Welcome to the Waste Connections First 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, April 28, 2015. I would now like to turn the conference over to Ronald Mittelstaedt, Chairman of the Board and Chief Executive Officer.
Please go ahead, sir.
Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our Q1 2015 results and provide a detailed outlook for the Q2. I'm joined this morning by Worthing Jackman, our CFO as well as several other members of our senior management team. In the Q1, strong performance from our solid waste collection and disposal operations enabled us to exceed our margin expectations for the quarter and keep us on track to attain our free cash flow target for the year.
We are particularly pleased with these results in the period in light of difficult weather conditions in certain markets, lower than expected recycled commodity values and an estimated $5,400,000 of expenses incurred in connection with both start up costs at 2 new E and P waste facilities and storm related cleanup and repair costs at our Permian Basin facilities. Solid waste organic price plus volume growth was 4.4% in the Q1 and adjusted EBITDA margins in our solid waste collection disposal business expanded 165 basis points over the prior year period. Free cash flow in Q1 was $123,000,000 or 24% of revenue and on track to meet our full year target of between $350,000,000 $360,000,000 despite a more precipitous decline in expected E and P waste activity than anticipated a few months ago. Regarding the macro E and P environment, as noted in our earnings release, over the past few months, estimates for projected 2015 U. S.
E and P CapEx spending decreased another 15% to down 45% to 50% year over year. While the deceleration in drilling resulting from lower customer spending has been faster and harsher than analysts had expected, many industry analysts now anticipate a spending rebound in 2016. This more precipitous in drilling activity was evident in our E and P waste operations beginning in late March and which will continue to impact our higher margin E and P waste related volumes for the remainder of the year. However, better than expected performance in our solid waste operations, improving recycled commodity values and potential acquisitions should help absorb a portion of this impact. And based on what we hear and see today, if crude prices hold at current levels, Q2 could prove to be the bottoming of our E and P Waste business.
Before we get into much more detail, let me turn the call over to Worthing for our forward looking disclaimer and other housekeeping items.
Thank you, Ron, and good morning. We must inform everyone listening that certain matters discussed in this conference call are forward looking statements intended to qualify for the safe harbors and liability established by the Private Securities Litigation Reform Act of 1995, including statements related to expected operating trends, fuel costs, crude oil prices, recycled commodity values and E and P waste activity, expectations regarding period to period comparisons, potential acquisition activity, contribution from closed acquisitions, the timing and contribution of newly opened facilities, our return of capital to stockholders and our 2nd 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 results 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. Stockholders, potential investors and other participants are urged to consider these factors carefully in evaluating the forward looking statements and are 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. Revenue in the Q1 was 506,100,000 dollars up 5.1% over the prior year period, with acquisitions completed since the prior year period contributing about 2.9% to year over year growth. Solid waste price and volume growth in the quarter were a combined 4.4% broken down as follows: positive 2.8% from core price and positive 1.6% volume. Floor pricing in the quarter was consistent with our expectations and we continue to expect it to average about 2.6% for the full year and range between 2.4% and 2.8% in any quarter.
A decrease in surcharges primarily resulting from current lower fuel prices could reduce all in pricing by up to 20 basis points in the second half of the year. Solid waste volume growth in the Q1 was near the lower end of our expectations as improving collection and disposal trends were somewhat impacted in late February early March by severe winter weather in certain markets. We estimate that weather impacted total revenue, primarily landfill related by about $3,000,000 or 70 basis points in reported volume growth. Solid waste collection revenue net of acquisitions increased 5.2% in the period, primarily due to higher roll off and commercial collection activity. Roll off revenue on a same store basis grew 11.5% in Q1.
Rollout pulls per day in the quarter were up about 8% and revenue per roll out pull increased more than 3%. Polls per day increased in each of our 3 solid waste regions with our Western region up 5%, our Central region up 8% and our eastern region up 10%. Commercial collection increased 5% in the period, as pricing and net new business trends continue to reflect an improving economy. Solid waste landfill revenue in the Q1 declined about 1% with flat volumes on a tonnage basis. Again, this is where we experienced most of the weather related impact in the quarter.
MSW tons increased 3% in the period with our 3 solid waste regions up between 2% 5% year over year. Special waste tonnage decreased 3% year over year in Q1 due to both the tough prior year comp in our central region we had benefited from a large project in Minnesota last year and inclement weather in our Q1, especially in our Eastern region. These influences can be seen in our results as our Western region experienced an 8% increase in special waste tonnage, while our Central and Eastern regions were down 12% and 2% respectively. C and D tonnage declined 4% in Q1, primarily due to weather, but also on a tough comp in Colorado, where we had benefited from flood related cleanup activity in the prior year period. C and D tonnage in our western region increased 5%, while our eastern region saw an 8% increase due to the opening of our new C and D land fill in New York's Hudson Valley.
C and D tonnage in our central region decreased 13% on a tough comp. Recycling revenue was $10,800,000 in the first quarter, down about $3,400,000 or 24% year over year with about half of the dollar decline due to lower recycled commodity value and the remainder due to our decision to close and outsource our San Jose recycling operation, the impact of which fully anniversaried at the end of March. Recycling revenue in the period was about $1,000,000 below our expectations in early February due to subsequent further weakening of commodity prices and labor related slowdowns at West Coast ports. Prices for OCC or old corrugated containers averaged about $92 per tonne during the Q1, down about 31% from the year ago period and down 15% sequentially from Q4. While current OCC prices remain down significantly on a year over year basis, we believe the lowest prices for the year are now behind us and expect continuing improvement over the next few quarters, narrowing the year to year comparison as the year progresses.
Turning now to E and P waste activity. We reported $68,600,000 of E and P waste revenue in the Q1, essentially flat compared to the prior year period. Revenue on a same store basis decreased about 13% in Q1, which was offset primarily by acquisitions completed since the year ago period. E and P waste revenue was about $3,000,000 below our expectations for the quarter due to the more precipitous decline in E and P activity late in the quarter than industry analysts had projected only a few months ago. Recognizing that E and P industry estimates may be continually changing, the goal we set forth for 2015 was to outperform the macro.
