US Ecology's (ECOL) CEO Jeff Feeler on Q4 2015 Results - Earnings Call Transcript

| About: US Ecology, (ECOL)

US Ecology, Inc. (NASDAQ:ECOL)

Q4 2015 Earnings Conference Call

February 19, 2016 10:00 a.m. ET

Executives

Eric Gerratt - CFO

Jeff Feeler - Chairman and CEO

Steve Welling - EVP of Sales and Marketing

Simon Bell - EVP of Operations for Environmental Services

Mario Romero - EVP of Operations for Field and Industrial Services

Analysts

Michael Hoffman - Stifel

Joe Box - KeyBanc Capital Markets

Tyler Brown - Raymond James

Scott Levine - Imperial Capital

Barbara Noverini - Morningstar

Operator

Good morning, and welcome to the US Ecology, Inc. Q4 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded.

At this time I would like to turn the conference call over to Mr. Eric Gerratt, Chief Financial Officer. Sir, please go ahead.

Eric Gerratt

Good morning, and thank you for joining us today. Joining me on the call this morning is Chairman 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 these results to differ materially from those expressed include, but are not limited to those disclosed 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 Web site at www.usecology.com. Throughout yesterday's earnings release and our call and presentation today, we refer to adjusted EBITDA, adjusted earnings per share, and pro forma adjusted EBITDA. These metrics 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 adjusted earnings per share, adjusted EBITDA, and pro forma adjusted EBITDA can be found in Exhibit A of our earnings release. We believe these non-GAAP metrics are useful in evaluating our reported results and our 2016 guidance.

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

Jeff Feeler

Thank you, Eric, and good morning everyone. I'll start this morning's call with a few summary comments on our fourth quarter and full year results that we released yesterday. I will then turn the call back to Eric for additional details on our financial results. I will then close out the call with some comments regarding our outlook for 2016, and then open up the call for questions and comments. For those following the webcast presentation, please direct your attention to Slide 5.

US Ecology finished the year on a strong note, with results slightly exceeding our expectations. In addition to producing solid results during some difficult market conditions, on November 1, we completed the sale of Allstate Power Vac, eliminating a non-core asset from our portfolio and simplifying our business model.

During the quarter we delivered adjusted EBITDA, up $33 million, up 6% from the $31.2 million in the same quarter last year. Pro forma adjusted EBITDA, which excludes Allstate and business development expenses grew 10% in the fourth quarter of 2015 compared to the same period last year. This is an impressive performance, given the fact that we have fully completed the large East Coast clean-up project that benefited in the fourth quarter of 2014.

As expected, revenue for the fourth quarter of 2015 was down from that of the prior year, primarily due to the Allstate sale, completed Event Business, and our continued focus on revenue quality in our Field and Industrial Services segment. Our Base Business was up 3% during the quarter as compared to the same quarter last year. Sequentially, from the third quarter of 2015, we experienced a 6% rebound in our Base Business, nearly offsetting the 7% decline experienced last quarter. Providing support that this decline experienced in the third quarter of 2015 was not a major contraction, but instead a combination of normal timing, and inventory optimizations.

Moving on the Side 6, as expected, our project-based Event Business was down in the fourth quarter primarily as a result of completed projects that were not fully replaced. Like previous quarters in 2015, we experienced select project deferrals, and now these deferrals should benefit 2016.

Our Field and Industrial Services segment continues to benefit from a strategic shift towards higher quality revenue opportunities that are targeted at leveraging our core Environmental Services assets. As a result, we continue to drive segment margin improvement, and in turn higher operating performance.

During the fourth quarter, our Field Services group saw operating margins almost double from that of the prior year, and delivered higher than expected results. We used the $59 million of proceeds from the Allstate divestiture to pay down our term debt, supplementing earlier pay downs during 2015. Our total repayment of debt in 2015 totaled $94.6 million, bringing our outstanding obligations to approximately $300 million, and resulting in a leverage multiple of 2.4 times trailing pro forma adjusted EBITDA. We remain focused on driving free cash flow and de-levering our business, while looking for opportunities to invest both organically and through acquisitions.

Overall, I am pleased with the team's focus and execution, and our ability to deliver these strong results in the current economic environment.

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

Eric Gerratt

Thanks, Jeff. Before I dive into the financial report, I'd like to remind listeners that the full year 2014 results include just over six months of the acquired EQ operations. As a result, there are significant variations in the year-over-year comparisons to 2015. The fourth quarters of both 2014 and 2015 include a full quarter of results for the acquired EQ operations.

