Waste Connections, Inc. (WCN) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections Third Quarter 2016 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, October 27, 2016. I would now like to turn the conference over to Ronald Mittelstaedt, Chairman and CEO. Please go ahead.

Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our third quarter 2016 results and provide our financial outlook for Q4. I'm joined this morning by Steve Bouck, our President; Worthing Jackman, our CFO; and several other members of our senior management team. As noted in our earnings release, our financial results continue to track at or above the increased expectations we communicated in August. And we are extremely pleased that safety, pricing, and operational improvements within recently acquired operations continue ahead of schedule. Adjusted free cash flow remains notably strong at 205.8 million in the third quarter, which reflects our first full quarter of combined operations since completing the Progressive Waste acquisition. Adjusted free cash flow on a year-to-date basis, which only includes four months of combined operations, was 440.3 million or 18.9% of revenue. Our strong free cash flow profile, following progressive merger, positions us for an outsized 24% increase in our quarterly cash dividend while maintaining our payout ratio at less than 20% of expected annual free cash flow. This financial strength and flexibility, together with our expanded footprint following the merger, keep us well-positioned to exceed our growth strategy at a time when acquisition dialogue is near record high levels, all while increasing our return of capital to shareholders. Before we get into much more detail, let me turn the call to Worthing for our forward-looking disclaimer and other housekeeping items.

Thank you Ron, and good morning. The discussions during today's call today include forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, and applicable securities laws in Canada. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement beginning on page two of our October 26 earnings release and in greater detail in filings that have been made by Waste Connections, formerly named Progressive Waste Solutions Limited and Waste Connections U.S. Inc. with the Securities and Exchange Commission and the Securities Commission or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect these events or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income, and adjustment net income per diluted share, and adjusted free cash flow. Please refer to our earnings release for our reconciliations 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. Finally, reported results reflect the impact of our merger with Progressive Waste on June 1st. Contribution from this combination will be treated as acquired revenue and will not be incorporated into our organic growth statistics until 12 months from the closing date. I will now turn the call back over to Ron.

Okay, thank you, Worthing. In the third quarter, solid waste core price and organic volume growth was 3.7%. Core price increases in the period were 2.6% year-over-year with total pricing growth, net of surcharges reductions, of 2.3%. Core prices on target to be about 2.7% for the full year. Volume growth in Q3 was 1.1%, driven primarily by the West Coast where we have seen strength for the past several quarters. Our year-over-year decline in special waste activity in Minnesota was about 70 basis points drag to volume growth in the period and is expected to continue in Q4 and certain projects in that market have been pushed into 2017. For the full-year, we expect our volume growth to be around 1.7% with core price growth plus volume of about 4.4%. We believe the volume growth environment remains in the range of about 1% to 2% under current economic conditions. They could run a little above that range in some period due to the timing of special waste activity or items within our prior-year comparison. As we consistently communicated, we tried to be conservative in guiding volume growth particularly given the 2016 is the fourth year of strong MSW volumes. The deeper we get into this recovery, the tougher we expect the comparisons to be, unless they economy shifts into higher gear, which with housing starts still running around 1 million units, we're not yet seeing or expecting. As a reminder, until we anniversary the Progressive Waste acquisition, a 50 basis points change in volume is currently about $2.5 million of revenue in a quarter. Volume growth in the third quarter was primarily driven by double digit increases in MSW disposal volumes along with higher commercial collection, and roll-off activity. MSW tons increased 11% in Q3 with about 75% of our landfills reporting higher MSW tons year-over-year in the period. Special waste and C&D tonnage were each down 6% due to the previously discussed decline in special waste activity in Minnesota and tough C&D comps at two landfills. Solid waste landfill tonnage overall on the same-store basis increased 3% year-over-year in the third quarter. On a same-store basis, commercial collection revenue increased almost 7% year-over-year in Q3. And roll-off pulls per day increased about 4%. All regions reported higher roll-off activity compared to the year ago period as pulls per day increased about 8% in our Eastern region, 3% in our Western region and 2% in our Central region. Increases were widespread with notable exceptions in both coal and E&P influence tonnage Recycling revenue, excluding acquisitions was 13.9 million in the third quarter, up almost 1.9 million or about 15% year-over-year due primarily to higher commodity values for fiber. Prices for OCC or old corrugated containers, averaged about $123 per ton during Q3, up 11% from the year ago, and up 18% sequentially from Q2. OCC prices currently are around $115 per ton, up about 8.5% from the level we averaged in last year's fourth-quarter but down off of Q3's highs. Regarding E&P waste activity, we reported 30.1 million of E&P waste revenue in the third quarter, consistent with our revenue guide for the period with segment EBITDA margins of about 30%. Monthly revenue is up as much as 20% from its low earlier this year with margins almost 500 basis points above the trough. As a lengthened oriented business, any revenue growth resulting from increases in drilling activity should flow-through at high incremental margins. Moving onto the Progressive Waste acquisition, as noted earlier and in our press release, results continue to track at/or above the increased expectations we communicated in August and we are extremely pleased that safety, pricing and operational improvements continue ahead of schedule. October safety related incident frequency for Progressive's legacy operations is currently trending about 40% lower than preacquisition levels. To put that in perspective, in September and October as a total company we had fewer incidents than Progressive Waste has a standalone company in many months throughout 2015. Pricing improvement initiatives within Progressive's footprint are also well underway, resulting in price increases within these markets, expected to range between 2.5% and 3% in Q4, up from less than 1% in Q1. Our focus remains on improving the quality of revenue within Progressive's operations to drive higher EBITDA from less revenue. Reduce the CapEx intensity necessary to generate the EBITDA and therefore convert a higher percentage of EBITDA to free cash flow. As mentioned already this involves the heavy focus on price improvement, but an equally heavy focus on shedding unprofitable volumes. The adjusted EBITDA margin of Progressive's operations before corporate overhead was about 30% in the third quarter. And we are extremely pleased to reported over $200 million of adjusted free cash flow in Q3 which was the first full quarter of combined operations since completing the Progressive Waste acquisition. Regarding other potential M&A activity, acquisition dialogue is near record high levels. These opportunities include new market entries and tuck-ins, competitive and exclusive markets, integrated and non-integrated opportunities. In some instances concerns over potential post election tax laws are driving the timing. Additional transactions in the pipeline that may get completed either later this year or early next year should easily surpass the $120 million of acquired annualized revenue we thought we would complete in an average year based on our expanded footprint following the Progressive merger. Similarly, interest and market divestitures or asset swaps remains very high and we will look to complete that process by Q1 of 2017. We currently expect to rationalize about $225 million in annual revenue and through swaps obtain approximately $100 million to $125 million of annual revenue in return, but with greater EBITDA coming than what is going out. Once completed this should add about 100 basis points to consolidated company margins and reduce our CapEx as a percentage of revenue driving even higher conversion of EBITDA to free cash flow. We currently have 2 to 3 options on each of the potential asset rationalizations. Finally, as also announced yesterday, our Board of Directors also authorized a 24.1% increase in our quarterly cash dividend, our sixth consecutive double-digit annual increase since commencing the dividend in 2010. Even with this increase our dividend remains less than 20% of our expected annual free cash flow following the merger. Providing tremendous flexibility to fund our growth strategy and further increase return of capital to shareholders. And now, I'd like to pass the call to Worthing to review more in depth the financials highlights of third quarter and to provide you an outlook for Q4.

