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. 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 Q2 2015 results and provide a detailed outlook for the Q3. I'm joined this morning by Steve Bouk, our President Dale Chambliss, our COO Orlean 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, disposable 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 and 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 $220,000,000 or over 21% of revenue, and we remain on track to deliver at least $350,000,000 of free cash flow for the full year despite increasing CapEx by $10,000,000 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 $500,000,000 note offering will expand our available liquidity to more than $1,000,000,000 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 and 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 Q3 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 ks 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 and 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, and 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 with total 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 4 of the last 6 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 commercial and roll off collection activity.
Commercial revenue increased 5% in the period, similar to the strength we saw in Q1. Roll up revenue on a same store basis grew 8% in Q2 broken down as follows. Polls per day were up about 6% and revenue per poll increased 2%. Polls per day increased in each of our 3 solid waste regions with increases of over 7% in each of our western and eastern regions and a 3% increase in our central region for record rainfall negatively affected many markets. Solid waste landfill volumes on a tonnage basis increased 10% in the 2nd quarter.
MSW tons increased by 3% in the period, special waste tonnage increased 24% and C and D tonnage increased 12%. Growth in our Western region also outperformed with tonnage up 15%. Recycling revenue was $12,100,000 in the quarter, down about $2,300,000 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 Q2, down 17% from the year ago period, but up 8% sequentially from Q1. OCC prices currently are around $110 per tonne, and we believe they could stabilize around this level or soften a bit given the quick 30% recovery off of their March lows.
Regarding E and P waste activity, as noted earlier, E and P played out as expected in Q2. We reported $52,500,000 of E and P waste revenue in the 2nd quarter or the midpoint of our $50,000,000 to $55,000,000 outlook for the period. We again outperformed the macro as same store revenue decreased about 40% on a more than 50% decline in average rig count in the basins where our E and 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 and P Waste business seemed to bounce along the bottom during the Q2.
For example, revenue per day increased from April to May and a few rigs began mobilizing in the Permian in late June after crude oil prices had stabilized around $60 per barrel during May 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 102 100 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 and P waste business to remain in the $50,000,000 to $55,000,000 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 landfill in the New Mexico Permian. This well, which is expected to cost about $10,000,000 and be online before year end, has an attractive payback as it will both enable us to avoid between $3,000,000 $4,000,000 per year of water disposal cost at 3rd party sites and position us for additional growth.
Regarding capital deployment for the year, we remain on track to acquire about $75,000,000 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 $1,000,000,000 of available liquidity for any opportunistic increases in acquisition activity or return of capital to stockholders. And now I'd like to pass the call to Worthing to review more in-depth the financial highlights of the Q2 to provide you a detailed outlook for Q3. I will wrap up before we head into Q and A.
Thank you, Ron. In the 2nd quarter, revenue was $531,300,000 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 $177,700,000 or 33.4 percent 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 and P waste business declined about 1500 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 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 percent 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 and L, the following are certain line items that moved a notable amount in Q2 from the year ago period as a percentage of revenue. Brokerage and rails RAGE costs increased 75 basis points on higher intermodal activity. Repair and maintenance costs increased 65 basis points.
Labor and supervisory expense increased 50 basis points. 3rd party disposal and transfer cost increased 45 basis points. Fuel expense decreased 95 basis points and risk management and 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 and 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 and 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 Q2 were 12.6 percent 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 and P waste activity. Had E and P revenue been flat year over year, D and 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 $15,300,000 primarily due to reduced borrowing costs on our outstanding bank facilities.
Our effective tax rate for the 2nd quarter was 39.2%, similar to the prior year period. GAAP and adjusted net income per diluted share in the 2nd quarter were $0.46 $0.50 respectively. Adjusted net income includes among other items, the amortization of acquisition related intangibles. Debt outstanding at quarter end was about $1,930,000,000 and our leverage ratio, if defined in our credit facility, was approximately 2.6 times debt to adjusted EBITDA. I will now review our outlook for the 3rd 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 Q3 is estimated to be between $545,000,000 $550,000,000 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 and P waste activity is expected to be similar to the prior quarter between $50,000,000 $55,000,000 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 and P waste activity and to a lesser extent the impact of the lower margin shale gas services acquisition. Depreciation and amortization expense for the 3rd quarter is estimated to be about 12.5% of revenue. Amortization of intangibles in the quarter is estimated to be about $7,200,000 or almost $0.04 per diluted share. Operating income for the 3rd quarter is estimated to be about 21.5 percent of revenue.
