US Ecology, Inc.

Good day and welcome to the U.S. Ecology, Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Eric Jarrett, Chief Financial Officer. Please go ahead, sir.

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. Before we begin, please note that certain statements contained in this conference call that do not describe historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Since forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. Factors that could cause results to differ materially from those expressed include but are not limited to those discussed in the company's filings with the Securities and Exchange Commission. These risks and uncertainties also include but are not limited to statements regarding the continued impact of the COVID-19 pandemic on our business, the microeconomic impact of specific and markets in which we operate, and our expectations for the financial results for 2020. Management cannot control or predict many factors that determine future results. Listeners should not place undue reliance on forward-looking statements which reflect management's views only on the date such statements are made. We undertake no obligation to revise or update any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise. For those joining by webcast, you can follow along with today's presentation. For those listening by phone, you can access today's presentation on our website at www.usecology.com. Throughout yesterday's earnings release and our call and presentation today, We refer to adjusted EBITDA, adjusted earnings per diluted share, cash earnings per diluted share, and adjusted free cash flow. These metrics are 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 adjusted earnings per diluted share, cash earnings per diluted share, adjusted EBITDA, and adjusted free cash flow can be found in Exhibit A of our earnings release. We believe these non-GAAP metrics are useful in evaluating our reported results. We'd also like to point out that our second quarter results include contribution from the NRC Group Holdings Acquisition that closed on November 1, 2019. Throughout this presentation, we often refer to NRC Group Holdings as NRC. We have also provided data on a standalone basis for U.S. Ecology, which is referred to as Legacy U.S. Ecology. Similarly, for standalone NRC data, we refer to that group as legacy NRC. This disaggregation is an attempt to provide increased transparency and understanding of the underlying business. With that, I'd like to turn the call over to Jeff.

