Earnings Call: Q1 2016

Apr 28, 2016

Earnings release

Ladies and gentlemen, thank thank you for standing by. Welcome to the Waste Connections first quarter 2016 earnings conference call. During the presentation, all participants will be in the listen-only mode. We will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Thursday, April 28, 2016. I would now like to turn the conference over to Ronald Mittelstaedt, chairman of the board and CEO. Please go ahead, sir. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our first quarter 2016 results and provide an update on our upcoming combination with Progressive Waste Solutions. I'm joined this morning by Steve Bouck, our president, Worthing Jackman, our CFO, and several other members of our senior management team. As noted in our earnings release, accelerating organic growth and continuing margin expansion within solid waste enabled us to once again meet or exceed our outlook for the first quarter and generate over 22% adjusted free cash flow as a percentage of revenue. Double-digit growth in solid waste landfill tonnage and strong increases in both commercial and roll-off collection activity across our regions drove core price plus volume growth in the period to above 6%, our fourth consecutive quarter for this metric to exceed 5%. We're also extremely pleased to note that our proxy statement and Progressive Waste Solutions' information circular are in the process of being mailed to our respective stockholders, and the stockholders meetings are now set for May 26th to approve the combination of our two companies, which we expect to close as early as June 1st. We look forward to completing this transaction and realizing the benefits of the combination. Before we get into much more detail around these benefits, let me turn the call over to Worthing for our forward-looking disclaimer, as well as other housekeeping items. Thank you, Ron, and good morning. Today's call is not intended and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy securities of Waste Connections or Progressive Waste Solutions. I'd like to call your attention to pages two through four of our press release yesterday. These pages include disclaimers and notices regarding additional information about the combination with Progressive Waste and where to find it, and the participants in the solicitation of votes. The discussions during this call will include forward-looking statements, and actual results could differ materially from those made in the statements. The factors that could cause actual results to differ are discussed both in the cautionary statement in those pages of our earnings release and in greater detail in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. There may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income, and adjusted net income 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. I'll now turn the call back over to Ron. Okay. Thank you, Worthing. In the first quarter, solid waste price and volume growth was 5.9% or 90 basis points above our expectations. Core price increases in the period were 3.1% year-over-year, with total pricing growth net of surcharge reductions of 2.7%. Volume growth was 3.2%. As noted on our February call, we estimate that the extra leap year day in this year's period contributed 40 to 50 basis points to volume growth. Higher than expected disposal volumes, commercial collection, and roll-off activity in Q1 drove strong solid waste growth. On a same-store basis, commercial revenue increased about 7% year-over-year in the period. Roll-off pulls per day increased almost 8.5% year-over-year in Q1, with all regions reporting higher activity. Roll-off pulls per day increased 10% in our eastern region, 6% in our central region, and 4% in our western region from the year-ago period. Solid waste landfill volumes on a tonnage basis increased 11% year-over-year on a same-store basis in the first quarter, with all three waste streams up double digits. C&D tons increased 12% in the period, special waste tonnage grew 12%, and MSW tons were up 11% compared to the prior-year period. About 70% of our landfills reported higher MSW tons year-over-year in the period. Breaking it down by region, pricing remains comparably higher in our competitive markets while volumes are strongest in our West Coast exclusive markets. Net pricing in our two competitive market regions averaged just over 3.5% in Q1 compared to around 1.5% in our western region. Our western region reported more than 4.5% volume growth in the period, compared to just over 2% on average across our two competitive regions. Within our competitive regions, volume growth in our eastern region was notably strong due to both the impact of Q1 being the final quarter of ramping for the new C&D landfill we opened in New York's Hudson Valley early last year and the benefit of milder weather patterns in certain markets this year. Recycling revenue was $10 million in the first quarter, down almost $900,000 or 8% year-over-year due to weaker recycled commodity values for plastics and metals and lower third-party volumes. Prices for OCC, or old corrugated containers, averaged about $98 per ton during Q1, up 6% from the year-ago period, but down 8% sequentially from Q4. OCC prices currently are around $105 per ton, up slightly compared to what we averaged in last year's second quarter. Commodity price headwinds now are mostly behind us, but we expect lower third-party volumes to continue impacting year-over-year recycling revenue comparisons between $500,000-$1 million for the next couple of quarters. Regarding E&P waste activity, we reported $30.5 million of E&P waste revenue in the first quarter, or about 6% of total revenue. Revenue was $4.5 million below our original outlook for the period, primarily due to continued declines in drilling activity throughout the period. Same-store E&P waste revenue in Q1 decreased 55% on about a 60% decline