Waste Connections, Inc. (WCN) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Waste Connections Fourth Quarter and 2015 Outlook Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, February 10, 2015. I would now like to turn this conference over to Ron Mittelstaedt. Please go ahead, sir.

Okay. Thank you, operator and good morning. I’d like to welcome everyone to this conference call to discuss our fourth quarter 2014 results and provide a detailed outlook for the first quarter and full year 2015. 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. As noted in our earnings release Q4 capped off an exceptional year for Waste Connections with solid waste volume growth and increase in pre-disposal activity once again driving better than expected performance in the period and providing strong momentum into 2015. Solid waste price and volume growth exceeded 5% in Q4 due to continuing pricing strength and increases in commercial collection, roll off activity and landfill disposal volumes. And margins expanded 50 basis points year-over-year reversing the trend seen in prior quarters. We expect organic growth within solid waste to remain strong in 2015 in part due to the economic stimulus associated with lower fuel costs, with continuing margin expansion in addition to any benefit we receive from lower fuel costs. If fuel price is persistent at current levels throughout the year, these savings could contribute up to 50 basis points of additional margin expansion within solid waste in the upcoming year. E&P waste activity in the fourth quarter once again increased more than 20%, easily outpacing sector wide growth in E&P CapEx spending and the resulting drilling activity. Just as our strong performance in 2014 exceeded sector CapEx growth, we believe will also outperform the expected decreases in sector CapEx spending in 2015 resulting from the precipitous decline in crude oil prices. There are several mitigating factors which should provide us from a portion of the decreases and results in our performance being down less than overall projected activity levels suggested by E&P industry projections. In fact, January was a good revenue month for E&P waste, up 31.5% over the prior year and already contributing about 10% of our full year revenue outlook for such activity in just one month. And trends remain strong to this point in February. Free cash flow generation remains a hallmark of our business model and a key differentiator from our peers. Adjusted free cash flow in 2014 was $321.6 million or 15.5% of revenue, up about $20 million year-over-year despite a $65 million in cash taxes and CapEx. More importantly we see this strength continuing and believe we’re well positioned for double-digit growth in free cash in 2015 in spite of the expected weakness in E&P. Before we get into much more detail about the continued strength of our solid waste business, the performance of our E&P waste business, outlook for 2015, recently completed acquisitions and resumption of our stock purchase program let me turn the call over to Worthing for our forward-looking disclaimer as well as 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 operating trends, fuel costs, crude oil prices, recycled commodity values and E&P waste activity, potential labor disruptions affecting ports, expectations regarding period-to-period comparisons, potential acquisition activity, contribution from closed acquisitions, the timing and contribution of newly opened facilities, our return of capital to stockholders and our first quarter and full year 2015 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 & Exchange Commission including almost recent annual report on Form 10-K. 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 obligations 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 a reconciliation of such non-GAAP measures to the 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 the fourth quarter was $526.2 million, up 8.3% over the prior year period. Solid waste price and volume growth in the quarter were a combined 5.2%, broken down as follows: positive 2.9% from core price and positive 2.3% volume. Core price growth in the quarter increased 10 basis points sequentially from Q3, it ranged between 2.6% and 2.9% during 2014 and averaged about 2.8% for the full year, about 20 basis points higher than we had originally guided. Surcharges did not contribute to pricing growth in the year. For 2015, we expect all-in pricing growth or core price plus surcharges to average about 2.6% or slightly below our 2014 on a combined basis. This is due to the impact of lower CPIs in our exclusive markets and reduced surcharges in our competitive markets primarily resulting from lower crude prices. Our strategic focus on exclusive and secondary markets should again result in comparatively better price plus volume growth in the upcoming year. Pricing in intensively competitive markets often gets more difficult to retain when a significant cost item such as fuel [indiscernible]. Smaller private companies tend to use these savings to be even more competitive in obtaining new collection business. In addition more distant landfills can become better competitive for volumes given reduced logistic tasks. As we often said, all companies know how to raise price, but the competitive intensity and number of landfills in a market determines how much of that price we get to keep. We also note that surcharges represent only about 1.5% of our total revenue, which is significantly less than that of larger national solid waste companies. In previous years when fuel prices had spiked, we were not able to surcharge within our exclusive markets to recover such cost increases, instead we ate the increase. With fuel prices now down we should retain a higher percentage of those savings as compared to the larger national surcharge dependent companies and we should recover some of the costs we incurred in earlier years. Solid waste volume growth in the fourth quarter once again exceeded the upper end of our expectations for the period by more than 1%, due primarily to higher commercial and roll off collection activity and an increase in MSW and special waste landfill volumes. Commercial collection trends continue to improve as we get deeper into this economic recovery. With net new business on a dollar basis in Q4 up over 50% both sequentially and compared to the prior year period. The economic stimulus for the consumer resulting from lower gas prices should provide additional tailwinds for commercial collection activity in 2015. While we’re exclusive in secondary market strategy insulates us from much of the negative pricing and margin impact related to commercial customer churn, it’s also important to note that in many markets where we do experience some level of churn, the gap between pricing per yard for new business compared to last business is also improving. Solid waste landfill revenue in the fourth quarter increased about 7% year-over-year with volumes on a tonnage basis up 6%. MSW tons