Thank you, Eric, and good morning, everyone. I hope you and your families have remained safe during these uncertain times. Before I have Eric review the second quarter results, I'd like to update everyone on how U.S. Ecology is managing through the last few months given the impact of COVID-19 to the economy and our customers. For those that are following on our webcast presentation, please direct your attention to slide six. During the second quarter, in response to the COVID-19 pandemic, we took swift action to deploy safety protocols throughout our organization, mobilized 30% of our workforce to work from home. Using our established networks and expanding our procurement channels, we were able to secure valuable PPE to ensure that our teams and customers were properly protected. With our services deemed essential by the US government, we implemented our business continuity plans, and I'm pleased to report that we have been able to remain operational during the entire pandemic, thus far with no lost days. This focus on safety, process, and protecting our team members was critical in mitigating the spread of the disease. particularly in hot zones where many of our team members are deployed. To safeguard the financial strength of the company, we implemented proactive and prudent measures to our operating plan, reducing costs and capital spending. Our capital preservation initiatives included a reduction of approximately 30% to our planned 2020 capital expenditures, the suspension of our quarterly cash dividend, cost controls, including deferment of non-critical activities, elimination of discretionary spending, and right-sizing the organization where needed. These actions are anticipated to generate up to $70 million of annual cash savings, providing the flexibility to preserve our talented workforce and position us to take advantage of the opportunities as the market rebounds. also supplement our strong operational cash flow generation, providing added financial flexibility as we navigate these unprecedented times. In fact, our free cash flow during the quarter almost tripled prior year levels, allowing us to strengthen our balance sheet and improve our net debt position since the first quarter. During the second quarter, we amended our credit agreement to temporarily increase our leverage covenant through March 31, 2022, allowing for further financial flexibility. I continue to be thoroughly impressed with the dedication, execution, and adaptability of our 3500 team members who have continued to service our customers despite these unparalleled and stressful conditions. They continue to provide safe and compliant solutions to protect human health and the environment, which is exactly what is needed today. This includes our COVID-19 Safe Operations Program, a new proactive cleaning and decontamination solutions package for commercial and government customers. This multifaceted program supports a full range of business needs to safely reopen and resume operations, including one-time or ongoing decontamination, preventative cleaning, and waste disposal services, all from one trusted partner. Through the end of July, we completed 1,700 COVID-19 responses, which accelerated in late June and July as infection rates increased on reopening. Looking at the quarter, we saw revenue declines across most business units compared with our budgeted 2020 expectations. As expected, the month of May was the low point, slightly below April levels. We saw a noticeable pickup in June as businesses started to reopen. Looking ahead, we are cautiously optimistic that we will continue to see sequential monthly improvement, barring any major pockets of the United States or Eastern Canada shutting down again. Despite the external challenges caused by the pandemic, our teams continue to move the company forward through the execution of long-term strategic initiatives. Specifically, during the quarter, We completed the construction and expansion of our enhanced drum handling capabilities at our Nevada operation, which will allow for more efficient treatment. Implemented five new retail account programs. Implemented our smarter sorting retail technology pilot program in three key markets. Deployed $4 million of capital on new high ROI growth projects. Launched a new customer interface technology that we believe will be best in class for our customers to use our services, obtain data, and manage their waste management needs. Opened up our global emergency response operations center. Commenced the reconstruction of our Grandview Stabilization Building. Focused on a number of environmental, social, and governance initiatives, including advancing our diversity and inclusion program, and starting the operation of our aerosol recycling technology. And these significant accomplishments were carried out while making material progress on the NRC integration efforts. This is just a small sample of what we've been doing during the pandemic. Shifting to the highlights on the quarter from a financial side on slide A, my big takeaway for the quarter is the resiliency of our business model. Despite the headwinds and turbulence in many of the markets that we serve, including energy, the diversification of our services and collection of irreplaceable assets allowed us to continue to generate strong cash and produce solid financial results. During the quarter, total revenue was $213.9 million, up 37% over the same quarter last year. NRC contributed $70.4 million in the second quarter of 2020 and was down 19% sequentially from the first quarter of 2020. Legacy US Ecology saw a revenue decline of 8% compared to the second quarter last year and 7% decline sequentially from the first quarter of 2020. During the quarter, total company adjusted EBITDA was $38.7 million. Legacy U.S. Ecology's adjusted EBITDA was down 6% when excluding over $2 million of insurance proceeds for business interruption claims recognized in the second quarter of 2019. Sequentially, Legacy U.S. Ecology's adjusted EBITDA was up 8% from the first quarter of 2020. NRC contributed $5.2 million of adjusted EBITDA during the quarter, which included a $2.1 million adjusted EBITDA loss from our energy waste disposal services business, which was hardest hit of all of our business lines. We reported an adjusted loss of $0.08 per diluted share, which included a higher than expected effective income tax rate due to the near break-even results and included approximately 14 cents per diluted share of non-cash amortization of intangibles related to NRC. As I mentioned earlier on, despite these softer results, we were able to increase our free cash flow to $18.7 million during the quarter, up from $6.5 million in the same quarter last year. Diving into some more details on slide nine, Legacy U.S. Ecology's environmental services segment revenue declined 9%. Bay's business was the primary contributor of that decline, down 10% from the second quarter last year and down 8% sequentially from the first quarter of 2020. We continued to see growth in our event business, which was up 12% year over year and up 2% sequentially from the first quarter of 2020, helping to offset the some of the impact of the shutdown had on our base business. We also were able to expand our environmental services segment EBITDA margin in the second quarter of 2020 by over 240 basis points to 44.1% compared to the same quarter last year. In our legacy field and industrial services segment business, revenue declined 6% in the second quarter from the same quarter last year. Most of the service lines were negatively impacted by the pandemic shelter-in-place orders and related business shutdowns, especially those service lines that required our field teams to be onsite. This led to an EBITDA margin contraction during the quarter. A bright spot continues to be our strong growth in our small quantity generation services led by our retail services. Strong year-over-year growth in our retail services more than offset double-digit declines in other small quantity services like LabPak, LTL, and household hazardous waste, which were more impacted by the shelter-in-place orders. Our emergency response business line also saw year-over-year increases as our legacy U.S. ecology operations responded to COVID-19 decontamination services benefiting from the cross-selling efforts of NRC services, offsetting the lower industrial-based emergency response activities. Despite positive developments in our business in June and into July, the evolving health crisis and its impact on local and regional business activity levels is resulting in a continued level of unprecedented uncertainty in the industrial economy. As such, It continues to be difficult to provide 2020 guidance with any degree of accuracy. We do expect our second quarter will be the lowest quarter in 2020 with a healthy recovery anticipated in the second half of the year. Despite the second half recovery, operating results will remain below our original expectations we established pre-COVID. Many of our field services that were hit the hardest by the economic shutdown are expected to resume at an accelerated pace, but are not expected to recover to pre-COVID levels in 2020. We expect our base business to continue its rebound at a slower pace, mirroring industrial activity. Partially offsetting expected base business softness will be continued growth in our event business on active shipments and a strong pipeline of projects expected to commence in the third and fourth quarters of this year. We expect industrial-based emergency response services to increase as business activity level increases. This will be in addition to responding to the high demand COVID-19 decontamination events that have continued to accelerate as the infection rates rise, as well as other weather and natural disaster responses. We experienced in the second quarter, as we experienced in the second quarter, our energy exposed businesses that were the most severely impacted. And we expect them to be operating at near break-even from an adjusted EBITDA basis for the full year in 2020. Despite the overall lower levels of business activities, We do expect to deliver strong year-over-year free cash flow generation in 2020 over 2019 levels. In summary, the financial flexibility of our business model, continued free cash flow generation, strong financial liquidity provided by cash on hand and available capacity on the company's lines of credit, and the dedicated workforce will allow us to navigate these challenging times and position the company to quickly capitalize on opportunities for growth as business conditions begin to recover. With that, I'll turn it over to Eric for some more details.