Waste Connections, Inc. (WCN) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Waste Connections First Quarter 2017 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, the conference is being recorded today, Thursday, April 27, 2017. And now it's my pleasure to turn the conference over to Ronald Mittelstaedt, Chairman of the Board and CEO. Please go ahead, sir.

Okay. Thank you, Operator, and good morning. I'd like to welcome everyone to this conference call to discuss our first quarter 2017 results and provide our financial outlook for Q2. I'm joined this morning by Worthing Jackman, our CFO; as well as several other members of our senior management team. As noted in our earnings release, 2017 is off to a great start with 15% same-store landfill tonnage increases, better than expected contribution from recent acquisition, increased E&P waste activity, and higher recycle commodity prices, all driving results above our outlook for the first quarter. Increased contribution from these higher margin activities resulted in an adjusted EBITDA margin being 50 basis points above our expectation. In addition, adjusted free cash flow in Q1 was $237.5 million putting us well on our way to our full-year adjusted free cash flow outlook of $725 million. We are extremely pleased with our first quarter performance and encouraged by both continuing strong solid waste fundamentals and then notable ramping of E&P waste activity and related margin. In addition, we are proud of our proposed three-for-two stock split then to broaden our shareholder base and increase liquidity for investors. If approved by shareholders, this will be the fourth such split in our almost 20-year history. Before we get into much more detail, let me turn the call over to Worthing for a forward-looking disclaimer and other housekeeping items.

Thank you, Ron, and good morning. The discussion during today's call includes forward-looking statement made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of applicable Canadian Securities Laws. Actual results could differ materially from those made in such forward-looking statements and information due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement on Page 2 of our April 26 earnings release and in greater detail in filings that have been made by Waste Connections with the U.S. Securities and Exchange Commission and the Securities Commission with similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements and information 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 and information in order to reflect events or circumstances that may change after today's call. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share, and adjusted free cash flow. Please refer to our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. Finally, reported results reflect the impact of our Progressive Waste acquisition on June 1, 2016. Contribution from this combination will be treated as acquired revenue and will not be incorporated into organic growth statistics until 12 months from the closing date. I'll now turn the call back over to Ron.

Okay, thank you, Worthing. In the first quarter solid waste core price plus volume growth was 4.7% exceeding our 3% to 3.5% outlook for the period due to higher than expected volume growth. Core price as expected was 2.6% in Q1 and in spite of benefiting from mild weather and an extra leap year day in the prior year making a very tough comp, volume growth was 2.1% in this year's first quarter. This strength in volume growth was primarily driven by double-digit increases in disposal volumes and continuing improvement in collection activity most notably in our Western and our Eastern region. As a reminder, price and volume growth from acquired operations are not reflected in our reported organic growth calculation until the anniversary date of the related transaction. That said we're pleased to note that operations acquired in the Progressive Waste acquisition delivered approximately 4% pricing growth in Q1. This means that once we anniversary the Progressive Waste closings on June 1, reported pricing growth for Waste Connections should approach or exceed 3%. First quarter volumes were down about 2.5% in the former Progressive Waste footprint, again as expected, due to our efforts to shed low quality and unsafe to service revenue. This is a purposeful price volume trade up in the near-term as we improve quality of revenue in many of these markets. We're also pleased to note continuing improvement in financial results and a dramatic improvement in safety in these operations. Accidents and injuries are now down over 60% in the former Progressive Waste footprint. Solid waste landfill tonnage overall in Q1 on a same-store basis increased 15% over the prior year period. MSW tones rose 15%, special waste increased 19%, and C&D was up 7%. On a same-store basis commercial collection and roll-off revenue in Q1 increased about 6% and 5% respectively on the period year period. Roll-off pulls per day increased a little more than 4% driven primarily by our Central and Eastern region. Our Western region was also positive despite record rain and snow in Q1. Recycling revenue excluding acquisition was $17.1 million in the first quarter or up about $7.1 million or over 70% year-over-year due primarily to higher commodity values for fiber. Prices for OCC or old corrugated containers averaged about $165 per ton during Q1, up 68% from the year ago period, and up 32% sequentially from Q4. OCC prices currently average about $140 per ton, up about 35% from the level we averaged in last year's second quarter. However it's important to note that current OCC prices despite the strong year-over-year improvement are currently down about 25% from March's high. Regarding E&P waste activity we reported $36.9 million of E&P waste revenue in the first quarter, up 21% year-over-year, and up 14% sequentially from Q4, with each month increasing throughout the period. The base in driving these results is currently showing the strongest improvement compared to monthly lows of last year is the Permian where revenue is currently running over two times its monthly low in 2016 outpacing the percentage increase in rig count within our market area during the comparable period. Given the high incremental flow through accompanying such revenue increases, margins also improved notably throughout the period providing a nice entry point into Q2. Margins are now once again solidly above our corporate average. As highlighted on our February call, we believe 2017 and 2018 are setting up a strong double-digit increases in E&P waste activity given sector trends. Looking at acquisition activity, the first quarter was quite active with transactions totaling over $225 million of annualized revenue. The approximate $200 million revenue Groot transaction completed in early January saw little part of leading position in Northern and Western Illinois, increased potential internalization benefits of additional disposal volumes into our landfill there, and further expanded our platform for additional growth acquisitions. We also completed four tuck-ins during the quarter across three states with total revenues of about $10 million and we remain under regulatory review for the previously announced acquisition at an approximate $15 million revenue franchise operation on the West Coast. That should close in late Q2 or early Q3. On the divestiture front, we signed a definitive agreement last week for an approximate $10 million revenue market-for-market swap to further the Progressive Waste divestiture program and we expect the remaining divestitures to be signed or closed during Q2. We currently have all planned divestitures under letters of intent or swaps for sale and are conducting reciprocal due-diligence on the assets involved. We believe these should all move to binding definitive agreement by the end of Q2 and close after receiving consent in late Q2 or Q3. Put simply M&A dialogue remains active and as indicated by our strong reported results in Q1 performance from recent acquisitions remains consistent with or ahead of our expectation. Regarding the status of our Chiquita Canyon Landfill Permit extension in Southern California we do not anticipate another update on that matter until a final vote in June or July as we noted in our April 20 press release. This is a very fluent process currently. Finally, we look forward to hosting our Investor and Analyst Day on June 20. Our second such event in our 20-year history the first one was held during our 10th anniversary year. We expect this upcoming event to be more conversational and interactive than presentation oriented and we plan to highlight our safety focus, servant leadership driven culture, the nuts and bolts of the progressive ways to integration, and a few deep dives into areas of continuous improvement including leadership development, quality of revenue, maintenance, and IT, speakers will include a variety of our field, region, and corporate personnel. Unlike at most of these events we won't be laying out multi-year targets as we are quite proud to discuss the present. Moreover there is no change to the differentiated strategy we have executed for the past 20 years to deliver differentiated results on a go-forward basis. Investors or Analysts interested in attending will need to pre-register for the event by contacting Mary Anne Whitney. And now I would like to pass the call to Worthing to review more in depth the financial highlights for the first quarter and to provide you a detailed outlook for Q2. I will then wrap up before heading into Q&A.

