Ladies and gentlemen, thank you for standing by, and welcome to the Waste Connections First Quarter 2017 Earnings Conference Call. As a reminder, the conference is being recorded today, Thursday, April 27, 2017. And now it's my pleasure to turn the conference over to Ronald Mittelstaedt, Chairman of the Board and CEO. Please go ahead, sir.
Okay. Thank you, operator, and good morning. Like to welcome everyone to this conference call to discuss our Q1 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 and P waste activity and higher recycled commodity prices, all driving results above our outlook for the Q1.
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 $237,500,000 putting us well on our way to our full year free cash flow outlook of $725,000,000 We are extremely pleased with our Q1 performance and encouraged by both continuing strong solid waste fundamentals and the notable ramping of E and 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 4th 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, and 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 2 of our April 26 earnings release and in greater detail the filings that have been made by Waste Connections with the U. S. Securities and Exchange Commission and the Securities Commission 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 commitment to revise or update any forward looking statements and information in order to reflect the events or circumstances that may change after today's call.
On the call, we will discuss non GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings release for a reconciliation of such non GAAP measures to the most comparable GAAP measure. Management uses certain non GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non GAAP measures differently. Finally, reported results reflect the impact of our Progressive Waste acquisition on June 1, 2016.
Contribution from this combination will be treated as acquired revenue and will not be incorporated into organic growth statistics until 12 months from the closing date. I'll now turn the call back over to Ron.
Okay. Thank you, Worthing. In the Q1, solid waste core price plus volume growth was 4.7%, exceeding our 3% to 3.5% outlook for the period due to higher than expected volume growth. Core price, as expected, was 2.6% in Q1. And in spite of benefiting from mild weather and an extra leap your day in the prior year, making a very tough comp, volume growth was 2.1% in this year's Q1.
This strength in volume growth was primarily driven by double digit increases in disposal volumes and continuing improvement in collection activity, most notably in our Western and our Eastern 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 1, reported pricing growth for Waste Connections should approach or exceed 3%. 1st quarter volumes were down about 2.5% in the form of 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 and 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 $17,100,000 in the Q1, up about $7,100,000 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 Q2. However, it's important to note that current OCC prices, despite the strong year over year improvement, are currently down about 25% from March's high.
Regarding E and P waste activity, we reported $36,900,000 of E and P waste revenue in the Q1, 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 2 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 2018 are setting up for strong double digit increases in E and P waste activity given sector trends. Looking at acquisition activity, the Q1 was quite active with transactions totaling over $225,000,000 of annualized revenue. The approximate $200,000,000 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 4 tuck ins during the quarter across 3 states with total revenues of about $10,000,000 And we remain under regulatory review for the previously announced acquisition have an approximate $15,000,000 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 $10,000,000 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 and 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 the final vote in June or July, as we noted in our April 20 press release.
This is a very fluid process currently. Finally, we look forward to hosting 2nd 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 multiyear targets as we are quite proud to discuss the present. Moreover, there is no change to the differentiated strategy we have executed for the past 20 years to deliver differentiated results on a go forward basis. Investors or analysts interested in attending will need to pre register for the event by contacting Mary Anne Whitney. And now, I'd like to pass the call to Worthing to review more in-depth the financial highlights of the Q1 and to provide you a detailed outlook for Q2. I will then wrap up before heading into Q and A.
Thank you, Ron. In the Q1, revenue was $1,091,000,000 or $16,000,000 above our outlook for the period. Acquisitions completed since the year ago period contributed about $540,000,000 of revenue in the quarter with progressive waste accounting for $490,000,000 of that. Adjusted EBITDA for Q1 is reconciled in our earnings release was $332,800,000 or 30.5 percent of revenue and about 50 basis points above our margin outlook. The margin beat is attributed to better than expected increases in higher margin flow through activities such as solid waste, landfill and E and P waste revenue and higher recycled commodity values.