Thank you, Ron. In the third quarter revenue was 1.85 – $1.085 billion or about 10 million above the upper end of our outlook for the period. Acquisitions completed since the year-ago period contributed about 538 million revenue in the quarter with Progressive Waste accounting for 513 million of that amount. Adjusted EBITDA is reconciled in our earnings release was 342.3 million, or 31.6% of revenue and in line with our margin outlook for Q3. The year-over-year adjusted EBITDA margins reported for the third quarter declined by almost 300 basis points, primarily due to the comparative lower margin profiles of the Progressive Waste operations acquired since the year ago period and to a lesser extent the impact of lower E&P activity. Fuel expense in Q3 was about 3.7% of revenue and we averaged approximately $2.33 per gallon for diesel which was down about $0.46 per gallon from the year ago period and $0.16 per gallon sequentially from Q2. Depreciation and amortization expense in the third quarter were 14.1% of revenue. The 155 basis points year-over-year increase as a percentage of revenue was primarily due to acquisitions completed since the year-ago period as D&A expenses was about 15.6% of incremental revenue contributed from the Progressive Waste acquisition, or over 300 basis points higher than legacy Waste Connections. Acquisition accounting typically increases our D&A as a percentage or revenue following a material transaction, due primarily to the expensing of that portion of the purchase price allocated to both intangibles and landfills. But as we've noted before, while a higher D&A percentage impacts GAAP results, that has no impact on free cash flow generation. Interest expense in the quarter increased 11.3 million over the prior-year period to 27.6 million due to the additional debt outstanding resulting from acquisitions completed since the year ago period and higher interest rate associate with fixed rates notes issued since the prior-year period. Debt outstanding at quarter end was about 3.66 billion and our leverage ratio, as defined in our credit facility, decreased to less than 2.8 times debt to EBITDA. GAAP and adjusted net income per diluted share in the third quarter were $0.50 and $0.72, respectively. Adjusted net income in Q3 excludes the impact of almost $38 million after-tax of acquisition-related items such as amortization of intangibles and certain items related to the Progressive Waste acquisition, including severance-related costs, accrued synergy bonus and professional fees. Our effective tax rate for the third quarter was 32.3%, which included a $2-million impact to the provision, associated with the change in deferred tax liabilities, resulting from the Progressive merger. Excluding the acquisition-related deferred tax item, our effective tax rate was closer to 30.8% in the period. We still anticipate our effective tax rate to be between 30% and 31%, subject to some variability depending on the percentage of total profitability, contributed by operations in the U.S. versus Canada. I'll now review our outlook for the fourth quarter. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and filings we've made and Waste Connections U.S., Inc. has made with the SEC and Securities Commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic and operating environment. It also excludes any remaining severance, integration costs or other items resulting from the Progressive Waste acquisition and any additional acquisitions or potential divestitures that may close during the period. Revenue in Q4 is estimated to be about $1.02 billion. We expect core price plus volume growth for solid waste to be between 3% and 3.5%. Adjusted EBITDA in Q4 is estimated to be almost $315 million or about 30.8% of revenue. Depreciation and amortization expense for the fourth quarter is estimated to be about 14.4% of revenue. Amortization of intangibles in the quarter is estimated to be about $27.4 million, more than $0.10 per diluted share net of taxes. Operating income for the fourth quarter is estimated to be almost 16.5% of revenue. Interest expense in Q4 is estimated to be about $27.1 million. As mentioned earlier, our effective tax rate in Q4 is estimated to be up to 31% subject to some variability. Non-controlling interest is expected to reduce net income by about $200,000 in the fourth quarter. And, finally, our fully diluted share count in Q4 is estimated to be about 176 million shares. And now, let me turn the call back over to Ron for some final remarks before Q&A.

