Waste Connections, Inc. (WCN) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections First Quarter 2015 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, April 28, 2015. I would now like to turn the conference over to Ronald Mittelstaedt, Chairman of the Board and Chief Executive Officer. Please go ahead, sir.

Okay. Thank you, operator and good morning. I like to welcome everyone to this conference call to discuss our first quarter 2015 results and provide a detailed outlook for the second quarter. I’m joined this morning by Worthing Jackman, our CFO, as well as several other members of our senior management team. In the first quarter a strong performance from our solid waste collection and disposal operations enabled us to exceed our margin expectations for the quarter and keep us on track to attain our free cash flow target for the year. We are particularly pleased with these results in the period in light of difficult weather conditions in certain markets, lower than expected recycle commodity values and an estimated $5.4 million of expenses incurred in connection with both start-up cost at two new E&P waste facilities and storm-related clean-up and repair costs at our Permian facilities. Solid waste organic price plus volume growth was 4.4% from the first quarter and adjusted EBITDA margins in our solid waste collection disposal business expanded 165 basis points over the prior year period. Free cash flow in Q1 was $123 million or 24% of revenue and are on track to meet our full-year target of between $350 million and $360 million, despite a more precipitous decline in excepted E&P waste activity than anticipated a few months ago. Regarding the macro E&P environment as noted in our earnings release, over the past few months estimates for projected 2015 U.S. E&P CapEx spending decreased another 15% to down 45% to 50% year-over-year. While the deceleration in drilling resulting from lower customer spending has been faster and harsher than analyst had expected. Many industry analysts now anticipated a spending rebound in 2016. This more precipitous decline in drilling activity was evident in our E&P waste operations beginning in late March and will continue to impact our higher margin E&P waste-related volumes for the remainder of the year. However, better than expected performance in our solid waste operations, improving recycled commodity values, and potential acquisitions should help absorb a portion of this impact. And based on what we hear and see today, if crude prices hold at current level, Q2 could prove to be the bottoming of our E&P waste business. Before we get into much more detail, let me turn the call over to Worthing for our forward disclaimer and other housekeeping items. Worthing Jackman 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, 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 second quarter and full year 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 results and uncertainties are set forth in the company’s periodic filings with the Securities & Exchange Commission, including our most 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 first quarter was $506.1 million, up 5.1% over the prior year period. With acquisitions completed since the prior year period, contributing about 2.9% to year-over growth. Solid waste price and volume growth in the quarter were a combined 4.4%, broken down as follows: positive 2.8% from core price and positive 1.6% volume. Core pricing in the quarter was consistent with our expectations and we continue to expect it to average about 2.6% for the full year and range between 2.4% and 2.8% in any quarter. A decrease in surcharges primarily resulting from current oil fuel prices could reduce oil and pricing by up to 20 basis points in the second half of the year. Solid waste volume growth in the first quarter was near to the lower end of our expectations. As improvement collection in disposal terms were somewhat impacted in late February and early March by severe winter weather in certain markets. We estimate that weather impacted total revenue, primarily landfill related by about $3 million or 70 basis points in reported volume growth. Solid waste collection net of acquisitions increased 5.2% in the period, primarily due to higher roll off and commercial collection activity. Roll off revenue on a same store basis grew 11.5% in Q1. Roll off pulls per day in the quarter were up about 8% and revenue per roll off pull increased more than 3%. Pulls per day increased in each of our three solid waste regions with our western region up 5%, our central region up 8% and our eastern region up 10%. Commercial collection increased 5% in the period. As placing and net new business trends continue to reflect in improving economy. Solid waste landfill revenue in the first quarter declined about 1%, with flat volumes on a tonnage basis. Again this is what we experience in most of the weather impact in the quarter. MSW tons increased 3% in the period with our three solid waste regions up between 2% and 5% year-over-year. Special waste tonnage decreased 3% year-over-year in Q1, due to both a tough prior year comp in or central region where we had benefited from a large project in Minnesota last year and inclement weather in our first quarter, especially in our Eastern region. These influences can be seen in our results as our western region experienced an 8% increase in special waster tonnage, while our central and eastern regions were down 12% and 2%, respectively. C&D tonnage declined 4% in Q1, primarily due to weather, but also on a tough comp in Colorado where we had benefitted from flood related clean-up activity in the prior year period. C&D tonnage in our western region increased 5%, while our eastern region saw an 8% increase, due to the opening of our new C&D landfill in New York’s Hudson Valley. C&D tonnage in our central region decreased 13% on a tough comp. Recycling revenue was $10.8 million in the first quarter, down about $3.4 million or 24% year-over-year with about half of the dollar decline due in the low recycled commodity value and the remainder due to our decision to close and outsource our San Jose recycling operation. The impact of which fully anniversaried at the end of March. Recycling revenue in the period was about $1 million below our expectations in early February, due to subsequent further weakening in the commodity prices and labor related slowdowns at West Coast ports. Prices for OCC or old corrugated containers averaged about $92 per ton during the first quarter, down about 31% from the year ago period and down 15% sequentially from Q4. While current OCC prices remain down significantly on a year-over-year basis, we believe the lowest prices for the year are now behind us and expect continuing improvement over the next few quarters, narrowing the year-to-year comparison as the year progresses. Turning now to E&P waste activity, we reported $68.6 million of E&P waste revenue in the first quarter, essentially flat compared to the prior year. Revenue on a same store basis decreased about 13% in Q1 which was offset primarily by acquisitions completed since the year ago period. E&P waste revenue was about $3 million below our expectations for the quarter due to the more precipitous decline in E&P activity late in the quarter than industry analysts have projected only a few months ago. Recognizing that E&P industry estimates will be continually changing, the goal we set forth for 2015 was to outperform the macro while our E&P waster operations are most highly correlated to changes in linear feet drill, more frequently published rig data adjusted for drilling productivity and efficiency improvement is a good proxy for relative changes in same store E&P waster volume on our facilities. We outperformed the rig count macro in Q1. As mentioned earlier, same store revenue in Q1 was down 13% year-over-year comparing favorably to an estimated 21% decline in average rig count in the basins where our E&P operations are located. On a combined basis, same store volume and average price per unit were each up single digits in the period. Average rig count declined in Q1 within our key business were as follows: Permian, down 21%; Bakken, down 28%; Louisiana and Gulf Coast combined, down 11%; and Eagle Ford, down 26%. Rig count declines in our basins accelerated during the quarter from down 2% in January to 21.5% in February and down 38% in March. Rig count for April is expected to take another step now to down almost 50% compared to April 2014. Some industry analysts are predicting slight additional dips in May and June with a bottoming around mid-year. As discussed early on this call, a more rapid deceleration in drilling activity has added another 15% since early February to estimated 2015 year-over-year E&P CapEx reduction, and will impact us for the remainder of the year. Because the bottom appears to be occurring sooner than many experts have previously expected, we estimate this will reduce our original 2015 outlook for E&P waster revenue for approximately $40 million, add about 75% decremental EBITDA margin. About 40% of this reduction will impact our second quarter’s results with the remainder spread out over the second half of the year. With E&P sector washout happening quicker and more severely than previously expected, many estimates now predict a rebound in 2016 with a sustained $60 to $65 per barrel crude price necessary for E&P companies to consider mobilizing additional rent in certain basins. But just as a decline in drilling activity lag, crude oil price declined by about four months. We believe any rebound in such activity will also lag direct with a increase in the price of crude, especially since there was an existing backlog of drilled but uncompleted wells. As mentioned earlier, free cash flow in the quarter was $123 million or over 24% of revenue and we remain on track to meet our full year target of between $350 million and $360 million despite the more precipitous decline in expected E&P waste activity. In Q1, we deployed about $90 million on acquisitions and $35 million on return of capital on stockholders. On our February call, we discussed the shale gas services acquisition and solid waste tuck-in acquisitions in North Carolina and Washington completed earlier in the year. In March, we also acquired a permitted but undeveloping E&P waste landfill in the Mexico Permian for potential future growth. With this start to the year, we believe we are on pace for what we consider to be a more typical M&A year. That is completing transactions totaling about $75 million of acquired annualized revenue. Regarding return of capital to shareholders, as noted on our February call, we expect to repurchase between 2% and 3% of outstanding shares in 2015 following over 2 million to 3 million shares in addition to what we’ve already repurchased year-to-date. With M&A plays out as expected and we repurchase 3% of our outstanding shares, our leverage ratio would end the year around our targeted 2.75 to 2.90 debt to EBITDA leaving us tremendous flexibility upon larger M&A opportunities or opportunistically increase the return of capital to stockholders. And now, I’d like to pass the call to Worthing to review more in depth of financial highlights for the first quarter and to provide a detailed outlook for Q2. I will then wrap up before heading into Q&A.

