Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

US Ecology (NASDAQ:ECOL)

Q3 2012 Earnings Call

October 30, 2012 9:00 am ET

Executives

Eric L. Gerratt - Acting Chief Financial Officer, Chief Accounting Officer and Treasurer

Stephen A. Romano - Chairman of the Board

Jeffrey R. Feeler - Acting President and Acting Chief Operating Officer

Steven D. Welling - Senior Vice President of Sales and Marketing

Analysts

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to Third Quarter 2012 US Ecology, Inc. Earnings Conference Call. My name is Tehicia, and I'll be your operator 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, Vice President and acting Chief Financial Officer. Please proceed.

Eric L. Gerratt

Good morning. Joining the call today is Steve Romano, Chairman of the US Ecology Board of Directors; also on the line are acting President and Chief Operating Officer, Jeff Feeler; Senior Vice President of Sales and Marketing, Steve Welling; and Vice President of Operations, Simon Bell.

Before we begin, please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These 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 could follow along with today's presentation. For those listening via phone, you can obtain a copy of today's presentation on our website at www.usecology.com.

Throughout our call today, and stated in our earnings release, we refer to adjusted EBITDA and adjusted earnings per share. Both adjusted EBITDA and adjusted earnings per share are measurements not determined in accordance with Generally Accepted Accounting Principles, and therefore are susceptible to varying calculations. A definition, calculation and reconciliation to the financial statements of each can be found in Exhibit A of our press release. We believe these 2 non-GAAP metrics are useful to better understand our reported results.

Now I'll turn the call over to Steve.

Stephen A. Romano

Good morning. First of all, I'd like to send our best regards and wishes to those of you who are dealing with Hurricane Sandy this morning. As an overview for the call, I will start with a few opening comments. Jeff and Eric will then update you on the business and discuss the financial results released yesterday. Jeff will also provide management's outlook for 2012 along with a glimpse into 2013. After concluding remarks, we'll open the call up for questions.

For those following along in the webcast presentation, please direct your attention to Slide 5. First, let me say that, across the board, US Ecology is performing exceptionally well. We've posted recorded treatment and disposal revenue, record operating income and record EBITDA in the third quarter. Both recurring Base Business customers and Event clean-up projects were strong in the quarter. Before Jeff and Eric dive into what drove these results, I'd like to take this opportunity to update you on the senior management reorganization announced by the company yesterday.

The board has promoted Jeff Feeler to acting President and Chief Operating Officer. Jeff replaces Jim Baumgardner, who's employment as the company's Senior Executive is terminated by mutual agreement. Our Board of Directors has tremendous confidence in Jeff's ability to lead the company and execute our long-standing growth strategy. A US Ecology executive since 2006, Jeff has in-depth knowledge of the business and the industry we operate in. He brings outstanding communication and leadership skills to his new position. Jeff has also played a central role in our successful acquisitions of Stablex Canada and Dynecol, as well as other business development initiatives.

Taking on Jeff's former role as the company's Senior Financial Officer is Eric Gerratt. Eric joined the company in 2007 as Vice President and Controller. Eric is now performing the added duties of acting Chief Financial Officer, acting Treasurer and Chief Accounting Officer. Eric's 15 years of financial and business management experience include 11 years working closely with Jeff at US Ecology and before that with PriceWaterhouseCoopers and Albertsons. The board has confidence in Eric's ability to take on this expanded role. I want to congratulate Jeff and Eric on their new roles.

As Chairman of the Board and the company's CEO from 2002 through 2009, I'm taking on an expanded role to provide guidance and support to Jeff and his team as Chairman. We anticipate a seamless transition given Jeff's role since 2006 as a senior member of an experienced management team that has been in place for more than 5 years. The collective excellence and continuity offered by this seasoned group, which also includes Senior Vice President of Sales and Marketing, Steve Welling; Vice President of Operations, Simon Bell; and Chief Information Officer, John Cooper, cannot be overstated. They in turn are supported by the General Managers of our 6 fix [ph] facility operations, who between them offered decades of combined experience.

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

Jeffrey R. Feeler

Thank you, Steve. The third quarter was an exceptionally strong quarter delivering record treatment and disposal revenue, operating income and adjusted EBITDA. This record performance was fueled by continued impressive growth in our Base Business, which was up 22% for the quarter. We also delivered a stronger than anticipated win rate in our Event Business, which helped drive our third quarter treatment and disposal gross margin to 48%. This combined Base and Event business strength more than replaced the earnings from the 2011 GE Hudson River clean-up project, which shipped in the third quarter of last year.

