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US Ecology (NASDAQ:ECOL)

Q2 2014 Earnings Call

August 07, 2014 9:00 am ET

Executives

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

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

Analysts

Justin Ward - Wells Fargo Securities, LLC, Research Division

Joe Box - KeyBanc Capital Markets Inc., Research Division

Barbara Noverini - Morningstar Inc., Research Division

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 US Ecology Inc. Earnings Conference Call. My name is Tahesha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Eric Gerratt, Executive Vice President and CFO. Please proceed.

Eric L. Gerratt

Thank you. 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; Executive Vice President of Operations for Environmental Services, Simon Bell; and Executive Vice President of Operations for Field and Industrial Services, Mario Romero.

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. Neither adjusted EBITDA nor adjusted earnings per share are determined in accordance with Generally Accepted Accounting Principles, and are therefore susceptible to varying calculations.

A definition, calculation and reconciliation, to the financial statements of each, can be found in Exhibit A of our earnings release. We believe these 2 non-GAAP metrics are useful in evaluating our reported results.

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

Jeffrey R. Feeler

Thank you, Eric, and good morning, everyone. Before I discuss the quarterly results, I want to remind listeners that on June 17, we completed the purchase of EQ, The Environmental Quality Company, transforming US Ecology from a primarily a fixed facilities-based environmental services company, to a full-service environmental and industrial services leader. We are very excited about the opportunities that combining these 2 complementary businesses will create under one unified company. Our vision, moving forward, is to be the premier North American provider of environmental and industrial services, where the best people come to work, delivering sustainable solutions for our customers and long-term value for our stockholders and the communities in which we live and operate.

We expect to organize US Ecology into 2 key segments: Environmental Services, and Field and Industrial Services. Simon Bell, who ran the operations for the legacy US Ecology organization, will run the combined operations of the Environmental Services segment of the combined company. I've asked Mario Romero to run the operations of the Field and Industrial Services segment. Mario served as the EQ's Vice President of Operations for over 5 years and has over 30 years of experience in environmental energy and industrial services. We are very excited to have Mario as part of our leadership team.

Given that second quarter results include only 13 days of ownership of EQ, on today's call, we're going to focus on highlights of the legacy US Ecology business. For more, I will provide additional information and color on the combined business in our outlook section.

With that, let's turn to second quarter results. For those who are following along in the webcast, I'll refer you to Slide 5. I'm very pleased with the second quarter financial results that we announced yesterday. Excluding EQ, our treatment and disposal revenue was up 13%, from the same quarter last year on a 14% increase in volumes, the strongest volume growth coming from the Gulf Coast market.

Our treatment and disposal gross margin was 49%, and in line with that of prior year. Consolidated operating income was up 30%, and consolidated adjusted EBITDA, was up 31%, over the second quarter last year, when excluding the $5.1 million of EQ acquisition-related cost.

Adjusted earnings per share was $0.47 per share, up from $0.44 per share in the second quarter last year. Adjusted earnings per share, in the second quarter of 2014, does include the 3 million shares issued in our December '13 equity offering.

All in, just an outstanding quarter across the company. I'll now turn the call back to Eric, so he can get some more detail on the financials.

Eric L. Gerratt

Thanks, Jeff. Revenue for the second quarter of 2014 was $66 million, including $14.6 million of revenue contributed by EQ. Gross profit was $25.2 million in the quarter, of which $4 million came from EQ. Second quarter 2014 operating income was $11 million, which included $1.6 million of operating income from EQ operations. As Jeff mentioned, for comparative purposes, I'll review second quarter and year-to-date 2014 results for the legacy US Ecology business, excluding EQ results for the 13 days, of our ownership in the quarter, unless otherwise noted.

As shown on Slide 6, revenue for the second quarter of 2014 increased 12% to $51.5 million. This was driven by higher treatment and disposal revenue, which was up 13% over the second quarter of 2013, as well as higher transportation revenue, which was up 12%.

We disposed of 289,000 tons in the second quarter, up 14% from 253,000 tons disposed in the second quarter of 2013. Our average selling price, or ASP, was basically unchanged from that of the year ago.

Slide 7 breaks down the trends in our Base and Event Business. Recurring Base Business contributed 62% of treatment and disposal revenue during the second quarter of 2014, and increased 4% compared to the second quarter last year. Event Business increased 26%, over the second quarter last year, and represented 38% of our treatment and disposal revenue in the quarter.