Year over year, our adjusted EBITDA margin reported for the Q1 declined by 2 50 basis points due primarily to the comparative lower margin progressive waste and crude acquisitions completed since a year ago period. Fuel expense in Q1 was about 3.9 percent 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 Q1 were 13.8 percent 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 $11,900,000 over the prior year period to 29,100,000 dollars 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 $3,970,000,000 and our leverage ratio as defined in our credit facility was slightly less than 2.8 times debt to EBITDA. In the Q1, we recorded a $77,300,000 charge for goodwill impairment in our E and 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 ks. It's somewhat ironic given the vagaries of acquisition accounting that despite the improving performance within E and P Waste, our early adoption of this January pronouncement eliminates all remaining goodwill in that segment. In addition, we recorded a charge of $53,500,000 for an expected loss on assets held for sale related to the remaining progressive waste divestitures and $11,300,000 for an adjustment to a contingent earn out related to an acquisition completed by Progressive Waste in 2015 due to that operation and strong financial performance this year. That acquisition is the only pre existing 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 Q1 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 of professional fees. Adjusted free cash flow in Q1 was $237,500,000 or 21.8 percent of revenue.
As Ron noted earlier, we are well on our way to meeting our original full year adjusted free cash flow outlook of $725,000,000 I will now review our outlook for the Q2 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 $1,145,000,000 $1,150,000,000 We expect core price plus volume growth for solid waste to be between 3% and 3.5%, reflecting a 1 month contribution for June from the Progressive Waste Operations. Adjusted EBITDA in Q2 is reconciled in 8 ks we're filing contemporaneously with this call is estimated to be approximately 31.5 percent of revenue or about $362,000,000 Depreciation and amortization expense for the 2nd quarter is estimated to be about 13.7 percent of revenue. Of that amount, amortization of intangibles in the quarter is estimated to be about $24,500,000 or about $0.09 per diluted share net of taxes. Interest expense in Q2 is estimated to be approximately $30,500,000 Our effective tax rate in Q2 is estimated to be about 28 point 5%, subject to some variability. Finally, non controlling interest is expected to reduce net income by about $275,000 in the Q2.
And now, let me turn the call back over to Ron for some final remarks before Q and A.
Okay. Thank you, Worthing. Again, 2017 is off to a great start and the tailwinds that drove our outperformance in Q1 should make for another exceptional year in 2017. Solid waste fundamentals remain strong. E and P waste activity and related margins continue to ramp and we remain on pace to grow adjusted free cash flow per share more than 15% in the year.
With over $250,000,000 of cash on the balance sheet at quarter end and three quarters of the year of cash flow generation ahead of us, we have tremendous flexibility to fund potential acquisitions, while significantly increasing our return of capital to shareholders. Regarding the latter, we expect to resume share repurchases opportunistically through our normal course issuer bid during this quarter or next and to implement another double digit increase of our regular quarterly cash dividend in October. We appreciate your time today and I will now turn this call over to the operator to open up the lines for your questions. Operator?
Thank you very much. And our first question is from Tyler Brown from Raymond James. Please go ahead.
Hey, good morning, guys.
Hey, good morning. Hey, Tyler.
Hey, Ron. You noted in your remarks that once Progressive has 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? And 2, how should we think about volume in the second half once all the revenue is in the base?
Yes. Well, what we said in the comments was that their volume in Q1 was a negative 2.5%, which was as expected. If you recall, we've said that there was approximately $50,000,000 of revenue that we looked to shed, not divestiture revenue, but revenue that was unsafe or unprofitable to service. So, if you take $50,000,000 over 1 $900,000,000 you get just about 2.5%. So, it was bang on what we planned.
So, that will continue. It will slowly abate as the year goes on or improve, meaning as the year goes on. So, if you take that, it says that with approximately 4% price that we said on their footprint, negative 2.5% on the volume, you're talking about somewhere in the 1.5% core price and volume growth and that should improve because volumes will continue to improve as we continue to replace revenue that we've shed with sales growth.
