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Edited Transcript of NRCG.A earnings conference call or presentation 18-Mar-19 2:00pm GMT

Q4 2018 NRC Group Holdings Corp Earnings Call

Apr 2, 2019 (Thomson StreetEvents) -- Edited Transcript of NRC Group Holdings Corp earnings conference call or presentation Monday, March 18, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian T. Swinbank

NRC Group Holdings Corp. - CEO, President & Director

* Joseph J. Peterson

NRC Group Holdings Corp. - CFO

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Conference Call Participants

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* Dan Dolev

Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

* Jared Filippone

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for participating in today's conference call to discuss NRC Group's financial results for the fourth quarter and full year ended December 31, 2018. Joining us today are NRC Group's President and CEO, Chris Swinbank; CFO, Joe Peterson; and the company's External Director of Investor Relations, Jared Filippone. Following the remarks, we'll open the call for your questions.

Before we go further, I would like to turn the call over to Jared Filippone as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Please go ahead sir.

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Jared Filippone, [2]

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Thank you, Denise. I would like to remind everyone that in the course of this call to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see NRC Group Holding Corp.'s publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

On today's call, we will also discuss adjusted EBITDA, which is a non-GAAP financial measure. Please refer to the earnings release we issued this morning for a definition and reconciliation to GAAP. We believe the presentation of adjusted EBITDA is useful because it provides investors and industry analysts the same information that we use internally for purposes of assessing our liquidity and core operating performance. I would like to remind everyone that this call will be available for replay starting after the call through April 1, 2019. A webcast replay will also be available via the link provided in today's press release as well as on the Investor Relations section of the company's website at ir.nrcg.com.

Now I would like to turn the call over to the President and CEO of NRC Group, Chris Swinbank. Chris, please go ahead.

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [3]

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Thanks, Jared, and good morning, everyone. It's pleasure to be joining you. Starting with Slide 3, we ended 2018 on a strong note having a very transformative year for our company. In 2018, we generated strong revenue growth and exceeded our previously communicated pro forma revenue and adjusted EBITDA targets for the year. This increase in revenue and earnings was driven by organic growth in our core business as well as contributions from recently completed acquisitions.

During the year, we were focused on executing our growth strategy and achieved several important milestones along the strong financial results. First, we have urged legacy NRC, which is comprised of a uniquely positioned standby business and adverse environmental services business with my former company, Sprint Energy, which contributed high-margin waste disposal assets to the combined company. We also executed, integrated several strategic acquisitions during the year, including Progressive Environmental Services or SWS, which expanded our geographic reach across both environmental services and emergency response services. Quail Run, which expanded our high-margin well side wastewater treatment capabilities within our Sprint business. And Cleanline, which broadened our recurring services offering across the U.K.

Lastly, in October 2018, we became a public company through our transaction with Hennessy Capital Acquisition Corp. III. These transactions along with our legacy businesses have uniquely positioned NRCG, providing us the capability to drive strong organic growth across a base of diversified end markets, while generating industry-leading adjusted EBITDA margins.

Next, construction on both our Pecos County and Reagan County waste disposal facilities is progressing according to plan, and we expect to commence operations starting in the second quarter of 2019 as previously communicated.

Additionally, we refiled our permit for Andrews County facility and expect to receive that permit in the second quarter of 2019. We believe the investments being made in waste disposal expansion will drive strong returns on the invested capital, generate relatively rapid payback periods and quickly be accretive to EBITDA margins as evidenced by the outstanding results for our current Karnes County facility. We also continued to execute the growth strategy in our Standby segment, including our expansion into Mexico. We expect to announce additional Mexico retainer contract wins, adding to the 6 retainer contracts already won in the region and further expanding our market-leading position for retainer-based emergency oil response services.

Finally, our Environmental Services business saw a strong demand in double-digit organic growth in 2018 on the heels of rolling out our new national emergency response capabilities. This program effectively outsources a customer's emergency response capabilities to NRCG. We believe this is a natural fit, given our existing global footprint, proven independent contractor network, existing 24/7 call center capabilities and longstanding market expertise and safety records. Customers have been very receptive to this expanded service offering, which we hope to continue and grow and expand over time.