Thank you, Ron. During the first quarter revenue was $1.091 billion or $16 million above our outlook for the period. Acquisitions completed since the year ago period contributed about $540 million of revenue in the quarter with Progressive Waste accounting for $490 million of that. Adjusted EBITDA for Q1 as reconciled in our earnings release was $332.8 million or 30.5% of revenue and about 50 basis points above our margin outlook. The margin being contributed to better than expected increases in higher margin flow through activities such as solid waste, landfill and E&P waste revenue, and higher recycle commodity values. Year-over-year our adjusted EBITDA margin reported for the first quarter declined by 250 basis points due primarily to the comparative lower margin Progressive Waste and Groot acquisitions completed since the year ago period. Fuel expense in Q1 was about 3.9% of revenue, and we averaged approximately $2.48 per gallon for diesel which was up about $0.06 per gallon from the year ago period and up about $0.07 per gallon sequentially for Q4. Depreciation and amortization expenses for the first quarter were 13.8% of revenue, up 50 basis points year-over-year due to higher intangible amortization expense related to acquisitions completed since the year ago period. For the quarter this was 30 basis points below our outlook primarily due to higher than expected reported revenue. Interest expense in the quarter increased to $11.9 million over the prior year period to $29.1 million due to the additional debt outstanding resulted from acquisitions completed since the year ago period and higher interest rates compared to the prior year period. Debt outstanding at quarter end was about $3.97 billion and our leverage ratio as defined in our credit facility was slightly less than 2.8 times debt-to-EBITDA. In the first quarter we recorded a $77.3 million charge for goodwill impairment in our E&P segment resulting from the early adoption of a new accounting pronouncement promulgated by FASB in January meant to simplify such calculations as discussed in our most recent 10-K. It's somewhat ironic given the vagaries of acquisition accounting that despite the improving performance within the E&P waste our early adoption in this January pronouncement eliminates all remaining goodwill in that segment. In addition, we recorded a charge of $53.5 million for an expected loss on assets held-for-sale related to the remaining Progressive Waste divestitures and $11.3 million for an adjustment to a contingent earn out related to an acquisition completed by Progressive Waste in 2015 due to that operation strong financial performance this year. That acquisition is the only preexisting earn out obligation assumed in the Progressive Waste acquisition. Excluding the impairment and loss on assets held-for-sale items, our effective tax rate for the quarter was about 24% which is about in line with 25% rate expected for the period. As communicated on our February call, our effective tax rate for the period was expected to be lower their estimated full-year rate as Q1 now includes a benefit to the provision resulting from a new accounting pronouncement that we classify as excess tax benefits associated with equity-based compensation arrangements on investing dates from the cash flow statement to the income tax provision. GAAP and adjusted net income per diluted share in the first quarter were $0.08 and $0.74 respectively. Adjusted net income in Q1 primarily excludes the impact of the previously discussed discrete charges, amortization of intangibles, and other acquisition-related items including mark-to-market accounting for share-based awards assumed in the Progressive Waste acquisition, certain rebranding cost, and the remaining severance and professional fees. Adjusted free cash flow in Q1 was $237.5 million or 21.8% of revenue. As Ron noted earlier we're well on our way to meeting our original full-year adjusted free cash flow outlook of $725 million. I will now review our outlook for the second quarter 2017. Before I do we 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 filings we made the Securities and Exchange Commission and the Securities Commission with 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 rebranding 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 Q2 is estimated to be between $1.145 billion and $1.15 billion. We expect core price plus volume growth for Solid Waste to be between 3% and 3.5% reflecting a one-month contribution for June from the Progressive Waste operations. Adjusted EBITDA in Q2 as reconciled in 8-K were filed contemporaneously with this call is estimated to be approximately 31.5% of revenue or about $362 million. Depreciation, amortization expense for the second quarter is estimated to be about 13.7% of revenue. Of that amount amortization of intangibles in the quarter is estimated to be about $24.5 million or about $0.09 per diluted share net of taxes. Interest expense in Q2 is estimated to be approximately $30.5 million. Our effective tax rate in Q2 is estimated to be about 28.5% subject to some variability. Finally, non-controlling interest is expected to reduce net income by about $275,000 in the second quarter. And now, let me turn the call back over to Ron for some final remarks before Q&A.