While we do not report site-by-site earnings, we had strong results at all 6 of our operating facilities. Our Idaho site posted strong quarter-over-quarter earnings growth, which was fueled by increased shipments from the U.S. Army Corps of Engineers, our Westinghouse Hematite Nuclear Decommissioning Project and other Event work.

Quarter-over-quarter growth at our Texas facility was driven by strong landfill volumes. This reflects a continuing, high level of industrial activity across the Gulf Coast region for both Base and Event business. As expected, our Thermal Recycling business experienced quarter-over-quarter declines in volume, revenue and earnings. These declines reflect an exceptionally strong third quarter 2011, where we saw an ideal service mix allowing us to process higher volumes compared to the current year, as well as charges associated with an agreement with the U.S. EPA on the regulatory investigation which we've discussed over the last couple of quarters.

I am pleased to report of that on October 4 we did reach agreement with the U.S. EPA with regard to this investigation. This agreement allows us a clearly -- or establishes a clearly defined path for us to obtain our RCRA Subpart X permit for the thermal unit. Once obtained, the new permit should allow us to expand our Thermal business beyond its current capability. As part of this settlement, we paid $166,000 fine and recognized a $293,000 charge as part of a sharing arrangement with the owner of the thermal unit.

Nevada also continued its solid quarter-over-quarter growth on the strength of increased Base Business and multiple clean-up project wins. Our Washington and Québec operations also made solid contributions during the quarter, executing at or above our expectations. We are very excited about US Ecology Michigan, formally Dynecol, which we acquired last quarter on May 31. The acquired business is now substantially integrated. During the quarter, we also received a post-closing purchase price adjustment from the seller, which resulted in a return of about $500,000 to the company for an adjusted net purchase price of $10.8 million.

Our expanded team is now working hard to secure new business through cross-selling, permit expansion and other growth initiatives. US Ecology Michigan provides us with a critical platform to continue expanding geographically, strengthening our service offering and increasing market penetration.

With that, I'll turn it back to Eric for him to walk through the details of the financial numbers.

Eric L. Gerratt

Thank you, Jeff. As shown on Slide 6, third quarter 2012 revenue was $45.7 million. This was up 15% from $39.7 million in the third quarter last year. Treatment and disposal revenue was 12% higher in the third quarter of 2012 compared to the third quarter last year and Transportation revenue was 40% higher quarter-over-quarter. US Ecology Michigan contributed approximately $2.9 million of total revenue in the third quarter. Excluding Michigan, our organic treatment and disposal revenue increased 5% over the same period last year. We disposed of 266,000 tons in the third quarter of 2012. This was 7% less than the 287,000 tons disposed in the same quarter last year. This decline primarily reflects shipments from the GE Hudson River clean-up project in the third quarter last year. Excluding the 2011 Hudson River project waste volume and excluding US Ecology Michigan, volumes grew 17% in the third quarter of 2012 compared to the same period last year. Our average selling price increased 21% during this same time period, reflecting a favorable service mix without the GE project.

Slide 7 breaks down our Base and Event business for the last 6 quarters excluding the US Ecology Michigan. Base Business during the third quarter of 2012 contributed 64% of our treatment and disposal revenue and grew 22% over the third quarter last year. Event Business was 36% of treatment and disposal revenue, down 9% from the third quarter last year.

Slide 8 breaks down treatment and disposal revenue for both Base and Event business by customer category. This slide also excludes US Ecology Michigan. Our Government Cleanup business increased 175% in the third quarter of 2012. This improvement was primarily due to higher volumes from the U.S. Army Corps of Engineers and waste received from a closed military base cleanup. Treatment and disposal revenue from the Army Corps was 118% higher in the third quarter of 2012 than the same period last year. Total revenue from the Army Corps, including transportation services, was $2.7 million for the third quarter of 2012, up from $1.7 million in the third quarter last year. Treatment and disposal revenue from our other industry customer group increased 44% over the same quarter last year. Growth in this area reflects a 41% increase in Base Business on stronger industrial production an new business and 59% growth in Event business from industrial customers.

