US Ecology : Transcript of the Raymond James Diversified Industrials Conference Fireside Chat

US Ecology, Inc. | Raymond James Diversified Industrial, August 24, 2021

Tyler Brown:

All right. Let's go ahead and get started with the next presentation. So for everybody that may not know me, I'm Tyler Brown, Senior Analyst here at Raymond James. I cover the environmental services sector. I also cover the transportation sector. So this afternoon I'm really excited to have US Ecology with us.

Joining us today is the company's CFO, Eric Gerratt, as well as Steven Park who heads up the IR effort. So thank you guys so much for joining us. Now, Eric, I know in these virtual formats we do kind of a fireside chat, but I do think that there may be some people out in the audience that may not know the US Ecology story, may not be as familiar, let's just say. You do have a great investor presentation on your website, but at a high level, can we just kind of kick it off and maybe have you just kind of give us an overview of your portfolio, the services that you offer, maybe just a little bit about what exactly you do?

Eric Gerratt:

Definitely. And thanks, Tyler. Excited to be here. Appreciate you having us. Yeah, you're right. So our investor presentation has got a lot of good stuff in it. We put a new version out there on our website yesterday, that's the most updated version. But just at the high level for US Ecology, we really break the company down into three operating segments. We have our waste solution segment, which is really our hazardous waste and specialty waste treatment and disposal business. So it's a network of five hazardous waste landfills, and a network of over 20 treatment and storage facilities or TSDFs throughout North America. And so that business really has those assets, whether it be the landfills or the treatment facilities throughout North America that are close to all the major industrial zones in North America, and allow us to service our customers and their hazardous and specialty waste treatment and disposal needs.

Eric Gerratt:

We then have our field services segment, which that segment provides vertically integrated complimentary field services, with the ultimate goal of providing our customers kind of a one-stop solution for their environmental services needs, and driving additional waste that comes to us through those ancillary or complimentary field services into our waste solution segment or our treatment and disposal business. And then we have our energy waste segment, which that business is anchored around three ENP landfills. Two in the Permian Basin in Texas, and the other in the Eagle Ford Basin, and then some ancillary services centered around those landfills in the areas such as equipment rental, industrial services, some bio waste treatment and disposal. And that business is really there to serve primarily the ENP upstream operators, again, in the Permian and Eagle Ford basins.

Tyler Brown:

Perfect. Okay. So we've got kind of a core hazardous waste business disposal. We have the field service and we have some energy related assets. So I want to kind of come back to the hazardous waste landfill assets. I think these are obviously high moat businesses, if you will, or high moat assets, I should say.

Eric Gerratt:

Yeah.

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Tyler Brown:

Just generally speaking, roughly how much of the market do you kind of make up in that sector? And has there been any real move to add new hazardous waste landfills say in the past 20 years in the U.S?

Eric Gerratt:

Yeah, good question, Tyler. And you're right. There are high barriers to entry for those hazardous waste landfills. And if you look at them, there's about 20 in all of North America. We have five of those. The last Greenfield one was in the early '90s. I don't expect or anticipate any new ones anytime soon. Let's be honest, nobody wants one of these in their backyard or in their city or state. And so don't expect any new ones to come online anytime soon. So yes, high barriers to entry. Very, very sophisticated from a regulatory perspective and from a compliance perspective. But we feel like we have the best assets in the industry. In terms of market share, not lots of current good market share data out there. The most recent is from early 2020 early, but historically, that would show from a haz landfill perspective that we have about 40% of that market.

Tyler Brown:

For zero?0.

Eric Gerratt:

Correct.

Tyler Brown:

Okay. And then those are relatively long life assets? Obviously a landfill has a defined life, generally speaking. Can you just talk about that really quickly?

Eric Gerratt:

Yeah. In terms of our landfill assets, the shortest remaining life is over 30 years. So we've got lots of footprint and ability to continue to construct additional landfill cells, if you will, on the existing footprint that's already been cited and permitted.

