Waste Connections, Inc. (WCN) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2013 Waste Connections Earnings Conference Call. My name is Tracy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ron Mittelstaedt, 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 third quarter 2013 results and provide both the detailed outlook for the fourth quarter and provide some early thoughts on 2014. 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 third quarter as revenue, EBITDA and free cash flow once again met or exceeded the upper end of our expectations. On an 18% growth in revenue, EBITDA increased 28% and year-to-date free cash flow generation exceeded 18% of revenue. Volume once again exceeded expectations at over 2% in the quarter, with continued broad-based disposal activity driving another quarter of double-digit year-over-year increases in solid waste landfill volumes. In addition, roll-off activity stepped up sequentially, resulting in a strongest year-over-year increase in pulls in several years. E&P waste activity again played out as expected, and construction of our new West Texas Permian landfill is running ahead of schedule, with targeted completion by the end of November. We recently signed a $25 million revenue follow-on collection acquisition in Minnesota's Twin Cities region, expanding our footprint in that market following the transfer and landfill acquisition completed last July. And also announced yesterday, our Board of Directors authorized a 15% increase in our quarterly cash dividend. Despite this increase, our dividend remained less than 20% of our expected free cash flow, leaving us with tremendous flexibility to fund our growth strategy and further increase the return of capital to shareholders. 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, expected E&P and special waste activity, expectations regarding period-to-period comparisons, potential acquisition activity, contributions from closed acquisitions, the timing for announced acquisitions to close, the timing of permitting and construction activities, our fourth quarter outlook for financial results and our early expectations for 2014. 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 Q3 was $503.6 million, up 18.3% over the prior year period. Solid waste internal growth in the quarter was almost 5%, broken down as follows: positive 2.7% from core price and surcharge, positive 2.2% volume and recycling was flat. In addition, intermodal and other services was down 0.5% in Q3. Core pricing plus surcharges has ranged between 2.7% and 3.2% during the year, and we expect this to be about 2.9% in Q4, resulting in a full year average of about 2.9%. Continuing strength in solid waste disposal tonnage resulted in a 70 basis points better-than-expected volume growth in the period. Reported volume growth was positive 2.2% in Q3, with underlying volume growth for the quarter a little over 3% when factoring in the headwinds discussed on previous calls, both notably the wrongful termination late last year of the municipal contract in Madera, California that we are now litigating. As we have said throughout the year, we expected that Q3 would show the strongest reported volume in 2013. We believe reported volume growth will change from positive 2.2% in Q3 to between positive 0.5% and 1% in Q4 due to a combination of day counts and a completion of a couple of special waste shops. Q3 had one more workday year-over-year, while Q4 has 1 less day, exacerbating the sequential comparison. We also had a couple of special waste jobs during the third quarter that finished in early October. We'd also note that a port-dredging job that was scheduled for Q4 has now been delayed until next year due to the government shutdown. All in all, we're quite pleased with the positive volume outlook for Q4 as we had speculated on our February call that Q4 volumes might be negative because of headwinds from Sandy volumes and the Madera contract, exacerbated by differences in day counts. Landfill volumes on a tonnage basis in the third quarter were up almost 15% year-over-year. This increase was close to the 13% adjusting for 1 more day in the current year period. All 3 solid waste streams increased year-over-year in the quarter. Adjusting for days, MSW disposal volumes increased almost 16%, construction and demolition-related volumes grew 25% and special waste volumes were up 5%. Year-over-year increases in disposal volumes during the quarter peaked in August and we're only up single digits in September due to declines in special waste activity in that month. In a study of volumes which account for the majority of disposal tonnage were up double digits in each month. 2/3 of our landfills reported increases in disposal tonnage for the period. Roll-off activity continued to ramp during Q3 in contrast to last year when pulls were sequentially flat Q2 to Q3. Roll-off pulls per day were up 4.6% on a same-store basis, and revenue per roll-off pull adjusted per day increased 2.6%. Our Central and Western regions posted the largest improvement, with roll-off revenue up 9% and 6%, respectively. The Western region was consistently strong throughout the period, while about 25% of the Central regions improvement related to tornado cleanup and reconstruction activity around Oklahoma City. Pulls per day in our Eastern region were up 5%, with revenue per pull about flat there. Recycling revenue of $16.7 million in the third quarter was relatively unchanged year-over-year. Higher recycled commodity values were offset by actions discussed on our July call that we initiated at a few locations which reduced recycling volume, namely our turning away of third-party volume at one location to approve operating efficiencies and returns, and the closing of another facility in September through outsource and improved returns on capital and operating margins in that market. When factoring in the plan -- the planned closing and outsourcing of an additional recycling facility in early 2014, we estimate these combined actions will reduce annualized recycling revenue by about $10 million, but increased EBIT by about $1.5 million and reduce future CapEx for these facilities up to $12 million. Prices for OCC, or old corrugated containers, averaged about $144 per ton during the third quarter, up about 23% from the year-ago period and up 12% from Q2. Our average OCC prices are currently approximately $150 per ton, and we expect recycling revenue in Q4 to be around $16 million, which would be down about $1.5 million year-over-year, reflecting a full quarter's impact of the closed facility. Intermodal and other services revenue in Q3 was down $2 million year-over-year, primarily due to a shift by one customer from rail to trucking. As discussed on our July call, we expect this to continue through Q1 of next year, but could potentially reverse during 2014 given recent customer discussions. Turning now to E&P waste activity. We reported about $66.2 million of E&P-related waste revenues throughout our network in the third quarter, up about 6% sequentially from Q2 and at the upper end of the monthly run rate we mentioned on our July call. EBITDA before corporate overhead allocation as a percentage of revenue for that segment increased another 200 basis points sequentially from Q2 to about 52%. We believe E&P waste revenue in Q4 may, again, exceed $60 million, which will reflect about 5% year-over-year increase in activity and provide a higher entry point into 2014 than where we were when we entered 2013. Our Q4 outlook excludes any benefit from the expected late November opening of our new West Texas Permian landfill as it is too early to predict how quickly our customers will audit and approve this location to accept their E&P waste. The good news for '14 is that this new landfill will be operational and provide incremental growth for the full year, and we continue to believe we should be able to permit and open an additional E&P waste landfill on the eastern side of the Eagle Ford by the middle of next year. Regarding M&A activity, we are pleased to announce what will be a first follow-on acquisition in Minnesota's Twin Cities region since we acquired our original transfer and landfill operations there mid-last year. Last week, we signed an agreement acquiring approximate $25 million annual revenue collection operation that we expect to close November 1. This acquisition will bring our total revenue in these market to about $60 million, and we believe we should be able to increase this to at least $100 million over the next few years with additional growth opportunities. The closing of this acquisition, together with additional tuck in [ph] E&P waste and solid waste transactions we expect to close later in the year, should result in a traditional amount of M&A activity completed during 2013 and provide rollover growth into 2014. And finally, as noted earlier, we were pleased to announce yesterday that our Board of Directors authorized a 15% increase in our quarterly cash dividend, our third consecutive annual increase since we initiated the dividend. Our dividend remains less than 20% of our expected free cash flow, leaving us with tremendous flexibility to fund our growth strategy and further increase the return of capital to shareholders. And now, I'd like to pass the call to Worthing to review more in-depth the financial highlights of the third quarter and provide a detailed outlook for Q4. I will then provide some early thoughts on 2014 in my closing remarks.