While our E and P waste operations are most highly correlated to changes in linear feet drilled, we're frequently published rig data adjusted for drilling productivity and efficiency improvements is a good proxy for relative changes in same store E and P waste volumes at our facilities. We outperformed the rig count macro in Q1. As mentioned earlier, same store revenue in Q1 was down 13% year over year, comparing favorably to an estimated 21% decline in average rig count in the basins where our E and P operations are located. On a combined basis, same store volume and average price per unit were each up single digits in the period. Average rig count declines in Q1 within our key basins were as follows: Permian down 21%, Bakken down 28%, Louisiana and Gulf Coast combined down 11% and Eagle Ford down 26%.
Rig count declines in our basins accelerated during the quarter from down 2% in January to 21.5% in February and down 38% in March. Rig count for April is expected to take another step down to down almost 50% compared to April 2014. Some industry analysts are predicting slight additional dips in May June with a bottoming around mid year. As discussed earlier on this call, the more rapid deceleration in drilling activity has added another 15% since early February to estimated 2015 year over year E and P CapEx reductions and will impact us for the remainder of the year. Because the bottom appears to be occurring sooner than many experts had previously expected, we estimate this will reduce our original 20 15 outlook for E and P waste revenue by approximately $40,000,000 at about a 75% decremental EBITDA margin.
About 40% of this reduction will impact our 2nd quarter's results with the remainder spread out over the second half of the year. With the E and P sector washout happening quicker and more severely than previously expected, many sustained $60 to $65 per barrel crude price necessary for E and P companies to consider mobilizing additional rigs in certain basins. But just as the decline in drilling activity lagged crude oil's price decline by about 4 months, we believe any rebound in such activity will also lag the requisite increase in the price of crude, especially since there is an existing backlog of drilled but uncompleted wells. As mentioned earlier, free cash flow in the quarter was $123,000,000 or over 24% of revenue and we remain on track to meet our full year target of between $350,000,000 $360,000,000 despite the more precipitous decline in expected E and P waste activity. In Q1, we deployed about $90,000,000 on acquisitions and $35,000,000 on return of capital to stockholders.
On our February call, we discussed the Shale Gas Services acquisition and solid waste tuck in acquisitions in North Carolina and Washington completed earlier in the year. In March, we also acquired a permitted but undeveloped E and P waste landfill in the next in the New Mexico Permian for potential future growth. With this start to the year, we believe we're on pace for what we consider to be a more typical M and A year. That is completing transactions totaling about $75,000,000 of acquired annualized revenue. Regarding return of capital to stockholders, as noted on our February call, we expect to repurchase between 2% outstanding shares in 2015 or another 2,000,000 to 3,000,000 shares in addition to what we've already repurchased year to date.
If M and A plays out as expected and we repurchase 3% of our outstanding shares, our leverage ratio would end the year around our targeted 2.75 times debt to EBITDA, leaving us tremendous flexibility to fund larger M and A opportunities or opportunistically increase the 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 Q1 and to provide a detailed outlook for Q2. I will then wrap up before heading into Q and A.
Thank you, Ron. Since Ron already reviewed the components of revenue growth, I'll begin with a discussion of adjusted EBITDA. In Q1, adjusted EBITDA is reconciled in our earnings release increased 2.5 percent to $168,300,000 As a percentage of revenue, this was 33.3% or about 30 basis points above the high end of our outlook range. Despite incurring more expenses than anticipated at the time of our February call in connection with E and P facility startup and storm related repair costs in the period. Had we adjusted for these impacts, adjusted EBITDA margins in the quarter would have increased 20 basis points year over year.
In the first quarter, adjusted EBITDA margins within our solid waste collection and disposal operations increased about 165 basis points, primarily due to lower fuel cost. Recycling was near breakeven on an EBITDA basis in the quarter. The year over year change in margins within our E and P waste business in the Q1 can be broken down into 3 buckets. First, the estimated $5,400,000 of facility startup and storm related repair cost impacted segment margins by about 800 basis points. 2nd, declines in same store margins of approximately 800 basis points on a 13% decrease in revenue impacted segment margins by approximately 625 basis points given the revenue weighting within the segment.
And 3rd, acquisitions diluted segment margins by about 2.75 basis points in the period due primarily to the lower margin Shale Gas Services facilities where the value of its recovered commodity is linked to and hampered by lower diesel prices. Shale gas services reported less than a 20% EBITDA margin in the period. On consolidated basis, the following are certain line items that moved a notable amount in the Q1 from the year ago period as a percentage of revenue. Brokerage and rails range cost increased 90 basis points on higher intermodal activity. E and P related subcontractor cleanup, equipment rental and repair cost increased 80 basis points.
Labor and supervisory expense increased 40 basis points, partly due to new E and P facility startup costs. 3rd party disposal and transfer costs increased 35 basis points. Fuel expense decreased 140 basis points and risk management insurance expense decreased 50 basis points. Fuel expense in Q1 was about 4.35 percent of revenue and we averaged approximately $2.95 per gallon for diesel, which was down about $0.67 per gallon from the year ago period and down $0.33 sequentially from Q4. Depreciation and amortization expense for the Q1 were 12.7 percent of revenue, down 30 basis points year over year, due primarily to lower landfill depletion expense as a percentage of revenue.
Interest expense in the quarter decreased $1,200,000 over the prior year period to $15,700,000 due to reduced borrowing costs on our bank facilities and lower average outstanding balances. Our effective tax rate for the Q1 was 39.4%, consistent with our expectations for the full year. GAAP and adjusted net income per diluted share in the Q1 were $0.42 $0.46 respectively. Adjusted net income includes among other items the amortization of acquisition related intangibles. Debt outstanding at quarter end was just under $2,000,000,000 and our leverage ratio, as defined in our credit facility, was approximately 2.67 times debt to adjusted EBITDA.
I will now review our outlook for the Q2. 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 2nd quarter is estimated to be approximately $530,000,000 Solid waste price and volume growth on a combined basis is expected to be about 5% in the quarter, up sequentially from 4.4% in Q1.