Slide 8 breaks down treatment and disposal revenue, for both Base and Event Business, by customer category. As you can see, the most significant changes during the quarter were in the private cleanup and government customer categories.

Treatment and disposal revenue from private cleanup events increased 69%, in the second quarter of 2014, compared to the same period last year. This increase primarily reflects shipments from an East Coast cleanup project, which were partially offset by lower shipments from a nuclear fuels fabrication decommissioning project, in the second quarter of 2014, that was temporarily shut down for the majority of the quarter. Normal shipments did resume in July.

Our government cleanup business decreased 28% in the second quarter of 2014, due to lower volumes from the U.S. Army Corps of Engineers, as well as a now completed military base cleanup projects. Treatment and disposal revenue from the Army Corps was 26% lower, in the second quarter of 2014, than the same period last year. Despite the lower second quarter volumes from the Army Corps, the outlook for the balance of the year looks strong, as shipments are expected to increase based on project specific disposal schedules.

Continuing to Slide 9, gross profit was $21.2 million in the second quarter of 2014, up 12% from $18.9 million in the second quarter last year. Overall, gross margin was 41.3%, in the second quarter of 2014, as well as the second quarter of 2013. Treatment and disposal gross margin for the second quarter was 48.8%, down slightly from 49% in the same quarter last year.

Selling, general and administrative spending, or SG&A, was $11.8 million in the second quarter of 2014. This was up from $6.5 million in the second quarter last year. The second quarter of 2014 includes $5.1 million of business development expenses, associated with the EQ acquisition. When excluding these costs, SG&A was down as a percentage of revenue from 14% to 13%.

Total consolidated operating income declined to $11 million, for the second quarter of 2014, down 11% from $12.4 million in the same quarter last year. When excluding business development costs, as well as EQ's operations for the 13 days of ownership, operating income increased 17%, in the second quarter of 2014, compared to the second quarter of 2013.

Total consolidated adjusted EBITDA, for the second quarter of 2014, was $17.1 million, up 1% from $16.9 million in the same quarter last year, but up 14% when excluding business development costs and EQ's operations for the 13 days of ownership. We realized $743,000 of noncash net foreign currency gains, in the second quarter of 2014, on the stronger Canadian dollar. This compared to noncash net foreign currency losses of $1.2 million in the second quarter of last year.

Net income was $6.9 million or $0.32 per diluted share. Adjusted earnings per share was $0.47; which includes approximately $0.02 of earnings per share from EQ and excludes a foreign currency gain of $0.04 per diluted share, as well as business development cost of $0.19 per diluted share. This was up $0.07 -- 7% from adjusted earnings per share of $0.44 for the second quarter last year.

Now turning to year-to-date results on Slide 12. Revenue, for the first 6 months of 2014, was $104.9 million. This was up from $88.7 million, in the first 6 months of 2013. Treatment and disposal revenue was up 18% in the first half of 2014, over the same period of 2013. Transportation Service revenue was up 20%, over the same period, reflecting more bundled transportation and disposal services on our project-based work. Base Business revenue increased 4%, in the first half of 2014, while Event Business was up 43% for the first half of 2014, compared to the first half of 2013.

Volumes grew 23% to 584,000 tons, in the first half of 2014, up from 476,000 tons in the same period last year. Our average selling price, or ASP, was down 3% in the first 6 months of '14 compared to the same period of '13, due to changes in service mix.

Treatment and disposal gross margin, for the first 6 months of 2014 was 49.2%, up from 45.6% in 2013, reflecting improved operating leverage resulting from higher volumes in the first half of 2014 and the higher proportion of direct disposal material compared to the first half of last year.

SG&A was $18.4 million in the first half of 2014. This was up from $12.2 million in the same period last year. The first half of 2014 includes $5.3 million of business development expenses, associated with the EQ acquisition. When excluding these costs SG&A was down, as a percentage of revenue, from 14% to 13%.

Total consolidated operating income increased 20% to $26.5 million, for the first half of 2014. This was up from $22.1 million in the same period last year. When excluding business development costs, and EQ's operations for the 13 days of ownership, operating income increased 37%.