Thank you, Ron. In the third quarter, revenue was $503.6 million, an 18.3% increase over the prior year period. Acquisitions completed since the prior year period, net of divestures, contributed 13.9% to year-over-year growth. Adjusted EBITDA is reconciled in our earnings release, increased 28% to $177.1 million. As a percentage of revenue, this was 35.2% or about 270 basis points above the year-ago period. We estimate margins on a same-store basis within our solid waste business expanded between 70 and 80 basis points year-over-year, while acquisitions added almost 200 basis points to year-over-year margin expansion. The following are certain line items that 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. Labor and supervisory expense decreased 80 basis points; rebates, revenue-sharing and pass-through fees and expenses decreased 80 basis points; third-party disposal and transfer cost decreased 75 basis points; maintenance and repairs expense decreased 55 basis points; recycling materials expense decreased 25 basis points; and fuel expense decreased 15 basis points. Meanwhile, third-party equipment rental and subcontracted expenses increased 50 basis points, and real estate cost and utilities expense increased 20 basis points. Fuel expense in Q3 was about 5.8% of revenue. We averaged approximately $3.67 per gallon for diesel, which was about $0.12 a gallon above the year-ago period and $0.09 above Q2. Depreciation and amortization expenses for the third quarter increased $13.5 million year-over-year and were 12.3% of revenues, up 90 basis points year-over-year due primarily to higher acquisition-related completion cost. As we have communicated in prior quarters, we expect a good portion of acquisition purchase prices through a depletion expense and/or amortization of intangibles where suppresses both operating income and GAAP EPS but not cash flow, and results in D&A expense well in excess of replacement CapEx. Through the first 9 months of this year, our D&A expense exceeded CapEx by over $40 million or $0.20 per share after-tax. Interest expense in the quarter increased $6 million over the prior year period to $17.9 million due to higher outstanding balances resulting from the R360 acquisition completed last October. Our effective tax rate for the third quarter was about 38.2%, slightly lower than our average due to true-ups associated with tax filings in the quarter. GAAP and adjusted EPS in the third quarter were $0.49 and $0.51, respectively. Adjusted net income includes, among other items, an addback for the amortization of acquisition-related intangibles. Adjusted free cash flow for the first 9 months of the year increased 17.6% to $263.4 million or 18.3% of revenue. As noted in our earnings release, given the continuing strength of our operating performance and free cash flow generation, we are supplementing the previously discussed pull forward into 2013 of up to $10 million of CNG trucks with an additional $10 million of landfill equipment, all to take advantage of bonus depreciation tax benefits. These accelerations, though increasing CapEx this year to approximately $200 million, should result in next year's baseline CapEx being closer to $185 million, offsetting the impact of higher cash taxes next year should bonus depreciation not be renewed by Congress for an additional year. Debt outstanding at quarter end was a little more than $2 billion, and we had over $450 million of available capacity under our credit facility. Our leverage ratio at quarter end, as defined in our credit facility, improved to about 3.1x debt-to-adjusted EBITDA. I will now review our outlook for the fourth 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 in November 1 closing of the Minnesota transaction, but it excludes the impact of any other acquisitions that may close during the period and items, such as the expensing of acquisition-related transaction cost. Revenue in the fourth quarter is estimated to be between $477 million and $480 million, up about 6.5% over Q4 2012. As Ron noted earlier, pricing volume growth were expected to be a combined positive 3.5% to 4%, while recycling, intermodal and others should be between a negative 0.5% and negative 1%. It's important to point out that the reduced revenue impact in Q4, primarily from both the divestitures discussed in July and actions taken within our recycling operations, are estimated between $6 million and $7 million in the upcoming quarter. Adjusted EBITDA for Q4 is estimated to be between $162 million and $163 million, reflecting a margin of around 34% or 230 basis points above the prior year period. We are pleased to note that this year-over-year margin expansion in the period is consistent with what we reported for the first 9 months of the year despite the fact that we will anniversary the higher margin R360 acquisition for over 2/3 of the upcoming quarter as it was closed towards the end of October last year. Depreciation and amortization expense for the fourth quarter is estimated to be about 12.8% of revenue, up 30 basis points over the prior year period. Amortization of intangibles in the quarter is estimated to be about $6.5 million or $0.03 per diluted share. Operating income for the fourth quarter is estimated to be about 22.2% of revenue. Interest expense in Q4 is estimated be about $17.8 million. Our effective tax rate in Q4 is estimated to be about 39.2%, and noncontrolling interest is expected to reduce net income by about $200,000 in the fourth quarter. Now let me turn the call back over to Ron for some final remarks before Q&A.