Recycling, Intermodal and other growth is expected to be between 0.5% 1% as increases in intermodal activity should more than offset the impact of year over year declines in recycled commodity values. Revenue from E and P waste activity is expected to be between $50,000,000 $55,000,000 or down almost 35% year over year. An estimated 40% decrease in same store revenue is expected to be somewhat offset by contributions from acquisitions and our recently opened landfill in the West Texas Permian not reflected in the prior year's results. Adjusted EBITDA for Q2 is estimated to be between 33% 33.5% of revenue. Margin expansion within our solid waste operations is expected again to be more than fully offset by high decrementals associated with lower E and P waste activity and to a lesser extent, the impact of a lower margin shale gas services acquisition and remaining start up costs at our new Eagle Ford deep well disposal facility.
Depreciation and amortization expense in the Q2 is estimated to be about 12.4 percent of revenue. Amortization of intangibles in the quarter is at about $7,300,000 or almost $0.04 per diluted share. Operating income for the 2nd quarter is estimated to be between 20.5% and 21% of revenue. Interest expense in Q2 was estimated to be about $15,500,000 Our effective tax rate in Q2 is estimated to be about 39.4%. Non controlling interest is expected to reduce net income by about $300,000 in the 2nd quarter.
And finally, it's important to note that on an earnings per share basis, we estimate the year over year change in the performance of our E and P business to be about a $0.10 drag to reported results in the Q2 when compared to the prior year period, fully masking 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 performance in the quarter, especially in light of the E and P, recycling and weather related headwinds. Solid waste drove our results in the period and should remain above original expectations throughout the year. In addition, we believe the worst of recycling and weather related issues are behind us.
These improving trends together with potential acquisitions should help us offset a portion of the impact from the more precipitous drop in E and P CapEx spending than the market estimates just a few months ago predicted. On our February earnings call, we identified objectives we hold ourselves accountable for in 2015. 1st, to expand margins within solid waste in addition to any benefit from lower fuel costs. 2nd, to outperform the macro trends within the E and P sector. 3rd, to increase free cash flow more than 10% and 4th, to maintain discipline and capital deployment both in acquisitions and the return of capital to stockholders.
We remain on track to deliver on each of these objectives. We appreciate your time today. I will now turn the call over to the operator and open up the lines for your questions. Operator?
Thank Our first question coming from the line of Joe Box with KeyBanc Capital Markets. Please proceed with your question.
Hey, good morning guys.
Hey, Joe. Good morning.
Ron, your volume walk was helpful on the
E and P side. Could you maybe just give us a little bit color on E and P landfill pricing? Curious if you've seen a stabilization on that front or if it's still trying to find a bottom?
Yes. I think it depends on the basin, Joe. For the most part, certainly in Louisiana and the Eagle Ford, I think it's been stable there throughout the quarter. I would say over the last 2 to 4 weeks, it has stabilized in the Bakken and the Permian, at least within a range. Obviously, most of landfill pricing is quoted on price dropped from $65 to $55 a ton.
The reality is that was probably $9.50 of transportation due to the decreased fuel price and $0.50 on the disposal end illustratively. So we're not really seeing large declines in disposal pricing in the Bakken or the Permian. We're seeing larger declines in the revenue piece, which includes the transportation.
Yes, Joe, if you look at Q1, again, as we said on the call, on a same store basis, revenue was down 13%. Average price across the business was down 6% to 7% as was average as was the volume, okay, on the same store basis. In Q2, what we've assumed is that average price declines range between down 10% to 15% in the quarter. So we've already baked in kind of the recent prices we've seen and stabilization in those ranges. And therefore, volume is assumed to be down 25% to 30% to get that same store number of down about 40%.
And I would tell you that almost all of that down 6% or so of price in Q1 came in March, which is why we have baked in a higher amount coming in Q2. It's just a rollover effect of March.
Understood. And I missed just a second of your guidance commentary. I caught the 2Q comments, but did you address full year EBITDA guidance?
What we said is just within the with regards to the E and P business relative to what we said in February where we guided at about $260,000,000 to $275,000,000 of revenue within E and P, We've taken that down $40,000,000 So that would get you if you're doing the math at home, it gets you to about $220,000,000 to $235,000,000 on the top line. And what we've said is that $40,000,000 would come off at a decremental margin of 75%. So that would take $30,000,000 of EBITDA out of that number associated again with E and P.
And then we said that we believe greater strength in the solid waste business, improvement in commodities over the balance of the year and potential acquisitions would impact some of that 75% yes, offset some of that 75% in EBITDA.
Okay. So there's not an official number, but we're kind of migrating closer to something around 700?
Right. We always wait till July to give an update on the full year because by July, we've got 6 months actual. We've guided for the upcoming 3 months. And so we will look to July to update the totality of the business at that point in time.
Understood completely. I'll hop back in queue. Thank you.
Thank you.
Thank you. Our next question coming from the line of Al Kaschalk with Wedbush Securities. Please proceed with your question.
Good morning, guys.
Hey, good morning, Al.
Just to follow-up on E and P. Ron, have you heard in terms of your outlook, how would you characterize your visibility for the 2Q troughing in terms of the June timeframe from recent conversations with your customer base?
Well, I would look, you had a pretty precipitous decline in Q1 now. And we were under our guidance for Q1 in E and P by $2,000,000 or $3,000,000 So that's less than 4%. So if I was to tell you that I think we're within a 5 percent range. I feel pretty good about that. Our guidance assumes that there are no incremental new rigs that either come into our geographic area or that we secure if they do.
So any of that would be an improvement potentially to our performance. It assumes that the existing rigs that we have today in our areas stay other than the ones we've been notified that upon completion, they will be removed. So again, we're revenue, we're pretty tight in how we can forecast revenue. Obviously, that business is moving around more than our solid waste business ever would. But we feel pretty good about it.
Yes, it seems like the worst of the rig declines is almost upon us. As we said, we're just seeing dribs and drabs here and there at this point in time. But more importantly, we're going into the what's typically an uptick in activity in that business seasonally. Plus we're getting in the part of the year where remediation jobs and some other revenue line items can come into play that you don't normally see in Q1.
