Waste Connections, Inc. (WCN) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Waste Connections First Quarter 2019 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, April 25, 2019. I would now like to turn the conference over to Worthing Jackman, President. Please go ahead.

Okay, thank you, Melissa. Good morning everyone. I like to welcome everyone to this conference call to discuss our first quarter 2019 results and provide a detailed outlook for the second quarter. I'm joined this morning by Mary Anne Whitney, our CFO and other members of our senior management team. Our CEO, Ron Mittelstaedt remains on a leave of absence and is not able to join us today. As noted in our earnings release, we are extremely pleased with a strong start to the year, which along with the expected sequential improvement in volumes and recently completed acquisitions, positions us well for the remainder of 2019. Continuing strength in solid waste price growth once again drove underlying margin expansion and better than expected financial results in the quarter, enabling us to overcome weather related impacts across multiple markets and further declines in recycled commodity value. Adjusted free cash flow of almost 20% of revenue on the quarter puts us solidly on track to achieve our full year outlook of $950 million. In addition, year-to-date, we've signed or closed acquisitions with total annualized revenue of approximately 100 million, putting us on pace to potentially deliver another outsized year of acquisition activity. Before we get into much more detail, let me turn the call over to Mary Anne Whitney, for looking disclaimer and other housekeeping items.

The discussion during today's call includes forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 including forward-looking information within the meaning of applicable Canadian securities laws. 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 on Page 2 of our April 24 earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the securities commissions or 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 commitments to revise or update any forward-looking statements and information in order to reflect 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 attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Worthing.

Thank you, Mary Anne. In the first quarter solid waste price plus volume growth was 4% in line with our guidance. That said, total price of 5.2% exceeded the high end of our outlook for the quarter and was our highest reported price in over 10 years, up 90 basis points year-over-year, reflecting the impact of the additional price increases we implemented in mid 2018 in response to accelerating cost pressures and lower recycle commodity values. Moreover, the total price was up 40 basis points sequentially from Q4 2018. As we've noted in recent quarters, our pricing strength reflects the differentiation of our market model and intense focus on execution and accountability. In Q1 our pricing range from approximately 3.5% in our more exclusive markets in the western region to an average of over 5.5% in our more competitive regions. Reported volume growth in Q1 was negative 1.2%, slightly lower than expected due to an estimated 50 basis points impact to volume growth from harsh winter weather conditions. Persistent and severe weather related impacts in several markets resulted in facility closures and delayed special waste projects in certain markets, most notably in our central region, which includes Minnesota, Illinois and Colorado, among the states hardest hit by pro longed, severe winter weather. As expected, about 50 basis points of negative volume was due to purposeful shedding of poor quality revenue, primarily the impact of the New York City Department of Sanitation Marine Terminal operations contract for the third party. As noted on prior calls, we expect to fully anniversary the impact of shedding later this year. As a result, we estimate that underlying volumes were about flat in the period and the quarter ended with improving trends, especially waste jobs and other activity picked up with improving weather in many markets. This sets us up for about a 150 basis points sequential increase in volumes and positive volume growth on a reported basis and Q2, sooner than we had expected in the year. Looking at year-over-year results in the first quarter by line of business on a same store basis, commercial collection revenue increased approximately 5.5%, mostly due to price increases. Roll-off revenue increased approximately 3% on higher pulls and revenue per day - revenue per pull. In the US pulls per day increased about 1% and revenue per pull was up about 4%. In Canada, pulls per day were about flat or an increase in revenue per pull of about 6.5%. Solid waste landfill tonnage increased about 1% on increases and MSW tons, up about 4% led by increases in the Northeast and California and C&D tons up 7% on increases in several markets led by the Mid Atlantic and Colorado. Special waste tons were down about 9% in Q1 on tough comps and weather impacts in several markets, as noted earlier, including Minnesota and Colorado. Recycling revenue excluding acquisitions was about 17 million in the first quarter, down 5.5 million or approximately 25%, which was worse than expected on continued deterioration in pricing for old corrugated containers or OCC and mixed paper. OCC prices in Q1 averaged about $77 per ton, which was down 24% from the year ago period and down 17% from Q4 2018. OCC prices exited the quarter at their lowest levels during the period and have continued to weaken in Q2, as demand from China remains muted and domestic mills are mostly full. Mixed paper revenue ex acquisitions declined approximately 65% year-over-year with values less than zero in many markets, currently averaging around a negative $7 per ton. We believe that flow through from changes in recycling revenue was similar to prior quarters, with decremental margins of approximately 95%. Due to the combination of lower fiber values and higher recycling processing costs, resulting in an impact of over $5 million in EBITDA, and about $0.015 per share of EPS in Q1. OCC prices currently average between $60 and $65 per ton, down another 15% to 20% from Q1 and down about 30% to 35% from last year's average of $95 in the second quarter. We see no impetus for improvement in recycled commodity values at this time, which reinforces our conservative approach to full year guidance back in February. Looking at E&P waste activity, we report 63.1 million of E&P waste revenue in the first quarter, up about 14% year-over-year. In addition to the Permian, which continues to be our largest basin, we're seeing a nice pickup and activity both on and off shore in Louisiana. And in Q1 we commenced operations at our new E&P waste landfill in Wyoming's Powder basin, where we expect that activity to begin to ramp during Q2. Looking at acquisition activity, year-to-date, we've signed or closed acquisitions with total annualized revenue of over 100 million, including three new market entries in Colorado, Illinois and Iowa and tuck ins in Colorado, Montana, Nebraska, New York and Wyoming. The majority of this activity completed year-to-date closed in April, including Mountain Waste & Recycling, a leading independent provider of solid waste collection in Colorado, which serves over 100,000 customers in the north central mountains and Denver markets. And we also acquired Lewis Clark Recycling & Disposal, an integrated solid waste company with operations in Southern Illinois, Iowa, and the Greater Omaha area. These acquisitions along with a robust pipeline and active dialogue put us on pace to deliver another outsized year of acquisition activity. Given the strength of our balance sheet and free cash flow generation, we remain well positioned for continued above average acquisition activity. Now I would like to pass the call to Mary Anne to review more in depth the financial highlights of the first quarter and provide a detailed outlook for Q2. I will then wrap up before heading into the Q&A.