Okay. Thank you, Worthing. Again 2017 is off to a great start and the tailwinds that drove our outperformance in Q1 should make for another exceptional year in 2017. Solid Waste fundamentals remain strong, E&P waste activity and related margins continue to ramp, and we remain on pace to grow adjusted free cash flow per share more than 15% in the year. With over $250 million of cash on the balance sheet at quarter end and three quarters of the year of cash flow generation ahead of us, we have tremendous flexibility to fund potential acquisitions while significantly increasing our return of capital to shareholders. Regarding the latter, we expect to resume share repurchases opportunistically through our normal course issuer bid during this quarter or next and to implement another double-digit increase of our regular quarterly cash dividend in October. We appreciate your time today and I will now turn this call over to the operator to open up the lines for your questions. Operator?

Thank you very much. [Operator Instructions]. And our first question is from Tyler Brown from Raymond James. Please go ahead.

Hey, Ron, you noted in your remarks that once Progressive is left, you're expecting to see roughly 3% pricing which is obviously very strong but I'm curious number one what was Progressive's organic volume in this quarter and two how should we think about volume in the second half once all the revenue is in the base?

Yes. Well what we said in the comments was that their volume in Q1 was a negative 2.5% which was as expected if you recall, we had said that there was approximately $50 million of revenue that we looked to shed -- the divestiture revenue but revenue that was unsafe or unprofitable to service, so if you take $50 million over $1.9 billion you get just about 2.5%. So it was bang on what we plan. So that that will continue, it will solely abate as the year goes on or improve meaning as the year goes on. So if you take that it says that with approximately 4% price that we said on our footprint negative 2.5% on the volume, you are talking about somewhere in the 1.5% core price and volume growth and that should improve because volumes will continue to improve as we continue to replace revenue that we had shed with sales growth.

And anniversary the loss.

And anniversary the losses both, so that's what you should expect there.

Yes, so Tyler here if you strip down to 3% to 3.5% obviously with the Q1 results you see the legacy Waste Connections is running higher than that. But again once the Progressive numbers come in, in June 1 we have one month influence of what Ron netted out about the 1.5% reported price plus volume for Progressive Waste which pulls down the average for June and gives you the 3% to 3.5% for the quarter. Now of course net of the business we are shedding as we said all along the underlying trends are stronger than that.

Okay, yes sorry. I missed the negative 2.5% remarks, sorry about that.

No problem.

But yes sorry and then Ron you noted that virtually all of your divestitures are under LOI which I'm assuming the balance sheet saw the asset held-for-sale spike but can you remind us may be how much annualized revenue you are looking to divest and may be what the EBITDA or free cash flow contribution are from those revenues today?

Yes, well what we've said was that there was approximately $200 million of revenue that we had identified that we would divest either through swaps or sale in one manner or another. We announced, as you know, in Q1 that we have completed $50 million of that, so that left approximately $150 million. We said today that there is another $10 million that was signed on definitive agreement in Q1 as well at the end of Q1 so that left $140 million. And if you used a -- I'm going to approximate if you used somewhere between $15 million and $20 million of EBITDA on that remaining $140 million that would be a fair number. And so that that tells you that, that's running 10% to 15% EBITDA and that on a free cash flow basis -- on a standalone basis right now it's probably negligible.

Okay, all right. Perfect. And then just lastly I had one quick question on the proxy. So I think in the proxy you guys made some changes to the compensation program that puts let's call it a more weight on PSUs. You also added a free cash flow may be a TSR metric to drive those PSUs. I'm just curious of one you can talk about the board's thought process there and two it's little unclear in the proxy what is the watermark on that free cash flow per share CAGR needed to fully participate in those PSUs. Thanks.

Sure, sure that's a good question, it's nice to see somewhat actually read the proxy lot of time we put in that thing. Anyway the metrics you're right, we increased the PSU component from 20% of the aggregate grant to 35% of the aggregate grant and by the way we do have financial performance hurdles on both elements of that, in the typical RSU or what people think about the time vested there is a one-year performance metric over free cash flow margin in that before vesting period starts but that's a separate item. In the PSUs you are right, we are at a free cash flow per share CAGR over the three-year period and we are at an absolute ROIC improvement over the three-year period. The ROIC improvement for target payout is 150 basis points over that three year period, so again about 50 basis points a year on average. And in the free cash flow CAGR for target payout it's about 10% again we target minimum double-digit free cash flow per share target growth and PSUs align with that target. Then overarching everything is kind of a relative TSR modifier to the extent that we're above the median and gives the S&P 500 that additional benefit on the calculation and we had said in the upper quartile as we've been for several periods, there is additional modifier as well.

And our next question is from Hamzah Mazari with Macquarie. Please go ahead.

