Ladies and gentlemen, thank you for standing by and welcome to the Waste Connections Second 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. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Tuesday, July 28, 2015. I would now like to turn the conference over to Ron Mittelstaedt, Chairman of the Board and CEO. Please go ahead, sir.
Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our second quarter 2015 results and provide a detailed outlook for the third quarter. I'm joined this morning by Steve Bouck, our President, Darrell Chambliss, our COO, Worthing Jackman, our CFO, as well as several other members of our senior management team. As noted in our earnings release, strong solid waste, organic growth, and margin expansion enabled us to once again meet or exceed the upper end of expectations for the quarter. Moreover, solid waste collection activity, disposal volumes, and recycled commodity values improved throughout the period, providing good momentum into the second half of the year. Adjusted EBITDA margins within solid waste increased an impressive 180 basis points over the prior year period, despite the year-over-year drag from lower recycled commodity values.
We believe that continuing strong operating performance and with E&P waste activity playing out about as expected, we should meet or exceed the full-year revenue and adjusted EBITDA expectations we updated in April. Free cash flow remains notably strong and a continuing hallmark of our differentiated strategy. Free cash flow in the first half of the year was $220 million or over 21% of revenue, and we remain on track to deliver at least $350 million of free cash flow for the full year, despite increasing CapEx by $10 million to construct a newly permitted disposal well in the New Mexico Permian that we've discussed on previous calls. We're also as well-positioned now as ever for any potential increase in acquisition activity or share repurchases. Our recently announced $500 million note offering will expand our available liquidity to more than $1 billion when it closes in mid-August.
Before we get into much more detail, 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. We must inform everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995, including statements related to expected operating trends, crude oil prices, recycled commodity values and E&P waste activity, expectations regarding period-to-period comparisons, the expected closing of our note offering, potential acquisition activity, the timing, cost, and contribution of new facilities, our return of capital to stockholders, and our third quarter and full-year outlook for financial results. Such forward-looking statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those currently anticipated.
These risks and uncertainties are set forth in the company's periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Stockholders, potential investors, and other participants are urged to consider these factors carefully in evaluating the forward-looking statements. They're cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this conference call. The company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. 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. Solid waste price and volume growth at 5.2% exceeded the upper end of our expectations in the quarter. Compared sequentially to Q1, core pricing in the period increased slightly to 2.9%, with total pricing growth net of surcharge reductions flat at 2.8%, while volume growth increased 80 basis points to 2.4%. Volume growth has exceeded 2% in four of the last six quarters, reflecting continuing economic improvement in our geographies. Solid waste collection revenue, net of acquisitions, increased about 4.5% in the second quarter, primarily due to higher commercial and roll-off collection activity. Commercial revenue increased 5% in the period, similar to the strength we saw in Q1. Roll-off revenue on a same-store basis grew 8% in Q2, broken down as follows. Pulls per day were up about 6%, and revenue per pull increased 2%.
Pulls per day increased in each of our three solid waste regions, with increases of over 7% in each of our Western and Eastern regions, and a 3% increase in our central region, where record rainfall negatively affected many markets. Solid waste landfill volumes on a tonnage basis increased 10% in the second quarter. MSW tons increased by 3% in the period, special waste tonnage increased 24%, and C&D tonnage increased 12%. Growth in our Western region also outperformed with tonnage up 15%. Recycling revenue was $12.1 million in the second quarter, down about $2.3 million or 16% year-over-year, primarily due to lower recycled commodity values. Prices for OCC, or old corrugated containers, averaged about $100 per ton during the second quarter, down 17% from the year ago period, but up 8% sequentially from Q1.
OCC prices currently are around $110 per ton. We believe they could stabilize around this level or soften a bit given the quick 30% recovery off of their March lows. Regarding E&P waste activity, as noted earlier, E&P played out as expected in Q2. We reported $52.5 million of E&P waste revenue in the second quarter, or the midpoint of our $50 million-$55 million outlook for the period. We again outperformed the macro as the same store revenue decreased about 40% on a more than 50% decline in average rig count in the basins where our E&P operations are located. Volume on a same store basis declined an average of about 25%, and average price per unit decreased almost 15% in the period, both consistent with our expectations. Our E&P waste business seemed to bounce along the bottom during the second quarter.
For example, revenue per day increased from April to May. A few rigs began mobilizing in the Permian in late June after crude oil prices had stabilized around $60 per barrel during May and June. In addition, the U.S. rig count rose in early July for the first time this year, with many industry analysts at that point projecting a rig count increase of between 100-200 by year end. While these trends and predictions are encouraging, we remain somewhat cautious looking ahead, given the almost 20% drop in crude oil prices since the end of June. U.S. rig count recently dipped again on this lower price per barrel, but rose again last week. As we previously stated and saw in late June, we believe a sustained $60 plus price per barrel of crude is needed to see a broader increase in U.S. drilling activity.
