Ladies and gentlemen, thank you for standing by, and welcome to the Waste Connections 4th Quarter 2015 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Tuesday, February 9, 2016. I would now like to turn the conference over to Ron Mittelstaedt, Chairman of the Board and CEO.
Please go ahead.
Okay. Thank you, operator, and good morning. I like to welcome everyone to this conference call to discuss our Q4 2015 results and provide a detailed outlook for both the Q1 and full year 2016. Our outlook excludes any impact from our pending combination with Progressive Waste Solutions. I'm joined this morning by Worthing Jackman, our CFO Daryl Campbell, our COO and several other members of our senior management team.
As noted in our earnings release, favorable revenue trends and an approximate 180 basis point year over year margin expansion in solid ways drove exceptional results and an almost 50% conversion of EBITDA to free cash flow in 2015. And they are continuing to provide continuing momentum into 2016. Strong pricing growth and better than expected volumes that benefited solid waste in the 1st 9 months of the year continued in Q4, enabling us to once again exceed our expectations
and our outlook for the quarter.
We look forward to completing the previously announced combination with progressive waste. Integration planning meetings are well underway and we still expect the transaction will close during the Q2. 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, Ryan, 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 3 through 5 of our February 8 earnings release. These pages include disclaimers and notices regarding additional information about the combination with waste with progressive waste and where to find it and the participants in the solicitation of votes. Also, the discussion during today's 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 ks. There may be additional risks of which we are not presently aware of 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 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 Q4, solid waste price and volume growth from the prior year period was 4.8 percent or 80 basis points above our expectations. Core pricing in the period was 2.9% year over year with total pricing growth net of surcharge reductions of 2.4%. Volume growth compared to the prior year period was 2.4% with both our Western and Eastern regions each reporting volume growth of over 3%.
Increased solid waste collection activity continues to be a key driver to our strong volume growth. Commercial revenue increased about 8% year over year in the period and roll off revenue on a same store basis grew 7% on higher pulls per day. Pulls per day increased 6.5% year over year in Q4. Rollout polls per day increased 8% in our Western region, 7% in our Eastern region, and 4.5% in our Central region from the year ago period. Solid waste landfill volumes on a tonnage basis increased 6% year over year in the 4th quarter.
C and D ton increased 19% in the period, special waste tonnage grew 5% and MSW tons were up 4% compared to the prior year period. About 75% of our landfills reported higher MSW tons year over year in the period. Recycling revenue was $11,400,000 in the 4th quarter, down about $1,600,000 or 12% 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 $106 per ton during Q4, down 3% from the year ago period and 4% sequentially from Q3. OCC prices currently are around $95 per ton, up slightly compared to what we averaged in last year's Q1.
However, year over year revenue headwinds for recycling will persist in Q1 due to continued weakness in plastics and metal prices, which we expect to impact Q1 revenue by about $1,000,000 Regarding E and P waste activity, we reported $43,100,000 of E and P waste revenue in the 4th quarter or about 8% of total revenue and slightly below our outlook of about $45,000,000 for the period. In spite of the 25% drop in crude oil prices during the period, we delivered over 95% of our outlook for expected revenue for Q4 at 35% EBITDA margins, highlighting the strong margins in this segment despite lower volumes. Same source revenue decreased about 55% on a more than 60% decline in average rig count in the basins where our E and P operations are located. Volumes in the period were down about 40% year over year and average price was down 15%, similar to the prior two quarters. With the price of crude oil down another 20% since year end and continued rig count decreases over the last 7 consecutive weeks, we now expect our E and P waste business to report approximately $150,000,000 of revenue in 2016, down about 30% from 2015 with Q1 being the toughest comp.
This full year expectation reflects a $30,000,000 decline from the $180,000,000 run rate in October. But as noted in our consolidated guidance, our full year EBITDA outlook remains within the preliminary range for 2016 that we provided in October and free cash flow expectations have actually increased slightly. With our E and P CapEx in 2016 less than 5% of E and P waste related revenue and E and P CapEx down an estimated $25,000,000 year over year, our E and P waste business remains a very attractive cash flow generator with any remaining headwinds a fraction of what we had to overcome in 2015. When crude oil prices ultimately cross 50 $55 per barrel and drilling activity starts to recover, incremental margins from volume growth should initially exceed 75%. Our asset positioning should enable us to immediately benefit from any increases in such activity.
Moving on to our recently announced agreement to combine the Progressive Waste in a stock for stock transactions, we reiterate how excited we are to welcome Progressive Waste into the Waste Connections family and believe the combination will be quite compelling to our collective customers, employees, shareholders and other stakeholders. As noted in our January 19th announcement, we anticipate the combined company will generate adjusted EBITDA between $1,250,000,000 $1,300,000,000 and deliver more than $625,000,000 of adjusted free cash flow in year 1, excluding any impact of any divestitures or asset swaps we may complete. Approximately $50,000,000 in SG and A cost savings are incorporated in these numbers, but additional contributions from operating and safety improvement in Progressive Waste U. S. Operations over a 2 to 3 year period are not included in these estimates nor is the expected benefit of certain asset rationalizations in the 1st year after closing.