And anniversary the loss.
And anniversary the loss is both. So that's what you should expect there.
Yes. So Tyler, if you strip down the 3% to 3.5%, obviously with the Q1 results, you see the legacy Waste Connections is running higher than that. But again, once the progressive numbers come in June 1, we have 1 month influence of what Ron netted out about the 1.5% reported price plus volume for progressive waste, which pulls down the average for June and gives you the 3% to 3.5% for the quarter. Now of course, net of the business we're shedding, as we've said all along, the underlying trends are stronger than that.
Okay. Yes. Sorry, I missed the negative 2.5% in the remarks. Sorry about that. That's right.
Yes, sorry. And then, Ron, you noted that virtually all your divestitures LOI, which I'm assuming why the balance sheet saw the asset held for sale spike. But 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 and maybe what the EBITDA or free cash flow contribution are from those revenues today?
Yes. Well, what we had said was that there was approximately $200,000,000 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 $50,000,000 of that. So that left approximately $150,000,000 We said today that there was another $10,000,000 that was signed to a definitive agreement in Q1 as well at the end of Q1. So that left $140,000,000 And if you use a I am going to approximate, if you use somewhere between $15,000,000 $20,000,000 of EBITDA and that remaining $140,000,000 that would be a fair number.
And so that tells you that that's running 10% to 15% EBITDA. And then on a free cash flow basis, on a standalone basis right now, it's probably negligible.
Okay. All right. Perfect. And then just lastly, I had one quick question on the proxy. 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, 1, you can talk about the Board's thought process there. And 2, 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. Sure. And that's a good question. It's nice to see someone actually reach 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. And by the way, we do have financial performance hurdles on both elements of that. In the typical RSU or what people about as a time vested, there is a 1 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 3 year period and we're at an absolute ROIC improvement over the 3 year period. The ROIC improvement for target payout is 150 basis points over that 3 year period.
So again, about 50 basis points a year on average. And then the free cash flow CAGR for target payout is about 10%. Again, we target minimum double digit free cash flow per share target growth and PSU is aligned with that target. Then overarching everything is kind of a relative TSR modifier to the extent that we're above the median in against the S and 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.
And our next question is from Hamzah Mazari with Macquarie. Please go ahead.
Good morning. Thank you. The first question is just around capital allocation. Ron, you mentioned you may resume buybacks. Maybe in light of that comment, maybe speak to the M and A pipeline a little bit more.
Is it different versus prior years in terms of size of deals? Are sellers more willing to sell with potential tax reform down the line? Just any color around the pipeline and your comments around resuming buybacks?
Sure. Thank you, Hamzah. Well, first off, capital allocation has not changed. What we've always said is that our first and best use of capital is appropriately strategic, appropriately priced M and A activity. Secondly, is our commitment to our dividend.
3rd would be our buyback. And then, of course, 4th would be debt repayment. The M and 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.
Well, 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 that is a retroactive, 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.
But and I believe and we've said since the presidential change and a potential tax change that there is going to be a window of opportunity if tax change occurs that is going to be, I think, an M and A bonanza in our not just in our industry, but in many. M and A has been somewhat muted over the last 8 years because of obvious reasons of high taxes and low interest rates. And if you lower the taxes, there is a pent up demand and people are going to believe there is a window to run through before a potential next presidential change and it could reverse the other way. So, we're cautiously optimistic in that way. But the pipeline remains, as we said in the comments, pretty robust.
I would expect things to be more a little back end loaded because of the potential tax changes being expected to happen perhaps by the August congressional recess. But we're very busy, no question.
Of course, we've already had our 3rd most active year doing $225,000,000 to date.
Right, right, right. That's very helpful. And then just on pricing, you mentioned 4% on progressive. Any color as to how that splits between Canada and the U. S.
Business and anything to be aware of in that pricing number regionally?