Perhaps projected declines in upcoming production data will reverse the recent negative trend in crude oil prices. As we look at Q3, we expect revenue for our E&P waste business to remain in the $50 million-$55 million range, consistent with the expectations we provided in April. We're also pleased to announce that we've commenced drilling on a recently permitted disposal well near our landfill in the New Mexico Permian. This well, which is expected to cost about $10 million and be online before year end, has an attractive payback as it will both enable us to avoid between $3 million-$4 million per year of water disposal costs at third-party sites and position us for additional growth. Regarding capital deployment for the year, we remain on track to acquire about $75 million of annualized revenue and repurchase between 2%-3% of outstanding shares.
With the expected closing of our note financing in mid-August, we've also pre-positioned our balance sheet with more than $1 billion of available liquidity for any opportunistic increases in acquisition activity or return of capital to stockholders. Now I'd like to pass the call to Worthing to review more in depth the financial highlights of the second quarter to provide you a detailed outlook for Q3. I will wrap up before we head into Q&A.
Thank you, Ron. In the second quarter, revenue was $531.3 million, or slightly above our outlook for the period due to strength in solid waste. In Q2, adjusted EBITDA, as reconciled in our earnings release, was $177.7 million or 33.4% of revenue. We estimate that adjusted EBITDA margins within our solid waste business expanded about 180 basis points year-over-year. While margins in our E&P waste business declined about 1,500 basis points on a same store basis and an additional 700 basis points from both the dilutive impact of lower margin acquisitions and new facility costs. Margins within solid waste expanded 60 basis points when excluding the benefit of lower fuel prices, which contributed 120 basis points to our margin expansion. We break out these contributing factors because we don't believe it's right to try to take operational credit for something we don't control, such as the price of fuel.
Fuel expense in Q2 was about 4.55% of revenue, and we averaged approximately $2.98 per gallon for diesel, which was down about $0.59 per gallon from the year ago period, but up $0.03 per gallon sequentially from Q1. Looking at the consolidated P&L, the following are certain line items that moved a notable amount in the second quarter from the year ago period as a percentage of revenue. Brokerage and rail drayage costs increased 75 basis points on higher intermodal activity. Repair and maintenance cost increased 65 basis points. Labor and supervisory expense increased 50 basis points. Third-party disposal and transfer cost increased 45 basis points. Fuel expense decreased 95 basis points, and risk management insurance expense decreased 35 basis points. Many of the increases as a percentage of revenue were either magnified or due in part to the decline in higher margin E&P waste activity.
For example, looking just at certain line items within solid waste as a percentage of revenue, risk management insurance expense decreased 45 basis points. Wages within SG&A declined 20 basis points. Labor and supervisory expense declined 15 basis points, and bad debt was down 10 basis points. Depreciation and amortization expenses for the second quarter were 12.6% of revenue, up 40 basis points year-over-year due primarily to the impact of higher depreciation expense on a top line negatively affected by lower E&P waste activity. Had E&P revenue been flat year-over-year, D&A expense as a percentage of revenue would have declined compared to the prior year. Interest expense in the quarter decreased $600,000 over the prior year period to $15.3 million, primarily due to reduced borrowing costs on our outstanding bank facilities. Our effective tax rate for the second quarter was 39.2%, similar to the prior year period.
GAAP and adjusted net income per diluted share in the second quarter were $0.46 and $0.50 respectively. Adjusted net income includes, among other items, the amortization of acquisition-related intangibles. Debt outstanding at quarter end was about $1.93 billion, and our leverage ratio, as defined in our credit facility, was approximately 2.6 times debt to adjusted EBITDA. I will now review our outlook for the third quarter. 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, and it excludes the impact of any acquisitions that may close during the period and expensing of any acquisition-related transaction costs.
Revenue in the third quarter is estimated to be between $545 million-$550 million. Solid waste pricing and volume growth on a combined basis is estimated to be about 5% in Q3. Recycling, intermodal, and other growth is expected to be about 1%, as increases in intermodal activity should more than offset any declines in recycling revenue. Revenue from E&P waste activity is expected to be similar to the prior quarter, between $50 million-$55 million. Adjusted EBITDA for Q3 is estimated to be about 34% of revenue. Margin expansion within our solid waste operations is expected again to be more than offset by high decrementals associated with lower E&P waste activity and, to a lesser extent, the impact of the lower-margin shale gas services acquisition. Depreciation and amortization expense for the third quarter is estimated to be about 12.5% of revenue.
Amortization of intangibles in the quarter is estimated to be about $7.2 million or almost $0.04 per diluted share. Operating income for the third quarter is estimated to be about 21.5% of revenue. Interest expense in Q3 is estimated to be about $16.5 million. The sequential increase over the prior quarter is due to the $500 million note offering set to close in mid-August. Our effective tax rate in Q3 is estimated to be about 39.2%. Non-controlling interest is expected to reduce net income by about $250,000 in the third quarter. Finally, it's once again important to note that on an earnings per share basis, we estimate the year-over-year decline in our E&P waste business to be about a $0.09-$0.10 drag to reported results in the third quarter when compared to the prior year period, fully masking revenue, margin, and earnings growth within our solid waste business.
Now let me turn the call back over to Ron for some final remarks before Q&A.