On a free cash flow per share basis, the combination should represent a more than 20% accretion in year 1 to the approximate $3 per share current Street estimate for Waste Connections. The stock for stock transaction structure also enables us to maintain the strength and flexibility of our balance sheet necessary to maintain our capital allocation priorities, namely to fund additional growth opportunities, increase our dividend annually and further increase the return of capital to stockholders through opportunistic buyback of 2% to 3% of outstanding shares per year. As I previously noted, integration planning is well underway in both Canada and in the U. S. And we're very encouraged by early takeaways.
Holding is still anticipated to occur during the Q2. And now I'd like to pass the call to Worthing to review more in-depth the financial highlights of the Q4 and provide a detailed outlook for Q1 and full year 2016. I will then wrap up before we head into Q and A.
Thank you, Ron. In the Q4, revenue was 531,900,000 dollars and adjusted EBITDA, as reconciled in our earnings release, was $175,600,000 or 33 percent of revenue. We estimate that adjusted EBITDA margins within our solid waste business expanded about 185 basis points year over year or almost 40 basis points excluding the benefit of lower fuel costs. Fuel expense in Q4 was about 4% of revenue and we averaged approximately $2.56 per gallon for diesel, which was down about $0.72 per gallon from the year ago period and $0.24 per gallon sequentially from Q3. Margins in our E and P waste business declined about 900 basis points on a same store basis and an additional 200 basis points from the dilutive impact of lower margin acquisitions.
Looking at the consolidated P and L, the following are certain line items that moved a notable amount in the 4th quarter from the year ago period as a percentage of revenue. Labor and supervisory expenses increased 70 basis points. Fleet and equipment repair and maintenance costs increased 60 basis points. Taxes and pass through fees increased 50 basis points. Rail and truck drayage expenses increased 40 basis points on higher intermodal activity.
Risk management and insurance expense increased 40 basis points. Fuel expense decreased 115 basis points. E and P related subcontracted expenses decreased 60 basis points and third party disposal and transfer costs decreased 30 basis points. We note that changes in many of the line items as a percentage of revenue were either magnified or due in part to the decline in higher margin E and P waste activity. For example, looking at certain line items within solid waste as a percentage of revenue, labor and supervisor expense decreased 25 basis points.
Fleet and equipment repair and maintenance costs increased 15 basis points. Taxes and pass through fees increased 35 basis points. SG and A expenses decreased 20 basis points and 3rd party disposal and transfer costs decreased 70 basis points. Depreciation and amortization expenses for the Q4 were 13.1% of revenue or about 20 basis points above our outlook due to the impact of the Rock River acquisition that closed in early November. Rock River, a vertically integrated and mostly contractual oriented business, has a structurally higher D and A percentage of revenue expense than our base business due to acquisition accounting.
While higher D and A percentage impacts GAAP results, it has no impact on free cash flow generation. Interest expense in the quarter increased $840,000 over the prior year period to $16,400,000 due to higher outstanding debt resulting from the Rock River acquisition. Debt outstanding at year end was about $2,150,000,000 and our leverage ratio as defined in our credit facility was slightly less than 2.9x debt to adjusted EBITDA. Our effective tax rate for the Q4 was 38.9 percent, slightly lower than our average rate, primarily due to a few tax credits included in the Federal Tax Extenders Act that passed in December. GAAP and adjusted net income per diluted share in the 4th quarter were $0.42 $0.49 respectively.
Adjusted net income includes, among other items, acquisition related costs and the amortization of acquisition related intangibles. Free cash flow in 2015 was $343,000,000 or 16.2 percent of revenue. As a percentage of revenue, this reflects an almost 75 basis point improvement year over year. I will now review our outlook for the Q1 and full year 2016. 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 our various SEC filings.
We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic and operating environment. It excludes any impact from the pending combination with progressive waste and any additional acquisitions that may occur during the year along with acquisition related integration and transaction costs. Looking first at full year 2016. Revenue in 2016 is estimated to be between 2 $200,000,000 $2,220,000,000 of which approximately $150,000,000 is expected to be E and P waste related.
Solid waste price and volume growth on a combined basis is expected to be between 4% and 4.5%. Adjusted EBITDA in 2016 is estimated to be approximately $750,000,000 or 33.9 percent of revenue, up 30 basis points compared to 2015. Depreciation and amortization expense in 2016 is estimated to be approximately 12.75 percent of revenue. Closure and post closure accretion expense as a percentage of revenue is estimated to be approximately 20 basis points in 2016. Operating income for the year is estimated to be approximately 21% of revenue.
Net interest expense in 2016 is estimated to be approximately $66,000,000 Our effective tax rate for the year is estimated to be about 39.2%. Non controlling interest is expected to reduce net income by about $800,000 in 2016. The 2 principal components of 20 16 free cash flow are expected to be as follows. Net cash provided by operating activities for the full year is estimated to be approximately 27% of revenue and capital expenditures are estimated to be about $230,000,000 This results in free cash flow of about 16.6 percent of revenue or about 40 basis points improvement over 2015. Turning now to our outlook for Q1 2016.