Thank you, Ron. So as Ron already reviewed the components of revenue growth, I’ll begin with the discussion of adjusted EBITDA. In Q1, adjusted EBITDA as reconciled in our earnings release, increased 2.5% to $168.3 million. As a percentage of revenue, this was 33.3% or about 30 basis points above the high end of our outlook range, despite incurring more expenses than anticipated at the time of our February call in connection with E&P facility start up and storm related repair cost in the period. Had we adjusted for these impacts, adjusted EBITDA margins in the quarter would have increased 20 basis points year-over-year. In the first quarter, adjusted EBITDA margins within our solid waste collection and disposal operations increased about 165 basis points primarily due to lower fuel cost. Recycling was near breakeven on an EBITDA basis in the quarter. The year-over-year change in margins within our E&P waste business in the first quarter can be broken down into three buckets. First, the estimated $5.4 million of facility start up and storm related repair cost impacted segment margins by about 800 basis points. Second, declines in same store margins of approximately 800 basis points on a 13% decrease in revenue impacted segment margins by approximately 625 basis points given the revenue rating within the segment. And third, acquisitions diluted segment margins by about 275 basis points in the period due primarily to the lower margin shale gas services facilities where the value of this recovered commodity is linked to and hampered by lower diesel prices. Shale gas services reported less than a 20% EBITDA margin in the period. On consolidated basis, the following are certain line items that moved a notable amount in the first quarter from the year ago period as a percentage of revenue. Brokerage and wage cost increased 90 basis points on higher intermodal activity; the E&P related subcontracts are cleaned up, equipment rental and repair cost increased 80 basis points; labor and supervisory expense increased 40 basis points partly due to new E&P start up cost; third party disposal and transfer cost increased 35 basis points; fuel expense decreased to 140 basis points and risk management insurance expense decreased 50 basis points. Fuel expense in Q1 was about 4.35% of revenue and we averaged approximately $2.95 per gallon for diesel which was down about $0.67 per gallon from the year ago period and down $0.33 sequentially from Q4. Depreciation and amortization expense for the first quarter were 12.7% of revenue, down 30 basis points year-over-year due primarily to lower landfill depletion expense as a percentage of revenue. Interest expense in the quarter decreased $1.2 million over the prior year period to $15.7 million due to reduced borrowing cost on our bank facilities and lower average outstanding balances. Our effective tax rate for the first quarter was 39.4% consistent with our expectations for the full year. GAAP and adjusted net income per diluted share in the first quarter were $0.42 and $0.46 respectively. Adjusted net income includes among other items, the amortization of acquisition related intangibles. Debt outstanding at quarter end was just under $2 billion and our leverage ratio as defined in our credit facility was approximately 2.67 times debt to adjusted EBITDA. I will now review our outlook for the second quarter. 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 and operating environment and it excludes the impact of any acquisitions that may close during the year and expensing of any acquisition related transaction costs. Revenue in the second quarter is estimated to be approximately $530 million. Solid waste price and volume growth on a combined basis is expected to be about 5% in the quarter, up sequentially from 4.4% in Q1. Recycling, intermodal, and other growth is expected to be between 0.5% and 1%, as increases in intermodal activity should more than offset the impact of year-over-year declines in recycled commodity values. Revenue from E&P waste activity is expected to be between $50 million and $55 million or down almost 35% year-over-year. An estimated 40% decrease in same-store revenue is expected to be somewhat offset by contributions from acquisitions and our recently opened landfill in the West Texas Permian not reflected in the prior year’s results. Adjusted EBITDA for Q2 is estimated to be between 33% and 33.5% of revenue. Margin expansion within our solid waste operations is expected again to be more than fully offset by high decrementals associated with lower E&P waste activity and to a lesser extent the impact of a lower margin Shale Gas Services acquisition and remaining start-up cost at our new Eagle Ford deep-well disposal facility. Depreciation and amortization expense in second quarter is estimated to be about 12.4% of revenue. Amortization of intangibles in the quarter is estimated at about $7.3 million or almost $0.04 per diluted share. Operating income for the second quarter is estimated to be between 20.5% and 21% of revenue. Interest expense in Q2 is estimated to be about $15.5 million. Our effective tax rate in Q2 is estimated to be about 39.4%. Non-controlling interest is expected to reduce net income by about $300,000 in the second quarter. And finally, it’s important to note that on an earnings per share basis we estimate that year-over-year change in the performance of our E&P business to be about a $0.10 drag to reported results in the second quarter when compared to the prior year period fully masking earnings growth within our solid waste business. And now, let me turn the call back over to Ron for some final remarks before Q&A.

