Waste Connections, Inc.
Q1 2014 Earnings Call Transcript

Published: 22 Apr 2014

[Operator:]

Welcome to the quarter one 2014 Waste Connections earnings conference call. At this time all participants are in listen only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Ron Mittelstaedt, Chairmen of the Board and CEO. Please proceed sir.

[Ronald J. Mittelstaedt:]

I’d like to welcome everyone to this conference call to discuss our first quarter 2014 results and provide a detailed outlook for the second quarter. I’m joined this morning by Worthing Jackman, our CFO as well as several other members of our senior management team. 2014 is off to a strong start as 5.5% combined solid waste price and volume growth together with 20% increase in E&P waste activity enabled us to exceed the upper end of our first quarter outlook in almost every metric. On a 7.1% increase in revenue in the quarter, EBITDA and free cash flow grew 12.4% and 15.3% respectively. EBITDA margins expanded 160 basis points year-over-year and free cash flow was 24% of revenue. More importantly, we believe the improving fundamentals we’ve experienced over the past year or so should continue into the near future positioning us to meet or exceed our full 2014 outlook for revenue and adjusted EBITDA. 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.

[Worthing F. Jackman:]

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 volume replacing trends, expected E&P and special waste activity, expectations regarding period-to-period comparisons, potential acquisition activity, contribution from closed acquisitions or recently opened facilities, the timing of permitting and construction activities, our return of capital to stockholders, and our second quarter and full year 2014 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 & Exchange Commission. Stockholders, potential investors, and other participants are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to replace 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 publically 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 adjusted free cash flow. Please refer to our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I’ll now turn the call back over to Ron.

[Ronald J. Mittelstaedt:]

Revenue in the first quarter was $481.7 million up 7.1% over the prior year period. As noted earlier, solid waste price and volume growth in the quarter were a combined 5.5% broken down as follows

[Worthing F. Jackman:]

In the first quarter revenue was $481.7 million, a 7.1% increase over the prior year period. Organic growth contributed 6.5% to year-over-year growth and acquisitions completed since the prior year period net of divestitures the remainder. We exceeded the upper end of our revenue outlook for the period by almost $8 million due to higher than expected landfill volumes and E&P waste activity. In Q1 adjusted EBITDA, as reconciled in our earnings release, increased 12.4% to $164.1 million. As a percentage of revenue this was 34.1% or about 160 basis points above the year ago period. We exceeded our EBITDA margin outlook for the period by about 80 basis points due to the higher than expected revenue from higher margin lines of business. We estimate that adjusted EBITDA margins on a same store basis within our solid waste business expanded about 85 basis points year-over-year while margins in our E&P waste business expanded about 600 basis points. Adjusting for the items reconciled in our earnings release, the following are certain line items that moved a notable amount from the year ago period as a percentage of revenue

[Ronald J. Mittelstaedt:]

We are extremely pleased with our first quarter’s results as we exceeded our expectations on almost every metric. We demonstrated strong leverage throughout the P&L and cash flow statement translating about 7% revenue growth into 12.5% adjusted EBITDA growth and 19% adjusted EPS growth with free cash flow growth surpassing EBITDA growth. We also put additional building blocks in place for future growth through the acquisition of two development stage landfills. We believe the momentum we are carrying into Q2 positions us well to meet or exceed our full year outlook for revenue and adjusted EBITDA but, we will wait until July to formally update our full year guidance as warranted. We appreciate your time today. I will now turn the call over to the operator and open up your lines for your questions.

[Operator:]

(Operator Instructions) Your first question comes from Joe Box – Keybanc Capital Markets, Inc.

[Joe Box:]

A question for you, if you strip out the special waste and the C&D disposal component, would that have put you pretty close to what you were forecasting going into 1Q? Then related to that, I get that you guys have had four strong years of special waste so holding it flat will be a pretty good outcome, but maybe to dig into that, can you talk about the type of special waste projects that you’re seeing and maybe if there’s any trends among those special waste projects that might suggest that strength could persist through 2014?

[Ronald J. Mittelstaedt:]

Let me take the second part of your question first. The special waste that we handle at our landfill is predominately one form or another of contaminated soil. Generally, hydrocarbon contaminated soil that is coming from a development site either commercial, residential, or industrial. So, it’s either an existing facility such as a manufacturing facility that is cleaning up a site that they want to develop or add on to, or it is property being cleaned up where something new is going to be developed. The other thing we also take is a decent amount of contaminated soil from highway construction as well as river dredgings that come when rivers are being dredged out for port expansion, etc. and it is really across the board. Obviously, we get a decent amount on the west coast, Washington down to California, but we are getting it in Illinois, we are getting it in Nebraska, we are getting some in Oklahoma, in South Texas so pretty much throughout our network, Colorado. That is what we’re getting. Do we think it can continue through 2014? Well, we think it will based on what we know now based on the projects that are out there, based on our historical success rate and what we’ve bid, yes. But, there’s never much more than 90 days, maybe a little more than that of visibility on special waste. We certainly feel confident in what we’ve guided for this quarter. As far as the answer to your first question, I’ll let Worthing, he probably has the exact details, but I think obviously, we had an outsized gain in special gain, an outsized gain in C&D. Roll off was higher both on volume than we expected and then E&P was higher than we expected by some $4 million or so in the quarter so that right there was about half of it almost. So, I think the answer would be the only thing that was right on was sort of our core commercial and residential business, everything else was up a little.