Revenue in the Q1 is estimated to be approximately $515,000,000 Solid waste price and volume growth on a combined basis are expected to exceed 5% in Q1, which includes about a 40 basis point benefit to the year over year growth from the one extra day in February. Recycling, intermodal and other growth is expected to be negative 20 basis points on slight reductions in recycling revenue that Ron previously discussed. Revenue from E and P waste activity is expected to be about $35,000,000 down almost 50% year over year. Again, as a reminder, Q1 will be our toughest comp for E and P related revenue as we did not see a meaningful decrease in E and P revenue in 2015 until Q2. Adjusted EBITDA for Q1 is estimated to be approximately $169,000,000 or about 32.8 percent of revenue.
We estimate the comparative margins year over year. Depreciation and amortization expense for the Q1 is estimated to be about 13.3 percent of revenue. Amortization of intangibles in the quarter is estimated to be about $7,600,000 or almost 0 point $500,000 or about 19.5 percent of revenue. Interest expense in Q1 is estimated to be about $17,000,000 and our effective tax rate in Q1 is estimated to be about 39.2%. Non controlling interest is expected to reduce net income by about $200,000 in the Q1.
Finally, our full diluted share count in Q1 is estimated to be about 100 and 23,300,000 shares. And now let me turn the call back over to Ron for some final remarks before Q and A.
Okay. Thank you, Worthing. 2015 was an exceptional year financially for Waste Connections due to outperformance within solid waste and strong cash flow generation across all segments. Industry leading solid waste organic growth, margins and an almost 50% conversion of EBITDA to free cash remain hallmarks of our differentiated market model. And for stockholders, 2015 was our 12th consecutive year of positive returns.
We're especially proud to note that with regards to safety, our industry leading incident rate improved 6.5% year over year and 2015 was our 9th consecutive year of improvement in incident rates with such rates down about 67% over that period. In addition, less than 1 10th of 1 percent of our 4,700 drivers at year end were categorized as a potential higher risk profile, down from about 3 tenths of 1% earlier in the year. This is a testament to the ownership of safety and coaching effectiveness by our local leaders in the field. Whether it's operational excellence, financial results or community impact, leadership, culture, commitment and accountability matter. We look forward to our pending combination with Progressive Waste and believe the attributes key to our success should continue to drive superior value creation for our stockholders as well as those in progressive ways.
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, you, And our first question comes from Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
Good morning Tyler.
Hey Ron, so thanks for all the color upfront, but can you give us a little more color on what is driving the special and C and D trends? If I look at my notes, it looks like you've had a couple of years of pretty robust trends. I just want to make sure that there's not anything that we should be thinking about like the lapping of maybe a big project or the New York C and D landfill, just anything to think about next year or 2017 that could change that trend?
Yes, I'd say there's nothing I'd say there's nothing notable on the special waste side, but you called out the right thing on the C and D side. In early 2015, we opened a new C and D landfill up in the Hudson Valley and that will anniversary itself as we move through Q1 of this year.
Okay. So overall though the economy still feels pretty good at least in the waste world?
Yes. Tom, I mean to your original question, I mean special waste is driven predominantly by speculative real estate development, both commercially and industrially. It is usually contaminated site cleanup And we get that throughout our footprint. Of course, we have a large footprint in the West where we get a lot of it. And the West Coast is sort of late to the recovery.
So they're still getting that and we're not really seeing any change. We're seeing increased dredging and other things on the West Coast, and that's a large part of what we get. So the special waste looks consistent at this point in time. And then again, the C and D is driven in large part by the housing increase that's happened. And again, sort of a disproportionate amount on the West Coast, although we noted our East Coast volumes were up over 3% as well.
So housing continues to be strong except for some softening in some of the oil patch related areas like Houston, outside of Denver, outside of Tulsa. But other than that, we're not seeing anything slow down other than related to oil.
Okay, great. Thank you. And then more than I just want to make sure I understand the margin impact of the extra day. So is the big picture here that it effectively helps with internal growth, you get an extra day of volume, but the margin impact is really that you're just adding another day of costs without another day of revenue?
Right. In some of our streams such as roll off or landfill, you can get an extra day of revenue. But you're right on the variable side, you got an extra day of labor and other variable costs that suppress margin. So it's about a 40 basis point estimated impact or benefit to price and volume growth and about a 40 basis point drag to reported margins.
Okay. Okay. That's good. And then maybe we're on my last one here. We all sit here with anticipation about Progressive.
It's clearly going to be your largest and probably your most complex deal from an integration perspective. It sounds like you guys are doing a lot of work upfront to ensure a smooth transition. But I am curious about bandwidth, not so much from financial side as this is a stock for stock deal, but more from a management side. I mean, should we think about 2016 as a year of integration or would you guys potentially pursue tuck ins as well?
