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US Ecology, Inc. (NASDAQ:ECOL)

Q1 2014 Results Earnings Conference Call

May 06, 2014, 09:00 AM ET

Executives

Eric Gerratt - EVP, CFO and Treasurer

Jeff Feeler - CEO, President and Director

Steve Welling - EVP of Sales and Marketing

Simon Bell - EVP of Operations and Technology Development

Analysts

Michael Hoffman - Wunderlich Securities Inc.

Justin Ward - Wells Fargo

Sean Egan - KeyBanc Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 US Ecology Incorporated Earnings Conference Call. My name is Glen and I'll be your operator for today. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

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

Eric Gerratt

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

Before we begin please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Since forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. Factors that could cause results to differ materially from those expressed include, but are not limited to, those discussed in the company's filings with the Securities and Exchange Commission.

Management cannot control or predict many factors that determine future results. Listeners should not place undue reliance on forward-looking statements, which reflect management's views only on the date such statements are made. We undertake no obligation to revise or update any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

For those joining by webcast, you can follow along with today's presentation. For those listening by phone you can access today's presentation on our website at www.usecology.com.

Throughout our call today and yesterday's earnings release we refer to adjusted EBITDA and adjusted earnings per share. Both adjusted EBITDA and adjusted earnings per share are not determined in accordance with Generally Accepted Accounting Principles and are therefore susceptible to varying calculations. A definition, calculation and reconciliation to the financial statements of each can be found in Exhibit A of our earnings release. We believe these two non-GAAP metrics are useful in evaluating our reported results.

Before I turn the call over to Jeff I would like to note that we will not be discussing US Ecology's pending purchase of EQ, The Environmental Quality Company that was announced on April 7. All commentary in the press release announced yesterday and the call this morning does not incorporate the pending acquisition. Consistent with our initial expectations we expect the acquisition to close sometime in the second or third quarter of this year.

With that, I'd like to turn the call over to Jeff.

Jeff Feeler

Thank you, Eric, and good morning everyone. I'll start this morning's call with a few summary comments on our first quarter results released yesterday and Eric will then provide some more details on the financial results. And I'll close out the call with comments regarding our revised guidance and improved business outlook for 2014, after which we'll open up the call for questions. For those of you following the webcast presentation please direct your attention to slide five.

I am extremely pleased with the first quarter financial results that we announced yesterday. Strength in the Northeast, Gulf Coast and Southern California regions drove volumes up 32% resulting in treatment and disposal revenue growing 24% over the first quarter last year.

Strong volumes resulted in increased operating leverage and related gross profit and when combined with controlled SG&A spending drove the 60% improvement in our operating income to $15.5 million and record adjusted EBITDA to $20.3 million. The strong growth in volumes and revenue during the quarter was a result of continued demand for our services including a 58% increase at our project-based event business and a 4% increase in our base business.

The strength in the event business was driven by the commercial sector more than offsetting the continuing softness in our government services business. Our base business was solid and grew in-line with our expectations. All-in, just an outstanding quarter across the entire company.

And I'll now turn the call back to Eric.

Eric Gerratt

Thanks Jeff. As shown on slide six, revenue for the first quarter of 2014 increased 24% to $53.4 million. This was driven by higher treatment and disposal revenue which was up 24% over the first quarter of 2013 and higher transportation revenue which was up 28%. We disposed of 296,000 tons in the first quarter of 2014, up 32% from the 223,000 tons disposed in the first quarter of 2013. Our average selling price, or ASP, decreased 6% in the first quarter of 2014 over the same period last year. This decrease was a result of a less favorable service mix driven by a higher proportion of lower price direct disposal volume in the first quarter of 2014.

Slide seven breaks down our Base and Event business over the last six quarters. Recurring base business contributed 56% of treatment and disposal revenue during the first quarter of 2014 and increased 4% compared to the first quarter last year. After adjusting for loss business from industry consolidation, base business grew approximately 6%. The event business increased 58% from the first quarter last year and represented 44% of treatment and disposal revenue.