[Worthing F. Jackman:]

That’s right. If you look at the revenue upside compared to guidance, about $4 million to $4.5 million of increased volume was associated with the C&D and special waste activity in the period and the balance of $3 million to $3.5 million or so is from higher than expected E&P waste activity.

[Joe Box:]

Just relative to the guide for Q2, it seems like the solid waste price volume is expected to be up 3.5% to 4%, that doesn’t really look like it includes another quarter of exceptionally strong special waste, is that fair?

[Worthing F. Jackman:]

Again, I think you always want to be cautious. As Ron said, you don’t always control those projects. We don’t know if they’re coming through until they actually come through and so just like we did in Q1, the visibility we have on the business right now is again, about a little over 2.5% on price and that shouldn’t move to much, and obviously, we’re guiding about 1.5% or so on volume. When you add those two together you get 4%. But remember, the comps get more difficult on volume as we move through the year. Last year in Q2 we reported a positive 0.9%, so call it 1%. Last year in Q1 there was a -1.9% on volume. So again, as we’ve said throughout the year, the comps on volumes get tougher, the toughness peaks in Q3 and so I don’t expect to see much variability on the combined pricing volume as you move from Q1 to Q2 to Q3 and again, if there is upside on disposal volumes you might see us beat a little bit but again, we don’t control that. What we do control we’re executing quite well.

[Joe Box:]

One more and then I’ll turn it over. Nice job on converting customer in the Bakken to third-party. I know a big value prop there was getting the liquid plant up and running and if that wasn’t really a factor in the quarter, can you maybe just talk to what the big drivers were to get customers to convert? I’m curious if it was price or a change in mindset of the customer and maybe what the conversion pipeline looks like over the next couple of quarters?

[Worthing F. Jackman:]

Right now it’s more of a change in mindset. Pricing is stabilized in that market place over the past two quarters or so and so you’re seeing again, more customers make their decision to go from pit to landfill. Obviously, you’ve seen some news in the headlines about growing concerns over the handling of waste in the Bakken and those sorts of headlines combined with the actions of the state will increase people’s awareness of the needs to go to a professionally engineered third-party spot like ours and so I fully expect to see the outsourcing trend to continue. Last year at this time was about a third of the rigs were outsourced and that’s increased to probably close to 40% to 45% right now.

[Operator:]

Your next question comes from Scott Levine – Imperial Capital, LLC.

[Scott Levine:]

I was hoping for a little bit more detail regarding the regional color that you gave on the marketplace in general. You said moderate growth, I think, in California I mean, should we perceive that as moderating? I mean, it seemed like the markets that were stronger there was a smattering across your entire geographic footprint but maybe a little bit more color and whether you were surprised with any of the regional developments from a solid waste perspective?

[Worthing F. Jackman:]

I think we called out a lot of states as being strong year-over-year. California being modestly up really as a result of having such a strong Q1 last year. Last year we called out how good the weather was in California and therefore how strong the C&D and roll off activity was in that marketplace. I’m not surprised therefore, that it was just modestly up this year.

[Ronald J. Mittelstaedt:]

I would say that we continue to see the central portion of the country, really from the Dakotas down to Texas, which is the area that surrounds the most active shale plays in the country, we continue to see that as the area with the most growth across the board. Very, very low unemployment, a lot of construction activity, a lot of home development to support the ancillary services of what’s going on in the shale play throughout the central part of the country.

[Scott Levine:]

The leaders of the cyclical improvement still disposal and roll off, any incremental traction on the commercial side of the business at all or would that be overstating it?

[Ronald J. Mittelstaedt:]

What we’ve seen now for probably about three quarters, basically to the midpoint of last year, is that increases continued to outpace decreases in service but not by a lot. New business exceeds lost business and closed business but not by a lot. If you look at our data we would say the economy I doing better, there’s no question, but there’s still a lot of closed business and foreclosed homes going on throughout the country. The pace hasn’t really slowed that much over the last 24 months. There’s a little bit more new business formation and we’re getting our share of that. So, what we would tell you is that it is a steady nominal growth scenario on the commercial side with new business coming on, unless it’s on the west coast, at lower profitability than business that’s closing shop so you’ve got to outpace it by a 20% to 30% factor to stay neutral and that’s really what’s happening. In typical recoveries we’ve seen the closed business and loss business come not to zero but come down dramatically, decrease come down dramatically, and then you have a pretty nice explosion with new business and increases in service. That has not occurred in this quote recovery.

[Scott Levine:]

One last one if I may, two new development stage landfill opportunities, can you help us understand your thought process with regard to these and whether it sounds like you’re looking at two more in the Eagle Ford, should we look at this as more of a focus relative to attritional acquisitions or is it just a function of opportunity? A little bit more color there.