Well, first off on the bandwidth question, Tyler, I think the reality is between there's very limited field overlap as you know. So this deal is not one that is based on any field synergies whatsoever. Those synergies occur only at the sort of duplicative corporate level. And so we're going to be needing all of the progressive management along with all of our field management, and we don't see any bandwidth impact there. So there would really be no reason for us to slow down our traditional tuck in sort of $75,000,000 on a standalone basis Waste Connections pipeline.
We've said that when we combine the 2 companies, it's reasonable to look at about $125,000,000 a year in acquired revenue, about 3% of the top line as an estimate. And again, I think you'll see that in 2016 between the two companies. Obviously, you won't have a full year impact to the 2 companies together. But if you looked at them individually, I think you'd see that.
Okay, great. Thanks guys.
Our next question comes from Al Kaszak with Wedbush Securities. Please proceed with your question.
Good morning, guys. Hey
Al. Hey Al.
Excellent year again. Appreciate that. Just a couple of clarification questions. First on Worthing, when you were talking about the notable increases in cost, The risk management piece struck me as a little bit high. But could you just clarify that when you adjust for the E and P, what that would have increased for the year in the Q1?
Well, it's more of an issue. While incident rates are down, it's more of a prior year increase in severity. So as some of the prior year claims develop, especially those, for instance, in California, you can get out of period impact like this.
Okay. Ron, I'd like to maybe participate in that management meeting where the East region finally gets to pump their chest for a 7% growth in the Q4. Was that weather induced? Or how much of that would we say is maybe some turn in the economy?
I think it was burning. It was mostly burning.
Feeling the burn. No, remember, Alan, on a volume growth basis, each region was slightly over 3% in total. Some lines of business were 6% to 7%, but overall the volume in the East was well over 3%.
Which was still very strong or second only to our West region which was approaching 3.5. And Al, it was, as you know, a relatively mild winter up until recently in the East, up until very recently in the last 2 or 3 weeks was a mild winter later onset in the Q4. So things stayed strong, construction continued and we really saw it across our certainly the Carolinas were strong for us and as was upstate New York, both of which are part of our Eastern region, as was Tennessee. So all of those, it was pretty broad based.
Okay, very good. Then just on E and P, I want to I appreciate the backdrop here and the tough comp in Q1. Are there any indications, I guess, from your customer base that really in Q2 there is it just more of a flat outlook in terms of starting in that quarter? Or is there a little bit of pickup that's expected, whether that be a slight increase in oil price or just a better comp from an acquisition or some type of growth?
No. Look, Al, you're really just cycling on about a $35,000,000 revenue number in Q1. Again, like we said in back in October, we thought it'd get worse before it got better. You're seeing probably the low point here in Q1 because not only do you have the continued decline in activity, but also you have weather impacting some of those areas as well. So clearly, we do think it will recover a little bit in the second half of this year because obviously a $35,000,000 run rate puts you at $140,000,000 for the full year.
And so I think lot of folks out there still believe you might have some pickup as you kind of get in the second half of this year and ramp into 2017. But we don't see any there's nothing of note from an acquisition standpoint or anything else that's going to drive the numbers. I mean, you're just looking at comps that in last year in Q1 we did about $70,000,000 of E and P revenue and it cycled down to just over $50,000,000 in Q2. That's why Q1 is the hardest comp.
Okay. Appreciate it. Good luck, guys.
Thanks, Alex.
Our next question comes from Scott Levine with Imperial Capital. Please proceed with your question.
Hey, good morning, guys.
Hi. Hey, good morning.
So just to be clear with regard to the minor revisions to the 2016 outlook versus your preliminary. Is this predominantly just factoring in the more the greater conservatism on E and T, bonus depreciation and maybe some adjustment to CapEx plans. Just want to get a better sense of whether the outlook for the core solid waste business and tax strengthening, weakening, just looking for a little bit more detail there?
Yes, I'd say on solid waste is a little bit stronger. Obviously, Q4 was a good quarter and as we talked before about the momentum in the 2016. But I think the three things you identified with regards to resetting E and P for the continuous decline in crude since Q4 or since really since October last year. Obviously, bonus appreciation was passed in December, but you've seen us soak up most of that through expectations on higher CapEx because we typically try to take advantage of that. So in a nutshell, you put all those together and you see the kind of consolidated revenue down just a little bit, but EBITDA within the band and free cash flow is slightly better.
Got it. And then regarding the ENT business, maybe just a little bit more color on the individual basins and either how they've behaved or how you expect them to behave as you run through this year. Any noteworthy changes in view by major basin there?
Yes. The trends we've seen through most of last year discontinued. Obviously, pricing stabilizes as you saw because this was the 3rd straight quarter where year over year pricing was down just about 15% last year. And so while pricing has stabilized, it does become a volume game. Obviously, we think we've had the most volume impact in basins like the Permian or Eagle Ford, given asset positioning.
But as we've always called out, the Bakken has been the most competitive on price, given the competitive landscape up there. So I'd say there's just there's no appreciable change in trends by basin. You're just seeing the impact of crude that was $50 a barrel back in October is now sitting at 29.
Got it. One last one, if I may, on capital allocation. So your tone suggests we should expect kind of a typical year and no real change to the traditional capital allocation program. You are pushing close to 3 times though and it is a large deal. I just want to push you a little bit on that.