Okay. Thank you, Worthing. Again, we are pleased with our performance in the quarter, especially in light of the E&P, recycling, and weather-related headwinds. Solid waste drove our results in the period and should remain above original expectations throughout the year. In addition, we believe the worst of recycling and weather-related issues are behind us. These improving trends together with potential acquisitions should help us offset a portion of the impact from the more precipitous drop in peak CapEx spending from the market estimates just a few months ago predicted. On our February earnings call, we identified the financial objectives we hold ourselves accountable for in 2015. 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 remain on track to deliver on each of these objectives. We appreciate your time today. I will now turn the call over to the operator and open up the lines for your questions. Operator?

Thank you. [Operator Instructions] Our first question coming from the line of Joe Box with KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning, guys.

Hi, Joe, good morning.

Good morning, Joe.

On your volume lock was helpful on the E&P side. Could you maybe just give us a little bit more color on E&P landfill pricing? Curious if you’ve seen a stabilization on that front or if it’s still trying to find a bottom?

You know I think it depends on the basin, Joe. For the most part, certainly, in Louisiana and the Eagle Ford, I think, it’s been stable there throughout the quarter. I would say over the last two weeks to four weeks, it has stabilized in the Bakken, in the Permian, at least within a range. Obviously, most of landfill pricing is quoted on a transportation and disposable basis. And so, it’s a little misleading when you look at somebody who says that price dropped from $65 to $55 a ton. But the reality is that was probably $9.50 of transportation due to the decreased fuel price and $0.50 on the disposable end, illustratively. So we are not really seeing large declines in disposal pricing in the Bakken or the Permian. We are seeing larger declines in the revenue piece, which includes the transportation.

Yeah, Joe, if you can look at the Q1, again, as we’ve said in the call, on a same-store basis, revenue was down 13%, average price across the business was down 6% to 7%, as was the average, as was the volume, okay, on the same-store basis. In Q2, what we’ve assumed is that average price declines range between down 10% to 15% in the quarter. So we’ve already baked in kind of the recent prices we have seen and stabilization in those ranges. And, therefore, volume is assumed to be down 25% to 35% to get to that same-store number of down about 40%.

And I would say that almost all of that down 6% or so on price in Q1 came in March, which is why we baked in a higher amount coming in Q2. It’s just a rollover effect of March. Q - Joe Box Understood. And I missed just a second of your guidance commentary. I caught the 2Q comments, but did you address full-year EBITDA guidance?

What we said is just within the – with regards to the E&P business. Relative to what we said in February where we guided at about $2.60 to $2.75 of revenue within E&P, we’ve taken that down $40 million. So that will get you – if you’re doing the math at home, will get you at about $2.20 to $2.35 on the top line. And what we’ve said is that $40 million would come off at a decremental margin of 75%. So that would take $30 million of EBITDA out of that number associated again with E&P.

And then, we said that we believe greater strength in the solid waste business, improvement in commodities over the balance of the year, and potential acquisitions would impact some of that 75% -- of that – some of that 75% in EBITDA.

Okay. So there is not an official number, but we are kind of migrating closer to something around 700?

We always wait till July to give an update on the full-year. Because by July, we’ve got six months actual, we’ll guide it for the upcoming three months. And so, we will look to July to update the totality of the business at that point in time.

Understood completely. I will hop back in queue. Thank you.

Thank you. Operator Thank you. Our next question coming from the line of Al Kaschalk with Wedbush Securities. Please proceed with your question.

Good morning, guys.

Hey, good morning, Al.

Hey, good morning, Al.

Just a follow-up on E&P. Ron and Worthing, have you heard – in terms of your outlook, how would you characterize your visibility for the 2Q dropping in terms of the June timeframe from recent conversations with your customer base?

Well, I would – look you had a pretty precipitous decline in Q1, Al, and we were under our guidance for Q1 in E&P by $2 million or $3 million. So that was less than 4%. So if I was to tell you that, I think, we are within a 5% range, I feel pretty good about that. Our guidance assumes that there are no incremental new rigs that either come into our geographic area or that we secure, if they do. So, any of that would be an improvement potentially to our performance. It assumes that the existing rigs that we have today in our areas stay other than the ones we’ve been notified that upon completion they will be removed. So, again, revenue, we are pretty tight in how we can forecast revenue. Obviously, that business is moving around more than our solid waste business ever would, but we feel pretty good about it.

It seems like the worst of the rig declines is almost upon us. As I said we are just seeking drips and drops here in air at this point in time, but more importantly we’re going into the – what’s typically an uptick in that seasonally plus we are getting into part of the year were remediation jobs and some other revenue line items can come into play that you don’t normally see in Q1.