Good morning, thank you. The first question is just around capital allocation. Ron, you mentioned you may resume buybacks may be in light of that comment, may be speak to the M&A pipeline a little more, is it different versus prior years in terms of size of deals are sellers more willing to sell with potential tax reform down the line, just any color around the pipeline and your comments around resuming buybacks?

Sure. Thank you, Hamzah. Well first off capital allocation has not changed, what we've always said is that our first and best use of capital is appropriately -- strategic appropriately priced M&A activity. Secondly, is our commitment to our dividend. Third would be our buyback. And then of course fourth would be debt repayment. The M&A environment and the pipeline I would consider very robust. There is a lot of people I would say looking at the possibility of doing something. As you know, we've said for quite some time that the impediment to deal is high taxes and low interest rates. While we still have that but there is a belief that there could be particularly after yesterday a change in the tax component of that. I think you're going to see a lot of people sort of lineup and look to get values on their company and then wait to see what occurs with taxes. Whether that is a retroactive -- whether anything happens number one and number two is it retroactive and then number three what is it. Most people will not be doing something I would say prior to understanding that because they want to have clarity on what their after-tax proceeds are going to be. But and I believe and we've said since the Presidential change and a potential tax change that there is going to be a window of opportunity if tax change occurs that is going to be I think an M&A bonanza not just in our industry but in many M&A has been somewhat muted over the last eight years because of obvious reasons of high taxes and low interest rates. And if you lower the taxes there is a pent-up demand and people are going to believe there's a window to run-through before a potential next Presidential change and it could reverse the other way. So we are cautiously optimistic in that way. But the pipeline remains as we said in the comments pretty robust. I would expect things to be more a little backend loaded because of the potential tax changes being expected to happen perhaps by the August Congressional Recess but we're very busy no question.

Of course we've already had our third most active year doing $225 million to-date.

Right, right. That's very helpful. And then just on pricing you mentioned 4% on Progressive any color as to how that splits between Canada and the U.S. business and anything to be aware of in that pricing number regionally.

No, it's very consistent. I would tell you that Canada is at or above that average. And so what tells you that the both the U.S. and Canada in the form of footprint is very similar. And I would say that it is reflective of our heavy focus on price. I would say that that the former Progressive was more focused on volume and not as much on price but as probably a little bit of pent-up price lag in some of their markets that we knew was there and we've been able to take advantage of. So I wouldn't tell you that, you should expect 4% out of that footprint on successive years going forward. But I would tell you that we are confident it will be consistent with what Waste Connections has historically done and dramatically higher than what was done in the prior footprint.

Great. Just last question I'll turn it over. As you head into next quarter anything you guys are looking for around seasonality of volumes and the question is really, you've seen normal seasonality the last year or two and then volumes are coming in better than expected what indicators lead to stronger seasonality and volumes for you guys. Thanks.

Again, if you look at our guide, our guide Q1 to Q2 sequentially as you kind of work through divestiture impact in Q1 is about a 6% seasonal bump in revenue which is about average for what we expect right now.

And our next question is from Michael Hoffman with Stifel. Please go ahead.

Thank you Ron, Worthing for taking my questions and Ron congratulations on the Hall of Fame.

Thank you, Michael. I appreciate that.

On the volume story can you help with the thinking about what's in it and what's permanent and where we are in the cycle of that what's permanent the trends in it. I have this belief that solid waste business cycle this time has been much more radical unmetered and not rapid like historic ones and so there's a lot more volume that come it’s not a hockey stick. That permanent volume so commercial collection versus the Indian special waste so I'm trying to understand in that 15% landfill growth, how much of that was permanent and how can you correlate that with your own commercial collection trend?

Yes. Okay, well if you, the comments Michael we said that that commercial grill approximately 6% in revenue and well up to approximately 5%. So if you take that and you assume that in your revenue stream of $1 billion that collection is approximately two-thirds and disposal and transfer are probably one-third. And that disposal owns approximately a third of your collection revenue. If you're getting 5% to 6% growth on what is 67% then mathematically the disposal is growing on your own collection at 10% to 12% and so what it says even you're getting a little bit of a pickup on your third-party which is also their business is probably growing at approximately 3% to 4%. So it's not really -- so it's way to say that while 15% in MSW, or 7% in C&D sounds very high you got to think about what it is as a percentage of dollar of reported revenue that we have and that we're just really getting the share that we have on our track and that our customers bring to us. So it's not really that we're taking any share. So -- I would -- so that sort of claims 15% for you. I would tell you that obviously, for a third-party business to be growing at that rate it tells you that there is still significant organic growth coming into the solid waste sector across all region because the growth and the comps that we have was broad-based across all five regions, there wasn’t anything that jumped out in particular other than West was late to the recession party, has been late to the recovery party, and is having a very strong housing recovery. So the West was a little outsized in that way. But I would say we agree with you that it has been a more staggered and prolonged recovery and we are not seeing evidence that that is letting up. We were cautious in February in our commentary as we headed into our sixth year of double-digit landfill volume growth. We feel like we're sort of busting at the scene in our disposal system. We've been surprised that the magnitude of the continued recovery quite honestly. But to answer your question, I mean I don’t know exactly where we are but we're not seeing a sign that we're necessarily near the end of it, it's just that we are copping higher and higher numbers and so that gets more difficult to do. We are for the first time over the last two quarters meaning the fourth and now the first quarter and into the April, we are adding wealth in many markets in the nation on the commercial side both residentially and commercially for the first time since the downturn. We are adding headcount fairly rapidly to stay up with this growth now. We had it has really been absorbed until probably the third quarter of 2016 and so that would tell you that that system is probably on the collection side nearing full capacity, when you look at it in that way.