No, it's very consistent. I would tell you that Canada is at or above that average. And so it tells you that both the U. S. And Canada in the former footprint is very similar.
And there I would say that it is reflective of our heavy focus on price. I would say that the former Progressive was more focused on volume and not as much on price. So, 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. So, I wouldn't tell you that you should expect 4% out of that footprint on successive years going forward. But I would tell you that we are confident it will be consistent with what Waste Connections has historically done and dramatically higher than what was done in 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? And the question is really, you've seen normal seasonality the last year or 2, and then 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, our guide Q1 to Q2 sequentially, if you kind of work through the investor impact in Q1, it's about a 6% seasonal pump in revenue, which is about average for what we expect right now.
Got you. Thank you.
And now our next question is from Michael Hoffman with Stifel. Please go ahead.
Thank you, Ron Worthing for taking my questions. And Ron, congratulations on the Hall of Fame.
Thank you, Michael. I appreciate that.
On the volume story, can you help with thinking about what's in it and what's permanent 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. And so there's a lot more volume to come. It's not a hockey stick, but permanent volume. So commercial collection versus C and D and special waste.
So I'm trying to understand in that 15% landfill growth, how much of that was permanent? And how can you correlate that to your own commercial collection trends?
Yes. Okay. Well, if you from the comments, Michael, we said that commercial grew approximately 6% in revenue and roll off grew approximately 5%. So, if you take that and you assume that in your revenue stream of $1,000,000,000 that collection is approximately 2 thirds and disposal and transfer are probably 1 third. And that disposal runs approximately a third of your collection revenue.
If you're getting 5% to 6% growth on what is 67%, then mathematically, the disposal is growing on your own collection at 10% to 12%. And so what it says is you're getting a little bit of a pickup on your 3rd party, which is also their business is probably growing at approximately 3% to 4%. So, it's not really so it's a way to say that while 15% in MSW or a 7% in C and D sounds very high, you got to think about what it is as a percentage of the dollar of reported revenue that we have and that we're just really getting the share that we have on our trucks and that our customers bring to us. So, it's not really that we're taking any share. So, I would so that sort of frames 15% for you.
I would tell you that obviously for our 3rd 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. So the West was a little outsized in that way. But I would say we agree with you that it has been a more staggered and prolonged recovery. And we are not seeing evidence that that is letting up.
We were cautious in February in our commentary as we've headed into our 6th year of double digit landfill volume growth. We feel like we're sort of busting at seams in our disposal system. We've been surprised at the magnitude of the continued recovery, quite honestly. But so to answer your question, I mean, I don't know exactly where we are, but we're not seeing a sign that we're necessarily near the end of it. It's just that we're comping higher and higher numbers.
And so that gets more difficult to do. We are for the first time over the last two quarters, meaning the 4th and now the Q1 and into the 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 Q3 of 2016. And so that would tell you that the system is probably on the collection side nearing full capacity when you look at it in that way.
And also Michael, if you look at this year being the 5th year, we're pretty strong recovery within our numbers on the volume side to the extent that tax law changes or infrastructure plans are something that gets Well, that just puts the economy in another gear. And just for well that just puts the economy in another gear and just further prolongs this period of recovery.
Okay. So one number that I grabbed onto was the 3rd party of 3 to 4, which is still better than what would be the structural volume of GDP related volume growth, which means there's an incremental driver. And that and you're and what I'm hearing is you're saying you're seeing that driver in your own commercial collection business as well, either service interval upgrades or new business adds.
That's correct.
And also remember, Michael, geography plays a role in this too. Remember, we've got a quarter of our total revenue I'm rounding sitting on the West Coast, we have another quarter sitting from 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. I mean there are that kind of small down around the U. S.
Is comparably higher growth than some other geographies within the U. S.
Yes. And 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 in the upper Northeast. And 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 and 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% to 10% sequential increase between from Q1 to Q2. And again, let's just take this 1 quarter at a time. But again, if those trends continue and the rig count continues to recover, you could see further sequential improvement beyond Q2.
