Waste Connections, Inc. (WCN) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing-by. Welcome to the Waste Connections’ Third Quarter 2015 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder this call is been recorded Tuesday, October 27, 2015. I would now like to turn the call over to Mr. Ron Mittelstaedt, Chairman and CEO. Please go ahead, sir.

Okay. Thank you, operator and good morning. I like to welcome everyone to this conference call to discuss our third quarter 2015 results and provide with the detailed outlook for the fourth quarter and some early thoughts on 2016. I’m joined this morning by Steve Bouck, our President; Darrell Chambliss, our COO; Worthing Jackman, our CFO, and several other members of our senior management team. As noted in our earnings release continuing momentum and strong margin expansion in our solid waste business drove better than expected performance in the third quarter, with margins 50 basis points above our outlook. Notable increases in collection activity and double-digit growth in special waste and C&D landfill tonnage resulted in over 2.5% organic volume growth in the period. The third quarter of the last seven in which our volume growth exceeded 2%. Solid waste price plus volume growth in Q3, again exceeded 5%. And EBITDA margins in solid waste expanded approximately 200 basis points year-over-year. M&A activity, as anticipated, has picked up very strongly. Our share repurchases target for the year remains on track and free cash flow at almost $300 million and more than 55% of EBITDA through nine months is notably strong. 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 growth and operating trends, crude oil prices, recycled commodity values and E&P waste activity, regulation of the E&P waste sector, expectations regarding period-to-period comparisons, potential acquisition activity, the timing of and contribution from acquisition, a return of capital to stockholders, the expected impairment charge, and our fourth quarter and full-year 2015 and preliminary 2016 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 10-K and subsequent quarterly reports on Form 10-Q. 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. And other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Ron.

Okay, thank you, Worthing. As noted earlier, solid waste price and volume growth exceeded 5% in the third quarter. Core pricing in the period was 2.7% with total pricing growth, net of surcharge reductions of 2.5%. Volume growth increased 20 basis sequentially from Q2 to 2.6%, led once again by Western Region, where volumes were up 3.5%. Increased solid waste collection activity was a key driver to continue to strengthen volume growth. Commercial revenue increased by almost 6% in the period and roll-off revenue on a same-store basis, grew 7% on higher pulls per day. Pulls per day increased by 150 basis points sequentially from Q2, with each of our three solid waste regions, up strong single-digit. Roll-off pulls per day increased 8% in our Western Region, 7% in our Central Region and 6% in the Eastern Region. With notable growth in collection activity now into a second consecutive year, we increased fleet CapEx by another $6 million in third quarter to address capacity constraints from certain markets, where we are positioning ourselves for continued growth. These are good problems to have, given the strong incremental margins we’re seeing from the volume growth. Solid waste landfill volumes, on a tonnage basis, increased 9% in the third quarter. C&D tons increased 29% in the period, special waste tonnage grew 13% and MSW tons were up 1%. C&D volumes increased in each of our three solid waste regions, with our central region, also notably strong in special waste activity. Recycling revenue was almost $12.1 million in the third quarter, down about $2.4 million or 17% year-over-year, primarily due to low recycled commodity values for plastics and metals. Prices for OCC or old corrugated containers averaged about $110 per ton during Q3, down 4% from the year ago period but up 10% sequentially from Q2. OCC prices currently are around $112 per ton or slightly above $110 per ton average in the fourth quarter. However, year-over-year revenue headwinds for recycling were persistent in Q4, due to continued weakness in plastics and metals, and to a lesser extent, reduced third party recycling volumes, from certain markets. Regarding E&P waste activity, as noted in our release E&P, once again was in line with our expectations in Q3. We reported $51.2 million of E&P waste revenue in the third quarter or about 0.09% of total revenue and consistent with our outlook of $50 million to $55 million for the period. Same-store revenue decreased about 45% on a more than 55% decline in average rig count in the basins where our E&P operations are located. Volumes in the period were down 20% year-over-year and average price was down 25%. Compared sequentially to Q2, year-over-year volumes on a same-store basis, improved five percentage points and average price per unit decreased to ten percentage points, primarily due to a large amount of completion volumes in Louisiana, which are similar to special waste and our