increased 4% in the period % with all three solid waste regions up between 3% and 6% year-over-year. As in the previous quarter this strength within MSW was notable as we had another tough prior year comparison with MSW tons up 15% in Q4 of 2013. In fact, Q4 ’14 marked the eighth straight quarter of MSW increases. Special waste tonnage increased 13% year-over-year in Q4 primarily due to strength in our western and our eastern regions and C&D tonnage declined 2% primarily due to tough comps in Minnesota and Michigan. December was our best month in the quarter for landfill volume improvement setting up a strong jumping off point into 2015. Total tonnage in the month increased 12.5% year-over-year with all three waste streams increasing between 9% and 20%. We’re also pleased to announce that we recently opened our newly constructed C&D landfill in the Hudson Valley. Roll off activity once again grew in the period also despite a most difficult prior year comparison. Roll off pulls per day in Q4 were up 7% on a same store basis and revenue per roll off pull increased 1% to the highest level in the year. Pulls per day increased in each of our three solid waste regions with our western region up 1%, our central region up 7% and our eastern region up 15%. Recycling revenue was $13 million in the fourth quarter down about $2.4 million or 15% year-over-year with about two-thirds of the dollar decline due to our decision to close and outsource our San Jose recycling operation earlier in the year. And the remainder due to lower recycle fiber values. Prices for OCC or old corrugated containers averaged about $109 per ton during the fourth quarter, down about 20% from a year ago period and down sequentially 6% from Q3. Current OCC prices are almost 10% lower in Q4 average and if they remain at these levels would result in about a 25% decline year-over-year in Q1. We expect recycling revenue in Q1 to be almost $12 million which would be down more than $2.2 million year-over-year at a high margin flow through with the year-over-year decline due to similar influences as in Q4. It’s important to note that this estimate assumes that we can get inventory to market, a labor slowdown associated with protracted union negotiations has now congested shipping activity at all west coast ports making it difficult for anyone to ship recycle material to Asia and further depressing prices. Any further work slowdown, work stoppage or employee lockout at the ports would exacerbate this issue. Turning now to E&P waste activity. We once again exceeded expectations in the period reporting over $80 million of such revenue up almost 25% year-over-year mostly from organic growth, as acquisitions contributed just 4% of total growth in the period. For the full year of 2014, we reported $310 million of E&P related waste revenue, this reported total does not reflect a number of items that increase our estimated drilling run rate for the full year closer to $365 million. New facilities contributing to the higher run rate include the following: Rollover contributions from facilities that we opened in late Q1 2014 and ramped during the year specifically one landfill, and two mud plant in the West Texas Permian and the Bakken respectively. Two additional landfills in the Bakken that were acquired late in the year, which are now fully operational and two new disposals facilities constructed last year are expected to start contributing revenue later this quarter mainly a second landfill in the West Texas Permian and a treatment and injection facility in the north central part of the Eagle Ford. And finally, the recently completed acquisition of shale gas services with an estimated $25 million of annualized revenue which treats and recycles E&P waste streams at facilities in both the east Eagle Ford basin and the gas rich play via proprietary and scaled thermal distillation technology. Industry estimates for potential E&P CapEx reductions in 2015 seem to change daily and have lately averaged between down 30% and 35%. As stated earlier we believe that our E&P revenues will be relatively less impacted than industry estimated decline for E&P CapEx due to a number of factors to include the following. First of all, continuing growing productivity and efficiency improvement should offset a portion of any decline in looking at potential changes in linear feet drill, which is what we’re most correlated with. Secondly, as that positioning should affect results with comparably less impacted facilities like ours that are well positioned within each basin and across a number of basins. Thirdly, sector trends favor increased outsourcing especially in the Bakken and the West Texas Permian. And finally, thus far most vertical rigs being laid down were not using third party disposal sites like ours because they use water base mud and onsite reserve pits were permitted by state regulations. With all this in mind, we applied an estimated 25% to 30% assumed average decline to the higher revenue run rate number in order to derive our outlook for potential reported E&P waste related revenue for the full year 2015. We recognized the timing and degree of the impact will be different by customer, by basin and within each basin, but believe our guidance at this point for E&P waste activity in 2015 to be prudent as we’ve assumed will see decreasing activity levels as we move through the year. As noted earlier, January was a good revenue month already contributing about 10% of our full year revenue outlook for E&P waste in just one month. January’s revenue increased about 31.5% year-over-year with same store sales up 1.5% and new facilities opened or acquired since the year ago period contributing 30% to top line growth. Trends also remain strong to this point in February. Regarding capital deployment, 2015 is also off to a strong start as we’ve already completed three acquisitions and continued buybacks under our stock repurchase program. In addition to the acquisition of shale gas services described earlier, we also completed solid waste tuck in acquisitions in North Carolina and Washington. These transactions represent about $30 million of combined annualized revenue. In addition, we resumed our share repurchase program in December deploying about $25 million since that time on buyback and we expect to repurchase between 2% and 3% of outstanding shares in the upcoming year. At the upper end of this range and together with our dividend, this would bring our total return to capital the stockholders to about 4% of market cap for the year. With over $350 million of free cash flow expected in 2015 and a leverage ratio already at the lower end of our target range, we’ve tremendous possibility to fund additional growth opportunities and opportunistically increase the return of capital to our stockholders. And now I’d like to pass the call to Worthing to review more in depth the financial highlights of the fourth quarter and provide a detailed outlook for both Q1 and full year 2015. I’ll then wrap up before heading into Q&A.