As a reminder, last quarter, we changed and conformed how we track and report our disposal revenues by industry group for the Environmental Services segment, looking at treatment and disposal revenue at the generator level, as opposed to the customer level. We also added better visibility to end markets by categorizing the generators based on a North American Industry Classification System or NAICS codes. Additionally, as of last quarter, we now define event business as non-recurring projects that equal or exceed 1000 tons, with the remainder being categorized as base business. We believe these new definitions are a better representation of base and event business, and will provide better insight into the ES segment as a whole.

As we report future quarters, prior periods presented will be recast based on the new definitions. On Slide 8, we've included a summary of event and base business metrics for the legacy US Ecology ES business, using the new definitions versus what we disclosed under the old methodology.

With that, I'd like to now turn the fourth quarter financial report. As shown on Slide 9, revenue for the fourth quarter of 2015 was $138.3 million, down from $157.2 million in the fourth quarter of 2014. Revenue for the Environmental Services segment for the fourth quarter was $97 million, compared to $100.6 million in the fourth quarter, last year. This decline was driven by lower treatment and disposal revenue, as well as lower transportation revenue. Recurring base business for the ES segment increased 3% compared to the fourth quarter last year, and represented 79% of the treatment and disposal revenue. Event business for the ES segment decreased 28% from the fourth quarter last year, and represented 21% of treatment and disposal revenue in the quarter.

Slide 10 breaks down treatment and disposal revenue for both base and event business by industry verticals. The 3% increase in base business was concentrated in the refining and general manufacturing verticals. These increases were partially offset by declines in the government, and metal manufacturing vertical during the quarter. The 28% decline in event business was driven by decreases in the chemical manufacturing, refining, and transportation verticals. As expected, the most significant decline in the chemical manufacturing group stem primarily from the expected reductions in volumes from a large east coast remedial clean-up project. Excluding this project, our Chemical Manufacturing event business was down approximately 12% from the fourth quarter last year.

These decreases in event business were partially offset by increased revenues in the metal and general manufacturing, utilities, government, and other industry groups. The Field and Industrial Services segment delivered revenue of $41.3 million, including $8.1 million from our one month of ownership of the divested Allstate business in the fourth quarter of 2015. This was down from $56.6 million in the fourth quarter of 2014, which included $17.4 million from a full quarter of the divested Allstate business. Excluding Allstate, the revenue decrease was primarily the result of lower transportation services, and lower project work in the Northeast remediation market associated with the large east coast cleanup project that is now completed, as well as other remediation opportunities.

Turning to Slide 11, gross profit was $44.2 million in the quarter, down from $46.2 million in the same quarter last year. The Environmental Services segment contributed $37.2 million in the fourth quarter of 2015, compared to $37.1 million in the same quarter last year. This increase was primarily due to improvement treatment and disposal margins, which were 43% in the fourth quarter of 2015, compared to 42% in the fourth quarter of 2014. Gross profit for the FIS segment was $7 million in the fourth quarter of 2015, compared to $9.1 million in the fourth quarter last year. This decline was primarily due to the divested Allstate business, which contributed gross profit of $1.6 million for our one month of ownership in the fourth quarter of 2015, compared to $4 million in the fourth quarter of 2014.

Excluding the decline related to the Allstate business, FIS gross margin improved by over 300 basis points in the fourth quarter of 2015. Selling, general, and administrative spending or SG&A was $22 million in the fourth quarter of 2015. This was down 19%, from $27.1 million in the fourth quarter last year. SG&A includes $1 million from Allstate for our one month of ownership in the fourth quarter this year, compared to $3 million for the fourth quarter of last year. The remaining decline in SG&A primarily relates to lower labor and incentive compensation, lower business development expenses, and continued cost control efforts in the fourth quarter of this year.

Operating income was $22.2 million in the fourth quarter of 2015, up 16% from operating income of $19.1 million in the same quarter last year. Interest expense for the fourth quarter increased to $7.2 million compared to $5.2 million in the same quarter last year. This increase was primarily the result of $2.4 million incremental non-cash amortization of our deferred financing cost associated with our credit facility.

The incremental amortization was primarily the result of the significant debt principal payments made in 2015, including over $59 million in principal payments in the fourth quarter using the proceeds from the Allstate divesture.

The higher deferred financing cost amortization was partially offset by lower interest expense as a result of a lower outstanding debt balance in the fourth quarter of 2015 compared to the fourth quarter last year.

During the fourth quarter 2015, we recorded a loss on the divesture of Allstate of $542,000. We expect to recognize additional gains or losses in the first half of 2016 as we finalized post closing adjustments with the buyer.

Turning to Slide 12, the company's effective income tax rate for the fourth quarter of 2015 was 45.5%, up from 36.3% in the fourth quarter last year. This increase primarily reflects an increase in our U.S. effective tax rate driven by a higher overall state tax rate which is the result of true-ups in our apportionments between the various states in which we operate as well as other adjustments based on filed state tax returns.

