US Ecology, Inc. (ECOL) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the US Ecology First Quarter 2021 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions I would now like to turn the conference over to Eric Gerratt, Chief Financial Officer. Please go ahead.
Eric Gerratt: Good morning, and thank you for joining us today. Joining me on the call this morning are Chairman, President and Chief Executive Officer, Jeff Feeler; Executive Vice President and Chief Operating Officer, Simon Bell; and Executive Vice President of Sales and Marketing, Steve Welling.
Jeff Feeler: Thank you, Eric and good morning to everyone joining the call today. Before I dive into some prepared remarks on the quarter, I'd like to personally thank all of my colleagues within US Ecology for their dedication to health, safety and operational excellence, despite the disruptions from the ongoing global pandemic, weather events and other constraints. For those that are following our webcast presentation, please direct your attention to Slide 5. The positive momentum we saw in our business in the second half of 2020 has continued into the first quarter 2021, with improving trends and overall business conditions across a substantial portion of our business. Overall, our first quarter results were slightly ahead of our expectations.
Eric Gerratt: Thank you, Jeff. Starting with consolidated results on Slide 8. Revenue for the first quarter of 2021 was $228.6 million. Revenue for the Waste Solutions segment was $104.1 million for the first quarter of 2021, down 5% compared to $109.4 million in the first quarter of 2020. The decrease was due to a 17% decline in transportation revenue and a 3% decrease in Treatment and Disposal revenue. The decline in our Treatment and Disposal revenue was driven by a 3% decline in base business and a 9% decrease in event business in the first quarter of 2021 compared to the first quarter last year. The Field Services segment delivered revenue of $118.2 million in the first quarter, up 4% compared to $114 million in the first quarter of 2020. This increase was driven by increases in our emergency response, small quantity generation and total waste management service lines. Total gross margin contracted approximately 280 basis points to 23% in the first quarter of 2021 compared to the same period last year. This was primarily a result of lower waste volumes in both our Waste solutions and our energy waste segments. Selling, general and administrative spending or SG&A was $51.4 million in the first quarter of 2021 and included $1.2 million of business development and integration expenses. This compared to $52.4 million in the first quarter of 2020, which included $2.9 million in business development and integration expenses. Adjusted loss per diluted share was $0.07 in the first quarter of 2021 compared to adjusted earnings per diluted share of $0.12 in the same quarter last year. Adding back the impact of intangible asset amortization, cash earnings per diluted share was $0.14 in the first quarter of 2021 compared to $0.33 per share in the first quarter of 2020. Adjusted EBITDA was $33.2 million in the first quarter, down 23% from the first quarter of 2020. Turning to Slide 9. We exited the quarter with a solid balance sheet and strong liquidity. Despite the lower operating results compared to the prior year, we were able to generate strong adjusted free cash flow of $13.7 million in the first quarter of 2021. We had cash of $82.4 million and over $140 million of available capacity on our revolving line of credit at the end of the first quarter. Net borrowings were $702. 9 million at March 31, 2021, which was an improvement over our net borrowings at December 31, 2020. Our bank covenant leverage ratio was 4.5 times at March 31, 2021, well under the 5.5 times covenant level for the quarter. We expect the first quarter of 2021 to be the high point in terms of leverage and that will be below 4 times at the end of 2021.
Jeff Feeler: Thank you, Eric. We are encouraged by the positive trends we are seeing with quarter-over-quarter improvement across most if not all our business lines. With this and the improving industrial trends combined with our ongoing success in our NRC integration activities, we have reaffirmed our 2021 business outlook. This includes a forecast of growth for revenue, adjusted EBITDA and adjusted earnings per diluted share in 2021. Diving into our integration activities in more detail. We continue to make terrific progress and we are seeing our revenue synergies really gained momentum here in the second year. We continue to see a path to meet our three-year target of $20 million of EBITDA synergies by the end of 2021, one year ahead of our original target. Slide 10 has a detailed breakdown of our 2021 guidance that was released in February of this year and that we are reaffirming today. I am so proud of the entire US Ecology team and their ability to step-up, innovate and drive value during these times. As the industrial economies recover, we have the right assets and services in the right places to capitalize and thrive. We continue to be a trusted partner to our customers and together we are building a sustainable future for all. And with that, we'll open up the call for questions.