Tyler Brown:

Okay, perfect. So I want to take a little bit of a walk back in history. US Ecology has been quite acquisitive over the years. I think most recently with a, let's call it a capstone kind of deal with NRC. And we'll get into NRC in a bit. But can you just talk a little bit about how US Ecology was kind of cobbled together? And then maybe again, kind of how NRC, which was obviously a bigger deal, but how that kind of fits into the overall strategy?

Eric Gerratt:

Sure. So yeah, if you go back 15 years ago, US Ecology in our roots came up on kind of the landfill side. And if you go back to 2010, we really were Western landfill base. We had four landfills and that was really what we did predominantly in the West, and then one in the Gulf coast, outside of Corpus. In the end of 2010, we acquired our Stablex facility, which is just outside of Montreal on the East Coast, which was a haz landfill and treatment facility. That was really our first footprint out East and internationally for us. Turned out to be a fantastic acquisition. It was very large at the time. It was about $80 million, was our first exposure to any leverage. And as we integrated, as we brought that facility into our

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network, first couple of years had some challenges, but ever since that's been an absolute home run. Huge returns, huge cash flows from that business, de-levered pretty quickly.

Eric Gerratt:

Fast forward to 2014, we acquired the Environmental Quality Company or EQ, for about $460 million. That acquisition brought with it another permitted haz waste landfill outside of Detroit, a network of standalone treatment and storage facilities, and then really got us into the field services part of the business, and got us into those ancillary complimentary field services that I mentioned to help us drive additional waste into our and network and get that more sticky, closer relationship to our customers. Prior to that, when we were just a landfill company, we were kind of the garbage guys at the end of the line, and didn't have a lot of influence or input into what waste came to us and whether it came to us or not. So that acquisition got us into that field services business. At the time, again, more than double this in size, it levered us back up to about three and a half times. And then over the course of the next few years, we integrated, we actually

Eric Gerratt:

... did some divestitures, non-core businesses that came with that acquisition, and de-levered, kind of leading us up to November of 2019 when we acquired the NRC company for just over a billion dollars. This was in November of 2019. That business brought to us additional geographic footprint and services footprint, primarily on the field services side in the areas of industrial services as well as emergency response, so a real strong track record network of not only facilities and service centers but capabilities for everything from small spill response, which we do about seven to 10,000 spill response or smaller emergency response events every year, and then gave us the capability to respond to very large emergency response events such as whether it be a hurricane, fires or a large chemical spill, chemical fire.

Eric Gerratt:

The largest example that we've had since the acquisition was the Naval ship fire in California, where we responded to that event. And then as a result, also quite a bit of hazardous waste was generated in that response, and from that event, that we were then able to drive and internalize into our Beatty, Nevada landfill. So really, a closed loop solution where by doing that response, we were able to drive that waste into our network, which is the highest margin business that we do. And then also as part of that acquisition, we acquired our energy waste business that I mentioned before, based in the Permian and Eagle Ford basins.

Tyler Brown:

Right. So on NRC, one of the major aspects and rationales on the deal was clearly to feed the disposal network on the back end, and it's really about controlling some of that field service. And just so people maybe have a little perspective, that is literally either you doing it or contracting out some of the yellow iron work and doing the soil remediation and excavation, and then feeding it back into the landfill system. Does that kind of [crosstalk]

Eric Gerratt:

Correct. That's one of the pieces. It could be remediation. It could actually be... We do a lot of collections and logistic work in our field services network around... One of our largest customer bases is retailers, where we will actually do service stops at their stores every quarter and pick up any waste

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that's accumulated since our last stop, do all the packaging, the manifesting, and then take it out of the store and into our network and then determine what the ultimate disposal of that waste is. And then on the emergency response side, as I mentioned, there's waste and opportunities for waste that are generated from responding to those events. And in many cases, the responding party or service provider has a lot of say, if not the ultimate say on what happens to that waste.

Tyler Brown:

Okay. And so obviously, NRC was a bit of a tough deal if we think about the timing of November, 19. There's some things that happened not too long after that, so a lot of it felt like he was out of your control, but can you just talk about what transpired there and what really drove the EBITDA effectively down there?

