Waste Connections, Inc. (WCN) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 2 2013 Waste Connections Earnings Conference Call. My name is Matthew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Mr. Ronald Mittelstaedt, who is the Chairman of the Board and CEO. Please proceed, sir.

Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our second quarter 2013 results and provide a detailed outlook for the third quarter. I'm joined this morning by Steve Bouck, our President; Darrell Chambliss, our COO; Worthing Jackman, our CFO; and several other members of our senior management team. We are extremely pleased with our results in the period. Favorable trends experienced earlier in the year accelerated during the second quarter, resulting in revenue, adjusted EBITDA and adjusted free cash flow all exceeding the upper end of our expectations for the quarter. Most notably, solid waste landfill volumes increased double digits, with municipal solid waste volumes up 14% in the quarter, the strongest increase we've experienced in several years. Put simply, volume recovery for the solid waste sector, which typically lags an improving economy, is finally materializing. This improving environment drove about a 200-basis-point increase in organic volume growth relative to our outlook for the quarter. As a result, revenue in the second quarter exceeded the upper end of our outlook by almost $8 million and adjusted EBITDA was 34.6% of revenue or about 40 basis points above our outlook. Adjusted free cash flow generation through the first 6 months of the year remained strong, up more than 18% year-over-year to $175.7 million or 18.7% of revenue. Before we get into much more detail, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items.

Thank you, Ron, and good morning. We must inform everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act of 1995, including statements related to expected volume and pricing trends, E&P activity, recycled commodity prices, expectations regarding period-to-period comparisons, potential acquisition activity, contributions from closed acquisitions, the timing of permitting activities and inquiries related to MLP treatment, the impact of the relocation of the company's corporate headquarters from California to Texas and our third quarter outlook for financial results. Such forward-looking statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. These risks and uncertainties are set forth in the company's periodic filings with the Securities and Exchange Commission. Stockholders, potential investors and other participants are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this conference call, and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. On the call, we will discuss non-GAAP measures, such as adjusted EBITDA, adjusted net income and adjusted net income per diluted share and adjusted free cash flow. Please refer to our earnings release for reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I'll now turn the call back over to Ron.

Okay. Thank you, Worthing. Revenue in Q2 was $489.4 million, up 19.1% over the prior year period. Internal growth in the quarter was almost 3%, broken down as follows: positive 2.6% from core price, positive 0.2% from surcharges, positive 0.9% volume, negative 0.8% from recycling and negative 0.5% from intermodal and other services. As previously noted, volume growth in Q2 was about 200 basis points better than expected. We had guided volume growth between negative 1% and negative 1.5% for the quarter due to the approximate negative 1.2% headwind in the period from prior year items we have discussed on previous calls that have yet to anniversary, primarily the wrongful termination late last year of a municipal contract in Madera, California that we are now litigating. A notable ramp in solid waste disposal tonnage, which typically leads a waste -- a sector recovery, drove reported volumes up 0.9% in the second quarter. More importantly, underlying volume growth for the quarter, net of the headwinds, was closer to 2%. And we expect volume growth in Q3, despite similar headwinds as Q2, to increase sequentially to a reported 1.5% or about 2.5% net of the headwind. Landfill volumes on a tonnage basis in the second quarter adjusted for the impact of acquisitions were up about 13% year-over-year. All 3 solid waste streams increased year-over-year in the quarter, as MSW disposal volumes grew 14%, construction and demolition debris-related volumes rose 26% and special waste volumes were up 7%. Year-over-year trends in MSW volumes improved throughout the quarter from up 8% in April to up nearly 20% in June. More than 70% of our landfills reported increases in disposal tonnage in the quarter. In Q2, we once again saw increased year-over-year activity in roll-off as revenue per pull increased 2% and roll-off pulls per day were up 1% on a same-store basis. Our western region continues to show the largest improvement, with roll-off revenue up almost 6%, followed by our eastern region, where roll-off revenue increased about 3%. Roll-off in our central region was about flat year-over-year as an unusually cold April delayed its typical season uptick. June, though, was the central region's strongest month in the quarter as roll-off revenue increased 4% over the prior June. Recycling was negative 0.8% in the period due primarily to year-over-year decreases in recycled commodity values. Proceeds from the sale of recycled commodities in the second quarter were $16.8 million or 3.4% of consolidated revenue. On a same-store basis, revenue from such activity declined $3.3 million year-over-year or about 16.5% at very high margins. This decrease resulted in a little more than $0.01 year-over-year impact to EPS in the quarter. Prices for OCC or Old Corrugated Containers averaged about $129 per ton during the second quarter, down about 11% from the year-ago period and down 2% from Q1. Our average OCC prices are currently about $140 per ton or almost 20% higher than what we'd averaged in last year's third quarter and about flat with Q4 of 2012. This upcoming quarter is the first period since 2011 that commodity prices should be a tailwind year-over-year. Recycling can be a labor- and capital-intensive business. The attractiveness of which rises or falls with the value of recovered commodities. Over the past several months, we have sought to improve returns on capital and operating margins within recycling. To optimize productivity within work shifts and improve margins and returns on capital, we have turned away third-party volumes in certain markets. To minimize future capital expenditures and improve long-term free cash flow and returns on capital, we are consolidating 2 facilities in Washington and outsourcing to a third party in 1 California market. We estimate that these actions will reduce annualized revenue by approximately $10 million, but increase EBIT by about $1.5 million and reduce future CapEx up to $12 million. Intermodal and other services was a negative 0.5% in the period primarily due to fewer cargo container movements in the Northwest and a shift by 1 customer from rail to trucking. We expect this trend for intermodal to continue for the remainder of the year, representing an almost $5 million impact to second half 2013 intermodal revenue compared to previous expectations. As a reminder, intermodal services represents about 2% of our total revenue at margins below our corporate average. Turning now to an update on E&P waste activity. On a reported basis, we handled about $62.5 million of E&P related waste throughout our network in the second quarter, up about 9% sequentially from Q1. And EBITDA before corporate overhead allocation as a percentage of revenue for that segment increased about 500 basis points sequentially from Q1 to about 50%. Above-average rain in the Bakken during late May and early June nominally slowed waste activity, impacting us an estimated $1 million to $1.5 million in the period. E&P waste-related revenue was currently averaging between $21 million and $22 million per month and could rise above that during Q3 should project-oriented remediation activity increase, as typically occurs during this time of the year. Our new solidification and liquids treatment facilities are up and running in the Bakken, and our recently permitted facility in Oklahoma has also commenced receiving waste. Regarding other E&P permitting activity. As noted in our press release, we expect to receive our permit and commence construction of a new E&P waste landfill in the west Texas Permian. This new facility should be operational late this year or early next year, providing incremental growth in 2014. In the Eagle Ford, we currently expect to receive another new landfill permit by the first quarter of 2014 and be operational at that facility mid next year. On the M&A front, the year continues to play out as communicated on prior calls. We've passed on a number of solid waste and E&P waste acquisition opportunities due to either strategic fit, financial due diligence or seller expectations. Given the current level of dialogue, we still expect to complete a traditional amount of acquisitions during 2013 and expect that most of the transactions will close late in the year, providing rollover growth into 2014. We've also been active on the divestiture front recently, either signing or closing sale of 3 operations totaling about $15 million of lower-margin revenue. Though margin and return is accretive, these divestitures will decrease second half revenue by about $7 million compared to previous expectations. I'd also note that we are not looking at any other divestitures beyond these at the current time. Finally, regarding our intentions to file for a private letter ruling as to whether traditional municipal solid waste landfills might qualify for MLP status, we believe the discovery in early June that the IRS had formed a REIT working group to study the legal definition of real estate may potentially increase the scrutiny of conversions to either REITs or MLPs. Our planned prefiling, consultative call with the IRS to discuss whether the use of landfill airspace might qualify for MLPs status has been rescheduled a few times by the IRS to enable a member of this REIT working group to also participate. We now expect this call to occur in late August, with the potential filing of a private letter ruling request dependent on the outcome of that call. As we've noted in prior discussions, our review of this opportunity is simply related to potential tax planning strategies and alternatives to increase the return of capital to stockholders, with possible additional upside of creating an attractive tax-advantaged dividend-paying security for acquisition opportunities. We do not foresee operational issues in implementing an MLP. Regardless of whether an MLP is possible for or attractive to implement, we'll always remain well positioned for future growth, sector-leading results and increasing return of capital to stockholders. And now I'd like to pass the call to Worthing to review more in depth the financial highlights of the second quarter and to provide you a detailed outlook for Q3.