Operator: The first question comes from Michael Hoffman with Stifel. Please go ahead.
Michael Hoffman: I appreciate that you got, you opened the year a little bit ahead of plan, you're reaffirming the guidance and I don't think companies are supposed to be trying to chase their guidance up prematurely. How would you reflect on the trend inside the guidance though? Is this have more momentum to the upside than not given what you're seeing?
Eric Gerratt: I mean we're one quarter into it, another month behind us after today with April on here. And what I would say is, is the year is looking, the way we intended it to look maybe it's a little bit better. I mean there's a lot of green shoots that are out there. And our first quarter results, they were strong results given the fact pattern. But you also put into context some of the continued start and stop activities that we've seen with the ongoing pandemic, but we also had some major weather events that disrupted everything. So all in, I'm really proud of what we delivered in the first quarter. And I think it does set us up for a strong 2021. But there is still nine months to go. And we're going to continue to execute our strategy in our plan. And we have conviction in our guidance range that we released just back in February and reaffirmed it yesterday.
Michael Hoffman: And when we think about cadence, is there anything particular about what happened is exited 1Q and what you know since March April, essentially done about, how to think about the cadence, is this sort of originally when we all have these conversations in February, it was kind of a steady, almost ratable March through the year. Does it picked up a little bit speed in 2Q or does it still stay pretty ratable as far as the top line?
Jeff Feeler: Thinking about the cadence of the top line, normal seasonality will play in and will drive it. So yeah, we're expecting Q2 to be sequentially better than Q1 and Q3, sequentially better than Q2. And they're talking about cadence from March to April, I would say, we're seeing similar patterns. And w -- when you get into the first quarter and look at it by month, March was the strongest month that we had. So all of that is pointing in the right direction. There is nothing that's given us a lot of pause there in their. And I would say that we're on track to deliver that range and execute on our plan.
Michael Hoffman: And then you mentioned and it's not the first time I've heard this, but some of the supply disruptions are slowing the recovery of some of the customer base. That doesn't looks like that's going to get any relief in this calendar year. And is that, that's all accounted for in the guidance as well as that that you weren't looking for a big lift on reopening per se more of an overall improvement in the industrial economy broadly?
Jeff Feeler: So all of that factored in Michael in what we're seeing. And I think that that when you think about the choppiness we referred to in Q1, we saw it with a lot of closures and kind of the high rates of infection that we saw in the pandemic, we've seen that alleviate. But on the supply chain information, it is impacting our customers. If you go and read the detailed commentary on what industrial customers are staying through ISM and things like that, they claim, they can't meet their demand because one supply changes disruption, but also labor shortages. And those are some of the things our customers are challenged with to regain and get back to I'll call pre-COVID levels and growth there upon. And so, those are things that are all factored in. But we're seeing it in our customer base and it creates ongoing choppiness.
Michael Hoffman: And then last two for me. Texas got snot beat out of it from a weather issue, power shutdown and you are not hiding behind any weather commentary. But I'm just curious if you hadn't had a loss of power for a week or more, what the difference in the numbers might have been?
Jeff Feeler: We haven't even tried to attempt to quantify that Michael. From our operational perspective, some of our business lines were down 10 and 10 days to two weeks, others reopened fairly rapidly, especially in our services arm and we had a little bit of freeze damage from the weather. But the reality is February was definitely impacted pretty hard in that region. We did see a nice uptick in March in that area, which probably is a little bit of pickup on there. But when we look at the whole of the equation, it's probably a setback because some of that business will never regain, because our customers were shut down. But for the most part, we still think that business conditions are robust enough down there that we'll be able to recover.