Okay. Thank you, Worthing. Again we are quite pleased that our financial results continue to track at or above the increased expectations we communicated in August. And we extremely pleased that safety pricing and operational improvements within recently acquired operations continue ahead of schedule. Our adjusted free cash flow remains notably strong at over 200 million in Q3 alone. Our first full quarter combined operations following the Progressive merger. Our strong free cash flow profile enable us to announce a record increase in our quarterly cash dividend while also maintaining tremendous flexibility to fund our growth strategy, particularly important given record M&A dialogue. In addition, our revenue and EBITDA look for Q4 is consistent with the sequential Q3 to Q4 expectations we provided back in August, and we have no resets at this point to alter the early thoughts for 2017 that we also had provided. We'll be better positioned in February, when we provide our formal 2017 outlook to incorporate the impact of any acquisitions and divestitures either signed or completed by that date. We appreciate your time today. I'll now turn the call over to the operator to open up the lines for your questions. Operator?

Thank you. [Operator Instructions] Your first question comes from the line of Tyler Brown with Raymond James. Please go ahead.

Hey, good morning, guys.

Good morning.

Hey, mice quarter. Hey, Ron I believe post the deal you guys had talked about getting back to call it a 32% EBITDA margin by maybe 2018 or so. But I mean this quarter you guys posted about 31.6. I get it the Q3 is probably one of the better quarters, but it sounds like you have 100 basis points of margin uplift potential from divestitures. You got some additional opportunity from here's and there's with insurance and safety. And it really doesn't even contemplate E&P or even a full round of pricing at Progressive. I guess my question is why shouldn't we start to think about 2017 margins coming in closer to that 32% and maybe even like 33% into 2018?

Well, Tyler, you just laid out what we believe is achievable. You laid the building blocks out properly, it's hard to argue since we did just 231.6%. We did another 100 basis point through the rationalization so that takes it to 32.6%. We said, there is about 50 basis points in safety. We are on track for that that takes you to 33.1%. And that's before we really improved pricing and other operating things. Now that also takes you to that in the best seasonal quarter of the year too. So, in fairness, I think we now believe cautiously that we can get 2017 to a 32% type EBITDA margins where we thought that would take us fully into 2018. And I think it's reasonable to think that we can get well beyond that probably approaching 33% in 2018. And that's without E&P help. If we're getting E&P help, then that number is north of 34% pretty quickly, which is where we were as you know before the deal and before some declines in E&P. So it's a long way around the bend to say we thought ultimately post deal because of the lower margin profile of Progressive overall that we got back to a 32%. We would be happy. We now see a pathway to get to 33% to 34% on the margin side.

Yes, very, very helpful. And then, Worthing, just maybe one follow-up here, just hoping to kind of deconstruct free cash flow next year, but if we start with call it that 1365 or so in EBITDA and you take out, I don't know, maybe, mid-400s for CapEx, you got some cash interest and cash taxes. I mean is it crazy to think about free cash approaching the $700 million mark sometime next year for the full year?

There is math that gets you at least $700 million for calendar year 2017.

Okay. All right. Perfect. Thanks, guys.

Our next question comes from the line of Derek Spronck with RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question.

Sure.

On the acquisition front, is the environment an opportunity lending itself more towards tuck-ins or are there more material acquisitions that could develop?

Well, Derek, again, as we just said in the call, we have got all the above. We have got standalone platform transactions and we've got tuck-ins, we have got integrated opportunities, we have got franchise opportunities. We are really seeing a variety of things become available in part due to a potential fear of tax raises depending on who wins the White House this year in November. And so it's a combination. Again, I would caution materials – everybody defines material differently, but what we said is that we thought an average year would be $100 million to $120 million in our new platform a year. And we're saying that the number ought to be well north of that. So there obviously is some reasonable size in our model, standalone transactions, to get to those kinds of numbers.

Is that partly why you weren't really that active with the NCIB in past few months after announcing the $8.8-million share buyback?

Well, that's right. As we've always said, we think probably priced strategically consistent acquisitions are highest and best use of excess capital. And given what we see in the pipeline, we stay down at the market during Q3 while we see what deals actually do get across the finish line.

Yeah. That makes sense. And can you do more material acquisitions or larger scale acquisitions, as you're currently in the midst of integrating the BIN assets?

Well, people forget that we already did $2 billion-plus of revenue this year.

Yeah.

Yeah. Derek, I mean, again, we're not sitting here saying we're doing – as you know, we're not sitting here saying we're doing something the size of a Progressive because that doesn't exist. But can we do numbers north of our $120 million by 1.5 to 2.5 times? Yes, we can. I mean, that level – that speaks to our divisional and our regional field structure. They can absorb those types of things, especially as it spread out, whereas the Progressive merger has put obviously tremendous resources and constraint on the corporate group because of the size of it. But our field infrastructure can do several hundred million dollars and continue to still deal with the integration of Progressive.

That's great and just one more quickly. Are you able to leverage – being now domiciled in Canada, are you able to leverage that better for U.S. acquisitions?

Look, we made – we do that evaluation on every deal we do. And so to the extent there is some planning we can do, we'll pursue it. So it's really on a case by case basis.

Okay. That's great. Thanks a lot, guys.

Thanks, Derek.

Our next question comes from the line of Al Kaschalk with Wedbush Securities. Please go ahead.

Hey. Good morning guys.

Hey. Good morning.

Good morning, Al.

It looks like you sent a new or set a new benchmark for free cash flow as well as the conversion of EBITDA to free cash flow for not only yourselves but for the industry. So keep up the good work.

Thank you.

Ron, I had a question on your M&A comments and portfolio commentary. It sounds like you're, without putting words in your mouth, exiting the New York area based on the commentary. But you also said that there are some competitive markets that you're looking at from an M&A perspective, which is slightly different than the legacy Waste Connections but I am sure are still very focused on the right returns. So if you could add a little more commentary around those comments?

Well, Al, are you exiting the securities research industry? We haven't publicly mentioned any markets at all. So I wouldn't put words in our mouth with regards to New York City.

Yeah. That's what I was going to say. I don't think we said that we're leaving New York. People may draw that conclusion because obviously it's a heavily urban centric market. But I will tell you that the margins in New York are up over 2.5 times since April. So just as a cautionary word there on people guessing what we are or aren't doing.