Okay. Thank you, Worthing. We are pleased with our results in the quarter. Our strong performance within the solid waste continues to differentiate us, while E&P waste activity is performing about as expected given the low price of crude. Solid waste revenue and margin trends improved throughout the second quarter, providing good momentum into the remainder of the year. This operating strength, combined with our outlook for Q3, puts us on track to report approximately $2.11 billion and $705 million of revenue and adjusted EBITDA in 2015, enabling us to meet or exceed our full-year expectations we updated in April. We remain on track to deliver at least $350 million of free cash flow for the full year. We appreciate your time today. I will now turn the 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. One moment please for the first question. Our first question comes from Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
Hey, Tyler.
Hi.
Hey, Worthing. We were doing some leisurely reading of the Q this morning. I just noticed that you added another, call it 500,000 gallons a month to your hedging program through 2017. Just on my math, you've got, I guess, call it about 9.5 million gallons annually hedged at this point. Is that about 30% of your usage? What is your expectation for hedging going forward? Do you expect to do more?
Well, I'm impressed that you were able to stay awake after going through the Q. You're right on the hedge side. Between derivatives as well as local locks, we've got about a third of our 30 million-gallon annual usage locked through 2017. Some of the locks we already have in place already reduce year-over-year fuel costs by about $5 million because we've got some above-market hedges this year that roll off at the end of this year to get replaced by the lower-priced ones. Our target overall probably will take us to about 40% of our targeted usage once we fully work through our lock programs.
Okay, perfect. The difference between the 330 you're getting on the hedge, and I guess if you call it PADD 5 diesel of $3, it's just the normal backwardation of the curve. Is that what it is?
Well, it's also the market pricing, the hedge pricing at the time the hedge was done.
Okay.
We have, for instance, a $3.60 hedge that's rolling off this year, and that'll get replaced by the $3.30 hedge next two years.
Okay, perfect. Then, Ron, when I think about your business, I think of you guys as maybe 50% in the open market. You've got 30% in CPI, maybe 20% in regulated markets. If we just assume that open market pricing holds and you assume that CPI just continues to print where it is, then I guess the regulated market might step down next year, do you guys think that your pricing metrics might actually slightly slow in 2016?
No, we don't. As we sit here today, we think pricing will be flat to possibly up next year. We're not really hearing any area where our regulated market or our franchise market should be backwards year-over-year at this point. It is a local CPI index, there are some local markets on the West Coast that could be backwards nominally. In the scheme of things, I would expect pricing to be roughly flat, possibly up.
Okay. Then on the regulated piece of the book. Western segment, EBITDA was doing very well out there. I know those markets are return on capital base, they probably don't have any fuel surcharge basically built into them. I assume they're doing very well. Is that a situation where the pricing maybe does slow as a result of just better EBITDA? How does that dynamic work in the regulated piece?
Well, again, as you look at our regulated business, and we have that in multiple states in the West. At any given time, we might be looking in any given year at between a third and maybe a quarter that's actually up for some sort of pricing review. You start with that dynamic. As we get very strong volume growth, which we are having, it certainly tends to push the pricing out some because the returns improve, obviously, because of the great density and price. That dynamic can come into play, where it pushes it out some.
I will tell you, at the type of volume growth that we are getting on the West, which in many areas is north of 4% in some of our regulated markets, I would take the volume trade-off, price trade-off all day long that we're getting right now relative to what we've had the last five to six years. Which might be a slightly higher pricing, but a 0% to a 2% type volume growth. It's a little bit hard to pinpoint exactly because we would have to be predicting volume continuation growth as well. Overall, you got to remember that we only are probably looking at between 20% and 35% in any given year of our regulated markets up for a review anyway.
Okay, perfect. Yeah, no, I was just curious. Thank you very much.
Our next question comes from Al Kaschalk with Wedbush Securities. Please proceed with your question.
Good morning, guys.
Hey, Al. Good morning.
Hey, Al.
I just want to focus on two areas first. I guess the West Coast in particular, the tonnage overall was pretty high, and then special and C&D continued to clip along. Is that a weight number or absolute volume in tons? What's the strength there, and is there certainly some special waste that's coming through? What's the duration on that?
Al, special waste is a project-by-project tonnage. It is weighed tonnage with regards to what's crossing the scales into the landfills. Again, when you see that kind of pop in special waste, a lot of those are just contaminated soil jobs, which are low-price jobs, as you know, to replace a cost we'd otherwise incur to provide daily cover for our landfills. This is a lower revenue per ton, a lot lower EBIT per ton because of the depletion associated with that, because it does go into the depletion calculations at landfills. It is a larger number, but again, these are project-by-project items that typically you do see strength in the second or third quarter with regards to special waste. I wouldn't predict a continuation at 24% for Q3.
Know the way it's going through the P&L is not as impactful as the % growth would lead you to think.
The special Sorry, the MSW side was also fairly positive, 3%, I think is what the comment was. I thought the economy wasn't doing so well out here on the West Coast, but that would indicate a fair amount of consumption.
Al, don't let the lack of rain get you down.
Al, actually, on the West Coast, it was closer to 7%. The total MSW was three, but the West Coast was actually higher. We've been having tremendous strength on the West Coast. Again, coming off of a much lower base, but very strong housing starts in markets throughout Southern Washington, Northern Washington, North Central California. Markets that we haven't seen in a while have much housing construction finally happening.