Total consolidated adjusted EBITDA, for the first half of 2014, was $37.4 million, up 21% from $30.8 million in the same period last year, and up 29%, when excluding business developing costs and EQ's operation for the 13 days of ownership. We realized $197,000 of noncash net foreign currency losses in the first half of 2014 on a weaker Canadian dollar. This compared to noncash net foreign currency losses of $2.1 million in the first half of 2013.

Net income was $16.2 million or $0.75 per diluted share. Adjusted earnings per share was $0.94, including approximately $0.02 of earnings per share from EQ and excluding $0.19 of business development costs. This was up $0.24 from adjusted earnings per share of $0.76 for the first half of 2013.

In the first half of 2014, we generated $20.5 million of cash from operating activities. We invested $8.7 million in capital projects and paid out $7.8 million in dividends to our stockholders.

For legacy US Ecology, return on invested capital, for the 12 months ended June 30, 2014, was 15.8%. Our return on total assets was 13.3% and return on equity for the same period was 19.2%.

As a reminder, on June 17, 2014, in conjunction with the EQ acquisition we entered into a $540 million credit facility. The facility consists of a 7-year $450 million term loan and a $125 million revolving line of credit. The current variable-rate on the term loan is approximately 3.75%. We do expect to fix at least 50% of the term loan in the near future. The term loan also has a required 1% annual amortization which is paid quarterly beginning in September of this year.

The revolving line of credit is a 5-year facility with a variable interest rate and a 50 basis point unused commitment fee. With that, I'll turn the call back to Jeff.

Jeffrey R. Feeler

Thank you, Eric. As I stated in my opening remarks, I cannot be more pleased with our second quarter performance. This is attributable to our team, especially given the major task of closing the EQ acquisition. It is very impressive.

Our business continued to be strong on the back of robust Event Business and solid Base Business. Economic conditions continue to show positive momentum, supporting what we believe will be continued mid-single digit Base Business growth.

With the acquisition of EQ now complete, we are updating our guidance to reflect the combined company. We now expect our adjusted earnings per share to range from $1.70 to $1.80 per share, and adjusted EBITDA to range from $100 million to $110 million. Our estimates exclude the $5.3 million of business development expenses incurred in the first half of 2014, and future development -- future business development expenses and integration costs for the balance of the year.

Our guidance also excludes foreign currency translation gains and losses. Component-izing [ph] our guidance shows a strong finish to the year, for our legacy US Ecology operations that would be at the top-end or slightly exceeding our previously issued guidance range, while adding strong accretion for the acquired EQ business in the back half of the year. The guidance also reflects limited visibility in the fourth quarter of the year and considers additional administrative investments needed to effectively combine the companies on the front-end of the integration process.

As we look to the second half of 2014, our Event Business remains stable, with solid second half volumes expected from projects currently shipping or under contract. As we look to the pipeline, new projects have softened slightly in recent months, relative to the stronger-than-typical first half activity. This apparent softening has been more visible on the Northeast where the majority of our operations now operate. Despite this, we are raising our guidance, given the overall strength of the combined businesses.

We also continue to see longer-term Event Business opportunities that will likely benefit 2015 and beyond. With the overall strength in the economy, strong industrial production and solid long-term project outlook, we believe this near-term softening is more reflective of the timing inherent in project-based Event Business than a systematic softness.

With the addition of EQ and the added complexities of our modeling -- of really modeling our combined businesses, we will deviate slightly this quarter and provide some additional guidance policies -- or I should say, additional guidance and a context and color regarding expectations for the balance of the year.

I'm going to turn the call back to Eric, to provide some highlights on some of the assumptions we've made.

Eric L. Gerratt

Thanks, Jeff. From a revenue perspective, we're anticipating quarterly revenues will range from $145 million to $160 million, in both the third and fourth quarters. We expect SG&A expense, excluding acquisition and integration-related cost, to range from $18 million to $20 million per quarter. Depreciation expense, we expect to approximate $8.5 million to $9.5 million per quarter. And our preliminary purchase price allocation results in amortization of intangibles of approximately $4 million a quarter.

One thing to note, this assumed amortization is based on our preliminary evaluation, which will be adjusted in future quarters, as we finalize our fair value analysis. Our cash and noncash interest expense is expected to be between $4 million to $5 million per quarter, and our expected tax rate is approximately 38% per quarter for the full year.