Is your expectation, it sounds like those factors really don't have any bearing with regard to your plans on capital allocation for this year in any
way? No, that's right. Whether it's pre BIN or post BIN, again, you've got a balance sheet that's just under 3 times levered. You've got cash flow that's about 1 6th of outstanding principal, which is unmatched in the industry. So you've got ultimate flexibility to fund again about a dividend program that averages about 20% of our free cash flow, Traditional M and A activity, if you put the $125,000,000 of estimated revenue that Ron talked about, that's about 30% of most of the free cash flow.
That still gives you 50% of free cash flow to use for either increased M and A activity or to repurchase the shares on an opportunistic basis and that would put in a 2% to 3% of outstanding shares. So no, the capital allocation doesn't change pre and post deal because again the shape of the balance sheet and the strength of the free cash flow to outstanding debt remains very similar albeit just bigger numbers.
Got it. Thanks Wendy.
Our next question comes from Michael Hoffman with Stifel. Please proceed with your question.
Thank you all for taking my questions. Sorry for the scratchy voice. Hey, Ron, so the stock market is just ringing its hands thinking we're going into a recession. When you look at every truck goes across the scale every day, what's the truck weight or the container weights telling you about the consumer?
You know that they continue to be in pretty good shape. Obviously, the precipitous decline in crude over 2015, we know what that's done to the E and P business and our E and P business. But the reality is, is it's put a tremendous amount more discretionary income for many people, most everyone and this is a consumer centric business. So the vast majority of our business is individual small businesses and individual households. That ultimately makes up 70 plus percent of who pays us.
And that 70 plus percent are in better shape than they were a year ago. So we're just not seeing, at this point any declines anywhere in the economy. We're continuing to add routes in certain markets due to capacity issues. I'd say we're nearing the point of full recovery from where things were, decline, but still not quite there in some of our systems.
Okay. So on that being, when you think about where you're adding incremental capital in the fleet, is it across front end loader or automated side loader roll off? Or is it concentrated? How do we think about that? And then could you contrast it on what you think you're seeing the private market do?
Yes. Number 1, I'd say that the majority of what we're doing is from an incremental route is on the West Coast right now, where obviously we get 100% of the density that comes in. So that is predominantly tends to be automated side loader for residential and front loader for commercial Of course, roll off is just determined by a number of holes. And we just told you that was up 8% in the West Coast in the Q4. So we're there.
But we are still seeing it in our other two regions as well. Those tend to be those are more competitive regions than contract. So it takes a bit longer to build that density. But again, across all systems. So I would tell you that it's a pretty broad based steady improvement.
No real big spikes, but pretty broad based and steady.
And then what do you think the private market is doing from adding capital or are they? I'm sorry,
you did ask I'm sorry, you asked that question. I didn't answer, Michael. From what we know and what we hear in our discussions with truck manufacturers and chassis and body manufacturers that we talk to and where we order from, their demand is very high from the private sector. There's a long lead time right now to get a new to get a build slot on a new vehicle if you haven't already put one in. And that's coming as much from the private side as any of the public.
So from what we're seeing, they're seeing the same thing.
So would it be fair to suggest that the private size at near capacity and that's helping the retained pricing as well?
I would certainly tell you that on a historical basis, there's no question as the private side gets near to use your word near capacity and of course that's a route by route issue market by market that they and as they have to take on incremental debt or lease payments, pricing for the public amazingly tends to get better.
Okay. Martin, what's the cash tax rate in 2016 for standalone noise connections?
Yes, it's probably close to about 85
percent. Okay. And then Ron, if Rick wrote John the holding a class on due diligence 101 for deals, What are the things you did that should give the market comfort on the due diligence at Progressive like landfill inspections or collection operation inspection? What did you do that gives everybody comfort this integration is going to go okay?
Well, I think I mentioned earlier, Michael, in a comment, one of the things that's caused issues in larger deals in our space on a historical basis has been the multiple paid for the transaction reliant upon field synergies that were estimated. There are no field synergies estimated in this deal at all. The synergies that were estimated were duplicative overhead rolls at a corporate level only And those are pretty straightforward. And we did a lot of diligence on those ahead of time. And so we know what those are.
We've done a number of planning meetings with Progressive since then and confirmed everything we had confirmed at the beginning and perhaps then some. So I would tell you that from just a pure numerical or financial standpoint, this wasn't a deal that was baked on a bunch of field synergies and targets that you have to get to for the model to make sense.
We kept those as additional upside.
That's right, for both for the combined company shareholders. Again, I would tell you that many times, I'm not saying in the last 5 to 10 years, but on a historical basis, I joked when we did our call from New York that these were the kind of deals that used to start on Friday night and get announced on Monday. And USA, of course, was famous for that. But we this took quite a bit longer. Obviously, this was a process that Progressive's Board ran that we participated in and there was a lot of due diligence done.