And the safety performance has been nothing short of exceptional.

Yeah. So, again, we don't talk about any markets that we may or may not be in until we're not there or we are there. But I would tell you that our New York team has just done an incredible job since before the close. But having said that, as you know, we have always tried to do a couple of different things in our market model, and that is enter markets where we can ultimately have the business performed less like a commodity than it might otherwise, where we can create a sustainable pricing platform and a more predictable volume platform and, therefore, a margin profile and, therefore, a free cash flow profile. That's ultimately what we do. When we can get into, we do that through contract markets, which is a whole market in the Western U.S. And off of that, outside of the Western U.S., we go into competitive markets. They may not all be urban centered and in fact aren't but competitive markets where we can get large collection position and those are the things that we look for in competitive markets. The transactions we are looking at doing continue to fit that profile. We're not deviating. We said all along, the larger profile – footprint profile of Progressive, that 85% plus of it was consistent our market platforms and 15% that wasn't, we would take a hard look at and we are doing that. But we're not changing our market strategy or our return strategy because we have a bigger profile footprint now. So I guess that's a long way around the barn to tell you nothing has changed in our M&A thought process. What has changed we have a larger platform and we have less competitors competing for that M&A opportunity. That's what has changed.

That's very helpful and I didn't mean to imply maybe what you heard. On the follow-up question, Worthing, on the tax rate, I know it's obviously about jurisdiction where revenue is coming in or income, the 31% seems a little bit above maybe what thoughts were, is it still something you are working on? Is that where we will be level setting going forward? What are your thoughts there?

The range of 30% to 31% is still consistent with what we said in our last call. But we also have reminded people since the day we announced transaction really is that the more improvement we get into the US operations and Progressive and raise the profit ability in the US, that tax rate will pick up a little bit. And for us, they have already gotten Progressive to a 30% EBITDA margins, you are starting to see us move that tax rate to be upper end of that. It's a good problem to have. Not a bad problem.

I agree. We'll watch. Good luck, guys. Thank you.

Thanks, Al.

Our next question comes from the line of Bert Powell with BMW Capital Markets [BMO Capital Market].

I guess, I must have said that wrong, it's actually BMO. Good morning, guys.

Good morning, Bert.

On the CapEx number for the quarter, if I think about the seasonality of it usually Q4 is a little heavier this quarter looked a little lighter. Can you help us understand that a little bit better? Is it a bit of a CapEx holiday or is this just really timing and how should we think about CapEx in the fourth quarter?

Yes, it's more of a timing issue. Last call we laid out an expected CapEx spending for the second half of the year about $225 million or so. The fact that about $95 million that got done in Q3 just tells you that Q4 will be a little heavier than that about $120 million, $125 million. So purely timing.

Okay. Okay. That's helpful. And then when you think about next year in terms of overall cash flow you're still thinking about CapEx as a percentage of revenue in that that 10% and 10.5% range?

Correct.

Okay. And then the volumes – specialty waste or C&D volumes that you mentioned that pushed off or it will be more than 2017 impact. Can you give us a sense of magnitude like how material is that?

Well, again in the quarter it was about $3.5 million revenue in Minnesota alone. That was 70 basis points. And we've been highlighting this kind of election malaise so to speak within some state government spending especially on infrastructure projects and the timing was curious but there's a cover piece in the Wall Street Journal that just covers that specific topic of how States has cut dramatically on infrastructure spending and we didn't place the article with same days our call, it's just coincidental by the way.

Okay. And just last question just Worthing we chatted about this a bit but I wanted to revisit leachate mentioned on the waste management call. It seemed indicate a little bit more problematic for the whole industry. I was just wondering how you would position your leachate relative to peers based on where your footprint is?

Well, you know, we're now 40 states. So relative to our peers Waste Management Republic obviously are complete national companies as are we being in 40 states now. So there is no really geographic differences in any of our companies. There's no real change in leachate when there are changes to is the enforcement standards of the various POTW or treatment facilities throughout the U.S. that are happening because of various localized or state reasons requiring lower particulate and other concentration matters in leachate to meet the discharge standards. And that comes at a greater cost. So if you look at state, if you were to take an example a state like Washington has a very high standard for the discharge into the POTW of leachate compared to other states perhaps not on the West Coast or not on the East Coast. So the coast tend to be concentrated in population, they tend to be concentrated with a lot of development and they have higher discharge standards. You tend have more costly where you have landfills on the coast. If you get into the central part of the country where there is more space available and it's not quite as concentrated, you tend to have lower costs. So this is really an evolutionary issue. There is no real change in what is going on with leachate. Other than your larger landfills now in the U.S. that are more regionalized with greater waste footprint. And therefore when rain falls on them you have a great amount of leachate coming off. It's just a geometry issue. So – but there is no real change going on.

Okay. Yeah. I think the positioning or at least the indications were that it was a bit of a step change and you are not saying that's the case.

Again, that's a geographic issue and a landfill specific issue. I think overall the step change is that you are seeing greater enforcement activity and therefore more stringent self policed treatment standards that we must point and that does come at a higher – a nominally higher cost.

Okay.

This has been going on for several years.

Okay. Perfect. Okay. Thanks Ron. Thanks Worthing.

Thank you.

Our next question comes from the line of Noah Kaye with Oppenheimer. Please go ahead.

Good morning. And as a New Yorker thank you to a New York team for the improved safety performance. Much appreciated. I'd like to ask about sticking with special waste. I'd like to ask about the coal ash opportunity. It [indiscernible] since we talked about this. But just wondering how you are seeing that opportunity set heading into 2017. Can that be a tailwind for you at this point?