Thank you, Ron. In the second quarter, revenue was $489.4 million, a 19.1% increase over the prior year period. Acquisitions completed during the prior year, net of any divestitures, contributed 16.7% to year-over-year growth. Adjusted EBITDA, as reconciled in our earnings release, increased 28.7% to $169.4 million. As a percentage of revenue, this was 34.6% or about 260 basis points above the year-ago period. We estimate margins on a same-store basis within our solid waste business expanded about 50 basis points year-over-year, as increased disposal volumes and strong pricing helped us easily overcome an estimated negative 40-basis-point year-over-year margin impact from lower recycled commodity values. Acquisitions added an estimated 210 basis points to year-over-year margin expansion. The following line items moved a notable amount from the year-ago period as a percentage of revenue primarily due to a change in revenue mix resulting from the higher-margin R360 acquisition. Third-party disposal and transfer cost decreased 110 basis points. Labor and supervisory expense decreased 80 basis points. Maintenance and repairs expense decreased 60 basis points. Fuel expense decreased 45 basis points. Rebates, revenue sharing and passthrough fees and expenses decreased 35 basis points. Recycling materials expense decreased 20 basis points. Meanwhile, third-party equipment rental and subcontractor expenses increased 45 basis points. Incentive and deferred compensation expenses increased 40 basis points, and real estate cost and utilities expense increased 20 basis points. Fuel expense in Q2 was about 5.9% of revenue. We averaged approximately $3.58 per gallon for diesel, which was about $0.06 a gallon above the year-ago period and $0.15 sequentially lower than Q1. Depreciation and amortization expense for the second quarter increased $14.9 million year-over-year and were almost 12.5% of revenue, up 125 basis points year-over-year due primarily to higher acquisition-related depletion cost. As we've noted before, this increase in D&A as a percentage of revenue is due to acquisition-related accounting and further widens the difference between D&A and CapEx, which runs about 9.5% of revenue. The 300-basis-point difference is noncash and does not impact free cash flow, but does dampen reported operating income, net income and GAAP EPS. Interest expense in the quarter increased $7.1 million over the prior year period to $18.9 million due to higher outstanding balances resulting from the R360 acquisition. Our effective tax rate for the second quarter was about 39.3%. We are pleased to announce that the final step of our corporate office relocation from California to Texas is now complete, as we are fully moved in to our new permanent corporate office, and we're also fortunate to have R360 co-located in the same space. As a result, in the second quarter, we incurred a $10.5 million pretax noncash charge related to the write-down of our prior corporate office lease in California. The expectation of this charge has been communicated over the past several quarters. GAAP and adjusted EPS in the second quarter were $0.35 and $0.47, respectively. Adjusted net income in the comparative periods includes, among other items, add-backs for the loss on prior corporate office lease, acquisition-related expenses and amortization of acquisition-related intangibles. Adjusted free cash flow through the first 6 months of the year was $175.7 million or 18.7% of revenue. Given the strong start to the year, we have decided to pull forward into 2013 up to $10 million of CNG truck purchases that we are committed to complete in 2014, enabling us to take advantage of bonus depreciation benefits this year. Debt outstanding at quarter end was $2.075 billion, and we currently have approximately $500 million of available capacity under our credit facility. We paid down about $165 million of debt during the first half of the year, and our leverage ratio at quarter end, as defined in our credit facility, improved to 3.15x debt to adjusted EBITDA. I'll now review our outlook for the third quarter of 2013. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and our various SEC filings. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic environment and excludes the impact of any acquisition -- additional acquisitions that may close during the period, expensing of acquisition-related transaction costs and any remaining costs incurred in connection with the relocation of the company's corporate headquarters from California to Texas. Let me start with revenue. Revenue in the third quarter is estimated to be between $500 million and $502 million, up about 18% over Q3 of 2012. Organic growth is expected to increase sequentially to positive 3.5%, with net pricing estimated at almost 3% and volume growth, on a reported basis, of approximately 1.5%. As noted earlier, we have a little over 1% negative volume headwind in the upcoming period, which fully anniversaries in Q4. Net of this headwind, underlying volume growth in Q3 is estimated at about 2.5%. Despite higher -- despite expected higher year-over-year commodity prices, recycling revenue is estimated to be about flat due to the changes in this line of business Ron previously reviewed. Intermodal and other is expected to be down a little more than 0.5%. Adjusted EBITDA for Q3 is estimated between $176 million and $177 million, reflecting a margin of around 35.2% or almost 300 basis points above the prior year period. Depreciation and amortization for the third quarter is estimated to be about 12.3% of revenue, up 90 basis points over the prior year period due to the impact of acquisition-related accounting. Amortization of intangibles in the quarter is estimated at about $6.2 million or $0.03 per diluted share. Operating income for the third quarter is estimated to be almost 23% of revenue. Interest expense in Q3 is estimated to be about $18.1 million. Our effective tax rate in Q3 is estimated to be about 39%. Non-controlling interest is expected to reduce net income by about $200,000, and our diluted share count in Q3 is assumed to remain around 124.1 million shares. Now let me turn the call back over to Ron for some final remarks before Q&A.