As per CapEx, we spent almost $9 million of our original $21 million capital plan for 2014. With the addition of EQ, we now expect our total 2014 capital spend to range from $33 million to $35 million, which leaves $25 million to $27 million in capital improvements left to be incurred in the second half of the year.

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

Jeffrey R. Feeler

This is an exciting time for US Ecology, as we work to integrate 2 industry leaders. The combined teams' contributions has been very positive, and remarkably smooth, given the size and scope of the transaction.

In the first month, we've already had joint sales and operation teams -- team meetings, where we've started identifying cross-selling opportunities, ways to optimize waste streams and identifying waste internalization opportunities. I can say the excitement amongst the group has been incredible.

As we spoke at the time of the acquisition announcement, we are planning for the integration to take up to 2 full years to complete, as we look to build on best practices of both companies and implement systems to support future growth and extract value.

Our top priority today is integrating these assets, identifying and generating cross-selling opportunities, and other operational cost efficiencies to drive synergies.

Looking longer term, we are very well-positioned to continue to execute on our strategy of using our best-in-class assets as a platform, driving organic growth and to further build out our disposal network and provide new complementary field and industrial services. I look forward to reporting on our progress in future quarters.

And with that, I'll turn it back to the operator to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Justin Ward from Wells Fargo.

Justin Ward - Wells Fargo Securities, LLC, Research Division

Just trying to -- you gave a lot of really good sort of details of the guidance, just at the end there. I guess, first, I'm trying to kind of rectify. It sounds like you, for the legacy business, you guided to kind of the high end of the prior guidance range, which was, that would be kind of $1.70. And -- but you also kind of noted some kind of softening in the pipeline, some limited visibility on event work in Q4. Can you kind of help us understand, those don't totally jive, why the confidence in the legacy business if you're seeing the softening in the pipeline there?

Jeffrey R. Feeler

Yes, the -- Justin, the softening in the pipeline is really attributable more to the Event Business. And it's -- we've seen more that up in the Northeast. We have limited operations on the legacy US Ecology side up in the Northeast. The rest of the sites, we're seeing some strong volume and second half improvement with that core business. Lack of visibility is always a wildcard in the fourth quarter. As companies decide, in the summertime, to either move ahead with projects in 2014 or move into 2015 can cause kind of a wildcard, for the fourth quarter, and we factor that in. The softness on the Northeast is somewhat typical of what we've seen in the past. And we really see it more of a timing element than, really, as more of a pervasive problem.

Justin Ward - Wells Fargo Securities, LLC, Research Division

Okay. And so the implication is the incremental accretion on EPS basis from EQ is expected to be, I guess, kind of $0.00 to $0.10? You put up $0.02 in this quarter for just 13 days of ownership. Can you help us understand the increase in the, in all the costs associated with integrating the business and how that's going to dampen EPS, in the back half of the year for EQ? Can you help us kind of break that out?

Jeffrey R. Feeler

Yes, I think the one thing you need to be a little bit careful with, Justin, is taking the 13-day period and extrapolating that to the full year. So when we gave a guidance range, it is literally a range, to the factors in a number of different assumptions that could, or may happen, in the back half of the year. So to make the assessment that the incremental $0.10 is all related to -- in EQ, not a fair assessment. There's a lot of still assumptions made, in the legacy US Ecology business, that could, on the back half of the year, drive that number lower. At the end of the day, we're seeing a healthy pipeline on the legacy US Ecology business, solid financial results within our previously issued guidance range, and we do see the EQ operation to be accretive in the second half and the further full year.

Justin Ward - Wells Fargo Securities, LLC, Research Division

Okay, great. And then just one more. You noted the strengths in volumes in the Gulf Coast. I guess, how does your capacity utilization look there in general? I mean, you guys still have plenty of capacity there, in order to handle all the waste coming your way. Have you guys had to deflect any of that waste to third parties, or how does that look?

Jeffrey R. Feeler

Yes, our capacity, especially in Robstown and many of our other facilities, are -- we have plenty the of capacity. Most of the material coming into, from the Gulf Coast, is landfill volume, which is direct disposal, which there's really not a -- it's just receiving trucks, as they come through the gate. So from a landfill space, we have ample capacity. We will be looking to build out additional capacity in 2015 because of some of the robust volumes we've seen down in there, but we have long-term capacity to build out.