in average rig count in the basins where our E&P operations are located, with volumes in the period down about 45% year-over-year. The number of rigs drilling for oil is down over 30% year-to-date and down almost 80% from the October 2014 peak. It certainly feels like we're at or nearing a bottom. In this environment, our E&P waste business is now running between $100 million-$120 million of revenue on an annualized basis at around a 25% EBITDA margin and with very low CapEx. As we've noted in the past, when crude oil prices ultimately cross $50 or $55 per barrel and drilling activity starts to recover, incremental margins from volume growth should initially exceed 75%, and our landfill asset positioning and capacity should enable us to immediately benefit from any such increases in activity. Moving on to the Progressive Waste combination. As noted earlier, stockholder meetings to approve the transaction are set for May 26th, with closing expected as early as June 1st. We anticipate the combined company will generate adjusted EBITDA between $1.25 billion-$1.3 billion and deliver more than $610 million of adjusted free cash flow in year one after the closing. This free cash flow estimate is down almost 3% from our original number due to the potential impact of recently proposed tax regulations in the U.S. Approximately $50 million of SG&A cost savings are incorporated in these numbers, and we believe we're on track to meet or exceed these SG&A synergies. A number of potential tailwinds from this combination are not included in these estimates, as we do not control their timing. These include any improvement in the Canadian dollar. Since we signed the merger agreement, the currency is already up CAD 0.10 since that time. Operating and safety improvements in Progressive Waste U.S. and Canadian operations and targeted asset swaps and/or divestitures within Progressive's U.S. operations that currently are significantly dilutive to their operating and free cash flow margins. Lastly, improvements in Progressive's approach to core pricing growth within its U.S. markets. 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 a few modeling inputs for Q2. This is a slight departure from our typical, more detailed outlook, given the projected June closing of the Progressive Waste deal, the exact timing of which will ultimately determine the contribution to Q2 reported results and acquisition-related items expected to be incurred in the period in conjunction with the transaction. We'll return to our more typical, detailed approach to guidance in Q3. Thank you, Ron. In the first quarter, revenue was $514.7 million, in line with our outlook, and adjusted EBITDA, as reconciled in our earnings release, was $169.7 million, or 33% of revenue and 20 basis points above our outlook. We estimate that adjusted EBITDA margins within our solid waste business expanded about 30 basis points year-over-year, excluding the impact of acquisitions completed since the year-ago period. Excluding the benefit of lower fuel prices, EBITDA margins decreased about 50 basis points from the prior year period, mostly due to the effect of the extra leap year day. Margins in our E&P waste business declined about 1,000 basis points from the year-ago period due to the high incremental and decremental margins on changes in revenue. Fuel expense in Q1 was about 3.8% of revenue. We averaged approximately $2.42 per gallon for diesel, which was down about $0.53 per gallon from the year-ago period and $0.14 per gallon sequentially from Q4. Looking at the consolidated P&L, the following are certain line items that moved a notable amount in the first quarter from the year-ago period as a percentage of revenue. Labor expenses increased 100 basis points. Fleet and equipment repair and maintenance costs increased 40 basis points. Risk management insurance expense increased 35 basis points. Brokerage rebates and taxes increased 25 basis points. E&P-related subcontracted and equipment rental expenses decreased 95 basis points. Fuel expense decreased 55 basis points. Changes in many line items as a percentage of revenue were either magnified or due in part to both acquisitions completed since the year-ago period and the decline in E&P waste activity. For example, looking at certain line items within solid waste as a percentage of revenue when excluding acquisitions, fuel expense decreased 85 basis points. Third-party disposal and transfer costs decreased 50 basis points. SG&A expenses decreased 30 basis points. Fleet and equipment repair maintenance costs were up 20 basis points. Labor and supervisory expense increased 45 basis points. Depreciation and amortization expenses for the first quarter were 13.3% of revenue, in line with our outlook. The 60 basis point year-over-year increase as a percentage of revenue was primarily due to the impact of the Rock River acquisition that closed last November, which has structurally higher D&A percentage of revenue expense than our base business due to acquisition accounting. As we've noted before, while the higher D&A percentage impacts GAAP results, it has no impact on cash flow generation. Interest expense in the quarter increased $1.5 million over the prior year period to $17.2 million due to the additional debt outstanding resulting from the Rock River acquisition and higher interest rates associated with fixed-rate notes issued since the prior year period. Debt outstanding at quarter end was about $2.07 billion, down about $82 million since year-end, and our leverage ratio, as defined in our credit facility, improved to slightly less than 2.8 times debt to adjusted EBITDA. Our effective tax rate for the first quarter was 39.2%, in line with our outlook. GAAP and adjusted net income per diluted share in the first quarter were $0.36 and $0.45 respectively. Adjusted net income excludes, among other items, the impact of acquisition-related items such as amortization of intangibles