Okay. Thank you, Worthing. Again, we are extremely pleased with our second quarter and year-to-date results. Acquisitions, consistent pricing growth, and increasing disposal volumes are all driving double-digit year-over-year growth in revenue, adjusted EBITDA and adjusted earnings per share and adjusted free cash flow. Landfill volumes are growing at the strongest rate we've experienced since before the Great Recession, and such improvements are typically a leading indicator of a sector-wide recovery. We have also taken actions to further improve margins and returns on capital, to reduce future CapEx requirements and to put additional building blocks in place for future E&P growth. As discussed, we're divesting a couple of low-margin smaller markets, rationalizing recycling operations and soon commencing construction of a new E&P waste landfill. These actions, together with pursuing potential acquisitions, permitting new E&P facilities and exploring MLP possibilities, demonstrate our continuing commitment to deliver sector-leading growth, margins and free cash flow generation. We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions. Operator?

[Operator Instructions] And your first question comes from the line of Ham Mazari of Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: The first question is just on volume. Could you give us a sense of what you're seeing in your commercial line of business, relative to what you saw at Q1, in terms of service increases versus decreases? And is it fair to say that you're seeing above-normal seasonality? Or are we just coming off of a pretty low base and so this is sort of just normal seasonality?

Yes, okay, let's see. To the first part of your question, Hamzah, in the second quarter, we saw a fairly marked -- in our commercial line, a fairly marked increase in service increases relative to both Q1 and year-over-year to Q2 of 2012. So in looking at both those periods, we saw a nice increase in service increases. We saw service decreases about flat with the first quarter and with the second quarter of last year, so they certainly did not accelerate at all. They did not move materially. We saw our closed businesses and our loss businesses come down from the first quarter and from Q2 of last year. And we saw the strongest period of net -- of gross new customers added commercially in Q2. So looking at that line, from a new account, service increases, a flattening of decreases and a decreasing of lost customers, we saw the most net new customer gains we've seen in many periods, so that is obviously a positive stream. As far as the seasonality, I mean, I would say 2 things. I would say we had a pretty typical seasonality. If anything, Hamzah, I would actually say it was more muted than normal because we had record amounts of rainfall in May and into June in several parts of the Midwest and the South.

And snow in April.

And snow in April. So if anything, I would say, it was a little muted. Having said that, part of the increase in landfill volumes, which is obviously measured by yardage and by weight, was due to the magnitude of how wet the spring was and how much rain we had in the system in May and June. So I would say that, that probably offset the more muted seasonality. So we would tell you it was just pretty typical with a few pushes and pulls. Hamzah Mazari - Crédit Suisse AG, Research Division: That's very helpful. And the second question is on pricing. I know most of your pricing is locked in sort of at Q1. Could you give us a sense of how your pricing differs from the majors, like Republic, in waste management, given that you have a lot more business that CPI tied? Do you need CPI to move up materially, to raise pricing going forward as you look over the next few years? Or can you raise pricing just given volumes are coming in better than expected? If you could just sort of parse that out, that would be helpful.