Michael Hoffman: So closing the loop on that, you had a good quarter better than your plan and you had to deal with all of that. So if without it, it would have been that much incrementally better?
Jeff Feeler: Absolutely.
Michael Hoffman: Debt repayment, are there any structural limits on any of the terms of the debt make whole agreements anything like that that can allow you to keep walking these numbers down as you generate cash?
Eric Gerratt: No. Michael, this is Eric. We're able to pay the facility down as quickly as we'd like. So there are no limitations on either obviously on the revolver, but even on the term loan B. The only limitations we have for the first year, there were some limitations on that, but that's, it's now wide open and we can pay down as quickly as we want.
Michael Hoffman: And one last one, you opened the year saying we expect decontamination work to trend down. It was actually better in 1Q than your thought. Is it trending down or is it holding up?
Jeff Feeler: No, it's actually trending down. So we saw a surge in January and the first part of February, and it's been trending down since then, which is what we anticipated and it really follows the case loads that are out there. And from the good side of things that for me humanity standpoint is we are seeing ourselves getting ahead of this pandemic at least here domestically. And so, if we see a risen case load, I would imagine that business line will benefit from it and otherwise they will be replaced by hopefully resurgence of industrial-based activities. Thanks, Michael.
Operator: The next question comes from Tyler Brown with Raymond James. Please go ahead.
Tyler Brown: So just to be clear, there's not really much additional de-con work in the guide for the rest of the year?
Eric Gerratt: No, I mean, no.
Tyler Brown: Okay, that's helpful. And then, I mean, I know the reopenings difficult to discern free all. But and you don't talk a lot about monthly trends, but you did kind of make some mentions about March. Is there any way you can kind of let us know what base did in March or is it not really, just any color on exactly how much base was up in March?
Jeff Feeler: From a year-over-year perspective, directionally, it was up about 10%. Now, the reality is if you go back to March of last year, we probably, we were starting to shut down in the second week or halfway through. So probably, March last year was a little bit lower when you look at the monthly cycle on that. So I think that's elevated. When you look at our base business for the full year, we are still confident that we're going to be able to deliver growth for between 5% to 7% on that and that's with us being down 3% in the first quarter. So everything is trending the way we expected it. It could be a little bit better than what we said on that side of things. But overall, when you equal everything out, we're still very confident in what we have for guidance out there.
Tyler Brown: And so, Q2 implicitly is like plus double digit range on the base side?
Jeff Feeler: I would expect a very healthy rebound in Q2 from a growth perspective.
Tyler Brown: And then, just, again, I don't know if you can put a finer point on Q2 just to help us with our models. But you say it should improve sequentially. I mean, are we talking something like $5 million to $10 million of EBITDA sequentially just to help us kind of get, because Q2 is just a really funny quarter?
Eric Gerratt: I think that's, this is Eric, Tyler. I think that's probably a reasonable range. If you look at our second quarter last year, we did EBITDA of just under $39 million. And so, I would expect us to be quite a bit better than that and that we can see laid out is probably reasonable.
Tyler Brown: Okay, that's helpful. And then, so Jeff, you talked a little bit about investing in your people and about your kind of human capital and how you're really focus there, which is great. First off, I'm curious how many drivers do you actually employ roughly?
Jeff Feeler: We're right around 250 to 300.
Tyler Brown: And so, how hard is that, is that group to retain and recruit in the current environment? I mean, we obviously cover the truckers. I mean there is a lot going on out there. I know it's a different business. It's more of a go home at night business. But curious, are you seeing like real, substantive pressures on hiring retaining in that particular group?
Jeffrey Feeler: We continue to see challenges in that group. And you nailed it. It's It's a demographic that it's not growing. And there's a lot of competing pressure, not only from our side of the world, but many other industries in there. So yes, we're continue to see challenges in there. Simon, maybe you can elaborate on some of the things that we're doing.
Simon Bell: So this is Simon. It is a challenge as Jeff says. What we're doing is we're certainly launching programs that kind of provide retention. We're launching programs to kind of pay for schooling and encourage our employees to get their CDLs, really creating committees to better understand what is important to the driving community and what we can do to support them. As you mentioned, we do have both long haul and short haul. But certainly we think we can differentiate ourselves in some of the short-haul and really just listening to their drivers needs. And so, as Jeff said, it's something we are fiercely focused on, but, and we will be for a while I suspect.
Tyler Brown: So some of those jobs, like I said are a little bit more LTL in nature, where I guess are coming home. But there is a subset, where you're actually laying those guys down at night that that long haul piece, it's probably a little bit tougher to recruit?
Simon Bell: Absolutely. I mean, you think of our retail program in particular that -- those guys will be on the road for several days and then definitely a more challenging?
Tyler Brown: Interesting. Okay. And then back to the NRC synergies. So correct me if I'm wrong, because I'm going off top of my head here. Eric, I think you of the 20, I think is the number you may be got 10 last year. I think you were guiding to something like 3 to 5. But then, Jeff, it sounded like there is more optimism there. So I'm just curious, are you basically tracking ahead of what you had originally thought on the synergies for this year, are we kind of right in line? You're just hoping that by the end of the year, you will be fully run rated.
Eric Gerratt: So we're tracking a little bit ahead of what we thought for 2021 and it's really driven on the revenue side of things and I talked about the momentum, that's definitely continuing. And we're seeing a lot of opportunities emerged as we continue to really get more of a cohesive sales group across the organization and driving those results. And we're seeing opportunities there. So we do believe that by the end of the year, we'll have achieved that $20 million run-rate and there is potentially upside to that next year.
Jeff Feeler: And as a reminder, Tyler, the $20 million number was one that we put out at the time of the acquisition that we thought we'd be at that run rate by the end of 2022. So we feel like we're a year ahead of schedule.
Tyler Brown: And then just my last one. Maybe coming back to the energy business. So I think you talked a little bit about it Jeff for kind of talked about on the periphery. But obviously, oil prices have moved. I'm just curious if you're starting to see any green shoots out there in the oil patch. Are you starting to see any building confidence that maybe that business could be a positive delta to what you're expecting for this year?
Jeff Feeler: Well, Tyler, there's definitely green shoots in there. I mean, we definitely were ahead of plan and what we have anticipated on that business. We've seen rig counts increased dramatically from the low point, but they've increased, they've increased sequentially as well. And it's in both of the basins, both the Permian and Eagle Ford that we're -- that we planned. The reality though and the sanity check is we're still at 50% levels of where we were pre-pandemic. So all the trends are good. The activity is increasing. We're seeing a lot of green shoots out there. But we still have a ways to go to get back to that pre-pandemic level.
Tyler Brown: And then, just real quickly, can you remind me what the mix is? Is it roughly half and half Permian versus Eagle Ford or is it skewed one way?
Jeff Feeler: From a revenue standpoint, it's about half and half on there. So where our strength right now is in Eagle Ford, because we have two assets that we're put in place just before the pandemic set in and the Permian. Those are -- they are and they are trending positive, but they're still not to where we want them to be.
Tyler Brown: And is the CapEx on that business roughly set as then you've kind of developed the footprint of the landfills probably built-out the first cells. Are you kind of good on the CapEx side, so that when we do see volumes come back in it, there is not a tremendous amount of capital mean?
Simon Bell: Tyler, this is Simon. We are certainly planning and moving forward with our landfill construction this year. So we're going to make sure we have capacity for whatever the demand is. And we're also continuing with some refurbishment of equipment. And certainly, we're planning for a recovery and we're spending our capital accordingly.
Jeff Feeler: And to just clarify that a little Tyler. The landfill Simon is referring to is the one in the Eagle Ford that that's the first one that was built. And so, it's current cell is almost, it's been operating for what four years and so it's just the next cell at that facility.
Tyler Brown: Good deal. All right, guys. Thanks so much for the time.
Jeff Feeler: All right. Thanks, Tyler.
Operator: The next question comes from Jeff Silber with BMO Capital Markets. Please go ahead.
Jeff Silber: Actually, just wanted to follow-up from one of Tyler's first question, about hiring and wage inflation and retention. We talked about truck drivers. Are you seeing, if it is anywhere else throughout the company? I know, we've got a lot of other companies complaining that it's tough to find good quality skilled workers out there.
Jeff Feeler: I think everybody is competing for the same talent. I mean, the reality is, not only is are we competing against other companies, but my personal opinion is I think that there, we're competing against some of the government subsidy programs that are out there and that will hopefully will free up here the summer timeframe. But I think the combination of those two is creating a challenging condition to recruit frontline workers.
Jeff Silber: Okay, that's helpful. And you mentioned the government subsidies. So I wanted to ask about the infrastructure plan. I know it's still early. I know there's just some proposals. Is there anything in there that you think might either help or hurt your business?
Jeff Feeler: Steve, why don't you address that?
Steve Welling: Sure. Hi, this is Steve Welling here. What we've read so far is we look to potentially increase super fund clean-up work. There is possibly a proposal to add back the super fund tax on corporations, which will provide money for those types of cleanups. There is also when you do infrastructure improvements, usually, that means there's things that get turned down, cleaned up first before you improve. So like bridges, there could be lead paints and other waste streams that come from that. Also seeing that there is some information about improvement at schools in urban areas, which they want to remove all the lead piping. So it looks like that would, it would be a benefit to us for sure. It's just we don't have much detail yet.
Jeff Silber: Sure nobody does, but that's actually good to hear. And finally, I think you alluded to this a little bit earlier. But you mentioned some of the starts and stops in terms of reopening. Are there any specific areas to call out that are doing better than others?
Jeff Feeler: So what we're seeing is the West has seen some positivity and really the Gulf. And they're the ones that are starting to have been reopened and are reopening more. When we saw the start and stop is we have a lot of operations in the Michigan corridor and they've been a hotspot. And so, that was a challenge in the first quarter. But they're getting things under control. And we anticipate that that to improve here overall. And then, internationally, Canada continues to struggle. They're not -- they don't have the same vaccination rates that we do here. And I think Ontario just walk back down or the province of Ontario. And so, they've been struggling there. But the underlying business still seems to be gaining traction and positive momentum even though they're going through some starts and stops.
Jeff Silber: Okay. That's really helpful. Thanks so much.
Jeff Feeler: Thanks, Jeff.
Operator: The next question comes from Tyson Bauer with KC Capital. Please go ahead.
Tyson Bauer: On the whole theme of pricing and inflation and treatment cost, whether it'd be freight or wage or other, some of the companies in the coverage universe have benefited from the inflation effects, others have suffered because of it. What is US Ecology stand as far as, are you able to pass those through, get a benefit in rising pricing environment or are you trying to absorb some of those treatment costs and that's may put a little pressure on?
Jeff Feeler: Steve, why don't you talk about the pricing in what we -- the strategy we've been doing this year and I'll have Eric kind of chime in on where we're seeing some inflationary challenges.
Steve Welling: So in prior years, we've done more across the board tag price increasing and this year it has been totally different. What we did is some selective price increase in certain markets, on certain waste streams and then some specific geographies, where the customer base wasn't as impacted as others. So we have taken price increases in the first quarter. Most went into effect between January 15th and February 15th on base business only. Event work, we bid case by case. But we have been doing a number of things and we're also looking, whether we potentially, one of the possibilities for maybe another increase in mid-year. But we've been able to pass the number of things along. In terms of the transportation, generally, we have a separate charge like on fuel surcharge. That does -- when things go up or down there recovered. But for the most part, a lot of our pricing, on waste disposal side, we have the ability to do adjust. We do have some select service lines, where we're in a longer term contract. But that's not the majority of our business.