Slide eight breaks down Treatment and Disposal revenue for both Base and Event business by customer category. Treatment and disposal revenue from private cleanup events increased 182% in the first quarter of 2014 compared to the same period last year. This increase primarily reflects shipments from an east coast cleanup project and a nuclear fuels fabrication decommissioning project in the first quarter of 2014.

Treatment and disposal revenue from our other industry customer group increased 22% over the same quarter last year reflecting increased shipments from a broad group of industrial customers. Treatment and Disposal revenue from third-party waste brokers was up 11% in the first quarter of 2014 over the first quarter of last year. This reflects increased shipments across a diverse range of generators directly served by our multiple broker customers, partially offset by lower volumes of brokered thermal recycling projects.

Our Refinery business was down 11% quarter-over-quarter. This decrease reflects lower landfill disposal volumes from our Refinery customers. Thermal recycling business may be included in our Refinery, broker or other industry category, depending on who our customer is. Thermal recycling revenue decreased 8% to $3.9 million in the first quarter of 2014. This was driven by a 12% decrease in volume, a direct result of a less favorable product mix, which decreased throughput.

Similar to our landfill operation, service mix is a key factor in results of our thermal recycling business. Another factor contributing to lower volume during the first quarter was a higher level of plant capital improvements combined with some unanticipated maintenance activities which lowered utilization.

Our government cleanup business decreased 41% in the first quarter of 2014 due to lower volumes from the U.S. Army Corps Engineers and a now-completed military base cleanup project. Treatment and Disposal revenue from the Army Corps was 71% lower in the first quarter of 2014 than the same period last year. Despite the lower first quarter volumes from the U.S. Army Corps outlook for the balance of the year looks strong as shipments are expected to increase based on project specific disposable schedules.

Continuing to slide nine, gross profit was $22.1 million in the first quarter of 2014. This was up 44% from $15.4 million in the first quarter last year. Overall, gross margin was 41.5% in the first quarter of 2013, up from 35.9% in the same quarter last year.

Treatment and Disposal gross margin for the first quarter of 2014 was 49.7%, up from 42% in the same quarter last year. This gross margin improvement reflects improved operating leverages leverage resulting from higher volumes in the first quarter of 2014 and a higher proportion of direct disposable material compared to the first quarter of 2013.

Selling, general and administrative spending or SG&A was $6.6 million in the first quarter of 2014. This was up slightly from $5.7 million in the first quarter last year but down as a percentage of sales from 13% to 12%. The increase reflects higher variable compensation business development expenses and other administrative expenses supporting the increased business activity.

Operating income grew 60% to $15.5 million for the first quarter of 2014, up from $9.7 million in the same quarter last year. Adjusted EBITDA for the first quarter of 2014 was a quarterly record of $20.3 million and an increase of 46% from $13.9 million in the same quarter last year. We realized $940,000 of non-cash net foreign currency losses in the first quarter of 2014 on a weaker Canadian dollar. This compared to non-cash net foreign currency loss of $938,000 in the first quarter last year.

Net income was $9.4 million or $0.43 per diluted share. Adjusted earnings per share, which excludes foreign currency loss of $0.04 per diluted share and business development costs of $0.01 per diluted share was $0.48. This was up 50% from adjusted earnings per share of $0.32 for the first quarter last year. In the first quarter of 2013 we generated $12.7 million of cash from operating activities. We invested $4.8 million in capital projects and paid out $3.9 million in dividends to our stockholders.

Our return on invested capital for the 12 months ended March 31, 2014 was 19.3%. Return on total assets was 13.9%, and return on equity for the same period was 20.4%. With that I’ll turn the call back to Jeff.