Okay. Well, I mean, I can't say too much about our competitors' pricing because I don't know what it is in the quarter. I can only look at what's been reported on the previous quarters. But again, on the solid waste side of our business, which is approximately $1.7 billion of our business, 52% of that is in a franchise-type environment, where we are -- effectively have a CPI-type of an escalator throughout our contracts, and that is running somewhere between about 1.8% and 2% currently. Some CPIs are as high as 2.4%. Some are as low as about 1.5%, 1.6% in certain parts of California. We just had a reset in the second quarter on one of our major contracts that we get every year, and that was 1.6% in the Bay Area of California. So that part of our business -- for that part of the business to have a greater pricing than CPI, it is always going to be at approximately the CPI. So whatever the CPI is, that's what we'll drive that piece. In the other 48% of our solid waste business that's competitive, again, our model is we are most predominantly -- over 90-plus percent of our businesses in suburban and rural markets, where we have very high market share, often own the only landfill in the market, we are getting about 4% to 4.2% in that market strata. And that's the competitive piece of our business. I think if you compare that competitive piece to the majors, where they have, obviously, a large urban footprint in about 90% of their business, so completely opposite ours, I think you're seeing they're getting about 1% to 1.5%, maybe up to 2%. So clearly, not nearly as much pricing power as our more competitive -- as our secondary markets. And again, I don't think it's that they're not getting nearly as much price, it's the retention rate of that price because of the churn rate being so much higher in their model than in ours in the competitive markets.

The one thing you should look for in a rising tide environment is their ability to retain price to improve.

Absolutely.

And you should see the urban guys start getting better price than what you've seen in the past couple of years.

Yes. Hamzah Mazari - Crédit Suisse AG, Research Division: And just last one for me, I'll turn it over. Any update on how you're thinking about the Puente Hills landfill?

Hamzah, no real update. I mean, the landfill is -- Puente Hills landfill is still closing, obviously, at the end of the day, on October 31, so the beginning of the fourth quarter. The market remains a market with improving volumes, but still well below prerecession levels, still approximately 30% below prerecession levels in terms of total market volume. As those volumes come back, it's going to help the folks that own landfill airspace down there, Waste Management, Republic Services and our self. And I don't think any of the companies are going to have a problem really achieving their -- probably their total permitted daily volumes and at improving price. That may be -- on the price side, it may be muted a little bit until some of the volumes return because some of the out-of-market landfills in adjacent counties that have historically not participated in handling L.A. basin markets due to budget crisis that are going on at local municipalities in California, they are taking certain amounts of volume from L.A. at very low rate for periods of time. So that puts a little bit of a damper on price for a while. But again, as the market volumes rise, there's only so much airspace in the market, and you should see an improvement for everyone in price there.

Your next question comes from the line of Alex Ovshey of Goldman Sachs.

Usha Guntupalli on behalf of Alex Ovshey. Could you update us on your outlook for full year 2013 free cash flow, given that the first half run rate seems ahead of your full year outlook?

Sure. We were running ahead of our full year outlook, and so what we've decided to do is pull in between $20 million and $25 million of additional CapEx into the year. That includes the $10 million of additional truck purchases that we talked about on the call and the additional landfill that we will -- that we expect to commence construction on during this quarter and possibly have open prior to the end of the year. Collectively, those 2 items are, again, $20 million to $25 million of additional CapEx. So that would put our target, based on the higher CapEx, somewhere around probably $300 million plus or minus $10 million for the full year.

Got it. And then could you call out C&D volume trend during the quarter?

Yes, we do. We said that disposal volumes at the landfill were up 26%. And again, the -- and pulls per day, as well as revenue per pull in the collection side of the business, were also up year-over-year.

Your next question comes from the line of Bill Fisher of Raymond James. William H. Fisher - Raymond James & Associates, Inc., Research Division: Just on the E&P side, you guys mentioned a couple of things that seem like they could help sequentially, like the solidification remediation and I think, even the Oklahoma thing. Is any of that incorporated in that kind of Q3 trends? Are you just trying to be probably more cautious on that? Or how do I look at that?

Certainly -- I mean, certainly, some of the volumes that are coming into our Oklahoma facility right now and some of the solidification volumes that are coming into our facility in the Bakken, I mean, yes, that is incorporated. What's really not incorporated is the remediation -- reserve pit remediation that typically happens in the Bakken this time of the year, where, in the first quarter and the second quarter, drillers, because of the weather conditions, use sort of temporary pits. And then when the weather improves and actually -- and the pits really start to de-thaw, they have to go in and clean those back up during the good weather periods. So we could typically get another maybe $2 million to $3 million of remediation events just in the Bakken. That, we have not incorporated because we just don't know what that number will be. William H. Fisher - Raymond James & Associates, Inc., Research Division: Okay, great. And then, actually, on the landfill side, you obviously mentioned the business really accelerated through the quarter, I think, 20% or something. Were those trends just more -- the C&D was even stronger or special waste was even stronger? Or could you give us more color on that?

Yes. I mean, it was -- certainly, I mean, the C&D was up 26%, as we mentioned. It was really more MSW driven than anything. MSW represents between 60% and 65% of the disposal volumes in our landfill, and that was up almost 14%. So it was more driven by that than anything. Certainly, we did have -- at a number of our Oklahoma landfills, we did have C&D up with the tornadoes that had happened in the period in Oklahoma. And we have 5 landfills throughout the greater Oklahoma City market area, and they certainly saw an uptick from tornado cleanup activity. But that was the only real notable thing on the C&D side.

Yes, Bill, if you -- again, as we laid out the trends within the MSW line, we said that June was the strongest month in the quarter. And obviously, with MSW volumes being 60% to 65% of total volumes, that was a notable item. C&D, on the other hand, was almost the reverse. The strongest 2 months in the quarter were April and May. June came in at still up double digits, but it was the lower of the 3 months. And again, it's -- C&D represents about 10% to 15% of total volume at the landfill.

Your next question comes from the line of Michael Hoffman of Wunderlich Securities.

Can -- Worthing, I get that 2 businesses pulled together, you characterize the cost of goods component as being down. But if I separated and just looked at solid waste the way you traditionally had shared us those items of cost of goods sold, are there any notable trends one way or the other, labor rising or something falling?