And 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 and 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 16 in the oilfield. We are seeing tremendous decision making changes with speed in the E and P business that are very price sensitive. So at 53 to 55 and above, we see a rapid deployment of rigs rapidly and an acceleration of drilling. And at 48, we see a rapid deceleration.
And the R and P guys have said that they have never seen such a sensitivity around $5 to $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. So, that's the only thing I would caution. You tell me what price you want to assume and I'll tell you whether it's going to be 8%, 10% or 15% growth. But there's a lot of sensitivity around where we're sitting right now.
And that's mostly about your Texas and Mid Continent exposure because would that
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. And then I know it was asked a different way, but if I'm reading through your comments, 3% is the right price trend for the second half. The volume trend in the second half though is somewhere between 0 and 1, not between 12. Is that the right way to think about it?
Yes.
The underlying
is between the 2.
We have the reported because of the conscious shedding of the 2.5% at the former Progressive, which will now come into it, yes, Michael. And what we will do, obviously, we'll report the reported, but we will provide what the underlying is doing relative with consideration to what we've shed in that period too.
And it's also possible on the pricing side as you get into Q4 this year start to anniversary some of the price increases from 2016 that you could see reported price dip slightly below 3%. It will
be at that upper end of 2.5% to 3%.
Okay. And then, one thing is a minutiae question, but what's the rollover have been in 2Q?
Well, in 2Q, if if you look at Q1 and Q1 again was what about $490,000,000 divide that by 3 and multiply that by 2. So 2 thirds of $490,000,000 and take it up a little bit for seasonality.
$300,000,000
Okay. So do the same 6% incremental sequential divide by 3, multiply 2?
Then you get in the zip code.
Yes. And Neil, Michael, this is Ron. I'm staying in the 320 range.
Okay, then. I got that right. Okay, great. Thanks a lot. See you at Waste Expo.
Thank you.
And our next question is from Derek Spronck, RBC Capital Markets. Please go ahead.
Great. Thanks for taking my questions.
CapEx as a percent of
revenue was around 8.3% for the quarter. I know that there's some lumpiness in CapEx on a quarter over quarter basis. But for the full year, should we assume CapEx comes in at around 10% of revenue? Or do you think you'll be able to get that ratio below 10% on a sustainable basis?
Yes. Derek, we guided about $450,000,000 of CapEx for the full year and our guidance remains unchanged on that. As you know, Q1 has less construction in it related to landfill build out. Q3 has that construction element in it. So Q3 is typically the peak.
Q1 is typically probably the lowest level. And so you'll we're still on target for that $450,000,000 of CapEx for the year and the quarter to quarter patterns are as expected.
Yes. And 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 Q1 before placing a substantial amount of our orders. So, you see a higher flow in Q3 and Q4 of our equipment and truck capital than you do in Q1 and Q2. So, it's just a timing issue.
Yes. Okay. It makes sense. Just moving on to your land fill portfolio. Overall, are there any major landfills that are reaching 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 Chequita landfill, which we've 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 5 to 7 years that have expected closure or expansions that, if not achieved, would lead to something in that period. So, depends on what your horizon is, but I just defined over the next 5 to 7 years, nothing.
Okay. That's great. And just one last one for me. What are you assuming for OCC pricing in your Q2 guidance? Yes.
We just 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.
And our next question is from Al Akashak of Wedbush Securities. Please go ahead.
Good morning, guys. Congratulations on a very strong quarter. Ron, 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 shared a lot of commentaries broadly, but is there anything in particular, whether it be the commodity prices in the quarter, what was the major factors to that performance?
Yes. I mean, Al, I would say the following. Number 1, achieving the 2.6% price in the prior historical waste connection footprint, but 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. So that certainly price would probably be number 1. Number 2, double digit landfill volume growth at a business that is structurally a higher margin business than collection. So that would be just about an equal contributor. Obviously, we said that E and P Waste had accelerated.