But also Michael if you look at this year being the fifth year a pretty strong recovery within our numbers on the volume side to the extent that tax law changes or infrastructure plan to something that gets implemented in DC that does actually drive GDP above that 1.5% to 2% to something closer to 3%, well that just puts the economy in another gear and just further prolongs this period of recovery.

So one number that I grabbed on to is the third-party three to four which is still better than what would be the structural volume of GDP related volume growth, which means yes there's an incremental driver and that in your and what I-m hearing is you're saying you're seeing that driver in your own commercial collection business as well either service interval upgrades and new business adds?

That's correct.

And also remember Michael geography plays a role in this too.

Yes.

Remember we've got a quarter of our total revenue rounding sitting on the West Coast may be another quarter sitting from the Southeast from kind of Gulf Coast stays up in the Carolinas. You've got growth pockets in Colorado and other areas offer the East Coast. I mean there are that kind of smaller foot down around the U.S. it's comparably higher growth in some other geographies within the U.S.

Yes, and as you know well we're not just because of what connection wasn’t by our model and where Progressive wasn't, we are not in and around the Great Lakes and we're not in on the Upper North East and I would tend to argue those the geographies that have had a more difficult to struggle from a recovery standpoint.

Okay. Switching gears to E&P given where the rig count in the counties you are located, could we anticipate that a 10% sequential improvement is a reasonable way to think about the path?

Well as you think about how we guided Q2, we've guided another 8% to 10% sequential increase between from Q1 to Q2. And again let's just take this one quarter at a time but again if those trends continue and the rig count continues to recover, you could see further sequential improvement beyond Q2.

One thing I would comment on Michael with regard to that, one thing that we are seeing and we've talked at length to our legacy E&P guys who have been around a long time to confirm whether they agree or not with what I'm about to say. Through this contraction that happens from 13 into 16 in the oilfields we're seeing tremendous decision making changes with speed in the E&P business that are very price sensitive so at 53 to 55 and above we see a rapid deployment of rigs rapidly and an acceleration of drilling and at 48 we see a rapid deceleration. And our E&P guys have said that they had never seen such a sensitive around $5 to $7 swing. The drillers are very much figured out what that return point is with their new cost structure and the technology is allowing them faster stop and start time and shedding and bringing on these rigs. So with that the only I would cost utilities would price more you want to assume but I would tell you whether it's going to be 8% 10% or 15% growth but there is a lot of sensitivity around where we are sitting right now.

And that's mostly about your tech midcontinent exposure because that would not be broken to the Bakken.

That's right. Well the Bakken is still really acquired and I would say that the Bakken turn on point is probably, $10 north of where things have been.

Okay, that's very helpful. And then, I know it was asked a different way but if I'm reading through your comments 3% the right price trend for the second half, the volume trend in the second half though is somewhere between zero and one not between 1% and 2% is that the right way to think about?

Yes, well the reported --

The underlying is --

The underlying -- the reported because of the conscious shedding of 2.5% former Progressive which will now come into it yes, Michael and what we will do obviously we'll report, the reported but we will provide what the underlying is doing relative with, consideration to what we've shed in that period or two.

And it's also possible again on the pricing side as you get into Q4 this year you start to anniversary some of the price increases from '16 that you could see reported price just slightly below 3%.

Yes, it will be upper end 3.5% to 3%.

Yes.

Okay. And then we're going to my initial question but what's the rollover of been in 2Q?

Well in 2Q if you've got to, if you look at Q1 and Q1 again with was about 490 million divide that by three and multiple that by two so two-thirds of that 490 and take it up a little bit for seasonality.

Okay so do the same 6% incremental sequential divide by three, multiply two.

You've been -- you're getting the zip code.

Yes, Michael I was wrong, I'm seeing in the 320 range.

Yes. Okay, then all right I got that right, okay. Great. Thanks a lot. See you at Waste Expo.

Thank you.

And our next question is from Derek Spronck, RBC Capital Markets. Please go ahead.

Great. Thanks for taking my questions. CapEx as a percent of revenue was around 8.3% for the quarter. I know that there is some lumpiness in CapEx on a quarter-over-quarter basis but for the full-year should we assume CapEx comes in at around 10% of revenue or do you think you'll be able to get that ratio below 10% on a sustainable basis.

Yes, Derek, we guided about $450 million of the CapEx of the full-year and our guidance remains unchanged on that. As you know Q1 has that construction in that related to landfill build-out Q3 has that construction element in it so Q3 is typically the peak, Q1 is typically probably the lowest level. And so you will, we're still on target for that $450 million of CapEx for the year and the quarter-to-quarter patterns are as expected.

Yes, and Derek the goes on the -- on the track and heavy equipment side. We wait to see sort of how things are coming out and projected to come out on a performance basis and a cash flow basis in the first quarter before placing a substantial amount of our orders. So you see a higher flow in Q3 and Q4 of our equipment and capital than you do in one and two so it's a timing issue.

Yes, okay that makes sense. Just moving on to your landfill portfolio overall are there any major landfills that are wreaking that end of life and/or any sort of major investment you cap it or expand their space.

