Waste Connections, Inc. (WCN) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Waste Connections' Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Ron Mittelstaedt, Chairman of the Board and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. And good morning. I'd like to welcome everyone to this conference call to discuss our second quarter 2015 results and provide a detailed outlook for the third quarter. I am joined this morning by Steve Bouck, our president; Darrell Chambliss, our COO; Worthing Jackman, our CFO, as well as several other members of our senior management team. As noted in our earnings release, strong solid waste organic growth and margin expansion, enabled us to once again meet or exceed the upper end of expectations for the quarter. Moreover, solid waste collection activity, disposal volumes and recycled commodity values improved through the period, providing good momentum into the second half of the year. Adjusted EBITDA margins within solid waste increased an impressive 180 basis points over the prior-year period, despite the year-over-year drag from lower recycled commodity volumes. We believe that given these trends, along with our expected continuing strong operating performance and with E&P waste activity playing out about as expected, we should meet or exceed the full year revenue and adjusted EBITDA expectations we updated in April. Free cash flow remains notably strong and a continuing hallmark of our differentiated strategy. Free cash flow in the first half of year was $220 million or over 21% of revenue. And we remain on track to deliver at least $350 million of free cash flow for the full year, despite increasing CapEx by $10 million to construct a newly-permitted disposal well in the New Mexico permian that we've discussed on previous calls. We're also as well positioned now as ever for any potential increase in acquisition activity or share repurchases. Our recently announced $500 million note offering will expand our available liquidity to more than $1 billion when it closes in mid-August. Before we get into much more detail 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, crude oil prices, recycled commodity values and E&P waste activity, expectations regarding period-to-period comparisons, the expected closing of our note offering, potential acquisition activity, the timing, cost and contribution of new facilities, a return of capital to stockholders and our third-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 risks and uncertainties are set forth in the company's periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10K and subsequent quarterly reports on form 10Q. Stockholders, potential investors and other participants are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this conference call and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. On the call, we will discuss non-GAAP measures, such as adjusted EBITDA, adjusted net income and adjusted net income per diluted share and free cash flow. Please refer to our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Ron.

Okay, thank you, Worthing. Solid waste price and volume growth, at 5.2%, exceeded the upper end of our expectations in the quarter. Compared sequentially to Q1, core pricing in the period increased slightly to 2.9%, with total pricing growth, net of surcharge reductions, flat at 2.8%, while volume growth increased 80 basis points to 2.4%. Volume growth as exceeded 2% in four of the last six quarters reflecting continuing economic improvement in our geographies. Solid waste collection revenue, net of acquisitions, increased about 4.5% in the second quarter, primarily due to higher commercial and roll-off collection activity. Commercial revenue increased 5% in the period, similar to the strength we saw in Q1. Roll-off revenue on a same-store basis grew 8% in Q2 broken down as follows. Pulls per day were up about 6% and revenue per pull increased 2%. Pulls per day increased in each of our three solid waste regions with increases of over 7% in each of our western and eastern regions and a 3% increase in our central region, for record rainfall negatively affected many markets. Solid waste landfill volumes on a tonnage basis increased 10% in the second quarter. MSW tons increased by 3% in the period. Special waste tonnage increased 24% and C&D tonnage increased 12%. Growth in our western region also outperformed with tonnage up 15%. Recycling revenue was $12.1 million in the second quarter, down about $2.3 million or 16% year over year, primarily due to lower recycled commodity values. Prices for OCC or old corrugated containers, averaged about $100 per ton during the second quarter down 17% from the year-ago period, but up 8% sequentially from Q1. OCC prices, currently, are around $110 per ton and we believe they could stabilize around this level or soften a bit given the quick 30% recovery off of their March lows. Regarding E&P waste activity, as noted earlier, E&P played out as expected in Q2. We reported $52.5 million of E&P waste revenue in the second quarter or the midpoint of our $50 million to $55 million outlook for the period. We, again, outperformed the macro, as same-store revenue decreased about 40% on a more than 50% decline in average rig count in the basins where our E&P operations are located. Volume on the same-store basis declined an average of about 25%. And average price per unit decreased almost 15% in the period, both consistent with our expectations. Our E&P waste business seemed to bounce along the bottom during the second quarter. For example, revenue per day increased from April to May. And a few rigs began mobilizing in the permian in late June after crude oil prices had stabilized around $60 per barrel during May and June. In addition, the U.S. rig count rose in early July for the first time this year, with many industry analysts at that point projecting a rig count increase of between 100 and 200 by year end. While these trends and predictions are encouraging, we remain somewhat cautious looking ahead given the almost 20% drop in crude oil prices since the end of June. U.S. rig count recently dipped again on this lower price per barrel, but rose again last week. As we've previously stated and saw in late June, we believe a sustained $60 plus price per barrel of crude is needed to see a broader increase in U.S. drilling activity. Perhaps projected declines in upcoming production data will reverse the recent negative trend in crude oil prices. As we look at the Q3, we expect revenue for E&P waste business to remain in the $50 million to $55 million range, consistent with the expectations we've provided in April. We're also pleased to announce that we have commenced drilling on a recently-permitted disposal well near our landfill in the New Mexico permian. This well which is expected to cost about $10 million and be online before year end, has an attractive pay back, as it will both enable us to avoid between $3 million and $4 million per year of water disposal costs at third-party sites and position us for additional growth. Regarding capital deployment for the year, we remain on track to acquire about $75 million of annualized revenue and repurchase between 2% and 3% of outstanding shares. With the expected closing of our note financing in mid-August, we have also pre-positioned our balance sheet with more than $1 billion of available liquidity for any opportunistic increases in acquisition activity or return of capital to stockholders. Now I would like to pass the call to Worthing to review more in depth the final highlights of second quarter to provide you a detailed outlook for Q3. I will wrap up before we head into Q&A.