Look, any coal ash we get is a tailwind because we have very little or none of it right now. But, look, we've consistently said for us we view this as something that is 2 to 3 years out. The utilities are first trying to address there some critical ponds ASAP. And longer-term they are trying to figure out what's the best way to try to minimize the cost themselves or ship as much to the rate base as possible. When certain areas get addressed that are approximate to our landfills, I'm sure we will get our share of that waste stream. But those actions are not going on right now in approximate locations. So for us I don't see it as a 2017 opportunity. If it happens, that's great. We only see this as kind of a 2018, 2019, 2020 opportunity for us. With North Carolina is ground zero for a lot of this. And our assumption is that the mandated data on which these things need to be addressed will ultimately get pushed out as most of the sorts of things do over time. And I'm sure this will be no different

Thank you. And then just maybe a question about the volume growth mix, you had another nice 7% growth in roll-off, but as you talked before about the 1% to 2% type volume growth. How do think about the mix of that sort of on the sector basis? And is the type of volume growth that you are expecting, how would you think about sort of the relative margin profile of where you're expecting the growth? Thanks.

Yeah. First and foremost, now you're talking about volume growth, but obviously, our focus has been on price, price and price. Many of the markets given our market share that we have, the numbers you see on the volume growth are purely reflection of the underlying economy and how well are now it's doing. And obviously, as we talked about the Progressive Waste operations are trying to shared some 50 million to 70 million of unprofitable or unsafe or broker related business. As Progressive comes into the volume mixture and calculation start in June 1st, you'll see that negative volume been corporated into our reported volume growth. And so that will give a clarity picture on volume growth and potentially some incorrect takeaways as to what's really going on, but first and foremost focus on the price. I'd say, with regards to flow through, again, our business is no different than others in our sector. Flow through is coming at the landfill, its coming in at 60% to 70% plus type incremental margins. It's coming off of the frontload commercial systems. It's coming in at as much as 40% incremental margins. So if it's coming in on residential, it could be a 20% to 25% incremental. If it's roll-off on the collection side, it's going to about 10% or 15% incremental. So it depends on where you see the economy kind of firing next year.

Are you sure, I mean, I think we love to get your views on that at this point. I mean, we do have a competitor talking about it yesterday. Just kind of curious this is a really macro question, right.

You mean – the macro question about where the economy is going?

What you are seeing right now. I mean, are you expecting – we had folks talking yesterday about still lagging on housing starts versus kind of a steady run rate. The idea is that that could drive growth and the idea is that commercial could follow. So I'm just curious for your views at this point. That's fine.

Yeah. Okay. Thank you. Sorry for the clarification. We said today on the script that we see the economy in sort of the 1% to 2% volume range and that's not coincidental that that approximates what GDP is. And with everything we've seen it's been running about 1% to 2%. Sometimes it's higher but then it's re-corrected downward. And so you know Ed [ph] I'm going to call it this that 750,000 to 1,000,000 housing starts, that is about 1.5% to 2% type volume environment on a historical basis for the industry. To get into that sort of 2.5% plus, we need to be as an industry – as a nation doing about 1.5 million to 1.7 million new housing starts and if you go back to when that happened last which was back in '06 to '08 we ran that, the sector was actually getting 3% plus volume growth. So – and the reason is because those levels of housing that leads to new infrastructure requirements development and it leads to new commercial and retail development and ultimately we're getting that across our system. We are getting construction, we are getting what's fits our roll-off system. In our landfill we are getting commercial starts and we're getting residential starts. So every leg is getting set there and outpacing competitive poaching. So, there is a step-change that happens if we get another 500,000 to 750,000 homes a year being built. It does take us probably to the 2.5% to 3% volume growth as a sector and us as a company. But we're just not seeing that at this point in time. We are seeing half of that.

Yeah. Great, thank you very much. I appreciate it.

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

Yeah. Hey guys. Can we just go back to the comment on volume at BIN? Can you maybe just give us a little color on the 50 million to 70 million that you said needs to be re-priced? I am curious is just going away altogether or is that re-pricing opportunity? Ultimately what I'm trying to understand here is just how much of the book should be re-priced so nice positive there and how we should think about maybe the volume declines over the next couple of years as you go through an update that book?

Yes. Well Joe look, as Worthing said there is probably ultimately $50 million to $75 million of business. So if you take that off of $2 billion footprint that's 3% to 4% or 3% to 3.5%, our business that needs to go away. And what I mean by that is unless we materially can change the price, we're not going to do business for 0% to 10% EBITDA margins. That's not going to the landfill. That's a waste of time. It's a waste of capital. It's a waste of risk allocation. It's a waste of overhead. So we're happy to give that to someone else. So there is brokerage business that we are actively shedding or giving notice to that upon expiration we are done doing it unless it's materially repriced. There are unsafe stops that we have directed the field that they are free to get rid of and allocate to another competitor. And there is non-integrated business that the margins are unacceptable and we've said either materially raise the price or do the same. That is an active process that's going on right now. It is not something that happens overnight. It's going to take time. It's going to take us a couple of years to get through that. I think will probably shed. I'm going to wind 30 million to 50 million of that business between now and the end of 2017. And to do that we will probably – they'll double that business. We will look at shedding, and we will improve it through price or another service mechanism and get it to an acceptable return. So that means we probably attack 100 million to get to 30 to 50 that we ultimately shed. So this should be – when we say replace it, as we have said all along, we believe within Progressive that we're going to take what was a $480 million EBITDA business at close on 1.9 billion of revenue and we're going to turn into $600 million EBITDA business on $1.8 million of revenue or 1 billion of revenue or less by the end of 2017. And so we don't really look at it as replacing it. We look at as there is some very good business within their – that was being clouded by some very poor business.

Got it, got it. And then maybe just to clarify on that – on the volume front then, so once you do work through that and I get that it's going to take time. Should we think about the BIN volume backdrop kind of migrating toward a market growth type backdrop or will it still be maybe a little bit light, just because you'll be pushing price higher?