Got it. Just to touch base on E&P, certainly appreciate the color. I guess the question would be, why not get more aggressive here if theoretically your EBITDA margins are about the same in both businesses, which says a lot about your the solid waste side, but at a pretty poor performing E&P market. Is there a need to get more aggressive, or is it more a function of strategically you're comfortable with where you're at and don't need to add in either existing markets or other basins, given that there's probably going to be some further carnage for existing players?
Al, just so I'm clear, you meaning get more aggressive with regard to M&A opportunities in E&P or get more aggressive with regard to pursuit of more volumes with price in E&P?
Well, I guess a little of both. On the first part, I can understand why you want to be patient on the M&A side. Second, I guess the underlying dynamic is it really more the larger players are going to be generating waste, you're comfortable with where your customer relationships are there, and therefore, over time, you feel like you'll get more than your fair share of volume.
Yeah. With regard to the M&A side, I think you said it accurately. Look, we are certainly taking a look at some M&A opportunities in the E&P space. Obviously, we're going to value those on a $40-$50 crude basis, and at a multiple that offers a very strong return. For the most part, we're very comfortable with our asset mix within our E&P business. We take a look at that business as what little bolt-on pieces might we need on a specific basin, and we're continuing to look at that. We've done some of that this year and in the fourth quarter of last year. With regard to pursuit of additional volumes, we are pursuing additional volumes. To stay at where we are, you saw our commentary that price was down as much as 15%, volumes were down 25%.
Remember, the volumes in some of our basins, at some places such as the Bakken, are down as much as 70% at places within the Bakken. For us only to be down aggregately 25%, that is coming at utilizing some price in some of the basins. I think, we are always looking constantly at the dynamic situation of where is the line between incremental price volume trade-off, and that line moves as transportation costs change because of fuel costs. There is a price at which we just can't get more volume because of distance that we might be from rigs that happen to be operating right now. I think that is really what our group does on a day in, day out basis, is try to maximize that volume into each site with the price trade-off and the transportation logistics.
Yeah. As you know, it's all about asset positioning in these basins. As Ron said, you look at the Bakken, you could have a location off upwards of 70-plus % in volume. In aggregate, our locations in the Bakken were off a combined 20% in volume. While one location can be off high, your asset positioning in the basin really determines your total change or flux in that basin. We're very pleased with the asset positioning we've got across all of our basins.
I think to that point, that's why we're down in a volume in total, virtually only half what the drilling rig count and volume reduction is in E&P in total.
The last thing I'd add on E&P, I guess it's not unexpected to see people want to get valued off of what they did last year. As you've seen with some other people, we'll see with some other folks that report after us in that space. It's a pretty quick switch that those guys flip to go from positive EBITDA to flat to negative. You have to be very cautious as you play this thing out and let those guys just do.
Thank you.
Our next question comes from Corey Greendale with First Analysis. Please proceed with your question.
Hey, good morning.
Morning, Corey.
A couple clarifications, you may have somewhat already answered these points, on the E&P price, can you just talk about the trend in the quarter? Does the guidance assume that kind of similar down 15% on price?
Overall, on a same-store basis, we're assuming down 40%-45% in Q3 because obviously you saw a sequential increase Q2 to Q3 last year, it's our hardest comp in the prior year period. The breakout is, again, ±5% around what we saw in Q2. It means volume would be down some 25%-30%, and price would be down some 15%.
Deploying the proceeds of that offering, is that right?
That's correct.
That's correct.
That is correct.
Okay. Next question, not to dig too deeply into a 10 basis point move, it is relatively unusual for your core price growth extra charges to move up sequentially as the year goes on, just because the denominator grows each quarter. That would signal, to me anyway, that you did something actively to get it to increase in Q2 from Q1. Can you just address, was there anything you went out with to the street on price in Q2?
As you know every market might have a little different timing as to when it's implementing its price increases in the current year. A couple of markets, rather than implementing them earlier in the year, delayed the price increases a couple of months, and you saw it slip into Q2. Obviously, you also have the timing of any anniversary and the prior year price increases that may roll off period to period. It's a mixture of things. As we look ahead, I wouldn't be surprised to see price decline sequentially to 2.4 ± in Q3. Much like you'd typically see in us, we peak as a percentage in Q1 because that's the lowest denominator from a comparison standpoint. Then it reduces as you move through the year, given the higher denominators on a fixed dollar increase.
I wouldn't read anything into sequential increase Q1 to Q2. Same thing, I wouldn't read much into the sequential decrease Q2 to Q3.
Okay, just one last quick one. I know you're not giving 2016 guidance, but Ron, since you opined on price, as we look at volume, just the way the economy is trending, is it fair to say that similar volume growth in 2016 as 2015, all else equal, and should we look at relative comps in each quarter? From where we stand now, you probably have better volume in Q1 of 2016 than in Q2, just given the tougher comp in Q2.
You're right. It's too early to try to get that granular in 2016. As you know, every year that we go into after coming off a year of such high volume growth like we have this year, much like going into this year, we get very cautious early in the year, and we guide around 1%-1.5% volume growth, and then let improvements during the year validate a 1.5-2 or better. You're right. It is too early to tell, but this has really been a year where volumes have once again impressed to the upside, much like coming off of 2014. We were cautious looking at 2015. Again, 2015 is outperforming on the volume side. I'm sure we'd have the same approach early next year coming off such a strong year this year.