Turning to Slide 4. Joe will provide more detail on our financial results, but I'd like -- likely to quickly highlight our strong performance. Revenue in the fourth quarter increased 15% to $107.3 million, and adjusted EBITDA increased 30% to $31.4 million. For the year, revenue increased to 30% to $360.2 million, and we exceeded our 2018 guidance for pro forma revenue, which came in at $388.7 million compared to our expectation of $360 million to $380 million. Additionally, adjusted EBITDA for the year increased 32% to $91.1 million, also above our guidance of $85 million to $90 million.

With that, I will now turn the call over to Joe to speak about our fourth quarter financial results in more detail and provide our financial outlook for 2019. Joe?

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Joseph J. Peterson, NRC Group Holdings Corp. - CFO [4]

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Thank you, Chris, and good morning, everyone. On October 17, 2018, we consummated the previously announced acquisition of all of the issued and outstanding membership interests of NRC Group, JFL-NRC-SES Partners LLC. In connection with the closing of the business combination, the company changed its name from Hennessy Capital Acquisition Corp. III to NRC Group Holdings Corp. However, it is important to note the financial results described today for the dates and periods prior to the business combinations relate to the operations of NRC Group Holdings, LLC, which we refer to as NRC Group unless otherwise indicated.

Now moving on to our financial results for the fourth quarter on Slide 6. Revenue increased 15% to $107.3 million compared to $93 million in the fourth quarter of 2017. The increase is primarily driven by the acquisition of SWS, Quail Run and Cleanline in 2018. Next, operating expenses, which include the cost of revenue, exclusive of depreciation and amortization in the fourth quarter of $73.7 million compared to $62.6 million in the prior year period. The increase is primarily due to the aforementioned acquisitions as well as the business combination completed in October '18. General and administrative expenses in the fourth quarter were $13.7 million compared to $10.4 million in the prior year period, primarily due to the acquisitions completed in 2018.

Net loss, excluding dividends from Series A preferred common stock, in the fourth quarter 2018 was $45.8 million or a net loss of $1.83 per share compared to net income of $7.7 million or $0.35 per share in the prior year period. The decline was primarily the result of increased transaction expenses related to the aforementioned acquisition and increase in interest expense. Adjusted net income, which excludes the onetime deal cost of $48 million, was $2.2 million or $0.09 per share. Adjusted EBITDA calculated consistent to our senior credit facility increased 30% in the fourth quarter 2018 to $31.4 million compared to $24.2 million in the previous year period.

Turning to our 2018 results. Revenue in 2018 increased 30% to $360.2 million compared to $277.6 million in 2017. The increase was primarily driven by acquisition of SWS, Quail Run and Cleanline in 2018. Excluding these acquisitions, revenue would have grown by 15%, driven primarily by strong organic growth in Sprint across both the service and waste disposal as well as higher project-related revenue in our domestic environmental services segment. Organic growth was partially offset by the decline in marine-based emergency response revenue, resulting from fewer hurricane events that occurred in 2017 but did not repeat in 2018.

Operating expenses, which include cost of revenues, exclusive of depreciation and amortization in 2018, were $242.2 million compared to $185.5 million in 2017. The increase is primarily due to the aforementioned acquisitions as well as the business combination with Hennessy Capital Acquisition Corp. III completed in October 2018. General and administrative expenses in 2018 were $53.1 million compared to $39.4 million in 2017. The increase is primarily due to the aforementioned acquisitions. Net loss, excluding dividends from Series A preferred stock in 2018, was $47.3 million or a loss of $1.89 per share compared to net income of $5.7 million or $0.26 per share in 2017. Decline is primarily result of the increase in transaction expenses related to the aforementioned acquisition and increase in interest expense.

Adjusted net income, which excludes the onetime deal cost of $52.3 million in 2018, was $5 million or $0.20 per share. Adjusted EBITDA calculated consistent with our senior credit facility increased 32% in 2018 to $91.1 million compared to $68.8 million in 2017.

Next, I'd like to briefly review our segment results. Starting on Slide 8. The Sprint segment grew revenue 50% in the fourth quarter to $21.2 million and 67% in the year to $75.2 million. Operating profit also increased significantly in the quarter by 61% to $9.5 million and was up 104% in 2018 to $30.7 million. Operating profit margins expanded significantly, both the fourth quarter and the year, primarily due to strong performance in our waste disposal business.