Thank you, Ron. In the fourth quarter revenue was $526.2 million, an 8.3% increase over the prior year period. Organic growth contributed 6.5% to year-over-year growth and acquisitions completed since the prior year period net of divestitures the remainder. We exceeded the upper-end of our revenue outlook for the period by $8.7 million with both solid waste and E&P waste contributing to the beat. In Q4, adjusted EBITDA, as reconciled in our earnings release, increased 8.3% to $178.2 million. As a percentage of revenue, this was 33.9% consistent with our outlook and flat to the year ago period. In the fourth quarter adjusted EBITDA margins within our solid waste business increased about 50 basis points primarily due to lower fuel and labor cost more than offsetting the weakness we saw in recycling. Margins within our E&P waste business declined about a 125 basis points year-over-year primarily due to facility repair and storm related cleanup costs in the Permian. Adjusting for the items reconciled in our earnings release, the following are certain line items that moved a notable amount in the fourth quarter from the year ago period as a percentage of revenue. Fuel expense decreased 70 basis points, labor and supervisory expense decreased 30 basis points; and medical and risk management insurance expense decreased 30 basis points. Brokerage and wage cost increased 75 basis points; SG&A increased 40 basis points on higher bad debt and a certain comp expenses and subcontract and processing cost increased 15 basis points. Fuel expense in Q4 was about 5.1% of revenue and we averaged approximately $3.28 per gallon for diesel, which was down about $0.37 per gallon from the year ago period and down $0.24 sequentially from Q3. Depreciation and amortization expenses for the fourth quarter were 12.5% of revenue, down 40 basis points year-over-year reflecting improved leverage on that line item associated with strong organic growth. Interest expense in the quarter decreased $1.7 million over the prior year period to $16 million due to lower average outstanding balances and reduced borrowing cost on our bank facilities. Our effective tax rate for the fourth quarter was 38.6% bringing our effective rates for the full year to about 39.5%. GAAP and adjusted net income per diluted share in the fourth quarter were $0.49 and $0.51 respectively. Adjusted net income includes among other items, the amortization of acquisition related intangibles and adjustments for impairments and other charges or gains. Adjusted free cash flow for 2014 was $321.6 million or 15.5% of revenue, up $20 million year-over-year despite the $65 million increase in cash taxes and CapEx. Debt outstanding at year end was about $1.98 billion and our leverage ratio as defined in our credit facility was approximately 2.7x debt-to-adjusted EBITDA. I will now review our outlook for the first quarter and full year 2015, but before I do would 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 an estimated 25% to 30% year-over-year reduction in E&P linear feet drill. It also excludes the impact of any additional acquisitions that may close during the year and expensing of acquisition related transaction costs. Looking first at full year 2015, revenue in 2015 is estimated to be approximately $2.15 billion up about 3.5% over 2014. Solid waste price and volume growth on a combined basis is expected to be between 4% and 4.5%. Recycling, intermodal and others should be about flat, as expected declines in recycling could be offset by increases in intermodal and others assuming no further slowdowns or work stop which is at west coast ports. Revenue from E&P waste activity is expected to be between $260 million and $275 million or down approximately 25% to 30% on the estimated $365 million run rate taking into account recent acquisitions and new facilities not fully reflected in the prior year's results, but only down between 13% and 16% on a reported basis. Adjusted EBITDA for 2015 is estimated to be between 33.5% and 34% of revenue down 50 to 100 basis points compared to 2014. This range assumes margins within solid waste expand between 50 and 100 basis points year-over-year primarily due to lower fuel costs, margins within E&P waste are expected to contract 600 to 700 basis points year-over-year due to the following three items; high decrementals associated with volume reductions and potential related pricing pressures. The impact of the lower margin shale gas acquisition and two non-recurring cost items estimated at $3 million to $3.5 million in the aggregate. Those being cleanup cost in the Permian Basin and the Mexico landfill resulting from heavy rains late last year and start-up costs at our two new E&P waste disposal facilities opening later this quarter. Depreciation and amortization expense in 2015 is estimated to be almost 12.5% of revenue. Closure and post closure accretion expense as a percentage of revenue is estimated to be approximately 15 basis points in 2015. Operating income for the year is estimated to be between 21% and 21.5% of revenue. Net interest expense in 2015 is estimated to be approximately $60 million. Our effective tax rate is estimated to be about 39.4%. Non-controlling interest is expected to reduce net income by about $500,000 in 2015. The two principal components of 2015 free cash flow are expected to be as follows; net cash provided by operating activity for the full year is estimated to be about 26% of revenue and capital expenditure is estimated to be between $200 million and $210 million. We expect double digit year-over-year growth in free cash flow in 2015 with free cash flow exceeding 140% of GAAP net income. With about $60 million of free cash flow already generated just in January we’re off to a good start towards the full year target. Turning now to our outlook for Q1, 2015. Revenue in the first quarter is estimated to be between $508 million and $512 million up almost 6% over Q1, 2014. Solid waste price and volume growth on a combined basis is expected to be between 4.5% and 5%. Revenue from E&P waste activity is expected to increase a little more than 5% as contributions from new facilities should more than offset declines on the same store basis. Recycling, intermodal and others should be about negative 0.5% assuming no further slowdown to work stop which is at west coast ports. Adjusted EBITDA for Q1 is estimated to be between 32.5% and 33% of revenue to previously mentioned storm related clean-up cost and new E&P facility start up cost should hit mostly in Q1 resulting in a 60 to 70 basis points drag on reported Q1 margins. Depreciation and amortization expense for the first quarter is estimated to be about 12.6% of revenue or down almost 40 basis points from the prior year period as a percentage of revenue. Amortization of intangibles in the quarter is estimated to be about $7 million or [$0.03.5] per diluted share. Operating income for the first quarter is estimated to be between 20% and 20.5% of revenue. Interest expense in Q1 is estimated to be about $16 million. Our effective tax rate in Q1 is estimated to be about 39.4% and finally non-controlling interest is expected to reduce net income by about $250,000 in the first quarter. And now let me turn the call back over to Ron for some final remarks before Q&A.