Again, if you separate the 2, we said that solid waste was up about 50 basis points year-over-year despite about a 40-basis-point headwind from lower commodity prices. You have to really look through the entire P&L, I mean, labor down, strong safe -- improvements in safety, maintenance down, fuel is about flat to down nominally year-over-year, SG&A also down modestly. So it really is a -- no 1 line item contributed the bulk of that 50-basis-point improvement.

Okay. But it's a good sign that labor's down, too, in what could potentially be a tight -- potentially tight driver market.

Yes. We've -- again, as we've noted in prior calls, we have taken labor down almost 14%, 15% since the beginning of the recession and total headcount on a same-store basis. We'd probably optimize that about as far as we can go. And now that we're into the turn in volumes, you're starting to see labor, at least on a headcount basis, start to come back into the business.

Okay. And then on your sales guidance, I'm assuming -- well, what's the contribution of less intermodal, based on what Ron had said in his comments, and the divestitures as it relates to the guidance?

That's a good question. When you add up the 3 components, it's almost $10 million in revenue in the period. Again, when you look at divestitures in the period, it could be $3 million to $4 million. If you look at the intermodal, another $3 million to $4 million. And again, the recycling, as we phase out those facilities during the second half of the year, it's probably $1 million to $2 million in the third quarter. And it add another $2 million to $3 million in the fourth quarter, so it's about $10 million plus or minus a little bit in each of the quarters in Q3 and Q4.

Okay. And have you -- given your -- the growth rates you gave, you have adjusted the prior year to reflect it on a same-store basis, the growth rates?

Only the divestiture, not intermodal, not recycling. That's right.

Okay. All right, that's good to know. And then the other question on the landfill side, if I could follow-through. This strength in volume is coming from existing business, not new business formation yet, so that's something to come as we see new household formation sort of translate into new business formation.

That's exactly right. It's primarily higher container weights at existing customers.

Okay. And then, lastly, on the outlook on the E&P side, how would you characterize the trend at the moment of increasing outsourcing of the service because of the sort of the overarching complexity of the volume coming at these operators, as opposed to any particular strength in the maturing of the regulatory environment?

Yes. I would say that it is not from the maturing at this point yet of the regulatory environment, Michael. I mean, we actually view that as a positive because with the performance where it is without significant regulation, I think it'll be quite dramatically higher with more regulation over time, much like we saw in the solid waste business in the early '90s. With regard to the first part of your question, if you look at just the last 5 years in, really, the frac-ing and the horizontal drilling that's been occurring throughout most of these major plays, they have reduced the drill time of a well from in the mid-30s, mid- to low-30 days to now into the mid- to low-teen. And so you've seen an enormous amount of productivity increase by the drillers. That has led to and is leading to almost a virtual 100% outsourcing by many of the drillers and producers at the wellhead itself for virtually all components that relate to the drilling activity because of the magnitude of what comes at them in such a short period of time and then the necessity to demobilize and move very quickly. So that is a trend we think is escalating.

Your next question comes from the line of Corey Greendale of First Analysis.

Following up on a couple of previous questions. Your answer to Michael's question about the revenue impact of intermodal and the divestitures and the recycling facility, can you give an estimate of what the EBITDA impact of those items is?

Sure. Let me stare at the ceiling for a second. It's probably close to $1.5 million -- $1 million to $1.5 million on the $10 million.

And following up on your answer to a question Hamzah asked about Puente. Given your commentary, Ron, about pricing being somewhat muted even past the closure, does that -- do you think you're still going to kind of refuse or decide not to take some volumes at Chiquita because of that? Or do you expect to start taking volumes once Puente closes?

Well, I expect us to get some additional volumes once Puente closes. We're already in negotiation with certain customers for taking portions of their volumes or all of their volumes once Puente closes. So no, I fully expect us to get incremental volume once Puente closes. My comment was more on sort of an expected step increase in price within the market area being more muted because of the necessity for overall volume in the market to increase and soak up capacity because of the fact that some volume in the market is now going to be going outside of the market into surrounding counties that have opened up certain of their landfills.

Okay, I understand. And then the MSW growth, 15% for the quarter, 20% in June. Those are obviously large numbers, certainly well above economic growth. Can you just -- is there anything about that, that's not kind of same store? And can you put those numbers in perspective given just what's happening with GDP?

Yes. I mean, I think what I would say to you, Corey, is this, number one, we certainly did have some increased volume in Oklahoma due to tornadoes. That was both in the C&D and the MSW line at some of our landfills in Oklahoma. I don't have that off the top of my head, but I mean it wasn't more than...

It was -- about 1% of the volume growth in tonnage was related to the storm.

Okay. So you have that. And then I would also tell you that we had a very abnormally wet May and June, and that increased weight within our customers' containers, as well as our third-party customers' containers. And that may have made up an additional 10%, maybe up to 15% of that volume increase could come from an abnormally high weight because of the weather. So those are the only things that we can really point to as being outside of any just pure organic growth.

Corey, I'd also add that we've always said the West Coast seems to have been the first one in the recession and the last one out of the recession, as you look around the country. And so, obviously, with half our business oriented to the Western markets, we're comping an easier number within that region, and obviously, that will make the comps a little bit difficult as you get into '14 or '15. But clearly, the West Coast is, as we said before, joining the party of the improving economy.

And I would remind you, Corey, that, again, the advantage that -- we've said all along, we took all of the downside through the Great Recession in the West Coast because of 100% market share in every one of these franchises. We took all of that, and as it comes back, we get 100% of that recovery at a guaranteed price, so it is incrementally very -- contributes tremendously, whereas, in the competitive markets, whether it's our model or anyone else's, you are not going to get that coming on at your average price. It is going to come on at lower than your average price. That is not the case in that 52% of our franchise business.