and transaction costs, net-of-tax. Adjusted free cash flow in Q1 was $113.6 million or 22.1% of revenue. On a dollar basis, free cash flow declined about $9 million year-over-year as a result of a $24 million increase in CapEx and cash interest in the current year period, simply due to differences in the timing of such payments this year. I will now review a few modeling inputs for the second quarter of 2016, assuming no change in the current economic and operating environment. As Ron noted earlier, this is a slight departure from our more typical detailed outlook, given acquisition-related items and integration costs expected to be incurred during the quarter in conjunction with the Progressive Waste transaction and the impact to reported results based on which day the deal closes in the period. We'll return to our more typical detailed approach to guidance in Q3. We'd also like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statement and our various SEC filings. We encourage investors to review these factors carefully. For legacy Waste Connections in Q2 and excluding any impact from the Progressive Waste combination, we expect core price plus volume growth for solid waste of at least 4%. The step-down from Q1 primarily results from the leap year benefit experienced in Q1, along with the anniversarying of the new landfill in New York's Hudson Valley, opened early last year. Q2 is the toughest comp for special waste, which was up 24% on a tonnage basis in the second quarter last year. This organic growth, together with an estimated $25 million-$30 million of E&P waste-related revenue, would result in sequential revenue growth of approximately 6% compared to Q1. Adjusted EBITDA margins for legacy Waste Connections in Q2 should improve sequentially about 70 basis points over Q1. We expect adjusted EBITDA margins within our solid waste business to expand in Q2, even excluding the benefit of lower fuel prices, a reversal from the leap year-influenced decline we saw in Q1. Depreciation and Amortization expense for the second quarter is estimated to be about 12.7% of revenue, with amortization of intangibles to be about $6.7 million. For the combined company resulting from our combination with Progressive Waste, a June 1st closing would contribute an incremental $160 million-$170 million of revenue to our reported results at an assumed 25%-25.5% adjusted EBITDA margin. This excludes any synergies, acquisition-related expenses, and integration costs. We will not be in a position to estimate an approximate D&A percentage against Progressive's revenue contribution until after the allocation of purchase price is determined for accounting purposes. Put simply, there will be quite a few moving pieces in Q2 related to the Progressive Waste transaction and the timing of the closing in the period. We expect Q3 to be a relatively cleaner quarter to guide by comparison. Now let me turn the call back over to Ron for some final remarks before Q&A. Okay. Thank you, Worthing. Again, we are quite pleased with our start to the year as continued price and volume strength and margin expansion in solid waste enabled us to once again meet or exceed our outlook for the first quarter and generate over 22% adjusted free cash flow as a percentage of revenue. Most importantly, we had another strong quarter in terms of safety, achieving a record low incident rate in March. We commend our team for maintaining their operational focus and commitment to safety, particularly noteworthy accomplishments given the potential distractions that the company has in this large merger. We look forward to completing our pending combination with Progressive Waste, perhaps as early as June 1st. We believe we are well-positioned to meet or exceed previously committed SG&A synergies and other cash flow savings in year one. More importantly, additional operational improvements and macro tailwinds discussed earlier on this call should help drive further stockholder value creation. 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. 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 been answered and you would 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. Again, to register for a question, please press the one followed by the four on your telephone. Our first question comes line of Hamza Mazari from Sterne Agee. Please proceed with your question. Hi, this is Kayvon filling in for Hamza. We were trying to get a better understanding of where you guys think we are in the cycle, in the commercial waste cycle, in terms of it just being sort of late cycle. If you guys could give us any call on that, much appreciated. Yeah, I think obviously from the results we've had the last couple of quarters with the strength of roll-off, with the strength of commercial collection and the flow-through you're seeing, not only within our company but within others that have reported recently, we're obviously very far along in that. We've been reporting double-digit increases in roll-off, or almost double digits, certainly in some regions, for several quarters now. Had the fifth consecutive quarter of organic growth greater than 5%. Those kinds of things, I believe, are historically indicative of being well into a recovery. You're also seeing most companies now, I think, report 2% or north in volume growth in a GDP environment that is 2% or less. That is also indicative of being well into the recovery and volumes at the commercial side catching up with where they were behind in the contraction. We would tell you we're well into it and I would tend to say fully recovered. All right. Great. Thank you so much for taking the questions. Appreciate it. Our next question comes line of Al Kaschalk with Wedbush Securities. Please proceed with your question. Good morning, guys. Good morning, Al. Couple quick ones here. Worthing, on the adjusted EBITDA, I think you said 70 basis points sequential improvement. How much of