solid waste business and typically come in at lower average price points. Excluding these lower price volumes, average price per unit remain similar to Q2 at down 15% year-over-year. More importantly, EBITDA margins within E&P waste exceeded 35% in the period before corporate overhead allocations. On our July earnings call, we describe that activity within our E&P waste business was bouncing along the bottom, bouncing means just that, up and down. The increases we saw in the first part of Q3 gave way to decreases later in the period as crude oil prices fell into the low $40 per barrel range. For example, rig count nationwide so far in Q4, is down more than 11% sequentially from the highest number deployed in Q3. This recent dip is expected to trim our quarterly revenue run rate for E&P waste to a little more than $45 million beginning in Q4. We believe a sustained $55 to $60 price per barrel of crude is needed to see a positive turn in U.S. drilling activity, especially in the Permian, while elevated stockpiles of crude oil inventories continue to weigh on near-term sentiment and crude oil prices longer-term trends remain favorable for increase drilling activity and our E&P waste business. We believe these trends include rising growth in forecast of global crude oil demand, projected declines in the U.S. production of crude, increased waste disposal – outsourcing trends and worsening economic conditions within OPEC countries, as well as the potential return of geopolitical risk premium in crude oil prices associated with the rising tensions in the Middle East. We also note that in late August several environmental groups notified the EPA of their intention to file suit over the contention that the EPA has failed to review and its necessary revise the RCRA Subtitle D criteria regulations for E&P waste. As required to do so at least once every three years. The groups also contended that EPA has failed to meet its duty under RCRA to review and revise as appropriate its guidelines for state solid waste management plans for such ways at least once every three years. We believe any overarching regulation at the federal level or increased scrutiny at the state level would be a positive catalyst for better capitalized E&P waste treatment and disposal companies such as R360. While we wait for a more sustained increase in activity it’s important to note that any remaining headwind for us is a small traction of what we had to overcome this year. And incremental margins from volume growth when it does occur should initially exceed 75%. Given our advantageous asset positioning in the most active basins, we believe we’re well-positioned to benefit from any increases in activity. Moreover, even if current conditions persist we are still targeting about a 30% EBITDA minus CapEx margin as we look at 2016. As CapEx needs in this environment should be very minimal. Looking now at M&A, we are pleased to announce the acquisition of Shamrock Disposal, a leading provider of municipal solid waste and industrial collection and disposal services in Duluth, Minnesota, as well as tuck-in acquisitions of collection operations in California, Oregon and Texas. In addition, we recently entered into an agreement to acquire an integrated provider of solid waste collection, recycling, transfer and disposal services, with total annual revenue of approximately $75 million. Sufficed to say, this is a typical Waste Connections transaction: a leading collection position in several suburban and rural markets; fully integrated with multiple landfills; and several long-term municipal contracts making a large portion of the revenue base. This new market transaction remains subject to closing conditions, including regulatory approval. Closing is expected to occur before year-end. And we’ll provide additional details at that time. These acquisitions total approximately $90 million of annualized solid waste revenue, providing more than 4% of incremental revenue growth in 2016. Additional transactions in the pipeline may get completed either later this year or early next year could provide another one or two percentage points of revenue growth on top of that amount. Sufficed to say while 2015 started out solely it looks to be ending strong with more than $125 million of acquisitions to be completed. Finally, as also announced yesterday, our Board of Directors authorized an 11.5% increase in our quarterly cash dividend a fifth consecutive double-digit annual increase since commencing the dividend in 2010. Even with this increase, our dividend remains at around 20% of our free cash flow, providing tremendous flexibility to fund our growth strategy and further increase the return of capital to stockholders. We also remain on track to repurchase between 2% and 3% of outstanding shares in 2015. In Q3, we repurchased a little more than one million additional shares, bringing a total year-to-date repurchases to about two million shares. And now I’d like to pass the call to Worthing to review more in-depth of financial highlights for the third quarter and to provide a detailed outlook for Q4. I will then provide a few early thoughts on 2016 and wrap up before heading into Q&A.