Thank you, Worthing. Each year, we focus on the fundamentals of our business, the integration of new acquisitions, improving our financial performance and positioning the company for future growth. We focus on continuous improvement in all areas on avoiding duplicating what is fundamentally a simple business -- excuse me, avoiding complicating what is fundamentally a simple business and on serving our employees to help them, our customers and our community succeed. If we get this right and maintain discipline and capital deployment, our shareholders should also win. One area I'd like to highlight is our continued improvement in safety metrics, as safety is our #1 value. Year-to-date, about 25% of our locations have not had a single reportable incident and another 50% of our locations have only a single-digit incident rate. To put this in context, we'll likely have fewer instance this year than we had almost 10 years ago despite our company now having more than 3x the amount of revenue, vehicles and employees. While even one incident is one too many, we'd like to recognize our more than 3,500 drivers and their leadership teams for their tremendous efforts and continuous improvement in this area. Our corporate theme for 2013 was Uncommon. Uncommon vision, leadership, commitment and results. We are pleased with our results in the year and how we position the company going into 2014. Our theme for 2014 is Commitment to Excellence, again, highlighting our intense focus on the basics. While it's early to provide a formal outlook for 2014, we do believe the year is already set up very nicely. Continuing pricing strength and positive volumes within solid waste should drive a 20 to 30-basis-point margin improvement for that portion of our business. New E&P waste facilities and increased activity from customers converting to off-site disposal should drive an expected 12% to 15% growth in E&P waste revenue, and an approximate 200-basis-point margin improvement in that segment. Together, this should result in an estimated 50-basis-point margin improvement on a consolidated basis, excluding the impact of any acquisition. Any further improvement in the economy or acquisitions completed this year and next would provide additional upside. 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] Your first question comes from Hamzah Mazari from Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: The first question is just on pricing. Could you maybe comment on how you think about the risk of lower inflation to your business, and whether you think that, that can -- whether you think that, that offsets higher pricing from a volume recovery, which is what you're seeing right now? I realize that your business is different because you pick up all of the volume and the franchise market, so maybe that's an offset to lower inflation. But if you could just talk about how to think about lower inflation headwind to your business and how that differs from the majors.

Sure. Well, Hamza, right now for 2014, our pricing has been effectively determined by the July of '13 CPI. So if the economy -- if inflation were to continue to weaken from this point into 2014, it really would not affect the 2014 portion of our franchise pricing. It could, obviously, have some effect on the 2015 portion of our franchise pricing. We are expecting between 2% and 2.2% in that CPI index portion of our business, which is about 50% of the solid waste business. We are expecting roughly 4% or maybe a little north of that in the non-CPI index portion of our business on the solid waste side in 2014. So that's how you get to a roughly a 3%-type blend. If there were less inflation, would it impact that pricing in the non -- in the competitive piece? I don't really feel that would unless it was a material deceleration in inflation and we were in a negative CPI environment, which we're not predicting. And I think any nominal impact to price would be more than offset, hopefully, with an improvement in volume, particularly in our franchise. It's hard for me to say for the other guys. I'm obviously not in that model. I've been in it in the past, and I think I can tell you that inflation or a lowering of inflation is generally not good for pricing in competitive markets because it allows the private independent guys who tends to be the price dictator in these markets, the ability to take customers at an even lower price. And as the majors raise price, it allows them to go in and grab and the majors end up having to roll back. So I would tell you that overall, price inflation -- less price inflation is not a good thing for price in the competitive model of this industry.

Hamzah, one thing I would add to that. If you look at the lower CPI drag into 2014, despite that drag, we still see the pricing strength, as Ron said, being close to 3% next year, and we've already talked -- discussed about a 20 to 30-basis-point expected improvement in margins just in our solid waste business. One thing I'd note to that is, that is after an assumption here of upwards 20-basis-point potential drag from ObamaCare next year. And so had it not been for changes in healthcare environment, we think we could've delivered -- or be positioned to deliver a stronger margin improvement year-over-year. That said, it's too early to see what -- how ObamaCare will play out the P&L next year. So we've been cautious in guiding about a 20 to 30-basis-point expectation net to that. Hamzah Mazari - Crédit Suisse AG, Research Division: Got you. Very helpful. And any update on the Puente Hills landfill closure, and how to think about your strategy in that market? It seems like some of your competitors are being aggressive on volume there. How do you think about the benefits there going forward?

Number one, the landfill is still expected to close here in about 10 days or a little less, Hamzah. It's required to be close at the end of the day on October 31 by federal consent decree, so that is still planned. As we mentioned on previous calls, there are some surrounding county, municipal landfills that have traditionally not taken out of county waste [ph] that, because of budgetary conditions in their communities have opted to take some L.A. basin waste at some reduced rates, that has put some pricing pressure on the in-county landfills for ourselves, for public and waste management for getting some of the Puente Hills volumes. And so the opportunity set still has not changed. I think it is getting drug out a little bit in terms of when we will all realize the benefit of that. And really, as the overall wasteshed market recovers, no doubt, accounting landfills are really getting close to what they can take and then you will see that benefit derived by the 3 companies within county landfill. I think because of those 2 landfills out of county municipal landfills getting aggressive and taking volumes, the public companies have responded by trying to be a little more aggressive on price to get some of that incremental volume out of Puente right now as the economy continues to improve very slowly. Hamzah Mazari - Crédit Suisse AG, Research Division: Great. And just last one for me for Worthing. Any update post your IRS conference call on the MLP?