Thank you, Ron. In the second quarter, revenue was $531.3 million or slightly above our outlook for the period, due to strength in solid waste. In Q2 adjusted EBITDA, as reconciled in our earnings release, was $177.7 million or 33.4% of revenue. We estimate that adjusted EBITDA margins within our solid waste business expanded about 180 basis points year over year. While margins in our E&P waste business declined about 1500 basis points on a same-store basis and an additional 700 basis points from both the dilutive impact of lower margin acquisitions and new facility costs. Margins within solid waste expanded 60 basis points when excluding the benefit of lower fuel prices which contributed 120 basis points to our margin expansion. We break out these contributing factors, because we don't believe it's right to try to take operational credit for something we don't control such as the price of fuel. Fuel expense in Q2 was about 4.55% of revenue and we averaged approximately $2.98 per gallon for diesel which was down about $0.59 per gallon from the year-ago period, but up $0.03 per gallon sequentially from Q1. Looking at the consolidated P&L, the following is certain line items that moved a notable amount the second quarter from the year-ago period as a percentage of revenue. Brokerage and railed rate costs increased 75 basis points on higher intermodal activity. Repair and maintenance cost increased 65 basis points. Labor and supervisory expense increased 50 basis points. Third-party disposal and transfer cost increased 45 basis points. Fuel expense decreased 95 basis points and risk management insurance expense decreased 35 basis points. Many of the increases, as a percentage of revenue, were either magnified or due in part to the decline in higher margin E&P waste activity. For example, looking just at certain line items within solid waste as a percentage of revenue, risk management insurance expense decreased 45 basis points. Wages within SG&A declined 20 basis points. Labor and supervisory expense declined 15 basis points and bad debt was down 10 basis points. Depreciation and amortization expenses for the second quarter were 12.6% of revenue, up 40 basis points year over year, due primarily to the impact of higher depreciation expense on a top line negatively affected by lower E&P waste activity. Had E&P revenue been flat year over year, D&A expense as a percentage of revenue would have declined compared to the prior year. Interest expense in the quarter decreased $600,000 over the prior-year period to $15.3 million, primarily due to reduced borrowing costs on our outstanding bank facilities. Our effective tax rate for the second quarter was 39.2%, similar to the prior-year period. GAAP and adjusted net income per diluted share were $0.46 and $0.50 respectively. Adjusted net income includes among other items, the amortization of acquisition-related intangibles. Debt outstanding at quarter end was about $1.93 billion. And our leverage ratio, as defined in our credit facility, was approximately 2.6 times debt to adjusted EBITDA. I will now review our outlook for the third quarter. Before I do, we would like to remind everyone, once again, that actual results may very significantly be 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 and economic operating environment and it excludes the impact of any acquisitions that may close during the period and expensing of any acquisition-related transaction cost. Revenue in the third quarter is estimated to be between $545 million and $550 million. Solid waste pricing and volume growth on a combined basis is estimated to be about 5% in Q3. Recycling, intermodal and other growth is expected to be about 1%, as increases in intermodal activity should more than offset any declines in recycling revenue. Revenue from E&P waste activity is expected to be similar to the prior quarter, between $50 million and $55 million. Adjusted EBITDA for Q3 is estimated to be about 34% of revenue. Margin expansion within our solid waste operations is expected, again, to be more than offset by high decremental, associated with lower E&P waste activity and, to a lesser extent, the impact of the lower-margin shale gas services acquisition. Depreciation and amortization expense in the third quarter is estimated to be about 12.5% of revenue. Amortization of intangibles in the quarter is estimated to be about $7.2 million or almost $0.04 per diluted share. Operating income for the third quarter is estimated to be about 21.5% of revenue. Interest expense in Q3 is estimated to be about $16.5 million. The sequential increase over the prior quarter is due to the $500 million note offering set to close in mid-August. Our effective tax rate in Q3 is estimated to be about 39.2%. Non-controlling interest is expected to reduce net income by about $250,000 in the third quarter. And finally, it's once again important to note that on an earnings-per-share basis we estimate the year-over-year decline in our E&P waste business to be about a $0.09 to $0.10 drag to reported results in the third quarter, when compared to the prior-year period, fully masking revenue, margin and earnings growth within our solid waste business. Now let me turn the call back over to Ron for some final remarks before Q&A.