Slide 9 outlines the performance in our domestic environmental services segment, which grew 29% in the fourth quarter to $70.9 million and 32% in the year to $226.4 million. Operating profit in the fourth quarter was $8 million compared to $8.8 million in the prior year quarter. And in 2018, operating income increased 3% to $23.3 million. The slight decline in operating profit in the fourth quarter was due to a reduction in higher-margin mix work performed in Q4 2017 that did not repeat in 2018.

Next, Slide 10 details Standby segment performance. In the fourth quarter, revenue was $8.3 million compared to $19.7 million in the prior year quarter. And in 2008 (sic) [2018], revenue was $34.1 million compared to $43.8 million in 2017. Operating profit in the fourth quarter was $3.5 million compared to $7.4 million in the prior year quarter. And in 2018, operating profit was $14.9 million compared to $19.5 million in 2017. The decrease in revenue in 2018 was primarily due to lower marine-based emergency response revenue in 2017 and included revenue due to efforts, supporting hurricane cleanups, that did not reoccur in 2018.

Lastly, Slide 11 outlines performance of the international segment, which grew revenue 64% in the fourth quarter to $6.8 million, 38% in 2018 to $24.4 million. Operating profit in the fourth quarter increased 69% to $1.1 million, and in 2018, increased 52% to $4.3 million. The increase in revenue for 2018 was primarily due to the acquisition of Cleanline and the higher North Sea revenue, which was slightly offset by lower revenue in the UAE.

As of December 31, 2018, NRCG had $18.4 million of cash and $352.2 million in total debt gross of issuance fees compared to $10.6 million of cash and $203.3 million of total debt at December 31, 2017. Capital expenditures in 2018 were $24.6 million and came in below our expectations. The lower-than-anticipated capital expenditures were largely due to a timing shift, but we now expect the certain capital expenditure originally planned in 2018 will now occur in 2019. I'd like to quickly mention that we are constantly evaluating our capital strategy to determine the best use of our capital to drive long-term shareholder value. Currently, we believe the best use of our capital is on the continued build-outs of our waste disposal facilities as they drive strong returns on our invested capital, generate relatively rapid payback periods, and once operational, they are quickly accretive to EBITDA margins.

Moving to our financial outlook on Slide 12. We remain solidly on track to achieve our previously communicated 2019 financial guidance, as described in our recent investor presentations for revenue and adjusted EBITDA, and we are updating our capital expenditures and free cash flow conversion outlook for the year. To reiterate, we still expect operating revenues in 2019 to range between $420 million and $460 million compared to $389 million in 2018, an increase of 8% to 18%. Adjusted EBITDA in 2019 is still expected to be between $105 million and $115 million compared to $91 million in 2018, an increase of 15% -- 15% to 26%. We now expect capital expenditures in 2019 to range between $55 million to $60 million compared to $45 million previously and $25 million in 2018. The increase in expected capital expenditures for 2019 is primarily due to a shifting of certain capital expenditures originally planned in 2018 into 2019. The company also expects blasting and construction cost to increase slightly to complete the Reagan facility. However,

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capital are still anticipated. Additionally, approximately 55% of the anticipated capital expenditures for 2019 is related to the initial waste disposal build-outs. Free cash flow conversion, defined as adjusted EBITDA less total capital expenditures, excluding onetime waste investments divided by adjusted EBITDA, in 2019 is now expected to be between 70% and 80%.

I'd also like to quickly note that on March 15, 2019, we entered into an incremental revolving credit commitment for $10 million under our existing credit facility, bringing our total revolving credit commitment from $35 million up to $45 million. The results show we have generated

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Operator [5]

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And I have rejoined the speaker location. Sir, please go ahead.

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Joseph J. Peterson, NRC Group Holdings Corp. - CFO [6]

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Yes, I will continue, thanks. I'd also like to quickly note that on March 15, 2019, we entered into an incremental revolving credit commitment of $10 million under our existing credit facility, bringing our total revolving credit commitment up to $45 million.

Lastly, I believe our results show we have generated strong results in our fourth quarter. And in 2018, we have built strong momentum in the business, and I'm confident in our organization's ability to execute on our 2019 strategic priorities, which Chris will take you through right now.