that, again, is the benefit from the extra workday or the impact of an extra workday in the first quarter? Was that 40, 50 basis points? Yeah, the margin impact in Q1 was about between 30 and 40 from the extra day. Again, it varies by company. Obviously, with us having more collection-oriented mix as a percentage of revenue year-over-year is where you see that decline or the margin drag from the leap year day. If you try to back in or back out net of the leap year day, it's about a 30 to 40 basis point expansion Q1 to Q2. Okay. Then do we also have to keep the fuel benefit in there? Does that taper off here in Q2, or how much again was it in Q1? I'm sorry, I missed that one. Yeah. In Q1, it was around 80, 85 basis points year-over-year. Q2, it's about the same. If you look at solid waste ex acquisitions and ex fuel, you saw the decline in Q1 because of leap year day. If you take that out in Q2, we're expecting solid waste margins to increase year-over-year net of the fuel. You see how once you remove the leap year impact, you get the year-over-year expansion, much like you saw every quarter last year. Right. Okay. Then just transitioning, I don't know if there's a way to talk about it, but each of the C&D special and MSW were all up pretty tight, similar range, 11%, 12%. I don't know if there's any more color you can give on that. At what point does the markets or the business, the size, start to maybe show a little bit of differentiation in those rates and we start to getting down into perhaps a little bit more mid-single digit type of numbers? In other words, what continues to drive the success there other than being positioned correctly in markets? First of all, you got to remember last year, definitely there were quarters where one stream was up single digits while others were up double digits. The fact that they both came in relatively similar this year is probably an anomaly. It's not something we drove or influenced. Again, we always caution folks that we're now three years in the rear view mirror in the recovery of disposal volumes. We're now into our fourth year of recovery, and we've always been very conservative in thinking ahead and forecasting year-over-year growth given the tougher comps. We'll take the double-digit increases, let that be upside. It's tough to really say one way or the other, given how broad-based the recovery seems to be. I mean, the only areas of modest weakness we see is, as you'd expect, in any geographies that have been influenced by E&P in the past. Other than that, it's been very broad-based. Right. Finally, thanks for that color, Worthing. Ron, a couple years ago, you led the, I call it, just circular change on the E&P side. Obviously, that's tempered. It's a very insignificant portion of the business now, still seeing a little bit of headwind. Given where you're going with the Progressive transaction and their strong commercial/industrial markets, are there other opportunities out there that you see, whether it be more in E&P? How do you look at the next leg or two of growth? I realize you haven't closed the transaction yet, but just maybe a little bit more broader thought of where things are going from your side. Thank you. No problem, Al. We are not currently looking at any additional footprint for the E&P business, Al. We are looking at various permits and various small tuck-ins. We believe that the E&P footprint we have today in the U.S. is comfortably by a margin of about five times the leading footprint on a disposal basis of anyone out there. We believe as it turns, whenever that is, and we're not going to project that we will capture a disproportionate amount of that business based on that footprint, and we don't need additional assets to have a 55% margin business as we did going into the downturn of E&P. We have taken out a tremendous amount of costs throughout 2015 and the first part of 2016 already in that business, and it is much more efficient business today than it was when we were running it at its peak in 2014. We believe it will perform even better. That business in Canada, meaning the E&P business, there effectively are three major players in Canada that focus on this business. This is a more developed and mature and regulated business in Canada. I don't really see an opportunity for us to do anything with that unless we were to acquire one or more of those companies, and we are not looking at that. I'm not saying we wouldn't down the line at some time, but we're certainly not today. As far as your question on growth, look, we've had a playbook at Waste Connections that seemed to have served us pretty well for 19 years. We're going to continue with that playbook, and that's the following. Look, we expect top line organic growth to be between 4% and 6%, probably 4% and 5% in a larger vessel is safe, relatively split between price and volume. Hopefully, a little bit stronger on the price than the volume. That's been our history. If you look at, as at 5%, we tend to be more close to 3% in price than 2% on volume. We're going to attempt to continue to drive that in the combined company. Then we've acquired sort of $60 million-$80 million a year of external growth. We believe that that will be probably more like $125 million a year in the combined company. We think we can do more, if we do that number, that's another approximate 3%. We believe that we're looking to have a 7%-10% growth type top line business. If we do that will drive a double-digit EBITDA and adjusted free cash flow per share increase in the business. That's the model. Someone shouldn't own us because they're looking for it to be greater than that. It may be greater than that, and it will in certain periods with opportunistic growth options. On a day-in and day-out basis, that's the growth model. Great. Good work. Good luck here in the closing, we'll talk soon. Thank you. Okay. Thanks, Al. Our next question comes from the line of Andrew Buscaglia