Okay, thank you, Worthing. Again, we're pleased with our results in the quarter and strong performance within the solid waste continues to differentiate us, while E&P waste activity is performing about as expected given the low price of crude. Solid waste revenue and margin trends improved throughout the second quarter, providing good momentum into the remainder of the year. This operating strength combined about our outlook for Q3 puts us on track to report approximately $2.11 billion and $705 million of revenue and adjusted EBITDA in 2015, enabling us to meet or exceed our full-year expectations we updated in April and we remain on track to deliver at least $350 million of free cash flow for the full year. We appreciate your time today. I will now turn the call over to the operator to open up the lines for your questions. Operator?

[Operator Instructions]. And our first question comes from Tyler Brown with Raymond James. Please proceed with your question.

So we were doing some leisurely reading of the queue this morning. I just noticed that you added another call at 500,000 gallons a month to your hedging program through 2017. Just on my map you have got, call it about 95.5 million gallons annually hedged at this point. Is that about 30% of your usage? And then, what is your expectations for hedging going forward? Do you expect to do more?

Well, I'm impressed that you were able to stay away after going through the queue. No, you are right on the hedge side. Between derivatives as well as local locks, we have got about a third of our 30-million-gallon annual usage locked through 2017. Some of the locks we already have in place already reduce year-over-year fuel cost by about $5 million because we've got some above-market hedges this year that roll off at the end of this year to get replaced by the lower-priced ones. Our target, overall, probably will take us to about 40% of our targeted usage once we fully work through our lock programs.

And the difference between the 330 you’re getting on the hedge and, I guess, if you call it [indiscernible] diesel of $3, it's just the normal backwardation of the curve? Is that what it is?

It's also the market pricing, the hedge pricing at the time the hedge was done. We have a $3.60 hedge that is rolling off this year, now to get replaced by the $3.30 hedge next two years.

Ron, when I think about your business, I think of you guys as maybe 50% in the open market. You've got 30% in CPI, maybe 20% in regulated markets. So if we just assume that open-market pricing holds and you assume that CPI just continues to print where it is and then I guess the regulated market might step down next year -- do you guys think that your pricing metrics might actually slightly slow in 2016?

No, we don't. As we sit here today, we think pricing will be flat to possibly up next year. We're not really hearing any area where our regulated market or our franchise market should be backwards year over year at this point. It is a local CPI index and there are some local markets on the West Coast that could be backwards nominally. But in the scheme of things, I would expect pricing to be roughly flat, possibly up.

And on the regulated piece of the book, so western segment EBITDA was doing very well out there. And I know those markets are kind of return on capital base and they probably don't have any fuel surcharge basically built into them. I assume they're doing very well. Is that a situation where the pricing maybe does slow as a result of just better EBITDA? Or how does that dynamic work in the regulated piece?

Well, I mean again, as you look at our regulated business and we have that in multiple states in the west, at any given time we might be looking in any given year at between a third and maybe a quarter that's actually up for some sort of pricing review. So you start with that dynamic. As we get very strong volume growth which we're having, it certainly tends to push the pricing out some because the returns improve. Obviously because of the great density and getting 100% of the growth at a guaranteed price. So that dynamic can come into play where it pushes it out some. I will tell you at the type of volume growth that we're getting on the west which in many areas is north of 4% in some of our regulated markets, I would take the volume trade-off, price trade-off all day long that we're getting right now relative to sort of what we have had the last five to six years which might be a slightly higher pricing, but a 0% to a 2% type volume growth. So it's a little bit hard to pinpoint exactly because we would have to be predicting volume continuation growth as well, but overall, you've got to remember that we only are probably looking at between 20% and 35% in any given year of our regulated markets up for a review anyway.

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

I just want to focus on two areas first. I guess the west coast in particular. The tonnage overall was pretty high and then special and C&D continued to clip along. Is that a weight number or absolute volume and tons? What's the strength there? And is there, certainly some special waste that's coming through? What's the duration on that?

Obviously, Al, special waste is a project-by-project tonnage. It is weighed tonnage with regards to what's crossing the scales into the landfills. But again when you see that kind of pop in special waste, a lot of those are just contaminated soil jobs which are low-price jobs, as you know, to replace a cost we would otherwise incur to provide daily cover for our landfills. So this is a lower revenue per ton, a lot lower EBIT per ton because of the depletion associated with that. Because it does go into the depletion calculations at landfills. So it is a larger number, but, again, these are project-by-project items that typically you do see strength in the second and third quarter with regards to special waste. I wouldn't predict a continuation at 24% for Q3. But know the weight, it's going through the P&L. It's not as impactful as the percentage growth would lead you to think.

The MSW side was positive at 3%, I think is what the comment was. I thought the economy was not doing so well on the West Coast, but that would indicate a fair amount of consumption.

Al, don't let the market rate get you down.

It was also, Al, actually on the west coast, it was closer to 7%, so the total MSW was 3%, but the west coast was actually higher. So we have been having tremendous strength on the west coast. Again, coming off of a much lower base, but very strong housing starts in markets throughout southern Washington, northern Washington, north-central California, markets that we have not seen in a while have much housing construction finally happening.