I understand. And one for Worthing. If you look at the out-performance on revenue versus your guidance Q2 and look at the out-performance on EBITDA, the about 50%, maybe a little bit more than that, of the revenue. Is that a good -- there's obviously a lot more moving pieces than just the volumes. But is that a good proxy for what we should expect on the margin on incremental revenue from volume, something a little bit north of 50%? Or how should we think about that?

Remember, the volume experienced in the period was related to disposal more so than anything else. So if it's that line of business that's contributing, as you have seen, so you'd see the highest incremental contribution. As you start seeing higher collection come back in, which typically lags the improvement disposal volumes, you could see that incremental margin start pushing closer to 40% rather than the 50-plus percent.

Okay. And you commented on your current thoughts on the full year free cash flow. Any updated thoughts on the full year EBITDA?

No additional updated thoughts. I mean, I think, if you look at the ins and outs, given the divestitures and the recycling initiatives and intermodal we talked about, you basically come back around to what we've laid out in February despite those hits.

Your next question comes from the line of Joe Box of KeyBanc Capital Markets.

Just use that last question as a segue here, I want to dig into adjusted EBITDA margin guidance for 3Q. I mean, if you look at it historically, you guys picked up about 100 basis points of sequential margin improvement in 3Q from 2Q. It looks like you're only guiding about 60 basis points of pickup now. I guess, with landfill feeling better, less headwind from recycling and some sequential pickup at R360, why wouldn't we be looking at something north of 35.2% margin? Is there something in the number? Or could it be, somewhat, conservatism?

Right. Well, remember our guidance of 35.2% is 100 basis points higher than our 34.2% we guided for Q2. Obviously, the metrics in Q2 allowed us to outperform the guidance. Let's wait and see how Q3 plays out. So I think we are being consistent with what we've seen in prior years based on how we've guided.

Okay. Ron, just a clarification, did you say that you were receiving waste at your new permitted facility in Oklahoma? I guess, I was under the impression that you'd be running that waste through your existing municipal solid waste facilities. Has something changed there?

Well, 2 questions you asked, Joe. Number one, we are running E&P waste through our traditional solid waste landfills in Oklahoma, but we also have commenced the operation of the one we permitted because it really competes in a little bit different strata than our existing landfill sites. So the answer is yes to both questions.

And just one quick follow-up then on the E&P side, and I apologize if you went through this earlier. But for your new permit in the Permian, can you maybe just layout where the location of that's going to be and how many rigs you think could be in that area and how we should start to think about a revenue flow-through from the positioning of the location?

Well, let's get the facility constructed and operational, and we'll give you more statistics on that.

Your next question comes from the line of Adam Thalhimer of BB&T Capital Markets. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Clearly, we saw an inflection point in the solid waste disposal line this quarter. When do you think we might see an inflection on the collection side?

Well, I would typically tell you, Adam, that the collection would probably lag no more than a couple of quarters beyond the disposal. So I would certainly say that by the end of this year, by the beginning of '14, we should see that. As you noted in our guidance, I mean, our volume growth guidance in Q3 is almost 50% higher than it was in Q -- than our actual performance was in Q2. Meaning, our total volume came in at just about 1% in Q2 and then we've guided 1%, 1.5% in Q3. So I mean, we are expecting some pickup and flow-through to the collection side. But I would typically tell you 2 to 3 quarter lag.

Yes. Obviously, if you look at early part of '14, you're in that seasonally slower period of -- Q1 is, obviously, typically the slowest period in the sector. So if you -- it might be muted somewhat by seasonality, and you'd see the pickup in Q2 next year if that happens. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. Wanted to ask about kind of bigger picture on recycling. I guess I don't want to make too much of what you're doing there, but I mean, is that possibly a trend for the whole group or take a little bit of a step back from recycling?

Well, I mean, again, we can't speak for anyone else. When everybody was running out, talking about MRFs and transcycle rates [ph] last year from a number of our other peers and taking their CapEx guidance up because they were going to make a lot of money in recycling, we reminded everybody that it looked great at $200 a ton and at $120, it looked materially different. You've seen those same companies come along this year and say they're shuttering a lot of those projects. So we never got too ingrained in the hype of thinking recycling was more than it is, which is a labor-intensive, capital-intensive commodity-based business. And our attempt is to minimize the exposures to those swings where possible, and that hasn't really changed. So I think that the recycling business is an extremely successful, good business on the West Coast. It is girded by strong regulation. It's a very mature business. It's been around 25-plus years regulatory. We have diversion levels of 50% to 70% along our franchise model. When you get off of the West Coast, it becomes a very different business. It is a business without mature regulation. It is a business that does not have favorable transport costs to the Far East markets like the West Coast does, from a commodity value standpoint. And so you'll introduce a number -- a much greater amount of variables. So I can tell you that, for us, most of the recycling that we will -- that we are involved in is coastal and will continue to be so. And I think the pace that it moves at in the rest of the country is really going to be determined by state-by-state regulatory environment, not economics.

And this -- remember, this is not a step back from recycling from the customer standpoint. What this is, is looking at operating efficiencies, looking at expected future CapEx requirements, operating income and returns on capital. It's optimizing kind of the backside of it, not the customer interface side of it. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay, great. I wanted to take one more attempt at the new E&P facilities and what the potential revenue could be, just so we can have some kind of sense for how to put that into the model. I mean, can you -- if you bring a new facility on, I mean, how does that typically ramp historically? I mean, do you see really low volumes in the first 6 months and then it ramps? Or how does that work?

Obviously, there's a ramping-in period, especially as the rigs in the west Texas Permian are converting to horizontal. I mean, that's a ramping on the customer side as well. So our expectation is that you could see a year 1 contribution in that $10 million plus or minus revenue range. And then as the rigs continue to convert, you should see us move up from that number. Initially, we will scale the facility for that expected run rate and again, look to put additional CapEx and expansion to for that site as the market warrants. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. And then just lastly, do you have any idea about intangibles and amortization of intangibles in 2014?