Our Rate Regulated business in Richland, Washington, was up 9% quarter-over-quarter due primarily to timing. Our Refinery business was up 7% quarter-over-quarter. This increase reflects higher volumes and improved pricing of thermal recycling services for individual refineries. Treatment and disposal revenue from third-party waste brokers was down 4% quarter-over-quarter. This decline reflects lower volumes of brokered thermal recycling services. Excluding brokered thermal recycling, our Broker business grew 8% quarter-over-quarter. As a reminder, our thermal recycling business may be included in our refinery, broker or other industry category depending on our customer.

In aggregate, our Thermal Recycling Treatment and Disposal Revenue was down 27% in the third quarter of 2012, driven primarily by a 24% volume decline. These declines reflect volume from a 2011 thermal recycling project from a New Jersey-based refinery and lower waste received due to voluntary restrictions pending clarification of the U.S. EPA regulatory requirements Jeff discussed earlier. Treatment and disposal revenue from private cleanup events decreased 53% quarter-over-quarter. This was due to the 2011 GE Hudson River clean-up project not being fully replaced by other private cleanup projects in the third quarter this year.

Continuing on to Slide 9. Gross profit was $18.6 million in the third quarter of 2012. This was up 22% from $15.3 million in the third quarter last year. Gross margin was a strong 40.6% in the third quarter of 2012, up from 38.5% in the same quarter last year. Treatment and disposal gross margin for the third quarter of 2012 was 48.4%, up from 45.6% in the same quarter last year. This gross margin improvement reflects favorable service mix and lower cost per chemical reagents used to treat certain hazardous waste.

Selling, general and administrative spending or SG&A was $6.2 million in the third quarter of 2012. This was up from $5.7 million in the third quarter last year. The increase reflects higher business development costs, payroll related costs, including variable incentive compensation and other general administrative costs associated with higher levels of business activity. Operating income grew 29.5% to $12.4 million in the third quarter of 2012, up from $9.6 million in the same quarter last year. As mentioned, this was a new quarterly record.

Also setting a record, adjusted EBITDA for the third quarter of 2012 was $16.7 million, up 18.9% from the $14.1 million in the same period last year. We realized $1.6 million of net foreign currency gains in the third quarter of 2012 on a stronger Canadian dollar. This compared to a net foreign currency loss of $3.7 million in the third quarter last year. Interest expense was $227,000 for borrowings on our credit facility. The interest rate on our credit agreement was approximately 1 1/2% during the quarter. Our effective income tax rate for the third quarter of 2012 was 37.4%, up from 33.4% in the same quarter last year. This increase is primarily the result of an increase in our estimated state income tax rate and favorable tax return adjustments in the third quarter last year. Net income was $8.7 million or $0.47 per diluted share. Adjusted earnings per share, which excludes foreign currency gain of $0.05 per share and business development costs of $0.02 per share were $0.44. This was up 33% from adjusted earnings per share of $0.33 for the third quarter last year.

Turning to year-to-date results on Slide 11. Revenue for the first 9 months of 2012 was $118.7 million. This was up from $113.4 million in the first 9 months last year. Treatment and disposal revenue was up 11% during the first 9 months of 2012 over the same period last year. This growth was partially offset by a decline in Transportation service revenue. Base Business revenue increased 18% in the first 9 months of 2012 over the same period last year, while Event Business was down 6% from the same period last year. We disposed of 6% higher volume in the first 9 months of 2012 than last year. Our average selling price was also up 6% during this same time period, reflecting normal shifts in service mix.

Slide 12 breaks down treatment and disposal revenue for both Base and Event business by customer category. As with the earlier discussion, this excludes US Ecology Michigan. Our Government Cleanup business was up 35% on higher shipments from the Army Corps in the first 9 months of 2012 and new project-based work. Treatment and disposal revenue from our other industry customer group increased 33%. Third-party Broker business was up 12% over the same period last year. Our Rate Regulated business in Washington was down 1% due to revenue recognition timing differences. We expect our Rate Regulated business to normalize in the fourth quarter. Our Refinery business was down 8% due to lower thermal recycling services sold directly to refining customers. Our private cleanup business was down 47% due to not fully replacing the 2011 GE Hudson River cleanup.