And with that, I'll turn it over to Chris.

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [7]

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Thanks, Joe. Before getting to our strategic priorities for 2019, I'd like to quickly reflect on 2018, which was a transformative year for our company and provide an update on our recent announcement of our acquisition of OIT Incorporated. As I've previously mentioned, we completed several transactions in 2018, which bolstered our waste disposal business, expanded our reach across both environmental services and emergency response services, and broadened our recurring services offering across the U.K. All these transactions combined with the rest of our operations, which generated strong organic growth throughout the year, have created an organization that is uniquely positioned to capitalize on our broad-based service offerings and diverse end markets. We see a large opportunity for profitable organic growth across our portfolio of businesses and anticipate 2019 to be a year of continued growth and market share gains.

On March 15, we entered into a definitive asset purchase agreement with OIT Inc. with an initial cash purchase price of $6 million plus an additional $2 million deferred consideration payable in cash and stock and up to an additional $5 million in earn-out payments over the next 3 years based on certain financial milestones, which is expected to close in the second quarter of 2019. The acquisition will add a provider of thermal treatment of nonhazardous petroleum-contaminated soils, absorbent pads and sludges, and the treatment of per- and polyfluoroalkyl substances to our already diverse portfolio.

Now turning to Slide 16. Looking ahead to 2019 and given our scale, unique set of capabilities and successful execution on our strategic growth plan today, we anticipate continuing momentum we have built in the business and look to drive strong organic revenue and adjusted EBITDA growth. For 2019, our company will be intently focused on the following strategic priorities. First is the build-out of new landfill and wastewater disposal facilities. We are on track to begin operating the Pecos County and Reagan County landfills in the second quarter of 2019. These facilities, combined with our facility in Karnes County, will allow us to continue to execute on our waste disposal expansion strategy in our core markets and grow our share. And as I previously mentioned, we expect to receive the permit for our Andrews County facility in the second quarter of 2019, supporting our expansion in the Permian Basin are the recent announcements by 2 major oil and gas companies regarding their intention to significantly increase oil and gas production in the Permian Basin over the next 5 years.

In addition, our acquisition of Quail Run back in October helps us expand into new waste streams, which are outside of our existing waste disposal facilities and offers new avenues of growth and opportunities at very attractive EBITDA margins. Secondly, within our Standby segment, we have been extremely successful with our growth strategy in Mexico to date. We anticipate securing additional contracts throughout the year as we are the only global commercial Oil Spill Response Organization that can meet the needs of the larger international energy customers.

Finally, we will seek to drive margin gains through an increased focus on higher-margin services, improving operational efficiencies and excellence and driving synergies through our recent acquisitions. On top of this, we expect our end markets to remain robust throughout 2019, and we will capitalize on any incremental growth or margin-enhancing opportunities that are in the best interest of our company and our shareholders. These initiatives

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revenue and EBITDA growth

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in the top quartile

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recap the key

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Operator [8]

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Ladies and gentlemen, thank you for standing by. We have rejoined Mr. Swinbank to the call. Please go ahead, sir.

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [9]

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Thanks. This is Chris Swinbank. I apologize for the technical difficulties.

Before we go to Q&A, let's turn to Slide 17 to recap the key takeaways. First, in 2018, we exceeded our pro forma revenue and adjusted EBITDA guidance. Secondly, 2018 was a transformative year for our company as we completed several acquisitions that expanded our service offerings and reach as well as transitions to a public company through our business combination with Hennessy Capital Acquisition Corp. III. Thirdly, we generated strong momentum in the business during 2018 that sets us up well to achieve our outlook for 2019 as well as our strategic priorities for the year. Lastly, construction on our Pecos County and Reagan County waste disposal facilities are on track and expected to be operational in the second quarter of 2019.

With that, I'd now like to turn the call back over to the operator for Q&A before my closing remarks. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Michael Hoffman of Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [2]

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I just kind of walk through sort of the segments. You did a nice slide on 14, which is your bridging of your EBITDA. So if I think about the pieces, how much of the $1 million to $2 million in Standby is Mexico versus just the ratable growth of the retain versus -- part of the business versus emergency response work? And then sort of walk through, I'd like to talk about ES and Sprint separately, but we'll get details.