Okay. Thank you, Worthing. Again 2014 was an exceptional year for Waste Connections and it was our 11th consecutive year of positive stockholder returns. While often easy to focus on financial metrics, it's especially worth noting the efforts of our nearly 7,000 employees towards continuing improvements within safety. As we’ve reached another historic low in our safety related incidents during 2014. Over the past five years, our annual number of incidents has declined 35%, despite a 75% increase in revenue over the same period and our employees have eagerly embraced the goal of further improvements going forward. This is about one example of how our safety first culture and empowered employees live up to our number one operating value. Each year we face many challenges and our track record demonstrates a focus on and a commitment to continuous improvement. In addition to the financial outlook provided for 2015, we hold ourselves accountable to the following core financial objectives for the upcoming year. First, to expand margins within solid waste in addition to any benefit from lower fuel costs. Second, to outperform the macro trends within the E&P sector. Third, to increase free cash flow more than 10% and fourth, to maintain discipline and capital deployment both in acquisitions and the return of capital to stockholders. We appreciate your time today and I will now turn the call over to the operator to open up the lines for your questions. Operator?

Thank you. [Operator Instructions] And our first question comes from Corey Greendale from First Analysis. Please proceed with your question.

Hi, good morning everyone. So, few questions. First of all, looking to your Q1 guidance for E&P to be up 5% giving the strong performance in the month of January and February, I calculate it would suggest that E&P is going to be down something like 8% in each of February and March that can actually slow that quickly or how much are you kind of building in there as a buffer?

Corey that's all buffer again, I think we are trying to be cautious on how we guide because when the stuff does turn off, it could turn off quickly. But again, we have tried to give additional color; the fact is that we are not seeing that yet. So, I think it’s prudent at this point to remain cautious.

And looking at the full year guidance so, obviously getting with E&P waste segment there is more variability there, I mean, in the obvious then is always, so if your assumption is right that linear feet drill is down 25% to 30%, what’s the range of your business there, so in other words what’s your confidence in a roll there, do you think if your assumption is right that - would you be surprised if your guidance on E&P waste is up by more than 10% or 20% or what’s the variability?

Well, I mean Corey, I think let’s say 10% on 25 is 2.5, so that’s I would say being within 10% to 15% is a pretty tight then with on something like that. I think, our confidence in being in that 25% to 30% range down as an outlier meaning as what we think could be the worst case right now, it’s fairly high given what we have heard from our customers and all the points we noted in our call about positioning, improvements in productivity etcetera. But, some customers are talking about being down 80% and others are talking about being down 10. So, it depends on, you’ll have to look at each basin and each customer and the economics they have, so it’s hard to project exactly where that will end up.

And again Corey, from a dollar magnitude standpoint, if we’re too conservative by 5% that would only add about $15 million of additional revenue to E&P and make it kind of a range of 2.75 to 2.90, well $15 million of additional revenue there is still less than 1% on the entire total reported for the year.

Yes, I appreciate. The question is given that you are still seeing strength in January and February what’s the odds are that at some point you’re going to see a more dramatic impact on either the trends when outsourcing staff because [indiscernible] is under pressure or they come back to you and say we want dramatic price cuts as we are under pressure?

Well, again as we said in the script, our assumption is that the comps will get more difficult as we move through the year, we fully expect that.