Interest expense in Q3 is estimated to be about $16,500,000 The sequential increase over the prior quarter is due to the $500,000,000 note offering is 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 3rd quarter. And 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 and P waste business to be about a $0.09 to $0.10 drag to reported results in the Q3 when compared to the prior year period, fully masking revenue, margin and earnings growth within our solid waste business. And now let me turn the call back over to Ron for some final remarks before Q and A.
Okay. Thank you, Worthing. Again, we are pleased with our results in the quarter as strong performance within the solid waste continues to differentiate us, while E and 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 $2,110,000,000 $705,000,000 of revenue and adjusted EBITDA from 2015, enabling us to meet or exceed our full year expectations we updated in April.
And we remain on track to deliver at least 3 $50,000,000 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 And our first question comes from Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning guys.
Hey, Tyler. Hi, Tyler.
Hey, Worthing. So 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 9,500,000 gallons annually hedged at this point. Is that about 30 percent of your usage?
And then what is kind of your expectations for hedging going forward? Do you expect to do more?
Well, I'm impressed that you're able to stay awake after going through the queue. No, you're right on the hedge side between derivatives as well as local locks. We've got about a third of our 30,000,000 gallon annual usage locked through 2017. Some of the locks we already have in place already reduced year over year fuel costs by about $5,000,000 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. And the difference between kind of the $330,000,000 you're getting on the hedge and I guess if you call it pad 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. We have a $3.60 hedge that's rolling off this year. Now it will get replaced by the $3.30 hedge next 2
years. Okay, perfect. And then Ron, when I think about your business, so I think of you guys as maybe 50% in the open market, you've got 30% in CPI, maybe 20% in regulated markets. So if we just assume that open market pricing holds and you assume that CPI just continues to print where it is, And 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. I'm not really we're not really hearing any area where We're not really hearing any area where our regulated market or our franchise market should be backwards year over year at this point.
I mean, there are it is
a local CPI index and there are some local markets on the West Coast that could be backwards nominally. But in the scheme of things, would expect pricing to be roughly flat, possibly up.
Okay. And then on the regulated piece of the book, so Western segment EBITDA was doing very well out there. And I know those markets are kind of return on capital base. So and 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? Or how does that dynamic work in the regulated piece?
Well, it certainly I mean, 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. So 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. So 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 sort of what we've had the last 5 to 6 years, which might be a slightly higher pricing, but a 0% to a 2% type volume growth. So it's a little bit hard to pinpoint exactly because we would have to be predicting volume continuation growth as well. But overall, you got to remember that we only are probably looking at between 20% 35% in any given year of our regulated markets up for a review anyway.
Okay, perfect. Yes, no, I was just curious. Thank you very much.
Our next question comes from Al Kaszak with Wedbush Securities. Please proceed with your question.
Good morning, guys.
Hey, Al. Good morning.
I just want to focus on 2 areas first. I guess the West Coast in particular, the tonnage overall was pretty high and then special and C and D continue to clip along. So 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?
Obviously, special waste is a project by project tonnage. It is weighed tonnage with regards to what's crossing the scales into the landfills. But again, when it's when you see that kind of pop in special waste, a lot of those are just contaminated soil jobs, which are low priced jobs, as you know, to replace a cost we'd otherwise incur to provide daily cover for our landfills. So 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 depletion calculations at landfills. So it is a larger number.
But again, these are project by project items that typically you do see strength in the second and third quarter with regards to special waste. I wouldn't predict a continuation at 24% for Q3. But no, the way it's going through the P and L is not as impactful as the percentage growth would lead you to
think. The special sorry, the MSW side was also fairly I mean, was positive at 3%, I think is what the comment was. I thought the economy wasn't doing so well out here in the West Coast, but that would indicate a fair amount of consumption.
Al, don't let the market rate get you down.
Yes. It was Al, actually on the West Coast, it was closer to 7%. So the total MSW was 3, but the West Coast was actually higher. So it was actually 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. And then just to touch base on E and 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 solid waste side, but at a pretty poor performing E and 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?