Sure. Yes, we did have a call with the IRS back in August. And the takeaway right now was what we've expected, and that is the nature of the current contract with customers don't lend themselves to an MLP structure. That said, what could be possible here is, although it's remote, it's setting up an opco/propco and creating a new contractual relationship between the 2 entities to allow for the transfer and some air rights and to qualify for MLP status. But that said, for the time being, we have not filed a PLR. We're still waiting and watching the REIT committee to find out what the outcome of that this, and we'll just continue to monitor that on a month-to-month basis.

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

I wanted to ask about the dynamics of price relative to volume as we move through 2013. Sequentially, pricing has been modestly moving lower, while volumes have been improving. Can you just talk about that dynamic and what's happening there? Is it a mix impact that's driven the modest sequential erosion in price through the course of the year?

Yes. Alex, I mean, it's not really a mix. It's more of seasonal issue than anything else. There's really been no erosion in price. I understand from your standpoint, the reduction in the calculated price. But our price increases are all done in the first quarter of the year and measured then. And so if you'll look back, you'll see that price was highest in the first quarter, lower in -- lowest in the third quarter and then steps up again in the fourth quarter. There's been no change to the permanent price increases that we put in. It's just the denominator of the seasonal revenue that measured against increases or decreases in those quarter seasonally. So that's really all of the change that's happened. It's just -- it's more just a seasonal measurement of what revenue was in or out than anything else. As far as price influencing volume, obviously, there has been an economic improvement that has improved both landfill volumes and roll-off volumes, and the roll-off volumes tend to come in at a lower margin mix than the rest of our business. But as we reported, the price improvement in 2 of the 3 regions was at or above the company average. So it's a little bit of a mix issue, but it's really, more than anything, seasonal revenue.

Yes, if you look at what we said in February with regards to expected price, we said we thought price for 2013 would be close -- about 3% for the year, and I would say 2.9% is about 3%.

Yes.

That's very consistent with how we felt the year will play out.

All right. That makes sense, Worthing. And would you be able to remind us what percentage of your solid waste business overlaps with the bigger competitors? I know it's a small part, but to the extent, you could remind us what that number is? Also, it would be helpful to get your perspective on how pricing is trending in those markets where those overlap, because it does seem the other 2 bigger competitors are more committed to pricing this year than what they may have been last year. So sort of any color on what you're seeing in those markets if [ph] there's overlap would be very interesting.

Well, let's take the first part of your question, Alex. Our overlap with the majors is less than 15% of our collection revenue. So as a percent of total company revenue, it's probably closer to 10% to 12%. The highest percentage of that is with Waste Management and then a very low percent at single-digit number with Republic. So we do not have by design of our model or franchise nature or secondary market nature, we do not have tremendous overlap with either of those companies. So as we've always said, we're not really a good barometer of what they may or may not be doing. In those markets where we do have overlap, with the 2 public -- the 2 national companies, we are seeing them both be, I think, disciplined on price. There are one-off landfill bids here and there where it's easy to say somebody got aggressive. But on the Street, it seems to me that the day-to-day, both are being fairly consistent in price. And relative to the question you asked, I would tell you, I don't know that that's necessarily a change. I don't think both are "more committed" to price today than they were in 2013 or '12. They've always been. It's just a matter of what the privates will allow them to do. And the privates are really the price leaders and the publics are the price takers. The publics are going to push price very hard. It's just that what level of churn they're going to have because privates are able to live at much lower margins than the public companies, and therefore, take business. So in a no-growth environment, it looks like they're not getting as much price as they are. But I think they've been committed to price from what we've seen. In a growth environment, the privates are getting their share of growth, and the publics can, therefore, get more of their price increase to stick to their customer and reduce their churn. So the improving economy certainly helps their ability to get greater price increase.

That's very helpful, Ron. Just one last question. How should we be thinking about start-up costs in the E&P business over the next 12 months?

Well, we factored in a certain level of start-up cost within our Q4 outlook. You might see additional start-up cost next year in the middle of the year if we're successful in getting the Eagle Ford site opened as well. But they're nominal in the period.

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

A couple of questions on the volume front. So Q3 volume outperformed your expectation. Any particular component of the business you would highlight as being responsible for the outperformance?

Again, it's across the board on the disposal side, especially in MSW and C&D. And again, as we highlighted, the increasing roll-off activity.

As across your regions, are you seeing any signs of increasing container waste translate into higher service levels yet?

We have -- yes, a tepid yes to that. We're certainly seeing increased container wastes. Obviously, there's a delay in certain areas of our ability to translate that to the next level of service in terms of number of days or next container size up. But I will point out, Corey, that in our competitive market footprint, so 50% of the solid waste business, service increases outpaced service decreases for the second quarter in a row and by the largest amount we've seen in over 5 years. So that is beginning to occur.

You got to remember, Corey, especially in our central region, our central region is well into its second year of volume strength. And so given the delay, typically, you see between the commencement of volume strength and getting into its kind of 18th to 24th month, you finally start seeing some increase in frequencies.