And just anecdotally Al, we got there is a couple of E&P companies in the Permian that were not – that had pulled rigs in the $40 range, but in the mid 50s have made commitments to redeploy a rig and we’ve picked three or four of those over the course of the last week. So, we do feel some things like that anecdotally that Q2 should be the bottom. Again with the assumption that [indiscernible] that is in today.

I just take a step here to ask here and given one of the very strong cash flow both on the core or what I call the core on your solid waste business, do you get more aggressive from an M&A perspective given the carnage in the market or do you stay true to this $75 million revenue contribution from acquisitions in the year?

Well, I mean Al I think the reality is that we tried always to stay about as aggressive as we can and as disciplined as we can, and I don’t think right now was any different from that. I mean we’re looking at a number of opportunities on the solid waste side, you know over the course of the last week I’ve reviewed with our M&A group, no less than above half dozen new opportunities and so, but there still is what I consider a bit of disconnect between sort of market valuation that we’re willing to pay and sellers expectation. Having said that there are ones, if you stay out long enough and you cross enough there is ones you are going to get and that’s happening with us. But I don’t think we step on the accelerator and stretch multiple as a way to quote offset the impact of E&P, you know you get an opportunity to spend capital ones and we pride ourselves on trying to do it right and if that opportunistically happens in this window great, if it doesn’t well than we will wait till it does.

Very good, and then finally if I may, could you add some additional color to the extent you can. The intermodal seems to be very strong, and I’m not sure, and then given other words located I think it is more of the franchise market, I would think that be a very healthy contribution on the margin side, so, if there’s any color you could add to that I would appreciate it. Thank you.

Sure. Our strength in the intermodal, it has kind of taken a lot step up in performance. It is associated with the change in import of call, but a couple of shipping lines that have moved out of the Portland area and now called on the Seattle Tacoma area and our business running with the LA direct train between Seattle Tacoma and Portland as benefitting from the repositioning of those containers back down into the Portland marketplace for subsequent distribution add-on drilling and trust from that location. That business in Q1 was up about 45% meeting with – about $8 million in change up to about $12 million in change of revenue in the quarter. Q2 we are seeing another step increase, putting that business on maybe a $14 million to $15 million per quarter run rate. If you look back over the 10 plus years or so of ownership of that business it’s generally ranged between 35 and low $40 million, $42 million of revenue. This year it’s hitting new highs and the incremental associated with that are not diluted to the business because obviously the odd cost, the overhead etcetera is already covered, gets required from a amount of Capex as we’ve grown the business to handle the increased container account, but this is a very good year for that business or setting us up to be a good year for that business.

And just to clarify Al, not dilutive to the intermodal margin, the businesses margin obviously the intermodal business even with incremental revenues like this it’s still nominally below company average.

Great, got it, thanks.

Thank you. Our next question coming from the line of Alex Ovshey with Goldman Sachs. Please proceed with your question.

Good morning everyone.

Good morning Alex.

Couple of questions for you Ron, Worthing, first on the free cash flow number and the ability to be able to maintain that number and in the context of E&P outlook can you just talk about some of the levers you are pulling that’s adding unless you get to your original guidance for free cash flow?

Sure, couple of buckets there. One is lower Capex year-over-year, last year we did about $240 million of Capex, this year is guided Capex is $30 million to $40 million below last year’s number. That alone represents a 10% plus increase in year-over-year free cash flow. Other levers we have, we came into the year with between a $7 million and $10 million of tax over payment position, just given the timing of when both appreciation was approved by Obama last year and then we had a working capital approaching $20 million or $25 million, a cushion on that side as we went into this year. And so going into the year, we had, if you just add all those up that gets you close to $60 million or so, but obviously with the decline in the E&P business on a year-over-year basis just from a receivables collection standpoint if you get to a lower level of activity it puts another $5 million to $10 million of collections into the system. So, there is – as we stick on to the year they are planning up levers that we knew we had to withstand any surprises with the E&P business and as we sit here today it's how the year is playing out.

Got it. Very helpful. And then on the pricing side for the E&P business, so coming into the year were you guys expecting to see much pricing erosion in that business or is that something that surprised you as we move through the year here?

No, I mean yes it has not surprised us Alex. Again as we said, it was about 6% or so in Q1, probably 10% to 15% in Q2, again while that sounds like a lot remember that that includes transportation as well as disposal. So, as fuel drops because crude drops your transportation component just naturally drops. So, it is a little more, it is not as weak as that sound, I guess what I would say. It is different than we price MSW C&D landfills were we price just disposals and if you were talking about a 6% to a 15% decline there, it implies that would be very substantial, but here we priced it including the transportation to most of our customers. So, you just have a natural increase or decrease in price as fuel changes.

Yes that’s very helpful on new ones there. Just last question from me on the recycling side, if I heard you correctly you said you were breakeven EBITDA, can you comment on what sort of normalized EBITDA in that business should be there is such thing and maybe just give us a perspective of what that EBITDA margin has been and the recycling business for you over time?

Well obviously it depends on commodity prices and I think what you are seeing is that Q1 with OCC at around $92 on average and obviously the other commodities that we handle generally bring the average price for all commodities handled at the facility, you know down into that mid-to-high 70s range at that kind of OCC price and given processing cost and given logistics to get the port that’s about a breakeven price point. So, the question would be the – the answer to your margin is really where do you see commodity prices going, if commodity prices rise 20% from here that probably puts that business back and they were around a 15% margin business. And you can just extrapolate the math from there.

Right thank you, very helpful. Thank you.

Thank you Alex.

Thank you. Our next question coming from line of Tyler Brown with Raymond James. Please proceed with your question.

Hi, good morning everyone.

Good morning.

Hi, Tyler.

Hey, Ron. So obviously I was curious to get your thoughts on maybe the solid waste by geographic region. So we’ve been talking with our housing team quite a bit and it sounds like that west coast to maybe even specifically coastal California is just pretty darn hot and I was just curious if that’s translating into your business, it seems like your western region is doing pretty well and if there is any opportunity to maybe coming better this year.