Yeah, we certainly are not seeing anything economically that is different as we sit here, using today as a point looking forward into 2016. There's nothing that has changed negatively. Certainly, most of the things that we are seeing are positive. I would tell you that, barring some other change, things should be approximately the same as this year, if not possibly a little better.
I appreciate it. Thank you.
Our next question comes from Scott Levine with Imperial Capital. Please proceed with your question.
Hey, good morning, guys.
Hey, Scott.
Hi.
I just want to follow up on the note offering and the thought process there. I know you guys have done proactive financings in the past. You're still guiding to, I think, the same amount of acquisition activity, and your leverage is toward the lower end of the recent range. Is there something you see in the marketplace causing that, or is this just taking advantage of rates or just normal course of business and just general good practice around financing? Maybe a little bit more color regarding the thought process behind the note issue and maybe a little bit more clarity regarding the M&A pipeline and when we might be able to see closings, what you're seeing out there from sellers, et cetera.
I'll take the first part with regard to the financing. Look, it's an opportunistic time to get into the market and lock up long-term money. We're able to get into the market and price 10-year notes through the trading levels with Waste and Republic. We thought that was a great execution on our side. What it also does is it takes the higher cost, long-term financing risk off the table and embeds that higher interest expense within our base business, such that when we do acquisitions going forward, they become highly accretive, not only on an EPS side, but also on a free cash flow side, because our amount of borrowing cost right now is sub 1.5%. We're really setting ourselves up for exponential contribution if transactions close or as we deploy excess capital.
On the M&A front, Scott, to your question, number 1, there's not a large singular transaction that we did this financing for that we're pre-positioning our balance sheet. We have done that in the past, as you've made comment to, when there was a very specific singular transaction ahead of us. That is not the case as we sit here right now. Having said that, I would say that we probably have as many LOIs outstanding in various stages of negotiation between executed and in due diligence to offered and awaiting counteroffers than we've had in probably at least the last two and a half to three years, particularly on the solid waste side.
We just know mathematically and with our history, that with the magnitude of the LOIs that we have outstanding, even though the M&A environment is a tougher environment for a whole variety of reasons right now, higher tax rates, low interest rates for sellers to deploy their after-tax proceeds in, higher multiples by some buyers. Despite all those things, we know when we have this magnitude of LOIs out, we're going to get our share of deals. That's why we reiterated that we think it'll be a relatively normal year at around $75 million in acquired revenue. I think we've already done about 30 to 35 so far year to date. That's what I can tell you. A lot of things that are up in the air right now. We're very active. We've made a lot of offers.
Just based on our history, we know what we'll be able to get done. That really has no core. We could have done that with our existing cash flow and our existing credit facility. The financing was a separate issue in and of itself, which as we said, positions us to take advantage of something we might not see today that will come along much as, for example, R360 did when it came along three years ago. Fortunately, our balance sheet was positioned to take advantage of that. That's really the answer to that.
Got it. Okay, great. Thank you. Then, as a follow-up, not to beat the volume horse to death here, but it did look like that explicitly was the driver of the upside in the quarter on the EBITDA. Just maybe a little bit more specifics around, was the upside from special waste or was it from the core business? Any additional clarity so we can get a sense of how sustainable, call it this uptrend in volume might be as we move into the back half of the year?
One thing I'd say about volume, what you note, I think on this call and the calls last week with both Waste and Republic, that no one's identified weather as an issue impacting volume. While you had some minor roll-off impacts in a handful of markets, I mean, we've got wet weather in Wichita, Oklahoma City, Memphis, Houston, et cetera. When you really see that kind of action in the P&L, volume still is what's contributing to the exceptional number because price obviously stayed where it was. You look at through the P&L, while weather can have a minor impact on revenue, really the strength of the P&L through EBITDA was there in all four of those markets throughout the period. The outperformance is really a little bit more on the landfill side. We're not calling out whether it's any influence.
Again, I think you saw the people do that as well.
Got it. Great. Thank you.
Our next question comes from Michael Hoffman with Stifel. Please proceed with your question.
Hey, thank you all for taking my call.
Thank you.
On the volume side on special waste, do you get a sense of, if you're looking at where it's coming from, there's a non-res piece happening as well as the res piece?
Michael, we had decent special waste on the West Coast, up and down the West Coast. Quite honestly, most of the special waste on the West Coast that we have is non-res. It is mostly infrastructure projects of one form or another. Be they road, be they tunnel, or be they river dredge cleanup. They tend to be infrastructure or cleanup remediation-oriented. Part of that is non-res, part of that is obviously environmental compliance.
I realize this is a Ouija board question, housing first took forever to come back. Now it's come back, it seems like it's a long and shallow recovery. Would you think about the non-res having the same characteristics when you look at the trends running through the business at the moment, that it'll be long and shallow?