Other than our disclosure and commentary around our Chiquita landfill which are in expansion process for almost 14 years, the answer to your question is no. There are no material landfills that are over the next five to seven years that have expected closure or expansions that if not achieved would lead to something in that period. So depends on what your horizon is but I just defined over the next five to seven years nothing.

Okay, that's great. And just one last one for me, what are you assuming for OCC pricing in your Q2 guidance?

Yes when we give guidance for any quarter, we assume current conditions, so it's about 140 a ton right now for OCC.

And our next question is from Al Kaschalk of Wedbush Securities. Please go ahead sir.

Congratulations on very strong quarter. Ron and Worthing I was wondering if you could parse it out a little bit more of the details on the 50 basis points of better margin expansion and plan, I know you had shared a lot of commentaries broadly but is there anything in particular whether it be the commodity prices in the quarter, what were the major factors to that performance?

Yes I mean, Al, I would say that the following, number one, achieving the 2.6% price in the prior historical waste connection footprint but also achieving a 4% price in the Progressive footprint obviously blending together a 3% plus price, that's a material margin driver, the costs are running out more than that 3%, you are getting 20 to 30 basis points expansion just on price leverage right there. So that certainly price would probably be number one. Number two double-digit landfill volume growth at a business that is structurally a higher margin business and collection. So that would be just about an equal contributor, obviously we said that -- obviously we said that E&P waste had accelerated, there was a small percent of revenue in the quarter obviously but it did come in at higher than average corporate margins. So that's a contributor. And then certainly commodities as you pointed out, it was probably a quarter of the contribution as well, if I had to break it down to that first 10 to 15 basis points because it's obviously all price not all but high percentage of price, so it flows through. So it was a combination of those four, the reality of those four give you more than 50 basis points and of course encourage it happens the other way too. So those three, those four things probably led to about 80 to 85 basis points of margin expansion and then there were another 30 to 35 points some of which were in detail going the other direction to give you a net yield of 50.

Yes, I'll keep rich fact to where we were in February we gave our outlook for the period, again as Ron said those higher margin flow through of recycling commodity, prices in March, and slightly higher E&P waste revenue as well as landfill volumes of the $16 million revenue be that was little over half of that revenue be and given the higher margin flow through that you expect to see an expansion of the margins relative to the 30% that we guided.

All right. That's nice to have all the levers but more importantly having the operating leverage that you guys continue to focus on. Ron I wanted to just may be spend a little bit, I know you said you are not really going to be making too many comments or any further comments on the LA County situation but may be just more broadly speaking given the strength that you're seeing in the landfill volumes and particularly the continued citing on the West Coast, is there -- any are there things you're thinking about that you're willing to share at least on other disposal opportunities or sourcing of landfills that could further leverage what you're doing on the West Coast?

Well I mean I think what our experience on the West Coast has shown us is how valuable and how critical strategic landfill assets particularly on the West Coast but that goes from many places. Really are because the permitting process is slowly elongated and so difficult and you're not seeing a decrease in population, you're not seeing -- you're not seeing -- you're seeing robust economic times right now on the West Coast and you're seen waste generation at virtually all-time highs in many markets throughout the West. So we would love to have incremental disposal or handling assets in the West. We are always working on that, we have things in the work. I think it’s important to note that we have really a half dozen major landfills in California. We have expanded every single one of those over the last 10 years successfully. And have 30 to 50 year length assets in all of our California landfills right now except the current Los Angeles assets and actually and have a permit that has been recommended that gives us a 30-plus-year assets we have to work through the details for that. But we have very successful in our permit activity in the West Coast. But it is very difficult. And I just think that points to the value. I think there is a long-term relatively strong upward price led increase that is coming in West Coast disposal volumes because of the volumes that exist there and the difficulty with which it is to permit facilities.

All right. That's very helpful which I just wondering if the short landfill in the West Coast or if there is a lot more power in that location than say across other parts of the country don't. So, we look forward to watching and monitoring on what happens there. Thanks and good luck.

Thank you.

Thank you very much, John.

And the next question is from Chris Murray with AltaCorp Capital. Please go ahead.

Just thinking about your -- the volume trends and certainly the discussion around GDP growth just I guess what I'm trying to understand and just thinking forward is just as the demand for your services continues to increase and you talked about adding routes and adding cost. I guess a couple things one is there a constraint on your -- going to be your ability either exciting people or assets in order to service that stuff and then can you just talk a little bit about whether or not this is sort of keeping your share of a growing higher or you guys actually being able to take market share away from other competitors.