Thank you, Worthing. In the first quarter revenue was 1.245 billion, about 5 million above our outlook and up 104.5 million over the prior year period. Acquisitions completed since the year ago period contributed about 75.4 million of revenue in the quarter or about 69 million net of divestitures. Adjusted EBITDA for Q1 as reconciled in our earnings release was 385.7 million or almost 3 million above our outlook for the period due to higher than expected revenue and margins. Adjusted EBITDA as a percentage of revenue was 31.0% in Q1, about 10 basis points above our margin outlook, in spite of the headwinds of lower recycled commodity values and weather related impacts, as noted earlier, and the margin diluted impact of acquisitions completed since the prior year period. Excluding the impact of acquisitions and the decline in recycled commodity values, adjusted EBITDA as a percentage of revenue was up approximately 45 basis points year-over-year. Moreover, underlying year-over-year margins increased 80 basis points. When further adjusted for the incremental costs associated with our improved 401k match and stronger stock market performance in the quarter, which resulted in a 20 basis points increase to deferred compensation costs. Fuel expense in Q1 with about 3.6% of revenue and we averaged approximately $2.66 per gallon for diesel in the quarter, which was down about $0.02 from the year ago period and up $0.01 sequentially from Q4 2018. Depreciation and amortization expense for the first quarter was 14.3% of revenue, up 30 basis points year-over-year due to higher capital expenditures, as well as increased amortization expenses associated with acquisitions completed since the year ago period. Interest expense in the quarter increased 4.9 million over the prior year period to 37.3 million due to higher outstanding debts and increased interest rates as compared to the prior year period. Net of interest income from invested cash balances, interest expense increased 2.8 million year-over-year. Debt outstanding at quarter end was about 4.2 billion, about 21% of which was floating rate. And there were leverage ratio as defined in our credit agreement was about 2.4 times debt to EBITDA with cash balances of almost $500 million. Since quarter, and we've increased our fixed to floating debt ratio to approximately 90%. As we completed a public offering of 500 million of senior notes on April 16, with most of the proceeds directed to floating rate debt repayment. Our current weighted average cost of debt is approximately 3.6%. Our effective tax rates for the first quarter was 18.2%. The Q1 rates as expected included a benefit to the provision related to excess tax benefits associated with equity based compensations. Regarding tax rates, we noted on our February call that late in December 2018, the IRS released proposed regulations associated with the Tax Act that we believe is finalized or drafted could impact our current effective tax rate of approximately 21.5%. We indicated at that time, that depending on the final form of any proposed regulations, our estimated resulting effective tax rate for 2019 could range between 21.5% and 26.5%. For the full year our outlook assumes that some form of the proposed rates would be enacted, and therefore reflected the midpoint of our expected range or a 24% effective tax rate. The proposed regulations are still anticipated to be finalized no earlier than June if they do indeed get improved approved as final. And that timing will impact our effective tax rates from quarter-to-quarter during the year. As we noted, our first quarter tax rate in 2019 was not impacted from these proposed rates. Similarly, our second quarter tax rate in 2019 is not expected at this time to be impacted, since the regulations remain in proposed form, and therefore should be about 22% in the period. However, if the proposed regulations are enacted during Q2 as drafted, there would be a true up to our tax rate in the period, which we expect would increase the rate to approximately 25% in Q2 resulting in about a $0.03 earnings per share impact for the period. We will provide a further update during our second quarter earnings call. GAAP and adjusted net income per diluted share was $0.48 and $0.62 respectively in the first quarter. Adjusted net income in Q1 primarily excludes the impact of intangible, amortization and other acquisition related items. Adjusted free cash flow in Q1 was 246.3 million or 19.8% of revenue. Given our strong start to the year, adjusted free cash flow is solidly on track to achieve our original outlook of 915 million for 2019. I will now review our outlook for the second quarter of 2019. 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 with the SEC and the 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 impact from additional acquisitions or divestitures that may close during the remainder of the year and the expensing in transaction related items during the period. Turning out to our outlook for Q2 2019, revenue in Q2 is estimated to be approximately 1.360 old billion. We expect price growth for solid waste to be in the range of 4.5% to 5% in Q2, with volume in the range of flat to up 50 basis points, a sequential increase of about 1.5%, reflecting the pickup in special waste and other activity noted earlier. Adjusted EBITDA in Q2 is estimated to be approximately 31.9% of revenue or about 434 million. In spite of margin dilutive acquisitions completed since the year ago period and lower recycled commodity values. Depreciation and 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 32.5 million or $0.09 per diluted share net of taxes. Interest expense net of interest income in Q2 is estimated to be approximately 36 million. Our effective tax rate in Q2, as noted earlier, is estimated to be about 22%, subject to change in the event that the proposed tax regulations as drafted are enacted during the quarter. As noted earlier, we estimate that the Q2 rate would increase to approximately 26.5% in the event that the proposed regulations have drafted or passed in June, which would result in an impact of approximately $0.03 per share in the quarter. And finally, non-controlling interest is expected to reduce net income by about $200,000 in the second quarter. And now, let me turn the call back over to Worthing for some final remarks before Q&A.