As mentioned in our earnings release yesterday, the higher U.S. tax rate applied to full year U.S. pre-tax earnings compared to the expected tax rate included in our fourth quarter and 2015 guidance resulted in incremental tax expense in the fourth quarter of approximately $0.5 per diluted share.

We reported net income of $7.7 million and diluted earnings per share of $0.35 in the fourth quarter of 2015. This was down from $8.7 million and $0.40 per diluted share in the same quarter last year.

Adjusted earnings per share was $0.36 in the fourth quarter of 2015, down from $0.40 per share in the fourth quarter last year, and includes the approximate $0.07 per diluted share related to the incremental non-cash amortization of deferred financing cost as well as the higher tax rate which impacted our fourth quarter by approximately $0.05 per share.

After adding back the impacts from the deferred financing and higher tax rate, our adjusted EPS would have been $0.48 per diluted share for the quarter. Adjusted EBITDA for the fourth quarter was $33 million, up from $31.2 million in the fourth quarter last year. The divested Allstate business contributed adjusted EBITDA of $502,000 in the fourth quarter of 2015 compared to $2.5 million in the fourth quarter of 2014.

Pro forma adjusted EBITDA, which excluded the divested all state business and business development expenses, was $32.6 million in the fourth quarter of 2015, up 10% from $29.5 million in the fourth quarter of 2014.

Turning to full year results on Slide 13, total revenue was $563.1 million in 2015 compared to $447.4 million in 2014. The divested Allstate business contributed $59.1 million of revenue in 2015 compared to $37 million during our ownership period in 2014.

Revenue for the environmental services segment for 2015 was $375.8 million compared to $319.8 million in 2014. The field and industrial services segment delivered $187.2 million in revenue in 2015 compared to $127.6 million in 2014.

Adjusted EBITDA for 2015 was $125.4 million compared to $1.9 million in 2015 and included $5.1 million and $5 million of adjusted EBITDA from the divested Allstate business in 2015 and 2014, respectively.

Pro forma adjusted EBITDA, which excluded the divested Allstate business and business development expenses, was $122.6 million in 2015 compared to $110.4 million in 2014.

Adjusted earnings per share, which excluded divested Allstate business, foreign currency translation losses, impairment charges, and business development expenses was $1.57 in 2015, down from $1.99 in 2014.

Adjusted EPS for 2015 was negatively impacted by approximately $0.07 per diluted share related to the previously mentioned incremental non-cash amortization of deferred financing cost, and approximately $0.05 related to higher than expected U.S. effective tax rate. Adding these two adjustments for deferred financing and higher taxes, our adjusted EPS would have been $1.69 per diluted share.

Turning to Slide 14, we generated $71.5 million of cash from operating activities in 2015. We also invested $39.4 million in capital projects, paid down $94.6 million on our long term debt and paid up $15.6 million in dividend to our stockholders.

Our balance sheet continues to improve with our long term debt balance, excluding deferred financing cost, at %300.2 million at December 31st, 2015.

As Jeff mentioned, our debt-to-pro forma adjusted EBITDA leverage ratio was approximately 2.4 times, down from approximately 3.3 times after the acquisition of EQ just a year and a half ago.

Return on invested capital for the 12 months ended December 31st, 2015, excluding the impairment charge, was 6.7%. Return on assets was 3.8% and return on equity for the same period was 12.6%. With that, I'll turn the call back to Jeff.

Jeff Feeler

Thank you, Eric. Moving on to Slide 15, as we enter in 2016, demand for services remained healthy and we're seeing many opportunities on both sides of our business to grow the company. However, despite being optimistic, we are mindful that these are uncertain times and the current macroeconomic conditions facing many of our customers, will likely remain a challenge again this year in 2016.

As we announced yesterday, we expect that 2016 revenue will range between 502 million and $528 million. This represents growth of up to 5% after adjusting for the $59 million of Allstate revenue recognized in 2015. Similarly, we expect our adjusted EBITDA to range from 126 million to $132 million in 2016, representing growth of up to 8% over the 2015 pro forma adjusted EBITDA.

Our adjusted earnings per share is expected to grow faster than revenue and adjusted EBITDA and range from $1.80 to $1.95 per share benefiting from lower interest expense and a lower anticipated tax rate.

Breaking down our operating segments on slides 15 and 16, we expect our environmental services segment to deliver revenue ranging from 378 million to $396 million, representing growth up to 5%. It is important to note that this excludes revenue on transportation services associated with currently unknown project based event business. This often results in actual transportation based revenue coming in above expectation.