Yeah. I think – look, I think that you should think of it as a market type volume growth. It's going to be our sales force, its going to the purchase that have generated what Waste Connections has done over time and I do not think that that's going to change. Look, when we can start shedding business we will obviously report what net – what real – reported volume is, but we will give you what underlying volume is and what the business we drove out personally is – or purposely is, so that you really know what's happening in the underlying volume environment. So, said in another way, if we come through and we'd report a negative half in a quarter on total footprint, but we drove out 2.5%, we're going to tell you here's what volume really was.

Got it. That is helpful. Thanks Ron.

Our next question comes from the line of Michael Hoffman from Stifel. Please go ahead.

Hey, Ron, Steve Worthing, thanks for taking my questions.

Sure. Good morning.

Sure. Good morning, Michael.

Good morning. In 2Q in August you were asked about sort of the free cash flow trend for the second half of 2016 and you responded it’s about 300 million. So my sense is we're now more in the 330 to 350 range for the second half. Is that an accurate conclusion?

It really depends on some timing of a few things at the end of December or late December. So you probably at the low-end 3.15 or so for the second half of the year and at the upper end you can get to the kind of number you just laid out. So it's more of a timing late December versus early January on a couple items

And just timing meaning capital spending and acquisition stuff?

Capital spending, timing of some working capital payments, timing of tax payments and amount of tax payments in December and things like that.

Okay. Then you've got asked earlier and you did say, yes, 2017 should be 700 million or better, but you've also talked about getting to 450 to 475ish share type free cash flow number, which if you assume normal – go back to some level normal buyback 2% a year that puts you in a 780 million to 800 million kind of number by 2018. That sort of – we're going to have this sort of step up from where we are to 700 then towards 8 and then settle into a long-term growth rate, if you add in the buyback and where a low double-digit per share growth and free cash. Is it the right conclusion?

It's something a leading question, but that's right. You are right.

I wasn't trying to be that obvious.

We've always talked about 450 to 475 or so free cash flow per share target internally here in 2018. Obviously if we can do at least $700 million next year, we've got a four bucket share number assuming no buybacks next year in 2017. So it kind of puts as well on track to that kind of number for 2018.

Okay. And then on all of the deal stuff both selling and buying, how do you think about where valuations are today? Are people being rational or is a buyers market for what you want to buy, but it's a seller market for what you want to sell? How do you see that?

Well I think, Michael when we break into buckets. As we've said on divestitures or rationalizations that we are looking at much of that we are doing in swaps, so that's really an EBITDA type swap, perhaps if there is some CapEx or other differences that's trued up. There's really not a multiple – and that's happening between public companies and large regional companies. And so I would just say that that doesn't really affect the swaps. On the acquisition environment, I would tell you that you've typically seen that as a Waste Connections that we've probably been around 5 to 7.5 times EBITDA buyer between tuck-ins and highly integrated or franchise standalone at the end. What you've seen is the upper end is probably moved up a turn or little more than a turn over the course of the last several years. Why? Because market multiples have moved up, public company multiples have moved up, interest rates have come down, a variety of reasons. And the long-term cost of debt capital allows it to move up that much and still get the same type returns on capital. There are sellers out there they think they have to get our multiple. We've told them go public. And that tends to end the conversation. But for the most part I think you would find that we're going to be right in line on the historical basis with where we have been on a multiple less some of those larger transactions might be a turn to turn and have higher.

Okay. That's great. And then last one for me, you've accrued about $5.5 million for bonus, so if I double that that says you're doing 105 to 110 for the synergies in the July program you rolled outs, is that the right conclusion?

It says we're trending above 100. Obviously, we need to wait and see how Q4 plays out, but we're clearly trending above 100.

And Mike I would remind, I know you're aware of this, just for those listening, when you say synergies that's synergies and cash tax benefit.

And it's just the SG&A portion because remember our pricing improvement is not in the number, operational improvement, safety improvements. So, again just focused on SG&A and cash tax.

That's right.

Right. So, juxtapose against 85 that you told us in June.

That's right.

Very close yet, right. Okay.

That's correct.

Okay. And then one last on the volume just trying to bring some clarity. You're not – you're looking at structural same-store volume trends in bin assets that are priced correctly versus Waste Connections are doing – they are doing the same things. They are participating in market volume in the same manner.

Yeah, if you look at for instance at the underlying Progressive operations as an example in Q3 and Q4 you've heard that their pricing is now trending towards ours in that mid to better range. And we've seen their volume again in that low 1% range. So, they're trending in that 1% to 2% and remember that low 1% range includes some impact as Ron talked about, about turning away some existing revenue. So, the trends are very similar. Also I tell you where – again, we've talked about weakness in the influenced economies are called influence economies, again Alberta is no different and Canada. I mean, they see similar sorts of weakness up there until you see the current economy recover. And Michael just as a comparison, again if we looked at where Progressive was running prior to the deal, they were running between 0.7 and 1% price and 2.5% plus volume. We completely inverted that.

Which is more operating...

We've driven the price to 2.5 plus and the volume down to about one and we want that trade-off.

Right.

We've said since day one, we'll take that trade off all day long.

Remember the Q1 there were 4% plus volume and sub 1% price.

Right.

And that's...

Which all comes back to how you'll do 700 million or better in free cash and almost $800 million in 2018 it’s that that's one of the drivers.

That is a material driver, well it might getting greater profitability through price and servicing customers that we can be safe at and fast effective at and driving down the CapEx as a percentage of revenue to which will – so all three of those flow to free cash.

Great. Thanks for taking my questions.

Our next question comes from the line of Hamzah Mazari with Macquarie Capital.