Yes. And Al, just so I'm clear, you mean get more aggressive with regard to M and A opportunities in E and P or get more aggressive with regard to pursuit of more volumes with price in E and P?
Well, I guess a little of both. I mean, on the first part, I can understand why you want to be patient on the M and A side. But second, I guess the underlying dynamic is it really more the you feel like you'll get more than your fair share of volume?
Yes. I mean, with regard to the M and A side, I think you said it accurately. I mean, look, we are certainly taking a look at some M and A opportunities in the E and P space. Obviously, we're going to value those on a $40 to $50 crude basis and at a multiple that offers a very strong return. But for the most part, we're very comfortable with our M and A our asset mix within our E and P business.
We take a look at that business as sort of what little bolt on pieces might we need on a specific base and we're continuing to look at that. We've done some of that this year and in the Q4 of last year. With regard to pursuit of additional volumes, I mean, 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.
So for us only to be down aggregately 25 that is coming at utilizing some price in some of the basins. So 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. But then 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. So I think we 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.
Yes. And 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 of upwards of 70 plus percent in volume. But in aggregate, our locations in the Bakken were off a combined 20% in volume. So while one location could be off high, your asset positioning in the basin really determines your total change or flux in that basin.
And we're very pleased with the asset positioning we've got across all our basins.
And I think to that point, that's why we're down in a volume basis volume in total, virtually only half what the drilling rig count and volume reduction is in E and P in total.
And again, last thing I'd add on E and P, I guess it's not unexpected to see people want to get valued off of what they did year. But 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. And so you have to be very cautious as you play this thing out and what 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, Clive.
A couple of clarifications and you may have somewhat already answered these points. But on the E and P price, can you just talk about the trend in the quarter? And does the guidance assume that kind of similar down 15% on price?
Overall on a same store basis, we're assuming down 40% to 45% in Q3 because obviously you saw a sequential increase Q2 to Q3 last year. So it's our hardest comp in the prior year period. The breakout is again plus or minus 5% around what we saw in Q2. So I mean volume would be down some 25% to 30% and price will be down some 15%.
Deploying the proceeds of that offering, is that right?
That's correct.
That's correct.
That is correct.
Okay. And then next question, not to kind of dig too deeply into a 10 basis point move, but it is relatively unusual for your core price growth ex surcharges to move up sequentially as the year goes on just because the denominator grows each quarter. So that would signal to me anyway that you did something actively to get it to increase in Q2 from Q1. So can you just address was there anything you kind of went out with to the street on price in Q2?
Again, 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 couple of months and you saw it slip into Q2. Obviously, you also have the timing of any anniversarying of prior year price increases that may roll off period to period. And so it's a mixture of things. Again, as we look ahead, I wouldn't be surprised to see price decline sequentially to 2.4 plus or minus in Q3, much like you typically see in us.
We peak as a percentage in Q1 because that's the lowest denominator from a comparison standpoint. And then we it reduces as you move through the year given the higher denominators on a fixed dollar increase. So I wouldn't read anything the sequential increase Q1 to Q2. Same thing, I wouldn't read it much into the sequential decrease Q2 to Q3.
Okay. And then just one last quick one. I know you're not giving 2016 guidance, but Ron, since you kind of opined on price. As we look at volume kind of just the way the economy is trending, is it fair to say that kind of similar volume growth in 2016 to 2015 all else equal? And should we look at relative comps in each quarter?
So 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. But 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 got around 1% to 1.5% volume growth and then let improvements during the year validate a 1.5% to 2% or better. So you're right, it is too early to tell, but has really been a year where volumes have once again impressed to the upside, much like coming off of 'fourteen and we're cautious looking at 'fifteen. And again, 'fifteen 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.
Yes. I mean, 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. So 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. So 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 kind of 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 kind of 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 and A pipeline and when we might be able to see closings, what you're seeing out there from sellers, etcetera?
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 of Waste and Republic. We thought that was a great execution on our side. What it also does is it takes the kind of higher cost long term financing kind of 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 a EPS side, but also on a free cash flow side because our incremental borrowing costs right now is sub-1.5%.
And so you really we're really setting ourselves up for exponential contribution if transactions close or as we deploy excess capital.