And then just to touch base on E&P, certainly I appreciate the color. I guess the question would be, why not get more aggressive here if theoretically your EBITDA margins are about the same in both businesses which says a lot about your solid waste side. But in a pretty poor performing E&P market, is there a need to get more aggressive or is it more a function of, strategically, you are comfortable with where you are at and don't need to add in either existing markets or other basins, given that there's probably going to be some further carnage for existing players?

Yes and Al, just so I'm clear, you mean get more aggressive with regard to M&A opportunities in E&P? Or get more aggressive with regard to pursuit of more volumes with price in E&P?

Well, I guess a little of both. On the first part, I can understand why you want to be patient on the M&A side. But second, I guess the underlying dynamic is, is it really more the larger players are going to be generating waste and you are comfortable with where your customer relationships are there? And therefore over time, you feel like you will get more than your fair share of volume?

Yes. With regard to the M&A side, I think you said it accurately. Look, we're certainly taking a look at some M&A opportunities in the E&P space. Obviously, we're going to value those on a $40 to $50 crude basis and at a multiple that offers a very strong return. But for the most part, we're very comfortable with our asset mix within our E&P business. We take a look at that business as what little bolt-on pieces might we need on a specific basin and we're continuing to look at that. We've done some of that this year and in the fourth quarter of last year. With regard to pursuit of additional volumes, we're pursuing additional volumes. To stay at where we're, you saw our commentary that price was down as much as 15%. Volumes were down 25%. Remember, volumes in some of our basins at some places, such as the Bakken, are down as much as 70% at places within the Bakken. So for us only to be down, aggregately, 25%, that is coming at utilizing some price in some of the basins. So I think we're always looking consistently at the dynamic situation of, where is the line between incremental, price, volume trade-off. And that line moves as transportations costs change because of fuel costs. But then, you know there is a price at which we just can't get more volume because of distance that we might be from rigs that happen to be operating right now. So that is really what our group does on a day-in-day-out basis is try to maximize that volume into each site with the price trade-off and the transportation logistics.

Yes and Al, as you know, it's all about asset positioning in these basins. As Ron said, you look at the Bakken, you could have a location off upwards of 70%-plus in volume, but in aggregate our locations in the Bakken were off a combined 20% in volume. So while one location could be off high, your asset positioning in the basin really determines your total change or flux in that basin. And we're very pleased with the asset positioning we have got across all of our basins.

And I think, to that point that's why we're down in a volume basis, volume in total virtually only half what the drilling rig count and volume reduction is in E&P in total.

And the last thing I would add on E&P, I guess it's not unexpected to see people want to get valued off of what they did last year. But as you have seen with some other people -- we'll see with some other folks that report after us in that space -- it's a pretty quick switch that those guys flip to go from positive EBITDA to flat to negative. So you have to be very cautious as you play this things out and let those guys just do.

Our next question comes from Corey Greendale with First Analysis. Please proceed with your question.

A couple of clarifications and you may have somewhat already answered these points. On the E&P price, can you just talk about the trend in the quarter? And does the guidance assume that similar down 15% on price?

Overall, on the same-store basis, we're assuming down 40% to 45% in Q3 because obviously you saw a sequential increase Q2 to Q3 last year. So it's our hardest comp in the prior-year period. The break-out is, again, plus or minus 5%, around what we saw in Q2. So volume would be down some 25% to 30% and price would be down some 15%, plus or minus.

Okay and another clarification, I think you probably said this. But just being clear, the guidance assumes the interest expense from the note offering, but you are not assuming any contribution from deploying the proceeds of that offering? Is that right?

That's correct.

Okay. And then next question, not to dig too deeply into a 10-basis-point move, but it is relatively unusual for your core price growth ex surcharges to move up sequentially as the year goes on, just because the denominator grows each quarter. So that would signal, to me anyway, that you did something actively to get it to increase in Q2 from Q1. So can you just address, was there anything you went out with to the street on price in Q2?

Again, as you know every market might have a little different timing as to when it's implementing its price increases in the current year. A couple of markets, rather than implementing them earlier in the year, delayed the price increases a couple of months. And you saw it slip into Q2. Obviously, you also have the timing of any [indiscernible] of prior-year price increases that may roll off period to period. So it's a mixture of things. Again, as we look ahead, I wouldn't be surprised to see price decline sequentially to 2.4 plus or minus in Q3, much like you typically see in us. We peak as a percentage in Q1, because that's the lowest denominator from a comparison standpoint. And then it reduces as you move through the year, given a higher denominator is on a fixed-dollar increase. So I wouldn't read anything, the sequential increase Q1 to Q2. Same thing, I wouldn't read much into the sequential decrease Q2 to Q3.

Okay and then just one last quick one. I know you're not giving 2016 guidance, but Ron, since you opined on price, as we look at volume, just the way the economy is trending, is it fair to say that similar volume growth in 2016 as 2015, all else equal? And should we look at relative comps in each quarter? So from where we stand now, you probably have better volume in Q1 of 2016 than in Q2 just given the [indiscernible] comp in Q2?