Yes, well Chris I think, you obviously asked a few questions let me try to take each one. First off is there and a build is there a constraint on getting assets was one of your question to service the growing volume. The answer to that is no obviously we have ample CapEx and truck and equipment manufacturers are more than always willing to take it and they are ramping their productions up. So on the physical asset side that is not a constraint. On the human asset side you did on something that I think is not well now understood a lot of public and the investment community and that is that we are in a tight, tight labor market especially for skilled labor in the United States. And depending on what happens with immigration reform that will not necessarily help that situation because that is difficult to find quality drivers, mechanics, equipment operators, people that is a type especially for skilled labor is a very tight market. It is out there but it is difficult and so we are not as of today are constrained on the physical resource side or the human resource side it's something that we pound on nonstop or trying to be out in front of but it is definitely a difficulty. As I'm sure you're probably aware in the month of March there were over 325,000 unfilled commercial driving positions in the United States alone in the month of March. So that tells you right there how many people are out going for what is a limited supply personnel. But this is something that we do and deal with and we'll get through. To your next question, the last part of your question which was about taking share, really I would say this is far more of a rising tide I mean Waste Connection has always been a price focused company and by default you are not necessarily a volume focused company. Our model is when where we get volume because of structural contract and geography not alone on price led volume growth so that -- to state out we can’t take share in a lot of market because in 43% to 44% of the market we have a 100% share by contract and so it would be misleading to say if anything more than a rising tide for a lot of what at least in our model delivers. But I think at some of our landfill we are the benefactors of some private companies that take share who tend to be more price aggressive. We're rather have them be more price aggressive and bring it into our landfill then I'll in fact to go get that on our trucks per se so that's how I would claim the pieces of your question.

All right that’s great. Thanks you. And then just one last question maybe Worthing, you guy made the decision to do some rebranding work I know you said at the top of your script all your guidance excludes those rebranding costs but any idea on magnitude or is that sort of already built in your Cap Ex plan and so it's already there.

Chris, this is Ron. And I know it's to Worthing but rebranding is not cap, we do not capitalize rebranding so number one you should know that's not in our CapEx which is why we call it out because we run it through the P&L as the current period expense. That branding should want above $10 million to $15 million over the balance of this year and probably into the first quarter of 2018 so that's what our expectations are currently.

And the next question is from Noah Kaye, Oppenheimer. Please go ahead.

Thanks so much for taking my question and I'll limit myself to one question. Just wanted to follow-up on the legacy progressive margins, between the price increase implementation and the operational improvements I think at the ending of the 2016 you talked about margins being up 500 bips where were those margins tracking in 1Q and then maybe if you could talk about upside from here both considering the plan divestitures and then separating that out just talking about kind of organic improvements and really ways those improvements coming from. Thanks.

Sure. Well in Q1 those margins were up approximately 550 basis points on the former and again it depends on how much of the corporate synergy you allocate to that versus something else but assuming that everything we took out of the former Progressive was all allocated to those, we would get to the around 550 number to answer your question. We have said as you know, that when the divestitures are complete that that will be approximately 100 basis points across the entire platform and so we're not complete with that yet but we've done what's call it 30% You should expect that there is 50 to 75 basis points of margin with when we are complete with the divestitures on a go-forward basis. So that would take the margins up 600 to 625 basis points on the former Progressive platform and from there is a continued improvement process through pricing through risk through shutting of low margin customers and let's just say another 50 basis points. So we expect that we will be coming into 2018 approaching probably a 700 margin point improvement on the original platform.

And the next question is from Joe Box with KeyBanc Capital Markets. Please go ahead.

Yes, hey guys. So may be just around that question can you actually give us what the realized synergy number was -- for been in 1Q and maybe where the run rate is currently?

Yes, Joe, we're not tracking that anymore. As we said back in our first call since closing back in August of last year we laid out the buckets, we laid out the numbers we rather communicated this business on an integrated basis versus trying to layer cake certain synergies. But what we can tell you is that the SG&A was mostly in place that you are in, the operating improvements on a run rate basis. Ex-safety were mostly in place by year end, safety again that we've targeted $25 million we're probably running in that $25 million to $30 million on a kind of run rate basis actuarially that will probably allow us to have about $18 million to $20 million of that at the high end in this year's number and the rollover to next year's number. Although the cash benefit from that's earlier and obviously using the additive benefit being able to get pretty strong on price. And so it's again, it’s more important to talk about this on a integrated basis rather than kind of continue that legacy this or legacy that.

If the estimate Joe from what everything Worthing just said the probably $25 million to $27 million of synergized benefit. Synergized meaning what Worthing jus said SG&A, safety and price margin impact of on the legacy I'm going to estimate the fact all in is $110 to $120 million, $25 million to $28 million in Q1.

Got it. Thanks. That's helpful and last one for me Ron I think it's an interesting comment that you made that you guys are busting at the seen on disposal and you are kind of closer to capacity on the collection network. I'm curious if that implies any change to the incremental margin profile is there some sort of reinvestment need and then may be to Derek's question earlier I guess there's no huge risk from facility closures but could we see radically see any sort of risk disposal growth rates if you guys are maybe bumping up against daily tonnage caps

Let me take the last part of that first. There is only a couple of facilities and Chiquita Canyon is one of those and we've discussed that I think. That we have daily tonnage caps so just to aware of that at our largest facilities for the most part there is two in Canada and two in the United States that we have daily tonnage caps. So there is not a real risk of that that is not something I think anyone should focus on as something that would inhibit us. I think as far as to your commentary of and "busting at the seen" seems meaning we're very full and we're running sort of full plateau at disposal. I way to continue to handle more all my point is that you’re cycling on larger and larger denominator your percentage is just naturally come down that that, that's what that commentary was referred to Joe and nothing more than that and was the another part in there and I apologize.

Yes, the incremental margin profile I guess more on the collection networks since you've addressed disposal.

Yes, yes no Joe I mean look there's always some -- there's some nominal margin compression when you add routes obviously could it take some time to get filled but you also if you do that right you're pulling down over time on other route, you’re pulling down variable on other route.

And that doesn’t happen across all markets at the same time.