And just, I know you just gave us ’15 guidance, I think in for ’16 what is your assumption here on the run rate that you’re entering ’15 on that business?

Yes, it all depends on how the price of crude moves this year. We are already seeing the crude come up 8 or 10 bucks of its low, we hear from some customers that breakeven is as low as 60 bucks a barrel would get them to restart the drilling activity. So it’s too early to speculate, I think some industry research pieces that suggest linear feet drill to actually increase to single digit next year. So, it really depends on kind of when we, how we see the price of crude move during the course of the year, whether or not more rigs gets mobilized and what’s the timing, what’s the lag of that might be or the timing of the restart and how that influences the year end run rate.

Okay. And then, on the solid waste business, Ron you commented that you exited ’14 kind of at the strongest point of the year that December trends were particularly strong, I was hoping you might just roll us forward into January and talk about landfill volume trends there?

Yes, Corey. It’s Worthing. I will take this, in January again we saw strong single digit growth in overall landfill volumes with all three waste streams up in the month and we also saw strong single digit increases in roll off activity in the month as well.

Okay, and really one, just last quick one given the moving pieces between ’15 with the CapEx, if we assume going forward beyond ’15 CapEx at 10% of revenue is that still a good assumption?

Yes that’s still a good assumption anywhere between 9.5% and 10% is a good range.

Okay. Thanks very much.

Our next question comes from Michael Hoffman with Stifel, please proceed with your question.

Hi, good morning and thank you for taking my questions and nice job at the end of the year. Ron and Worthing, on solid waste can we talk about the service interval environment and commercial and if you have seen that out, if I remember your commentary eight quarters of positive MSW trends and you’re starting to see more weight for yard, where are we on that path that you get in the industry post the recession that service renewal upgrade?

Well, I mean, Michael we try to provide a little bit color on this. We saw our greatest spread in net new business in five years occur in the fourth quarter on our commercial activity meaning that we had the greater spread between new business in last and core business and increases and decreases in service. So that certainly that convergence is occurring. We also saw that December was the strongest month in the quarter in that. So obviously, we are getting closer to that impact. And we also said that in the fourth quarter solid waste margins expanded 50 basis points which had reversed them declining in the prior two quarters so obviously you are seeing that has an impact of fuel granted starting the decline of fuel, but it also has the impact of improved commercial activity.

And some major price increases we put in place to offset some cost pressures. That's right.

Okay. And then, any sense on the construction side, I am presuming it's been heavily weighted housing for a while, but you are starting to see the non-resident side of the marketplace coming back as well?

Well, certainly special waste as we noted was very strong again in Q4 and it is up again in Q1 and again for the most part special waste is development activity or pre-development activity for mostly the commercial and the industrial sector. So, I think that’s a good indicator. Roll off as we mentioned was up in all of our regions, the least in the west coast which is still the slowest in the recovery and all large upside. So we think that's actually a good thing going forward. But, I would still say predominantly residential related, but we are seeing in other areas.

Okay and then your EBITDA obviously was better in garbage. I got to believe product companies, LTM EBITDA is better. So, is the deal environment getting back to a place where buyers and sellers are getting closer together on evaluating because LTM EBITDA is starting to track at a place where - what they want their purchase price versus where you want to play on the evaluation basis sort of make more sense?

Michael, I would say on that basis yes, but unfortunately that basis is over shadowed by some very visible high multiple deals that have been out there that - so I would say that there is still predominantly a disconnect on evaluation where we have traditionally been as you know in the 6x to 7x EBITDA range for a well won decent margin company, I would say on solid waste right now those expectations are more than 9x to 11x range because that has been established by some of the private equity buyers as well as some others. And on E&P I would say those more companies for sale, but many are looking for what I would call the data multiple, 12 to 15 or so times EBITDA and in the declining EBITDA environment. So, on E&P side we are obviously being much more selective.

Okay and then of your $200 million to $210 million capital spending, am I right about 25 of that’s in E&P, the rest is in garbage?

That's correct.

Okay. And then, on the fuel side, do I remember correctly you have about - it's about low 30 million gallons a year of diesel and you got about 20% of that hedged so that leaves me something that's 70% to 80% of that’s going to get impacted by the lower fuel cost that’s how to work math?

We have got about 35% to 40% effectively locked between hedges and fixed price delivery contract, so it's a balance of that market.

Okay. And then, on the E&P, I appreciate that this is all brand new to everybody and so nobody really knows what is the real bottom is, post advance of that I find interesting working back overtime, true major crisis in other industries, even in garbage in 2009 you didn’t see quite compression on disposal assets unless the operators, service companies chose to do so. The customer didn’t drive it. Is that a reasonable expectation that the customer understands, you put fixed facilities in with highly engineered environmental operations and where they may come out of completion companies, you can pick everything up and move it all around with big price compression that's not likely to happen here?

Michael, I would say that for the most part that is true. There are certain basins that is far more true than others, older or greater number of disposal assets as logistics cost come down with a drop in crude which translates to a drop in diesel that allows for further transportation, that allows the customers to be able to move the material further, so that does provide some price competition. But having a multiple disposal site across multiple basins as we do and really we are the only company that does have that, it does allow us some ability to provide multi-basin pricing and have some reverse leverage relative to just being a price taker.