[Ronald J. Mittelstaedt:]

Yes, number one I think it’s just an opportune situation. You’ve rarely heard us say in any year we’ve had two development landfills let alone in one quarter. The one in New York is something we’ve been working on for over two plus years actively with the prior owners in getting some permits redone and that took a while on the political front and so we’ve been working on that one a long time it just happened to get finally done at the end of Q1. Then the landfill in the Permian, that is one we’ve been tracking throughout ’13. We actually thought we’d close it in the fourth quarter of ’13 and it got pushed into the first quarter. That was I think one of the only couple of sites permitted over the last five or six years in the Permian and so it represented a great opportunity for us to even expand our presence in the Permian where we are already comfortably the leader. We will continue to look for these opportunities. Actually, this is no change we’ve always looked for these opportunities and they’re hard to find and you’ve got to constantly be working a year or two out on these types of options and that’s what we’re doing now.

[Operator:]

Your next call comes from David Warner – First Analysis Securities Corporation.

[David Warner:]

You mentioned that you’re maybe not seeing so much of the C&D comeback being reflected in commercial volumes but are you seeing any type of increase in MSW volumes from increases in residential construction activity especially, in those markets you mentioned where you’re seeing some strength in C&D in the central area?

[Ronald J. Mittelstaedt:]

Yes, we’re seeing our residential was nominally up. Your residential is not a weight based service line so for the revenue to be up in that it is through new homes being added and we’re seeing that in markets like Washington and California in some of our system. We’re seeing that in Colorado, we’re seeing that in Texas, in Oklahoma, the Dakotas, and Kansas so definitely there is some residential construction that is translating into new residential house formation and we are seeing that in our residential system relative to prior quarter so there is some of that occurring. It’s a nominal amount but it’s certainly positive.

[David Warner:]

Then on the E&P side, the 20% growth which is above what you were guiding at the beginning of the year, is that more a result of newer landfills ramping faster than you expected or is that still split 50/50 as far as the growth that you mentioned? I think you had previously mentioned 50/50 growth?

[Worthing F. Jackman:]

Right now the E&P space is really the trifecta of growth if you think about it. As you’ve heard from other players in the space on the drilling side, or analysts that cover that sector, many folks have increased their expectations for wells drilled or linear feet drilled as the year progressed. I think we entered the year with most folks anticipating 5% to 6% increase on those statistics and at this point many folks are in the 12% to 15% range for the year and so you just have a rising tide of activity on the drilling side. You combine that with the other growth driver of increased customer outsourcing in a place like the Bakken, that gives you two drivers of growth. Then the third for us is the two facilities that are ramping. From a revenue standpoint, as we said on the call, a lot of the $3 million that was contributed in the period, $2 million of that $3 million came in March and frankly, very little contribution from the mud plant in the Bakken just because it was so damn cold up there. You’ve got to really wait until the weather thawed somewhat to start seeing some contribution from that facility and so that’s kind of a late Q2 or in the early Q3 where I think the EBITDA will start ramping on that facility. In the meantime, as Ron said, our landfill we opened in the West Texas Permian has ramped nicely. It’s contributing as landfills do at this stage and again, you look at those two facilities they ought to at a combined basis contribute between $5 million and $7 million of revenue in Q2 compared to the $3 million they contributed in Q1. Again, when you’ve got all three of those growth drivers working in your favor you see the kind of results that we’ve punched in Q1 and hopefully do it going forward.

[David Warner:]

Just finally, you had a pretty good contribution from working capital to free cash flow this quarter, was there any timing items that would affect that?

[Worthing F. Jackman:]

As we talked about on our February call, we focused long and hard since buying R360 on bringing the DSOs down in that business and I’d say those folks did a tremendous job in further improving DSOs. I think as a company now we are back near DSOs that we had prior to acquiring R360 and so I’d say kudos to us for all the efforts in that area.

[Operator:]

Your next question comes from Al Kaschalk – Wedbush Morgan.

[Al Kaschalk:]

Ron, I’ve got two questions. The first one, I’m still having a hard time, at least on my side, understanding the strength in C&D in particular, what market given the timeframe of the year with weather and generally economic activity. So, the first part of that would be is some of this a lag effect from maybe ’13 and now it’s showing up or, is it new projects that commenced in the year? If so, can you add a little further color than what you’ve shared already?

[Worthing F. Jackman:]

I’ll start out by saying again, you look at the strength in C&D that’s really persisted for some time now. C&D after we hit the lows in ’09 as you a precipitous drop in activity in many markets especially, in the west coast, that activity was cut by 70% or 80% from where it was pre-recessionary levels. Once we got that in the rearview mirror you’ve seen steady increases on C&D volumes on a year-over-year basis really since 2010. If I look at my statistics ’10 was up 19% in volume year-over-year coming off such a low base and it was up between single digits and double digits since then. Last year, the second and third quarter C&D was up almost 25% in both the periods. So again, we’ve seen this kind of strength before. We did not predict it would happen in a seasonal dipper of Q1 but obviously it continued peaking in March between all three months in that period.