Good news. And then, Worthing, at the risk of asking a dumb question, I'll follow on the sort, so to make sure our modeling is correct. I just want to make sure I understand the impact of some of these things you do in other recycling side like shutting down facilities and the change in the number of shift. So I think you said, $6 million to $7 million revenue impact in Q4, but I thought you said about a $10 million impact through all of 2014. So could you just kind of walk through what the annualized impact is of the stuff is and when it anniversaries?

Sure. Good question. So again, there are 2 components. You have recycling and you have divestitures. The divestitures that we discussed in July were about $15 million in revenue. And again, the recycling impact is about $10 million in revenue. You see in Q4, you see about $1.5 million of the recycling impact hitting this upcoming quarter. And the balance are rolling over the next year. For the divestitures, you've seen a couple of million dollar in impact in Q3, you see about $5 million impact in Q4. And then so you got the balance rollover impact in the next year, which puts the aggregate impact next year at about $15 million headwind for solid waste. But now when you take it from revenue down to EBIT on a consolidated basis, that $15 million revenue headwind next year is actually a positive contributor to EBIT because that's about $1 million improvement in EBIT on a $15 million reduction in revenue next year.

Right, that helps. And on the new permit landside, I know there's a timing question. But once it's running at full capacity, about what you expect the revenue and EBITDA contribution to be?

Well, in July, we said we would cautiously expect it to be about a $10 million revenue asset at first year. It's fairly well positioned within the activity in the Permian. It's just its ability to ramp. It's really dependent, as we said, upon the time it takes for some of the customers to approve the site. If we can get the major customers to approve the site by year end, we would hope to see that full $10 million hit in the first full year next year.

And that about a -- at our current approximately 50% to 55% E&P disposal margin.

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

Just a clarification here. The volume year-over-year change on MSW and C&D were 16% and 25%, respectively?

That is correct. At the disposal site.

At landfill.

Yes.

Okay. And we will anniversary the easy comp on C&D beginning of next year, or what is the expectation there?

Well, again, the C&D -- C&D has been improving really for the past couple of years. And so every quarter that we -- that passes, the comps are getting that much more difficult. Overall, you should see, again, a tougher aggregate volume comparison, 2014 versus '13, compared to what we have this current year. And so clearly, our expectation is that, just because the comps get tougher, the math would be that the year-over-year increases next year are not as high as what you've seen this year.

Okay. And then another clarification, Worthing, on -- what's the burden of Sandy in Q4? Or was that a Q1 [indiscernible]?

Sure. Sandy, yes, Sandy, you'll see it in our east region results year-over-year. It's about $2 million of revenue that we had last year from Sandy. And so as you look at our east region this year, we think, on a reported basis, volume to be down about $1 million. But adjusted for Sandy, we think volumes up about $1 million in that area.

And then, Ron, it's tough to find things wrong here with the quarter, so -- but let me just press a little bit on the acquisition. If I heard...

We won't press you on Michigan if you go too hard.

Minnesota was here you did what I think you were the first follow-on implying that maybe something more is coming. But before you get too far down the road, this was collection-oriented. Are there maybe in this market or other markets where you're seeing the M&A would be -- follow along these types of acquisitions? Or are we looking for something a little larger?

Well, in our model, this is fairly large, Al. I mean, first off, take 2 pieces of I think your question: Number 1, this was a collection acquisition because we led the entry into this market a year ago with a disposal acquisition.

Transfer.

And a transfer acquisition, so with the acquisition of 2 landfills and 2 transfer stations. And so we have been looking to integrate that market since. And this is one of the premier top 1 or 2 privately held companies that sort of service north of the Metroplex there, a large residential and commercial company, very little roll-off, a lot of municipal contracts. So -- and again, we believe we can do some others and bolster our integrated presence in that market. So -- but to the second part of your question, this is sort of classically how we go into a market. I mean, we often lead with either a large private company on the collection side and then bring disposal in, or sometimes, we bring disposal in. But our ability to get to a $60 million presence in that market within the first year and perhaps get to $100 million within the first 1.5 years to 2 years, I can tell you that if we are able to do that, that will make us the second largest player in that greater market within a 2-year entry. So this is sort of classic for how we look to do things. As far as larger acquisitions, again, I'm going to point out in our model, if we do generally 1 or 2 sort of stand-alone entities a year between $15 million and $25 million, and then 10 to 15 tuck ins, I mean, that's how we get to $60 million, $70 million of acquired revenue in any given year..

And the E&P waste business is no different.

And then we bolster that with E&P. Are there $50 million to $150 million private regional companies we are looking at and in discussions with? Absolutely. Could one of those happen? Yes. Do we think someone should buy the stock based on that? No. We think that should be an upside when it happens like our Alaska waste deal or Hudson Valley entry 2 years ago or something along those lines.

Okay. But this clearly fits in the secondary market category and it's called not urban. So hence, you can work your way towards, as you said, second position in the market and not have margin issues.

Yes. I mean, #1, this is a very strong margin profile company. And when you look at it on an integrated basis, with what we have there in disposal, it is at or above our company solid waste disposal margins -- excuse me, integrated margin, number 1. Number 2, this is a company that predominantly -- when I say predominantly, 85% plus of its revenue was outside of Hennepin County. Hennepin County is the major Minnesota -- Minneapolis Metroplex. This is actually north of that in the suburban areas, north of Minneapolis-St. Paul. So yes, this is really consistent, I'd say, with what we do.

But Al, you got to remember, on a consolidate basis, our margins reflect not only solid waste, but also E&P. And so it's not atypical for solid waste acquisitions to come in at lower averages than the corporate margin. Much like if we did E&P acquisitions, that will likely come in at above corporate averages. So really, the margin impact is dependent upon the mix of what closes.