Thank you, Ron. In the third quarter, revenue was $547.9 million. And adjusted EBITDA, as reconciled in our earnings release, was $189 million or 34.5% of revenue. We estimate that adjusted EBITDA margins within our solid waste business expanded about 200 basis points year-over-year or 60 basis points excluding the benefit of lower fuel prices. Fuel expense in Q3 was about 4.2% of revenue and we averaged approximately $2.80 per gallon for diesel, which was down about $0.72 per gallon from the year-ago period and $0.18 per gallon sequentially from Q2. Margins in our E&P waste business declined about 1,150 basis points on a same-store basis and an addition 500 basis points from the dilutive impact of lower margin acquisitions. Looking at the consolidated P&L, the following is certain line items that moved a notable amount the third quarter from the year-ago period as a percentage of revenue. Labor and supervisor expense increased 60 basis points. Repair and maintenance cost increased 50 basis points. Rail and truck torage expenses increased 40 basis points on higher intermodal activity. SG&A increased 30 basis points. Risk management insurance expense increased 25 basis points. Third-party disposal and transfer cost increased 20 basis points. Fuel expense decreased 110 basis points. E&P related subcontracted expenses decreased 30 basis points. And recycling rebates to third-parties decreased 20 basis points. It’s important to note, the changes in many line items, as a percentage of revenue, where either magnified or due impart to decline in higher margin E&P waste activity. For example, looking at certain line items within just the solid waste business as a percentage of revenue, repair and maintenance cost increased 25 basis points are just half of the consolidated reported increase. SG&A decreased 20 basis points, third-party disposal and transfer cost decreased 30 basis points and recycling rebates to third parties decreased 20 – excuse me 30 basis points. Depreciation, amortization expenses for the third quarter were 12.5% of revenue, up 50 basis points year-over-year due to the impact of slightly higher depreciation expense on the topline negatively affected primarily by lower E&P waste activity and to a lesser extent reduce surcharges. Similar to what we noted in Q2, 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 increased $550,000 over the prior year period to $16.4 million due to the longer-term fixed-rate note offering that closed in August. Debt outstanding at quarter-end was about $1.95 billion and our leverage ratio, as defined in our credit facility, was approximately 2.65 times debt to adjusted EBITDA. Our effective tax rate for the third quarter was 38.8% slightly lower than our average rate due true-up associated with tax filings in the quarter. GAAP and adjusted net income per diluted share in the third quarter were $0.50 and $0.54 respectively. Adjusted net income includes among other items for the amortization of acquisition-related intangibles. In addition, as noted in our earnings release, our GAAP and adjusted non-GAAP measures, exclude the anticipated non-cash charge to GAAP earnings for impairment of the significant portion of the goodwill and indefinite-lived intangible assets associated with its E&P segment. In accordance with applicable accounting standards, we evaluate our reporting units for impairment annually in the fourth quarter of the year, or more frequently if certain events or circumstances have changed. We currently believe that the significant and sustained decline in crude oil prices in recent months, together with market expectations of a likely slow recovery in such prices, constitute a change in circumstances that makes it more likely than not that a significant portion of the $550 million of goodwill and indefinite-lived intangible assets associated with our E&P segment was impaired in the third quarter of 2015. Any such impairment would be a non-cash charge and mostly deductible for tax purposes. We are in the process of performing and reviewing such impairment testing with our auditors. Upon completion of that testing and a final determination by our board of directors, we expect to record the non-cash mostly tax adjustable impairment charge to GAAP earnings in our third-quarter financial statements, included in our Form 10-Q filed with the Securities and Exchange Commission. Looking at free cash flow. Through the first nine months of the year, free cash flow was $298.6 million or 18.8% of revenue. As Ron noted earlier, we increased fleet CapEx by $6 million in Q3, in response to better than – expected growth in our collection business. And in October, we also spent an additional $6 million in landfill equipment, due to increased discounts we were able to negotiate with one manufacturer on some of this available inventory. These increases in CapEx will likely put full-year 2015 free cash flow, between $340 million and $350 million, and should result in next year’s CapEx being about $215 million excluding any additional CapEx resulting from acquisitions, closed during the remainder of this next year and next. I’ll now review our outlook for the fourth quarter. Before I do, I would like to remind everyone once again, that actual results may vary significantly, based on risks and uncertainties outlined in our Safe Harbor statement and our various SEC filings. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic and operating environment, it excludes the impact of the recently signed $75 million revenue acquisition and any additional acquisitions that may close during the period, along with acquisition-related transaction cost and it excludes any loss or gain on impairments or other operating charges. Revenue in the fourth quarter is estimated to be approximately $520 million. Solid waste price and volume growth on a combined basis is expected to be about 4% in Q4. Recycling, intermodal and other growth is expected to be about 1% as increases in intermodal activity more than offset any declines in recycling revenue. Revenue from E&P waste activity is expected to be a little more than $45 million. Adjusted EBITDA for Q4, is estimated to range between $171.5 million and $172.5 million at the midpoint this will put full year adjusted EBITDA at about $707 million exceeding the outlook we provided in July. Depreciation and amortization expense for the fourth quarter is estimated to be about 12.9% 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 fourth quarter is estimated to be approximately $105 million. Interest expense in Q4 is estimated to be about $16.4 million. Effective tax rate in Q4 is estimated to be about 39.2%. Non-controlling interest is expected to reduce net income by about $200,000 in the fourth quarter. Our fully diluted share count in Q4, is estimated to be about 123 million shares. And finally, similar to what we have noted for the prior two quarters, on an earnings per share basis, we estimate the year-over-year decline in our E&P waste business will be about at $0.10 drag to reported results in the fourth quarter, when compared to the prior year period, fully massing revenue margin and 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. Once again strong organic growth and margin expansion within solid waste drove better than expected performance in the quarter. E&P waste activity was in line with our expectation and remains a strong contributor to cash flow. We’re on track to exceed full year adjusted EBITDA expectations we updated in July. And with acquisition activity picking up and continuing strengthen our solid waste business, we are putting additional building blocks in place for incremental growth in 2016 and beyond. Although we won’t provide our formal outlook for 2016 until next February, we’re able to provide some early thoughts assuming no change in the current economic environment. We believe revenue should range between $2.22 billion and $2.25 billion, with EBITDA between $750 million and $760 million. These figures assume about 4% to 5% solid waste price plus volume growth, the $75 million solid waste revenue acquisition we just announce is completed by year-end and E&P waste comes in around $180 million for the year, which simply annualizes the estimated revenue run rate for E&P waste which we expect to exit 2015. Potential upsides to these early estimates for 2016 could come from many of the following: additional acquisitions we might close this year or next, an increase in E&P waste activity should oil prices recover somewhat during the year and increased recycled commodity values. These upsides could add another two percentage points to four percentage points of topline growth in 2016, mostly at accretive margins. Again we expect a better visibility on this in February when we provide our formal outlook for the upcoming year. We appreciate your time today and I will now turn the call over to the operator to open up the lines for your questions. Operator?