Sure, we do. If you look in our 10-Q, you'll see an expected annual expense for amortization of intangibles. It stays -- in 2014, it stays around that $23.5 million to $24 million number.

Your next question comes from the line of Barbara Noverini of Morningstar.

So with such strong MSW volume improvement in the quarter, what explains the lower internalization rate, both year-over-year and sequentially? Shouldn't we expect to see that tick up as volumes improve?

The internalization doesn't look at it from the landfill side. It looks at it from the collection side. And so it's really calculating the percent of our collection volumes that are going into our own sites. And remember, in some markets like Alaska or markets in South Dakota and elsewhere, you've got markets where the government owns the only landfill and we send a third party. So really internalization is driven by activity on the collection side and what the disposal dynamics are within those marketplaces.

Are you seeing more volumes flow through your collections operations as things seem to be improving a little bit?

Yes. As we've said before, container weights are up within existing customer base, and so that would be that higher. You don't see that as much then in revenue initially on the collection side. You see it more as an increase in disposal cost. But then as that translates into increased container size or increased frequencies, you'll start to see more of that flow through on the collection revenue. And as Ron said, that's a 2 to 3 quarter delay or lag from when you see the disposal volumes increase.

Got it, okay. And then just moving back to the recycling questions that have been asked previously. I mean, with California being one of the more favorable markets for recycling growth and whatnot, with this decision to pull back in that 1 particular market, was it simply just a matter of not being able, in that specific market, to achieve the necessary scale to make it worthwhile?

No, not all. It was just simply a matter of there is a decent amount of capacity. First off, it's a very mature market in California. It's really not a growing market in California from a recycling standpoint. It's a very mature market. And really, what you have in some places is you have overcapacity of processing. So it was really more a decision of utilizing existing market processing rather than just dumping additional capital in into a market that already had enough capacity for the market.

Your next question comes from the line of Jeff Osborne of Stifel. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Worthing, just a couple of quick questions here on the 3 items that you called out that hit revenue by $10 million. How should we think about any onetime charges in the third quarter? And is there any lingering charges from the corporate relocation that also flowed through this quarter?

Yes. First, on the corporate relocation, as we disclosed in the Q, you could have an additional $1 million to $1.5 million over time. We've got some minor mop-up. Obviously, we moved into the facility in Q3, and so we've got some moving costs that will come through. So it's -- we're down to the small numbers now on the relocation side. With regards to the other things we've talked about on the divestiture side, you could see a modest loss on sale of assets there. In another case, you've got a gain on sale of assets, and so the netting of those will always back out or adjust out of our results. On the recycling side, similarly, once we shutter one of those facilities, you could see us have a loss on disposal of those assets as well. But again, these are smaller numbers. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Got you. My last question is just on the E&P side. As the -- I appreciate the color on the $10 million, kind of thought process there as the new facilities open. I would assume the same would be true for next year with the Eagle Ford. Historically, is the Texas market a less profitable market than Oklahoma and North Dakota? And how do we think about the mix shift just for the broader R360 portfolio over the next 12 to 18 months in terms of profitability?

No, I would not say that the Texas market is a less profitable market than the Bakken or anywhere else. Now the -- from a margin standpoint. But what it is, is it is a lower price point market per ton. So what you see is that -- you're talking about a market that has price points for handling and processing that are probably about 60% of what they are in the Bakken, as an example. So if you were to compare handling the same amount of tonnage in the respective markets, your revenue and your aggregate EBITDA would be lower, if you were to look at it that way. But margin-wise, it's really not.

Your next question comes from the line of Al Kaschalk of Wedbush Securities.

I'll try to make this brief and not belabor some of these. But I just wanted to clarify here on the E&P side, and I think I missed it. But Ron, you talked about some of the upcoming projects, and what I'm trying to get at is the run rate of the core R360 business x these new landfills coming on and if that's tracking consistent with what you've talked about or what Worthing's shared in terms of cadence, et cetera.

Yes. I mean, I think, again, we haven't had the assets for a full 12-month seasonality cycle, Al. So it's a little hard to extrapolate. But if you were to take Q2 that we just reported and you were to take sort of our guidance on Q3, that would tell you that the run rate of that is somewhere around $260 million or so in revenue, if you were to get 4 quarters of that. And then the projects that we've talked about would be additive to that by whatever they come into. So that could be -- I would tell you that it's -- right now, between $250 million and $275 million in revenue is sort of the bandwidth around the R360 business.

All right. And then, Ron, prior quarters -- maybe earlier this year, part of the year-end call, you talked about some third-party contracting cost. And I just wanted to see how that was trending and if those are behind us now.

Yes, those are mostly behind us, Al.

Okay. And then finally, we've talked a little bit about the landfill volume growth and then the lag on collection. But I guess, the takeaway here is to suggest, even with all of the strengths from moisture being heavier, you're seeing a period here -- over the next several quarters, we should be seeing these very strong comps, even if it's off a low base, but the trend is favorable here for the next couple of quarters. Is that fair?

Well, it's certainly based on what we see today and what we saw in Q2 and preliminarily through the first 22 days of July in Q3. And based on what our field is reporting, yes. I mean, that's, certainly, we believe, a safe statement at this point.

Your next question comes from the line of Tony Bancroft of Gabelli. Tony Bancroft - Gabelli & Company, Inc.: What types of businesses were -- specifically, were the business that came to you -- opportunities that came to you in the E&P waste side? And where were they located?

I'm not quite sure. What do you mean by what type of opportunities, Tony? Tony Bancroft - Gabelli & Company, Inc.: Specifically, like, were they water treatment? Were they filtration? Are they transportation? Were they the solid -- E&P solid waste? What were the -- what kind of business are they specifically?