Continuing on Slide 13, gross profit was $48 million in the first 9 months of 2012. This was up from $37.8 million in the first 9 months of 2011. Gross margin was 40.4% in the first 9 months, up from 33.4% in the same period last year. Treatment and disposal gross margin for the first 9 months of 2012 was 46.3%, up from 41.8% in the same period last year. SG&A was $18.2 million in the first 9 months of 2012 compared to $15.9 million in the 9-month period last year. This increase reflects higher payroll-related costs, including variable incentive compensation on stronger financial performance, business development costs and other general administrative costs associated with the higher levels of business activity.

Operating income grew 35.8% to $29.8 million for the first 9 months of 2012. Adjusted EBITDA for the first 9 months of 2012 was $42.7 million, up 23.7% from the $34.5 million in the same period last year. Net income for the first 9 months of 2012 was $19.5 million or $1.07 per diluted share. Net income was $11.7 million or $0.64 per diluted share in the first 9 months of last year. Adjusted earnings per share grew 42% to $1.04 in the first 9 months of 2012 from $0.73 per share in the same period last year.

Slide 15 summarizes our financial position and return metrics. At September 30, 2012, we had $5.5 million in cash. Borrowings on our credit agreement totaled $49.5 million. This leaves $24.8 million available under our credit facility for future borrowings.

During the first 9 months of 2012, we generated $24.8 million of cash from operating activities. We invested $12.4 million in capital projects and paid $9.9 million in dividends to our stockholders. Our return on invested capital for the 12 months ended September 30, 2012, was 14.7%. Our return on total assets was 12.3% and return on equity for the same period was 25.3%.

With that I'll turn the call back to Jeff.

Jeffrey R. Feeler

Thank you, Eric. For those following along on the webcast, I'm now on Slide 16. As noted earlier, we posted very strong results across all sites and service sectors. Perhaps the most encouraging is the fact that we have generated 2 sequential quarters of record results, primarily on the strength of our recurring Base Business. Unlike some periods in the past, we are no longer dependent on that single large project to set new quarterly records. This demonstrates the diversity and breadth of our expanded operation. It also validates our strategy of driving Base Business growth, while expanding our geographic footprint by acquiring fairly priced strategic assets.

As we enter into the final quarter of 2012, business conditions continue to be favorable. We expect Base Business to continue growing into the fourth quarter and our Event Business pipeline remains very healthy. Given this positive outlook, we are increasing our full year 2012 earnings guidance to $1.30 to $1.35 per diluted share. This reflects a 13% to 17% increase from the high end of our previous guidance of $1.05 to $1.15 per share. We now expect adjusted EBITDA to range between $55 million and $57 million. This is up from our previous guidance of $48 million to $52 million. These estimates exclude any impact of the foreign currency translation gains or losses.

For those of you that our refining your own financial models, we expect T&D gross margin or our treatment and disposal gross margin to range between 46% and 47%, and our effective income tax rate to approximate 38% for the full year. As Eric mentioned, we invested $12.4 million in capital projects in the first 9 months of this year. We project full year capital spending to range between $17.5 million and $18.5 million and this includes approximately $600,000 of planned investment at our US Ecology Michigan facility. This capital expenditure level is down from our previous guidance of $18.5 million to $19.5 million, primarily due to reduced landfill construction costs in Idaho, which is down approximately $1 million under plan.

For this, we can thank the exceptional performance of our General Manager, Terry Geis, and the rest of the Grand View site team. Before I turn the call back to Steve, I want to spend a few moments on Slide 17 talking about 2013. While it's too early to provide and offer detailed guidance, we are encouraged by the trends that are developing, which suggest another year of solid growth. We currently project normalized growth rates in our Base Business as our sales team continues to execute and secure new accounts and waste streams. Our Event Business pipeline looks strong, with several higher margin niche projects under contract and slated for 2013.

Finally, with the regulatory requirements for our Texas thermal recycling operation clarified, we are focused on growing that business back to 2011 levels. Taking in combination these developments give us confidence that 2013 will be another excellent year of results on the heels of what is expected to be a record year in 2012.

With that I'll turn the call over to Steve for concluding remarks.

Stephen A. Romano

Thank you, Jeff. US Ecology's performance this year, in the third quarter in particular, is a tribute to the entire organization. Credit for the success extends from our committed senior management team, to our experienced operations personnel, our knowledgeable, customer-focused sales and marketing and customer service professionals and our dedicated and efficient corporate office staff.