Jeff Feeler

Thank you, Eric. As I stated in my opening remarks I cannot be more pleased with our first quarter performance. Our project pipeline has been filling out nicely as we gained visibility in to the summer time clean up season. Several of our ongoing projects grew in size and duration while new opportunities are emerging for the back half of the year.

Economic conditions continue to strong supporting healthy base business growth into the mid-single digits. Despite still fairly early in the year the strength seen thus far in our business has led us to increase our expectations for 2014.

We now expect that 2014 adjusted EBITDA will range between $74 million to $78 million, up from earlier estimates of $70 to $74 million. Earnings per diluted share is now expected to range between $1.60 and $1.70 per share up from our initial range of $1.50 to $1.60 per share. This of course includes excludes any foreign currency translations gains and losses and business development expenses and does not factor in our pending acquisition of EQ.

The earnings estimate -- our earnings estimate per share are based on the company's new share count which approximates 21.6 million and includes the nearly 3 million issued in December of last year. For comparative purposes, if 2014 estimated share count of 21.6 million shares was outstanding for all of 2013 adjusted earnings per share for 2013 would have been $1.57 per share instead of the $1.82 we reported last year.

We continue to expect our effective tax rate to approximate 37% for the full year of 2014. Finally we do expect that our Treatment and Disposal gross margins will range between 46% and 48% for the full year, with SG&A expenses ranging between $6 million to $7 million per quarter excluding any business development related cost.

Capital spending is on plan and we continue to expect spending to range to range $20 million and $21 million for 2014. As a reminder our 2014 capital spending plan includes approximately $2.3 million of carry over projects from 2013.

Capital expenditures for 2014 will be devoted primarily to the constructing additional shelf space, ongoing infrastructure upgrades and equipment replacements across our operating facilities.

As we look longer term we are very well positioned to continue to execute on our strategy to use our best-in-class assets as a platform to drive both organic growth and to further build out our disposal network. The recently announced acquisition of EQ will add to our best-in-class assets broadening our geographic footprint and provide new complementary field and industrial services to our portfolio to better meet the needs of our customers. We believe the combined assets create an even stronger platform that will enhance our competitive position in the marketplace.

And with that, operator we'll open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Michael Hoffman, Wunderlich Securities. Please proceed.

Michael Hoffman - Wunderlich Securities Inc.

Good morning, Jeff, Eric great quarter. So it is noted by except exemption that you didn't say anything about the weather. Would you have done even better if the weather had been normal?

Jeff Feeler

You know it's pretty hard to say Michael on that. There is definitely some pockets up in the Northeast that were definitely severely impacted by the weather conditions. So I would say yes, I think the magnitude of improvement would not been significant but there definitely was some weather events up there.

Michael Hoffman - Wunderlich Securities Inc.

Okay, and then as we think about the tonnage in particular on the events side did I understand the way the comments were shared that pattern of accelerated completion of the two big projects, one in East Coast and one in Missouri continued and so that's what accounted for the high volume or did I misunderstand and there in fact it's breadth and depth across lots of small short cycle projects as well?

Jeff Feeler

Yeah, Michael there were -- I wouldn't call it acceleration but the ongoing projects that we are seeing in the fourth quarter of last year continued into the first quarter. We also took advantage of having our volumes stored up in our warehouse of its -- that we are process through the first quarter of this year and that was one of the whole thesis for having that building built to help smooth out the seasonality trends in that business so we were able to see those benefits.

We also saw a number of emerging, I'll call emerging and new projects that hit and in particular down in the Gulf Coast region. We saw some record volumes going into our Texas facility and we also saw strength in the Southern California markets. So it was more broad than the way you portrayed it and even though those projects did help out the overall quarter.

Michael Hoffman - Wunderlich Securities Inc.

Okay, so that’s what gives you confidence about raising the guidance that breadth of new business beyond the accelerated activity in the existing business?