Yes. Remember, we actually have laid it out before. This is a solids and muds treatment and disposal and recovery business. So it's landfills. It's a few injection wells at the landfills. It's -- another case is it's treatment facilities, depending on state regs, to treat the solids and extract the hydrocarbons and then stockpile or landfill the clean muds. So again, about 2/3 of the business is a solids-oriented business. It is not a trucking business, as you've laid it out. That is you find the trucking side of this business to be more on the fluids management side, and that is not the side of the business that our assets are focused on. Tony Bancroft - Gabelli & Company, Inc.: So I should have been more clear. I meant to say that opportunity -- I thought you said earlier in the call that you had some opportunities that came to you for acquisitions in the past quarter. And I was just wondering what specific -- I know there's a lot of different types of businesses in E&P waste business. I was just wondering what's -- are there any specific businesses that came to you? And what were they and where were they, like, located?

Yes, okay. You were referring to the acquisition opportunity. We didn't understand that, Tony. Thanks for the clarification. We looked at -- well, I mean, again, the businesses we've looked at were within the strata or within the basins and across the basins that we -- that R360 operates in, which is, basically, all of the basins, petroleum-rich basins in the U.S. except for the Marcellus. We looked at disposal opportunities, disposal and processing opportunities. We also looked at what I'd call sort of solids control companies that manage the solids and the on-site drilling activity of what's coming up out of -- going down the hole and up out of the hole. The solids control, we looked at about 2 or 3 solid control companies across the various basins. Tony Bancroft - Gabelli & Company, Inc.: Got it. And for -- on the MLP side, do you have any more insight or color or anything more besides what you've already talked about with the REIT working group, the news that came up there and why or why not the traditional landfill business might be able to -- depending upon the MLP Parity Act, might be able to obtain qualified income status?

Again, nothing further than what we've said. We're still waiting to have a discussion with folks from both the MLP side as well as the REIT working group side.

Your next question comes from the line of Michael Hoffman of Wunderlich Securities.

Just a couple quick sort of loose ends. On the last question, the MLP Parity Act isn't relevant to this. You're pursuing this regardless of that because that something to do with renewable energy facilities, not landfills, right?

You're correct, Michael.

Right, okay. And then just to be clear, on the E&P side, the much more relevant number going into the Permian in that conversion into horizontal drilling, this is about the number of holes drilled because you pointed out the efficiency issue. We may not see a rig count recovery, but we could see a lot of holes drilled.

That's correct. This is about linear feet drilled more so than it necessarily is -- I mean, rig count is obviously a very good proxy. I mean, let's -- but you could be down in rig count and up in linear feet drilled, and that's what we're looking at.

And to that end, in the markets you're in, you've seen permits for new drilling increase. While the wells drilled may be down a little bit first half of the year, more seasonal issues, the permits are up and linear -- total linear feet drilled in the markets you're in are up year-to-date?

They are up or they are projected to be up by the end of '13 because what you saw when you compare year-over-year in most of the basins, last year was a very first half-heavy drill season and sort of tapered at the second half of the year. This year, it was a slower first half and is projected to be a stronger second half.

[Operator Instructions] And your next question comes from the line of Stewart Scharf of S&P Capital IQ. Stewart Scharf - S&P Capital IQ Equity Research: You just added a little color on the M&A environment. Are there any specific regions or size of deals that you're looking at or you're basically continuing with your normal strategy and just being opportunistic? And what are the multiples looking like? Are they ticking up?

Sure. We'll try to provide a little clarity on that for you, Stewart. I mean, number one, we're looking at acquisitions throughout our footprint on the solid waste side and on the E&P side, so I wouldn't say that there is any one geography necessarily more predominant than the other. I would tell you that with the federal and state tax rate increases that have occurred in certain states, such as California, where there was a material increase in the state income tax, retroactive to January 1 of last year, that we do not really see much activity in California because of sellers looking at a combined state and federal capital gains rate that is at 35%. And I would say that, that has muted sales in California for some period of time, most likely. So other than that 1 exception, I would say that the opportunities are across our footprint. Obviously, we don't disclose any specific companies that we would be in discussions with. As far as size, I would tell you that, as we've said before throughout the year, we think this will be one of our more sort of traditional year, sort of in that $40 million to $60 million of acquired revenue. That tells you there's no individual 1 large transaction. Again, remember, in our model, a large transaction is $20 million or $30 million of acquired revenue, and so we're not looking at a $200 million type of regional company. That would be misleading because that's not something that's in our backlog at this time. And then, again, we remain -- acquisitions are the result of relationship cultivation and one of timing. That usually involves some sort of estate-planning, lineage-transition-type issues. And so they are opportunistic when they occur. And so that's why we do not provide acquisition revenue guidance. And we've, for several years now, asked investors to own us for what we own, not what we might own, and let what we might own be upside as we cultivate and produce, such as R360. Stewart Scharf - S&P Capital IQ Equity Research: Okay. And on the multiples, [indiscernible] 6x range?

Yes. I would say that they're, in part, due to some of the tax rate changes, both federally and by state, that have occurred in 2012 and 2013. I would also say, because of some very visible high-multiple transactions done by private equity in the space in 2012, I would say there are seller expectations that are higher than they have been in 2011 and 2012 and before. That really doesn't change our math. We're going -- we're a return-focused company. We're going to pay what we can pay. But I would tell you that, in general, there's probably a .5 to a 1 turn of EBITDA higher multiple expectation out there than was out there the previous several years.

Ladies and gentlemen, I would now like to turn the call over to Ron Mittelstaedt for the closing remarks.

Okay. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Worthing, Mary Anne, Steve and I are available to answer any direct questions we did not cover that we are allowed to answer under Regulation FD and Regulation G. We thank you again, and we look forward to speaking with you at an upcoming investor conference or on our next earnings call.

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a very good day.