And on the M and A front, Scott, to your question, I mean, number 1, there's not a large singular transaction that we did this financing for that we're sort of 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. But having said that, I would say that we are probably have as many LOIs out standing in various stages of negotiation between executed and in due diligence to offered and awaiting counter offers than we've had in probably at least the last 2.5 to 3 years, particularly on the solid waste side. So we just know mathematically and with our history that with the magnitude of the LOIs that we have outstanding, even though the M and 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. And that's why we reiterated that we think it will be a relatively normal year at around $75,000,000 in acquired revenue. I think we've already done about $30,000,000 to $35,000,000 so far year to date. So 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. And just based on our history, we know what we'll be able to get done. But 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 3 years ago.
And fortunately, our balance sheet was positioned to take advantage of that. So it's that's really the answer to that.
Got it. Okay, great. Thank you. And 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? And 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?
Yes. And 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, etcetera. When you really see that kind of action in the P and L, volume sold is what's contributing to the exceptional number as price obviously stayed where it was. But you look at through the P and L, while weather can have a minor impact on revenue, really the strength of the P and L through EBITDA was there in all four of those markets throughout the period.
So it's the outperformance is really a little bit more on the landfill side. We're not calling out whether it's any influence. And again, I don't 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. And 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 dredge, river dredge cleanup. So they tend to be infrastructure or cleanup remediation oriented. Part of that is non res, part of that is obviously environmental compliance.
So I realize this is a Ouija board question, but 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 kind of having the same characteristics when you look at the trends running through the business at the moment that it will be long and shallow?
Yes. I mean, I think that's an accurate statement certainly on housing, although I do think it's accelerating in certain places quicker recently than expected. And 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. But 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% to 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, etcetera. I think the good news is the type of performance that we're having. So as that improves, it should be an additional leg.
Okay. And then when you talk about MSW trends in the landfill and if we did it by region and you said, okay, so West Coast is 7 and other parts must be less to blend the 3. Is your own commercial front end loader volumes tracking about the same pace as the 3rd party commercial into your landfill?
Yes. I mean approximately our commercial was up about 5%. I think we noted that in the call notes or call transcript, excuse me. And we would say that that is about the same. Again, it's a little it's different by local market, obviously.
But yes, that's a fair assessment.
So underlying that, it seems that 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,
the 2% to 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. But although our guess is as good as anyone we've heard.
Generally better.
I think they just
go further.
I don't know. But yes, we do not see anything right now getting in the way of things continuing at this, 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. And then, with regards to thinking of the second half and 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 basis points, 120 basis points is fuel. So 60 basis points is you ran the business better.
Is that the right way to read? Okay. So is the 60 should hold all the way through and then the fuel begins to lap itself as I work my way around the year?
Right. As you look at Q3, fuel is probably 90 to 100 basis points versus the 120 we saw in Q2 and the 140 we saw in Q1. So the benefit from fuels and solid waste starts to decrease sequentially Q2 to Q3. And then it gets less than that in Q4. But again, somewhere in that 40 to 60 basis point ex fuel range should hold for the balance of the year.
You got to remember Michael, the decremental impact of the E and P contraction Got
that.
Fair enough. And
Got that. Fair enough. And so high level, if I looked at where forward, because I have to forecast forward, thinking about solid waste being all in organic growth 4% to 5% is the right way to think going into 2016 kind of 34% to 34.5% margins. E and P assume it's flat and if anything is better great, but that's the way to think about it at the moment?
Well, that's what you just thought about it.
Well, I'm trying to lead you.
All these years only worries
can either the mortar trough.
We're obviously not sitting here providing any guidance, Michael. But 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% approximate price to 3% could be up 1.5% to 2% volume. You get in that 4% to 5% range on solid waste that you said. There's certainly not a reason that think solid waste margins would be down. We do get an incremental fuel rollover benefit From price, you get margin expansion if your costs are staying at 3%, which they should be.
So I think you're thinking about it if I just sit here and think about how we look at the business correctly.
Okay. And then New Mexico, you should be done that this year, so I see the benefit next year?
Yes, assuming it works. Yes.
It will work. That's good.
Take the suspended solids out of the liquids before you push it
in there. And then when you
push this down 18,000 feet, anything can happen. But no, you're right. If it's up and running before year end, you'll see that $3,000,000 to $4,000,000 which by the way in that business alone is 150 to 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 Baughts with KeyBanc Capital Markets. Please proceed with your question.