Operator

Your next question will come from the line of Joe Box from KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Just a question on the integration. It sounds like there could be an SG&A build later in the year. Can you just give us a sense on what type of infrastructure you need to put in place and maybe how we should think about the SG&A, on a percentage basis later in the year?

Jeffrey R. Feeler

Yes, I mean, this is Jeff, and I'll let Eric quote the numbers. But we gave guidance on what we expect for SG&A to be, per quarter for Q3 and Q4. With regard to the comment of additional SG&A investment, as we talked about on the -- at the time of announcement, both companies operate a very lean ship with regard to the support functions. As we combine and go through this process of integrating -- integration, where there are going to be some additional investments that we're going to make. From a general range, it's less than probably $1 million will be my guesstimate at this stage. That, over time, will probably work itself out as we get on common platforms, common systems through the 2-year integration process that we are planning now.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Perfect, that's helpful. And then can you maybe just put a little bit more color around the $4 million per quarter in purchase accounting. Are you planning to call that out explicitly so that if we want to, we can exclude that?

Eric L. Gerratt

Yes, Joe, this is Eric. I don't know that we'll call it out explicitly. We do have some intangible amortization, which is the biggest piece of that. We do have some intangible amortization that comes from previous acquisitions, but it's relatively small in comparison to what comes from EQ. So that $4 million really reflects kind of the incremental. And again, as I mentioned in the prepared remarks, it's based on a preliminary evaluation. So we still have quite a bit of work to do to finalize that valuation and the value of those intangibles. So as those values change, and as that results in changes to that amortization going forward, we'll communicate that so that, that's clear. But that $4 million is really the incremental amortization on those intangibles, based on what the preliminary values look like today.

Jeffrey R. Feeler

And Joe, I'll add to that. With regard to calling out those intangibles, it will be in our adjusted EBITDA calculations. So you'll be able to see that. we don't have any intention of stripping it out from EPS or other reported numbers. But you will have visibility to what those -- what that amortization is.

Eric L. Gerratt

Yes, so the intangible amortization on that EBITDA reconciliation, Joe, will reflect the purchase accounting specific to EQ, as well as the legacy purchase accounting amortization.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay. But I mean, so net-net, if we're talking $4 million per quarter, if we choose to add that back to your adjusted EPS, we could be looking at something potentially $0.20 higher relative to your existing guidance?

Jeffrey R. Feeler

I haven't done the math. But yes, it would be a lot higher.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then, when we do see the 10-Q and you do break out your 2 segments, are you going to be moving any components from the legacy US Ecology to the Field and Industrial business or is it literally just going to be legacy ECOL as the environmental services, your lump in the new disposal business and then Field and Industrial services is just going to be EQ service?

Jeffrey R. Feeler

Yes, at this stage, we're still working through the details of where all the segment -- segmentation of the business. But generally speaking, the legacy EQ treatment and disposal business will roll in and be combined with the US Ecology treatment and disposal business. There really won't be anything coming from the US Ecology Field Services side, which is very minimal anyway, going to the services side of the combined business.

Eric L. Gerratt

And Joe, one thing to just clarify. So for this quarter in the 10-Q, as Jeff mentioned, we're still working through how we'll be structured and how the reporting will work, both internally and externally, from a segment perspective. So for this 10-Q, what you'll see is you'll see the entire EQ business kind of handled as in our segment disclosure in its entirety. So you'll have the legacy US Ecology segments, as they've been, with an additional segment for the entire EQ business. We expect, as we finalize kind of our segment and internal structure, going forward, into next quarter and through the year, that we'll have that broken out by year-end. But that's the way it'll look in this 10-Q.

Operator

Your next question will come from the line of Barbara Noverini from Morningstar.

Barbara Noverini - Morningstar Inc., Research Division

If you exclude the impact of the Army Corps business in the second quarter, would your year-over-year volume change look more like it did in the first quarter, which is more like a 30% increase? Or do both quarters really just illustrate that the lumpiness of project work here?

Jeffrey R. Feeler

Barbara, I haven't done the math of excluding out Army Corps volumes. I mean, they were definitely down in the second quarter. When you look at the prior year Army Corps volumes, we saw sequential declines throughout 2013 in that business. So part of the percentage, that we gave, is just cycling a higher quarter last year. We're seeing the back half this year being a lot stronger. With regard to kind of sequential volume decline, first quarter volumes just were really strong. There were a lot of things shipping. Second quarter, we did see some different of our nuclear fabrication decommissioning plant. That facility we shut down during the quarter and has resumed in July. And we see back half volumes picking up in July on that front as well.