Thank you, Mary Anne. Again, we're extremely pleased with our start to the year, strength in solid waste pricing, improving solid waste volume trends and further growth in E&P waste activity position as well for the remainder of the year. Year-to-date acquisition activity and ongoing dialog are already indicative of another potential outsized here for Acquisition activity. And as noted earlier, adjusted free cash flow is trending solidly on track to achieve our original $950 million outlook for the full year. That all said we believe it's appropriate as in prior years to wait until our Q2 earnings release to update our outlook for the full year. We appreciate your time today. I'll now turn this call over the operator to open up the lines for your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of a Michael Hoffman with Stifel. Please proceed.

Thank you very much. When you look at the solid waste business, and all the talking heads would go, we're 10 years into an economic recovery. How can this possibly continue? We've got to be entering into a recession eventually. What are you seeing that would tell us that you're wrong, that things are stable, flow growth, healthy economy?

I think you just answered your own question. Because I'd agree with you kind of slow and steady seems to be kind of the path over the past decade versus a bubble that gets pop. Yeah, they could still be proven right that slow and steady could come to an end, but we're not seeing any signs of that, Michael. In fact, we're pleasantly surprised at the earlier ramp and volume activity versus what we had expected in February. So clearly it's been a longer road for recovery. It's been a slow and steady, but again, we're not seeing any signs of a slow down at all.

Okay, and then the ADSW transaction, presuming that they're going to have to sell stuff? Is there anything from a hard scarp standpoint that would prevent you from being able to buy any or all of that based on what you know about?

Not to our knowledge, Mike. Not to our knowledge.

So that's an attractive future potential opportunity for you as well then?

Absolutely.

Okay and then within the context of recycling model itself, has the lower prices helped accelerate the pace to which the market model is changing or are we just still on a slow and steady its contract cycles and you got to plow through it.

You got to plow through it. I mean, look, this has been an ongoing effort over the past year and a half to two in some cases. It's a market by market, kind of whack a mole that you have out there, depending upon what's happening unique in the market, including third party or other facility closures that disrupt recycling. Obviously, you've got some independence that are in financial straits that might be shutting down. That disrupts the market further. You got contracts that have different termination dates on it that give you different opportunities to renegotiate it. So clearly it's - I think the industry has made a lot of progress on this, significant amount of progress over the past year and a half or two, but again it's not fully done.

Okay. Thank you very much and congratulations on the good quarter.

Thank you.

Our next question comes from Hamzah Mazari with Macquarie Capital. Please proceed.

Good morning. My first question is on pricing. Worthing you mentioned, pricing a little over five, this goes to the six that you saw mid 2008. I know you're giving quarterly guidance on price, but if you look over a multiyear timeframe, assuming the economy holds up, do you expect to surpass the 6% pricing level just given that the sector is a lot more consolidated than we saw back in '08 and potentially a lot more disciplined any comments?