Yes. And just anecdotally, we got there is a couple of E and P companies in the Permian that were not that had pulled rigs in the $40 range, but in the mid-50s have made commitments to redeploy rigs. And we picked up 3 or 4 of those over the course of the last week. So we do feel some things like that anecdotally that Q2 should be the bottom again with the assumption that crude stays in sort of this band that it's in today.
As you take a step back here and given what is very strong cash flow both in the core or what I call the core in your solid waste business, Do you get more aggressive from an M and A perspective given the carnage in the market or do you stay true to this $75,000,000 revenue contribution from acquisitions in the year?
Well, I mean, Al, I think the reality is that we try to always stay about as aggressive number of opportunities on the solid waste side. Over the course of the last week, I've reviewed with our M and A group no less than about half dozen new opportunities. And so but there still is what I'd consider a bit of a disconnect between sort of market valuation that we're willing to pay and sellers' expectations. Having said that, we are there are ones if you stay at it long enough and you cross enough, there's ones you're going to get. And that's happening with us.
But I don't think we step on the accelerator and stretch capital once, and we pride ourselves on trying to do it right. And if that opportunistically happens in this window, great. If it doesn't, well then we'll wait till it does.
Very good. And then finally, if I may, is there could you add some additional color to the extent you can? The intermodal seems to be very strong. And I'm not sure and then given that where it's located, I guess more of the franchise market, I would think that would be a very healthy contribution on the margin side. So if there's any color you could add to that, I'd appreciate it.
Thank you.
Sure, Al. The strength in intermodal, it's kind of taken a lockstep up in performance. It's associated with the change in port of call by a couple of shipping lines that have moved out of the Portland area and now call on the Seattle Tacoma area And our business running the daily direct train between Seattle, Tacoma and Portland is benefiting from the repositioning of those containers back down into the Portland marketplace for subsequent distribution out on rail and trucks from that location. That business in Q1 was up about 45%, meaning it went from about $8,000,000 in change up to about $12,000,000 in change of revenue in the quarter. Q2, we're seeing another step increase putting that business on maybe a $14,000,000 to $15,000,000 per quarter run rate.
If you look back over the 10 plus years or so of ownership of that business, it's generally ranged between 35 and low 40s, dollars 40,000,000 $42,000,000 of revenue. This year, it's hitting new heights and the incrementals associated with that are not dilutive to the business because obviously the yard cost, the overhead etcetera is already covered. It's required some incremental CapEx as we've grown the business to handle the increased container count. But this is a very good year for that business or setting itself up to be a good year for that business.
And just to clarify, Al, not dilutive to the intermodal margin business' margin. Obviously, the intermodal business even with incremental revenues like this is still nominally below company average.
Great. Got it. Thanks.
Thank you. Our next question coming from the line of Alex O'Shea with Goldman Sachs. Please proceed with your question.
Thank you. Good morning, everyone.
Good morning, Alex.
Couple of questions for you, Ron Worthing. First on the free cash flow number and the ability to be able to maintain that number in the context of a weaker E and P outlook. Can you just talk about some of the levers you're pulling that are going to let you get to your original guidance for free cash flow?
Sure. It's a couple of buckets there. One is lower CapEx year over year. Last year, we did about $240,000,000 of CapEx. This year's guided CapEx is $30,000,000 to $40,000,000 below last year's number.
That alone represents a 10% plus increase in year over year free cash flow. Other levers we have, we came into the year with between a $7,000,000 and a $10,000,000 tax overpayment position, just given the timing of when both depreciation was approved by Obama last year. And then we had a working capital approaching $20,000,000 or $25,000,000 of cushion on that side as we went into this year. And so going into the year, we had as you just add all those up, that gets you close to $60,000,000 or so. But obviously with the decline in the E and P business on a year over year basis, from a receivables collection standpoint as you get to a lower level of activity puts another 5,000,000 to 10,000,000 of collections into the system.
So there's as we say going into the year, there are plenty enough levers that we knew we had to withstand any surprises in the E and P business. And as we sit here today, it's how the year is playing out.
Got it. Very helpful, Bridge. And then on the pricing side for the E and P business. So coming into the year, were you guys expecting to see much pricing erosion in that business? Or is that something that surprised you as we move through the year here?
No. I mean, it has not surprised us, Alex. Again, as we said, it was about 6% or so in Q1, probably 10% to 15% in Q2. Again, while that sounds like a lot, remember that that includes transportation as well as disposal. So as fuel drops, because crude drops, your transportation component just naturally drops.
So it's a little more it's not as weak as that sounds as I guess what I would say. It is different than we price MSW, C and D landfills, where we price just disposal. And if you were talking about a 6% to a 15% decline there in price, that would be very substantial. But here, we price it including the transportation to most of our customers. So you just have a natural increase or decrease in price as fuel changes.
Yes. That's a very helpful nuance there. And just last question for me on the recycling side. If I heard you correctly, you said you were breakeven EBITDA. Can you comment on what normalized EBITDA that business should be if there's such a thing?
And maybe just give us some perspective of what that EBITDA margin has been in the recycling business for you over time?
Well, obviously, it depends on commodity prices. And I think what you're seeing is that Q1 with OCC at around $92 on average. And obviously, the other commodities that we handle generally bring the average price for all commodities handled at the facility down into that mid to high 70s range at that kind of OCC price. And given processing costs and giving logistics to get to port, that's about a breakeven price point. So the question will be the answer to your margin is really where do you see commodity prices going.
If commodity prices rise 20% from here that probably puts that business back into around a 15% margin business. And you can just extrapolate the math from there.
Great. Thank you. Very helpful. Thank you.
Thank you, Alex.
Thank you. Our next question coming from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, everyone.
Good morning, Tyler.
Hey, Ron. So I was just curious to get your thoughts on maybe the solid waste by geographic region. So we've been talking with our housing team quite a bit and it sounds like that West Coast and maybe even specifically coastal California is just pretty darn hot. And I was just curious if that's translating into your business. It seems like your western region is doing pretty well and if that's any opportunity to maybe come in better this year.