As we look further into our event business outlook, we estimate that about $13 million of our 2015 adjusted EBITDA will need to be replaced in 2016 from the completion of large multi-year event project that are now completed or will be completed in the near future.

Our pipeline continues to be strong and we are seeing a number of opportunities to backfill or replace this business. We have already secured approximately half of the event business gap with new multi-year projects, and have several other large projects where we believe we are well positioned to secure given our nationwide footprint, breadth of permits and high throughput capacity.

We also believe we have a competitive advantage when it comes to securing new phases of projects where we have provided pass services. Opportunities continue emerge as we gain visibility into the summertime construction and remediation season. And we believe we are well positioned to not only backfill completed event business but potentially grow upon 2015 levels.

As for the base business, we anticipate growth in low single digits as our industrial customers adjust production schedules and right size their operations. Our field and industrial services segment is expected to generate revenue from 124 million to $132 million in 2016. This represents growth of up to 3% excluding the 2015 Allstate revenue.

This growth stems from opportunities in services such as total waste management and small quantity generator services such as retail. We are also expecting to see growth in our remaining industrial services group and remediation services. These growth areas are offsetting transportation services and other lower quality revenue that was cold during 2015 as we shifted our strategy.

We will continue to focus on optimizing our revenue in the segment, improving quality, and growing those services -- service areas where we can provide a value-added proposition to our customers, or services that drive waste into our core Environmental Services assets.

Looking at seasonality, on Slide 17, we anticipate the first quarter of 2016 to be the lowest quarter of the year, with each quarter improving thereafter. In fact, seasonality looks to be more pronounced in 2016 than in prior years, given that a number of our replacement projects that have been secured are not anticipated to commence until the summer time. In addition, we also exited the year with less waste stockpiled at our Canadian operation, limiting some of our first quarter production that we had enjoyed in previous years.

Turning to capital expenditures, we expect to spend between $35 million and $38 million on capital projects in 2016. Approximately 12 million of this capital is expected to be spent on added landfill capacity throughout our disposal network, including Nevada, Texas, Michigan, and Blainville. Approximately $3 million has been planned on upgrading our information systems and in information technology infrastructure in 2016. The remaining amounts are a combination of maintenance and growth capital projects.

Finally, on Slide 18, our primary initiatives for 2016 center around fine-tuning our integration activities, and driving operational excellence throughout the organization. Investing in our information systems remains a top priority, and we are committing significant resources to get this accomplished. We expect that our financial systems will be operational on January 1, 2017. Other IT initiatives will continue over the next couple of years as we combine legacy systems, creating new capabilities, and scalability. Other areas of priority are obtaining key permit renewals and modifications at a number of our operating facilities to create incremental market share opportunities or drive cost savings. Execution of our Field Services business plan, while leveraging our go-to-market approach will allow for greater cross selling and new market penetration.

Typically, many of our Field Services contracts have long sales cycles. And as a result we contract wins in 2016 will most likely benefit outer years. We remain optimistic that this area of the business has great growth opportunities for the company to leverage. Tuck-in or other acquisitions will continue to be part of our strategy to expand our network, allowing for increased growth opportunities.

In closing, as I reflect on these turbulent times in our economy, I can honestly say I'm more excited today than I've ever been in the past. We have the best collection of assets in the industry, and operate in a regulatory framework that make our services essential, not optional. High barriers to entry allow us to generate strong cash flow with a healthy balance sheet. And with a healthy balance sheet, we are in a position to take advantage of opportunities as they present themselves. Our team is driven and energized to become the premier North American provider of environmental services, where the best people work, delivering sustainable solutions for our customers and long-term value for our stockholders. And with that, I look forward to reporting on our progress in future quarters.

Operator, we'll now open up the call for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Michael Hoffman from Stifel. Please go ahead with your question.

Michael Hoffman

Thank you very much. Jeff, if I looked at the sales mix chart in the PowerPoint, and focused on the broker, when I think about the broker, they're taking an amalgam of different end markets. So that 4% should be somewhat indicative of the underlying customer base volume growth. Is that a fair way to think about it?

Jeff Feeler

I would say, yes. I mean, I think that's a good way to take a look at it. Along with broker-based business, there's a lot of timing elements to it as well. But I think that that's a good representation of primarily small quantity generation. That's what primarily the brokers will be serving as the small quantity generators and manufacturers. Steve, do you have anything else you want to add?

Steve Welling

Hi, Michael.

Michael Hoffman

Hi, Steve.

Steve Welling

Well, some of the brokers are also doing government work, like DLA, which is ongoing maintenance-type waste treatments for military bases, in addition to commercial industries. So it's a combination of everything really.