No, look, we've been fairly consistent. And pricing is linked to CPI and underlying costs escalators that we're saying. On average, we're getting around 150 to 200 basis points right now over CPI in this environment. You tell me what CPI is, and we'll tell you where our pricing might end up. And so I wouldn't - obviously, we're not saying 5.2% is going to six, we're saying 5.2% will go to probably 4.5 to 5 likely the upper end of that of that range for Q2. But that's more just the fact that some price increases we put in place last year response to inflation pressures we saw in the first four months of last year, as well as the decline of recycling commodity values early last year that really started this trend. Those interim price increases we put in place are anniversary. So we'll stay right now in this environment, we'll stay in that 4.5 to 5 for the full year unless we see something in the underlying cost side that causes us to need more.

Got it and for my follow up question, could you maybe frame for investors what the leadership team is doing to substitute in for Ron or how you're handling the burden of his leave of absence? Specifically, is it preventing you from doing much larger transactions? I know you've done some transactions that you highlighted, new market entries, et cetera. But curious, that does his absence prevent you from doing multimillion dollar deals in the near term? And then maybe for investors, what is the leadership going to sort of step in for him?

Well, I hope you see in the performance in Q1 at every level, whether it be top line growth, execution in the middle of a P&L, the underlying margin expansion that Mary Anne laid out for you that's exceeded 80 basis points year-over-year, reflective of strong price. I think you see the, as we talked about the execution and accountability that our culture - this foundation of our culture. So I think you've seen all of that in play in Q1. I think you've seen our guidance, it continuing. You see the acquisitions that we've gotten done year-to-date, as well as what will continue to get done during this quarter shows you that we haven't skipped a beat. And it really is a testament to the longevity of the management team and a team from top to bottom really mean throughout the organization. It's been together for a long period of time. It's a testament to the strength of the culture that's been purposeful that we've been driving through the organization for the past 12 to 14 years. So again, I don't think - I wouldn't say anyone's skipping a beat. I would say our decentralized model, which puts a lot of decision making at the front level in the local markets that's supported by an operating model that's a strong PVP and RVP model, shows you that the execution doesn't slip. So I tell you that from our seat right now, we're quite pleased with how things have stepped up. Obviously, Ron stays in our mind just from a care and concern for him and his family. But again, I think you see it's a testament to the organization that he has put together, that you've seen the results that we're printing right now.

Great, thank you.

Our next question comes from the line of Brian Maguire with Goldman Sachs. Please proceed.

Hey, good morning, Worthing and Mary Anne and Ron to listen and best wishes to you. Yeah, I think Michael and Hamzah sort of danced around the question a little bit, I just wanted to ask it a little bit more directly, given you can borrow it 3.6% sort of weighted average debt, What is it about the Advanced transaction that made you guys a little bit hesitant to pull the trigger on it or get involved and any comments you could kind of have as to your activity in that asset as it came up for sale.

Sure, nothing prevents us from writing checks of that size. Nothing would prevent us from doing a large transaction to Hamzah's question of writing a multibillion dollar check. So there's nothing organizationally, balance sheet or any other constraints that prohibits us from doing that. Obviously, every acquirer see something different in a target. We're no different. How waste management is looking at the Advanced acquisition is for the next call, to be discussed. So I wouldn't want to want to weigh in on how they view Advanced. Obviously, we've had our own view of that acquisition over the years. We put it up and benchmarked it next to the progressive acquisition that we completed in 2016. And the metrics are different as we see them. But again, that's just from our perch. So I agree with you. I mean, there's nothing that prohibits us from doing it. Obviously, as we've always said, it's not just the markets you enter, it's the price you pay to get into them and from our standpoint, we wish waste the best. It's this is not something we believe we missed. Obviously, we hope to hang around the rim and pick up any divestitures potentially, that come out of that transaction.

Yeah, that makes a lot of sense. Can you can you comment on the sort of related question on the 100 million of acquisition you've closed on? Sort of how much of that was signed during the period, it does sound like most of it was in April, but just the cadence of when it'll come into the earnings and then sort of how the multiple you're paying on those compares to what you've been paying on transactions in the last year or two.

Sure, why don't I start with the first part of that and then turn it over to Worthing. So in terms of the 100 million signed or closed about 10 million of that closed it during Q1, about 80 closed in Q2, so that tells you in April, the majority of it's gotten done, and it's still about 10 million left to close. So that's the breakdown. And then if you look - if you're adding that into your model for subsequent quarters, it's about 22 million per quarter is the way to think about the incremental contribution from acquisitions.