Yeah. I think that's an accurate statement, certainly on housing, although I do think it's accelerating in certain places quicker recently than expected. In some areas very frothy, to be honest, especially when you look at places like the Bay Area or parts of Southern California or Portland, Vancouver area as examples. On the non-res, I do think that will be long and shallow. Again, if you look at our West Coast and you look at areas like the Central Valley, you still have commercial vacancies that are running 25%-35% in those markets. That's a lot that still needs to get sucked up in order for speculative development to happen there commercially and for retail, et cetera. I think the good news is the type of performance that we're having. As that improves, it should be an additional leg.
Okay. When you talk about MSW trends in the landfill, and if we did it by region, and you said, "Okay, West Coast is 7 and the other parts must be less to blend to 3." Is your own commercial front end loader volumes tracking about the same pace as the third-party commercial into your landfill?
Yeah. Approximately, our commercial was up about 5%. I think we noted that in the call notes or call transcript, excuse me. We would say that that is about the same. Again, it's different by local market obviously. Yes, that's a fair assessment.
Underlying that It seems that the consumer in the U.S. has found some level of purchasing behavior that's triggering a sustainable low-level growth. You don't see anything get in the way of that. I mean, at 2%-3% GDP, kind of holds that pace.
Based on what. We're not economists, obviously. We've gotten in trouble trying to do that before. Although our guess is as good as anyone we've heard.
Generally better.
Well, I don't know. Yeah, we do not see anything right now getting in the way of things continuing as is, Michael. If that's a 2% to 3% type GDP environment, I think the consumer seems certainly better today than we've seen in the last several years.
Okay. With regards to thinking of the second half, I appreciate your comment about the fuel. I want to make sure I understood it. Up 180 basis points approximately in solid waste. Of that 180, 120 is fuel. 60 is, you ran the business better. Is that the right way to read?
Right.
Okay. The 60 should hold all the way through, then the fuel begins to lap itself as I work my way around the year.
Right. If you look at Q3, fuel is probably 90-100 basis points, versus the 120 we saw in Q2 and the 140 we saw in Q1. The benefit from fuel in solid waste starts to decrease sequentially Q2 to Q3. I think it's less than that in Q4. Again, somewhere in that 40-60 basis point ex-fuel range should hold for the balance of the year.
Okay.
You got to remember, Michael, the decremental impact of the E&P contraction being our guidance of 50-55 becomes the greatest drag we will have is Q3.
Got that. Fair enough. High level, if I looked at forward, because I have to forecast forward, thinking about solid waste being all in organic growth, four to five is the right way to think going into 2016, kind of 34 to 34.5 margins. E&P, assume it's flat, and if anything's better, great. But that's the way to think about it at the moment?
Well, that's the way you just thought about it.
Yeah. Well, I'm trying to lead you. All these years owning horses
Sorry
getting you to the water trough.
We're obviously not sitting here providing any guidance, Michael. I think as we sit today, assuming commodities are flat, assuming intermodal is flat to up, and there's not something we're not thinking about, I think 2.5%-3% approximate price, could be up 1.5%-2% volume. You get in that 4%-5% range on solid waste that you said. There's certainly not a reason that I think solid waste margins would be down. We do get incremental fuel rollover benefit from price. You get margin expansion if your costs are staying at 3%, which they should be. I think you're thinking about it, if I just sit here and think about how we look at the business correctly.
Okay. New Mexico, you should be done that this year, so I see the benefit next year?
Yeah, assuming it works.
Yeah. It will work.
That's good. You take the suspended solids out of the liquids before you push it in there then.
When you're pushing this down 18,000 feet, anything can happen. No, you're right. If it's up and running before year-end, you'll see that $3 million-$4 million. Which, by the way, on that business alone is 150-200 basis point margin improvement in and of itself.
Right. That's what I was trying to get at. Okay. Thanks a lot.
Our next question comes from Joe Box with KeyBanc Capital Markets. Please proceed with your question.
Hey, good morning, guys.
Hey, Joe.
Good morning, Joe.
Your decremental E&P margin was a little bit greater than what we were looking for. Can you just talk to a couple things? One, what drove such a high decremental, whether it was cost bleed or negative mix? Two, I think I heard you earlier, Ron, you updated revenue trajectory for E&P. Can you maybe just give us a feel for margin expectations for E&P that's baked into your guidance?
I'll start on, Ron, you can jump in. You look at decremental year-over-year, it's not just looking at it on a same store, but also looking at the fact that we've got that many more facilities open than we had last year. We've got all the incremental costs associated with those facilities that kind of magnifies the decrementals in a year-over-year decline market. If you look at the E&P waste business right now, if you look at 34% is what we guided for Q3 on an aggregate basis. E&P is running slightly above that, with solid waste running slightly below that. You get the 34% in the aggregate.
Okay. Appreciate that. Just on the commercial side, I think I heard you earlier, you said that revenues were up 5%. Have you hit the inflection point in this business where you're seeing the incremental margins flow in over 50%? Or are you at the point where there's still maybe a little bit of a drag because not everybody has gone out and added service or upped their can size and there's still a bit of a disposal cost drag?
I'll start with that because I think every market's a little bit different, and Ron, jump in. In some markets, we're actually at a point where we're putting more capacity in place because of the volume growth on the hauling side. By adding excess capacity, the initial wave of excess capacity comes in not at the 50% contribution you're looking at, but it comes in at a lower incremental because you have to then go out and optimize those routes and fill up the trucks. In some markets, we've already gone through that 40%-50% incremental, and now we're pushing into the additional growth capacity, which again, initially will come in at some lower margins until you then see those incrementals ramp.