with Credit Suisse. Please proceed with your question. Hey, guys. Thanks for taking my question. Sure. If we look at how things are trending, I just want to get some more color on the integration of BIN so far as you've seen in over the past quarter. Things like the turnaround effort in the West, it seems like given BIN's report last night, it seems like things are going okay, but can you just give us a little more color on how things are going in that direction? Sure. Obviously, it's most appropriate for them to comment, and I know they're not having a call, so you don't get to have that question opportunity, Andrew Buscaglia. Look, there are very strict rules about what we can and can't do both in the U.S. and Canada regarding integration work. We can do a lot of planning and a lot of discussing about what we will be doing and what we hope to be doing. There's not a lot of actions we can yet take or influence to take. We have a very good idea of the things we will be doing upon close. To this point, we can't really affect their business, if you will, under the laws that guide these combinations. With regard to their West business, there was two things that happened as investors and analysts know in 2015. One was a very severe flooding that happened in North Texas that actually left some of their facilities underwater, including vehicles underwater and facilities underwater. That caused not only damage and delayed route Servicing, but it caused a tremendous incremental cost to bring in trucks and employees from outside the market to service the customers, cost to clean up facilities and repair facilities, et cetera. That's non-recurring, I'd say you've seen the benefit of that non-recurrence. As far as incremental operating improvement in the West, that really hasn't happened yet. The reality is that they have spent a good amount of time shoring up the business, working to start driving down safety, and working also on continuing to improve the volume position they have through their sales organization. You've seen that come through in their first quarter numbers. That's where they've benefited. As far as operating improvements, risk improvements, variable improvements, headcount reductions, and price, those are coming. Okay, understood. That's very helpful. Just so we're on the same page, do you want the Street to be modeling the assumption that we're closing here? You said that it would contribute $160 million-$170 million. Should we assume that and be modeling for that? Are you going to update us when the closing occurs? Are we not going to get really another update until Q2? Obviously, you'll get the update when the deal closes because you'll see it in the stock because one ticker will go away, and the other one will survive. No, you'll know when the deal closes. There'll be a press release around that. Look, it's my sense that, and again, I don't want to get into your business, but it's my sense that some folks will wait till the transaction closes to then attempt to update their expectations for Q2 because then they can get a better sense of, is it June 1st, therefore are we going to do $165 million ± additional revenue? Obviously, by that point in time, we may have some guidance around D&A. Again, GAAP is going to be a very hard number to model in Q2 given the uncertainties around acquisition accounting and transaction costs. That's why we felt it was more important to give directional inputs to the shape of the business and not focus too much on GAAP because clearly, EBITDA and free cash flow are what we're focused on here. Okay, got it. Thanks, Ricky. Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question. Hey, good morning, guys. Morning, Tyler. Hey, Ron. I was curious if you could talk a little bit about the trends within the geographic region. If I recall last year, the West was really strong, but it looks like this quarter that the East is just doing really well. Can you talk about some of the trends there and were the fuel hedges rolling off a particular benefit in the East? Yeah. First, I'll take the volume. Clearly, the West still by far is the top dog here. Volumes in the West were about 4.5% in the period, where volumes in the East were around. 10 in the East on roll-off. Roll-off. Yeah, total volume growth, I'm saying was about three percentage points in the East region. Again, East is where we saw the benefit of the final quarter ramp in the landfill. East is where we saw now the detriments last year with the severe weather, magnified by the benefit this year of the milder weather. I'd say the strength in the East has been very broad-based for us across all markets. Central region is where you had a little bit of the drag with some E&P related economies, but clearly the West and the East were the bright spots from a volume growth standpoint. You got to remember what the central benefits from also is leadership and price. All the regions are still getting close to 6% price plus volume growth in the period. It's just the mathematics are different by region. Okay. No, that's very helpful. Again, another strong quarter on C&D, but I was curious, do you know what the growth rate would be if you had excluded Hudson Valley? How much do you think Hudson Valley attributed to the overall volume number? Yeah, the final ramp for Hudson Valley was probably about 40 basis points to volume growth in the period. If you look at Hudson Valley and the leap year day, collectively, that was almost 100 basis points in the period as you try to compare that sequentially to Q2. When we think about that price to volume stepping down, it's really a function of three things, I guess, leap year, lapping Hudson Valley, and then also the mild weather that probably helped Q1. That's right. On the pricing side, obviously Q1 always shines the brightest on price. On a % basis, it steps down nominally throughout the year given the higher denominators that we're