And the cadence on activity here, look, just because we're on this call today doesn't mean we're done with acquisitions for the period. Obviously, we've got a full quarter in front of us in Q2. I suspect you'll see a handful of additional transactions that's signed or closed in the period. That could by midyear take us up to what we call an average year of 125 million to 150 million of acquired revenue done by midyear, which leaves half the year leftover for what we would call an above average amount of activity. And again, that would exclude any divestitures because we don't know the timing of the Waste and Advanced deal and they've already highlighted that it's probably an early 2020 transactions. So as we said before that pipeline is robust, dialogue is active and the cadence of what we're doing has continued unabated. With regards to multiples, again, as we've talked in the past, look, high quality, larger meaning, 40 million, 50 plus million type revenue, acquisitions, attractive franchises, integrated models, markets, things like that. Those multiples have gone up about it turned to a ton and a half. Those are running anywhere from 9.5 to 10 times EBITDA right now, obviously, smaller market tuck ins are running right now still in that four to six times and kind of collection only no smaller transactions could be running in that six to eight times depending upon the market. Everything we do is again cash-on-cash. So what I'm giving you is just the output of an NPV of what we're willing to pay divided by what the EBITDA is.

Yeah, that makes sense. Just one last one for me, on the volume pickup you're seeing in 2Q. It's hard to quantify this, but is it possible that some of that is just the positive give back of the 1Q weather related issues? And then this bounce that we're seeing in 2Q may not be sustainable or do you feel like this is actually a good trend kind of heading into the back half of the year.

I think it's a good trend because again, in February, we had mentioned that we thought volumes would turn positive in the second half of the year, and that's not changed. The fact that we're turning positive in Q2 earlier than expected, doesn't pull forward anything that we're seeing in the second half of the year in Q2. But to your point, wherever weather broke, whether it be the second, third or fourth week in March, volumes improved dramatically. Now, the weather hasn't broken everywhere, but that breaks and other markets we expect to see to a continued increase. As you look at Q2, again, central region we've noted before, which was negativity one mostly due to weather, turns nicely positive in Q2 and obviously in fact economic and weather. East region as well. I mean, East region we also expect to be positive and of course the West has been the largest area for volume growth for the company as well. And again, as we've continued to push through the purposeful shedding and get to the end of that you're seeing the impact of that abate in the - what I would call the legacy, more progressive type markets and Canada and the South region.

Alright, appreciate it. Thanks.

The next question comes from Tyler Brown with Raymond James. Please proceed.

Hey, good morning.

Hey, good morning.

Hey, congrats on the start to the year. Mary Anne thanks so much for unpacking the margins, but I want to make sure that I've got it. So total margins were down say 30 basis points ex - down 30 basis points, but excluding M&A and recycling they were up 45, is that right?

That's correct.

Okay, and then -

Sorry, 50 and 25.

Okay, and okay, 50 and 25, great. And then they were up 80 if you take out the 401k in Stockholm.

That's correct, yeah.

Yes, that would equate to reported margin - that would put consolidated margins again, in excess of 32% in the period.

Okay, now I know you play an outdoor sport, but any thoughts on what weather did on margins, maybe specifically at the leachate level?

Well, we did note that that leachate was up year-over-year and whether is part of that reason. I would say, when we think about the weather impact, and the incremental volume loss associated with weather. If you set up 50 basis points, there's not a big margin impact from that because of course, as Worthing noted in his remarks, in some cases, actually facility closures that happened during weather impacts. And so, it's really more about the volumes and not a big margin impact there. There are some costs that - cost increases and leachate was one of them and part of that is weather.

And Tyler as you know, I mean - Tyler as you know EBITDA before expenses is called revenue, right? And so we're starting at 100% margin there's ins and outs throughout the P&L. So if we start isolating all the bad things we're not recognizing good things as well. So I believe is that what we should really be focused on is simply just the impact of recycling because that episodically can move the needle. Obviously, recycling has been a topic this year and so we've highlighted that. The deferred comp as the market goes up is a really a mark-to-market hit from a margin standpoint on EBITDA. It doesn't hit earnings per share because you see that impact come back in other income because we've invested in - we restricted cash to mere the deferred comp liability and so the income on that comes back in other income. And again, the 401k is just a one year item for us because we'll adversary that next year. Everything else, to start highlighting one thing here one thing there one extra day, one less day, I mean, it's just starts getting confusing.

Yeah, no, I hear you, but very strong. That's the key message there. Okay, so Mary Anne on the - so I think going into the year your guiding to call it 4% revenue contribution from M&A. So basically, at this point you're not going to get the full 100, but say you maybe add another 1% to 2%. to that 4%, is that the right way to think about it for the full year?

Sure, as I said, there's about between 65 million and 70 million of what's closed year-to-date that will contribute in 2019. That's where the - call it between 20 million and 25 million, 22, 23 per quarter incremental to what you already had rolling in.

You put simply, I mean, Ron, last year, when he talked about what could happen in 2019, we talked about 8% to 10%, top line growth, we came to the year with 8% already in the bag, what you're hearing now is the march up towards 10% as transactions continue to close. Again, so I think what you're seeing is the execution that backs up what we expected for the year last year.