Good morning. Thank you. Ron, you mentioned a lot of comments around sort of drivers for volume. I was wondering if you could sort of just frame for us where we sit in today's cycle you talked about fourth year of positive MSW volume. Is that in past cycles is that generally a trend to look at? Is it six years of positive volume or are we in the eighth-inning or the fifth inning of waste cycle if one wants to call that being a cycle in waste any sort of color around that. I realize what the drivers of volume growth are?

Yeah, so good to talk to you. Well, look I mean, Hamzah, I would generally tell you that historical past cycles sort of the volume increases for 4 to 6 years and then you tend to see some sort of economic change and as you know we are a laggard in that effect. We tend to still have positive volumes a year, year and a half into a contraction. But I don't know that that is a good indicator Hamzah. We also thought interest rates would rise six or seven years ago and they have gone the other way and there is no indication that that's going to change. So as long as the government could continue to print money and make things free, you're going to continue to see this slow growth train just continue along.

It's about what any we're in but the innings are longer innings.

Yeah. I mean, in that way, I would tell you we are in the fifth or six innings not the eighth.

Got it. Okay. I know. That's helpful. And then on the divestitures and rationalization, I think you mentioned there are couple of options around asset rationalization, I was when if you could walk through those? And then also how should investors think about the risk to that 100 bps of margin expansion. I realize one of the risk is the deal doesn't get done, but any sort of confidence level around that margin expansion. Thank you.

Yeah. Thanks, Hamzah. Well, look as far as more color on divestitures rationalization, we're not going to provide specifics on that, A, because of the competitive nature of that, B, the sensitivity of that both on our side as well as those that were discussing this with. So we really just are not at liberty to do that at this point in time. But what I will tell you is that what I meant by there were two to three options, I meant that in each of our potential rationalizations we are talking to several players or have talked to several players and had discussions of what those options look like that they may or may not be interested in. We've identified sort of a lead option for each of our rationalizations and swaps and we're going to work through that. And if that doesn't work we're going to go option two. So how confident in my in the basis points, I'm very confident in the 100 basis points. We're going to get that done either through swaps or we're going to get done through exiting that business in something manner or another. I am aware the 100 basis points is going to happen, but I'm highly confident that it will happen in the matter that we have outlined. Remember the 100 basis points if you go through the math of what Ron laid out before, it is just math. If we are getting the same or slightly higher EBITDA dollars, but having been able to do that on 100 million to 125 million of less revenue the math is you've got to 100 basis point margin expansion. So it's still like margins grew up hundred on the same revenue or higher. But the key is obviously, you can keep the same dollar of EBITDA and actually shrink that revenue by 100 million, 125 million, you're pulling off 10 million or 12 million of CapEx related to that EBITDA, and dramatically improve an EBITDA minus CapEx to the conversion of that free cash flow. And so the 100 basis points consolidated margins is just the output of math. The key thing is the free cash flow profile. And again I want to emphasize, the whole key in these – what I called rationalizations or swaps is these are not – these are not bad businesses or markets. These are markets where our position isn't good. And so the whole opportunity here is can we get something where one and one equals three and whoever is getting what we have one and one equals three for them. So we're fixing market positions for – meaning improving the market positions for our self and our competitor. That's the challenge. These are not bad markets, these are just positions that aren't optimal for whoever owns the assets, right, in this case us, on these assets.

Great. That's very helpful. Good talking to as well, guys. Thank you.

Thanks, Adam.

Our next question comes from the line of Corey Greendale with First Analysis. Please go ahead.

Hey, good morning. Most of my questions have answered. Just a quick one. The Q4 guidance implies less seasonality in EBITDA margins than you've seen before? I'm assuming that because you ramp up some the work with Progressive and once all the movie pieces anniversary, you would expect more additional seasonality? But looking for some thoughts on how to model seasonality kind of once everything normalizes?

Yes. Seasonality that we are expecting is really the same seasonality we laid out in the August call with regards to the sequential change Q3 to Q4. Any comparison to what call the old Waste Connections, obviously, Progressive is less landfill revenue as percentage of the total and obviously the landfill side of the business is where you see more a seasonable depth Q3 to Q4, so the extent that mix of our P&L looks different now post combination that might be what's influencing some of the outcome here?

Great. I'll turn it over. Thanks and nice work.

Thanks, Corey.

Our next question comes from the line of Chris Murray with AltaCorp Capital. Please go ahead.

Thanks, guys. Good morning.

Hey, good morning, Chris.

Good morning. On the E&P business, I guess, a couple pieces of this, one, you've talked in the past about the fact that the margin coming back comes back pretty strong high-double digits definitely. Can you give us some idea of what the guys are seeing in the field right now? I mean I know it's sort of almost on a daily basis that we are seeing changes in rig counts and some activity levels coming back, any thoughts around that? And then, I guess, if we think in 2017 for whatever reason we do see some stabilization and improvement, is this an area where guys would look to more acquisitions, or you think you have got enough for what you have right now?

Yes, first on the activity side, just as the rig count data may suggest, we are seeing the most improvement in the West Texas Permian. We are seeing a few things, few rigs in the New Mexico side and, obviously, when you get to the Mexico side, it's a bigger impact on us because there the state regulation requires all the volume to go to a landfill. Louisiana is seeing some improvement as well. We're looking potential improvements, believe it or now, Eagle Ford or South Texas as some gas drilling has come back into play. We've actually seen return of rig or two in Oklahoma again in the Phrasal. I'd say the Bakken [ph] is probably the least active for the obvious reasons right now. But so we're seeing it, but again the Permian is we're received the most activity. With our asset positioning is still what we believe is the best in the industry. From an M&A standpoint, what we have looked at a couple one-off assets that might expand our geographic footprint, but a lot of our efforts have been historically on just Greenfield permitting and we're still pursuing 4 to 5 new Greenfield permits to try to expand our footprint because where we want to be there are no assets right now, so you got to work out with the permitting side.