Well, I mean certainly and I think you heard it in our commentary, Tyler, our West Coast, whether you look at it on roll off poles or MSW volumes or special waste or C and D was our leading region in the quarter. And of course, it's our largest region in the company and it is our region that is 95% franchised or exclusive. So we have always said when that turns, it's very beneficial to us because we get 100% of the volume at a guaranteed price. So the incremental margins are fairly strong and stronger than our corporate average EBITDA margin. So yes, I mean that's what part of what we're hoping for to plug some of the E and P shortfall over the balance of this year.
We are also seeing and hearing up and down the West Coast really of residential construction for the first time in some areas since 2,007, 8 years or so in areas like Vancouver, Washington, in areas outside of Tacoma, in areas really all throughout Southern California and the Bay Area. And we don't have a collection presence in Southern California, but we have a disposal. And we do have a collection presence in the Bay Area. The pocket of weakness that remains on the West Coast is the Central Valley of California, sort of from Bakersfield really to the Oregon border on the I-five corridor. And we have a decent presence there and that is a little weak.
And Coastal Oregon remains a little weak. But most of the rest of the West Coast, we've seen strong improvement in over the last 4 to 5 months.
Yes, that's great color. Perfect. And then Worthing, I'm just curious if we can work through fuel again for you guys. So I think in the past you guys have said you burn, let's call it like 30,000,000 gallons of fuel and maybe a third of that is hedged. So I get it.
I think you guys have mentioned you don't have a lot of surcharge revenue. But how should we think about that 20,000,000 gallons? If it's off a BUC, I mean is that largely flowing through for call it maybe 3 quarters of the year? What is the year to year impact there?
That's about right. It's about a 10 month to 10.5 month impact until you start anniversarying the declines we saw late last year. What we've assumed here in our numbers is about anywhere from a $12,000,000 to $14,000,000 retention of those savings because you see surcharges in some markets begin to roll back nominally as we mentioned in the second half of this year.
Okay, perfect. And then just maybe last, I don't really want to beat the E and P horse here, but real quickly, how should we think about those earn outs or contingent payments? So to my understanding, a lot of those deals were structured with an earn out. So I surmise given the conditions in the space that you will probably see maybe a reversal on the balance sheet from those. Do you think that that provides a buffer this year?
Or is that am I reading too much into that?
Well, number 1, Tyler, only a few of our deals and they were really the ones done in the second half of last year as crude started to contract. So it represents 2 or 3 deals where there was some sort of earn out. Those earn outs are generally have a measurement period of approximately 1.5 years to 2 years. And so there really shouldn't be per se a benefit in 2015 potentially, unless it's so clear that it can't be made. It would probably be more of a benefit in 2016 or even into 2017.
But Tyler, any benefit from that we would call out and adjust out of our results because obviously that's a non cash one time item.
Yes, perfect. Okay. And then on the corporate expense though, there was nothing unusual this quarter. It just looked awfully low on the corporate expense side. There wasn't a reversal there?
No, it's really just we increased the embedded within the region, some of them went embedded within the region, some of them went up 50 basis points in their absorption of allocated costs. So that's why you see almost all the corporate or just the allocable costs being absorbed in the region versus having a stub amount at corporate.
Okay, perfect. Thank you.
Thank you. Our next question coming from the line of Scott Levine with Imperial Capital. Please proceed with your question.
Hey, good morning guys.
Good morning, Scott.
So really just curious for your app your take and you did this new acquisition here in E and P Waste obviously been interested in growing this business, investing in it last few quarters. Curious for your updated thoughts on that, including the potential, are you looking at the Northeast as an opportunity to expand that at all or maybe a little bit more color your thoughts there and plans for growth investment in that business in 2015, the current environment?
Yes. Let's tackle the easier of the 2 first, Scott. I mean, right now, we are not looking at anything in the E and P business in the Northeast, in the Marcellus or the Utica. I mean, the reality is those are fairly urban for the most part plays or in proximity to urban plays. And they have a long lived low cost MSW land build up and down the I-ninety five corridor for the most part that are that and then down obviously through Pennsylvania that can take these waste fairly inexpensively.
And if you look at such as Waste Management or Republic, the vast, vast majority of what they do in E and P is in that is in the Marcellus and the Utica and really not anywhere else to speak of. Prior to the Trevita acquisition, obviously, by Republic. As far as our interest in the space, look, we feel we've got tremendous assets right now in the remaining shale basins that are out there off of the East Coast, we're going to look to continue to sort of densify that asset position and shore it up in any area that we might feel there could be a little bit of an improvement in. I wouldn't expect that to be a tremendous amount, but we have done one in the Q1. We're looking at some others.
And particularly, if we can get those based on $40 crude at reasonable multiples, if we get something at a 4 to 5 EBITDA margin on current run rate, as crude turns and hopefully gets back to $70 to $80 at some point, that will turn into a 2 multiple. So we are we will be looking at it like that.
Yes. And I'd say the closer term opportunity for us from an investment standpoint, periodically, we've been talking about our attempt to get a liquid disposal well in our New Mexico Permian operation because of the amount of money we're spending on 3rd party water disposal at that facility. And we've been working a couple of years now trying to get that permitted. We're getting close to when we hoped we can do that. And obviously, if we can do that, that may be about an $8,000,000 or $10,000,000 investment on us, but in under a 3 year payback given the cost we can take out of the business there.
So we'll continue to update you on that one because that's a certainty of return given the reduction of internal costs.
Got it. Thank you. And as my follow-up, I guess, you mentioned in the press release and on this call, you expect to offset a portion of the E and P downside with upside in these other areas. I know you update formal guidance mid year, but maybe trying for a little bit more detail or color in terms of either the proportion or whether it's kind of equal parts solid waste, commodities, M and A, you're talking about a pretty nice outlook for M and A at 70 $5,000,000 in annual revenue this year, but maybe a little bit more detail where the upside is coming from?
Yes. We would never guide M and A that's not completed. So if you just focused on solid waste and recycling and try to quantify that, for instance, look, solid waste, we're already guiding to 5% price plus volume growth in Q2. That's fairly strong number compared to anyone's data that's being released. If you look at the balance of the year, just to move the needle, 50 basis points in volume is a big number and now we're just staring at half of a year left beyond Q2.