Okay, and you noted some new market entries, but were there some disposal assets in the mix in that100 million.

Yeah, one of the markets is integrated. And in terms of your - if you're thinking about the margin contribution, excuse me, the two landfill come in the next. And if you're if you're thinking about the margin impact, I think about it the same way for the full year guidance, the 30 basis points deluded impacted, it wouldn't be materially different with these incremental acquisitions.

And if you look at Q2, when we talk about the cadence of acquisitions, it could be another one or two landfills that we execute on in Q2.

Okay, great. And then on the assets that are potentially coming to market, is it safe to assume that you would have interest in both call it selected small container and landfill or would you favor maybe one over the other or is everything at play?

I'd tell you, everything's in play.

Okay. And then maybe my last one here Worthing, so you guys are putting up great pricing, your large peers are putting up great pricing? And I'm curious about what's going on deeper in the industry, particularly the mom and pop level. So what would you attribute this breakout in price to? Is it simply that everybody's full or do you think that the mom and pops who seem to set the marginal price in the industry are really getting crushed on recycling and other cost pressures and it's just forcing them to make big price increases? And I'm curious if you're seeing that, as you do diligence on those small guys.

Absolutely, I think you just answered your question in that. Look, if you came into to '17 and '18, living on lower collection margins, trying to subsidize it with recycling. Well, again, you went from getting paid for recyclables to getting charged 120 to 180 a ton depends on where you are in the marketplace. That was a dramatic reversal for folks that were trying to give away recycling from a collection stand - pricing standpoint, and try to avoid landfill costs from a disposal standpoint. And so that alone was a major impact to those companies. And as well, they're seeing the same labor pressures, fuel pressures, third party logistics pressures that we saw last year. And so the combination of that forced everyone really to go back in to get pricing and what you said is true one diligence, I mean, look, if the companies that we're looking at and the few that we have bought, went in the middle of last year, and put incremental 6% and 7% price increases on top of their traditional 4% price increases. And basically we're putting 10% to 11% price increases in place last year to offset everything we just talked about. So without a doubt it's a period of time meaning last year and the rollover that into this year that folks have had to pursue price to offset what hit him. So it is a unique time with regards to both those things hitting simultaneously.

Okay, yeah, that's very helpful. Thanks, guys.

Our next question comes from Derek Spronck with RBC. Please proceed.

Good morning. Thank you for taking my questions. Just thinking with the pricing thematic, are you getting any pushback from customers around the absolute pricing level and how are the customer churn levels?

No, I would say you're coming into the quarter we got into 4.5% to 5% and we delivered higher than that. So what that tells you is the retention rates were better than we expected, coming into the quarter. And again, as Worthing said, some of what you're seeing on reported price is the rollover contribution from last year. So those were already in place and actually a disproportionate amount of PIs were in place coming into the year because of that. Our typical model, we put our prices in Q1 and so you're seeing the benefit of the rollover and current retention rates being a little higher than expected.

And we've seen no notable change in churn rates.

Okay, great. Just on the E&P CapEx, I believe you indicated you're marketing around $15 million, but you had some optionality that you decide whether to deploy the full $15 million. Any update there?

Yeah, I mean, we're still pursuing the same projects we've been talking about before. Obviously, the timing of those expenditures are really now in the hands of contractors and their ability to mobilize to work in our projects. These basins are labor constrained, they're contractor constrained, some cases most labor has been sucked into pipeline construction and other areas and diverted away from traditional movement in other construction. So we're at the mercy right now of contractors for the timing of what we get done in those areas. I'd say the good news is E&P trending at or above where we expected for the year. Now, with crude coming in at 65 as we sit here today and M&A activity picking up in the E&P land, we feel pretty good about where we sit looking at the balance of the year.

Is the 50% EBITDA margin a good run rate margin and would you still assume there's significant operating leverage of volumes were to pick up an E&P?

Absolutely.

Okay and then just one more for myself. SG&A expenses were down on a net basis nicely. I saw that there was around a $6 million legal expenses that rolled off I believe, does that - should we assume that is sustained and therefore we should appropriately take down our SG&A expense over the next few quarters with the roughly the same number?

No, I mean, look, with 85% of our revenue sitting in the US and 150% of our litigation sitting in the US, legal does not, legal is a growth expense not something that's shrinking. So, no, it's just - it's timing against analysis based on what was in prior year. And further my point before we start trying to add back every cost that went up, you're missing some costs that go down, right. And so it's like any portfolio of items. Some go up with some good now, but I wouldn't extrapolate Q1 into future periods.

Okay, fair enough as thanks for taking my question, so I'll turn it over.

Our next question comes from Mark Neville with Scotiabank. Your line is open. Please proceed.

Hey, good morning.

Good morning.