Barbara Noverini - Morningstar Inc., Research Division

Okay. Okay, got it. And then next, can you give us a sense for what kind of capital improvement projects need to be done over at EQ? And is this additional, call it, $10 million to $15 million of CapEx earmarked for then, just the start of additional improvements that yet need to be made over the course of your forecasted to your integration period?

Eric L. Gerratt

Sure. The capital improvements that they have over at EQ are really planned, budgeted capital purpose. It's not anything that US Ecology is coming in and saying, "This needs to be improved upon." So it's broken down into kind of the 2 segments of their business, typical maintenance activities and minor growth activities in the Environmental Services side of the business. On the services side of the business, it's really concentrated into equipment, which is revenue producing equipment that we see in the second half of the year. So kind of broken down in that -- those areas.

Barbara Noverini - Morningstar Inc., Research Division

Got it. Got it. So given that, would you say $30 million to $35 million is a good ballpark figure, for the consolidated entity going forward?

Jeffrey R. Feeler

Yes, we're still reviewing all the capital plans, going forward. As we talked about at the announcement date, we expect $20 million to $40 million, I'm sorry, $30 million to $40 million on a combined basis kind of as a general run rate for capital improvement. That being said, in years, you have some variability when you have to build out cell construction. We're not seeing having to build anything out at EQ, for some time period. But we're also -- we're seeing some acceleration of volumes that were down in the Gulf Coast that has kind of accelerating our 2015 plan when we -- where we're going to have to build some cell space down there. So we're still working through those details. But I think, for a general range, $30 million to $40 million is probably a good range to go with.

Operator

[Operator Instructions] Your next question will come from the line of Michael Hoffman from Stifel.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Jeff, if we could start a little bit with the outlook of the legacy company project, if you said it in your comments, I may have missed it. Army Corps, I would have thought would have started to ramp off of last year's depressed levels. So what was happening there?

Jeffrey R. Feeler

It's just timing of the projects that -- and when they start shipping. They really didn't start shipping up until July, for the most part, any larger volumes. And we do see that trending to where we're going to see some year-over-year growth. So the back half should be very strong in the Army Corps business.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Okay. And because their fiscal year ends in the end of September, do you see acceleration to trying to use allocated money in the fiscal year? Or are they going to be able to roll that money over and not lose it?

Jeffrey R. Feeler

There should be strong -- well, I don't know if I'll be able to roll anything over and not use it. But the volumes, definitely, are going to be very strong in the third quarter in the Army Corps business. With regard to the fourth quarter, that will enter a new budget cycle. And from what we can tell, it looks like that they'll continue shipments into the fourth quarter.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then, typically, the project market can take -- takes a pause when the big industrials are going through maintenance turnarounds. And 2Q was a pretty healthy maintenance cycle, for a lot of what have been your customer base for broadly the sort of that industrial marketplace. So is that some of why there may be a pause? Is it just they're very focused on the turnaround and so that discretionary project gets delayed until they get through the turnaround?

Jeffrey R. Feeler

That definitely could be. We've seen a little bit of a pause, and it's really geared towards kind of the back half. And when I say the back half, it's really limited to the fourth quarter. Third quarter visibility looks very strong on what we're seeing. The fourth quarters are wildcard right now. And I think what you just pointed out could definitely have some merit to that, as people are focused in other areas and could definitely change the outlook as they get more -- get redirected new tasks.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

And to that end, the thermal business is very turnaround sensitive. So I am assuming, you had a good quarter in thermal?

Jeffrey R. Feeler

Thermal did well. We were still down, year-over-year, on volumes. But it's really mix-related versus demand. We have a strong backlog of demand. We're anticipating solid, a solid, really second half volumes being consistent with first half volumes based off a consistent mix of waste streams.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

And you have 2 big projects for a multi-period. Both of them are going through expansions in scope of work, at least reviews. Where are we on that expansion of scope of work?

Jeffrey R. Feeler

Yes, some of our larger project's shipping now. One in particular has definitely expanded the scope, and that's the nuclear fabrication decommissioning project. Volumes on that are definitely increasing. And now we expect it to ship through 2015 into 2016. On the other large Northeast project, it continues to ship. We expect it to ship into 2015.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Okay. And at this juncture, would that be, if you're thinking about the headwind of a bigger project ending, is that a first half end or second half end on the East Coast project?