Thank you. [Operator Instruction] And our first question comes from the line of Al Kaschalk of Wedbush. Please proceed with your questions.

Good morning, guys.

Good morning, Al.

Good morning.

I just want Ron on the Subtitle D comment, could you just elaborate a little bit, is this something you are expecting waste volumes to come in 2016 or what’s the – what are you putting us on alert for here [ph]?

Well, I were putting you on alert is that that has just recently in the last few weeks been litigation filed, that is challenging the EPA under its – under RCRA to update both federal and state requirements regarding how E&P waste is handled throughout the U.S. And under its charter the EPA has committed to review that every three years as a minimum. It’s been over 20 years since they have updated that. And so the lawsuit alleges that the EPA is severely delinquent in updating the handling of that waste and it asked [ph] that it be updated to be handled in Subtitle D facilities, which all of our E&P facilities are. So our reporting out is that, and we don’t know how that lawsuit is going to go or how long it’s going to take. But I think its suffice it to say there’s a lot of discussion at the federal and several of the state levels to incrementally increase how the regulation around how E&P waste is handled and to limit, if not completely eliminate the use of reserved pits. We have said all along that that alone would more than double the volumes that are available to be handled throughout our basins. So, while we don’t know when that will happen or if it will happen, we’re just pointing out that if it does, it could be even in the absence of incremental crude oil prices increase, it could lead to quite a bit of additional volumes for handling in the future.

Okay very helpful. From a transition to CPI or the index contracted markets for a second obviously some headwinds there you guys continue to do an excellent job and relative to the your competitors. But is that fair to say that you’re seeing some increased pressure there on the top-line and the ability to get 2% to 2.5% is sort of a consistency with what you’re guiding for 2016 or for preliminary outlook for 2016.

Yes, I think, as you know approximately 50% of our solid waste business is index to a CPI or a similar metric. And that business we’re currently getting, I mean, around between 1.5% and 1.8% or so. That tells you we’re getting 3.5% to 4% in the other 50% of our business that’s competitive to yield the, approximately 2.5%. We expect that there could be 20 basis points to 40 basis points depending on the market area, pressure next year relative to this year on the indexed portion of that business, meaning that CPIs could be one to one fourth not one fourth to one eighth [ph]. And we believe that through the weight making process where we get a return on invested capital and operating ratio, as well as through ratcheting up nominally our competitive markets we can offset some of that 20 basis points to 40 basis points. It still maybe that pricing is nominally down next year but we wouldn’t expect that to be more than – in that 20 basis points to 30 basis points at most.

All right. And then finally if I may, just on the acquisition front, given how you’re valued in the market, would you not care to be more aggressive on M&A? And then secondly, particularly, on the MSW side. But secondly, can you comment on the nature of the Minnesota deal given to me a perception anyways that they are a landfill market as the third alternative in terms of waste in that particular market?

Yes let’s tackle the second part of that, first because it’s easy. You are correct that in Minnesota, land filling is not a preferred, if you will, method of handling of ultimate waste disposal. However, that is predominantly a Hennepin County and a Twin Cities issue so that is basically a Minneapolis, St. Paul and the Greater Hennepin County issue. This is a well north of that in Duluth, where there are not burners and incineration capacity such as Iran [ph] in and around the Twin City area and disposal there is the predominant method of handling of waste there. So from that standpoint when you are talking about the Duluth market, very different market than the Hennepin County market. We know Hennepin and Twin Cities very well. Secondly, to your first question, the reality is, is that we believe the reason that we are fortunate enough to have the multiple, the trading multiple of that we do is that because investors trust us to invest the capital that we get wisely. If we were to invest at our multiple, we could not get the type of value creation that we demonstrated over the years. Let’s be honest, there are companies out there doing that at our multiple, that don’t have our multiple. And it’s created value destruction for them unfortunately. So we view that we get one chance to spend capital, we look it at to turn on invested capital basis, our multiple really has little to do with that in the equation, it obviously affects the weighted average cost to capital, but other than that it doesn’t have a lot to do with it. It’s really what we can earn on the capital we’re going to invest. So we don’t look at it on that – on a multiple basis. Yes, deals get down and can be back into on a multiple basis, but ultimately it’s an all cash in, all cash out analysis and what kind of return can we get on that capital relative to our weighted average cost to capital and is that a wise investment. That’s ultimately how we look at it.

Yes, as we recall Al, if you normalize the companies in our space on a free cash flow basis, the fact that we can convert 45% to 50% of EBITDA to free cash and many other companies will do 30% or so of EBITDA to free cash. All things being equal if we all trade at a similar multiple of free cash flow that then results in what it appears to be a higher multiple of EBITDA to your point about EBITDA multiples. Again but everything we do we look at on the cash flow basis. And again I know many investors don’t look beyond the income statement. But again you got to look beyond the EBITDA multiple and look at the free cash flow being generated.

Very good, thank guys and good luck.

Thank you.

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

Hi, thank you all for taking my questions. Ron, how would you frame in solid waste the post recession volume trend and I’m presuming we’re thinking about it’s got a longer cycle and it’s a shallower curve, but it hasn’t hit a level off point, yet. What’s your thoughts about where you are in that?