It was a small percent of revenue in the quarter, obviously, but it did come in at higher than average corporate margins. So that's a contributor. And then certainly, commodities, as you pointed out, It was probably a quarter of the contribution as well, if I had to break it down. So that says 10 to 15 basis points because it's obviously all price, not all, but a high percentage of price so it flows through. So, it was a combination of those 4.
The reality is those 4 give you more than 50 basis points. And of course, in any period, you have things that go the other way too. So, those three those four things probably led to about 80 basis points to 85 basis points of margin expansion and then there were another 30 to 35 points, some of which were in detail going the other direction to give you a net yield of 50. Yes.
I'll see bridge back to where we were in February and 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 and P waste revenue as well as landfill volumes. Of the $16,000,000 revenue beat that was a little over half of that revenue beat and given the high margin flow through 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 LA County situation. But maybe just more broadly speaking, given the strength that you're seeing in the landfill volumes and particularly the continued sighting on the West Coast, is there any are there things you're thinking about that you're willing to share at least on other disposal opportunities or sourcing of landfills that could further leverage what you're doing on the West Coast?
Well, I mean, I think what our experience on the West Coast has shown us is how valuable and how critical strategic landfill assets, particularly on the West Coast, but that goes for many places, really off because the permitting process is so elongated and so difficult. And you are not seeing a decrease in population. You are not seeing you are not seeing 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. So, we would love to have incremental disposal or handling assets in the West. We are always working on that.
We have things in the 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 to 50 year linked assets in all of our California landfills right now, except the current Los Angeles asset. And 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.
But we have been very successful in our permit activity in the West Coast. But it is very difficult. And I just think that points to the value. I think there is a long term relatively strong upward price led increase that is coming in West Coast disposal volumes because of the volumes that exist there and the difficulty with which it is to permit facilities.
All right. That's very helpful 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. So good. And we'll look forward to watching and monitoring them what happens there. Thanks and good luck.
Thank you. Thank you very much, Al.
And the next question is from Chris Murray with AltaCorp Capital. Please go ahead.
Thanks, guys. Good morning. Good morning. Just thinking about your the volume trends and certainly the discussion around GDP growth, just I guess what I'm trying to understand and just thinking forward is just as the demand for your services continues to increase, and you talked about adding routes and adding collection, I guess a couple of things. One, is there a constraint on you're going to be your ability either finding people or assets in order to service that stuff?
And then can you just talk a little bit about whether or not this is sort of keeping your share of a growing pie or you guys actually being able to take market share away from other competitors?
Yes. Well, Chris, I think you obviously asked a few questions and let me try to take each one. First off, is there 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 and truck and equipment manufacturers are more than always willing to take it and they are ramping their productions up.
So, on the physical asset side, that is not a constraint. On the human asset side, you've zoomed 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, tight labor market, especially for skilled labor in the United States. And depending on what happens with immigration reform, that will not necessarily help that situation because that it is difficult to find quality drivers, mechanics, equipment operators, people that is a tight especially for skilled labor, it is a very tight market. It is out there, but it is difficult.
And so 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 United States alone in the month of March. So, that tells you right there how many people are outgoing for what is a limited supply of personnel.
But this is something that we do and deal with and we'll get through. To your next the last part of your question, which was about taking share, really, I would say this is far more of a rising tide. I mean Waste Connections has always been a price focused company. And by default, you're not necessarily a volume focused company. Our model is 1 where we get volume because of structural contract and geography, not reliance on price led volume growth.
So to say that, we can't take share in a lot of our market because in 43% to 44% of the market area, we have 100% share by contract. And so 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. But 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 would rather have them be more price aggressive and bring it into our landfills and also have to go get that on our trucks per se. So that's how I would frame the pieces of your question.
All right. That's great. Thank you. And then just one last question, maybe Worthen. 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. But any idea on magnitude? Or is that sort of already built into your CapEx plan and so it's already there?