[Ronald J. Mittelstaedt:]

The other thing I think you need to remember, not just you but anyone who is listening on our call, our mix of C&D is dramatically lower than the other public companies. They’re very cyclically exposed as we’ve seen in prior contractions. By the nature of our model we have a lot less C&D waste in our system. In fact, of our landfills we only have two that are even C&D only landfills so that’s less than 5% of our landfills are C&D landfills. We are comparing a relatively smaller denominator against a relatively small denominator when we talk about the percent increases. The other thing you have to remember is that we don’t compete for most of the C&D that occurs on the west coast up and down the west coast so to the extent there’s recovery in the west coast

[Al Kaschalk:]

Just to clarify, you’re able to put C&D waste in traditional landfills on the west coast or no?

[Ronald J. Mittelstaedt:]

Yes, we are. Most MSW landfills throughout the nation for us or anyone else in fact, I would say I’m not aware of any that deviate from this, an MSW landfill is a higher level of permitting, regulatory, and engineering than a C&D landfill so you can obviously take C&D waste into an MSW landfill. We calculate the C&D that we give you as the C&D that goes into our MSW landfills as well.

[Al Kaschalk:]

My second question, a little more strategic here, on the acquisitions you have done and the ones you’ve just made landfill orientated, I guess my question is do you see in the backlog, for lack of a better word, more permit opportunities for MSW or do you see it more for energy side? Then secondly, does your model permit you from looking into energy landfills related in places like Canada or is it still too early in their regulation?

[Ronald J. Mittelstaedt:]

A couple of things number one, it is rare, extremely rare for us to acquire a recently permitted yet undeveloped MSW landfill, or landfill on the MSW side so I would tell you in our backlog of things we are looking at it is much more highly likely that we would acquire an E&P related landfill and development than a MSW or C&D landfill and development because that rarely comes along. Secondly, actually the E&P sector or the energy waste sector, depending on who you want to ask, is more developed in Canada than the US. The US is quite far behind relative to Canada in regulation, maybe a decade or more behind. This is a very mature and developed industry in Canada, very robust. You’ve got three or four major half billion dollar plus revenue type players in Canada that do what we do in the US, or what we predominately do in the US in the E&P side. But that is not a market that we are looking at going into. Certainly not looking at it from going in permitting facilities. I would never preclude us from possibly acquiring one of the companies that was in Canada if we were to look at that strategically. We’re not today but there’s nothing that would preclude us from that. But, it is a much more mature business in Canada than the US.

[Operator:]

Your next question comes from Adam Thalhimer – BB&T Capital Markets.

[Adam Thalhimer:]

On the MSW side of the business where volumes were up 9% on the disposal business, how sustainable is that unless the economy really kicks into higher gear?

[Ronald J. Mittelstaedt:]

Well, we would tell you that we don’t know.

[Worthing F. Jackman:]

You read my mind.

[Ronald J. Mittelstaedt:]

We were surprised by it as well. The reality is that it’s sustainable but you’re going to start cycling eventually stronger quarters and mathematically the same amount of incremental tonnage will be a lower percentage. That part is just a math part, it doesn’t mean that the absolute tonnage isn’t increasing by the same. So, I would tell you that mathematically it’s not sustainable but that doesn’t mean it’s not going to be up 5% to 10% in the second quarter but there’s going to come a time, probably in the third as we’ve said, that that same amount is going to look more like 4% to 6% than 9%. We were surprised as well and I guess the good news is it’s there and we’re continuing to project it to be there for a while but it will not go on indefinitely.

[Adam Thalhimer:]

Can you guys just roll through the E&P site additions? Which ones are kind of definitely coming online in the next year and when? Then, you brought up a couple facilities in the Eagle Ford, what are the kind of development projects out there?

[Worthing F. Jackman:]

First off, obviously as we talked earlier this year late last year, we already have the two new facilities, one mud plant in the Bakken and one landfill in the West Texas Permian that are up and operating and contributing revenue. The landfill we just acquired, a second site, in the West Texas Permian, as we said in the press release and on the call, we’ll build that out this year and hope to open it within the next year or so, so perhaps as early as the end of this year or early Q2 next year. We’ll see what the timing is again, on the construction done on that and that should be up and contributing at that point in time. With regards to the Eagle Ford, we’ve been talking about getting a couple of facilities additionally permitted in the Eagle Ford now for a year and a half really. We’ve been working on these and R360 had been working on these before we acquired them. These were assets in process and permits in process along with the several others they’d been working on. We hope we’re closer to getting those done. I more east you move in the Eagle Ford the more likely it is to have some local opposition develop in some of these sites stretching out the permitting process. If we were fortunate enough to get one or two of those permits in place by Q3 then that would hopefully mean those sites would be open by late Q1 next year and after some customer approval process and kind of licensing process for truckers, etc., in midyear next year it could be when they start contributing. It’s just hard to predict the timing of when regulators will get through their process and allow us to proceed with construction.