Right. I guess, I agree 100%. I guess the point that, to me, is constructive here is you're buying a collection business, and the ability to move it to an integrated market helps quote [ph] the overall MSW margin business. So at least it showed, I think, in theory.

Yes. Al, I think it showed as well in theory. As I said, this is a -- this market will be at or above our solid waste integrated margin. So it should be additive.

Your next question comes from Joe Box, KeyBanc Capital Markets.

I recognize you guys haven't given formal guidance yet for 2014, but I do just want to ask in your qualitative outlook. Within the context of the 20 to 30 basis points of margin expansion within solid waste, I'm curious how you're thinking about volume growth next year. Obviously, you have a tough comp from the 2 natural disasters. You comped out some contract losses. So directionally, does your outlook assume that volume growth gets better or worse from 2013?

Well, again, on a -- again, it's possible for the comps do get tougher as you look at '14 versus '13. If you think -- the early thoughts on '14 is that the volume will likely be plus or minus 1%. If you take upper 2% to almost 3% price on top of that, you're looking at, call it, almost 4% organic growth within solid waste. If you look at it on the base revenue and you take out the headwinds from divestitures and recycling that we already discussed, you probably have net of about $50 million to $60 million of total revenue growth because you got about 4% top line growth, that's about $65 million to $70 million of organic growth, minus the $15 million of headwinds that we discussed. Then on top of that, you've got the 12% to 15% growth in E&P, which takes that up some $40 million to $50 million. So you got almost $100 million of net top line growth. Then on top of that, you had the Minnesota acquisition that we just discussed and anything else we closed in the year. And I know you're pushing $125-plus million of top line growth at a 50 basis point margin expansion before anything else gets done on an M&A standpoint the balance of this year or next.

And Joe, that -- as Worthing mentioned in his comments earlier, that 50 basis points of margin expansion assumes roughly a 15 basis point plus impact of Obamacare that we are estimating right now because we don't really know exactly how that will shake out. And that's a happier impact because most of that impact hits us on the second half of next year. So you'll really be looking at closer to a 65 to 70 basis point aggregate margin expansion if we were comparing it to this year.

Great. That's helpful. And then you guys had great cash utilization in the quarter. My model has you going back to about 3x leverage as of the end of the year. Does that number keep going down from here? Or at that point, do you change your priorities for cash?

It really depends on the outflows for acquisitions, right? If it weren't for acquisitions, you're right, we'll probably at or slightly below 3x at the end of the year. But with Minnesota transaction closing, and potentially some others, that might keep us above 3x at year end. But then you start to see that dramatically decrease depending upon the timing of acquisitions next year.

Okay. Last one, and then I'll turn it over. And I apologize if I missed this earlier, but in the context of the double-digit growth that you're expecting within the E&P business, I guess I'm just curious what you're hearing from some of your drilling customers within your shale place in terms of activity levels for next year.

Well, what we're hearing right now -- number 1, Joe, it's different by basin, to answer your question. For the most part, we are hearing roughly a 5% to a 6% expected linear footage increase. The CapEx budget of most of the major E&P companies are right now being projected to be up quite a bit more than 5% or 6% for 2014, relative to 2013. So there's a little bit of a disconnect that the CapEx budgets would indicate virtually double-digit increases in footage drill. But they are telling us about 5% to 6%.

Your next question comes from the line of Scott Levine, Imperial Capital.

Follow-up question on E&P waste. Coming up here just past the 1-year anniversary announcing R360, I was hoping you might be able to talk a little bit about what has been different, better or worse in that business versus what you guys had initially expected? And maybe a little bit of elaboration on what's driving the expectation of 200 basis points of margin expansion you expect in that business in 2014?

Okay. Well, let me take the last part of that first because it in a way might be the easiest. What's driving the margin expansion in that business is effectively incremental volumes due to new projects and a 5% to 6% growth in linear footage drill on what is a fairly heavily fixed-priced business -- fixed-cost business, excuse me. So that incremental volume, because it's a disposal business, much like our disposal business in our solid waste piece, incremental volumes come in at very high margin, higher than the E&P average. So the margin expansion is being driven by volume increase and new facilities that are opening. That one that we opened this year, one that we're opening next year, the fact that they're both disposal landfills and the rollover impact of that margin is the largest driver of that.

And I would add just -- in addition to that, we anniversary-ed some of the integration expenses and start-up expenses that we incurred in the first half of last year.

Yes. So that answers the second part of your question. The answer to the first part of your question, Scott, I mean, this business is very similar to what we thought going into it. But it's always a little different than when you get fully into it. I mean, obviously, relative to the solid waste business, it has much more explosive growth characteristics, organic growth characteristics than the solid waste business because its maturity just doesn't have. We knew that. That goes both directions very quickly. And so projectability of this business is a lot less than the projectability of our solid waste business, obviously. The other differences are that your customers move, and they move on a daily and weekly and a monthly basis. So it is much more of a logistics and a dynamic pricing environment, literally on a daily and an hourly basis than the solid waste business is. And that is very different. Exceptional people, exceptional asset positioning, that is what we thought and it has been as good or better than we thought. I would say the new development opportunities have been better than we thought. I would say the acquisition pace has been a little lower and slower than we thought. And so overall, there's some pushes and pulls, but I'd say we are relatively satisfied relative to what we thought in the due diligence period going into the deal of 1.25 years ago at this point.

Understood. One quick follow-up. I know you'd mentioned in the past the possibility of restarting the buyback program, perhaps when leverage got below a certain level, you're 3.1x now. Can you help us assess maybe your longer-term thoughts into 2014 with regard to capital deployment and when we might see the buyback come back into the picture of constant?