Well, I mean certainly and I think you heard it in our commentary, Tyler, west coast whether you look at it on roll off pulls or MSW volumes or special waste or C&D was our leading region in the quarter. And of course it’s our largest region in the company and it is our region that is 95% franchised or exclusive. So we have always said when that turns, it’s very beneficial to us because we get a 100% of the volume at a guaranteed price. So the incremental margins are certainly strong and stronger than our corporate average EBITDA margin. And so, yeah, that’s what part of what we are hoping for to club some of the E&P shortfall over the balance of this year. We are also seeing and hearing up and down the west coast really of residential construction for the first time in some areas since 2007, eight years or so in areas like Vancouver, Washington and areas outside of Tacoma and areas really all throughout Southern California and the Bay area. We don’t have a collection presence in Southern California where we have a disposal and that we do have a collection presence in the Bay area. The packet of weakness that remains on the west coast is the central valley of California sort of a baker’s field really through the Oregon border on the outside corridor and we have a decent presence there and that is I don’t know weak and close to Oregon remains a little weak. But most of the rest of the west coast, we’ve seen a strong improvement in over the last four to five months.

Yeah, that’s great color and perfect. And then Worthing I am just curious if we can work through fuel again for you guys. So I think in the past you guys have said, you burn let’s call it like 30 million gallons of fuel and maybe a third of that is hedged. So I think you guys have mentioned, you don’t have a lot of surcharge revenue. But how should we think about that 20 million gallons, if it’s off a buck, I mean is that largely flowing through for call it maybe three quarters of the year, what is the year-to-year impact there.

That’s about right. It’s about a 10-month to 7.5 month impact because you sort of anniversarying the declines we saw late last year. What we’ve assumed here in our numbers is about anywhere from $12 million to $14 million retention of those savings because you will see surcharges in some markets begin to roll back normally as we mentioned in the second half of this year. Q - Tyler Brown Okay, perfect. And then just maybe last I don’t really want to beat the E&P horse here but real quickly, how should we think about those earn-outs or contingent payments? So to my understanding, a lot of those deals were structured within earn-out. So I summarize given the conditions in the space that you will probably see maybe a reversal on the balance sheet from those, do you think that that provides a buffer this year or is that am I reading too much into that?

Well, number one, Tyler, only a few of our deals and they were really the ones done in the second half of last year as crude started to contract. So it refers two or three deals where there was some sort of earn out. Those earn outs are generally having measurement period of approximately year and a half to two years. And so they really shouldn’t per se a benefit in ’15 potentially unless it’s so clear that it can’t be made. It would probably be more of a benefit in ’16 or even into ’17.

But Tyler, any benefit from that we would call out and adjust out of our results because obviously that’s a non-cash one time item.

Yeah, perfect, okay. And then on the corporate expense though, there was nothing unusual this quarter. It just looked awfully low on the corporate expense side, there wasn’t a reversal there.

No, it’s really just – we increased the allocation of overhead to the field in couple of our regions. And so basically you saw embedded with the region, some of them went up 50 basis points in their absorption of allocated cost. That’s why you see almost all of the corporate or the costs being absorbed in the region versus having a stub amount at corporate.

Okay, perfect. Thank you.

Thank you. Our next question is coming from the line of Scott Levine with Imperial Capital. Please proceed with your question.

Hey, Good morning guys.

Good morning, Scott.

So I am really just curious for your take, you did this – in this new acquisition here on E&P waste obviously it’s been interested in growing this business, investing in it last few quarters. Curious for your updated thoughts on that including the potential, you are looking at the Northeast as an opportunity to expand that all or maybe a little bit more recall your thoughts there and plans for growth investment in that business in 2015, the current environment.

Yeah, let’s tackle the easier two first, Scott. I mean right now, we are not looking at anything in the E&P business in the north east, in the Marcellus or the Eureka. I mean the reality is as those are certainly urban for the most part plays or in proximity that are being placed. And they have a long life low cost MSW landfill up and down the i95 corridor for the most part, and then down obviously through Pennsylvania that can take these waste certainly and expensively. And if you look at such as waste management or republic, the fast vast majority of what they do in E&P is in that – is in Marcellus and the Utica really not anywhere else to speak up. Prior to distribute acquisition by republic, as far as our interest in the space, we see always got a tremendous assets right now in the remaining shale basins that are out there off of the east coast. We are going to look to continue to densify that asset position and [indiscernible] up in any area that we might feel there could be a little bit of an improvement in. I wouldn’t expect that to be a tremendous amount, but we have done and won in the first quarter. We are looking at some others and particularly if we can get those based on 40 hour crude, that reach the multiples if we get something out of 4% to 5% EBITDA margin on current run rate. As clued turns in and hopefully get back to $70 to $80 at some point, that will turn into a Q multiple. So we are – we know we will be looking at as that.

Yeah, that’s – the closer term opportunities for us from an investment standpoint. Periodically we’ve been talking about our chance to get a liquid disposal well in our domestic Permian operation because of the amount of money we are spending on third party water disposal of that facility and we’ve been working at couple of years now, trying to get that permitted we are getting close to when we hope we can do that. And obviously if we can do that, that maybe about $10, $11 investment under a three year payback given the cost when you can take out of the business. So we are continuing to update you on that on because that’s a certain yield of written given the return of internal cost.

Got it. Thank you. And as my follow-up I guess you mentioned in the press release and on this call, you obviously expect that a portion of the E&P downsize with upside in these other areas. I know you date formal guidance midyear, but maybe trying for little bit more detail or color in terms of either the proportion or whether it’s kind of equal part, solid waste, commodities and then you’re talking about a pretty nice outlook for M&A at $75 million in annual revenue this year, but maybe give a little bit more detail where the upside is coming from.