Yes. Chris, this is Ron. I know you said Worthing. But rebranding is not we do not capitalize rebranding. So number 1, you should know that.
So it's not in our CapEx, which is why we call it out because we run it through the P and L as a current period expense. That branding should run about $10,000,000 to $15,000,000 over the balance of this year and probably into the Q1 of 2018. So that's what our expectations are currently.
Okay. Thanks guys.
And the next question is from Noah Kaye, Oppenheimer. Please go ahead.
Thanks so much for taking my question and I'll limit myself to one question. Just wanted to follow-up on legacy Progressive margins. Between the price increase implementation, the operational improvements. I think at the ending of 2016, you talked about margins being up 500 bps. Where were those margins tracking in 1Q?
And then maybe if you could talk about upside from here, both considering the planned divestitures and then separating that out, just talking about kind of organic improvements and really where
you see those improvements coming from? Thanks.
Sure, Noel. Well, in Q1, those margins were up approximately 5.50 basis points on the former and again, it depends on how much of the corporate synergy you allocate to that versus something else. But assuming that everything we took out of the former Progressive was all allocated to those, you would get to the around $550,000,000 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. So, we're not complete with that yet, but we've done, let's call it 30%.
So you should expect that there is 50 to 75 basis points of margin lift when we are complete with the divestitures on a go forward basis. So that would take the margins up 600 to 625 basis points on the former Progressive platform. And from there, it's a continued improvement process through pricing, through risk, through shedding of low margin customers. And let's just say that's another 50 basis points. So 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 Waste XPEL. Thanks.
Thank you.
And the next question is from Joe Box with KeyBanc Capital Markets. Please go ahead.
Yes. Hey, guys. So 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?
Yes. Joe, we're not tracking that anymore. As we said back in our first call since closing back in August of last year, we laid out the buckets, we laid out the numbers, we'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 and A was mostly in place at year end, the operating improvements on a run rate basis, ex safety were mostly in place by year end, Safety, again, that we targeted $25,000,000 We're probably running in that $25,000,000 to $30,000,000 on a kind of a run rate basis. Actuarially, that will probably allow us to have about $18,000,000 to $20,000,000 of that at the high end in this year's number and the rollover to next year's number, although the cash benefit from that earlier.
And obviously, you're seeing the additive benefit being out of the gate pretty strong on price. And so it's again, I think it's more important to talk about this on an integrated basis rather than continue legacy this or legacy that.
Yes. If you estimated it, Joe, from what everything Worthing just said, it probably gets $25,000,000 to $27,000,000 of synergized benefits. Synergized meaning what Worthing just said, SG and A, safety and price margin impact on the legacy, I'm going to estimate that that all in is $110,000,000 to $120,000,000 $25,000,000 to $28,000,000 in Q1.
Got it. Thanks. That's helpful. And last one for me. Ron, I think it's an interesting comment that you made that you guys are busting at the seams on disposal and you're kind of 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? And 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 and Chiquita Canyon is one of those and we've discussed that I think that we have daily tonnage caps. So, just be aware that at our largest facilities for the most part, there is 2 in Canada and 2 in the United States that we have daily tonnage caps. So, 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 are busting at the seams, meaning we're very full and we're running sort of full throttle at disposal. I we could continue to handle more. All my point is that you're cycling on larger and larger denominators. Your percentages just naturally come down. That's what that commentary was referring to, Joe, and nothing more than that.
And was there another part in there? I apologize.
Yes. Just the incremental margin profile, I guess, maybe more on the collection network then since you've addressed disposal?
Yes. No, Joe. I mean, look, there's always some there's some nominal margin compression when you add routes, obviously, because it takes some time to get full. But you also if you do that right, you're pulling down over time on other routes, you're pulling down variable on other routes.
And that doesn't happen across all markets at the
same time. That's right. It doesn't happen across all markets the same time. And 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. And 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.