Hey, good morning guys. Hey, Joe. Good morning, Joe.
So your decremental E and P margin was a little bit greater than what we are looking for. Can you just talk to a couple of things? 1, what drove such a high decremental, whether it was cost bleed or negative mix? And then 2, I think I heard you earlier, Ron, you updated revenue trajectory for E and P. Can you maybe just give us a feel for margin expectations for E and P that's baked into your guidance?
Yes, I'll start on and then Ron you can jump in. But when you look at year over year, it's not just looking at our same store, but also looking at the fact that we've got that many more facilities open than we had last year. So 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 and P waste business right now, if you look at 34% is what we guided for Q3 on an aggregate basis, E and P is running slightly above that with solid waste running slightly below that. And so you get kind of 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 point where there's still maybe a little bit of a drag because not everybody has gone out and added service or up their can size and there's still a bit of a disposal cost drag?
Let me I'll start with that because I think every market is 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. And so 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. And so in some markets, we've already kind of gone through that 40% to 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.
Yes. I mean, Joe, I concur with everything Worthing said. I'd say it's a good problem to have. Exactly. It's a good problem to have.
And I would say that 50% incremental margins is possible in the commercial sector. But 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. But I would tell you that we are getting margin accretion from the 5% growth 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. So some growth pains here, but ultimately still margin expansion in this business. 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% to 3% of your shares number over number over the next two quarters? Or how do you recommend we look at that
in the model?
Yes. The challenge with baking it in, which I would never recommend, is 1 around timing. As you look, for instance, at the almost 500,000 shares we bought back in Q1, that was done early in the period. And so you saw the benefit in the share count in Q1. Obviously, that rolled into Q2.
Q2, the timing was very late in the quarter, and so you didn't see any impact in Q2, but that benefit rolls into Q3. And so right now in Q3, we're probably staring at about 124,000,000 shares outstanding before any additional buybacks. So given that the difficulty in predicting the timing, I'd always recommend you keep it out. Let us get the shares bought back and then we'll know the timing definitively and then we can bake it into the share count.
Okay. That's fair. Thanks guys.
Our next question comes from Alex Ovshi with Goldman Sachs. Please proceed with your question. Mr. Afz, can you hear me?
Yes. Go ahead, Alex.
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, dollars 75,000,000 that you do year in year out?
You know, Alex, there are always a couple at any given time of potentially transformative deals. But 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 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. So it's 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. And then just a couple of housekeeping items. What is your CapEx number for 2015?
Yes, it's about $210,000,000
Got it. That will be up $10,000,000 versus what you would have said on the last call given the New Mexico?
Initially, we guided between $200,000,000 $210,000,000 and we're just affirming the upper end of that based on the increase in the metal $10,000,000 that we've We
were running about $190,000,000 to $200,000,000 and we added the $10,000,000 for this well in the New Mexico Permian at our landfill that we outlined today. So that's how it moved from $200,000,000 to $210,000,000 at the upper end.
Got it. And then 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 would that look like for you?
Yes. I mean, we went into the year with about an $8,000,000 tax overpayment position. And so you've seen cash taxes benefit from that $8,000,000 You've also seen E and P release some working capital because of the decline in the top line. And so that's probably contributed $10,000,000 to $15,000,000 of incremental cash flow as well. So you put those together and you've got I'm just going to round $20,000,000 to $25,000,000 of incremental working capital that we benefited from this year as those two things move through the cash flow statement.
Very helpful. Just a quick one on E and P. So in the Q1 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 Q1 of 2016, is it going to be in that $50,000,000 to 55 $1,000,000 range or could it be closer to what you reported in the Q1 of 2015?
Well, again, the strength in the Q1 of 2015 was really kind of the hangover from all the activity and momentum coming out of last year. And so then you saw the precipitous drop in rig count once all those committed rigs were and leases, etcetera, had worked their way through. And so you saw the step function drop between Q1 and Q2. And so there was nothing seasonal about Q1. It was just again the hangover from last year.
And so if we stay in that $50,000,000 to $55,000,000 range sequentially and move that through, if that happens in Q1 next year, well then you got a $15,000,000 to $20,000,000 revenue headwind as the last headwind quarter for E and P before the anniversary kind of the drunken state of 2014.