You’re right. It's too early to get that granular in 2016. But as you know, every year that we go into after coming off a year of such high volume growth like we have this year, much like going into this year, we get very cautious early in the year. And we go out around 1% to 1.5% volume growth and then let improvements during the year validate a 1.5% to 2% or better. So you're right. It is too early to tell, but this has really been a year where volumes have, once again, impressed to the upside. Much like coming off of 2014 and we were cautious looking at 2015. And again, 2015 is outperforming on the volume side. I'm sure we would have the same approach early next year coming off such a strong year this year.

Yes, we certainly are not seeing anything economically that is different as we sit here using today as a point looking forward into 2016. There's nothing that has changed negatively. Certainly, most things that we're seeing are positive. So I would tell you that barring some other change, things should be approximately the same as this year, if not possibly a little better.

Scott Levine, Imperial Capital.

So I just want to follow up on the note offering and the thought process there. I know you guys have done proactive financings in the past. You are still guiding to, I think, the same amount of acquisition activity and your leverage is toward the lower end of the recent range. Is there something you see in the marketplace causing that or is this just taking advantage of rates or just normal cost, of course, of business and just general good practice around financing? Maybe a little bit more color regarding the thought process behind the note issue? And maybe a little bit more clarity regarding the M&A pipe line and when we might be able to see closings, what you are seeing out there from sellers, et cetera?

I'll take the first part with regard to the financing. Look, it's an opportunistic time to get into the market and locked up long-term money. We're able to get into the market and price 10-year notes through the trading levels of waste and republic. We thought that was a great execution on our side. What it also does is it takes the higher cost, long-term financing kind of risks off the table and embeds that higher interest expense within our base business. Such that, when we do acquisitions going forward, they become highly accretive. Not only an EPS side, but also on a free cash flow side because our incremental borrowing cost right now is sub 1.5%. And so we're really setting ourselves up for exponential contribution if transactions close or as we deploy excess capital.

On the M&A front, Scott, to your question, number one, there's not a large singular transaction that we did this financing for that we're pre-positioning our balance sheet. We have done that in the past, as you have made comment to, when there was a very specific singular transaction ahead of us. That is not the case as we sit here right now. But having said that, I would say that we probably have as many LOIs outstanding in various stages of negotiation between executed and in due diligence to offered and awaiting counter offers, than we have had in probably at least the 2.5 to 3 years, particularly on the solid waste side. We just know mathematically and with our history that with the magnitude of the LOIs that we have outstanding -- even though the M&A environment is a tougher environment for a whole variety of reasons right now, higher tax rates, low interest rates for sellers to deploy their after-tax proceeds in, higher multiples by some buyers. Despite all those things, we know when we have this magnitude of LOIs out, we're going to get our share of deals. And that's why we reiterated that we think it will be a relatively normal year at around $75 million in acquired revenue. I think we have already done about $30 million to $35 million so far, year to date. So that is what I can tell you. A lot of things that are up in the air right now -- we're very active, we've made a lot of offers. And just based on our history, we know what we'll be able to get done, but that really has no -- we could have done that with our existing cash flow and our existing credit facility. The financing was a separate issue in and of itself which, as we said positions us to take advantage of something we might not see today that will come along, much as, for example, our [indiscernible] did when it came along three years ago. And fortunately, our balance sheet was positioned to take advantage of that. So that is really the answer to that.

And then as a follow-up, not to beat the volume horse to death here, but it did look like that explicitly was the driver of the upside in the quarter on the EBITDA. And just maybe a little bit more specifics around was the upside from special waste? Or was it from the core business? Any additional clarity, so we can get a sense of how sustainable, call it this up trend in volume might be as we move into the back half of the year?

Yes, one thing I would say about volume, what you note, I think on this call and the calls last week, with both waste and republic, that no one has identified weather as an issue impacting volume. While you had some minor roll-off impacts in a handful of markets, we've got weather in Wichita, Oklahoma city, Memphis, Houston, etcetera. When you really see that kind of action in the P&L, volumes sold is what's contributing to the exceptional number, as price obviously stayed where it was. But you look at through the P&L, while weather could have a minor impact on revenue, really the strength of the P&L through EBITDA was there in all four of those markets throughout the period. So the outperformance is really a little bit more on the landfill side. We're not calling out weather as any influence and I think you saw other people do that as well.

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

On the volume side on special waste, do you get a sense of, if you're looking at where it's coming from, there is a non-res piece happening, as well as the res piece?

Michael, we had decent special waste on the west coast, up and down the west coast. And quite honestly, most of the special waste on the west coast that we have is non-res. It is mostly infrastructure projects of one form or another, be they road, be they tunnel or be they river dredge cleanup. So they tend to be infrastructure or clean-up remediation oriented. Part of that is non-res; part of this is, obviously environmental compliance.

So I realize that this is a Ouija-board question, but housing, first, it took forever to come back. Now it has come back, it seems like it's a long and shallow recovery. Would you think about the non-res having the same characteristics when you look at the trends running through the business at the moment? That it will belong and shallow?