Yeah, we would never guide M&A that’s completed, so if you just focus on [indiscernible] ways and recycling trying to quantify that for instance. The solid waste, we are already guiding to 5% growth in Q2, that’s fairly strong number compared to anyone’s data that's being released. If you look at the balance of the year, move the needle 50 basis points is a big number, and that we are just a entering a half of your luck beyond Q2, 50 basis points over half of the year is only about $5 million or $6 million of incremental volume, you put a margin on that, you’re talking about $2 million to $3 million maybe of incremental EBITDA for basis points over half the year. You start looking at recycling commodities, if those come up 10% or 15%, you are looking at another $4 million or $5 million of incremental revenue at a high flow through. A long way of saying, if the headwind is $40 million of revenue, what we just talked about from a revenue standpoint is maybe we could offset 20% or 25% of that. If the EBITDA headwind is $30 million, what we just added up to is maybe 20% of that being offset. So you got to put the buckets in perspective and keep acquisitions out of the analysis. Yeah. And, Scott, again, remember, if we did, we are sitting here almost in May, if we did $50 million of acquired revenue over the balance of the year, that tells you $25 million would hit the P&L approximately saying it will and that’s assuming it was done by July 1. If it’s done after that, maybe an average of, let’s say, September, I’d just pick a point, then it’s going to be a number closer to $20 million – $15 million to $20 million hit the P&L…

$10 million to $12 million.

…in 2015.

$10 million to $12 million.

That’s correct. I’m sorry, I apologize. Hit the P&L and then you assume that those deals come on at somewhere around 25%, which is our typical history. You’re looking at $3 million to $5 million depending on the timing of EBIDTA that can impact this year. So, again, we are not going to be able to offset the dollar for dollar most likely unless there were some very large jobs or very large deals that we got done that was highly accretive. We don’t see that, but we will offset a portion of it.

Or other drivers in the business that we don’t control, obviously, the special waste could pickup above expectation second half of the year. The much discussed coal ash that we don’t put in our outlook. If coal ash where it start come into fruition in the second half of the year, you can see some contribution from that as well. But, again, let’s just wait till July and have a better insight looking to the business.

Got it. Thank you.

Thank you. Our next question is coming from the line of Michael Hoffman with Stifel. Please proceed with your question.

Thank you very much for taking my call. Ron and Worthing, on the free cash flow, just a kind of closed loop on that. Started the year with 26% of revs was cash flow from ops. I assume that walks up maybe a 0.5, most of that would be working capital to help hit this – stay in this target range 350 to 360?

Yeah, you got about a 30-basis-point to 50-basis-point walk up on that.

Okay. And then on solid waste, can we talk a little bit about some of the trends that we haven’t discussed yet. Frontend loader, the way PR [ph] trends have been improving to the second half of 2014, how is that looking coming into 2015 and how do you think about that service interval cycle, I’m assuming that’s not in the guidance either, so that’s another sort of opportunity for margin?

Yeah, I mean, I would say, certainly, some of that is in the guidance, Michael. I mean, again, the reality is, is that, to have 2% to 2.5% positive volume in a GDP environment that is running approximately that, you are certainly getting – you’re getting some benefit of that. Again, each of the last three quarters now, service increases over service decreases in our commercial system has expanded both in number of customers and dollar amount. So we are continuing to get that and we expect that continue. It’s not growing at an explosive pace, but it’s growing at a very steady and predictable pace. I think to get to, I’m just using this, 3% to 4% type volume growth that many would like to see, I mean we really need to get back to 1.5 million plus housing start number and that’s sort of the piece that we haven’t – not we, the whole industry hasn’t yet seen. But the commercial business is performing very, very strong right now with regard to service increases.

Okay. And then following that line of question. On the C&D pull trend, can you tell that whether there is a res versus non-res component to that and non-res hasn’t recovered yet, there is a little bit of activity in 2014, but that’s also another opportunities for non-res construction to come back?

Yeah, we can clear with that. And, certainly, if you look at it, all business is split not quite on – on the temporary roll off pulls, which is, I think, what you’re referring. Get on about 50-50 historically between res and non-res. And certainly, right now, the non-res is a little larger, it’s more like 60% to 65%. So there certainly is an opportunity for that to provide some acceleration if housing continues to pick up. We are seeing a pickup on our West Coast, specifically.

Okay. I just want to make sure I got the mix right. So the res part is 60%, 65% is of non-res?

No, no, inverse of that.

Okay.

Yeah, the non-res right now.

Okay. And so, that’s the other question I had on the res part. We did just under 1.1 million starts last year, within your guidance basically your assumption was it will be flat in starts year-over-year. So that sort of is the premise coming into the year and if it’s better --?

We thought there would be about 1 million. That’s correct.

Right. Okay. I mean the smarter people than me on housing think that’s going to be 1.2 million to 1.3 million. Are you starting to see that kind of level of activity beyond just the West Coast?

You know, I would say – we’d tell that the Midwest and the Southeast has been pretty strong throughout 2014 and 2015. I don’t think we’ve seen a possible change there. Where we are seeing the change is the West Coast for us.

Okay. And then on the recycling, has the congestion of the ports cleared, so that overhang is gone?

Virtually. It hasn’t completely cleared, but it certainly not – it is not a reason for a prize dislocation at this point in commodity. The turnaround times are such that that’s not causing any discounting.

All right. And then lastly on solid waste, price retention, given better volume trends, are we seeing just better overall price retention, you don’t have give us much back?

We are. Our price retention right now is hovering right around 89% to 90%, which is very good and sort of is indicative of – and by the way that’s in our competitive footprint. Our price retention in our exclusive is 100%. So, company together, it’s 95%. But that is indicative of a stronger economic environment. Wherein the competitive areas, you’re able to raise price without as much retribution from private haulers because they are getting organic growth in their business too. So, that overarching improvement in the economy helps the pricing environment without question.

Okay. And then one last question on E&P.

Let’s get the horse out of the glue factory, go on.

What’s that?

Let’s get the horse out of the glue factory.

Yeah, no, well, this one is slightly different. In your conversations with your customer, where do they think they are in successfully reducing cost of drilling, cost of completion, such that they can – the new normal now is 50 to 60 and they can make money and they will start doing business again. Where do they think they are in that process? Do you have any sense for that?