[Adam Thalhimer:]

Then just lastly for me Worthing, with leverage being under three times now and your commentary about acquisition difficulty, I’m just curious how you think about capital deployment?

[Worthing F. Jackman:]

I think we’ve been consistent in saying that growth of capital deployment is the highest and best use of capital. Obviously, we’re always working on acquisitions and I would hope to get a couple of things done in Q2 as well. But again, we’re also balancing deployment of capital on that side with share repurchases and it’s possible we turn the buy back on in Q2 again, dependent on what we see on the M&A side.

[Operator:]

Your next question comes from Michael Hoffman – Wunderlich Securities.

[Michael Hoffman:]

You implied Worthing, in your 3.5 to 4 guidance that 2.5 of that is price so not to nitpick too much, but you did a 2.9, that’s the sequential dip before you get the CPI in there so is this just a conservative view of aggregate pricing or you can feel the slight slide beginning?

[Worthing F. Jackman:]

It’s what we said happened in February, we guided price for the full year at 2.6% or so. We said it would come out of the blocks higher than that in Q1 and it has. We’ll probably be at 2.6% or so for Q2 and Q3 and maybe slightly below that. That has nothing to do with the pricing environment, it has more to do with when we implement pricing which is mostly Q1, it has when we anniversary pricing which we did last year, and it has some lower CPIs that kick in in the July timeframe that influences the second half of the year. It really is playing out exactly how we said it would in February.

[Ronald J. Mittelstaedt:]

The other thing is again, just a math situation. We report to you permanent price increases, net permanent price increases so the gross price increase down less any roll backs or losses to the price increase. That’s what you get as a net number. Now, what that doesn’t do is track temporary roll off price. Temporary roll off volume moves up in Q2 and Q3 so your revenue denominator is higher against a fixed permanent price increase number. That’s where the math changes.

[Michael Hoffman:]

I know you answered this somewhat on the volume side and it seems the volumes are on everybody’s mind, on a same store basis if you looked at a commercial collection route structure, the trend is volumes are continuing to rise?

[Ronald J. Mittelstaedt:]

That’s correct.

[Michael Hoffman:]

We’ve been on a steady rise now, this would be really your third solid quarter of that, 2Q, certainly 3Q/4Q and maybe there was even an indication in 2Q ’13.

[Ronald J. Mittelstaedt:]

Yes, I would agree with that.

[Michael Hoffman:]

My guess is that if you’re driving behind commercial operations on a weekly basis you’re seeing lids popped up more often than not so by definition the trend is moving in the right direction albeit relatively muted and the service interval issue can’t be predicted but it can’t be that far away can it?

[Ronald J. Mittelstaedt:]

We’ve been thinking that for a couple of quarters now and we actually saw it start to move up in Q2 and Q3 of ’13 had a pretty nice ramp going to it of increases outpacing decreases. Then since Q3, meaning Q4 and Q1 it sort of come down a little. It’s still positive but it’s flattened out which has surprised us somewhat, it didn’t continue on the same trajectory that we thought it would, it’s flattened out. So yes, at some point that does occur Michael, you’re correct but for me to sit here and tell you that it’s going to be next quarter is just a guess because I don’t know. I’m sitting here looking at a chart that had a great upward slope and then flattened out to come down the next two quarters.

[Worthing F. Jackman:]

Just like disposal volumes, we’re not going to sit here and try to predict when MSW increases. When it happened we told you about it and started taking it in. We can’t sit here and predict when the turn that you’re looking for is going to start but obviously, when it happens we’ll be the first to report it and start baking it in going forward.

[Ronald J. Mittelstaedt:]

Obviously, for MSW to be up 9% coming off the heels of 13% the prior quarter, the weight is there. As you know, we don’t necessarily charge by weight on the commercial side, but the weight is there, that’s why volumes at the landfill are higher than volumes overall at 2.5%. So, it’s coming meaning ultimately this translates to conversion on the street but we’re just not there.

[Michael Hoffman:]

To that 9% do you have a sense that those trucks that are driving across, the third-party guys, are those more commercial routes or is it hard to tell?

[Ronald J. Mittelstaedt:]

Well, it’s commercial and residential. It’s both.

[Michael Hoffman:]

So clearly there’s a behavior on the consumer that suggests those volume patterns hold at the moment?

[Ronald J. Mittelstaedt:]

We would concur with that at the moment, yes.

[Michael Hoffman:]

Did you pay all your bills really fast in the first quarter? It looks like your payables dipped a bit or is it a timing issue based on the way the quarter ended?

[Worthing F. Jackman:]

A timing issue. When the quarter ends on a Monday you can see some flux in that but I wouldn’t read anything else into it.

[Michael Hoffman:]

We just have to sort of balance that out between 1Q and 2Q because you have a really big cash outflow related to taxes, interest expense, and what have you in the second quarter so we need to remember that?

[Worthing F. Jackman:]

That’s right, it might skew that offset a little bit by the payables getting back to normal.