Got it. And just one last one, I'll turn it over. So the rig count is going to be down a very massive number. And so we could certainly see some sort of uptick in the rig count in 2016. How do we think about the E and P business to the upside whenever the rig count does start to improve?
It materially is going to outperform in a declining work environment as the rig count starts to improve? How do you see the leverage in the E and P business relative to the rig count?
Yes. I mean, mean, 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 have meant you would have seen us exit at a number probably higher than that $50,000,000 to $55,000,000 per quarter in Q4. So that's not what people currently predict. And so 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. But I think predicting the pace and the timing of the increase in rig count is difficult. I mean you saw a 19 rig count increase last week after a little bit the prior week after 2 weeks of increases. But it does 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 increase is difficult. But again, as revenue comes back in the system, you'll see that come through at high incrementals as any landfill based business has.
Yes. I would say, Alex, that I mean, again, we're not in the business of predicting the pace of the rig count. But if you just look at the decrementals that we've taken throughout this year on the down side, 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 headcount and other costs such as water costs along the way and start up costs. So I would tell you that 65% to 75% incrementals are very realistic.
And you may see higher than that early on, but we're just operating more cost back in the system, which would then lower the incrementals to somewhere in that 60% to 70%. But you likely see higher than that 70% initially. Yes.
Okay. Very helpful working around. I appreciate it. Thank you.
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?
Yes. I mean, Adam, the net new business formation has improved each of the last 6 quarters relative to closed businesses that gap. If you go back to 6 quarters ago, closed businesses were still pacing new business formation that reversed itself 6 quarters ago. And so all of certainly all of 2014 and the 1st 2 quarters of 2015, net new business has outpaced closed and it has outpaced it by an ever increasing margin. So we are seeing that.
That is obviously very helpful in the system. Obviously, it depends on where that comes in. It comes in more in the West Coast, where we get it with no associated SG and A cost and at a guaranteed rate, it is even more accretive. And that happens to be where we're getting more right now. So it certainly is a driver of things.
Great. And then just my last one, just to clarify,
Yes.
Yes. The rollover effect of the step up should be 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 multiyear contracts and expected to be multiyear port changes. So there's no reason to expect that that would decline.
Great. Thanks guys.
Our next question comes from Barbara Novarini with Morningstar. Please proceed with your question.
Hey, good morning everybody. Pricing in E and P has obviously come down very quickly due to the volume drop off. But in a recovering environment, do you have the ability to raise prices just as fast? Or will you be faced with contractual obligations that kind of lock you into weaker than average pricing for a little while even as the environment improves?
The short answer is that the E and P pricing, unlike the solid waste pricing, is more of a spot pricing and not long term contractual. So 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 to it on a basin by basin process.
Got it. Thank you.
Thank you.
And we have a follow-up question from Tyler Brown with Raymond James. Please proceed with your question.
Hey, thanks for squeezing me in. Hey, I don't want to be nitpicky, but why did you show a profit at the corporate level of $3,000,000 Was there an accrual reversal there?
No, it's just we allocate a fixed percentage of revenues to each of our regions. And 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 the period, it just shows up as a positive at corporate.
Perfect. Okay, great. And then Ron, can you just give us a refresh on the geographic breakdown of E and P at this point? And I know you guys talked about same store pricing off 15, but 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?
Yes. I mean, if you look at where as we've always said, the Bakken is the most competitive. You've got 9 landfills. We own 3, 6 other people own 6 other landfills. And so 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, etcetera, were flat to up. And so you really have to look at it basin by basin to see those kind of differentials.
And 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. Therefore, you Therefore, you're seeing a price reduction that really has no price contraction. It's just purely the pass through of fuel.
Okay, great. And then do you have the what 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. And the Bakken is now our 3rd largest basin. Bakken used to be the 2nd largest. Now given those declines, Louisiana onshore offshore has kind of hopped up into 2nd place.
Okay. Because it still seems like the Delaware Basin and the Spraberry are still pretty good ultimately that far Western Permian?
Yes. I mean, as you know, we've got 3 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 5 years.
Okay, perfect. Thanks guys.
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 we did not cover that we are allowed to answer under Regulation FD and Regulation G. Thank you again and 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.