Yeah, we got those conversations. I will tell you we were with a couple of the larger drillers who would tell you that one year ago today their AFE [ph] for drill was $8 million to $8.5 million. They are saying that exact same AFE [ph] is between $4.8 million and $5.4 million. They were saying they need to knock another $200,000 to $500,000 out of that to give them, at current oil pricing, the same IRR they had at the $8 million to $8.5 million. So they think they are very close. Obviously, anything above this price, they are there.

Okay. And by all reckoning then their conservative bunch, they fight for that through the midyear and then maybe that’s the turn in the rig count? That’s the way to think about it?

I think that is a possibility assuming crude state where it is today or above.

Right. Okay. Thank you very much.

Thank you.

Thank you. Our next question is coming from the line of Charles Redding with BB&T Capital Markets. Please proceed with your question.

Hi, good morning, gentlemen. Thanks for taking my call.

Good morning.

Just a little bit of a follow-up here. If you could just drill down a little bit more on the stronger roll off activity, what were some of the really strength – some of the components of the business that were really strong in the quarter and then where do you kind of see that heading into the next quarter or two?

Yes, well overall roll up pulls were up 8% and they were up in all three of our regions. Price was up almost 3.5% per pull. We would expect the price component to stay relatively consistent. I would expect the incremental increase in pulls to stay relatively consistent, I mean I haven’t looked at last year’s Q2 to know what type of comp we are looking at yet, but the reality is the business was strong across the board. Different reasons in different places. In the Southeast we are seeing some recovery in some of the manufacturing, particularly the marine industry and of course the auto industry that we didn’t have as much of it in 2013 and 2014. In the mid-west despite the fact that the mid-west front, the Dakota is down through Oklahoma is in and around the strong shale plays we are still seeing 2% to 3% unemployment in those areas and I am just overarching strong construction commercially strip malls, restaurants, apartments etcetera. And then on the West Coast we are starting to see it in residentially housing, particularly in the Pacific Northwest and in parts of Northern and Southern California. So, a little bit different by geography, but all the geography is contributed to roll up pulls increase both temporary and our permanent industrial customers.

Okay great. And then I guess on special ways then it is also little on the tougher comp, but just stepping back, how you think about that business and is it possible to have any visibility in that business or is it simply illuminated a function of kind of how you are collecting?

Well I mean you do have some visibility on that business. You know we are monitoring or we monitor all permit pulls in the geographic areas in every one of our landfills that can handle special ways. We have estimates of the size of the projects and when those projects will begin and when they will end. Sometimes they are and then we know what you are awarded. So, based on those you can triangulate where special waste approximately will be. The only thing that causes a difference to that is that sometimes jobs get delayed in starting or they drag out longer than anticipated. So, any given 90 day period might be greater or less than you projected. And again the only reason that Q1 was down in special ways was just due to our central region and the factor was a very large storm clean-up where rivers flooded throughout parts of Colorado last year, and we were awarded several clean-up jobs in several markets because of our landfill network in Colorado. We just didn’t have that this year. That caused 13% decline in that region and that’s what led to the overall company being down. We don’t have that [indiscernible] in Q2. So I would expect special waste in Q2 to be flat to up not down.

That’s great. Thanks Ron.

Thank you. [Operator Instructions] Our next question coming from the line of Barbara Noverini with Morningstar, Inc. Please proceed with your question.

Hi, good morning everybody.

Good morning

Good morning.

You talked about this briefly in the last question, but I just want to revisit it, are you starting to see any report tracks in your central solid waste region as a result of E&P central weakness, you know I would expect that since that is the significant driver of the economic environment in that region. Specifically you might see a little bit pumping maybe into Q2 a little bit later in the year.

Yes, very good question. We are seeing some ripple effects of that Barbara, I mean the reality is that with the lay down in rigs in places in North Dakota and places like Colorado and Oklahoma you are seeing fairly substantial and in some cases job loss, half of those rigs and so you are seeing a little bit less commercial activity at restaurants. You are seeing a little bit less commercial activity at apartments and temporary lodging, but it’s really not affecting our residential business at all, it’s just a fairly agnominal effect right now on our commercial business in the central portion of the country.

Got it, that’s helpful. Thank you.

Thank you.

Thank you. Our next question coming from the line of Corey Greendale with First Analysis. Please proceed with your question.

Hi good morning.

Good morning Corey

Good morning.

Worthing you have me worried that I’m going to have the animal rights people after me, if I ask about the E&P waste business that you are [indiscernible].

You’re at your own risk then.

You are going to have them.

I think my chances are slightly, a couple of slightly different angles. First is actually Ron, maybe this is at a reach, but I know that historically you talked about one of, you are very focused on building and developing good talent at the company, is there any silver lining to the downturn in that maybe there is more good talent out there or more opportunities in the [indiscernible] area to accumulate either space or people based on E&P.

Well we don’t need any more space right now. So that’s a good think and in the Woodlands, despite the fact there is a lot of E&P business here, the commercial vacancies remain under 2%. So, the market is still very, very strong. Your [indiscernible] constantly focuses on making certain that we’ve got the best possible people we can and to be honest in the E&P niche specifically, yes this is an opportunity to do that. This is an opportunity for us to upgrade really at some levels as talent comes on the market end and we are looking at that. We have taken advantage of some of that recently such as on the sales side. So it’s not a needle moving opportunity but it all matters ultimately.

And secondly, on the regulatory environment with volumes being this weak, first of all, do you see any kind of slide back, people using open test and standard line landfills or do you think the weakness slows down any of the legislative or regulatory wheels that could be moving towards more forcing people to use line landfills?

Well, one thing you see to the extent that pricing comes down in those states that still allow pits, you see land filling being a lot more competitive for the cost of using pits. And so we do see some additional rigs moving into landfills and away from reserve pits. On the regulatory front, for instance, you saw in North Dakota, the first of what could be two initiatives to encourage more landfilling or just moving away from reserve pits. The first one that they did was a bill that recently passed to the extent that the waste stream goes into a recycle and reuse format which we have got a couple of technologies that could apply there. It’s more advantageous for the generator wave and that the liability chain gets cut, that’s one way the states try to induce additional moves away from reserve pits. And one that is still out there is there, North Dakota has considered doing basically a tax incentive in order to encourage the use of landfills. In other words to the extent that they could get folks out of reserve pits to basically the tax credit alone is equal to – almost equal to the cost of disposal. And so again we do see initiatives in states that are still allowing reserve pits to try to encourage folks to move away from them.