Jeffrey R. Feeler

It's kind of hard to tell right now. As you can appreciate following our business for so long in the industry, is that estimating ultimate volumes of a large cleanup facility can be very problematic. Right now, we think that they'll shift through all of 2015 next year. But that could change. It could go, move into '16 or they could accelerate into being completed in the first half.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then back to Joe's question on the amortization. I don't -- if I remember correctly, you didn't get a step up on the tax basis. That amortization, you don't get a tax shield for it. So your effective tax rate is going to move up on us as a result?

Eric L. Gerratt

Yes, Michael, a lot of what will happen with the tax related to the book is it's going to result in a lot of timing differences. So you're going to see, if you look at our balance sheet, you'll see a pretty big spike in our, particularly our long-term deferred tax liabilities. So what I really -- it becomes a timing issue. There are pieces that there's no tax shield for. But, by and large, I think it's going to have a small impact on the overall rate.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

All right. But if somebody is trying to do that cash earnings versus GAAP earnings, they got to remember there's a fairly significant tax difference on that calculation, just can't apply the book tax rate?

Eric L. Gerratt

That is correct.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then on capital spending, that amortization doesn't require capital from a replacement standpoint. So using a proxy D&A, as a proxy to capital spending, breaks down now after this big deal?

Jeffrey R. Feeler

So Michael, was that a question?

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Yes, it's typical proxy, as you spend your D&A from a capital spending standpoint, or some high proportion -- is there -- you're not going to have to spend capital to replace this amortization, this is customer as...

Jeffrey R. Feeler

No, that's correct. Yes, that's correct.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

And then one other businesses that EQ had bought near the tail end just before you acquired them was a company called Allstate, which is pretty interesting work, refining, turnaround and maintenance business for the Pennsylvania, New Jersey, Delaware area. What are the opportunities to take that expertise and at least identify the right target acquisition, if not, any growth organically in other regions of the country?

Jeffrey R. Feeler

Yes, with regard to that Northeast business, that EQ bought or Allstate PowerVac, there's definitely service components on that you can take and move, especially down in the Gulf Coast, tank cleaning business, other type of maintenance activity business down there. It's definitely something that we're looking at, and evaluating on. Whether we do it organically or look for other acquisitions down there to try to expand that business line is to be seen. Right now, we have a pretty good backlog of material. We pretty much are running the unit we have down in Texas at full capacity as is. So it's probably a longer-term venture on that front. Once we get to the new permits that are in place down in Texas allowing us to increase our capacity.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

And your about a year away from that at this point, that's more -- that was kind of a 3-year plan and we're into year 2?

Jeffrey R. Feeler

Yes, we're planning to have -- we're still on track for the permits to be issued some time in 2015. We're already developing capital plans to move from a 60-inch dryer to a 90-inch dryer, which could happen as early as Q4 into 2015.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then just so I'm clear. If you hadn't bought EQ, you have -- if not revising the guidance outright, maybe at least walking us through the brand [ph] with a lot of confidence. Is that the original guidance?

Jeffrey R. Feeler

That's correct.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

One last question. On your senior leadership team, as you're walking through this integration, clearly have on the top of the list, this is a big risk to our success. What is that risk in your mind? And what are you doing to mitigate it?

Jeffrey R. Feeler

Well, with regard to the leadership team, at the highest levels of the organization, they're all on the call today. And with regard to protecting them and making sure that they stay employed, I think that we've got a good team and a good compensation package for them. And I'm not terribly concerned about that, that process of it. Kind of going to the next layers down. What we have are very motivated workforce right now. Everybody's excited about this combination. They see the opportunities ahead and where we can grow the business. And for those that are competitive, which we have in this organization, I think that they see the opportunities and they are embracing it right now.

Michael Edward Hoffman - Wunderlich Securities Inc., Research Division

Well, I'm sorry I asked that question that clumsily, I appreciate that answer. What I really meant is if you sat down with the team and you're formulating integration plan, you have identified and prioritized first items that would be risk to a successful integration. What is at the top of that list that you, as a team, have thought about that? And what are you doing to mitigate that risk, right? I appreciate that what you're doing is just to keep the team together. But I really meant about putting the 2 businesses together.