50 basis points over half a year is only about $5,000,000 or $6,000,000 of incremental volume. You put a margin on that, you're talking about $2,000,000 to $3,000,000 maybe of incremental EBITDA per half per fifty basis points over half a year. You start looking at our resale and commodities, if those come up or 15%, you're looking at another $4,000,000 to $5,000,000 of incremental revenue at a high flow through. Long way of saying if the headwind is $40,000,000 of revenue, what we just talked about from revenue standpoint is maybe we could offset 20% or 25% of that. If the EBITDA headwind is $30,000,000 well, what we just added up to is maybe 20% of that being offset.
So you got to put the buckets in perspective and keep acquisitions out of the analysis.
Yes. And Scott, again, remember, if we did we're sitting here almost in May, if we did $50,000,000 of acquired revenue over the balance of the year, that tells you $25,000,000 would hit the P and L approximately
saying it would and that's assuming
it was done by July 1. If it was say, let's say, September, I'd just pick a point, then it's going to be a number more closer to $20,000,000 $15,000,000 to $20,000,000 hit the P and L in
10 to 12. In 15. 10 to 12.
That's correct. I'm sorry. I apologize. Hit the P and L. And then you assume that those deals come on at somewhere around 25%, which is our typical history.
You're looking at $3,000,000 to 5,000,000 dollars depending on the timing of EBITDA that could impact this year. So again, we're not going to be able to offset dollar for dollar most likely unless there were some very large job or very large deal that we got done that was highly accretive. We don't see that, but we will offset a portion of it.
Yes. Or other drivers in the business that we don't control, obviously, special waste could pick up above expectations second half of the year, the much discussed coal ash that we don't put in our outlook. If coal ash were to start coming to fruition in the second half of the year, you can see some contribution from that as well. But again, let's just wait full July and have a better insight look into the business.
Got it. Thank you.
Thank you. Our next question coming from the line of Michael Hoffman with Stifel. Please proceed with your question.
Thank you very much for taking my call. Ron and Worthing on the free cash flow just to kind of close the loop on that, Started the year with a 26% of revs was cash flow from ops. I assume that walks up maybe a half a point most of that would be working capital to help hit this stay in this target range of 3.50 to 3.60?
Yes. And you got about a 30 to 50 basis point walk up on that.
Okay. And then on solid waste, can we talk a little bit about some of the trends that we haven't discussed yet? Front end loader, the weight PR trends had been improving through the second half of 'fourteen. How does that look in coming into 'fifteen and how do you think about that service interval cycle? I'm assuming that's not in the guidance either.
So that's another sort of opportunity for margin.
Yes. I mean, I would say certainly some of that is in the guidance, Michael. I mean, again, the reality is that we to have 2% to 2.5% positive volume in a GDP environment that is running approximately that. You're certainly getting some benefit of that. Again, each of the last three quarters now, service increases over service decreases in our commercial system has expanded both in number of customers and dollar amount.
So we're continuing to get that, and we expect that to continue. It's not growing at an explosive pace, but it's growing at a very steady and predictable pace. I think to get to I'm just using this 3% to 4% type volume growth that many would like to see, I mean, we really need to get back to a 1.5 $1,000,000 plus housing start number. And that's sort of the piece that we haven't we not we, the whole industry hasn't yet seen. But the commercial business is performing very, very strong right now with regard to service increases.
Okay. And then following that line of questioning, on the C and D pull trend, can you tell whether there's res versus non res component to that and non res hasn't recovered yet. There's a little bit of activity in 2014, but that's also another opportunities for non res construction to come back?
Yes, we concur with that. And so if you look at it, our business is split not quite on the temporary rollout pulls, which is I think where you're referring, dead on about fifty-fifty historically between res and non res. And certainly right now, the non res is a little larger. It's more like 60% to 65%. So there certainly is an opportunity for that to provide some acceleration if housing continues to pick up.
We are seeing a pickup on our West Coast specifically.
Okay. I just want to make sure I got the mix right. So the res part is 60, 65, so non res picks
up? No, inverse of that. Okay. Yes, the non res right now.
Okay. And so that's the other question I had on the res part. We did just under 1,001,000 starts last year. Was in your guidance, basically your assumption was we'd be and starts year over year. Is that sort of was is the premise coming into the year and if it's better than that?
Yes, we
thought there'd be about 1,000,000. That's correct. Right.
Okay. So you're I mean the smarter people than me on housing think that's going to be $1,200,000 to $1,300,000 Are you starting to see that kind of level of activity beyond just the West Coast?
I would say we've felt that the Midwest and the Southeast has been pretty strong throughout 2014 2015. I don't think we've seen a palpable change there. Where we're seeing the change is the West Coast for us.
Okay. And then on the recycling, has the congestion in the ports cleared so that overhang is gone?
Virtually. It has completely cleared, but it's certainly not it is not a reason for a price dislocation at this point in commodities. The turnaround times are such that that's not causing any discounting.
All right. And then last on solid waste price retention or given better volume trends, are we seeing just better overall price retention? You're not having to give as much back?
We are. Our price retention right now is hovering right around 89% to 90%, which is very good. And sort of is indicative of and by the way, that's in our competitive footprint. Our price retention in our exclusive is 100%. So company together, it's 95%.
But that is indicative of a stronger economic environment, where in the competitive areas, you're able to raise price without as much retribution from private haulers because they're getting organic growth in their business too. So that overarching improvement in the economy helps the pricing environment without question.
Okay. And then one last question on E and P. In your conversations Let's
get the horse out of the glue factory. Go
What's that?
Let's get the horse out of the glue factory.
Yes. No, well, this one's slightly different. In your conversations with your customers, where do they think they are in successfully reducing costs of drilling, cost of completion, such that they can the new normal now is 50 to 60 and they can make money and they'll start doing business again? Where do they think they are in that process?
Do you have a sense of that? Yes. We've had those conversations. I will tell you we were with a couple of the larger drillers who would tell you that 1 year ago today, their AFE for a drill was $8,000,000 to $8,500,000 They're saying that exact same AFE today is between 4.8 and 5.4. They're saying they need to knock another $200,000 to $400,000 to $500,000 out of that to give them at current oil pricing the same IRR they had at the 8% to 8.5%.