Great. Thank you. And let it be the horse is walking into the barn under his own power. Operator Thank you. Our next question is coming from the line of Adam Baumgarten with Macquarie. Please proceed with your question.

Hey, thanks for taking my question. Can you guys just touch on pricing you are seeing across different lines in commercial, industrial, and residential, what are the trends you are seeing there?

Yeah. They remain what our industrial is sort of encompassed in the roll off pricing that we gave out today. So that 3% to 4% range in our competitive market is a fair number. And I would show you that our commercial and our residential, we are seeing in our competitive markets 3% to 4%, in our exclusive markets both residential and commercial, we hit approximately the CPI on both those lines, there really isn’t as well as roll off in that piece of the business. And that is running for us probably between 18 and 22 in most part of the west coast. We’ve seen some as well as 14 to 16, we’ve seen others a little higher than 22, but really in line with our expectations so far and this year.

Great. Thank you.

Thank you. Our next question is coming from the line of Tony Bancroft with Gabelli. Please proceed with your question.

Good morning. Thanks for taking my questions.

Hi, Tony.

Hi, just I beat the horse one more time, just on the MLP front, if now that the PLR has been positive to fit and then maybe a rebound in 2016, what’s the interest potential there in doing that?

Again, the listing of the PLR issuances by the IRS had no impact on us because we already have our PLR. With regards to any MLP of that business, we’ve really stated from day one that, that business cost a $400 million or so in revenue scale. That’s a scale on amount of EBITDA and tax yielding that we would want to pursue that may make sense about to consider MLP, but clearly as kind of the low 200 run rate, we have ways to go. So we will see the pace of recovery in ’16 see what that’s add to growth and for that matter in the ’17 and continuously evaluate that.

Thanks.

Thank you. Our next question is a follow up question coming from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hi guys. Just real quick modeling question here, but what is the plan on the hedge fuel. I think that the expiration on that, that hedges in December. Do you guys expect to rehedge or do you just want to roll it off to the market?

Tyler, we constantly look at both hedging in the derivative market for fuel business and dislocation over the past four or five months as some of the indices that have traditionally been used meaning the DOE retail index has been dislocated from the downward movement of diesel. We are now starting to see that market losing up a bit and getting bids now for ’16 and ’17 on diesel. So we are evaluating that. We are also now the point in the year in 2015 that some of our distributors in local markets are now willing to price us for calendar ’16 for fuel locks and we have already started looking at doing some of those in the markets that we are able to do that.

Okay. So you would think of it like 10 million gallons coming down to somewhat close to spot. And I think are the hedges and locks around 360 or so?

That’s right but again if you are looking into ’16, the forward curve is not the spot. The forward curve against that 360 is probably somewhere around the deal, we resell somewhere down $0.40 to $0.45 on that hedge right now where you lock it today. And for those districts where we have fuel locks in place from a local distributor, this year those hedges are also looking somewhere in the down $0.80 or so to $0.60 range relative to how they were a lot this year. So there is some roll over savings on that as well.

I think it’s safe to assume a 30% to 40% of our fuel will be hedged most likely for 2016.

Okay, perfect. And then just real quickly, I know you got $175 million of notes, I think they are 6.625%, maybe coming off this year. Do you expect to just roll that off into the term loan or do you expect to refinance it?

We did our bank refinancing in January. We took the capacity of that facility up in anticipation of taking those notes into the revolver. I’m not saying we wouldn’t look to do a fixed rate note financing at some point if it make sense to lock lower rates longer-term, but right now the plan to finance is to put them in the revolver.

Alright. Thanks.

Thank you. Our next question is a follow-up question from the line of Michael Hoffman with Stifel. Please proceed with your question.

So I’m trying to avoid horse question since I own them. So let’s talk about solid waste. The drought in California, how big of a deal is that to the business?

Well, I mean, I guess the reality is we don’t exactly know yet, Michael. They have been in drought for three years. We don’t think it will impact any commercial, industrial, or retail businesses whatsoever. So the only impact really – and I think it’s an offsetting impact; the only impact is you are going to have less green waste residentially. That’s actually good for us because we are paid a flat rate fee and our cost will go down per home in disposable, in composting, in labor, et cetera, it’s very nominal. But then, again, so it will drive in customers at each of our California transfer stations where they will have less yard waste to dispose, but they pay a fair number for it. So I think they are probably offsetting. And there is nothing that any of our California locations have told us based on the drought that is going to push a negatively impacted business. The only negative potential impact out there is that we do have to have dusting and erosion control measures in place at our landfills. We have some large landfills in California. And it depends on what kind of restrictions they put on water usage there and what we could take out of our own wells versus what we don’t have to buy in the market or buy credits for. So we don’t think that is a big number, it’s a de minimis number. But we are very aware of the ins and outs of this in our P&L.

Okay. And then I have to slip an E&P question. The market share of outsourcing versus on-site is surprisingly low in North Dakota coming out of 2014. Has that started to shift [indiscernible] and therefore there is another play here, maybe you start to capture share because of the incremental outsourcing and that helps the story?

I would say outsourcing is actually up a little bit from year-end not because of the reason you think. The reason why it’s up a little bit is some of those rigs that we’re using as reverse pits have gone away. And so, the share of those rigs probably gone to landfills has necessarily gone up. So we are somewhere approaching that 55% to 60% outsourcing in the Bakken, up from about 50% at the year-end. The Bakken, right now, probably has close to 75% or so plus or minus rigs in the basin. So you are looking at potentially another 30 rigs to 35 rigs that are still using reserve pits at this amount of activity.

Okay, great. Thanks.

Thank you. Mr. Mittelstaedt, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

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 and Mary Anne Whitney are available today to answer any direct questions that 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 upcoming investor conferences or on our next earnings call. Thank you very much.

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participant and ask that you please disconnect you lines. Have a great day.