Jeffrey R. Feeler

Yes, from an integration risk standpoint, when you look at the overall combined businesses, I mean, the most challenging areas that we have is combining the sales force team, getting the go-to-market approach right, and making sure that we're selling services and being able to cross-sell services and educate the teams, across the board, on the capabilities on both sides. We've already held those joint sales and ops team meetings with the first really 3, actually, 4 weeks of acquisition close, and those went extremely well. The teams are out, actually out, working and mobilizing right now, doing those type of things. So we're mitigating it through communication and education, and I think that that's how we're going to be successful at it.

Operator

[Operator Instructions] We have a follow-up question from the line of Justin Ward from Wells Fargo.

Justin Ward - Wells Fargo Securities, LLC, Research Division

I just had a couple of questions on margins. The large project scope increases, that you guys have had on your legacy business, does that enable the legacy treatment and disposal gross margins to stay in that high 40s range, longer than you guys have previously expected? I mean, previously, you guys have exactly not start to kind of trend down in the mid-40s.

Eric L. Gerratt

Yes, Justin, this is Eric. I think it will definitely help and keep it maybe above that mid-40 range and will slow that kind of decrease back down to that level and more of the historical level. How long that takes, and what that timeframe looks like, I'm not sure yet or we're not sure yet. But I think your point is valid that we'll likely see our margin on the legacy US Ecology T&D business, stay up closer to that 48%, 49% for a longer period of time.

Justin Ward - Wells Fargo Securities, LLC, Research Division

Okay. And then on EQ's Field Services and Industrial Services, and I think last time you spoke and noted that, that business was kind of going through a margin improvement initiative. Primarily, I think, focusing kind of a higher margin end markets. Obviously, a lot of that initiative is going to change with the integration. But I'm wondering if you can kind of update us on the progress there?

Jeffrey R. Feeler

Yes, this is Jeff. I mean, with regard to that, there is definitely initiatives underway and how we've organized, the combined companies is to put some additional emphasis on the services organization to be able to drive some additional margin improvement in that organization, looking at quality of revenue, looking at how we go-to market within those services and what we really want to compete at. It's early on. I mean, that's a longer-term initiative that we see. We're still focused on working on the integration side and developing plans. But there's definitely -- and we'll have more to report on that in coming quarters.

Operator

Your next question is also a follow-up from Joe Box from Keybanc Capital Markets.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Just one quick follow-up. It looks like there's actually a decent variation in your revenue guidance in the back half of the year. I do appreciate the comments that you guys gave earlier on some of your bigger projects. But can you maybe just help us with some of the items that you baked into your guidance that would put you at the upper end of the range, as opposed to maybe some of those items that might not occur, that would put you at the lower end of the range. I'm just curious what some of the sensitivities are to that guide.

Jeffrey R. Feeler

Joe, the range that you see is pretty broad on revenue because of the fact that when we look at it, quarter-by-quarter, you have less visibility in the back half. So of the, I should say, into the fourth quarter. So I mean, when you kind of take a look at that, as what could happen to be up at the top end of the range, each of the third and fourth quarter is we have improved visibility and more opportunities arrive in the fourth quarter than what we're seeing today. To be down at the lower end of that, it's kind of what we're kind of seeing right now as a limited pipeline visibility, in the fourth quarter.

Eric L. Gerratt

Yes, Joe, just to tag on. This is Eric. It really boils down to what we've seen on the legacy US Ecology business. It's kind of those event projects that we always try to make some assumptions about projects we may not even know about yet. And so what really takes us in that range is, as the pipeline firms up and if there's better projects, then we may -- we're expecting on the low end then now push us to the high-end and if there's few works on the low-end. I mean, we know what we know about some of the big projects and largely we've talked about it. It's really those projects that are either unidentified or the timing is unsure.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay, that's helpful. I wasn't sure if it was predicated on the larger side, some of your bigger projects. So that's helpful.

Operator

We have no more questions in the queue. I would now like to turn the call back over to Jeff Feeler for any closing remarks.

Jeffrey R. Feeler

All right. I want to thank participants for listening today, and we look forward to updating you in early November. Thank you.

Operator

Ladies and gentleman, that would conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: US Ecology's (ECOL) CEO Jeffrey Feeler on Q2 2014 Results - Earnings Call Transcript
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