Today, this closely knit team is running the most productive and unique set of fix facilities hazardous and radioactive waste asset in North America. Our strategy has consistently been to grow the company organically by expanding our permits, adding new technologies and service lines and cross-selling between our environmentally protective state-of-the-art facilities. We also remain committed to adding new assets to further expand our geographic reach and service offerings. Our board has every confidence in Jeff taking the helm, with the support of our seasoned executive team and our site General Managers. In short, we don't expect to miss a beat.

As we prepare to open up the call for questions, I'd like to note that due to mutual agreement, we will limit our disclosure about the recent senior executive change to what is in our press release and an 8-K filing that will be filed later today. We appreciate your understanding.

With that, we'll turn the call over to the operator to begin our Q&A session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Hoffman from Wunderlich Securities.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Question with regards to how to think about volumes in the fourth quarter. Clearly they'll be down. How do we think about them sequentially in the context of the pattern you're on?

Jeffrey R. Feeler

Yes. This is Jeff. I would expect the volumes sequentially will be fairly consistent, maybe down slightly as we just enter into the fourth quarter. The seasonal patterns we have versus the third quarter.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

And then as you think about the ASP for the third quarter, does it hold at that level going into 4Q? What are the flections on it as you think about the sort of various inputs to it?

Jeffrey R. Feeler

Yes. Well when you start looking at ASPs and you look at growth rates in the fourth quarter, I mean, I would expect to have a pretty sizable increase in ASP just because we took a significant volume, the GE Hudson River project in 2011 in the fourth quarter. I think where you're really getting at is on pricing. And from the landfill side of the business, pricing remains stable and continues to be stable to increasing. So we would expect that to continue.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then could you tell us what your free cash flow was for the quarter? I think I calculated it right, but I just wanted to verify what you thought it was.

Jeffrey R. Feeler

Yes. We'll have to get that for you.

Operator

[Operator Instructions] Your next question comes from the line of Al Kaschalk from Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

The Base Business is doing quite well and up as a percentage of total. I'm just wondering, given your commentary and outlook, et cetera, are we -- should we look for that to become an increasing greater percentage of total revenue?

Jeffrey R. Feeler

Al, this is Jeff. I'm going to have Steve Welling address that.

Steven D. Welling

Al, the last few years, yes, Base Business has been increasing as a percentage of our total revenue and we fully expect that trend to continue going into '13. That's really a focus of ours is to continue diversification. I mean, Events are great but, as you know, they're hit or miss. So the Base business is very important to our long-term strategy and we foresee continued growth.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Right. So with 2, I guess, now sequential quarters the Base has been pretty strong and probably, I would guess, better than your expectations. What's driving -- I mean, what's increasing that volume and activity on the customer side? Is it special projects that they've now are releasing under their own budgets? Is it certain areas that are seeing just better economic activity versus the global -- versus the U.S. domestic economy? What's driving -- what you're taking advantage of from your customers' standpoint?

Jeffrey R. Feeler

As Steve mentioned earlier, we've done a lot of work in modifying our permits, changing our service offering and then gone out to the market with what we consider a really great package for a lot of our customers. So we believe we are taking some share. And on a national basis, we've also seen some strong activities in the Gulf Coast, in particular, in the Texas market. So it's not really any one area.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Right. If I may drill down just a little bit on thermal, given that, I think, you expect that 2013 to be back to 2011 levels. What was -- can you remind us what '11 was like in that business from a dollar perspective or a volume perspective?

Jeffrey R. Feeler

Yes. 2011 we did close to 40,000 tons of processed volume. It generated approximately $17 million of revenue and about $4 million of EBITDA.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Sorry, what was the revenue again?

Jeffrey R. Feeler

About $17 million.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. All right. I think I had one final question. The reduced CapEx suggests that maybe either volumes may not be as high to the landfill or -- what's the benefit there, at least on the short term from a cash flow perspective? What was happening structurally in the market? I think you had signaled out, was it the Idaho landfill or...

Jeffrey R. Feeler

Yes. And Al, this is Jeff again. The reduction in the CapEx is solely related to the landfill that we're constructing this year came in $1 million under cost. I mean, it's going to be pure pass-through benefit in future years when we start using that landfill.

Operator

Ladies and gentlemen, we have no more questions in queue. I would now like to turn the conference back over to Mr. Jeff Feeler for any closing remarks.

Jeffrey R. Feeler

All right. Well thank you so much for attending the call and your interest in the company.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: US Ecology Management Discusses Q3 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts