Earnings Call: Q1 2017

Apr 27, 2017

Ladies and gentlemen, thank you for standing by, 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'll conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time you need to reach an operator, please press star zero. As a reminder, the conference is being recorded today, Thursday, April 27, 2017. Now it's my pleasure to turn the conference over to Ronald Mittelstaedt, Chairman of the Board and CEO. Please go ahead, sir. Thank you, operator, 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 acquisitions, increased E&P waste activity, and higher recycled commodity prices, all driving results above our outlook for the first quarter. Increased contribution from these higher-margin activities resulted in 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 the notable ramping of E&P waste activity and related margins. In addition, we are proud of our proposed 3-for-2 stock split meant 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 our forward-looking disclaimer and other housekeeping items. Thank you, Ron, good morning. 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 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 two 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 of 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. Reported results reflect the impact of our Progressive Waste acquisition on June 1, 2016. Contributions 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. Thank you, Worthing. In the first quarter, solid waste core price plus volume growth was 4.7%, exceeding our 3%-3.5% outlook for the period due to higher-than-expected volume growth. Core price, as expected, was 2.6% in Q1. 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 strengthened 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 regions. 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 are 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 closing on June 1st, 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-off 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 tons 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 from the prior year period. Roll-off pulls per day increased a little more than 4%, driven primarily by our Central and Eastern regions. Our Western region was also positive despite record rain and snow in Q1. Recycling revenue, excluding acquisitions, was $17.1 million in the first quarter, 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. 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 basin driving these results and 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 for 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 group transaction completed in early January solidified our leading position in Northern and Western Illinois, increased potential internalization benefits of additional disposal volumes into our landfills 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 of 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 for swaps or sales and are conducting reciprocal due diligence on the assets involved. We believe these should all move to binding definitive agreements by the end of Q2 and close after receiving consents 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 expectations. 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 20th press release. This is a very fluid process currently. Finally, we look forward to hosting our Investor and Analyst Day on June 20th, 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-focused, servant leadership-driven culture, the nuts and bolts of the Progressive Waste 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. Now I'd like to pass the call to Worthing to review more in depth the financial highlights of 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. In 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. Margin beat is attributed to better-than-expected increases in higher margin flow-through activities such as solid waste, landfill, and E&P waste revenue, and higher recycled 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 crude 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 from 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 the 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 E&P Waste, our early adoption of 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's 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 the 25% rate expected for the period. As communicated on our February call, our effective tax rate for the period was expected to be lower than our estimated full-year rate, as Q1 now includes a benefit to the provision resulting from a new accounting pronouncement that reclassifies excess tax benefits associated with equity-based compensation arrangements on their vesting 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 costs, 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 are 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 of 2017. 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 Securities and Exchange Commission and the securities commissions of 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%-3.5%, reflecting a one-month contribution for June from the Progressive Waste operations. Adjusted EBITDA in Q2, as reconciled in an 8-K we're filing contemporaneously with this call, is estimated to be approximately 31.5% of revenue or about $362 million. 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 $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. Now let me turn the call back over to Ron for some final remarks before Q&A. Okay. Thank you, Worthing. 2017 is off to a great start. 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. 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, 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, to implement another double-digit increase of our regular quarterly cash dividend in October. We appreciate your time today. I will now turn this call over to the operator to open up the lines for your questions. Operator? Thank you very much. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has already been answered and you'd like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. Once again, ladies and gentlemen, for questions, please press the one followed by the four. One moment for our first question. Our first question is from Tyler Brown from Raymond James. Please go ahead. Hey, good morning, guys. Hey, good morning, Tyler. Hey, Ron. You noted in your remarks that once Progressive is lapped, you're expecting to see roughly 3% pricing, which is obviously very strong. But I'm curious, number 1, what was Progressive's organic volume in this quarter? Two, how should we think about volume in the second half once all the revenue is in the base? 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've said that there was approximately CAD 50 million of revenue that we looked to shed, not divestiture revenue, but revenue that was unsafe or unprofitable to service. If you take CAD 50 million over CAD 1.9 billion, you get just about 2.5%. It was bang on what we planned. That will continue. It will slowly abate as the year goes on or improve, meaning as the year goes on. If you take that, it says that with approximately 4% price that we said on their footprint, -2.5% on the volume, you're talking about somewhere in the 1.5% core price and volume growth. That should improve because volumes will continue to improve as we continue to replace revenue that we've shed with sales growth. Anniversary the loss. Anniversary the losses both. That's what you should expect there. Tyler, if you strip down to 3%-3.5%, obviously with the Q1 results, you see the legacy Waste Connections is running higher than that. Again, once the Progressive numbers come in in June 1st, 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%-3.5% for the quarter. Of course, net of the business we're shedding, as we've said all along, the underlying trends are stronger than that. Sorry, I missed the -2.5% in the remarks. Sorry about that. No problem. Sorry. Ron, you noted that virtually all your divestitures are under LOI, which I'm assuming why the balance sheet saw the asset held for sale spike. Can you remind us maybe how much annualized revenue you're looking to divest, and maybe what the EBITDA or free cash flow contribution are from those revenues today? Yeah. What we had said was that there was approximately $200 million of revenue that we had identified that we would divest, either through swaps or sales in one manner or another. We announced, as you know, in Q1 that we completed $50 million of that, so that left approximately $150 million. We said today that there's another $10 million that was signed to a definitive agreement in Q1 as well, at the end of Q1. That left $140 million. 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. That tells you that's running 10%-15% EBITDA, and that on a free cash flow basis, on a standalone basis right now, it's probably negligible. Okay. All right, perfect. Just lastly, I had one quick question on the proxy. I think in the proxy, you guys made some changes to the compensation program that puts, let's call it, more weight on PSUs. You also added a free cash flow, maybe a TSR metric to drive those PSUs. I'm just curious if, one, you can talk about the board's thought process there. Two, it's a 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. That's a good question. It's nice to see someone actually reads the proxy after all the 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. By the way, we do have financial performance hurdles on both elements of that. In the typical RSU or what people think about as a time vested, there is a one-year performance metric of a free cash flow margin in that before the vesting period starts, but that's a separate item. In the PSUs, you're right, we're at a free cash flow per share CAGR over the three-year period, and we're 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. Again, about 50 basis points a year on average. The free cash flow CAGR for target payout is about 10%. We target minimum double-digit free cash flow per share target growth, and PSU is aligned with that target. Overarching everything is a kind of a relative TSR modifier to the extent that we're above the median against the S&P 500, there's additional benefit on the calculation and the extent we're in the upper quartile, as we've been for several periods, there's additional modifier as well. All right. Thank you very much. Thanks, Tyler. Now 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. Maybe in light of that comment, maybe 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. Thank you, Hamzah. First off, capital allocation has not changed. What we've always said is that our first and best use of capital is 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 in the pipeline I would consider very robust. There's 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 deals is high taxes and low interest rates. 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 line up and look to get values on their company, and then wait to see what occurs with taxes, whether anything happens, number 1, and number 2, is it retroactive, and then number 3, 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. 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 8 years because of obvious reasons of high taxes and low interest rates. If you lower the taxes, there's 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. We're cautiously optimistic in that way. The pipeline remains, as we said in the comments, pretty robust. I would expect things to be more a little back-end loaded because of the potential tax changes being expected to happen, perhaps by the August congressional recess. We're very busy, no question. Of course, we've already had our third most active year doing CAD 225 million to date. Right. That's very helpful. 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. So it tells you that both the U.S. and Canada in the former footprint is very similar. I would say that it is reflective of our heavy focus on price. I would say the former Progressive was more focused on volume and not as much on price. There's probably a little bit of a pent-up price lag in some of their markets that we knew was there and we've been able to take advantage of. 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 their 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? The question is really, you've seen normal seasonality the last year or two, and volumes are coming in better than expected. What indicators lead to stronger seasonality in volumes for you guys? Thanks. Look, if you look at our guide Q1 to Q2 sequentially, if you kind of work through the divestiture impact in Q1, it's about a 6% seasonal bump in revenue, which is about average for what we expect right now. Gotcha. Thank you. Now our next question is from Michael Hoffman with Stifel. Please go ahead. Thank you, Ron Worthing, for taking my questions. Ron, congratulations on the Hall of Fame. Well, thank you, Michael. I appreciate that. On the volume story, can you help with 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 the solid waste business cycle this time has been much more ratable and metered and not rapid like historic ones, there's a lot more volume to come. It's not a hockey stick. It's that permanent volume, so commercial collection versus C&D and special waste. I'm trying to understand, in that 15% landfill growth, how much of that was permanent and how can you correlate that to your own commercial collection trends? From the comments, Michael, we said that commercial grew approximately 6% in revenue and roll-off grew approximately 5%. 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 runs approximately a third of your collection revenue. If you're getting 5%-6% growth on what is 67%, mathematically, the disposal is growing on your own collection at 10%-12%. What it says is you're getting a little bit of a pickup on your third party, which is also, their business is probably growing at approximately 3%-4%. It's a way to say that while 15% in MSW or a 7% in C&D sounds very high, you got to think about what it is as a percentage of the dollar of reported revenue that we have, that we're just really getting the share that we have on our trucks and that our customers bring to us. It's not really that we're taking any share. That sort of frames 15% for you. I would tell you that obviously, for our 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 regions, because the growth and the comps that we had was broad-based across all five regions. There wasn't anything that jumped out in particular, other than our west, who was late to the recession party, has been late to the recovery party and is having a very strong housing recovery. The west was a little outsized in that way. I would say we agree with you that it has been a more staggered and prolonged recovery, we are not seeing evidence that that is letting up. We were cautious in February in our commentary, as we've headed into our sixth year of double-digit landfill volume growth. We feel like we're sort of busting at the seams in our disposal system. We've been surprised at the magnitude of the continued recovery, quite honestly. To answer your question, I don't know exactly where we are, we're not seeing a sign that we're necessarily near the end of it. It's just that we're comping higher and higher numbers, that gets more difficult to do. We are, for the first time over the last 2 quarters, meaning the fourth and now this first quarter and into April, we are adding routes 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. It had really been absorbed up until probably the third quarter of 2016. That would tell you that the system is probably, on the collection side, nearing full capacity when you look at it in that way. Also, Michael, if you look at this year being the fifth year, we're pretty strong recovery within our numbers on the volume side to the extent that tax law changes or infrastructure plans or something that gets implemented in D.C. that does actually drive GDP above that 1.5%-2% to something closer to the 3%, well, that just puts the economy in another gear and just further prolongs this period of recovery. Okay. One number that I grabbed onto was the third party at 3%-4%, which is still better than what would be the structural volume of a GDP-related volume growth, which means. Yeah There's an incremental driver. 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 or new business adds. That's correct. Also remember, Michael, geography plays a role in this, too. Yeah. Remember, we've got a quarter of our total revenue, I'm rounding, sitting on the West Coast. We have another quarter sitting from in the Southeast, from kind of Gulf Coast states up in the Carolinas. You've got growth pockets in Colorado and other areas up the East Coast. That kind of smile down around the U.S. is comparatively higher growth than some other geographies within the U.S. Yeah, as you know, where we're not, just because of where Waste Connections wasn't by our model and where Progressive wasn't, we're not in and around the Great Lakes and we're not in and up piece. I would tend to argue those are the geographies that have had a more difficult struggle from a recovery standpoint. Okay. Switching gears to E&P, given where the rig count is in the counties you're located, could we anticipate that a 10% sequential improvement is a reasonable way to think about the path? Well, if you think about how we've guided Q2, we've guided another 8%-10% sequential increase between from Q1 to Q2. Again, let's just take this one quarter at a time. 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 have 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 happened from 2013 into 2016 in the oil fields, we are seeing tremendous decision-making changes with speed in the E&P business that are very price sensitive. At $53-$55 and above, we see a rapid deployment of rigs rapidly and an acceleration of drilling. At $48, we see a rapid deceleration. Our E&P guys have said that they have never seen such a sensitivity around $5-$7 swing. The drillers have very much figured out what that return point is with their new cost structure, and the technology is allowing them faster stop-and-start times in shutting and bringing on these rigs. That's the only I would caution. You tell me what price oil you want to assume, and I'll tell you whether it's going to be 8%, 10%, or 15% growth. There's a lot of sensitivity around where we're sitting right now. That's mostly about your Texas and Mid-Continent exposure because that would not-. Yes. That would-. Be relevant to the Bakken? That's right. The Bakken is still very quiet, and I would say that the Bakken's turn-on point is probably $10 north of where things have been. Okay. That's very helpful. I know it was asked a different way, but if I'm reading through your comments, 3%'s the right price trend for the second half. The volume trend in the second half, though, is somewhere between zero and one, not between one and two. Is that the right way to think about it? Yeah. Well, The underlying is between that one and two. The reported, because of the conscious shedding of the 2.5% at the former Progressive, which will now come into it, yes, Michael. 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, too. 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 2016, that you could see reported price dip slightly below 3%. Yeah. It'll be at that upper end of 2.5%-3%. Yeah. Okay. This is a minutiae question, but what's the rollover of BIN in 2Q? Well, in 2Q, if you look at Q1, again, was what, about $490 million? Divide that by three and multiply that by two. Two-thirds of that $490, take it up a little bit for seasonality. 320. Yeah. Do the same 6% incremental sequential divide by three, multiply two. You're getting the ZIP Code. Yeah. Michael, this is Ron. I'm staying in the 320 range. Yeah. Okay. I got that right. Okay, great. Thanks a lot. See you at Waste Expo. Thank you. 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's some lumpiness in CapEx on a quarter-over-quarter basis. 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? Yeah, Derek, we guided about $450 million of CapEx for the full year, our guidance remains unchanged on that. You know, Q1 has less construction in it related to landfill build-out. Q3 has that construction element in it. Q3 is typically the peak. Q1 is typically probably the lowest level. We're still on target for that $450 of CapEx for the year, the quarter-to-quarter patterns are as expected. Yeah. Derek, the same goes on the truck 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. You see a higher flow in Q3 and 4 of our equipment and truck capital than you do in one and two. It's just a timing issue. Yep. Okay, makes sense. Just moving on to your landfill portfolio. Overall, are there any major landfills that are reaching the end of life and/or requiring any sort of major investment to cap it or expand airspace? Other than our disclosure and commentary around our Chiquita landfill, which has been in an 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. Depends on what your horizon is, but I just defined over the next five to seven years, nothing. Okay, that's great. Just one last one from me. What are you assuming for OCC pricing in your Q2 guidance? When we give guidance for any quarter, we assume current conditions, so it's about $140 a ton right now for OCC. Okay. Thanks so much. Thank you. Our next question is from Al Kaschalk of Wedbush Securities. Please go ahead. Good morning, guys. Congratulations on a very strong quarter. Ron and Worthy, I was wondering if you could parcel out a little bit more of the details on the 50 basis points of better margin expansion than planned. I know you've shared a lot of commentaries broadly, is there anything in particular, whether it be the commodity prices in the quarter? What were the major factors to that performance? Al, I would say the following. Number one, achieving the 2.6% price in the prior historical Waste Connections footprint, also achieving the 4% price in the Progressive footprint. Obviously, you're blending together at 3% plus price. That's a material margin driver. As long as your costs aren't running up more than that 3%, you're getting 20 to 30 basis points expansion just on price leverage right there. 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 than collection. That would be just about an equal contributor. Obviously, we said that E&P Waste had accelerated. It was a small % of revenue in the quarter, obviously, it did come in at higher than average corporate margins, that's a contributor. Certainly, commodities, as you pointed out. It was probably a quarter of the contribution as well, if I had to break it down. That says 10 to 15 basis points because it's obviously all price, not all, but a high % of price, it flows through. It was a combination of those four. The reality is those four give you more than 50 basis points, of course, in any quarter, you have things that go the other way, too. 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. Al, if you bridge back to where we were in February when 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 fee, that was a little over half of that revenue fee, Given the high margin flow through of that, you would expect to see an expansion of the margins relative to the 30% that we guided. All right. It's nice to have all the levers working, but more importantly, having the operating leverage that you guys continue to focus on. Ron, I want to just maybe spin a little bit. I know you said you're not really going to be making too many comments or any further comments on the L.A. County situation. Maybe just more broadly speaking, given the strength that you're seeing in the landfill volumes, and particularly the continued siting on the West Coast, 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, Al, 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 for many places, really are, because the permitting process is so elongated and so difficult. You are not seeing a decrease in population. You're seeing robust economic times right now on the West Coast, and you're seeing waste generation at virtually all-time highs in many markets throughout the West. We would love to have incremental disposal or handling assets in the West. We are always working on that. We have things in the works. 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 30-50-year length assets in all of our California landfills right now except the current L.A. asset. Actually, we have a permit that has been recommended that gives us a 30-plus year asset. We have to work through the details of that. We have been very successful in our permit activity in the West Coast. It is very difficult. 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. Right. That's very helpful because I was just wondering if we're short landfill on the West Coast or if there's a lot more power in that location than, say, across other parts of the country. Good. We'll look forward to watching and monitoring what happens there. Thanks and good luck. Thank you. Thank you very much, Alan. The next question is from Chris Murray with AltaCorp Capital. Please go ahead. Thanks, guys. Good morning. Morning. Just thinking about the volume trends and certainly the discussion around GDP growth, 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 collection, I guess a couple things. One, is there a constraint on going to be your ability, either finding people or assets, in order to service that stuff? Can you just talk a little bit about whether or not this is sort of keeping your share of a growing pie, or are you guys actually being able to take market share away from other competitors? Well, Chris, I think, you obviously asked a few questions there. Let me try to take each one. First off, is there a constraint on getting assets, was one of your questions, to service the growing volume? The answer to that is no. Obviously, we have ample CapEx, truck and equipment manufacturers are more than always willing to take it, and they are ramping their productions up. On the physical asset side, that is not a constraint. On the human asset side, you zeroed in on something that I think is not real well understood by a lot of the public and the investment community, and that is that we are in a tight labor market, especially for skilled labor in the U.S. Depending on what happens with immigration reform, that will not necessarily help that situation, because it is difficult to find quality drivers, mechanics, equipment operators. That is a tight, especially for skilled labor, it is a very tight market. It is out there, but it is difficult. We are not, as of today, constrained on the physical resource side or the human resource side. It's something that we pound on nonstop of 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 U.S. alone in the month of March. That tells you right there, how many people are out going for what is a limited supply of personnel. This is something that we do and deal with, and we'll get through. To the last part of your question, which was about taking share. Really, I would say this is far more of a rising tide. Waste Connections has always been a price-focused company, by default, you're not necessarily a volume-focused company. Our model is one where we get volume because of structural contract and geography, not reliance on price-led volume growth. To say that, we can't take share in a lot of our market because in 43%-44% of the market area, we have 100% share by contract, it would be misleading to say it's anything more than a rising tide for a lot of what, at least in our model, delivers. I think at some of our landfills, we are the benefactors of some private companies that take share, who tend to be more price-aggressive. We rather have them be more price-aggressive and bring it into our landfills than us have to go get that on our trucks, per se. That's how I would frame the pieces of your question. All right. That's great. Thank you. Just one last question, maybe Worthing. You guys 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. Any idea on magnitude, or is that sort of already built into your CapEx plan, so it's already there? Yeah. Chris, this is Ron. I know you said Worthing. Rebranding, we do not capitalize rebranding. Number one, you should know that. It's not in our CapEx, which is why we call it out, because we run it through the P&L as a current period expense. That branding should run about $15 million over the balance of this year and probably into the first quarter of 2018. That's what our expectations are currently. Okay. Thanks, guys. The next question is from Noah Kaye, Oppenheimer. Please go ahead. Thanks so much for taking my question, 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 2016, you talked about margins being up 500 basis points. Where were those margins tracking in 1Q? Then maybe if you could talk about upside from here, both considering the planned divestitures and then separating that out, just talking about organic improvements and really where you see those improvements coming from. Thanks. Sure, Noah. Well, in Q1, those margins were up approximately 550 basis points on the former. Again, it depends on how much of the corporate synergy you allocate to that versus something else. Assuming that everything we took out of the former Progressive was all allocated to those, you 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. We're not complete with that yet, but we've done, let's call it, 30%. You should expect that there is 50 to 75 basis points of margin lift when we're complete with the divestitures on a go-forward basis. That would take the margins up 600 to 625 basis points on the former Progressive platform. From there, it's a continued improvement process through pricing, through risk, through shedding of low-margin customers. Let's just say that's another 50 basis points. We expect that we'll be coming into 2018 approaching probably a 700 margin point improvement on their original platform. Okay, fantastic. See you at WasteExpo. Thanks. Thank you. The next question is from Joe Box with KeyBanc Capital Markets. Please go ahead. Yeah. Hey, guys. Maybe just to round out that question, can you actually give us what the realized synergy number was for Bin in 1Q, and maybe where the run rate is currently? Yeah, 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'd rather communicate this business on an integrated basis versus trying to layer cake certain synergies. What we can tell you is that, again, the SG&A was mostly in place at year-end. The operating improvements on a run-rate basis at safety were mostly in place by year-end. Safety, again, that we targeted $25 million. We're probably running that $25 million-$30 million on a run-rate basis. Actuarially, that'll probably allow us to have about $18 million-$20 million of that at the high end in this year's number, and then roll over to next year's number. Although the cash benefit from that's earlier. Obviously, you're seeing the additive benefit being out of the gate pretty strong on price. Again, I think it's more important to talk about this on an integrated basis rather than continue a legacy this or legacy that. Yeah, if you estimated it, Joe, from what everything Worthington just said, it probably gets you $25 million-$27 million of synergized benefits. Synergized meaning what Worthington just said, SG&A, safety, and price margin impact on the legacy. I'm going to estimate the fat all in is $110 million-$120 million, $25 million-$28 million in Q1. Got it. Thanks. That's helpful. Last one from me. Ron, I think it's an interesting comment that you made that you guys are busting at the seams on disposal, and you're closer to capacity on the collection network. I'm curious if that implies any change to the incremental margin profile, if there's some sort of reinvestment need. Then maybe to Derek's question earlier, I get that there's no huge risk from facility closures, but could we theoretically see any sort of risk to disposal growth rates if you guys are maybe bumping up against daily tonnage caps? Let me take the last part of that first. There's only a couple of facilities, Chiquita Canyon is one of those, and we've discussed that, I think, that we have daily tonnage caps. Just be aware that at our largest facilities, for the most part, there is two in Canada and two in the U.S. that we have daily tonnage caps. There's 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 ours, of quote, "busting at the seams," meaning we're very full, and we're running full throttle at disposal, we could continue to handle more. All my point is that you're cycling on larger and larger denominators, your % just naturally come down. That's what that commentary was referring to. Joe, nothing more than that. Was there another part in there? I apologize. Yeah, just the incremental margin profile, I guess maybe more on the collection network then, since you've addressed disposal. Yeah. No, Joe, look, there's some nominal margin compression when you add routes, obviously, because it takes some time to get full. You also, if you do that right, you're pulling down overtime on other routes. You're pulling down variable on other routes. That doesn't happen across all markets at the same time. That's right. It doesn't happen across all markets at the same time. If you're at a point you're doing that, you better be pushing price hard, if it's a competitive area, to justify it, to offset as much of that margin compression from the additional capital as possible. If it's not a competitive market, and it's in our 43% of our footprint that's fixed, you're getting the full benefit of adding that capital. I wouldn't want to hide behind that. We're also 60% internalized, so all of that flows through at the landfills that run at 50%, so it helps offset it. I wouldn't expect any margin compression from that. Got it. Thank you, guys. Our next question is from Brian Maguire at Goldman Sachs. Please go ahead. Hey, good morning, everyone. Hey, Brian, good morning. Really strong volumes in the quarter, up more than 2%. Just wondering if