Eric Gerratt:

Yeah. So as you mentioned, timing was definitely not on our side with that deal. So we announced it in June of 2019, and we closed on November 1st of 2019. The largest and most immediate impact we felt was in the energy waste business which you may remember, about the end of December of 2019, we started to see real issues in terms of oil prices and disputes with the Saudis and the Russians, which then had a lot of impact on oil prices. And then come March of 2020, we saw the pandemic start to hit. We saw big demand decrease for oil and gas, et cetera, which made the issue even worse. And so really, that was the piece of the business that was hit the fastest, and frankly, the hardest.

Eric Gerratt:

Coming into 2020, we thought that energy waste business would do about 40 million of dollars of EBITDA in 2020. That effectively went to zero. We then also saw the impacts of shutdowns, manufacturers' idling facilities, things of that nature where that impacted the core business a bit as well, but the largest, most immediate impact we felt was in the energy waste business.

Tyler Brown:

Okay. And so let's just talk about the balance sheet right up front here, something we may get into a little more. But it was a stock deal that included the assumption of the debt for NRC, and as you mentioned, the EBITDA for NRC, it got hit pretty hard, pretty quick. I think as of Q2, you were 4.7 times levered.

Eric Gerratt:

That's right.

Tyler Brown:

It's obviously high, it's probably outside your comfort zone, but is it really just more of a function of the EBITDA than it is for broad debt levels?

Eric Gerratt:

Yeah, it really is, Tyler, and you're right, coming out of the second quarter, we were at about 4.7 times. That is certainly above our comfort level. We've said in our five-year target is to get back down to around two, two and a half times, which we think is the right level, which after we did Stable X, after we

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did EQ, over the next couple of years, we were able to de-lever and get back down to those levels. That's certainly our goal here.

Eric Gerratt:

And you're right, it really was a function of the EBITDA decline, pretty unexpectedly and pretty rapidly that drives that number up. As we grow back out, as the EBITDA recovers, that number comes down fairly quickly. We think we'll be around 4.2 times the end of this year, and then get back down well below that in 2022, which is absolutely our goal. And frankly, probably our top capital allocation priority right now is to continue to de-lever. It's never been a question of liquidity or being able to service the debt, but it's a number that people are focused on and I understand why, and one that we want to get down.

Tyler Brown:

But it sounds like it's going to be more a function of EBITDA and less about the debt level. And that's important because we're going to get down to your free cashflow guidance, but should we basically assume that the debt level remains fairly steady or maybe only trickles down slightly?

Eric Gerratt:

Well, yeah. The great thing about our credit facility is it's very flexible. It doesn't mature until 2026. We only have a required pay-down of about four and a half million a year, but we can pay it down as fast as we want above and beyond that. And I would tell you, yes, as the EBITDAR grows, as we generate more free cash flow, we do want to pay that debt down because I'd rather not be paying the interest. You know, the other thing that we always look at that we're continuing to look at is, the other thing that will potentially lead to some more de-leveraging is as we identify either facilities or business lines that are not core, we have a history of this, we may do some divestitures of those things which, again, those proceeds would go towards [inaudible].

Tyler Brown:

Okay. That's extremely helpful as well, but it feels like NRC at this point is largely integrated. Actually, maybe the synergies are coming in a little bit faster than you had originally anticipated. So just to put that to bed, it seems like the integration is largely done, the synergies are coming. It's just the business needs to recover and largely the energy business frankly.

Eric Gerratt:

Yeah, I think that's right, and yeah, we've made really good progress on the integration. I would say we're ahead of where we thought we'd be in terms of synergies. We're going to capture the 20 million of synergies we thought we would

Eric Gerratt:

... capture it by the end of year three. We're going to capture those by the end of this year, a year early, but there's still a lot of opportunity for us in terms of footprint utilization and combination in some cases, as well as there's a lot of cross-selling opportunities that some of those have been hampered by the pandemic. And as we kind of come out of that and grow out of that, I think there's still a lot of opportunities and a lot of value to unlock there.

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