The 5 million impact to recycling or from recycling in Q1. Is that a similar type hit in 2Q or in through this back off or is it more normal in the second half?

No, as we've described, what we've seen since Q1 is continued deterioration recycle commodity prices. So even though last year that commodity prices stepped down a little between Q1 and Q2, I would say you'll see at least the same kind of impact in Q2 that the decrementals continue to be in that 95% range from the deterioration.

But probably a little less punitive in the second half of the year just given the declines we saw throughout the 2018.

By Q2 I think similar is the right way to think about it.

Okay, okay. And you touched on this E&P is up nicely in activity seems to be picking up. I guess is the thought there now that's maybe a little better than flat. I think that was previous expectation?

Well, again, we'll give our thought for the full year in July, but obviously, we printed north of 60 in Q1. We're trending again north of 60 in Q2. So if you annualize just that first six months, you're getting to at least flat are better than flat year-over-year. But let's wait for Q2 is in the bank.

Sure. And maybe just to clarify Mary Anne, this 22 million from M&A that starts in Q2?

That's correct.

Okay. Thank you, I'll pass it over to someone else. Thanks.

Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets. The line is open. Please proceed.

Hi, team, thanks for taking my questions. I just wanted to go back to the volume outlook. Last quarter, you guys messaged kind of a flat underlying volume trajectory for the full year. Obviously, we started the quarter with some weather impacts, but it seems like sort of the earlier than expected ramp in 2Q is maybe a more meaningful data point there. So maybe, we're waiting till next quarter, but I'm just wondering if you could comment on the bias toward that flat underlying outlook based on what you've seen so far in this kind of initial 2Q ramp up?

Sure, I would say we're certainly encouraged by what we've seen. I mean, some of it is - it's a sharper increase, which you would expect with a prolonged winter and longer downs are going to make for a sharper ramp, but we're encouraged just looking at one time jobs and the pace of those coming in not just timing related, but bigger, do some incremental jobs there. We've had some nice wins, so there's a number of factors that are supporting not just the seasonal pick up, but some improving trends. So I would just say, in general, we're encouraged, as Worthing said, look, in the middle of the year to communicate what we think the full year looks like, but we're certainly encouraged by what we've seen thus far in Q2.

And even on the more longer term municipal contract wins. Our win to loss ratio is up nicely relative to where it been in the prior several quarters. So to Mary Anne's point, we are encouraged.

Okay, that's great, very helpful. And it's been asked a couple of times on recycling and I realize it's a small business. But I was wondering just if there's maybe a more concrete number around how we should think about the revenue which translates into EBITDA, essentially sensitivity to like a $10 change in that underlying basket, just to the extent maybe we see further declines through the year having a better idea of exactly what that means for you guys would be helpful.

Well, sure, I mean, if you just look, last year, we did around 88 million in recycled commodities. And so, a 10% move is about 8 million, 8.8 in that example and we're telling you the decrementals that it would be almost that amount going to the EBITDA, so you tax affect that and , convert that and you get at least a penny per share per quarter.

And what we're talking about here is really how you see it come through the P&L on a consolidated basis, right. Obviously, to the extent that we're putting tip fees in inner company to our own collection operations for the true processing costs of recycling, that can do a left pocket and right pocket and make recycling look a lot better within our own P&Ls, but on consolidated databases, moving tip fees from our cost from a recycling facility into your own collection operation doesn't move the consolidated needle, it just makes recycling look - isolation, a little bit better year a year. But frankly, on a solid basis, you got to think about it. And that's what Mary Anne is laying out for you.

Okay, that's helpful. And then just last one for me on recycling. You guys just seem a little less enthusiastic about sort of the pace at which this kind of challenged model is shifting towards something more sustainable. Just wondering kind of longer term five year outlook for recycling, how do you position around that sort of time frame for recycling? How might that business look long-term for connections, I'm just curious kind of higher level long-term view there for that business.

Look, we're making investments in recycling, where it makes sense to make investments in recycling, make no mistake and looking at other alternative technologies to further our sustainability initiatives as well. But I tell you what recycling is something that we're getting close to the watch out, meaning, look, as soon as you've watched out, right, it's easy to go up. And what I mean like that, look, as additional mills start to open in North America, that will accept recycling feedstock as the input that will put a better bid to the underlying commodity fiber in this case, which will help turn the tide for the commodity value. Obviously, last year you saw four mills get purchased for such repurposing, as those come online and if others come online, you will see the tied turn is that second half of 2020 or early 2021, can't tell you, but if your question over the five year horizon, this will definitely become a better business as you play this thing out, Now, again, what this is also suggesting is an understanding by regulators, which is difficult and others that diversion is not recycling. Diversion, which people thought is diversion from landfills really meant divert to Asia, and that game is over. And so you have to as an industry and as the economy be sustainable within our shores to handle the recycling feedstock and deal with the discards and contamination coming out the back end within our own landfills. So a five year horizon, obviously, it'll be better than it is today. Obviously, last week's data, we saw OCC just moved up $1, so maybe we've hit the bottom in that shore, but clearly at 60 to 65, it feels pretty close. But again, this is a domestic answer to the issue not offshore.