I mean, we looked at every landfills model, engineering model in-depth and CapEx models in-depth. We looked at various financials, of course, very in-depth as well as tax structures
very, very
in-depthly, review of their contracts, review of their historical reserves in a variety of areas for landfill and risk. So without giving you a laundry list, what I can tell you is that this was something that was quite due diligence. No deal is without risk and we would never say that. But that's also why we gave our 1st year guidance of a bandwidth of $1,250,000,000 to $1,300,000,000 of EBITDA is to protect against some of those uncertainties that we might not have fully understood throughout the due diligence process. What we would tell everyone is in due diligence on a deal like this, you look at 20% of things that are going to make 80% to 90% of the issue.
And that's what we focused on.
Okay. And then the spring, on E and P, we had a conversation recently with a bunch of regional bank people and they've started shifting E and P loans into the critical status from January 2015
and maybe 5% of them are
there now, the December 15, about 50% of those E and P type loans. So you come into redetermination through the spring. How do you think about your exposure to upstream companies that might face pretty compressive actions from their banks with regards to their balance sheets?
Well, unlike the banks, we've been watching this now for almost 2 years. So it's not a kind of a semiannual or once a year remeasurement. So now I think our guys have done a great job in A, in collections and B, managing their exposures to their customers.
All right. And last thing for me that I'm assuming I should model the dividend policy going forward of the new code, it looked like the waste connections dividend 15% to 20% of free cash flow, if I'm modeling?
Again, well, I think we've talked about before of a dividend being about 20% of our free cash flow out of the box. That's a good zip code. Again, we'll leave it to the once the combination is finalized, leave it to the Board to establish the official policy.
Great. Thank you so much.
Thanks, Michael.
Our next question comes from Corey Greendale with First Analysis. Please proceed with your question.
Hey, good morning.
Hey, Corey.
First question I had is, the E and P impact of the guidance. So given the reduction in revenue, we're expecting more of an impact on EBITDA, so presumably there's been something to offset that. Can you just talk a little bit about that?
Well, it's whenever we get preliminary guidance, Corey, we know there's still 3 months of learning to go through and so we'll leave ourselves sufficient amount of cushion.
All right, fair enough. And then I had a couple of questions about solid waste price. So core price actually accelerated sequentially in Q4. That's not the usual seasonal pattern. So did you go back to market for more increases, people have been with fuel surcharges or just what drove that?
Yes, it's just a normal implementation. I mean, some people get an early start on the Q1 price increases and it benefits Q4 a little bit. You'll see a little uptick Q4 to Q1 in both core price, but also in surcharge rollbacks such that net price will probably be at or slightly better than what we did in Q4. But it's again, you'll see next year that our net price will peak in Q1 and have kind of a expected same trends that we typically think about, which means higher price in Q1. And then mathematically, it just reduces a little bit as you move through the year.
Yes.
And Corey, when you move some of the PIs up by a month or so and pick some of that up in December, remember, you're doing it on a seasonally lower revenue base. So that also explains just mathematically some of the incremental, what it looks like on a margin basis excuse me, on a reported basis. And to Worthing's point, I mean, you see that even greater because Q1 is your lowest seasonal quarter. So it's not really a price per se is changing. It's that your denominator is changing.
All in price came about where we expected for the period.
Okay, understand. And then the on the fuel surcharge, I think you were rolling more of that into core price, but it moved more in Q4 than it had been. So can you just help us think about how changes in diesel prices will correlate with your fuel surcharge?
Yes, again, it's just more of a timing issue as to what the comps look like. But again, we've not been a company that's focused on surcharges compared to many others in the industry. So again, you'll see some just small numbers moving through the P and L on a rollback standpoint.
Yes. And it lags a bit. It lags at least a quarter, Corey. So that's more indicative of the larger drop sort of that happened throughout the Q3 that gets fully reflected in either a rollback, a reduction of the surcharge or a conversion of a component of the surcharge to permanent price. So think of that as a backward looking indicator more than a forward.
Okay. And last one, I don't know if you'll comment on this at this point, but how should we think about internal growth for the combined companies? Is this 4 to 4.5 reasonable for the whole company or what how should we be thinking about that?
Yes. Again, when we've spoken with investors, Corey, I think our focus has been more on cash flow generation and the quality of that conversion of EBITDA to free cash flow. I would hope that cash flow growth exceeds EBITDA growth and EBITDA growth exceeds revenue growth. Again, I think early on we're looking at improving the quality of revenue and the EBITDA that it generates and minimize the amount of CapEx against that EBITDA that gets generated. So again, I don't think we'll set organic growth targets right now for the combined company as we're more focused on initially improving the quality of what's in the P and L and the free cash flow generation.
Understood. Thank you.
Our next question comes from Barbara Novarini with Morningstar. Please
It appears that we're hearing a tale of 2 economies in North America lately, and you've already touched on the strength of the consumer. But aside from the obvious oil and gas sector weakness, are you starting to see other pockets of the industrial economy weakening?
First off, Barbara, we have very limited exposure to the industrial economy. Within our business model, that represents probably only about 3% of revenue or so. So we're not a great proxy for anybody who wants to understand that economy. In that 3% of our revenue, we're really not seeing a decline in the U. S.