Well, as we said in the release Michael, or on the call, excuse me, that we’ve had greater than 2% volume growth now for five quarters of the last seven quarters. So clearly, we are well into a recovery, it’s continued to improve, we’ve really seen that with our Western Region, which is our largest region, last into the recession, certainly last out of the recession, probably they felt that’s the deepest, because of the housing collapse on the West Coast. And that’s where we’re getting the greatest lift in our business as noted 3.5% to 4%. So I would tell you that, I think, we’re well into it. All of our indictors, whether it’s roll-off pulls per day, whether it is incremental landfill volumes, both MSW C&D and special waste, or net new business and service increases over service decreases, all of those improved incrementally in Q3 over Q2 and well year-over-year. So I can’t tell you that we’re 80% through it and there’s 20% less, but we clearly don’t see that things should slow right now in 2016. The building blocks continue to be there from everything we’re seeing that it should stay at about this level through 2016.

Yes the rate of growth could decelerate a little bit just because of tougher comps.

Absolutely.

That doesn’t mean there’s anything slowing down in the macro.

Right, so we can still describe, the volume line as an upward slope, it hasn’t leveled yet. That is what I was trying to get at to is your thoughts about when hits a level point. It’s not a – that’s not a negative, it’s just we’ve hit sort of economies ability to sustain a rate of change.

Yes well, yes you’re right. I mean what will happen is on the West Coast, which again has been the big driver of volume growth this year, 3.5% before, when that anniversaries itself, if it reverts just two or 2% mean, then the company overall starts converting to 1.5% to 2% volume growth environment, perhaps further up slide, from where it’s standing on the macro. But again the ability to continue to replicate 2.5% or 3% volume growth, if you try to you raise the bar on us gets more difficult as the comps get tougher.

Right so and thinking about, if you look out little long view in the model 2016 you hold this sort of a 2% – it’s a 2% plus 2% and there’s some variability between the price and volume of what creates the upside to the 5%, 2017 is still 2% plus 2% is the place to start up but maybe the volume becomes 1.5% to 2% and the prices of 2% to 2.5% and that’s how you get the 2% plus.

So you did finish our budget through 2017 so we thank you for that.

And you’re welcome.

And does it only work like that?

Yeah, realize that. But that’s the way to think about it, is that the right way to think about it, I mean?

We think it is.

Yes, okay.

I mean we think it is Michael we can certainly comment on 2016 obviously we did today saying that we expect 4% plus in volume growth in solid waste and another approximate 1% in intermodal and others. So we just said almost 5% top-line from organic for 2016. Obviously 2017 it’s a little early for us to call, but assuming there’s no change in the macro environment materially we would expect it to be in that 2% plus or minus range on both price and volume.

Okay. And then what type of equipment are you buying that’s been supported by the extra CapEx for the truck side, I think, the landfill equipment side I get but the – is it front-end loader, side loader, rear loader roll off?

Yeah, it was across the board.

It’s across the board it different by market obviously Mike but its front-end loaders, it side loaders and its roll-off as well in certain markets.

Okay. And then switching gears to E&P if for whatever reasons all of the hopes and dreams that $40 to $50 become doesn’t become $50 to $60 on oil, what do you do differently if $40 to $50 is the brave new world for a while three years in that business?

Yes.

How do you think about that business differently?

Well number one that’s how we are preparing for things what you just said. And we’ve…

What we’ve baked into our 2016 guidance.

And what we’ve baked into our 2016 guidance at this point. Mike, right now we’re running between we just reported approximately 35% EBITDA margins on that business. We believe next year even on the business down approximately $30 million on an annualized revenue basis, $30 million to $40 million down that will deliver almost the same amount of EBITDA. So we are expecting to take somewhere between 300 basis points and 500 basis points of cost out of the business between now and next year and run that business at up 35% to 38% EBITDA margin. We believe we can do that on the sustain basis next year at least next year. Now if it dips big below the $40 level and that really reduces drilling even more we’re obviously have to revisit it. But we’ve taken – we’ve taken 18% to 20% of the headcount out of that business out this year so far. And there will be more. There also other cost reduction initiatives that we believe collectively, like I said, taken another 300 basis point to 500 basis points out of the cost side of the business.

And Mike, do you remember that business also has a couple of tailwinds as it goes into next year from an EBITDA standpoint. We anniversary the $4 million or so cost we had in Q1 of this year. For some cleanup – facility cleanup cost and startup cost and we also have the third-party water disposal savings once our well that we are drilling in the Mexico comes online. And those collectively are $7 million to $8 million of EBITDA tailwinds going into next year. So as Ron’s point, our target is to increase, maintain or increase EBITDA and business next year. But more important look at it on the cash basis to cash tax in that business for it easily be less than 5% or 4% of revenue, which again means we can hold 30% plus EBITDA minus CapEx margins, which again is very attractive on a cash basis.

Okay, great. Thanks. And then on the deal side, the $75 million transaction when you think about three years, that’s a $100 million business because of the opportunity to consolidate around it. Is that the way to think about it?

Yes, I think that’s a fair statement. Michael we think that three years to five years that’s a $100 million to a $120 million platform at approximately 35% EBITDA margin.

Okay. And then I appreciate your commentary on the RCRA observation but it’s, I mean, on a practical basis lobby that has successfully put in the E&P and mining exception is pretty powerful lobby. So we shouldn’t all get too excited about this, nice to know that there’s an effort here but this has withstood the test of time for almost 50 years.