Michael Hoffman

Okay. So having said that, I'm assuming you can see the difference between brokers, and then coming direct to you. What the trend through the first seven weeks?

Jeff Feeler

We really haven't -- we're not going to get down into details, Michael, on the first seven weeks. I will say that January has started as expected. We're tracking as planned from that standpoint. So, we're not seeing any real surprises during the first seven weeks of the year than what we had anticipated when we entered the year.

Michael Hoffman

Okay. And with regards to your comment on the seasonality, and thanks for pointing that out, just reminding us, how do we think about that though in sort of the nature of change? I mean, a year ago, if my memory serves, you were down kind of 9% year-over-year. Is that how we're thinking about it, kind of a five to 10 down, or is it greater than 10?

Jeff Feeler

Yes, the way I kind of look at it, you know, it gets a little confusing with Allstate being in the prior year numbers, but when you strip out the Allstate numbers last year, our first quarter, we did revenue approximately $123 million, it was about 24% of our full year from that standpoint. From an adjusted EBITDA excluding the Allstate, we were right around 26 million from that standpoint. And so when I look at the quarterly sequential, I would say that we're probably going to be trending down close to 20% in the first quarter, plus or minus a percent of two, just because of some of the factors that I highlighted in our prepared remarks.

Michael Hoffman

Okay, and then a pretty reasonable [ph] recovery into 2Q, and kind of a smooth pattern through the year?

Jeff Feeler

Yes, I would think that Q2 would be -- you would see some sequential improvement there at a little bit of a slower ramp. I think you're going to see the bigger improvement in the second half of the year starting in Q3.

Michael Hoffman

Because of the project work, but the base work, and even your Field and Industrial Services shouldn't be that -- quite as lumpy, right?

Jeff Feeler

On the revenue side, the Field and Industrial Services won't be as lumpy. You do have margin changes from quarter-to-quarter. And if you go back and kind of look at that, and piecemeal it down our first quarter on the margin side, it was the lowest. And we saw improvement through the balance of the year.

On the base business side, base business, there just is some volatility from just timing and lumpiness in it. And when you really look at that from a sequential standpoint, all the way back since we've combined with EQ, we've seen some sequential declines from Q3 to Q4 '14. We saw declines from Q4 to Q1 in '15. We saw substantial rebound in Q2 of '15. And then -- so we've seen some volatility in there. When you look at the numbers, it's pretty flat from that time period.

So as I look to 2016, I would think it to be lower single digits. Probably lower in the first half of the year, recovering in the back half.

Michael Hoffman

Okay, fair enough. And then with regards to the margin expansion that you're suggesting in the guidance, when I think of the drivers, how much of this is individual business or between Environmental Services, Field and Industrial versus leveraging corporate overhead. Did I lose you?

Jeff Feeler

We're kind of thinking about that question.

Eric Gerratt

Michael, this is Eric. I think it's more a function of the business and the operations, with a little bit around the edges from the corporate kind of SG&A perspective. It's being driven more by the business, by the two segments.

Michael Hoffman

Okay, so if I look at it at the gross margin level as a good place to start, then I should see a clear pattern of improvement in both business lines. And probably more substantial improvement in Field and Industrials because of the lower base I'm working off of?

Jeff Feeler

On that, Michael, I would just be a little careful of putting too much margin improvement in the Field and Industrial Services side. We've made tremendous progress in that effort in 2015. And so I think they're going to be minor steps along the way. So from a percentage perspective, yes, it may be larger than the environmental services side. But the environmental services side is our 100-pound gorilla. So you have minor basis point changes there, and you can drive real cash flow change throughout the organization.

Michael Hoffman

Okay. And at this juncture are you happy with where the leverage is, and so we kind of manage leverage about this level?

Eric Gerratt

Yes, I think, Michael, we're projecting in 2016 to continue to pay down based on our budget and kind of guidance we expect by the end of the year to be down closer to about 2.1 times. So that's about $25 million-$26 million of pay down in the year which is -- I think that still results in us building a little bit of cash towards the end of the year. But I think we're going to continue to pay down at that level, and kind of get closer to that 2 to 2.1 times.

Michael Hoffman

Got it. All right, thank you very much. Oops, go ahead.

Jeff Feeler

Michael, I'll just add to that one thing. I mean, that's our plan assuming we don't have better uses for our cash. And as I've mentioned, we continue to look for opportunistic opportunities to expand our network, and acquire businesses more likely on the tuck-in side of things. So assuming those don't materialize, or we don't find new opportunities, yes, we'll pay down debt from that standpoint.

Michael Hoffman

You have a competitor in the business, it's in a different industry, but is in the landfill side. Suggested yesterday they'd love to do deals as well, but are finding the fields fairly thin. What's your view?