Sure. We still maintain our belief that our highest best use of capital are acquisitions that fit within our model, as well as the greenfield development of new E&P facilities. As you get through that, our next best use of capital is going to be the return to shareholders. We said we will look at turning that portion back on or accelerating that portion. Obviously, we increased the dividend yesterday. But accelerating that portion next year, as we get below 3x, which, again, it should occur sometime during Q1. But we have to take down the context of looking at our pipeline for acquisitions, what we think might close during the course of the year as we pace our return of capital. I mean, it's our desire to run our balance sheet somewhere between 2.75x and 3x leverage. And so where we would think that acquisitions pace might increase next year, we don't want to be prudent with our deployment of capital until the outflows for those acquisitions.

And does the M&A pipeline suggest that '14 could be a normal year versus '13? Or might be a little early to say, but it seems like the pipeline is still pretty active there.

Yes. I would say, Scott, I mean, again, this is always somewhat crystal-ballish, which is dangerous. But coming out of '12 with a large R360 acquisition, some other things we did with tax law changes coming into effect at the federal level in many states, we knew that '13 would likely be a more muted year and a slower year and a back-end loaded year. It has played out exactly that way. I can tell you that our activity level in dialogue and in offers has picked up quite a bit in the last 60 days. And so, I would expect '14 to be a higher year than '13 and probably at the higher end of a normalized year than at the lower. So we are expecting '14 to be a larger year.

And again, Scott, it's because of that and the uncertainty around the timing of that, that will pace how we deploy capital next year.

Your next question comes from the line of Adam Thalhimer from BB&T Capital Markets. Sorry, his line just disconnected. Can we move on to the next question from Michael Hoffman from Wunderlich Securities.

So a couple of items here on the volumes subject again. Can you give us a sense of what the source of such strength was on MSW at the landfill? When you think about it as you're working back to your customers -- their customers, is this coming from restaurants? Is it coming from green fence having more residuals? How do you think about where that volume is coming from?

Yes. You know, Michael, really, all of our lines, be it commercial roll-off and residential, container waste, homes per -- pounds per home, pounds per role-off box, all were up. So it really is coming, I would say, across the board. It's probably -- it is disproportionately coming at our commercial system so that would indicate strip malls, restaurants, shopping centers, apartment complexes, consumer-driven locations. So it's disproportionately coming from there. Also, as we noted, a large amount is coming in the construction side, and we are seeing construction come back strongly on the West Coast. Strong is a relative word because it was at such a low denominator. I want to emphasize that in California, our roll-off business, peak to drop, dropped almost 80%. So when you -- it is coming off, when you're saying -- when we're saying it's up as much as it is, remember that the base that we are comparing it to had gotten so low. But construction came in very strong on the West Coast and in the South and Southeast.

Okay. So in following through with an earlier question from Corey, you're seeing container rates starting to drive some upgrade either in size containers or days of sale -- day service. That's on a same-store basis. Are you starting to see this C&D activity create enough new housing density where you're getting some new business formation?

We are. In both -- in the second quarter, I mentioned earlier to Corey's question, that service increases outpaced decreases for the second quarter in a row, which was the first time in 5 years that we had back-to-back quarters of that. And it outpaced it by more than it did in the second quarter. The other thing that happened was new business starts outpaced business closures and business losses by the greatest amount in the third quarter of any quarter we've had in quite some time.

Okay. And then that would correspond with C&D strongest in California. You are seeing it more there than you were, say, on the East, for instance?

That's correct.

Okay. And so that's great news that we're starting to see some new business formation. Then on the landfill. Overall, landfill volume issue. If volumes are strong as they're trending, and even if they -- I get -- we lap ourselves and the pace has to come back, but it's still trending positively, the slope of the line. How and when does this industry, specifically, you as your own company, get far more aggressive outracing rental prices?

Well, you've got to remember -- I can't answer for the broader national companies who obviously have the largest disposal footprint and that is such a key driver to them. For us, it is not quite as key of a driver. We are getting roughly 2.5% to 3% disposal price increases, consistent with the average that we're getting in collection. We are highly internalized, almost 50% of MSW disposal comes on our own trucks, and over 60% of our disposal on our trucks goes to our landfill. So it is much more critical for us to get it on the collection side necessarily than it is the disposal just by the map of how that works. But having -- and having said that, because disposal is so incrementally margin and cash flow accretive, Michael, I don't know where exactly the trade-off is in our network of an extra 1% price increase, and what that does on the incremental volume coming in. So I'm not really answering your question because for us, it's not as much of a driver, but my sense is we're still a ways away from disposal pricing being a large driver for the national company in 2014.

Okay. That's very helpful. And then, a couple of housekeeping items, Worthing. Should I be thinking about SG&A in the fourth quarter around 11% of sales?

That's a little bit less than that.

Okay. And then on your guidance, I was writing numbers so fast, I may have written this down wrong. Did you say D&A 12.8% and EBIT 22.2%?

Correct.

Okay. That's 35%, your EBITDA guidance is 34%. So how do I bridge that?

What's that?

That adds up to 35% of the D&A, right? 12.8% plus 22.2%?

Good catch. So it's 21.2%, good catch.

21.2%, okay, good. So you scared me to death on my model there. All right. Last item on the housekeeping side. I get the divestitures in the intermodal and the recycling. We never really got a revision of guidance. We just sort of absorb them in. How do I bridge sort of how I'll finish out the year? If you take the mid-point of your current guidance for the fourth quarter, you're kind of talking about a $1.922 billion revenue and call out 6 56 [ph] for the full year. That's kind of $16 million and $12 million difference to the mid-point of the old guidance, the original guidance. Can you bridge that and about $12 million of EBITDA? Can you bridge that for us so we get all the moving pieces there?