So they think they're very close. Obviously, anything above this price, they're
there. Okay. And by all reckoning then, they're conservative bunch. They fight for that through the mid year and then maybe that's the turn in the rig count.
Well, again That's the way to think about
it. I think that is a possibility assuming crude stays where it is today or above.
Right. Okay. Thank you very much.
Thank you.
Thank you. Our next question coming from the line of Charles Redding with BB and T Capital Markets. Please proceed with your question.
Good morning, gentlemen. Thanks for taking my call.
Just a little bit of a follow-up here.
If you could just drill down a little more on the stronger roll off activity, what were some of the really strength some of the components of the business that were really strong in the quarter? And then where do you kind of see that heading over the next quarter or 2?
Yes. Well, I mean, overall roll off poles were up 8%. They were up in all three of our regions. Price was up almost 3.5% per pole. We would expect the price component to stay relatively consistent.
I would expect the incremental increase in polls to stay relatively consistent. I mean, I haven't looked at last year's Q2 to know what type of comp we're looking at yet. But the reality is, the business was strong across the board, different reasons in different places. In the Southeast, we're seeing some recovery in some of the manufacturing, particularly the marine industry and of course, the auto industry that we didn't have as much of in 2013 2014 in the Midwest. Despite the fact that the Midwest from the Dakotas down through Oklahoma is in and around the strong shale plays, we're still seeing 2% to 3% unemployment in those areas and just overarching strong construction commercially, strip malls, restaurants, apartments, etcetera.
And then on the West Coast, we're starting to see it in residential housing, particularly in the Pacific Northwest and in parts of Northern and Southern California. So a little bit different by geography, but all the geographies contributed to roll off poles increase both temporary and our permanent industrial customers.
Okay, great. And then I guess on special waste, I know that's off a little on the tougher comp. But just stepping back, kind of how do you think about that business? And is it possible to have any visibility in that business? Or is it simply limited as a function of kind of how you're collecting?
Well, I mean, you have you do have some visibility in that business. We are monitoring we monitor all permits pulled in the geographic areas of every one of our landfills that can handle special waste. We have estimates of the size of the projects and when those projects will begin and when they will end. Sometimes there are and then you know what you're awarded. So based on those, you can triangulate where special waste approximately will be.
The only thing that causes a difference to that is that sometimes jobs get delayed in starting or they drag out longer than anticipated. So any given 90 day period might be greater or less than you projected. And again, the only reason that Q1 was down in special ways was just due to our central region and the fact it was a very large storm cleanup where rivers flooded throughout parts of Colorado last year and we were awarded several cleanup jobs in several markets because of our landfill network in Colorado. We just didn't have that this year. That caused 13% decline in just that in that region, and that's what led to the overall company being down.
We don't have that as much in Q2. So I would expect special waste in Q2 to be flat to up, not down. That's great. Thanks, Ron.
Thank you. Our next question coming from the line of Barbara Nilverini with Morningstar. Please proceed with your question. Hi, good morning everybody.
Good morning. Good morning.
You talked about this briefly in the last question, but I just want to revisit it. Are you starting to see any ripple effects in your central solid waste region as a result of E and P sector weakness? I'd expect that since that is a significant driver of the economic environment in that region specifically, you might start to see a little bit something maybe into Q2 or a little bit later in the year.
Yes. Very good question. We are seeing some ripple effects of that, Barbara. I mean, the reality is, is that with the lay down of rigs in places like North Dakota and places like Colorado and Oklahoma, you're seeing fairly substantial, in some cases, job loss off of those rigs. And so you're seeing a little bit less commercial activity at restaurants.
You're seeing a little bit less commercial activity at apartments and temporary lodging. And but it's not really affecting our residential business at all. It's just a fairly nominal effect right now on our commercial business in the central portion of the country.
Got it. That's helpful. Thank you.
Thank you.
Thank you. Our next question coming from the line of Corey Greendale with First Analysis. Please proceed with your question.
Hey, good morning.
Good morning, Cory.
Good morning. Good morning.
Breeding, you have me worried that I'm going to have the animal rights people after me if I ask a question about the E and P waste business with your glue factory metaphor?
Do it at your own risk then.
You're going to have them.
Well, I'll take my chances slightly a couple of slightly different angles. The first is actually, Ron, maybe this is a reach, but I know that historically you talk about one of you're very focused on building and developing good talent at the company. Is there any silver lining to the downturn in that maybe there's more good talent out there or more opportunities in The Woodlands area to accumulate either space or people based on weakness in E and P?
Well, we don't need any more space right now. So that's a good thing. And in The Woodlands, despite the fact there's a lot of E and P business here, the commercial vacancies remain under 2%. So the market is still very, very strong. You're correct, we're constantly focused on making certain that we've got the best possible people we can.
And to be honest, in the E and P niche specifically, yes, this is an opportunity to do that. This is an opportunity for us to upgrade really at some levels as talent comes on the market, and we are looking at that. We have taken advantage of some of that recently such as on the sales side. So it's not a needle moving opportunity, but it all matters ultimately.
Yes. And then secondly, on the regulatory environment with volumes being this weak, first of all, do you see any kind of slide back people using open pits instead of line landfills? Or do you think this that the weakness slows down any of the legislative or regulatory wheels that could be moving toward more, forcing people to use line landfills?
Well, one thing you see to the extent that pricing comes down in those states that still allow bids, you see landfilling being a lot more competitive to the cost of using pits. And so we do see some additional rigs moving into landfills and away from reserve pits. On the regulatory front, for instance, you saw in North Dakota, The first of what could be 2 initiatives to encourage more landfilling or just moving away from reserve pits. The first one that they did was a bill that recently passed to the extent that the waste stream goes into a recycle and reuse format, which we've got a couple technologies that could apply there. It's more advantageous to the generator waste in that the liability chain gets cut.