Yes. I mean, I think that's an accurate statement, certainly, on housing. Although, I do think it's accelerating in certain places quicker recently than expected. And in some areas very frothy to be honest, especially when you look at places like the Bay area or parts of southern California or Portland/Vancouver area as examples. But on the non-res, I do think that will be long and shallow. Again, if you look at our West Coast and you look at areas like the central valley, you still have commercial vacancies that are running 25% to 35% in those markets. That's a lot that still needs to get sucked up in order for speculative development to happen there commercially and for retail, etcetera. I think the good news is, is even with those types of vacancies, you are having the type of performance that we're having. So as that improves, it should be an additional leg.

Okay. And then, when you talk about MSW trends in the landfill and if we did it by region and you said, okay, so west coast is seven and the other parts must be less to blend to three, is your own commercial front-end loader volumes tracking about the same pace as the third party commercial into your landfill?

Yes. Approximately, our commercial was up about 5%. I think we noted that in the call notes or call transcript. Excuse me. And we would say that is about the same. Again, it's different by local market, obviously, but yes, that's a fair assessment.

So underlying that, it seems that the consumer in the U.S. has found some level of purchasing behavior that's triggering a sustainable low-level growth. You don't see anything getting in the way of that? A 2% to 3% GDB [ph] kind of holds that pace.

We're not economists, obviously. We've got into trouble trying to do that before. Although, our guess is as good as any one we have heard.

Generally better. I think they just--

Well, I don't know, but yes, we do not see anything right now getting in the way of things continuing as is, Michael. If that's a 2% to 3% type TDP environment. I think the consumer seems certainly better today than we have seen in the last several years.

Okay. And then with regards to thinking of the second half and I appreciate your comment about the fuel. I want to make sure I understood it. Up 180 basis points, approximately, in solid waste. Of that 180 basis points, 120 basis points is fuel, so 60 basis points is you ran the business better. Is that the right way to read?

Right.

So the 60 basis points should hold all the way through and then the fuel begins to lap itself as I work my way around the year?

Right. If you look at Q3, fuel is probably 90 basis points to 100 basis points versus the 120 basis points we saw in Q2 and the 140 basis points we saw in Q1. So the benefit from fuels and solid waste starts to decrease sequentially Q2 to Q3. And then it gets less than that in Q4. But again, somewhere in that 40-basis-point to 60-basis-point ex-fuel range should hold for the balance of the year.

You have got to remember, Michael, the decremental impact of the E&P contraction being our guidance of 50 to 55 becomes the greater -- the greatest drag we will have is Q3.

And so, high level, if I looked at where -- forward, because I have to forecast forward. Thinking about solid waste being all-in organic growth four to five is the right way to think going into 2016 kind of 34 to 34.5 margins. E&P, assume it's flat and if anything is better, great, but that's the way to think about it at the moment?

Well, that's the way you just thought about it.

Well, I'm trying to lead you -- getting you to the water trough.

We're, obviously not sitting here providing any guidance, Michael. But I think, as we sit today, assuming commodities are flat, assuming intermodal is flat to up. And there's not something we're not thinking about. I think 2.5%, approximate price, to 3%, could be up 1.5 to 2. Volume, you get in that 4% to 5% range on solid waste that you said. There is certainly not a reason that I think solid waste margins would be down. We do get an incremental fuel roll-over benefit from price. You get margin expansion if your costs are staying at 3% which they should be. So I think you are thinking about it, as I just sit here and think about how we look at the business, correctly.

Okay. And then New Mexico, you should be done that this year, so I see the benefit next year?

Assuming it works.

Yes. It will work.

Just take the suspended solids out of the liquids before you push it in there.

When you push this out 18,000 feet, anything can happen, but you're right. If it's up and running before year end, you will see that $3 million to $4 million which by the way, in that business alone is 150-basis-point to 200-basis-point margin improvement in and of itself.

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

So your decremental E&P margin was a little bit greater than what we were looking for. Can you just talk to a couple things? One, what drove such a high decremental? Whether it cost bleed or negative mix? And then two, I think I heard you earlier, Ron, you updated revenue trajectory for E&P. Can you just give us a feel for margin expectations for E&P that is baked into your guidance?

Yes, I'll start and then, Ron, you can jump in. When you look at decrementals year over year, it's not just looking at on a same-store, but also looking at the fact that we've got that many more facilities open than we had last year. And so we have got all the incremental costs associated with those facilities that magnifies the decrementals in a year-over-year decline market. If you look at the E&P waste business right now, if you look at 34% is what we guided for Q3 on an aggregate basis, E&P is running slightly above that, with solid waste running slightly below that. And so you get the 34% in the aggregate.

Just on the commercial side, I think I heard you earlier, you said that revenues were up 5%. Have you hit the inflection point in the this business where you are seeing the incremental margins flow in over 50%? Or are you at the point where there's still a little bit of a drag because not everybody has gone out and added service or upped their can size and there's still a bit of a disposal cost drag?

