Wedbush Securities. Please proceed.

Al Kaschalk – Wedbush Securities

I want to try and press a little bit here on the vine (ph) question, Jim. And in particular, as we look at I think $118,000 in the quarter and the GE project guidance maintained, how should we think about second half and CapEx expenditures? How should we think in the year on a run rate volumes per quarter or the next two quarters, how we should think about sort of volume levels?

Jim Baumgardner

Well, let’s see. I’m not sure what else I can say except that we do expect volume in the second half to grow. We had a lot of that growth is coming from specific EBITs although I will continue to note that our Base business is holding up and had grew both quarter over quarter and had grew slightly sequentially which gives us, I believe, that kind of industrial production levels as we render the paper and reported results are moving forward. But with regard to volumes and I don’t have our volume estimate for Q3 or Q4 in front of me, but what I will do say is that we expect that to support the Arabian guidance. Jeff, I don’t if you have any other color to add to that.

Jeff Feller

Well, Q1 and Q2 have were right just under 120,000 tons being disposed and I would say that in cumulative second half, we’re going to see a much greater improvement in volume and a lot of it is dependent upon several of the Events business project shipping and the timing is about how much hit in Q3 versus Q4.

Al Kaschalk – Wedbush Securities

All right, so in an effort to try to say how much is an improvement, we’re at a 120,000 round tons at Q2, are we talking about 10%? Are we talking about 2%? Are we talking about double digits? Again, I appreciate that you don’t want to comment. Competitive reasons I’m fighting but the guidance is quite wide here and just trying to get a sense of what I hear you talking about is a pickup in business but yet, you don’t want to quantify or set forward something that we can measure here against.

Jim Baumgardner

Jeff, you can think about that. I would just say, look, in the first half, we made $0.23. For us to hit the bottom of the range, we’re going to have to make, do the math, what’s that, $0.34 in the remainder through the bottom end. So that would be – in earnings, that’s a 50% increase in earnings to hit the bottom of the range. We’re comfortable with that today. So volumes taken into account mix taken into account other factors, but volumes should roughly approximate that effort (ph). Is that a fair statement, Jeff?

Jeff Feller

I would say that’s a fair statement.

Al Kaschalk – Wedbush Securities

The other way (ph), maybe (inaudible), we’ll take the midpoint of your EPS, is it implied the run rate of 108,000-120,000 tons or up 10% in the back half of the year? Is that something that you can comment on?

Jim Baumgardner

No, I don’t think that’s the right math either. No. Yes, I mean, our run rate’s 120,000 now tons and we’re saying that our projected earnings in the second half are going to be 50% better than a year ago.

Al Kaschalk – Wedbush Securities

Right, so I guess, why shouldn’t we think tonnage should be up at least 30%, 40%?

Jeff Feller

There’s not necessarily a direct correlation with tonnage and earnings per se. There’s a lot of other variables that go into it. So the type of material that comes in, the average selling price, there’s just a number of variables.

Jim Baumgardner

But I think it’s fair to see there’s a loose correlation taken into the account the things, I mean, without pinning me down on a number because as Jeff said, a number of other factors affect revenue and ultimately earnings mix being chief among them. But I think it’s fair to say, Al, that we were expecting the second half, that volumes would be up, obviously in the double-digit percentages and be within a range of what we expect to see growth in earnings if we’re expecting a 50% growth in earnings in the second half, well, I think it’s fair to reduce the earnings. The volumes might be up 30 or 35 or 40% or even 50%. But know that we meant, it’s not a direct correlation.

Al Kaschalk – Wedbush Securities

If I may ask one follow-up question. Jim, in terms of capital and deployment of capital and returns to shareholders, what are you – what is your proposal maybe to the board in terms of the dividend? Because what I sense that maybe we’re resurfacing in evaluation of whether this dividend is consistent and sustainable? I mean, at the current revenue levels, do you feel that the dividend should be under consideration to be sustained? You have plenty of capital to go out and do what I think is you words, niche acquisitions that are strategic to grow the business?