Jeff Feeler

Exactly, and as we look at the pipeline moving out we are continuing to see emerging opportunities that we’re going to be able to compete for, some under contract, some that we’re just going through the bidding process. And so that’s what gives us the confidence which is atypical at this time of the year to really raise guidance and so that really demonstrates the balance of the year and how we are seeing things play out.

Michael Hoffman - Wunderlich Securities Inc.

And to that end so you made comments about the Army Corps, so I am assuming that your comments were based on having appropriated the money and then allocating it. You’re starting to see those allocations work through and that’s what giving you comfort about Army Corp volume

Steve Welling

Michael, this is Steve Welling. We actually have begun new projects just in the last few weeks and then we received a number of new task orders that are in hand for upcoming work throughout the second and third quarter. So we are confident based on the documents we have in hand and the fact that railcars are actually moving that.

Michael Hoffman - Wunderlich Securities Inc.

Okay, and then there's a lot of refineries are talking about turnarounds in the second quarter so would that be fair to assume that thermals should see a lift in activities sequentially.

Jeff Feeler

Yeah, Michael, this is Jeff, for the thermal business we continue to run at or near capacity. Demand for that business continues to look strong. We are not seeing any change in that trend.

Michael Hoffman - Wunderlich Securities Inc.

Okay, and then just two housekeeping questions around EQ, not about business but have you, you haven’t reported any of the cost of the like your legal cost or what have you in your results related to the transaction yet, is that correct?

Jeff Feeler

We had about just under $ 200,000 of business development expenses which was almost a 100% geared toward EQ purchase. A substantive majority of that's going to trickle in, in the second quarter and upon close in either later this quarter or next quarter.

Michael Hoffman - Wunderlich Securities Inc.

Okay so we should be mindful of that is that as you report that we might see bigger SG&A because of that but other than that six to seven is the right number?

Jeff Feeler

Well, I will refrain that, you will see a bigger SG&A there, once that hits.

Eric Gerratt

You will, and Michael, this is Eric as you look at the release at the last page in the exhibit that adjusted earnings per share table will give you, it does this quarter and will going forward some perspective on the dollar magnitude of that how much it impacted EPS.

Michael Hoffman - Wunderlich Securities Inc.

That’s on the power point or on the press release?

Eric Gerratt

In the actual press release.

Michael Hoffman - Wunderlich Securities Inc.

Press release, okay, I’ll go and look at that again. And then last, just the timing of the closing is about the HSR review, it is here, you can’t control that, so it’s done and you are closing, is that right?

Jeff Feeler

Well, there is more than that we have our other permits with in EQ's facility that we have got to go through certain state regulatory review and transfer. We don’t view those as being hurdles but dealing with any government agency and there's some bureaucratic red tape that needs to go through that process. So it is really a combination of HSR review as well as permit transfers.

Michael Hoffman - Wunderlich Securities Inc.

Great, congratulations on the quarter.

Jeff Feeler

Thanks, Michael.

Operator

Your next questions comes from the line of Justin Ward with Wells Fargo, please proceed.

Justin Ward - Wells Fargo

Morning guys.

Jeff Feeler

Morning, Justin.

Justin Ward - Wells Fargo

It sounded like in the prepared remarks you guys mention that kind of like you have some scope increase on some of the ongoing projects and wondering if that sort of relates to the two large projects that are kind of ramping down, initially thought of ramping down, kind of by midyear this year. Maybe if you can expand on that comment a little bit.

Jeff Feeler

Yeah, you are spot on. There are a couple of jobs that, larger jobs we’ve had as with is typical with most of these large projects the scope and duration of that actually expanded that will benefit 2014 and conceivably benefit 2015.

Justin Ward - Wells Fargo

Okay, great. And you mentioned a little bit about some potential impact from weather in the quarter, the adjusted base business is up 6% which is a bit of a deceleration from up 9% in the Q4, is there anything else in there that could cause that deceleration, is it just lumpiness in weather or is there anything else in there that you guys want to call out?