Eric Gerratt

I think if you look hard enough you can find the right assets.

Michael Hoffman

Okay, perfect. Thanks.

Operator

Our next question comes from Joe Box from KeyBanc Capital Markets. Please go ahead with your question.

Joe Box

Hi, good morning, guys.

Eric Gerratt

Good morning, Joe.

Jeff Feeler

Good morning.

Joe Box

So I want to go back to one of Michael's questions on the guidance and the margins. If were to ex-out Allstate, and we were to just use the midpoint of your revenue, and your EBITDA, I'm coming up with about a 58% incremental EBITDA margin next year. Can you maybe just give us a little bit more context around how you theoretically get to that type of a number? Is it maybe more disposal-oriented contracts that are expected to come in? I guess because it seems like a fairly solid number, especially in light of some of the big disposal contracts that are ending in '15.

Jeff Feeler

So, Joe, one of the comments in the prepared remarks on the guidance I wanted to try to highlight and maybe it needs a little bit more of an explainer is when we provide guidance, especially on the Environmental Services side of things, we do not do a lot of precision in our transportation revenue that is bundled with our disposal, for unknown projects. And because of that, when you look at a margin profile, without that top line revenue, you're going to see some expansion there. The reality is, we are -- most of our event projects will most likely have some form of a logistic or transportation services that we will procure, and be part of. And there will be some additional revenue that goes along with that.

Now that comes along with, a lot of times, value-added, where we're providing those service to make sure that we can hopefully secure the work, as well as potentially put a little bit more certainty on timing of when that work comes into our business. But just keep that in mind when you're comparing previous years to what we're kind of giving from a guidance perspective.

Joe Box

Okay, thanks for driving that home. I understand you guys have obviously chopped a lot of wood on the FIS margin side. But if you look at gross margins ex-Allstate, I'm coming up with 320 basis points of improvement in 4Q. I guess I'm curious why it wasn't a little bit better. It sounded like there should've been maybe a mix benefit, with less transportation, and less low-margin remediation services. Am I thinking too much into this, that it should've been better?

Jeff Feeler

Actually, I think you are. I was very pleased with what the Field and Industrial Services side of the business did, and was not expecting to that level of improvement that we saw in Q4. They, as I mentioned, they exceeded our internal expectations on that group. The group continues to be focused on that. And to be honest, I'm very pleased with what they did in the quarter.

Joe Box

Okay, got it and then just one clarification for you. So you said that 13 million of EBITDA, it's going to roll off from event jobs in 2015, is that both PPG and Westinghouse, or is that just PPG ending?

Jeff Feeler

That would be those two projects, plus others.

Joe Box

Those two plus others, okay. So you've secured over half or approximately half of that 13 million that's locked and loaded to go in '16?

Jeff Feeler

Yes, it's about approximately half right now.

Joe Box

All right, guys, that's it from me. Thank you.

Jeff Feeler

Thank you.

Operator

Our next question comes from Tyler Brown from Raymond James. Please go ahead with your question.

Tyler Brown

Hi, good morning, guys.

Jeff Feeler

Good morning.

Eric Gerratt

Good morning, Tyler.

Tyler Brown

Hey, Eric, so a couple of quick modeling questions. So it sounds like you reported the charge in interest expense from the pay down on the principal side. But looking ahead, can you give us an expectation for interest expense in '16? Maybe including and excluding the amortization? And just to be clear that amortization is not included in the 180 to, I think, it's 195 range?

Eric Gerratt

Yes, so I'll start with your last question first so that the guidance includes kind of the expected or budgeted amortization in 2015 based on our estimated pay down. So, it's all in.

Tyler Brown

Okay.

Eric Gerratt

It includes all in interest expense. What we don't expect is the -- kind of the incremental hit we have this year. From kind of a modeling perspective, I am expecting interest expense, again based on our pay downs and including additional deferred financing amortization, to be around 17 million. So that's -- and that's for the full year.

Tyler Brown

Okay. Okay, prefect. And then, what is the -- I think you noted in the prepared remarks about a lower tax rate, what are you guys are expecting to book?

Eric Gerratt

Yes, all in around 40%. So, I would use 40 to 41 all in, that again where we get susceptible the variation is depending on how big of proportions it ends up being because it's at a pretty significantly lower tax rate. We will be doing as we file returns during 2016 some additional reapportionments and things like that, but we're expecting it to be around that 40% range.

Tyler Brown

Okay. Perfect. And then, can you guys touch a bit on your current tax -- cash tax pay status? So, maybe where are we on the NOL position? And what do you expect specifically in cash taxes in '16?

Eric Gerratt

For '16, I think my cash taxes will be a little bit higher than my book taxes, but not to the extent that that we saw last year.