comping. Okay. All right, good. Perfect. Just lastly, Ron, I appreciate that you've got Progressive in the hopper and you've got lots of work to do there, but can you talk a little bit about your appetite for additional M&A and just how the M&A market feels right now? Yeah, we are continuing. That's obviously a bit of a challenge right now because we're all running so many different directions with this Progressive combination. Having said that, we did several tuck-in acquisitions in the first quarter. We have closed at least three more so far in the beginning of the second quarter. Have an active pipeline of tuck-ins. We are working on a couple of larger, again, larger in our model, let's define that, which is $20 million-$40 million footprint transactions. We're working on a couple of those. I was out as recently as last week, spending a couple of days personally with a private company reviewing things. We're continuing to be very active. As far as your question, how is the M&A environment? I think the M&A environment has continued to incrementally improve over the last year and a half or two. People have lived now for four years with higher tax rates. They've lived now, well, for a decade with no interest rates. Those two things affect M&A activity, but life events continue to happen and stack up. In fact, the transactions we are looking at right now are exactly that. They're life event driven. I think the overall, I would categorize the M&A environment as improving, and we'll continue to be very active. All right. Perfect. Very helpful. Thanks, guys. Ladies and gentlemen, as a reminder to register for a question, please press the one followed by the four on your telephone. Our next question comes from Scott Levine with Imperial Capital. Please proceed with your question. Hey, good morning, guys. Hi, Scott. I was hoping you could focus a little bit on the industrial trends within your business, whether it be construction and demolition, permanent roll-off, special waste activity. Have you seen any deterioration or improvement in either of these three categories quarter-to-quarter, maybe over the last six months, either regionally or for your business as a whole? Anything worth highlighting there? I would say, as we talked about in the call, we've seen all three of those segments specifically improve quarter-over-quarter, year-over-year, and in every geographic region. I know while there may be some commentary out there in the Main Street media and otherwise that perhaps the industrial business is slowing, we're not seeing that. Now, again, as you know, this business is later cycle, but we are definitely not seeing that. Again, roll-off pulls were up between 4.5%-10% by region. That is a mix of both construction and industrial activity, relatively split equally, and they were both up. C&D was up double digits. Special waste was up double digits. C&D is a direct indicator of construction. Special waste is a direct indicator of speculative development or industrial reclamation. What we see in those three waste streams and those three generators across our 34 state or 33 state network, we're just not seeing a dent at this point. Got it. No appreciable difference in, call it, your more energy sensitive markets, the energy belt, et cetera. Anything to speak of there? Well, yeah. Certainly, look, you get in and around Houston, and I think anyone who was in Houston would tell you that you're seeing some contraction in certain consumption-related patterns that relate to Houston. Oklahoma. Yeah, Oklahoma, in and around Oklahoma City. Certain parts on the Front Range side of Denver. Certainly, Williston, North Dakota. You're seeing declines in markets like that. Again, let's look at a Williston, North Dakota. Our business there on the collection side is down 40%. That's $2 million for a year. You don't see things like that. When we give you, are there places that are down? Yes. They're far overshadowed by the places that are benefiting from the decrease in oil. Let's remember, the shale markets are hurting from the people that work in and around not having less disposable income. The other 328 million people in the U.S. got a pay raise, and many are spending it from a consumption standpoint, which is why you're seeing waste volumes outpace GDP, in part. You're certainly seeing some contraction in the oil markets, but it's more than overshadowed in the rest of the country. Yeah. We interrupt this waste call for a call from the Fed. No, I get the point. Net system wide, this is having the knock-on effect of improving growth throughout the platform on a national basis. I get the point and that makes sense. Maybe sticking with the E&P topic. Oil has pushed above WTI, above $45 here. Could you remind us, we got a little bit of a false start in oil last year. You're starting to see rigs come back then. To your comment earlier, at 50/50 for $5 a barrel. Would your expectation see some improvement, or have you seen a pickup on the margin in any of the basins that you operate in? Well, I'd say two things to that, Scott. First off, there is some chatter with some customers around some potential rigs coming back as early as June. This is just a couple, handful, and it's a single basin specific, so it's not broad based. Louisiana obviously can ebb and flow based on activity coming in and out of the Gulf. As we've always said, once you see oil stabilize at that $50-$55 a barrel or so range, it's still going to take a few months for folks to see that stabilize, know it's for real before they consider engaging in a broader base with return of rigs. Then they got to get the rigs back in, you got to get the employees, you got to go find the employees again. There could be a four- to five-month delay before you see a more notable turn in the trends in that business, even after you've looked back and said that crude stabilized at that level. Scott, I believe we'll see it, first in the Permian