Eric Gerratt: And Tyson, Just in terms of kind of the categories where, we're feeling the most pressure in terms of costs. That we've talked a lot about labor, that that's probably one of the biggest right there with it insurance. Insurance is one that that everyone frankly whether in our industry or not, we're seeing pretty significant increases and have over the last couple of years, this year is not exception. Steve talked about transportation. We feel like we do have some opportunities there just based on where our contracts work to recapture, a lot of the increases there. So the reagents in commodities, that's another area. I would say, as the companies grown and as we've kind of diversified at that, that's not a significant of portion as it used to be US Ecology, but it is still a meaningful cost that we're continuing to watch and monitor. And there's some pressure there as well.
Tyson Bauer: Well, piggyback they targeted price increases. You only do that when you have the ability to do so. What are you seeing us as the greater leverage opportunities for you as far as certain business segments or waste streams that you can take advantage of?
Jeff Feeler: Well, like I said what we did already was in the mid-west, we've looked at some select waste streams and particularly known it has solidification, where there seemed to be opportunities. And we're just that much more than 3% to 5%. In West Coast, we're able to look at our customer base and do some things across the board in the West, that maybe we're not able to do in the Gulf. Right now, we're seeing the Gulf recovered, which was not at all in the first quarter, we're struggling a bit in the beginning. And then, we had to freeze. So we maybe looking to see if there's opportunities there in the future. But it's a case by case review. And we're just trying to see how things evolve as the roads get doing back to normal here.
Tyson Bauer: Do you anticipate, even thought they don't call it the green act that we may see some materials or other things that have not previously been considered as it is fall into that category going forward?
Simon Bell: Tyson, this is Simon. There was long term, yes. I think there will be some certainly you think fast, but I'll say it's a, that's a generally fairly slow process in terms of changing the regulations. But certainly, I would expect this administration to be more aggressive on that front. But I certainly can't point to specific things in the near term.
Tyson Bauer: Last question. On the event pipeline, are we still looking at a lot more of the smaller jobs maybe the 5 million - 10 million or less as opposed to some of the larger discrete projects that are multi-year and have that?
Jeff Feeler: We still have a combination of both. We have some multi-year projects that are continuing this year, that we have a multi-year project that we had done work in prior years that was off a bit last year is kicking back in in the next three weeks. And then, we have another new long-term project that will be kicking off in the third quarter. So I would -- I don't think anything is really different in terms of that, it's a mix of all the above.
Operator: The next question comes from Peter Rabover with Artko Capital. Please go ahead.
Peter Rabover: Just a couple of questions. One small one, how much was the Texas freeze or the storms, was that a beneficial or a negative impact for you guys in the quarter?
JeffFeeler: Peter, we didn't quantify it, but it would have been negative in the quarter.
Peter Rabover: Just thinking through next year. And then, maybe like a longer-term question. I mean, what are you guys thinking in terms of capital structure? I know you suspended dividend last year and were cash conservation mode. And I think you're back to be in fairly free cash flow positive and growing. And so, just thinking, what's your ideal capital structure, what are your plans for capital allocation any, you have some warrants out there or so? Just anything you guys can comment on that will be appreciated.
Eric Gerratt: So our capital deployment plan is really focused on organic capital investment, paying down debt, doing small tuck-in acquisitions if they come available and then we'll be looking at returning any capital to shareholders likely in 2022.
Jeff Feeler: All right, thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Feeler for any closing remarks.
Jeff Feeler: Well, I just want to thank you for your interest today and looking forward to updating you in future conferences here in the second quarter.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.