Yeah. Joe, I concur with everything Worthing said. I'd say it's a good problem to have.
Yeah, exactly.
It's a good problem to have. I would say that 50% incremental margins is possible in the commercial sector. Obviously, that's a market-by-market issue. There are some markets we actually get greater than that contribution. There are some that it's obviously less than that. I would tell you that we are getting margin accretion from the 5% growth that we are having in our commercial business, despite incremental capital and expense being added due to routes needing to be added back into the system because of growth, which again, is a good problem in our mind.
Right. Some growth pains here, ultimately still margin expansion in this business.
Yeah.
Worthing, just a technical question for you here. I know you called out in your release that you still expect to buy back about 2%-3% of your shares outstanding. Your share count was up in the quarter. Should we actually bake in the buyback since you're giving a specific number over the next two quarters, how do you recommend we look at that in the model?
The challenge with baking it in, which I would never recommend, is one around timing. You look, for instance, at the almost half million shares we bought back in Q1. That was done early in the period, you saw the benefit in the share count in Q1. Obviously, that rolled into Q2. Q2, the timing was very late in the quarter, you didn't see any impact in Q2, that benefit rolls into Q3. Right now in Q3, we're probably staring at about 124 million shares outstanding before any additional buybacks. Given the difficulty in predicting the timing, I'd always recommend you keep it out, let us get the shares bought back, then we'll know the timing definitively, then we can bake it into the share count.
Okay. That's fair. Thanks, guys.
Our next question comes from Alex Ovshey with Goldman Sachs. Please proceed with your question. Mr. Ovshey, can you hear me?
Yep.
Yeah, go ahead, Alex.
Oh, perfect. Excellent. Good morning, guys. A couple of ones for you. Just on the acquisition side in Solid Waste, do you see any potential transformative opportunities out there for you where you can add significantly more revenue than the typical, call it $75 million that you do year in, year out?
Alex, there are always a couple at any given time of potentially transformative deals. What I would tell you is that our history is that those are really things that we're very disciplined on and often not the buyer of, and we would certainly never advise you or any shareholder to own us due to potential transformative deals. I'm not saying they won't happen, but I would always let them be significant upside. Hopefully a way to tell you is they're there, but I wouldn't look at us as a likely buyer of any of them.
Okay. That's helpful, Alex. Then just a couple of housekeeping items. What is your CapEx number for 2015?
Yeah, it's about $210 million.
Got it. Worthing, that would be up $10 million versus what you would have said on the last call given the New Mexico-
Initially we guided between $200 million and $210 million, we're just affirming the upper end of that based on the incremental $10 million that we
We were running about $190 million to $200 million, we added the $10 million
Right
for this well in the New Mexico Permian at our landfill that we outlined today. That's how it moved from $200 million to $210 million at the upper end.
Got it. Just cash flow, can you just talk about some of the key cash items that are going to flow through this year, just working capital, cash taxes, what that looks like for you?
We went into the year with about an $8 million tax overpayment position, and you've seen cash taxes benefit from that $8 million. You've also seen E&P release some working capital because of the decline in the top line. That's probably contributed $10 million-$15 million of incremental cash flow as well. You put those together and you've got, I'm just going to round, $20 million-$25 million of incremental working capital that we benefited from this year as those two things move through the cash flow statement.
Helpful. Just a quick one on E&P. In the first quarter of 2015, that business didn't really see any volume or revenue erosion. If we assume that nothing changes in the current environment, thinking about the first quarter of 2016, is it going to be in that $50 million-$55 million range, or could it be closer to what you reported in the first quarter of 2015?
Again, the strength in the first quarter of 2015 was really the hangover from all the activity and momentum coming out of last year. Then you saw the precipitous drop in rig count once all those committed rigs and leases, et cetera, had worked their way through. You saw the step function drop between Q1 and Q2. There was nothing seasonal about the Q1. It was just, again, the hangover from last year. If we stay in that $50 million-$55 million range sequentially and move that through, if that happens in Q1 next year, you got a $15 million-$20 million revenue headwind as the last headwind quarter for E&P before you anniversary the drunken state of 2014.
Got it. Just one last one, and I'll turn it over. The rig count's going to be down a very massive number, we could certainly see some sort of uptick in the rig count in 2016. How do we think about the E&P business to the upside whenever the rig count does start to improve? If material's going to outperform in a declining rig count environment as the rig count starts to improve, how do you see the leverage in the E&P business relative to the rig count?
I think the rig count estimates and the timing and the amount of increase is always in question. Again, 3 months ago, people expected up to 200 rigs to be added in the second half of this year and have a pretty strong exit ramp this year, which would've meant you would've seen us exit at a number probably higher than that $50 million-$55 million per quarter in Q4. That's not what people currently predict. The pace of the increase, if that gets pushed into 2016, depends on when that increase materializes. If it does materialize around the middle of the year, then we should be able to offset the revenue headwind in Q1 by some higher exit ramp in the second half of the year. I think predicting the pace and the timing of the increase in rig count is difficult.