Okay. Alright, thanks a lot.

Our next question comes from Adam Baumgarten with Macquarie. Please proceed with your question.

Hi guys. Thanks for taking my question. Touching on your pricing guidance, is the lower core pricing solely due to CPI or you’re actually starting to see some sort of tougher pricing conditions due to fuel or especially on the open market side?

No, it's all related to slower CPI. Again, half of our business is effectively tied to that so you see that as a fair one.

Yes that’s down about 20 to 40 basis points depending on the market on the west coast year-over-year. Last year we saw between 2 and 2.4 and this year we are seeing between 1.6 and 2.1.

Okay and then just touching on your volume guidance I mean, it seems like volumes are going to be up 1.5% to 2% for solid waste. Can you talk about why you are not actually building in sort of acceleration, I mean it seems like the trends are improving especially on the commercial side?

Yes, the trends have improved, but remember the math from a comparison standpoint gets tougher and tougher.

Okay. Thanks guys.

Our next question comes from Scott Levine with Imperial Capital. Please proceed with your question. Our next question comes from Charles Redding with BB&T Capital Market. Please proceed with your question.

Hi, good morning gentlemen. Thanks for taking my call. I know, I’ve heard some of the color from other providers regarding potential change in CPI whether it's the waste and sewer or otherwise. It's just simply not as relevant to you guys just given the long term nature of the franchise agreement?

It's actually more relevant to us because we actually have more of our revenue that is tied to it. The other companies only have between maybe 15% and utmost 25% of the revenue that’s actually tied to CPI. I mean, I think that's used as a point of maybe making why they’re not achieving as much price as they should in the open market. But we actually have 50% of our revenue tied with the CPI. So reality is, there is going to be no change to the CPI. Anyone that wants to talk about it from other companies can talk about it, but the local government decides it and the fact that we would want to change it is a reason it won't happen. So, there is not going to be any changes to any contracts from anyone occurring as a change in CPI unless it is an open market contract on a commercial customer, but not a municipal franchise.

Okay. That's fair. And then, I guess outside of diesel have you seen any additional impact on fleet expenses or otherwise from the commodity dislocation?

Nothing out of the ordinary at this point in time. You are still seeing tire, you are still seeing international tire vendors out for small rate increases despite crude being down a bit. You are still seeing container manufacturers and lid manufacturers out for nominal increases. So lower crew is not yet translating into lower material and assets prices for us or operating expense cost for us other than diesel and lubricants.

Okay. Thanks Ron.

Our next question comes from Scott Levine with Imperial Capital. Please proceed with your question.

Hi, good morning guys sorry about that.

Hi Scott.

Hi Scott.

Let me just wanted to clarify on the volume side little bit more, just looking back your initial guidance. I think you guys are looking for about 1% volume growth for 2014, you came in [indiscernible] and it’s not a business that typically things move very quickly, I’m just wondering how much that surprises you and maybe a little bit more color geographically within what you except certain regions stop from other regions are surprised by any of the trends that you’ve seen on the volume side of the business of solid waste?

Well, Scott our West Coast is still our slowest in recovering and provides us a biggest opportunity. We saw spots of it improve more than we projected in 2014 when it does seem to have improvements, it’s pretty impactful for us obviously and I would show you that that is the largest amount of upside for us throughout different quarters in ’14. I believe that that will be an upside for us in 2015 because we have guided and budgeted our West Coast with our lowest incremental improvement of our regions year-over-year in terms of volumes. But we saw very good strength in our central part of the country of course that was heavily surrounded areas where there was shale development. So when you talk about Colorado, Kansas, the Dakota, Oklahoma, Texas and Louisiana that sort of all central part of the country. We got heavy shale throughout ’14 going there and that had a ripple effect through those economies. And we’re sourcing that impact whether that’s slow somewhat in’15 we are not quite sure. So there is a little conservativeness about our central region in our mind this year. Our Eastern region which is really more of a upper southeast then it is through east, we have seen strength across the board there. We have seen manufacturing, improving, manufacturing that was existing adding ships, more construction activity. So that region as we mentioned our roll off pulls were up 15% in the fourth quarter in that region. So that is where we saw the largest strength in at least the most recent quarter.

In Scott, I’ll also add that if you look at a year ago, we were just coming off of 2013 when volume growth was just under 1% for the full year of ’13. So, if you’re coming off of that in rear view mirror, we were cautious in our outlook for ’14, we are now coming off a year with volume growth of slightly over 2% of rear view mirror which gives a little more confidence to guide in that 1.5% to 2.0% range for the full year of ’15.

Got it, makes sense. And turning to recycling, coming off a couple of years pretty poor pricing trends there it seems like things are getting better, you made some moves I think a few quarters back with regard to some of your facilities and I’m wondering where your thought process is now, you feel like things have stabilized, this port issue aside and with pricing continues to erode maybe see some more moves going forward just a big picture of that?