It certainly has withstood it, there’s no question. I think the difference now Michael is, your point is that the lobby has affected the legislation. This is going added through the judicial system. And whether or not a court takes a different position that the EPA is in violation of its own rules, that’s what could be, I’m not saying will be could be different, because whether or not lobby is going to influence the judicial decision is a very different issue than a legislative decision.

Okay. It’s fair.

And under – and in equipment and ministration, we will be interesting to see how it all plays out.

Where you are moving the corporate office?

It was nice in Ireland, wasn't it?

They’ve got really low corporate tax rate. Okay, I got it and EPA over the last ten years has used the courts for a predominant amount of its changes versus going through the legislative process. So this is consistent with the pattern you’ve seen. Okay, fair enough. Thank you very much, nice quarter.

Thanks.

Thank you, Michael.

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

Hey, good morning, guys.

Hi Joe.

Good morning Joe.

Question on, capital allocation for next year and clearly you guys executed on the deal pipeline this quarter, curious if that’s been harvested now and maybe we should think about share buyback being maybe a little bit more likely in 2016. And is that $2 million to $3 million is share target for this year? Is that potentially applicable for next year, as well or are there still some moving deals out there that can give you pause on that front?

Yes Joe, there’s really no pause on any of the fronts, I mean the strength of the free cash flow not only from the dividend and the dividend increases you have seen also can consistently fund at 2% to 3% of outstanding share buyback, as well as fund, kind of a $75 million to $100 million of acquired revenue. With that really affecting the balance sheet, because of the strength of the capital structure on the balance sheet. So it would have to be a very large unexpected optimistic transaction that would give us any pause on the share buyback side. So again I think of it looking next year, I would hope it’s the same sort of outlay you the you see this year which is funding all three.

Okay, appreciate that. And you guys spend some time earlier on these tough comps in general, but I’m guessing your toughest comps are probably at the landfill with MSW now up two plus years. Can you maybe just talk to your outlook on MSW to landfill and if that has any positive or negative reads on what fit fees may do?

Well for us the fit fees portion of the question, Joe, I mean, we look to raise fit fees between 2% and 3% on a consistent basis, annually. That’s baked into our price, some markets are a little higher, some are a little lower, But we feel confident in that for 2016 as well. We noted that although landfill volumes were up very strongly in the quarter, MSW was up 1%, it was not up as strongly, because of just what you said, tougher costs.

It is the third year, actually.

And it’s actually a third year of increased MSW volumes. So certainly the comps are tougher, but we would expect again, because when you see very high roll-off volumes, again that – a good portion of that is C&D related or special waste related that translates – should continue to translate an incremental landfill volumes going forward. So we continue to believe that will be strong. But there’s no question as the denominator get’s larger the same amount of growth is a lower percentage, it’s mathematically and that certainly will happen.

Yes, Joe what you’re seeing in the numbers as we move to last couple of quarters and looking ahead collection, increased collection activity is driving more of a reported volume growth than the prior two years, because remember, in the early phase of the recovery to the extent that we’ve got more waste than the containers, that’s just increasing internal cost. So that landfill volume might increase but again you’re not seeing the volume growth on the collection side until you change containers sizes, and change frequency, et cetera. We’re seeing that now flow through. So collection is now contributing more of the top-line growth than disposal volumes.

Understood, thanks. And then just a clarification, Ron, did you say that the $750 million to $760 million of preliminary EBITDA, does that include or does that exclude the acquisition that you guys announced this morning?

It includes.

It does include, okay. Got you. And is it about $20 million of EBITDA that’s going to come from the deal?

Approximately $25 million.

$25 million, okay. Great I’ll hop back in queue. Thanks.

Our next question comes from the line of Tyler Brown of Raymond James. Please proceed.

Hey, good morning guys.

Good morning, Tyler.

Hey, first off nice quarter. But Ron, I was curious about the commentary on the C&D and special waste side, again it’s very strong there. I totally get the West Coast Housing market, it’s pretty solid. But I think you mentioned some notable strength in the central region. I’m just curious if you have any thoughts about what’s driving that? Was it coal ash by chance?

No it was not coal ash, we have not – we are working on some projects in both our central and our eastern region for coal ash, but we have not commenced any of those, so none of that is yet in the numbers should we get it. Our central region was just a variety of things, certain cleanups in various areas, not one specific state or one specific issue.

Okay. Now that’s very helpful. And then I know – there are probably some more questions about E&P so only I’m going to ask one, but Worthing can you give us what you are expecting to spend in 2015 E&P CapEx and what that might be in 2016? I mean, if you’re targeting 30% EBITDA less CapEx I would think you’re talking low single digit CapEx to revs for E&P next year?

That’s right. Yes that’s right what we’ve said is probably in that 3% to 4% of revenue range. So put that in kind of the $6 million to $8 million at most in CapEx.

Okay. And is that part of the thoughts about call it the brave new world of this $45 oil where you might be able to kind of repatriate the CapEx somewhat?

Well, also again to the extent that airspace [ph] is already being constructed and volumes have slowdown we’re getting longer lives out of what’s already been constructed, so it kind a pushes the need for a lot of cell construction out of 2016.