Jim Baumgardner

Well, as member of the Board of Directors, I mean, I can tell you right now that we’re having those discussions about what is our best use of capital and in our stance today, given our current financial condition, given our outlook, given our internal capital needs, we believe the dividend is sustainable. I will tell you that the Board will re-evaluate, re-look at that, re-think that as facts and circumstances change. If we are successful on the corporate development front, and as Jeff alluded in his remarks and I follow up with we are actively working on delivering acquisition given the size capital needs, ultimate capital structure of the company.

We’re going to have to re-evaluate all that. At this point though, I don’t see any reason why we would not continue to pay the dividend based on facts and circumstances a day because we believe that the second half is going to be materially stronger than that first half. And the second half quite frankly will support the payment of the dividend. All other things being equal and of course, there will be some but we do expect there to be some additional factors to be considered in the second half. At this point, and again, just reiterating your earlier comments, the board discussed it. The Board evaluated in light of specific facts and circumstances and will continue to do so in the future.

Al Kaschalk – Wedbush Securities

So it’s fair to conclude that recent discussions have increased over this topic versus, say, at the end of earlier this year?

Jim Baumgardner

Well, what I would – yes, that is fair to say. I mean, a couple of things. I mean, we are driving toward – to grow in the business. To grow in the business requires capital. We’re focused on acquiring additional assets. That requires capital. So revisiting the dividend as an allocation of the firm’s capital is an appropriate discussion. Does it make sense to deploy it back in the business? Does it make sense to employ any acquisition or does it make sense to return it to the shareholders and we would not change the dividend policies lightly. There is a significant shareholder constituent that find value in the dividend. We think dividend is an important aspect of the investment profile of our company. And we would only change it if there was a compelling reason to do so.

Operator

Our next question comes from the line of Patt Mclaughlin (ph) of UBS. Please proceed.

Patt Mclaughlin – UBS

I know that you all have been flooded with the GE questions. But it isn’t as if GE has total call on when a new play rest with his project. And can you shed any light on the process through which GE has to go in order to conclude to and face to and how far in advance of starting the project would the bids be needed to be offered, I mean, with the environment of General Electric raising dividends and beginning a share buyback if I have a regulator of any sort? Certainly gives them far less argument to postpone dealing with this besides a project. So, I mean, do you have any color on any of these thoughts of them?

Jeff Feller

Well, the point of the pilot phase, from what we understand, was to determine impact on the environment and there’s a lot of public documents you can read about what happened when the sediments were brought up, excavated. How did they impact downstream to affect the fish and the local environment? Those studies are in progress. I’m not sure exactly where they are but that’s what will be reviewed between GE and the EPA in terms of making decisions on – does the work plan need to be modified? Do they do phase two? Did they not do phase two?

In terms of the timing, we don’t know exactly what the timing would be. I can tell you that the infrastructure is there to move relatively quickly. I mean, they’re material now. They put in a lot of money and key water existence and for dredging (ph) but I can’t tell you. That is something that we really need to talk to GE and EPA in terms of what the final decision is on whether they go forward with the next phase.

Jim Baumgardner

Yes, this is Jim. I mean, I think there’s – you’ve got really three primary constituents relative to whether or not there’ll be a phase two. You’ve got GE is going to make their arguments based on the data that was accumulated in the pilot phase. You’ve got the EPA who’s going to make their own assessment of that data and relative to both the regulatory framework as well as the quarter order that’s in place. And then, you’ve got constituents, environmental groups in and around the Hudson River who have opinions about things, too.

I think all of that will be taken in to consideration and actually, a very good website, hudsonriverdredging.com is a GE website that’s very useful as well as if you just Google Hudson River EPA, there’s a special website dedicated by the EPA so you can actually read about GE’s opinion about where the pilot phase got them and where they think they should go. And you could read the EPA’s view of that. We just can’t speculate on that because it’s just, it’s now knowable for us to know when and if and how much and it’s just not knowable.