So far in our model. So that's just something we're not seeing. I can't speak about it any more broadly than the 3% of revenue we have.
Okay. And then now that we've experienced several quarters of weakness in E and P, can you comment on the M and A landscape? Are you starting to see more attractive valuations in the space now?
Well, we're not how do I best say it? Not that we wouldn't look at acquiring something in the E and P space. If it was an asset we felt we needed and it was appropriately priced for $29 oil. But in order for us to improve our E and P business, it's purely just a function of rig activity. And we do not need any additional assets.
We have comfortably the best positioned assets in this space with a very large lead over who's in 2nd place. And it's all just a function of activity, which is a function of oil price. So I'd never say never, but it's not something we're actively out looking at right now.
All right. Very good. Thanks very much.
Our next question comes from Andrew Buscaglia with Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for taking my question. Sure, Mark. Can you just comment on the free cash flow growth in 2016? Can you just walk through the puts and takes again, just so we're clear how you're getting that growing and specifically if you can comment on the working capital?
Yes, look it's I think you've seen us over time generating that kind of 15.5% to 17% of revenue range over the past several years. And as we look at the upcoming year, obviously CapEx is down nominally year over year as we've guided On a working capital standpoint, working capital is normally a slight benefit as we look ahead to the CFFO. So I think you'll see cash flow from ops again go towards that upper end of what we've typically guided being 27% of revenue. And again, the rest of it is just pure math.
Okay. And then can you just comment on, you haven't touched too much on recycling and intermodal in 2016. I know we're expecting more headwinds in recycling, but can you just comment on, specifically what you expect?
Yes, both on recycling and intermodal, again recycling, the headwinds continue to abate. Again, last year, more of the headwinds are associated with OCC. OCC is now kind of anniversary itself. And we're about to anniversary kind of the weakness within metals and plastics as well as third party volume reductions. And so last year you saw in some quarters about a $2,500,000 reduction in revenue.
You saw that be about 1.6 or so in Q4 and now we got into about $1,000,000 and our outlook for OCC right now is we think with $95 right now that we're getting that'll probably firm up $3 to $5 as you kind of move through the balance of the quarter. That's not baked into the numbers, but we don't see much risk on OCC going down from this level as you look in the near term. So again, headwinds around recycling continue to abate. It's nowhere near the amount of drag it was year over year that we saw last year. In intermodal, intermodal is running about all out.
We started some contracts early last year that took a lockstep up in activity for that. We'll be anniversarying that this year. Obviously, the lower fuel surcharges at the railroads put on us gets passed on to our customers. And so you'll see revenue probably flat to down just a little bit based on the surcharge pass throughs. But again, we're not expecting any increase in 2016 like we saw in 2015.
All right, great.
That's helpful. And just one last one.
I mean, I know there have been some questions on the broader environment and you guys not really seeing in the waste stream much risk here. But what is the biggest risk you see in 2016 at this point? If the market's headed lower, what are some of the sort of the leading indicators you guys are looking at that would give you concern?
Well, on a Andrew, on a historical basis, our sector has lagged a contraction in the economy by, to be honest, probably 9 to 18 months minimum. Of course, it's lag coming out too. But so we if you go back to the last contraction that occurred in 2008, 2009, people were talking about it in 2010, everybody in our industry was still having strong volume and price. So it tends to lag. Now there are 2 things that we look at very closely on a real time basis almost daily that are real time indicators and that are what are our roll off calls per day throughout our system doing by geography because that's a real time indicator of on demand activity.
And what is going on in the C and D portion of our landfills throughout our network because again that's a good indicator of construction activity which as it comes down is a precursor generally to the economy contracting. So we look at those two things. Those two things right now, we just gave you on a real time basis. The Q4 are very strong. Through the month of January, we're on target with our plan, which is supporting the guidance we gave today.
So it continues to be. So those would be the things that if they started to reverse themselves would tend to indicate that there's
Our next question comes from Joe Box with KeyBanc. Please proceed with your question.
Hey, good morning, guys.
Hey, Joe. Good morning.
Worthing, can you just help us with the solid waste margin trajectory in 2016? One thing I want to be cognizant of is the timing of fuel benefits, especially relative to some of your higher cost hedges that are going to be rolling off. If you could just help us square the cadence of margin expansion, I think that'd be helpful.
Sure. Well, the high cost hedges that were in place last year expired at the end of last year. Now what's in place are the high cost hedges that we put in place last year that we managed to top mid year right last year that will weigh out of this year compared to market prices. Now, but the you look at Q1, fuel savings are about between $1,500,000 to $1,800,000 Again, that will work its way up just a little bit as you move through the year, given timing of some of the local fixed price distribution contracts that rolled off last year and started benefiting this year. And so you'll see probably about around $7,000,000 plus or minus benefit at current fuel prices from fuel year over year.
So call that 35 basis points on a range of 30 to 40. Away from fuel, we expect to see another kind of 20 basis point to 40 basis point improvement on kind of the aggregation of various line items. So when you kind of add fuel to that, you're looking at anywhere from 50 on the low end to about 75 on the upper end in solid waste margin expansion on a year over year basis. How that flows through in any one quarter can vary, but on a full year basis that's what we'd expect to see.