Jeff Feeler

Yeah, actually our base business on a sequential from Q4 to Q1 that’s actually somewhat typical and a lot of it is that you have a fourth quarter surge and we saw that surge in the fourth quarter last year and that where people are emptying their warehouses and getting them to compliance before the year-end using up budgets those types of things. So that’s not really atypical to see that sequential decline in the first quarter. That being said, I think the weather did play more of a roll in the base business in the first quarter of this year. But we haven’t quantified or even attempted to quantify what that number would be.

Justin Ward - Wells Fargo

Okay, great. Let me ask about be this $5 billion in Anadarko remediation settlement is it too early to say how much you guys would be able to compete for, generally speaking what percent of that type of remediation spend you guys will be able to compete for with your legacy business and then maybe how EQ could contribute to that as well?

Steve Welling

Jeff I’ll take this, this is Steve Welling again. The current EQ facilities are generally located in spots where they are closer to our building in Texas and there’s also some radioactive projects according to what I’ve read. So we believe we'll be in good position to bid and potentially win as work moves. At this point we don’t really have anything identified definitely other than what I’ve seen in the settlement agreements.

Justin Ward - Wells Fargo

Great.

Jeff Feeler

And I’ll just add to that one thing is that whenever you inject $5.2 billion in to the system there’s going to be opportunities and with EQ coming on board on this deal is just going to increase the breadth of opportunities in areas that we’re going to be able for compete for with the full service offering.

Justin Ward - Wells Fargo

Great, thanks very much guys.

Jeff Feeler

Thanks Justin.

Operator

(Operator Instructions). And you next question comes from the line of Sean Egan with KeyBanc Capital Markets. Please proceed.

Sean Egan - KeyBanc Capital Markets

Hey, good morning guys. How are you doing?

Jeff Feeler

Morning, Sean.

Sean Egan - KeyBanc Capital Markets

Great, just a quick item for you, I know this is an ASP decline and it was the first decline that you’ve seen in a few quarters and obviously we recognized that there is mix of the impact for that but going forward with these ongoing projects should we expect ASP to continue to decline or be pressured or is that pretty difficult to say quarter-by-quarter basis?

Eric Gerratt

Yeah Sean this is Eric. It is difficult to say quarter-to-quarter because it really does depend on mix. In the first quarter what really the biggest driver of that ASP decline was we had a pretty significant increase in the direct landfill volumes which typically come at a lower price point. That tends to help us on the T&D margin side because there is essentially no cost to that material because it just goes straight to the whole. But predicting that in the future is pretty difficult and we frankly don’t even attempt to try to predict what ASPs are going to do going forward.

Sean Egan - KeyBanc Capital Markets

Okay great, thanks. That’s all from me.

Jeff Feeler

Okay, thanks Sean.

Operator

(Operator Instructions). At this time we have no further audio questions.

Jeff Feeler

Great.

Operator

Pardon me, there is one more that just came in and that comes from the line of Justin Ward with Wells Fargo.

Justin Ward - Wells Fargo

Hi guys, I thought I could sneak it in, the Gulf Coast you guys called out some ramping up in Gulf Coast and it seems that this activity there is only going to continue to strengthen in the next few years. How does your capacity look down there, how do the opportunity -- how are you guys set up to kind of process the opportunity as the construction activity in that area continues to ramp up in the next few years?

Simon Bell

Yeah Justin, this is Simon Bell speaking here. One of the things that we pride ourselves in all facilities is what I would call is surge capacity and certainly at the Texas facility we have ample capacity to increase both fronts, bulk shipments direct vary whatever the market might throw our way. The only area as Jeff mentioned where we’re operating at capacity or at or near capacity is our thermal [distortion] system.

Justin Ward - Wells Fargo

Okay, thank you.

Operator

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

Jeff Feeler

All right, well I thank to those participants for joining today. We look forward to updating you on Q2 results on our sometime late July or August.

Operator

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

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