Yes, I mean Scott if you look at, if you look at commodity pricing in Q4 was up now 109 down from the beginning of the year, the 130 and down from 13 at about 140. If we look at our five year average it’s around 120. So, we’re down right now about 20% from the five year average and 40% from the high. We believe that average will move back $10 to $15 higher as the transportation issues of the west coast ports are resolved. If those issues get resolved then that price for commodity stays in the $90 to $100 range then we might have to revisit a few of our locations and see what options we have. But, at this point we feel very well optimized on the processing side and remember much of our processing that we do, in fact over 85% is built within our franchise part of our model and we are allowed to return on those operating expense in those franchises. So, it is ultimately captured, it's only the 15% so we just guided for Q1 to have only 12 million of commodity revenue so 15% of that is 2 million bucks or so, it's really pretty the minimus to us at this point in time.

Got it, thank you.

Our next question comes from Joe Box from KeyBanc Capital Market. Please proceed with your question.

Hey good morning guys.

Good morning Joe.

Ron, I think you said you are up to about 8 quarters of consecutive gains the landfill. I am curious how you see pricing at the landfill playing out this year? Do we start to see it move up here or will lower fuel maybe hinder some of those gains?

Yes, Joe I mean we have - first off, we have consistently been moving landfill price throughout our system at about 2% to 2.5% each of the last several years and that's what we believe we will achieve and we forecasted to achieve in 2015 as well. Obviously as crew drops, it's sort of winds the radius that other landfills are competitive and it puts incremental pressure on pricing on the margin on everybody's landfill. So, I think lower crude environment you are unlikely to see a consorted upward movement in price. I think you will see the effort, but whether you will see the result will be a different story. And that also depends on the pace of the recovery because if the recovery continues to accelerate then people -- that tends to help pricing not hurted. So it's - I would expect pricing to be relatively consistent year-over-year in landfill for most players and at least certainly for ourselves.

And then maybe just staying on that same scene, if diesel does hold at a lower price here, how should we be thinking about the key into that 50 basis points of savings flowing through? Is that 70 basis points benefit in the first half than maybe 30 basis points benefit in the back half as surcharges catch up just any color on that will be helpful?

Yes, you will get the benefit - the majority of the benefit in the first half of the year because obviously as you move second half you start the anniversary the drop in fuel.

Okay so it's not actually about the surcharges catching up as much it is just the timing of diesel.

That's right.

And then just quickly switching gears on the E&P side, you guys talked about 25% to 30% reduction linear footage drilled I appreciate the comments earlier about pricing and reversal leverage because you guys are multiple players, but I am curious relative to the 260 million to 275 million of revenue that you are calling out, what type of pricing are you guys baking into this business?

Yes, it's not as granular to say we have got a certain price baked in. What we recognize is that decrementals are higher than incrementals and I say that because if you look at the increase in the volume and the activity, 2013 to 2014, when margins expanded about 400 basis points in that line of business, it’s our assumption as volume comes off that will over shoot that on the way down because not only the other volume coming off, but you will have some pricing impact within the business. And so again, we assume that 600 to 700 basis point overall decline in the E&P line of business, again about 100 basis points of that is sitting in the first quarter for clean up and start-up costs. So, we have baked in a higher degree of decrementals in the business, but not necessarily tied it to any pricing pressure in any one basin.

Understood. So then I guess Worthing, theoretically is pricing is in negative, it's not quite as bad the decrementals should theoretically be less than what you guys are guiding to?

That's correct.

Okay. Excellent. Thanks for the questions and nice job.

Thank you.

Our next question comes from Al Kaschalk with Wedbush Securities. Please proceed with your question.

Good morning guys.

Morning Al.

Just one thoughts on E&P for a surprise, but could you share any specific, whether you have or see a specific customer action about timing of cuts or lay down on rigs or stoppage in drilling activity or regions or basins that you think that’s forth coming more so than others?

Yes, I mean, without naming specific customer names, obviously that's not appropriate. But yes, we have received notice in the Bakken, in the Permian and in the Eagle Ford from specific customers about their scheduled lay down, their lay down schedule for rigs basically over the ensuing months we started receiving those in late November early December, we have had some customers literally over Super Bowl weekend tell us that hey you know we are running six rigs in the Bakken, we are going to lay down four in the next 30 days and here is what it looks like. Having said that, we have had other customers say we are going to pull rigs out of specific basins and we are going to add rigs to other basins. So that's why we are still seeing as much activities we are.

By the way, and rigs that they do lay down may not have necessarily been going to us.

That’s correct and they may also not have been horizontal or directional rigs either. So that's another important point. But yes, I would tell you that unlike solid waste, I think one of the analysts made this comment, we know sort of 30 to 45 days out. We don't know 5 to 6 months out. Okay. So that's why when people say while you are guiding what more cautiously in March than in January yes that's how this business actually is especially on the down side.

Okay. Fair enough appreciate that. Can you add a little color as to the strategic nature of the small acquisition you announced the Shale gas one particular just maybe a little color on that is that a customer service request I know it's small, but trying to get at the strategic nature of that?