That's one way the states tried to induce additional moves away from reserve bids. And one that is still out there is I know North Dakota has considered doing basically a tax incentive in order to encourage the use of landfills. In other words, to the extent that they could get folks out of reserve bids, basically the tax credit alone is equal to or almost equal to the cost of disposal. And so again, we do see initiatives in states that are still allowing reserve bids to try to encourage folks to move away from them.
Great. Thank you. And might it be known the horse is walking into the barn under his own power?
Thank you. Our next question coming from the line of Adam Baumgartner with Macquarie. Please proceed with your question.
Hey, thanks for taking my question. Could you guys just touch on the pricing you're seeing across different lines, commercial, industrial and residential, what the trends you're seeing there?
Yes. They remain well, our industrial is sort of encompassed in the rollout pricing that we gave out today. So that 3% to 4% range in our competitive markets is fair number. And I would tell you that our commercial and our residential, we are seeing in our competitive markets 3% to 4%. In our exclusive markets, both residential and commercial, We get approximately the CPI on both those lines.
There really isn't as well as roll off in that piece of the business. And that is running for us probably between 1.8% and 2.2% in most parts of the West Coast. We've seen some as low as 1.4% to 1.6%. We've seen others a little higher than 2.2 but really in line with our expectations so far this year. Great.
Thank you.
Thank you. Our next question coming from the line of Tony Bancroft with Gabelli. Please proceed with your question.
Good morning, gents. Thanks for taking my call. My question is just hey, just I'll beat the horse one more time. Just with on the MLP front, if now that the PLR has been positive and lifted and then maybe a rebound in 2016, What's the interest potential there in doing that?
Well, again, the lifting of the PLR issuances by the IRS had no impact on us because we already have our PLR. With regards to any MLP ing of that business, we've really stated from day 1 that as that business across the $400,000,000 or so dollar in revenue scale, that's a scale and amount of EBITDA and tax yielding that we'd want to pursue that may make sense at that point in time to consider an MLP. But clearly, at kind of the low 200 run rate, we have a ways to go. So we'll see the pace of the recovery in 2016, see what that adds to growth and for that matter in the 2017 and continuously evaluate that.
Our next question is a follow-up question coming from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, guys. Just real quick modeling question here. But what is the plan on the hedged fuel? I think that the market?
Tyler, we constantly look at both hedging in the derivative market for fuel. There's been some dislocation over the past 4 or 5 months as some of the indices that have traditionally been used, meaning the DOE Retail Index has been dislocated from the downward movement of diesel. We're now starting to see that market loosen up a bit and getting bids now for 2016 2017 on diesel. So we are evaluating that. We're also now at a point in the year in 2015 that some of our distributors in local markets are now willing to price us for calendar 2016 for fuel locks and we have already started looking at doing some of those in the markets that we're able to do that.
Okay. So you would think of it like 10,000,000 gallons coming down to somewhat close to spot. And I think are the hedges and locks around 360 or so?
That's right. But again, if you're looking into $16,000,000 and the forward curve is not at spot. The forward curve against that $3.60 is probably somewhere in the deal we retail, somewhere down $0.40 to $0.45 on that hedge right now where you lock it today. And for those districts where we have fuel locks in place from a local distributor this year, those hedges are also looking somewhere in the down $0.80 or so to $0.60 range relative to how they were locked this year. So there is some rollover savings in that as well.
And I think it's safe to assume a 30% to 40% of our fuel will be hedged most likely for 2016.
Okay, perfect. Then just real quickly, I know you've got $175,000,000 of notes. I think they're like the 6.5.8 maybe coming up this year. Do you expect to just roll that off into the term loan or do you expect to refinance it?
When we did our bank refinancing in January, we took the capacity of took the capacity of that facility up in anticipation of taking those notes into the revolver. I'm not saying we wouldn't look to do a fixed rate note financing some point if it made sense to lock low rates longer term, but right now the plan to finance is to put them into the revolver.
All right. Thanks.
Thank you. Our next question is a follow-up question from the line of Michael Hoffman with Stifel. Please proceed with your question.
So I'm trying to avoid horse questions since I own them. So let's talk about solid waste. The drought in California, how big of a deal is that to the business?
Well, I mean, I guess the reality is we don't exactly know yet, Michael. They've been in a drought for 3 years. We don't think it will impact any commercial, industrial or retail businesses whatsoever. So the only impact really and I think it's an offsetting impact. The only impact is you're going to have less green waste residentially.
That's actually good for us because we're paid a flat rate fee and our costs will go down per home in disposal, in composting, in labor, etcetera. It's very nominal. But then again, so we'll drive in customers at each of our California transfer stations where they will have less yard waste to dispose of that they pay a fair number for. So I think they're probably offsetting. And I there's nothing that any of our California locations have told us based on the drought that is going to per se negatively impact their business.
The only negative potential impact out there is that we do have to have dust and erosion control measures in place at our landfills. We have some large landfills in California. And it depends on what kind of restrictions they put on water usage there and what we can take out of our own wells versus what we might have to buy in the market or buy credits for. So we don't think that is a big number. It's a de minimis number, but we're very aware of the ins and outs of this our P and L.
Okay. And then I have to slip an E and P question. The market share of outsourcing versus on-site is surprisingly low in North Dakota coming out of 2014. Has that started to shift ex the 13.90 being passed and therefore there's another play here maybe you start to capture share because of the incremental outsourcing and that helps the story?
Yes, I'd say outsourcing is actually up a little bit from year end, not for the reason you think. The reason why it's up a little bit is some of those rigs that were using reserve pits have gone away. And so the share of those rigs that are going to landfills is necessarily gone up. So we're somewhere approaching that 55% to 60% outsourcing in the Bakken up from about 50% at year end. The Bakken right now probably has close to 75 or so plus or minus rigs in the basin.
So you're looking at potentially another 30 rigs to 35 rigs that are still using reserve pits at this amount of activity.
Okay, great. Thanks.
Thank you. Mr. Mittelstaedt, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.
Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in our call today. Worthing and Mary Anne Whitney are available today to answer any direct questions that we did not cover that we are allowed to answer under Regulation FD and Regulation G. We thank you again, and we look forward to speaking with you at upcoming investor calls, conferences or on our next earnings call. Thank you very much.
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.