Basin, second in the Eagle Ford, third in Oklahoma, and Louisiana right in there as well, and last in the Bakken. That effectively in that order is the cost structure for the drillers, lowest to highest. Got it. Great. Thanks. Good luck with the BIN closing. Thank you. Our next question comes from the line of Corey Greendale with First Analysis. Please proceed with your question. Hey, good morning. Hey, Corey. I'll just ask a couple of quick ones. Can you remind me, in your markets with contractual price increases, are those weighted toward January 1, or how much are they spread throughout the year? Yeah, remember we do about 80% or so of our price by March or April every year. There are some exclusive markets that do reset in the middle of the year. Again, you're seeing those escalators somewhere in the 1.4%-1.5% range. What's the timing for Progressive? What's the what? You broke up. Sorry, the timing for Progressive. In their markets with contractual price increases, are they also kind of similar seasonal weighting? No, those tend to be a little more balanced throughout the year. While we don't have that number exactly, to be honest with you, they tend to be more balanced throughout the year. Their competitive markets tend to be more first quarter focused, just as ours. Their contractual markets are more balanced than they are in the first quarter, like us. Okay. Also on the price front for you. A strong result in light of the soft CPI. Can you just talk a little bit about what the market is bearing as you're pushing in your competitive markets, as you're moving price up? Are you seeing any more pushback or increases in churn or anything along those lines? Obviously the higher you push price, the greater the pushback and the greater the churn. The most opportune time to do that is when the market is expanding, because that tends to minimize the impact of the churn and the pushback. We and others are a benefactor of very good timing right now to be raising price because of the expansion in volumes and the market, and the fact that many privates who generally take customers on price, they are relatively full in their systems as well. The rising tide lifts all boats is clearly helping the sector, and minimizing the amount of churn that occurs because of incremental pricing. With that background, Ron, it sounds like you're not seeing any meaningful increase in capacity with a better set of conditions stimulating new entrants to the market or privates adding capacity. As a rule of thumb or as an overall guideline, I would say that that's correct, Corey. Certainly there are one-off markets always where there are new private entrants or privates adding incremental capacity to their fleet or their facilities. That's always going on. We're constantly looking at that on a market by market basis. Price is much, much more of an art than a science. When we're telling you we're getting 3.5% in-- I'm using that, in a central region, that may be 6% in one market and 1.8% in another. Within that market, it may be double digits on certain customers and none on many. It is much, much more of an art to come up with that number than to make a generalization that you're getting 3.5% price across a geography. That's not how it happens. Yep, I understand. All right, I'll turn it over. Thank you. The next question comes line of Michael Hoffman with Stifel. Please proceed with your question. Thank you, Ron, Worthing, Steve, for taking my questions. Happy to. If I could focus first on legacy Waste Connections. Just want to make sure I got my notes right. Worthing, you did 33% adjusted EBITDA margins, and you're suggesting a 33.7% for 2Q. That's right. Okay. I want to make sure I followed that right. The adjustments were about $10 million in this first quarter with just under $9 million for deal-related costs. What's that adjustment mix look like in Q2? Stay tuned for that. There'll be a handful of items that may get expensed with the transaction as they're incurred post-closing. There may be other expenses that get accrued with acquisition accounting. There's a mix of things. There's swap breakage numbers that we have to do on the Progressive side. The swap breakage alone is probably $30-plus million. There's various line items here. Progressive's already taken a handful of the change in control costs in their Q1 number. They already had $21 million. The sum total of these numbers are going to be sizable, which is why they're hard to estimate at this point in time. We will break that out, Michael, and detail that for people in buckets so they know exactly what was integration or non-recurring. Okay. Well, let me come at it a different way. If I stripped out that $8.8, I'm assuming that was an SG&A this quarter. That's right. If I strip that out and looked at, you're about 11.4% as a percentage of revenues. You get some seasonal lift in revs, so I get maybe I'm an 11% SG&A is the way to think ex these costs. This is the operating company. I at least get something. Close enough. You'll get between $60 million and $61 million or so for SG&A when you run that kind of math. Yeah. Okay. That gets me somewhere. All right. Looking at a 20.5%-21% EBIT margin, operating profit margin before all of that stuff is the way to think about it. That would be the math. Okay. All right. That helps. The deal cost number, Well, I guess you can't really frame it. It's going to be big. We should just prepare. There's going to be a big number that comes in when the headline comes across, and it'll get stripped away. Oh, yeah. As Ron said, there'll be a separate line item in the P&L that we expect to have that'll be titled "Acquisition and Integration Costs" that you can track. It just wasn't big enough to break out in Q1, but it'll get pulled out in the year to date and put in that line item for the six-month period ending June 30. Then we'll keep that line item active because even beyond closing. Yeah. Q3 