Sure. Again, if you go back to February, the bridge on the revenue is about $10 million to $12 million from divestitures and recycling. So if you add that to effectively what the new revenue is, you get back to about the mid-point of what we guided in revenue back in February. And then on the EBITDA side, again, relative to expectations in February, you got a little less E&P revenue replaced by more solid waste revenue. And that shift in margin mix accounts for about $5 million or so of EBITDA on a combined basis.

The next question comes from the line of Jeff Osborne from Stifel. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Two quick ones here for me. One, Ron, I was wondering if you could just talk about the regional exposure you have on the E&P side. I think historically, the Bakken and the New Mexico side of the Permian were the main drivers. Is there any kind of broadening of that either here late in 2013 or as you look out into next year with your plan?

Well, first, to your question, yes, the largest components of the E&P exposure we have are the Bakken and the Permian. And let me just say this. We have just opened an additional facility. Well, actually more in the West Permian, the West Texas Permian. We are expanding our presence in the Eagle Ford, and we are looking to expand our presence due to a couple of activities we are doing, both organic and external growth in the Bakken. So I think we will have greater penetration as we sit here a year from now than we do today in both of those basins. And we will have more presence in the Eagle Ford, so you will see things a little bit more spread out in terms of our coverage area. In addition, we're expanding our presence in the Gulf, and we are also expanding our presence in Oklahoma, which is slower moving due to the regulatory environment there. But those are the 2 largest -- the Permian and the Bakken are the 2 largest basins and so you're going to continue to have that as the greatest exposure for us. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Great. And the last question I had which is on the regulatory side. Is there anything at the state level that has you excited that drives greater volumes to the landfill as opposed to open pitting? Any various different jurisdictions that you're operating in?

There are various pieces of legislation and discussion in several of the basins. I would tell you that I think the greatest opportunity, I don't know that it's going to occur in '14, but I'm cautiously optimistic. Clearly, in the Bakken, there is a number of land owner and other concerned pushing the state regulators to seize the use of drilling and reserve pit. And there is discussion amongst state regulators that they are getting close to enacting. As the amount of disposal capacity comes on, that could -- in that state, that could handle that if they were to do it, which we're getting closer to with the development of some new sites. They are saying they are going to do that. Whether that's '14 or not, I don't know. I would -- I feel very confident that is coming. They have said they are going to move the direction of New Mexico and the direction of Louisiana, both of which you cannot do such.

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

Just a follow-up to that last question. I understand that New Mexico's stringent rules have actually been relaxed recently. And how has that affected R360's business? And what do you make of that backtracking?

No. Well, let me back up. That's more semantic. That's more form over substance. What has happened is the definition of what kinds of liquids can be used in a reserve pit has been changed. It has not had any impact on any reserve pit used in the state of New Mexico. We have surveyed all of our E&P customers there, and they have all said that the cost of doing reserve pit under the "relaxed regulation” is so much higher than the cost of all off site [ph] disposal that it is not something they would consider doing unless they have some sort of emergency. So we have not seen that impact, and we do not expect to see it.

Well, what the law really let them do is, for some of the drillers that are trying to just do exploratory wells in very remote areas, meaning, very distant from landfills, the logistics cost for that can be so high that if they do want to put a very expensive pit in that remote area, it allows them to proceed with that exploratory well. So really, it was an accommodation for that kind of drilling activity.

Your next question comes from the line of Stewart Scharf from S&P Capital IQ. Stewart Scharf - S&P Capital IQ Equity Research: Just regarding where do you stand on headcounts. Are you still looking for volume to get up to closer to at least a 3% range before you add people?

Yes, you're starting to see in some of our markets. Again, the markets where you're into, what I would call the 18th to 24th month of strong volume growth. We are seeing headcount come back in some of those markets. We are putting additional trucks on the street. So it really depends on how late in the volume recovery cycle each of those markets are. But without a doubt, in some markets, we are bringing some headcount back.

Yes. But I would say, sort of -- as a general rule of thumb, if we're just trickling along at sort of 1% to maybe up to 2% volume growth, there's really no incremental headcount necessary, few headcount on the french [ph] here and there. If we actually got into a 3%-plus volume, consistent volume growth, that's where we would need to bring additional headcount in, and we would love to get into that environment. Stewart Scharf - S&P Capital IQ Equity Research: Okay. And regarding OCC prices, you had said that you're looking for a tailwind by the end of third quarter from roughly $140 to $150 currently or $144 at the end of the quarter. Is that the kind of tailwind you're looking for? Or were you expecting it to be a little higher?

Yes. The quarter played out as we had expected by averaging at the mid $140s. That improvement in OCC pricing -- some other -- not all commodities were up that same percent, but that improvement, as I talked on the call, was offset by lower volume based on the actions we took. If you look at Q4 last year, OCC averaged almost $140 a ton, so as we sit here today, we're about 4% to 5% above that number year-over-year. But that's more than offset by the decreased volume from the closed facility, which is why we guided to unexpected decrease year-over-year in recycling revenue in the fourth quarter. Stewart Scharf - S&P Capital IQ Equity Research: Okay. And any volume effect from the government shutdowns in the fourth quarter?

Yes. What we talked about is a nominal impact of one special waste project. It's a port dredging project. It doesn't sound intuitive why a couple of weeks shutdown. The government would've delayed that because that scratched my head as well. But that couple of week delay allowed fish migratory pattern to reemerge in the port, which shut down activity until the spring. So it's not something you would think cause-and-effect would be.

There are no further questions at present. [Operator Instructions]

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

Thank you for your participation. Today's conference is now concluded. You may now disconnect your lines. Have a good day.