The thing that we’re focused on, Patt, is we want to execute and perform under our current contract with GE. And if there is ever a future phase or other work available to us, GE knows that we’re the guys that can perform. That’s our focus right now – is perform under our contract in a way that we solidify our relationship with GE for the Hudson River Project or anything else that might come under (ph). And that’s our focus. That’s quite frankly, the only thing we control.

Patt Mclaughlin – UBS

All right, well that’s a great answer. I appreciate it.

Operator

Our next question comes from the line of Eric Prouty of Canaccord. Please proceed.

Eric Prouty – Canaccord

First, on the SG&A, it sounds like there weren’t as many kind of one-time expenses this quarter as it as last. Can we look at this quarter’s run rate of $3.3, $3.4 million as being a good forward run rate or is there likely to be pickup in SG&A expense since especially as kind of GE and I are volumes kick in in the back half of the year?

Jeff Feller

Eric, this is Jeff. We would expect SG&A would pickup in the second half primarily due to the accrual of incentive compensation. Other than that, the $3.4 million , $3.3 million with a good dates, run rate without incentive compensation.

Eric Prouty – Canaccord

Right. And then finally on the transportation side, I mean, given GE is not using the transportation services, we do have the slow on business, is that an offering you guys continue to expect to be below off your client source at a business you’re going to think of maybe getting out of the transportation sub?

Jeff Feller

What we have in our expectations for the second half, some of the projects that we’re planning involve us performing transportation and disposal so we still need the cars there. They’ve been viable and closing new awards and I wouldn’t envision getting rid of those cars.

Operator

Our next question comes from the line of Rich Wesolowski of Sidoti & Company. Please proceed.

Rich Wesolowski – Sidoti & Company

Just two more. On the event year-end projects that you’re bidding for the second half, is there any commonality between what’s driving them to be undertaken? Is it the local government’s towing companies to cleanup site or is there some economic benefit for them to do so or some other factor that are not seen?

Simon Bell

We’ve seen a combination of all of the above. We have projects involved in freeway widening. We have some real estate development on a former military base, a couple of mandated cleanups, those are things we’ve been saying the last few years that we are seeing a combination of all that. I can’t say there’s one specific trend or area to look at. I do think though, Steve, that we have seen certainly a pickup in private sector cleanups. We’re in this at least a pickup in activity, people know they have contaminated material. They put it back on the shelf or were forced to clean it up in ‘09. Now they’re kind of bringing them back and say, “How much did it cost me to take good care of this for whatever reason there is.” But I think that’s one of the more encouraging pieces of data kind of embedded in our outlook. We are seeing more activity in the private than we saw last year certainly.

Rich Wesolowski – Sidoti & Company

And secondly, can you suggest where outside the Gulf you are bidding for through the desorption contracts and maybe give us an idea of how big a job needs to be for it to be worth outside of that normal range?

Simon Bell

While we’ve taken thermal projects from Alaska, New Jersey, Southern California, in the mountain areas, so there’s really not any place we can’t know necessarily but the majority of the work is within 500 to 750 miles of Corpus Christi. That’s where the bulk of the projects that we’re working. That’s where most of our volume comes from. And we have a number of refinery companies that we deal with as national accounts where we’ve been able to go in on these more remote locations and these are real assets to be competitive and bring that material to Texas. So I’m thinking the future, you’re going to see 75%, 80% of the volume coming from Texas, Louisiana, Oklahoma and then we’ll have an occasional award or two by using rail.

Rich Wesolowski – Sidoti & Company

Is the – are you still contemplating building a similar facility at Beatty at anytime in the future, perhaps an investment in competition with the acquisitions you’re considering?

Simon Bell

No, not at this time. What we’re doing is we’re offering service for those customers in the West to Texas and it’s been working fairly well.

Jim Baumgardner

We just don’t see a market in Southern California just to find the kind of investment which is required to support the investment in Texas. So the market just doesn’t appear to be large enough to support the investment we need to make to get a similar capability in Beatty. And as Steve mentioned, we have been able to meet a number of our customers’ needs and keep relationships through transshipping from Southern California to using our rail assets to transship from Southern California out to Rottstown (ph) facility.