I'll start with that because I think every market is a little bit different. And then, Ron, jump in. In some markets we're actually at a point where we're putting more capacity in place because of the volume growth on the hauling side. And so by adding excess capacity, the initial wave of excess capacity comes in, not at the 50% contribution you are looking at. But it comes in at a lower incremental because you have to go, then, go out and optimize those routes and fill up the trucks. And so in some markets we've already kind of gone through that 40% to 50% incremental. And now we're pushing into the additional growth capacity which, again, initially will come in at some lower margins until you then see those incrementals ramp.

Yes. Joe, I concur with everything Worthing said. I would say, it's a good problem to have.

Exactly.

It's a good problem to have. And I would say that 50% incremental margins is possible in the commercial sector, but, obviously, that's a market-by-market issue. There are some markets we actually get greater than that contribution. There are some that it's obviously less than that. But I would tell you that we're getting margin accretion from the 5% growth that we're having in our commercial business, despite incremental capital and expense being added due to routes needing to be added back into the system because of growth which, again, is a good problem in our mind.

Right. So some growth pains here, but, ultimately, still margin expansion in this business.

Yes.

Worthing, just a technical question for you here. I know you called out in your release that you still expect to buy back about 2% to 3% of your shares outstanding and the share count was up in the quarter. Should we actually bake in the buybacks since you are giving a specific number over the next two quarters? Or how do you recommend we look at that in the model?

Yes, the challenge with baking it in which I would never recommend, is one around timing. Because you look, for instance, at the almost 0.5 million shares we bought back in Q1, that was done early in the period. And so you saw the benefit in the share count in Q1 outfit rolled into Q2. Q2, the timing was very late in the quarter and so you didn't see impact in Q2. But that benefit rolls into Q3. And so right now in Q3, we're probably staring at about 124 million shares outstanding before any additional buybacks. So given the difficulty of predicting the timing, I would always recommended you keep it out. Let us get the shares bought back and then we'll know the timing definitively and then we can bake it into the share count.

Our next question comes from Alex Ovshey with Goldman Sachs. Please proceed with your question.

A couple of one's for you. Just on the acquisition side in solid waste, do you see any potential transformative opportunities out there for you where you can [indiscernible] more revenue than the typical, call it, $75 million that you do year in, year out?

Alex, there are always a couple at any given time of potentially transformative deals. But what I would tell you is that our history is that those are really things that we're very disciplined on and often not the buyer of. And we would, certainly, never advise you or any shareholder to own us due to potential transformative deals. I'm not saying they won't happen, but I would always let them be significant upside. So, hopefully a way to tell you is they're there, but I would not look at us as a likely buyer of any of them.

And then just a couple of housekeeping items. What is your CapEx number for 2015?

It's about $210 million.

And that would be up $10 million versus what you would have said on the last call, given the New Mexico--

Initially, we guided between $200 million and $210 million and we're just affirming the upper end of that based on the increased--

We were running about $190 million to $200 million and we added the $10 million for this well in the New Mexico permian at our landfill that we outlined today. So that's how it moved from $200 million to $210 million at the upper end.

And then on cash flow, can you just talk about some of the key cash items that are going to flow through this year? Just working capital, cash taxes, what that looks like for you?

Yes, we went into the year with about an $8 million tax overpayment position. And so you've seen cash taxes benefit from that $8 million. You have also seen E&P release some working capital because of the decline in the top line. And so that's probably contributed $10 million to $15 million of incremental cash flow, as well. So you put those together and you have got, I'm just going to round, $20 million to $25 million of incremental working capital that we benefited from this year, as those two things move through the cash flow statement.

Just a quick one on E&P. In the first quarter of 2015, that business didn't really see any volume or revenue erosion. If we assume that nothing changes in the current environment, thinking about the first quarter of 2016, is it going to be in that $50 million to $55 million range or could it be closer to what you reported in the first quarter of 2015?

Well, again the strength in the first quarter of 2015 was really kind of the hang-over from all the activity and momentum coming out of last year. And so then, you saw the precipitous drop in rig count once all those committed rigs and leases, et cetera had worked their way through. And so you saw the step function drop between Q1 and Q2 and so there was nothing seasonal about Q1. It was just the hang-over from last year. And so if we stay in that $50 million to $55 million range sequentially and move that through, if that happens in Q1 next year, well, then you've got a $15 million to $20 million revenue headwind as the last headwind quarter for E&P before the anniversary, kind of the [indiscernible] state of 2014.

And just one last one and I'll turn it over. So the rig count is going to be down a very massive number and so we can, certainly, see some sort of uptick in the rig count 2016. How do we think about the E&P business to the upside whenever the rig count does start to improve? It materially is going to outperform in the declining rig-count environment as the rig count starts to improve? How do you see the leverage in the E&P business without the rig count?