Tyler Brown

Okay.

Eric Gerratt

We don't have a significant amount of NOLs. Most of the NOLs that we have are typically we have evaluation [indiscernible] against a lot of those because they are in places where we are not really doing lot of business anymore.

Tyler Brown

Okay, perfect. So then, I know you guys -- well, let's step back and look at Q4 real quickly on the cash flow side. You had a great quarter. It looks like that free cash flow was maybe a little bit light in Q4. Was there something in working capital that worked hard against you?

Eric Gerratt

No. I think really the biggest impact to our free cash flow at least the way we look at it in the fourth quarter was our CapEx actually came in a little higher than we expected, even a little higher than the top end of our range. But a lot of that's timing and this like that. But, I think CapEx was probably the bigger driver for both the quarter as well as the year.

Tyler Brown

Okay. And then I know you guys didn't given '16 free cash guidance, but maybe we can walk through a simple reconciliation if you'll indulge me here? So, is it really a simple as you are starting with call it midpoint EBITDA? You take out I don't know 17 million or so of cash interest, you maybe have 20 million of cash taxes, assume working capital is neutral and take out the CapEx and that probably gets somewhere in that 50 million range?

Eric Gerratt

Yes, you are really close. I think based on the two ends of the guidance range, I think free cash flow is popping out between 48 and 50 million.

Tyler Brown

Okay, prefect. And then, Jeff, you mentioned in '15 -- sorry in '16, you got a heavy aerospace spend, does that imply that '17 will actually see a step down in CapEx?

Jeff Feeler

I wouldn't go that far. I mean I think our normal range is probably going to be in 30 to 35 million range on an ongoing basis. In most of our landfills, we will do annual constructions, especially in Texas and our Canadian operation. What we are planning to build out in Nevada in 2016 will last several years from that standpoint. But it's also a brand new landfill, so there is a heavy construction spent because you have to put all the infrastructure in place as well. And Michigan has just been able to access additional aerospace on a vertical that is requiring that. Now that will happen almost every year from that standpoint too.

Tyler Brown

Okay, perfect. Thanks guys. I appreciate the time.

Eric Gerratt

Thanks, Tyler.

Jeff Feeler

Thank you.

Operator

Our next question comes from Scott Levine from Imperial Capital. Please go ahead with your question.

Scott Levine

Hey, good morning guys.

Eric Gerratt

Hi, Scott.

Scott Levine

How would you characterize your visibility, if you will, regarding the guidance you are providing here today relative to the visibility you had on the guidance you provided a year ago taking into consideration what you've booked an event pipeline, which seems to be a little bit more volatility in the base business as you now defining it and all that of that, looking for a color there?

Jeff Feeler

Well, I'll start and I'll let the team chime in where they think they can supplement on this. When we reviewing the game tapes kind of compare last year's guidance in February '15 versus where we are here, I mean personally I am more comfortable with where we are today. And that's not necessarily because we have enhanced visibility per se but we understand the acquired operations that much better.

We spent a lot of time investing in those business units developing business plans, right sizing the teams, really getting the team marching in the right order and developing those processes around there. So, I feel a lot more bullish on the guidance that we provided this year than I did probably a year ago just because of clarity.

That being said, the economic uncertainty that our customers are facing right now, it can't be just overlooked. And so that's the part of this year's guidance that we just got to be mindful of as they continue to go through tough time and adjust their production schedules on the base business side from that standpoint.

I'll let Steve talk a little bit more about the event pipeline.

Steve Welling

Sure. Generally what happens is first quarter is a planning quarter for a lot of the event projects. And normally, we are not getting awards until later in the first quarter by the times it's second quarter until we know. So, nothing is really unusual at this time in terms of how the event pipeline unfolds throughout the year.

Another thing that we're seeing, which is kind of interesting, is with the metal prices down dramatically this year, recycling companies are struggling which is actually creating opportunities for treatment and disposal. So we are seeing something we didn't expect as a result of economic trouble, but it's actually our treatment disposal sites.

Scott Levine

Got it. Thanks. And then as a follow-up, regarding your balance sheet and capital structure; so you are talking I think about ending the year close to two times leverage. Wondering is it a situation where we don't see much out there in the M&A landscape because you get more active on the capital return side? Just looking for your current thoughts regarding either a possibility of a buyback or possible dividend and just big pictures of which you consider yourself under levered?

Eric Gerratt

Yes, Scott, this is Eric. I think as we get down close to that two times range, again assuming there's -- not depending on what's going on in M&A pipeline, the rate environment, we're going to want to look at our capital structure and evaluate things like options like the dividend possibly a share repurchase. A share repurchase is something that that we'll consider and something we'll with the board about as we get closer to that two times range. But yes, we'll be looking at those options and their capital structure this year as we kind of get down to that range -- that two times range.