and Q4, it'll be there as well. Yeah. When you have things like retention payments and separation payments, anything that happens post-close, we expense those as incurred. You don't accrue for those things. Okay. There'll be some dribs and drabs that come in beyond Q2 that we want to make sure we're keeping track of and also reflect that not only for our EBITDA purposes, but also for adjusted free cash flow purposes. Okay, now talking about NewCo, how much of the $50 million in G&A do you think you can get out by the end of June? By the end of June? That will not be a large number by the end of June, Michael. What I will tell you is that I expect to come out of 2016 on the combined company with all of it on a run-rate basis. Okay. Do you have a sense of what the NewCo CapEx will look like for the second half? Not for the second half. We've been talking in terms of year one. When we talked about the combined business, again, we think of year one as the four clean quarters beginning July 1st of this year. Obviously, Progressive has spent a lot of their CapEx already year to date, we'll take a fresh look at their remaining CapEx spend after the deal closes. Okay. All right. I think that's it for me then. Thanks. No problem. Ladies and gentlemen, as a reminder to register for a question, please press the one followed by the four on your telephone. Our next question comes from the line of Jeff Silber with JP Morgan. Please proceed with your question. Good morning. Thank you for taking my questions. I only have a couple of housekeeping questions, really. Looking at 2016 and excluding any impact from Progressive, kind of a two-part question, how does your second quarter guidance compare with your prior estimates? Again, excluding Progressive, how would it change full year 2016 guidance based on first quarter results? We hadn't given Q2 guidance before today, there's really nothing to compare it to. If you look at the full year, obviously back in February, we talked in terms of about $150 million of E&P-related revenue in the full year. It's running run rate right now of $100-$120. There you've got arguably a $30-plus million decline in E&P-related revenue. Solid waste was about $5 million or so higher in revenue than expectations in Q1. If that continues through the balance of the year, we'll offset a majority of that headwind on E&P. If E&P does recover nominally or somewhat during the back half of this year, that might help us overcome some of that as well. This is the first time we're giving Q2 numbers. With regards to full year, again, solid waste will go a long way to offset the E&P headwind. Good. That's helpful. Any color on your intermodal business for 2016? Intermodal business obviously had a nice ramp last year with the start of a couple new contracts. That business this year is nominally down, really just from a change in fuel surcharge pass-throughs, the way the rails push through those to the customer. That business is, net of the fuel surcharges, it's running about flat. As we said last year, that business is running at about full speed based on the asset footprint it has right now. We don't expect that business to grow much at this point. The opportunities there are more in pushing more waste volumes to our landfills in Eastern Oregon. Okay. Thank you very much. Now a follow-up question from the line of Tyler Brown from Raymond James. Please proceed with the question. Hey, thanks for the follow-up. I'm pretty good here, but can you just talk about your fuel hedge position? In the Q, I see that you're down to two instruments. It maybe encompasses 6 million of annual gallons. I thought you were burning north of 30. Can you talk a little bit about what your approach there is? Yeah. What you don't see in there is we've got many fixed price fuel contracts where our locations have made commitments to take physical delivery at a fixed price, in most cases through 2017. We have two-year fixed price delivery contracts in place with distributors. If you add that to those two hedges you're looking at right there, you get about 40%-45% as we sit here today, as being locked on legacy Waste Connections through 2017. 45%? Yeah, 40-45. That's right. Okay. This is a bit of an esoteric accounting question. Believe me, I'm certainly no accountant, but in your K, I see that you made a big adjustment to your contingent consideration last year. First off, I'm curious, why did you do that? Second, is it safe to assume that just runs through comprehensive income and not the P&L? No. The contingent consideration, obviously last year, we satisfied a couple things, or the seller satisfied a few things that we paid out contingent consideration on. That's where you see a reduction year-to-year because it impacted the cash flow. You see those payments go out on the cash flow statement. To the extent that we have contemplated those contingent payments at the date of closing, you don't see the impact through the P&L to the extent that there's a change in the amount of payment relative to what we initially contemplated. You do see a flow through the P&L, and we always adjust for those. Okay. In the K, the schedule has you actually physically paying out some $25 million this year. Is that a good number to use, or is that tied largely to E&P, or how will that play out? No, it's not tied to E&P. It's a modest amount tied to E&P, but the vast majority is on landfills and stay tuned. Okay, so. Stay tuned with regards to satisfying the milestones requisite to paying those out. Okay, perfect. All right. Thanks, guys. Ladies and gentlemen, to register for a question, please press the one followed by the four on your telephone. Mr. Mittelstaedt, there are no other questions at this time. Okay. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne Whitney is 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 on our next earnings call. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.