Well yes, without delving too much into the strategic nature of it what this process does is take oil based mud and cuttings that has been lubricated in part by diesel and it separates the oil from the mud and extracts the diesel into a molecular component that is still purely diesel and it allows us to sell back to that customer that gave us those mud and cutting that actual diesel they gave us. So with a 100% closed loop and recyclable for that customer and so some of our large customers in the Eagle Ford where we do this in the phase where we don't do other services but we now have this service we are able to offer them a completely 100% recycle solution for portion of their waste stream. That is extremely important to your multi-national producers and it was something that they wanted us also have and we wanted to have in our quiver of what we could offer our customers because we’re the only company that can offer that full suite. We will expand this service overtime probably not at $50 a barrel, but overtime we will expand this into additional basins because again it is something that only we can offer and we see linkage to that with our other disposal base services.

Great. Thanks for the color. My final question as intrigued by your, one of your targets for the team for 2015 as expense our lease margins extra fuel cost given you had slight headwind with price maybe you get a little bit better from lower cost but what are the leverage that you think can still be pulled or not to help your team out, but where do you think you are going to get that benefit from where they are going to deliver?

Sure. I will start, Ron you can conclude this. But firs of all Al, I will start to believe that we shouldn’t take credit for something that we don’t control. So, the price of fuel is down and that results in savings in P&L, we’re already better than that and we’ve to hold ourselves accountable to that. With regards to magnitude really if you look down the P&L we are talking in terms of between 5 and 10 basis points across the number of line items that in the aggregate add up to something more meaningful.

Got it. I certainly appreciate you called out the fuel and given the volume and brand you’re probably a little help there too as well so, great.

To give you other specific, I mean I would tell you, we told you that incremental volumes we’re guiding higher volume growth in ’15 then we had in ’14 incremental volumes comes into our system as it does every one system, very profitable on both the collection and disposal system. We have the rollover affect of the landfill that we opened in the Hudson Valley in the fourth quarter we have that affect. We have our incremental price being above our estimated cost increases. So, we are getting gross margin expansion and then we are expecting to be able to get leverage, improved leverage once again on risk management and we’re forecasting that based on overall improvements that we saw ’14 going into ’15. So, it’s 10 basis points here and there and holding our cost structure consistent at our price or below, if we do that we will get 30 to 40 basis points and expansion plus fuel.

Right. Very good, I look forward to seeing in the half end.

We hope so as well.

[Operator Instructions] And our next question comes from Barbara Noverini with Morningstar, please proceed with your question.

Hi, good morning everybody.

Good morning, Barbara.

So just building off of the Al’s last question you had mentioned in the past that in the regular solid waste - some labor pressure occurring in central region and specifically as workers could easily find job in the shale place. So, have you started to see this led up a little bit, given from the reason hearing about and really this dynamic would also translate into some of that margin benefit from next year that you are targeting?

Yes. The short answer, we are starting to see a little bit, not flat but availability of frontline employees available at what I call market rate rather than ever escalating market rates due to very lay-offs throughout the shale plays that is benefiting not only our E&P side of employment but also our solid waste side in our central region and the central state from the country that you have mentioned. So, I don’t know if that will on its own lead immediately to margin improvement, but what it ultimately does is it leads to greater employee stability which leads to greater projectability of our cost structure, improve safety, improve customer service etcetera, the kind of thing s that you find when you have less turnover in your workforce.

Great. Thanks. And then, on the last call you had mentioned the three E&P disposal permits you acquired in Montana and Wyoming, so drilling activities were going on these regions, see if this kind of put these in your back pocket for a little while and so activities ramps up again, are you still making couple of regions to move forward which will be 2015 and 16 as you had mentioned in the past?

Yes, with regard, specifically to the ones in Wyoming and Montana your commentary about putting those in our back pocket as we would say sort of placing them in inventory until shale pricing improve or excuse me crude pricing improve and there is drilling activity projected in those shale region that is what we will do. We don’t know if that will be the latter part of ’15 or ’16, could well be into ’17 or ’18, we believe there is a lot of future development that will occur in those states down the line, but I don’t think it will be in 2015.

Got it, great, thanks very much.

Thank you.

Thank you.

And our next question comes from Tony Bancroft with Gabelli Funds. Please proceed with your question.

Yes, good morning gents. I just little frame the materiality of the vertical rig. Could you give a general estimate of the percent that you’re exposed to vertical rigs in your basins versus horizontal? Is there some, you could sort of frame that?

Yes, in the state like in New Mexico where the regulations require third party disposal there you got vertical rigs and as those lay down we could be impacted by that in the states like Texas to the extent that the rig was using water base mud, they’re using onsite reserve pits as allowed by regulations and so there where we see lay downs of vertical rigs we are not impacted.

Got it. Thank you very much that’s it.

We have no further phone questions at this time. I will turn it back over to you.

Okay. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and the interest in our call today. Worthing and Mary Anne are available today 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.

Thank you, sir. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day. Thank you.