[Michael Hoffman:]

If you listen to E&P operators doing their calls in the US, the US operators are all sort of very boisterous of, “We’re going to spend 12 months of capital in nine months,” then they’ll talk about all of the weather issues that impacted them in 1Q but their intentions spend 12 months of capital in nine months, are you seeing that as well?

[Worthing F. Jackman:]

What nine months are they referring to? Are they referring to April to December given the tough weather in Q1?

[Michael Hoffman:]

Yes.

[Ronald J. Mittelstaedt:]

Yes, we’re hearing the same thing and effectively seeing the same thing. As you know, this is a basin driven business. I mean, it’s not as local as our waste business but it’s still pretty local meaning it’s by basin. A basin like the Permian is up 25% year-to-date in terms of wells drilled, feet drilled so that basin is clearly outpacing that 12% to 15% you’re hearing. But, that is consistent with what we’re hearing.

[Michael Hoffman:]

There seems, as I talked to operators, the outsourcing thing is clearly inevitable there’s no denying it on their part, if they’re buying leases they’re doing environmental audits, they’re taking off the top on pricing if you’ve used pits and ponds, things of that nature. But they’re starting to talk about a total waste management solution. They’re looking for operators, service providers, to do more and more of the whole logistic management because of the sheer volumes and the complexity issues they need to recycle on both solids and liquids. How is that impacting how you think about your business model?

[Ronald J. Mittelstaedt:]

Here’s what we’re seeing, it is different by customer by basin. The reality is that we have customers that want a one stop shop, they want us to manage everything from the well head out that comes up so, transportation, everything. There are other customers that say, “That is the fox over the chicken coop, there is no way we’re having one company do the whole thing because you have an incentive to give yourself too much into the disposal category versus what we would like to see recycled and reused.” The reality is it is really a customer driven decision and you have to be able to do both. The good news is for us the hardest thing to do is the disposal side, as others are finding out. That’s where the real barrier to entry is. To do the trucking piece, or to do the solid’s management, that’s pretty easy.

[Michael Hoffman:]

Then last thing for Worthing, you opened the year with cash flow from operations about 25.5 of sales, is that still sort of a target for the year or does that look like it might shift up a little?

[Worthing F. Jackman:]

We’ll provide a formal update on the outlook in July.

[Operator:]

Your next question comes from [Unidentified Analyst] – Credit Suisse.

[[Unidentified Analyst]:]

Just one quick question from me, can you give us an update on landfill pricing in Louisiana basin post the Puente Hills landfill closure? Is that still an opportunity or are there structural issues in that market preventing higher prices?

[Ronald J. Mittelstaedt:]

I think you mean [inaudible] read out LA as Louisiana but the LA basin, the Los Angeles basin where the Puente Hills landfill closed and what we are seeing, and I believe the other participants in that market are seeing, is we are seeing a uptick in volume at our Southern California landfill there, our Chiquita Canyon landfill and we are not really seeing an uptick in price per say in that market because some of the surrounding counties such as Orange County, Riverside County, and San Bernardino County have decided to allow some waste from LA County into their sites at a very discounted level and some of the private operators are taking advantage of that. So, the price expectation that I think us, and Waste Management Republic had for that market, I would say has been delayed for a period of time. But the volume increase has begun and that began in the late fourth quarter of ’13 and has continued into the first quarter. That was one reason volumes were up in Q1 on the MSW side relative to last year and we’re up 9%, because we are getting incremental volume at our Chiquita Canyon landfill because of the fourth quarter closure of Puente.

[Operator:]

Your next question comes from Alex Ovshey – Goldman Sachs.

[Alex Ovshey:]

A couple of questions, first on the second quarter guide I think it implies that EBITDA margins are going to be up about 50 basis points year-over-year versus 160 in the first quarter? I know we talked about the volume comparison being a lot more difficult, is there anything else you would call out about the second quarter of last year that would make it a more difficult comparison versus the second quarter of this year relative to how we saw it in the first quarter of this year versus last year?

[Worthing F. Jackman:]

Let’s start with remember that we only guided up to 80 basis points in Q1 and the relative outperformance of that was drive off of a beat on higher margin revenue and maybe that occurs again in Q2. But, what I would also say is that Q1 of last year we had also called out some startup costs around E&P as well as some integration and transition costs in the acquisition of R360 that hit us in Q1 and so I’m not surprised that the margins are up the strongest in our E&P business in Q1 because of that and again, how E&P ramps during the year again, will primarily drive whether or not we will continue to exceed our expectations. The good news is we guided margins for the full year up about 50 basis points and if we do our outlook in Q2 we effectively delivered the full 50 basis points for the full year in just the first half of the year so mathematically we would have already gotten there so really leaves the second half of the year to be a pure upside on a margin beat basis.

[Alex Ovshey:]

Maybe the other part of that question, I believe in your current full year guidance you’re saying that your E&P margins will be up about 200 basis points full year ’14 versus ’13. Does that essentially reflect the 500 basis point increase in the first quarter and then the comp gets more difficult so it should trend lower from there? Is that sort of the right way to think about it at this point in the year?