Rich Wesolowski – Sidoti & Company

Great, thanks again.

Operator

(Operator Instructions) Our next question comes from the line of Michael Hoffman of Wonder League (ph) Securities. Please proceed.

Michael Hoffman – Wonder League Securities

From your own perspective on the incineration side, points out saying guidance is up for the second half. A couple of other chemical guys are saying through similar – they’re not being silly about it but business activity is a little bit better. What’s the lag effect of that activity happening before volumes come off and the incinerator guys move back upstream and get out of your backyard and putting pressure on the thermal desorption business – three months, six months, what’s the take?

Jim Baumgardner

I think it’s hard to predict but I think it’ll vary by facility in kind of ways. But generally speaking, large customers, refineries or chemical plants have permit to temporarily hold material on site. So we’ve been looking at this now for a couple of quarters and I think it’s at least nine-day lag. It can’t be longer for a variety of reasons from the time we see a pickup in production to the time waste drugs come into the – a lot of these facilities have 90-day temporary storage permits and they want to ship things efficiently and not dribble out a little a time. So I would, hey Steve, tell me if you think I’m off-page but I think it’s a least 90-day lag from production.

Steve Welling

It would be – I would think it would be at least 90 days until the incinerator figured out that they’re getting busy, that they don’t necessarily want the refinery sludge anymore.

Jim Baumgardner

Yes, so that’s where the leg is actually to run – you get the – it’s the increased production that they stored outside and then they start shipping and then the incinerator says I’ve got a Q and up problem. I got to start saying no, we’ll stop beating and that works for the market over some few months period of time.

Michael Hoffman – Wonder League Securities

So one to two quarters, where do you think you are in that at this point?

Steve Welling

Well, again, I’ll go back to the quarter. We did see in our Base business which is not just thermal now. It’s a larger category, Base business or recurrent customers. Customers, based through a lot of our broker, customers who service chemical plants and other industrial, that was up 7% quarter-over-quarter, and then sequentially, up 3%. So kind of like you start a lot of your comments, Michael, with the chemical companies not getting crazy about their outlook. We are seeing slight improvement sequentially, in particular, in industrial output production. So I am speculating which I hate to do and I think all of our attorneys are withheld, I should never do this. But I think we’re a quarter or two into it right now, but at a pretty slow round.

Michael Hoffman – Wonder League Securities

So how much of that thinking is in your confidence about the $0.34 in the second half?

Steve Welling

We have assumed that basically, on the Base business, we’re going to continue slow growth. We’ve assumed on the thermal business, pricing is not going to improve and it’ll be – have some seasonality effect from the summer and then start to see a little bit of what we saw last year. So on the Base business side and on the thermal side, we’re not expecting big changes there on our business. Is that fair to say, Jeff?

Jeff Feller

That is fair.

Steve Welling

And the real drivers of the second half are going to come from Events.

Michael Hoffman – Wonder League Securities

And then, you may have said this when I was scribbling too fast and didn’t get. Has GE shipped anything yet?

Steve Welling

No.

Michael Hoffman – Wonder League Securities

So the 100,000 is – could it all happen in the second half?

Steve Welling

Yes.

Michael Hoffman – Wonder League Securities

That’s the number?

Steve Welling

Yes, I believe its GE’s plan and desire to have all of the stock piled material out of the upper Hudson River Valley this year.

Michael Hoffman – Wonder League Securities

And would you, have they give you a start date for the shipping?

Jim Baumgardner

Yes, we expect to begin receiving material in August.

Michael Hoffman – Wonder League Securities

And so thinking sort of reasonably about this, weather in our issues, the weather starts to turn in that part of the world, sort of Novemberish, so theoretically, they’d like to get it all done before the weather got bad.

Steve Welling

I’ve got a very good assumption.

Michael Hoffman – Wonder League Securities

There you go. Thanks, guys.

Operator

There are no further questions at this time.

Jeff Feller

Okay, well thank you for everybody attending the call and I appreciate the time.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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