You saw a 19 rig count increase last week after a little dip the prior week after two weeks of increases. While it does feel like it's bouncing along the bottom, to try to sit here today and predict the timing of that kind of magnitude of increase is difficult. Again, as revenue comes back in the system, you'll see that come through at high incrementals, as any landfill-based business has.
I would say, Alex, that again, we're not in the business of predicting the pace of the rig count. If you just look at the decrementals that we've taken throughout this year, on the downside, you can expect at least the incremental to be equal, if not greater, because we have taken some costs out of this system, both in head count and other costs such as water costs along the way, and startup costs. I would tell you that 65%-75% incrementals are very realistic.
You may see higher than that early on.
Correct
before we start bringing more costs back in the system.
Correct
which would then lower the incrementals to somewhere in that 60%-70%. You'll likely see higher than that 70% initially.
Yes.
Okay. Very helpful. Worth the reminder. Appreciate it. Thank you.
Mm-hmm. Thank you.
Our next question comes from Adam Baumgarten with Macquarie Group. Please proceed with your question.
Hey, guys. Thanks for taking my question. Can you talk about the trends you're seeing in commercial from a net new business formation perspective, and if that's driving any of the strength you're seeing?
Yeah. Adam, the net new business formation has improved each of the last six quarters relative to closed businesses. That gap, if you go back just six quarters ago, closed businesses were still outpacing new business formation. That reversed itself six quarters ago. Certainly all of 2014 and the first two quarters of 2015, net new businesses outpaced closed, and it has outpaced it by an ever-increasing margin. We are seeing that. That is obviously very helpful in the system. Obviously, it depends on where that comes in. If it comes in more on the West Coast where we get it with no associated SG&A costs and at a guaranteed rate, it is even more accretive. That happens to be where we're getting more right now. It certainly is a driver of things.
Great. Just my last one, just to clarify, the step up in Intermodal that you saw in 2015, that should continue into 2016, right? At the E&P levels?
The rollover effect of the step up would be there barring any other sea change, if you will, in that business. That step up was due to some port changes on the West Coast that positively affected our business, and some new customers through those port changes that we entered into contracts with. Those are multi-year contracts and expected to be multi-year port changes, so there's no reason to expect that that would decline.
Great. Thanks, guys.
Our next question comes from Barbara Noverini with Morningstar. Please proceed with your question.
Good morning, everybody. Pricing in E&P has obviously come down very quickly due to the volume drop-off. In a recovering environment, do you have the ability to raise prices just as fast, or will you be faced with contractual obligations that lock you into weaker than average pricing for a little while, even as the environment improves?
Woo. Brave, Barbara. The short answer is that the E&P pricing, unlike the solid waste pricing, is more of a spot pricing and not long-term contractual. While pricing has come down in a contracting environment to retain volumes and improve volumes where the opportunity exists, pricing will increase as volumes increase and should go back to where it was pre-contraction, assuming the volume goes back to it on a basin-by-basin process.
Got it. Thank you.
Thank you.
We have a follow-up question from Tyler Brown with Raymond James. Please proceed with your question.
Hey, thanks for squeezing me in. Hey, Worthing, I don't want to be nitpicky. Why did you show a profit at the corporate level of $3 million? Was there an accrual reversal there?
No, it's just we allocate a fixed percentage of revenues to each of our regions. It's just if we over-allocate to the regions, because we allocate 3%-3.5%, depending upon who you are. If you over-allocate in a period, it just shows up as a positive at corporate.
Perfect. Okay, great. Ron, can you just give us a refresh on the geographic breakdown of E&P at this point? I know you guys talked about same-store pricing off 15%. I'm very curious, was there a really big notable difference by basin? I mean, was your Permian, did it hold up much better than, say, the Bakken?
Yeah.
I mean, if you look at where As we've always said, the Bakken is the most competitive. You've got nine landfills. We own three. Six other people own six other landfills. There, the average price was off about 15% for us across all of our system. The Bakken was about 2x of that, so 30%, 30-plus% off on price, where other ones such as the Permian or South Texas, et cetera, were flat to up. You really have to look at it basin by basin to see those kind of differentials.
The other comment I would have, Tyler, on price, is you also must keep in mind that in various basins, we price transportation plus disposal, and some we only price disposal. All you really, I believe, care about is the price of disposal. As fuel drops, the transportation plus disposal price drops. Therefore, you're seeing a price reduction that really has no price contraction. It's just purely the pass-through of fuel.
Okay, great. Basically, I'm looking for what your Permian mix was.
Permian as a total is running close to 30%, a little over that. Louisiana and Gulf Coast is now running just over 20% or so. The Bakken is now our third-largest basin. Bakken used to be the second-largest. Now, given those declines, Louisiana onshore, offshore has kind of hopped up into second place.
Okay, it still seems like the Delaware Basin and the Spraberry are still pretty good, ultimately that far western Permian.
Yeah. I mean, as you know, we've got three landfills between the West Texas and New Mexico Permian. As you know, we're actively looking to add more assets because as most analyst estimates show that basin is a spot of good growth over the next five years.
Okay, perfect. Thanks, guys.
We have no further phone 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 our call today. Worthing and Mary Anne Whitney are available today to answer any direct questions 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, everyone.