It seemed like maybe it could have been even stronger if not for the days and the weather. Just wondering if you had a thought on what kind of an impact that might have had, and thinking about the rains in the West Coast and the impact of the leap day. Yeah. Again, the rains on the West Coast probably hit us for a couple million dollars on the volume side. Again, March recovered. Thinking about it through February, March rebounded pretty strongly in the West Coast, and so we may have recovered some of that in the month of March. Frankly, we don't call things like that out, given the scale of the company right now, and given how isolated it was just on the West Coast. Okay, great. Just thinking about the 2Q outlook for 3%-3.5% price and volume. I think the price part of it, you've probably got pretty well implemented at this point, should be pretty consistent. That maybe implies a little bit of conservativism on the volume part of it. Just wondering if there were any inter-quarter trends that would make you a little bit more cautious about it, or are you just being a little conservative because you hit the law of large numbers in your comp and tougher numbers there? No, we're really hitting the introduction of Progressive Waste on the volume side into our reported numbers, right? Because as we laid out on the February call, the underlying trends in the U.S. seem to be around that 1.5%-2% on the volume side. The underlying trends in Canada seem to be around that 1% side. Again, based on the $50 million of revenue that we're shedding within the Progressive footprint, that causes Canada to be about a -2% impact on reported volumes, such that the reported volumes are -1% plus or minus. In the U.S., if you're running that 1.5%-2%, you take 1% out of that based on what we're shedding in the U.S., that means the optics on a reported basis become a 0.5 point to 1. We just don't have as much of an impact in Q2 because it's just one month of Progressive. Again, as we've noted, as you bring more months of Progressive's operations into reported numbers, the purposeful shedding of some of that revenue will make the optics of reported volume to be lower than the underlying trends. That's all a good thing. Yes. Just one last one from me. Just now that you've owned Groot for a couple of months, just wondering about if you've found any positive or negative surprises in it, anything unusual, or maybe it's just going as expected? I would tell you that it's been mostly all positive. Groot, we knew, was an exceptional company, one of the best private operators in the nation for many decades, tremendous market, tremendous assets, tremendous people. If anything, they've exceeded expectations. They have shown we have pushed our safety culture. They have reduced incidents over 30% in three months. They have increased the internalization to our disposal network. They've just done an exceptional job. Ryan Brandsma and Jon Groot, who 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've almost ever seen it done. We're not surprised by that, but we're very happy about it, and we're thrilled to have them. They've got a variety of growth things that we're working on. We're very encouraged by Groot. Great. Thanks. Our next question is from Andrew Buscaglia, Credit Suisse. Please go ahead. Hey, guys. Congrats on a good quarter. Thank you, Andrew. Can you just talk about your recycling? I know some of your competitors seem to have sort of de-risked some of their contracts. It seems you guys really benefited from an incremental pull-through in the quarter. Can you just talk about how are your contracts structured in that? Then just as a check on the way down, do you guys really eat it if we get a pullback here in recycled commodities? Yeah, Andrew, if you look back over time, we've been very consistent about changes in commodity values flow through at about a 70% clip, on the way up and on the way down. While some folks talk about changes of contracts, I think you're seeing a similar kind of flow-through in other companies as well. I'm not sure how the contracts have changed or maybe if they've really been able to influence the vast majority of their contracts. I'd say the flow-through at most companies throughout the space related to changes in price are around 70%. Yeah. Okay. Okay, then just one last one on free cash flow. You got about a third of it now of your targeted $725 million range. How are you feeling about that for the full year? It seems like at this point it's definitely well within reach. It's not uncommon for us to always have a strong start to the year. We've typically always been at a point where if you annualize what we've reported to date, you 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 we're not a company that relies on some back half performance that we can't control in order to make a full year number. Yeah. Andrew, the only thing I would add to that is, as Derek pointed out earlier in his question, Q1's a 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 Qs 2, 3, and 4. As Worthing noted, this is a normal flow cycle for us. For those two reasons, you cannot take Q1 and annualize it. I think it gives us great visibility and great confidence, but we wouldn't want people to normalize it because of those two outflows that didn't occur. Right. Okay. All right. Thanks, guys. 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 did not cover that we are allowed to answer under Regulation FD and Regulation G. Thank you again. We look forward to speaking with you at upcoming investor conferences or at our June 20th investor and analyst meeting. If not then, on our next earnings call. Thank you very much. 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.