[Worthing F. Jackman:]

Again, any margin beat we’ll have in the year will be primarily due to what happens in E&P and to a lesser effect what happens in solid waste because we’ve already guided nice margin expansion in solid waste. Again the [inaudible] you have on E&P because of higher margin activity again, if we are able to continue to beat 15% growth on revenue year-over-year quarter-to-quarter-to-quarter then you’ll see a beat on the margins because you would expect to see a landfill oriented business have that kind of flow through. So, it really depends on how E&P ramps. Again, at a 12% to 15% growth year-over-year we guided E&P margins up full year about 200 basis points. We’ve always said Q1 was going to be the easiest comp and to the extent we continue to see 15% you’ll see us continue to exceed or be on a trend to exceed the full 200 basis points in the year.

[Alex Ovshey:]

Then just turning to the solid waste business, did you actually say what your commercial and residential collection volumes were up in the first quarter of this year? I think I may have missed that if you said that.

[Ronald J. Mittelstaedt:]

You didn’t miss it because we didn’t say it.

[Alex Ovshey:]

Can you say?

[Ronald J. Mittelstaedt:]

I don’t have that right in front of me but I would estimate that they were up about 2%.

[Alex Ovshey:]

One last question, any incremental updates to just the regulatory environment around the E&P business for the last quarter?

[Ronald J. Mittelstaedt:]

Well, there’s been no incremental regulation of any substance passed since the last quarter. But, I will tell you that the rhetoric at multiple states around increased regulation is starting to grow pretty quickly. We continue to believe that there will be both the state and potentially federal level regulation and that dramatically impacts the size of the market opportunity.

[Operator:]

Your next question comes from Derek Sbrogna – Macquarie Securities Group.

[Derek Sbrogna:]

I just wanted to ask, I know we talked a lot about it, some of the E&P development landfills, how does the multiple compare on a development stage landfill versus something that maybe already fully operational?

[Ronald J. Mittelstaedt:]

It compares very favorably generally. Obviously, with an operational landfill you are probably valuing it on future cash flows and projected cost of building out air space over time, etc., you’re probably getting into a multiple of, I’m just going to say, five to seven times EBITDA of what that site is sort of running at. Obviously, that [inaudible] operator has put all the infrastructure in, has put the equipment in, has gotten customers, you’re paying for what they have done. On a development landfill, depending on what stage it’s at, you’re paying for the permit, you’re going to put the capital in to develop the site, to put the equipment there.

[Worthing F. Jackman:]

That outflow goes through capital expenditures not acquisition outlays.

[Ronald J. Mittelstaedt:]

Yes. Then you’re probably giving the former owner some sort of success payment at certain hurdles in time and in performance. So, all-in maybe 1 to five or six multiple, the other end is up between a 2.5 and a four multiple because there’s more risk therefore there’s more risk to it being successful than buying a site that is already up and running.

[Worthing F. Jackman:]

If you look at what we said on the call, we said that once these two landfills are fully ramped in the second half of ’15 we could think on a combined basis they will contribute about $10 million of EBITDA. If you set that aside for a second, if you looked at the cash flow statement we spent about $27 million to buy these two sites, we said we’re going to invest about $10 to $15 million to build them out, that’s about a $40 million total outlay. Look at that against a $10 million annualized EBITDA you get back to what Ron laid out for you, about a 4x multiple.

[Derek Sbrogna:]

It sounds like there’s some potential that they could be ramped up by the end of the year. How does the overall timeline, if you compare one of these development stage, how long does the permitting process typically take and how much time does buying one of these facilities at the development stage typically cut out of an overall time line?

[Ronald J. Mittelstaedt:]

You have to bifurcate what we did. When you’re talking about a MSW or a C&D landfill in most places of the country, particularly a place like New York with a high regulatory hurdle as well as political and local, you’re talking about a three to a 10 year permitting process and in some cases more. It’s a long lead time on a development stage project. That’s why I said on the one we announced, which was a C&D site, we have been working on it for over two years with the prior owners. On the E&P side, that can be a two to a four year process for a disposal site. It is not as high regulatory hurdle as a MSW site. They tend to be near the shale plays which have lower population bases so the politics are a little easier. But make no mistake about it, whether it’s an E&P site or anything else, a landfill is a difficult permitting proposition and not from an engineering standpoint but from a political standpoint.

[Worthing F. Jackman:]

We talked about the ramping happening in the second half of ’15 not the end of this year.

[Ronald J. Mittelstaedt:]

We could get them opened by the end of this year but we think the ramp will be in ’15.

[Derek Sbrogna:]

Then just one more, maybe high levelly, we talked about it seems like the volumes are improving here and we talked about the service level increases, the other thing that we kind of look for to kind of really see that volume accelerate has typically been new business starts. I’m wondering if we need to see those start to accelerate before we kind of get volume back above the 3% level? Just any kind of general commentary on whether you see that coming back and whether we really need those to come back before volume accelerates?