Okay, great. And then moving to one of the things that I know I've always been focusing on is a safety performance. I mean you got the human impact of what that does in the environment, but there's also been the cost impact. I think if we go back to preannouncement, I think the comments you made is that BIN was running roughly 3 to 4 times your absolute safety cost. I mean you referred some good stats on incident rates and things like that. I think that's a great leading indicator. You made the comment that you're a little ahead of plan in terms of safety performance. How would you actually – how should we start thinking about where you are along this journey to get with the BIN rate was in terms of the cost back down to where Waste Connections was historically?

Yeah. Well, I'll give you some actual numbers, and that hopefully that puts in perspective. So at the closing Waste Connections had in our industry we looked at as an incident rate and that effectively measures how many of your employees per year are going to have an accident or injury statistically based on what is actually occurring. Ours was about one in eight. Okay. We have an incident rate of 12 to 13. BIN was 1 in 2. So an incident rate of 50. We have the combined company back down into the mid-20s and we will have the combined company by the anniversary date under 20. To put that in perspective that will yield a 60 plus percent reduction in incident in the first 12 months at BIN.

Okay. And then, if you're going to put a number on it, I think, your safety cost was running something in the 1% plus range of revenues pre, the acquisitions, so you would think that – you just start to use that or is that a fair way to think just dimensionalizing of the incentive rate with good proxy?

It's a little different. Obviously the U.S. where we have workers comp and auto been responding about 220 basis points higher than us as a percentage of revenue. And so that's what we've always targeted at least to 25 million savings as we thought about the overall reduction. Could it hit a number closer to 30 if we are truly successful across all markets? Sure. But 25 is still the bogie we've targeted as a cost reduction. And understand that part of this also while we believe the safety reduction well as we get the high rate down into the low teens, you can do math and get to a number that's closer to 40 million. Part of our program, we give back safety improvements to those driving it, meaning the front line employees. They share a greater percentage as we improve. So you can't just look at the pure savings and say we're going to take all that because we are going to give part of that back to the employees driving it.

Okay. Great. But you feel like you are well on track to hit that number?

We are well ahead. Yes. We were hoping by year end to get to a 20% to 25% reduction. We're at 40% in October. We are on track to approach 50% reduction by year end. That's almost double where we thought we would be. But again as we've talked about in the past how it comes through is more of a timing issue. You get more of the cash flow savings immediate because we're not hitting things or people aren't hitting us. And so with high deductible programs were going out of pocket with less frequency right, because we're not having as many incidents. From an actuarial standpoint because we still have legacy progressive in the trailing analysis, you don't really see the flow through on the actuarial analysis coming through the P&L accruals until you get beyond the anniversary of the closing that we start anniversarying these improvements. So we've always said the gap benefit as more of the second half 2017 timing where the cash benefit is immediate.

Okay. Great. Thanks, guys.

Our next question comes from the line of Andrew Buscaglia with Credit Suisse. Please go ahead.

Hey, guys. Just a quick one for me. Can you talk a little bit about just being operationally in the quarter. I've just done a standalone basis how did they do, I know you talked about some pricing volume stuff for them but can you just talk about like starting what the margins would've been or how they would've done?

Yeah. We laid it out in the prepared remarks that the progressive operations did about 30% EBITDA margins in the period. That was obviously before any incremental corporate allocation from this office.

Okay. Can you talk a little bit about – it sounds like the actually we're doing fairly well or a little bit more on track to improve. How much of – as you've now seen them for a full quarter, how much of their operations have they started to turn around and that you are kind of benefiting from as well at this point?

Yeah. I think...

All hands on deck.

Look Canada has an exceptional quarter. They didn't have turnaround per say to worry about because they have been performing well for a long time. But they even on their standard had a good quarter. We are seeing – we've seen very nice improvement in the Eastern – East Coast all progressives operations really dating back to the beginning of the merger. And then where the laggard has been which is a southern region which is the largest piece of the Progressive footprint in the United States we've seen nice improvements in Florida. We've seen nice improvements in parts of Texas. We've seen nice improvements in parts of Louisiana. Arkansas has continued to be strong. And Missouri has continued to be strong. So there is really not a part of the U.S. footprint that has declined performance wise. All of the operations in the macro or market areas in the macro in the U.S. are improved since the closing.

All right that's helpful. Nothing else for me. Thanks guys.

[Operator Instructions] Our next question comes from the line of Barbara Noverini with Morningstar. Please go ahead.

Good morning everybody. Jumping off the comments that there are some improving activity in certain North America oil and gas areas, are you starting to see any signs of life in the MSW waste side in the communities that surround oil and gas regions? Or would you say that it's still too early to really see that and is there any difference is activity you see in the communities near the U.S. based oil and gas areas versus the Canadian-based area?

Yeah. So Barbara we have. We have started to see the U.S. particularly when you look at North Dakota you look at parts of New Mexico and parts of south Texas and parts of the Gulf Coast in Louisiana and then really large parts of Oklahoma, those are the areas that took the crude decline hard and the local communities large losses of jobs and large impacts on the commercial and the retail front in those markets. We saw that really bottom in Q1 and start to show some signs of improvement in Texas, New Mexico and Louisiana in Q2 and again – step up again in Q3. We have not really yet seen those improvements flow through in, for example, North Dakota or Oklahoma. Those markets are still – have been on the MSW side pretty impacted. But in the others, we are starting to see the MSW. As jobs come back and some small businesses are able to come back, we're starting to see some of that flow through.

Excellent. Thanks for that. A nice quarter.

Thank you.

Thank you.

And there appears to be no further questions on the phone line 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 the call today. Both Worthing and Mary are with me available to answer any direct questions that we did not cover and that we're allowed to answer under Regulation FD and Regulation G.

We thank you again, and we look forward to speaking with you at upcoming investor conferences or on our next earnings call.

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.