Yes, okay, perfect. And then again thanks so much for the read on 2016. And I’m – Worthing I’m hoping you can indulge me here, but kind of bridging it if I was to look at that $707 million to $755 million midpoint. Just thinking about the big puts and takes for 2016. So on the solid waste side its seems that you guys have internal growth, I don’t know maybe it comes in at 40%, 45% incremental if I got a few million dollars of a fuel savings benefit rollover, its kind a whatever we think about recycling and then you’ve the incremental EBITDA from the $90 million of acquired revenue. Is a kind of the bridge on solid waste?

That’s a good bridge on solid waste.

Okay, and then on E&P it's kind of whatever we think that linear footage maybe pricing does you guys call it, I think, you noted $8 million of savings from the water well and startup costs that don't recur, is there anything else we're missing big picture?

Not big picture, I mean, you got to factor in that if we do, do $180 million on a reported basis that’s about $40 million declining revenue.

Yes.

So you got to take the decrementals off with the revenue before you put the comebacks on tailwinds.

Yes, okay, no perfect. Thanks guys.

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

Hey, good morning.

Good morning, Corey.

Good morning.

I just got a couple of quick ones. So first of all, in the E&P segment we’ve been looking at the $45-plus million in Q4. Is that all volume driven or what are you seeing on price?

That’s our volume.

Yes, it’s mostly volume. Again, as you look at the – look when the comps get tougher as move through the year and so while same-store was down about 45% or so in Q3, we’re assuming about 50% or so decline on a same-store basis in Q4.

Okay. And its sounds like things are going well across your geographies, but I just want to verify that you are not seeing any signs of economic weakness in the oil patch?

You mean.

You mean, not in the oil patch.

No, you mean just back grow into Texas, or Oklahoma or Colorado areas.

I mean, where there is weakness in E&P is driving broader economic weakness in other areas.

No, no. We’re not seeing that. Obviously, the one exception I’d say to that is in obviously in Williston, North Dakota. It’s certainly driving economic weakness in that small micro market, but where upwards of 35,000 jobs have been lost in one market. But other than that we are not seeing that in Texas, Oklahoma, Colorado, Wyoming, Montana, where we have E&P, we’re not seeing that.

Okay. Is it fair to say Williston, North Dakota counts for less than 10% of your revenue?

States that account less than one [ph].

And then just a quick, since you’re providing thoughts on 2015, first of all the Q4, 4% price decline it is down a little bit from Q3 [indiscernible] few comments on why it will be lower, sequentially?

Yes well you start – in Q4 you start anniversarying some of the uptick in West region that we saw in Q4 of last year. So again as the West region did 4% in Q2 of this year to 3.5% volume growth in Q3, it’s our expectation that the tougher comps suffering [ph] in the west region, closer to that 2.5% to 3% in Q4, which effectively pull volume down a little bit. And you’ve got, a slightly higher surcharge rollback in the fourth quarter that brings net pricing down into – sequentially down about 10 basis or 20 basis points from Q3.

Okay and then thinking about 2016 Worthing do you think there’s a couple of a little bit with the quarters should we assume on price that you start the year at the highest level and then go down from there as the comps as you’re working upon your revenue base?

That’s correct, as you see most of year as the pricing is highest in – the growth – rate of growth on dollar base might be similar, but the rate of growth is always higher in Q1 than in Q4 as we always sit and look at an upcoming year, the only other in and out next year on a quarterly basis so obviously Q1 is the toughest, on E& P because we did $70 million in revenue this past Q1. And so you’ll see some movement in that line in Q1 until we anniversary that in Q2.

Okay and that is all I needed, thank you.

[Operator Instructions] And our next question comes from the line of Scott Levine of Imperial Capital. Please proceed with your question.

Hey, good morning, guys.

Hey good morning.

Good morning, Scott.

So one [ph] fuel obviously has been a big benefit this year. A little bit of rollover effect into next year. Could you comment, you guys any thoughts on additional hedging within that business or status quo with regard to your strategy there? And also maybe some updated thoughts on your CNG fleet investments and whether there has been any change recently?

Sure, I will start with the hedges, we are about 40% hedged at this point through 2017. We’ve got some above market hedges rolling off at the end of this year that help provide that $5 million or $6 million of fuel savings already locked up for next year. I suspect you will see us hedged above another 10% of our needs through 2017. We’re within about $0.05 of the targeted in one of our major markets. So I suspect as we get through in the year-end will be about 50% hedged. As you think about how that plays through, in E&P waste this past year we are down what about $80 million in EBITDA and saved over $20 million on diesel and solid waste side. So it’s about a four to one hit on the way down – if crude does start coming back to leverage on the upside is probably six or seven to one given the fact that we would have hedged about half of our fuel needs through 2017. In regard to CNG again our strategy there hasn't really changed. We have put some CNG in place, in certain states where we’ve gotten some tax incentives around the infrastructure spend or in some markets where we’ve gotten the benefit of contract extensions and the ability to recapture that initial higher price or higher cost of outlay through the longer term life of a contract.