And that’s right it doesn’t happen across all markets at the same time and if you add a point you are doing that, you better be pushing price hard if it’s a competitive there to justify it to offset as much of that margin compression from the additional capital as possible. And if it's not a -- if it's not a competitive market and in its in our 43% of footprint that’s fixed, you are getting the full benefit of adding that capital. So, I wouldn't want to hide behind that, we're also 60% internalized so all that flow through with that landfill that runs through 50% so it helps offset it. So I wouldn't expect -- I wouldn’t expect any margin compression from that.

And our next question is from Brian Maguire of Goldman Sachs. Please go ahead.

Really strong volumes in the quarter up, more than 2% just wondering if, it seems like maybe they could have been even stronger if not for the days in the weather, just wondered if you had a thought on what kind of an impact that that might had and thinking about the rains in the West Coast and the improbable leap day?

Yes again the rains in the West Coast probably headed for couple of million dollars on the volume side. Again March recovered that was kind of slipping through February and March rebounded pretty strongly in the West Coast and so we may have recovered some of that in the month of March perhaps we don't call things like that out given the scale of the company right now and given how isolated was just on the West Coast.

Okay, great. And then just thinking about the 2Q outlook for 3% to 3.5% price and volume, if you think of the price part of it, you have probably got pretty well implemented at this point should be pretty consistent. So that it may be implied a little bit of conservatism on the volume part of it, just wondered if there were any in the quarter trends that would make you little bit more cautious about it or you just being a little conservative because you hit the large numbers and your comp in tougher numbers there?

No, we're really hitting the introduction of Progressive Waste on the volume side into our reported numbers right because as you laid out on February call, the underlying trends in the U.S. seem to be around that 1.5% to 2% on the volume side, the underlying trends in Canada seem to be around that 1% side. But again based on the $50 million of revenue that we're shedding within the Progressive footprint that causes Canada to be about negative 2% impact to our reported volumes such that reported volumes are negative one plus or minus and in the U.S. if you're running 1.5% to 2%, you take 1% out of that based on where we are shedding in the U.S. not being [indiscernible] on a reported basis become half a point to one. And so we just don’t have as much of an impact in Q2 because it is just one month of Progressive but again as we’ve noted as you bring more months of Progressive’s operations into reported numbers the perfect shedding of some of that revenue will make the optics of reported volume to be lower than the underlying trend.

Just one last one from me -- just now that you've owned group for a couple of months just wondering about any if you found any positive or negative surprises in it anything unusual or maybe just going as expected?

I would tell you that it has been mostly all positive, Groot we knew was an exceptional company, one of the best private operators in the nation out for many decades, tremendous market, tremendous assets, tremendous people, and if anything they succeeded expectations, they have shown, we have pushed our safety culture, they have reduced incidence over 30% in three months, they have increased the internalization to our disposal network. They've done an exceptional job, Ryan Brandsma and John Groot are running that for us have done a really nice job of assimilating into a public company after being in a private company life so long as well as I have almost ever seen it done and we are not surprised by that. But we are very happy about it and we are thrilled to have them and they have got a variety of growth things that we are working on. So we are very encouraged by Groot.

And our next question is from Andrew Buscaglia of Credit Suisse. Please go ahead.

Can you just check or can you just talk about your recycling, I know some of your competitors seem, seem to sort of de-risk those some other contracts, it seems you guys really benefited from incremental flow through in the quarter, can you just talk about what how are your contracts structured in that and then just as a check on a way down, do you guys really eat it if we get a pullback here on recycled commodities.

Yes Andrew if you look back over time, we have been very consistent about changes in commodity values flow through at about a 70% clip the way up and on the way down, and it involves first talk about changes of contracts, I think you are really you're seeing a similar kind of flow through in other companies as well, so I'm not sure how the contract have changed or maybe that really been able to influence the vast majority of their contracts but I will tell you the flow through at most companies throughout this phase related to changes on price are around 70%.

Yes okay, okay and then just one last one on free cash flow, I mean you got about a third of it now of your targeted $725 million range, how you're feeling about that for the full year, I mean it seems like at this point that facility well within reach?

Again it’s not a common for us to always have a strong start to the year, we typically always been at a point where we annualize number reported to-date always get something higher than our full year target, it’s too early in the year to think about changing our full year target but it’s obviously nice to know that there are no, we are not a company that relies on some back half performance that we can't control in order to make the full-year number.

Yes and Andrew the only thing I would add to that is as excuse me as Derek pointed out earlier in his question, Q1 is low CapEx quarter for us by cycle, so you're not going to have that in other quarters. We also do not have U.S. cash taxes paid in Q1, material cash taxes are paid in Q3 and Q4. So as Worthing noted this is a normal flow cycle for us but for those two reasons you cannot take Q1 and annualize it, I think it gives us quite visibility and great confidence but we wouldn't want people to normalize it such of those two outflows that didn’t occur.

And we have no other questions at this moment. I will turn the call back over to you.

Okay, well if there are no further questions on behalf of our entire management team, we appreciate your listening to and interest in the call today. Both Worthing and Mary Anne Whitney are available today to answer any direct questions that we do not cover that we are allowed to answer on the Regulation FD and Regulation G. Thank you again, we look forward to speaking with you at upcoming investor conferences or at our June 20, Investor and analyst meeting and if not then on our next earnings call. Thank you very much.

And ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation, everyone have a great rest of the day. You may disconnect your lines.