Very helpful, thanks for the time.

Alright, next question comes from Chris Murray with AltaCorp Capital. The line is open. Please proceed.

Thanks, folks. Good morning. You're just looking longer term you you've talked a little bit about your revenue numbers might be a bit better on some better than expected volume. But I'm just looking at your free cash flow conversion. So we're getting up to around 20%. And you're still kind of talking about a $950 million number, which at the rate you're at least seeming to be running seems to be a bit late, just wondering if there's something that we should be thinking about in terms of the free cash flow conversion rate that may be is thinking that you're going to be more conservative. Is there something in this tax change that could be hitting you? Or is there something that we may be missing? Or should we be thinking that maybe your free cash flow number might be moving a bit higher over time?

Again, we've got it at 950 that's the spike what we talked about, in February, that 20 million of cash flow we expected and this year just happened to clear the banks on December 31. We don't control that, so really 950 could have been 970. Look, I think we need to play the long game on cash flow generation, make sure we maintain cushion year in and year out for the things to surprise us or market visions that could materialize. So I wouldn't get over my skis on sitting here today trying to looking at promising more than 950. Obviously, if recycling turns and E&P takes off and acquisitions go well above what we're talking about, certainly I would expect 950 ago higher, but. With regards to taxes, obviously, we've always talked about cash taxes that we expect over time to move up from that 60% or 65% range into that 80%and 90% range. The way the US tax law is structured right now and bonus appreciation peels off in 2022, every company will see an increase in cash taxes in 2023, as a big spike that year, then we'll start coming down again after you start putting that in the rearview mirror. But again, I don't know as for what we say we can do and there's no impetus for us to do just artificially tried to deliver something above and beyond what is sustainable.

The other thing that I would add Chris, would just be a reminder that you can't generalize from Q1, it's always our strongest free cash flow quarter given the timing of tech payments and interest, and so important to recognize that it is a strong start, but keep that in mind.

I always felt people don't analyze Q1.

Fair enough. I guess what I'm trying to figure out though is that you've got a - you basically had a 30 basis point increase in EBITDA, 50 basis point increase in free cash flow margin, just trying to think about whether or not there's something in the system that's letting you do that other than just the scale and growth that you're seeing.

It's just timing. Again, I wouldn't - let's get - if you ask me that after us putting that five consecutive quarters, I'll give you a different answer. But as we're - to make an extrapolation of one quarter, I think would be premature.

Alright, thanks, folks.

[Operator Instructions] Our next question comes from the line of Noah Kaye with Oppenheimer.

Great, thanks so much for getting me in. I guess just on margins, kind of guiding flat for 2Q year-over-year despite the headwinds. I just want to understand how we should think about cadence for the next couple of quarters. I mean, basically does the incremental from recycling preclude you from getting that sort of 30 bps margin expansion for the full year or let's just recycling plus a little bit more acquisitions spend.

Again, from a margin - obviously, we said we look at full year guidance in July. Obviously, if E&P comes in better that's got nice incremental, recycling is a little worse, that's got high decrementals, acquisitions can come in normally as we always caution you on a margin diluted basis, it depends on the type of deal we're doing. So let's see what we've done by July to give you a better insight on the impact of acquisitions for the full year. Obviously, the stock market is melting up, that could have some margin pressure based on deferred comp, but that's not earning pressure, right because it comes back and other income. So again, let's get to July to get a full picture on not only margin, but more importantly dollar or EBITDA dollar revenue because obviously, we're trending well enough in those areas.

Yeah. Make sense. And then just on your point around potential E&P outside, I mean, you're not only going to the higher oil prices, but you've even seen consolidation or shall we say, acquisitions by pressing more disciplined operators in the relevant basins. What are you seeing on pricing, in the E&P space and how does that play into potentially better leverage for your assets.

I'd say that's a customer by customer, rig by rig discussion. Without a doubt the trend in pricing, in many cases is higher. But obviously, volume also plays a big role in that dialogue. Obviously, capacity at each landfill, the water content within the solid waste stream can play a role in that discussion as well. We're not seeing pricing pressures, the overall the underlying tone is flat to hire in most cases attire.

Great, thanks so much.

There are no further questions at this time. End of Q&A

Thank you, Melissa. With no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne and I are available today to answer any direct questions that we did not cover that we're allowed to answer on the Reg FD, Reg G and Applicable Securities Laws and Canada. Thank you again. We look forward to speaking with you at our upcoming investor conferences or on our next earnings call.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.