[Worthing F. Jackman:]

I’d start by saying clearly new business starts is a big driver of growth on the commercial side. It also helps on the pricing side because where you have competition, we have new accounts to go for versus trying to feed off of each other’s accounts so new business starts is a critical success factor within commercial. We have not seen that in this recovery, that’s the one thing that’s been missing in this recovery. I would hope that again, improving macro, improving confidence, and hopefully loosening credit standards to get the small business owner back in play would help business starts reignite.

[Operator:]

Your next question comes from Tony Bancroft – Gabelli & Company, Inc.

[Tony Bancroft:]

[Inaudible] consistent to how you view they’ll eventually play out as far as the E&P waste in each basis and the joint projections that are currently in place and your estimates of those. On an order of magnitude level how do you estimate how many more of these landfills in each of the basins need to be permitted or done just in a macro sense? Is it going to be like a few more or do you have any numbers around that?

[Ronald J. Mittelstaedt:]

The first part of your question cut out, I’m not sure why, but I think you were asking in our E&P business do we have an idea of how many additional landfills by basin might be needed to developed? Is that the question?

[Tony Bancroft:]

Yes. Obviously, it is a hard thing to guestimate but using all the current regulations and estimates for [inaudible] drilled, do you have something like an order of magnitude of each basin of what you’d estimate?

[Ronald J. Mittelstaedt:]

We do internally obviously, that’s not something we share externally because it’s a fairly critical proprietary information. But, what I would tell you is that there are an adequate number of landfills by basin today unless there is state and federal enforcement. If there is, then you’re probably talking about approximately another third or 35% of disposal sites needed to be built pretty much by basin to adequately handle if all E&P waste was required to go into a landfill versus an onsite reserve pit. That’s a little more than a guestimate but it should be pretty close.

[Worthing F. Jackman:]

I suspect you’ll see the most activity continue in the Bakken as well as in Texas both in Eagle Ford as well as the West Texas Permian.

[Tony Bancroft:]

Just one last quick one, just any update with [MLPing] the R360 sort of like long run time line, when do you view the EBITDA sort of going to critical mass where it would make sense? Is it a long five year play, any kind of estimate would be helpful?

[Worthing F. Jackman:]

I [inaudible] no update on that side but what I will add is if you look at the popular press you will see that the IRS has basically shut down last year rulings on potential REITs. That has now bled into [MLPs} and now there’s a working group looking at [MLPs] as well. According to what I read in the press, not only they’re looking at what are the right tax assets and the right tangents of the business that would qualify as [MLP] but they’ve also said they will take another look at what they have granted rulings for in the past. I guess their wondering is have they gone too far away from the actual drilling process of these natural resources. I guess the best example is the taco truck. A taco truck drives up onto the site, serves tacos to the rig, is it [MLP] able and I think the answer to that is no. We sit back and read what’s going on in the popular press and we’ll just stay abreast of that.

[Operator:]

Your next question comes from Barbara Noverini – Morningstar, Inc.

[Barbara Noverini:]

I appreciated your earlier comments on valuation in the sector and I’d expect the same to be true in the E&P services space. If there is indeed a lack of attractively valued acquisition candidates in E&P how does that affect your ability establish what I’ll call a service entity or this total waste management solution around your disposal assets for those customers that do want it? If you stay on the sidelines does this open up the opportunity for competitors to chip away at that first mover advantage that you’ve built in the shale plays if they do increasingly demand this total solution going forward?

[Worthing F. Jackman:]

You’ve got to remember on the solid side, the solid side does $800 million to $1 billion in revenue, and if you look at us being comfortably 25% to 30% of that we already have the density within the basin that we operate in. Obviously, these basins cover a lot of geographies so there is a position for us to be a multi asset player in these markets and you see us already double down in the West Texas Permian. I expect over time you’ll see us get another asset or two within the Bakken and so really it’s the density on the disposal side in kind of the geography that you cover that’s most important in these basins and being in the right plays is also critical. As Ron said, when you look beyond the solid said, it’s not our view that being in the liquids or being in the trucking side are as critical because especially on the trucking side, where appropriate, we could team with other players in the marketplace. It’s not uncommon for three E&P companies to have a list of a dozen or so truckers that have already been prequalified to go on their rig site and as long as you’re working with one of those prequalified players then we can provide a kind of total solution where appropriate based on the customer’s needs. Obviously, as we said all along, being in the liquids business for us, we view that as a much lower barrier to entry business and not one that we’ll be pursuing. So I guess from a solid side in the US we already are by far the largest player and again, we’ll be expanding our footprint when broadening our geographic coverage within certain basins.

[Operator:]

This concludes our question and answer session for today’s call. I’d now like to turn the call back over to Mr. Ron Mittelstaedt for closing remarks.

[Ronald J. Mittelstaedt:]

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 Maryann Whitney are available today to answer any direct questions that we did not cover that we are allowed to answer under Regulation FD and Regulation G. Thank you again and we look forward to speaking with you at an upcoming investor conference or our next earnings call.

[Operators:]

Ladies and gentlemen this concludes today’s conference. Thank you for your participation you may now disconnect. Have a great day.