Scott Levine

Got it. Fair enough.

Eric Gerratt

I'll just add to that that when we look at our capital allocation, we don't look in the short term as far as what's happening in the next nine to 12 months. We are mindful of what the opportunities may be out there in several years and how best to position our capital structure to create a competitive advantage for us to be able to deploy that capital.

Scott Levine

This suggests more bias towards a buyback and more flexibility or would that be overstating it?

Jeff Feeler

I would suggest that, yes.

Scott Levine

Got it. Thank you.

Eric Gerratt

Thanks, Scott.

Operator

Out next question comes from Barbara Noverini from Morningstar. Please go ahead with your question.

Barbara Noverini

Hey, good morning everybody.

Eric Gerratt

Good morning.

Jeff Feeler

Good morning.

Barbara Noverini

You talked about a long sales cycle in field and industrial services, but are you finding that your ability to bundle services in now helping to move the processes along a little bit? And maybe just give us an example of some cross selling opportunities you have managed to capture?

Steve Welling

We had -- this is Steve, Barbara. We had a number of opportunities where we actually bundled the site work some of the remediation work with treatment and disposal resulted in two awards I think of late last year. And we are working on multiple opportunities for '16 and '17 where we would be bundling the site work with our field group and also transportation and disposal. So, we had success there. Some of the other field services really are like retail we had great success in growing retail. We have new awards and things we are bidding, it will feed the treatment and disposal facilities with waste. And we're actually doing that now in the West. We are -- our Idaho facilities had received that type of waste before. But now we are actually feeding material into those sites. They are just couple of examples.

Barbara Noverini

Okay, great. Thanks. And then, you talked about sanctioning your integration as a priority for 2016. So, maybe can you provide a little bit more detail about that? Is much of that is predicated on your information systems roll out? Or, are we still talking about field specific opportunities where you can find efficiencies and continue rolling those types of projects out?

Jeff Feeler

Yes, for defining just limited integration. I mean it's predominantly information systems. And we knew that that was going to be an endeavor upon the acquisition. We are currently working on the financial system roll out which will go live next year. We are also concurrently operating on a couple of other systems including a CRM system for our sales -- for the sales team which has been deployed right now. And we are starting the phases to roll in our production systems and combine those that that's probably a couple of year endeavor that we will roll out in modules along the way.

And so, we're spending a lot of time in those, deploying a lot resources, internal resources and to a certain degree external resources on those. And we think that that's critical on the long term basis to really build scalability and create new options within our information technology area.

Barbara Noverini

Okay. Got it. Great. Thanks. Thanks and nice execution in the tough environment.

Jeff Feeler

All right. Thank you.

Eric Gerratt

Thank you, Barbara.

Operator

[Operator Instructions] And our next question is a follow-up from Michael Hoffman from Stifel. Please go ahead with your question.

Michael Hoffman

Yes, thank you. In light of the transitions to lower long term growth in the industrial economy, are we seeing any change in the turnaround cycles on the customer side and correspondingly that has positive volume consequences for you?

Jeff Feeler

When you say turnaround, Michael, are you referring to kind of the refineries?

Michael Hoffman

Yes, the maintenance processes and what have you. It's been long time since many of them are taking the big 45 - 60 day turnarounds.

Jeff Feeler

Most of our work at least on outside of industrial services is more routine maintenance not geared towards large turnarounds.

On the industrial services side, the remaining group that we still have in Michigan doesn't do a lot of work in refining space. They are more I'll call it the core steal mills -- I'll call it the steel mills and real over industries from that standpoint that's up in that area of the world. So we really don't have a lot -- we don't track turnarounds from that. I will say it from the maintenance side and the refinery side, they continue to spend. We continue to see strength in the thermal market and the services that we provide to those companies. And we don't really anticipate that change.

Michael Hoffman

Okay. And then, within your revenue guidance for environmental services, what is approximate mix of transportation that you presumed in that number?

Jeff Feeler

Michael, it's a racket between high and a low. And the average is probably somewhere around 60 million.

Michael Hoffman

Sixty million. Okay, great. Thank you. That's very helpful.

Jeff Feeler

Thanks, Michael.

Operator

[Operator Instructions] And ladies and gentlemen, at this times showing no additional questions, I would like to turn the conference call back over to management for any closing remarks.

Jeff Feeler

I would just like to thanks those for attending the conference call and look forward to updating you in April on our first quarter results.

Operator

Ladies and gentlemen, that does conclude today's conference. We do thank you for attending. You may now disconnect your telephone lines.

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