I think the rig count estimates and the timing and the amount of increase is always in question. Again, three months ago people expected up to 200 rigs to be added in the second half of this year and have a pretty strong exit ramp this year which would have meant you would have seen us exit at a number probably higher than that $50 million to $55 million per quarter in Q4, but that's not what people currently predict. And so the pace of the increase, if that gets pushed into 2016, depends on when that increase materializes. If it does materialize around the middle of year, then we should be able to offset the revenue headwind in Q1 by some higher exit ramp in the second half of the year. But I think predicting the pace and the timing of the increase in rig count is difficult. I mean, you saw a 19 rig-count increase last week after a little dip the prior week, after two weeks of increases. But while it does feel like it's bouncing along the bottom, to try to sit here today and predict the timing of that kind of magnitude of increase is difficult. But again, as revenue comes back in the system you will see that come through at high incrementals, as any landfill-based business has.

Yes. I would said, Alex, that, again, we're not in the business of predicting the pace of the rig count. But if you just look at the decrementals that we have taken throughout this year, on the downside you can expect, at least, the incremental to be equal, if not greater because we have taken some cost out of this system both in head count and other costs such as water costs, along the way and start-up costs. So I would tell you that 65% to 75% incrementals are very realistic.

And it may see higher than that early on--

Correct.

But when we start bringing more costs back in the system which would then lower the incrementals to somewhere in that 60% to 70%, but you are likely see higher than that 70% initially.

Yes.

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

Can you talk about the trends you are seeing in commercial from a net-new-business formation perspective? And if that's driving any of the strengths you are seeing?

Yes. I mean, Adam, the net-new-business formation has improved each of the last six quarters relative to closed businesses. That gap, if you go back just six quarters go, closed businesses were still out-pacing new business formation. That reversed itself six quarters ago. And so all of, certainly all of 2014 and the first two quarters of 2015 net new businesses outpaced closed. And it has outpaced it by an ever-increasing margin. So we're seeing that. That is, obviously, very helpful in the system. Obviously, it depends where that comes in. If it comes in more on the west coast where we get it with no associated SG&A cost and at a guaranteed weight, it is even more accretive. And that happens to be where we're getting more right now. So it, certainly, is a driver of things.

And then just, my last one, just to clarify, the step-up in intermodal that you saw in 2015? That should continue into 2016, right?

Yes. The roll-over effect of the step-you would be there, barring any other sea change in that business. That step-up was due to some port changes on the west coast that positively affected our business and some new customers through those port changes that we entered into contracts with. Those are multiyear contracts and expected to be multi-year port changes. So there's no reason to expect that would decline.

Our next question comes from Barbara Noverini with Morningstar. Please proceed with your question.

Pricing in E&P has, obviously, come down very quickly due to the volume drop off. But in a recovering environment, do you have the ability to raise prices just as fast? Or will you be faced with contractual obligations that lock you into weaker-than-average pricing for a little while, even as the environment improves?

The short answer is that the E&P pricing, unlike the solid waste pricing is more of a spot pricing and not a long-term contractual. So while pricing has come down, in a contracting environment to retain volumes and improve volumes where the opportunity exists, pricing will increase as volumes increase and should go back to where it was pre-contraction, assuming the volume goes back to it on a basin-by-basin process.

And we’ve a follow-up question from Tyler Brown with Raymond James. Please proceed with your question.

Worthing, I don't want to be nit-picky, but why did you show a profit at the corporate level of $3 million? Was there an accrual reversal there?

No, we allocate a six percentage of revenue to each of our regions. And it's just, if we over allocate to the regions, because we allocate 3%, 3.5%, depending on who you are. If you over allocate in a period, it just shows up as a positive at corporate.

And then, Ron, can you just give us a refresh on the geographic break-down of E&P at this point? And I know you guys talked about same-store pricing off 2015, but I'm very curious, was there a really big notable difference by basin? Was your permian, did it hold up much better than, say, the Bakken?

If you look at where -- as we've always said, the Bakken is the most competitive. You've got nine landfills. We own three. Six other people own six other landfills and so there the average price was off about 15% for us across all of our systems. The Bakken was about two times of that, so 30%, 30%-plus off on price. Where other ones such as the permian or south Texas et cetera were flat to up. So you really have to look at it basin by basin to see those kind of differentials.

The other comment I would have, Tyler, on price is you also must keep in mind that in various basins we price transportation plus disposal. And some we only price disposal. And I care about is the price of disposal. As fuel drops, the transportation-plus-disposal price drops. Therefore, you are seeing a price reduction that has no price contraction. It's just purely the passer of fuel.

And then be do you have the -- basically, I'm looking for your permian mix was.

So permian as a total is running close to 30%, a little over that. Louisiana and the Gulf coast is now running just over 20% or so and the Bakken is now our third largest basin. Bakken used to be the second largest. Now, given those declines, Louisiana on-shore-off-shore has kind of hopped up into second place.

Okay, because it still seems like the Delaware basin and the [indiscernible] barrier is still pretty good. Ultimately, that far western permian?

Yes. As you know, we've got three landfills between the west Texas and New Mexico permian. As you know, we're actively looking to add more assets because as most analyst estimates show, that basin is a spot of good growth over the next five years.

We have no further phone questions at this time, sir.

Okay. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in our call today. Worthing and Mary Anne Whitney are available today to answer any direct questions we did not cover that we're allowed to answer under regulation FD and regulation G. Thank you, again and we look forward to speaking with you at upcoming investor conferences or on our next earnings call.

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