Got it. Thank you and then just one quick follow-up on M&A. I don’t know can you comment on the approximate outlay for the acquisition this morning if you wanted to factor that deal into our model and maybe just some broader commentary regarding the M&A landscape and any noteworthy changes there with regard to potential buyers evaluations or anything like that?

Well, let's start with the latter part of your question first. As far as the M&A landscape, we believe it is continuing to improve. I think that really is just a function of one thing to be very honest and that is just the people who have lived with higher taxes and lower interest rates both of which affect their after tax re-investability of the proceeds tremendously. They have lived with it now for three, now going into four years. So there is just some pent-up demand for deals. In addition, the economy has helped their business get back closer to where it was pre-contraction as well. So the combination of both of those things, Scott, I think is helping deal flow. We have looked at more deals and made more offers this year than anytime I can think of in the last seven to ten years. We are having to look – we are having to go through deals more finally than ever because there is quite a gap that plans between the bid and the ask. Let's say that. We are trying to be very prudent with the capital we have to spend. So we have not – our hit rate is lower this year than it has been, because we are staying disciplined, but most of the time when we are losing a transaction we're not losing a transaction to another buyer, we are losing it to the seller keeping the business. Incidentally, the transaction, the larger transaction that we signed yesterday and announced last night, talked about today that is the company that I personally have followed for 21 years and this is the fifth offer I’ve made them in 21 years. So it finally worked. And that was because of some changes in the state lives of those particular sellers, which as we say, is often one of the things that drive things. To your first commentary – to your first question about valuation, this is a large, integrated standalone new market entry for us. And the valuation is somewhere in that 7.5 to 8 times EBITDA range for the large acquisition. The others that we did, valuation was closer to the 5.5 to 6. So the blended average for the $90 million was probably around 7 to 7.5 times.

Got it. Thanks. Congrats and getting the deal done. I guess persistence pays off there.

Sometimes.

Our next question comes from the line of Tony Bancroft of Gabelli & Company. Please proceed.

Hi, good morning gentlemen. On the E&P side with the sustained low crude prices and customers constrained cash flow are there any updates, I guess we talked about before of any updates with pressure for any contract renegotiations?

Because of the reduction in crude and that was the reduction in fuel.

Yes. Okay, sorry…

As we noted in our script, the pricing environment didn’t change Q2 to Q3 notably see a change looking ahead either.

Got it. Okay.

We have not – we have not seeing that pressure – the direct answer to that question, Tony.

Quite a bit, okay. And then…

There is really no one left to ask us for a concession.

With your long-term E&P view that you laid out earlier and along with the EPA changes you mentioned didn’t make sense to I know we talked about again in the past but look at E&P, M&A and it’s not now – when would it potentially make sense in the markets you are in and like to be?

Yes, I mean, I think the answer is it does make sense, Tony. And we are looking at something, could it get lower. It certainly it could. It could get a lot lower. We don’t believe that it could do that but there are some one-off smaller deals where there would be some asset improved – asset positioning improvement that if we could get that at an appropriate valuation and by the way, appropriate valuation right now to us is three to five times run rate EBITDA in this environment. If we could do that then – and we're looking at some, then we would take a hard look at that.

Thank you. Appreciate it.

And our last question comes from the line of Alex Ovshey of Goldman Sachs. Please proceed.

Thank you very much. Good morning guys. Couple of very quick ones…

Good morning, how are you?

Good morning. How you think about OCC over the next 12 months? And what are your latest thoughts on coal ash and implications for the industry, if any?

Well, as far as OCC, right now I think we said in Q4, we are trending at about $112 a ton. If we assume that – our thoughts sort of that next year it sort of stays in that $100 to $115 range and if it does that it’s flat on a year-over-year basis, 2016 over 2015. So it is not a headwind and it’s not a tailwind either, it’s really hopefully a neutral event. That is where we believe OCC is based on what we know today. As far as coal ash, as I mentioned in my earlier comments, we have not yet taken any certainly any to speak up. We're working on some projects that if they are successful could be very material and we would obviously call them out a singular customer could be 1.5% to 1% in volume on their own in a year. That is how large these potential coal ash customers and jobs are. You are talking about sites that have millions of tons that need to be cleaned up over a period of time. In some cases jobs are large enough that it could require – it would take all of the airspace we believe and have at endcap certain landfills. We are obviously not willing to do that because of the municipal commitments we have. So we are working through with various companies on that issue. We would hope to have some success in 2016. These are long negotiations, long process they have 15 to 20 years to clean this up. But it is going to start we just are not sure when.

Fair enough. Thanks a lot for that color.

Okay. And our last question actually comes from the line of Barbara Noverini of Morningstar. Please proceed with your question.

Hey, good morning guys. Just a quick one for you, with jobs going out of the oil patch is it getting any easier for you guys to find labor on the MSW side drivers in such?

Barb, that is a good question. And in and around those shale areas, yes, it is. It is getting a little easier in the Oklahoma. It is getting a little easier in the Upper Midwest in and around the Dakotas and in the Minnesota and in the South Dakota. So in certain areas, yes it is a little bit easier.

Okay. Thanks.

And there are no further questions at this time.

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 that we did not cover that we are allowed to answer under Regulation FD and Regulation G. I 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 concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.