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Joseph J. Peterson, NRC Group Holdings Corp. - CFO [3]

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Sure. So, of course, U.S. Standby predominantly is Mexico driving the incremental growth.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [4]

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Okay. And then when we think about ES, you talked about your national emergency response program that you rolled out. Can you parse what you think contributed in the organic growth from that versus who you are? And you have this great small -- and I think this is good thing, the small project business you have this niche you play in, but how much was just doing that well, and there's a good industrial economy versus the national rollout?

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Joseph J. Peterson, NRC Group Holdings Corp. - CFO [5]

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Yes, the national emergency response is really not contributing or at least now anticipated to contribute significant EBITDA growth in this year. To the extent that it does, it could represent upside. It's more of the infancy phase. The growth we're seeing right now is really from organic growth in our Environmental Services business like you've seen last year, and toward the late half of the year, some contributions from the OIT acquisition.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [6]

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Okay. And then on the Sprint business energy waste, how do you reflect on Petro Waste being bought by Waste Management, and now there's 2 really well-capitalized players between Waste Connections and Waste Management, and then you're in a development mode. How do you think about that competitive environment? Is this a good thing now that you've got a good competitor? I'd just like to understand your view of Petro Waste in your model?

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [7]

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Sure, Michael, it's Chris. We're encouraged by the fact that Waste Management bought Petro Waste. We think we have great facilities and so does Petro Waste, and we look forward to competing. The nice thing about Waste Management who we have a ton of respect for is that they have a much longer range vision of the market as opposed to trying to time a commodity cycle as do we. We have the same long-range vision. And so the entrants of well-capitalized competitors into the market is welcomed by NRC, and so we look forward to it.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [8]

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Okay. And then lastly, in your sales guidance this year, could you share with us what's deal-related rollover from '18? And then any part of OIT so we can parse between what's organic versus what's deal in the current guide?

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [9]

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Yes, all of the guide right now is organic growth except for perhaps $1 million to $2 million at most that would contribute from OIT.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [10]

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And there is no rollover from prior year deals?

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [11]

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Yes, they're all kind of in the base, exactly. So we did the pro forma to get to the [2 89], but once they're all in, they're now all in on a go-forward basis.

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Operator [12]

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(Operator Instructions) Your next question will be from Dan Dolev of Nomura.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [13]

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You did a really good job on EBITDA. Can you maybe tell us why you are reiterating the '19 numbers and not sort of upping them a little bit at this point?

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Joseph J. Peterson, NRC Group Holdings Corp. - CFO [14]

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Yes, it's Joe. I'll chip. Chris can chime in as well. I mean, right now, we are showing from 91 to, let's take the midpoint of our range of 110 that represents over 20% growth, which is quite aggressive versus the peer set, so we feel good about the growth that we're showing, number one. I'd say, number two, although management feels confident, and Chris went into some detail around the construction remains on track, there are a lot of things that we need to execute on and execute well on. And I would say just kind of into March of this year is way too early to go out there and raise guidance. Right now, we feel very comfortable where we are, and we have a lot of execution to do, but we're set up well. I don't know, Chris, anything you would add to that?

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [15]

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Yes, I would agree with that. So we've got blocking and tackling that we need to continue to take care of. And we've got some aggressive goals for the year, although achievable. And so to go out and just get those done is our top priority, and we're not ready to change guidance yet.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [16]

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I understand. And just for some housekeeping from, maybe I missed that, for -- in 2018, the Quail Run acquisition in terms of revenue, what was the contribution for that? Maybe I missed it in the slide, sorry about that.

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Joseph J. Peterson, NRC Group Holdings Corp. - CFO [17]

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For Quail Run, in 2018, was roughly -- well, roughly on a pro forma basis, roughly $6 million on -- in the reported numbers because it just closed early October, it's roughly $2 million of EBITDA.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [18]

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Okay. So sort of in line with what we were modeling there?

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Joseph J. Peterson, NRC Group Holdings Corp. - CFO [19]

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Yes.

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Operator [20]

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And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the call back over to Mr. Swinbank for his closing remarks.

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Christian T. Swinbank, NRC Group Holdings Corp. - CEO, President & Director [21]

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Thank you. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our first quarter results. Thanks, again, for joining us.

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Operator [22]

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Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.