Okay, great. That's good color. Thank you. And then Ron, I think you mentioned earlier that you're starting to see some headwinds in geographies where there's oil exposure. I guess what I'm trying to understand is what products you're seeing it in specifically?
Is it just related to C and D? Are you starting to see it spill into commercial? And then how isolated is it? Is it maybe on a county by county basis or is it maybe even a little bit broader than that?
Yes. First off, Joe, I would tell you that it is what I would consider very isolated. It tends to be in a county by county basis to your point and it tends to be really in one segment. It tends to be in high end real estate and the construction thereabouts. So in places outside of Houston, outside of Austin, in certain parts of Texas where there tends to be concentrated oil wealth.
You're seeing a reduction of construction activity in high end real estate there. So that's a very small portion of our business. Of course, you're seeing the same thing in a small market like Williston, North Dakota, where the Bakken, the largest city where the Bakken is. And you've seen that market go from over 80,000 to 90,000 oil related jobs down to under 25,000 in a 1 year period. So when you take out 70% of the population that's going to hotels and restaurants and strip center, it has a big impact.
But that market is a $5,000,000 to $10,000,000 market for us. So it goes to 3,000,000 to 7,000,000 So it's just these are very isolated. They're in the scheme of things, they're rounding errors that you never see. But they do exist where there was a lot of oil concentration.
Got it. Thanks for the color, guys.
Yes.
Our next question comes from Charles Redding with BB and T Capital Markets. Please proceed with your question.
This is Peyton Porter on for Charles Redding. Just a quick question dealing with due diligence here. Kind of just looking at some of the preliminary meetings that you guys have had with the Progressive guys, have you identified any of the 10% to 15% of underperforming assets that you guys are looking to divest at this point? What is the priority there? Are you looking at more U.
S.-based assets? Are they going to be Canadian based assets? Just any color that you can add on sort of those divestitures
Well, first off, we identified through our due diligence before we ever went into a definitive agreement that there was 10% to 15% of the view of the revenue in the combined company, all of which that was within the U. S. I think
it's about 15% to 20% of the U. S.
Right. None of the revenue in Canada that was in one manner or another inconsistent with our strategy of how you create value long term in this space. And so that tells you that that's $200,000,000 to $300,000,000 of revenue in the U. S. We know what that revenue is and post closing we will look to rationalize that most likely in swaps where it can help somebody adjacent to that revenue that is consistent with what they do and they may have a piece of business that's more consistent with what we do throughout our network.
That would be the first priority and how we believe most of this will get handled. We have not had any of those discussions. That is not something that it's proper to do or even legal to do pre closing. We've had a lot of inbound inquiries. We've told everybody the same thing that once things are closed and we understand the details of the business better than we do today, we'll sit down with people when appropriate.
But that's there's nothing that won't happen until the transaction close.
Again these are markets that we've identified just as strategic non fits with our model. Obviously from a HSR standpoint we're still undergoing that review and that dialogue right now. Yes, sir. Thanks guys.
We have another question from Tony Bancroft with Gabelli and Company. Please proceed with your question.
Good morning, gents. Good morning. I guess just to jump on the last question there. I know there wasn't any comment on the BIN call regarding the New York City contract. But just since we're not going to hear from them this quarter, is there any update there?
And is that somewhere I know you just mentioned that you really you can't really discuss what you where you want to be, where you want to be. But is New York City a place in general where you see yourself in the future? Is that somewhere you want to be? Or is there anything you can add some color there?
Sure, Tony. I mean, some of it we can add some color, some of it we can't. First off, Progressive is moving forward with the contract they have under negotiation with the Department of Sanitation in New York City. And I believe that it will be executed prior to the closing of our transaction. We know of that contract.
We have reviewed that contract. I think the Citi and Progressive have done an enormous amount of work over the last 6 years to get what is an extremely comprehensive and well thought through document that works for both contract that works for both sides. We're very supportive of that agreement and think it makes a lot of good long term sense for the company going forward. And so that's where that's at and I think that's what you would hear if you talk to Dan Peele or somebody from Progressive. Secondly, I think there is a little misunderstanding in the market.
And when we've talked to investors, we have clarified this as we've gone around and answered individual questions. There is no interplay between Progressive's existing collection transfer and disposal operations in New York City and the New York City transfer and disposal contract. There's none. There won't be those 2 completely independent entities, completely independent decisions. In other words, transfer, the waste that is picked up by Progressive today and goes through their transfers to their landfill in Seneca Meadows, it will never go to the city's marine transfers that Progressive operates and vice versa.
So it's completely independent and autonomous decisions that have no financial interplay with each other. So I want to make sure you or whomever is thinking about that contract understands that.
Thanks so much. Appreciate it.
We have no further phone questions at this time, sir.
Okay. Well, if there are no further questions on behalf of our entire management team, we appreciate your listening to and interest in our call today. 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 our Pummin Busser 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.