So, I wouldn't want to hide behind that. We're also 60% internalized. So, all that flows through the landfills that run at 50 percent, so it helps offset it. So I wouldn't expect any margin compression from that.
Got it. Thank you, guys.
And our next question is from Brian Maguire of Goldman Sachs. Please go ahead.
Hi, 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 wondered if you had a thought on what kind of an impact that might have had and thinking about the rains in the West Coast in call that the Leap Day?
Yes. Again, the rains in the West Coast probably hit us for a couple of $1,000,000 on the volume side. Again, March recovered and that was kind of 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 in the West Coast.
Okay, great. And then just thinking about the 2Q outlook for 3% to 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. So that maybe implies a little bit of conservatism on the volume part of it. Just wondered if there were any inter quarter trends 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 and your comp in tougher numbers there?
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% to 2% on the volume side. The underlying trends in Canada seem to be around that 1% side.
But again, based on the $50,000,000 of revenue that we're shedding within the progressive footprint, that causes Canada to be about a negative 2% impact on reported volumes such that the reported volumes are negative 1 plus or minus. And in the U. S, if you're running in that 1.5% to 2%, you take 1% out of that based on what we're shedding in the U. S. And that means the OpEx on a reported basis become a 0.5.1.
And so we just don't have as much of an impact in Q2 because it's just 1 month of Progressive. But 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. And that's all a good thing.
Yes.
Just one last one for me. Just now that you've owned Groot for a couple of months, just wondering about any 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. The group we knew was an exceptional company, one of the best private operators in the nation for many decades, tremendous market, tremendous assets, tremendous people. And if anything, they've exceeded expectations. They have shown we have pushed our safety culture. They have reduced incidents over 30% in 3 months.
They have increased the internalization to our disposal network. They've just done an exceptional job. Ryan Brandsma and John 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 so long as well as I've almost ever seen it done. And we're not surprised by that, but we're very, very happy about it and we're thrilled to have them. And they've got a variety of growth things that we're working on.
So we're very encouraged by growth. Great. Thanks.
And our next question is from Andrew Buscaglia, Credit Suisse. Please go ahead.
Hi, guys. Congrats on a good quarter.
Thank you, Andrew.
Can you just check or can you just talk about your recycling? I know some of your competitors seem to have sort of derisked those some of their contracts. It seems you guys really benefited from an incremental pull through in the quarter.
Can you
just talk about what how are your contracts structured in that? And then just as a check on the way down, do you guys really eat it if we get a pullback here in recycled commodities?
Yes. Andrew, if you look back over time, we've been very consistent about changes in commodity values flow through at about a 70% cliff on the way up and on the way down. And while some folks talk about changes of contracts, I think you really you're seeing a similar kind of flow through in other companies as well. So I'm not sure how the contracts have changed or maybe if it really been able to influence the vast majority of their contracts. But I'd tell you the flow through at most companies throughout the space related to changes in price are around 70%.
Yes. Okay. Okay. And then just one last one on free cash flow. I mean, you got about a third of it now of your targeted 725,000,000 dollars range.
How are you feeling about that for the full year? I mean it seems like at this point it's definitely well within reach.
Again, 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 there are no 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.
Yes. And Andrew, the only thing I would add to that is, as Al excuse me, as Derek pointed out earlier in his question, Q1 is 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. So as Worthing noted, this is a normal flow cycle for us. But for those two reasons, you cannot take Q1 and annualize it. I think it gives us great visibility and great confidence, but we wouldn't want people to normalize it because of those 2 outflows that didn't occur.
Right. Okay. All right. Thanks guys.
And we have no other questions at this moment. I will turn the call back over to you. Okay.
Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Both Worthing and Mary Anne Whitney are available today to answer any direct questions that we 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 20 Investor and Analyst Meeting and if not then on our next earnings call. Thank you very much.
And ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation everyone. Have a great rest of the day. You may disconnect your line.