Waste Connections Inc (WCN) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, October 27, 2016. I would now like to turn the conference over to Ron Mittelstaedt, Chairman and CEO. Please go ahead.

Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call discuss our third-quarter 2016 results and provide our financial outlook for Q4. I'm joined this morning by Steve Bouck, our President; Worthing Jackman, our CFO, and several other members of our Senior Management team.

As noted in our earnings release, our financial results continue to track at or above the increased expectations we communicated in August. We are extremely pleased that safety, pricing, and operational improvements within recently acquired operations continue ahead of schedule. Adjusted free cash flow remains notably strong at $205.8 million in the third quarter, which reflects our first full quarter of combined operations since completing the Progressive Waste acquisition. Adjusted free cash flow on a year-to-date basis, which only includes four months of combined operations, was $440.3 million, or 18.9% of revenue.

Our strong free cash flow profile following Progressive merger positions us for an outsized 24% increase in our quarterly cash dividend while maintaining our payout ratio at less than 20% of expected annual free cash flow. This financial strength and flexibility, together with our expanded footprint following the merger, keep us well-positioned to exceed our growth strategy at a time when acquisition dialogue is near record high levels, all while increasing return of capital to shareholders. 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. The discussions during today's call include forward-looking statements made pursuant to the Safe Harbor Provisions of US Private Securities Litigation Reform Act of 1995 and applicable Securities Laws in Canada. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties.

Factors that could cause actual results to differ are discussed both in the cautionary statement on page 2 of our October 26 earnings release and in greater detail in filings that have been made by Waste Connections, formerly named Progressive Waste Solutions Limited, and Waste Connections US, Inc., with the Securities and Exchange Commission and the Securities Commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements, as there may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's date.

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.

Finally, reported results reflect the impact of our merger with Progressive Waste on June 1. Contribution from this combination will be treated as acquired revenue and will not be incorporated into our organic growth statistics until 12 months from the closing date. I will now turn the call back over to Ron.

Thank you, Worthing. In the third quarter, solid waste core price and organic volume growth was 3.7%. Core price increases in the period were 2.6% year over year, with total pricing growth net of surcharge reductions of 2.3%. Core price is on target to be about 2.7% for the full year.

Volume growth in Q3 was 1.1%, driven primarily by the West Coast, where we have seen strength for the past several quarters. A year-over-year decline in special waste activity in Minnesota was about a 70 basis points drag to volume growth in the period and is expected to continue in Q4 as certain projects in that market have been pushed into 2017. For the full year, we expect our volume growth to be around 1.7%, with core price growth-plus volume of about 4.4%.

We believe the volume growth environment remains in the range of about one We believe the volume growth environment remains in the range of about 1% to 2% under current economic conditions. They could run a little above that range in some periods due to the timing of special waste activity or items within a prior-year comparison. As we've consistently communicated, we try to be conservative in guiding volume growth, particularly given that 2016 is the fourth year of strong MSW volumes.

The deeper we get into this recovery, the tougher we expect the comparisons to be, unless the economy shifts into a higher gear which, with housing starts still running around 1 million units, we're not yet seeing or expecting. As a reminder, until the anniversary the Progressive Waste acquisition, a 50 basis point change in volume is currently about $2.5 million of revenue in a quarter. Volume growth in the third quarter was primarily driven by double-digit increases in MSW disposal volumes, along with higher commercial collection and role-off activity.

MSW tons increased 11% in Q3, with about 75% of our landfills reporting higher MSW tons year over year in the period. Special waste and C&D tonnage for each down 6% due to the previously discussed decline in special waste activity in Minnesota and tough C&D comps at landfills. Solid waste landfill tonnage overall on a same-store basis increased 3% year over year in the third quarter.

On a same-store basis, commercial collection revenue increased almost 7% year over year in Q3 and roll-off pulls per day increased about 4%. All regions reported higher roll-off activity compared to the year-ago period as pulls per day increased about 8% in our Eastern region, 3% in our Western region and 2% in our Central region. Increases were widespread, with notable exceptions in both coal and E&P influenced tonnage

Recycling revenue, excluding acquisitions, was $13.9 million in the third quarter, up almost $1.9 million, or about 15% year over year, due primarily to higher commodity values for fiber. Prices for OCC, or old corrugated containers, averaged about $123 per ton during Q3, up 11% from the year-ago period and up 18% sequentially from Q2. OCC prices currently are around $115 per ton, up about 8.5% from the level we averaged in last year's fourth quarter but down off of Q3's highs.

Regarding E&P waste activity, we reported $30.1 million of E&P waste revenue in the third quarter, consistent with our revenue guide for the period, with segment EBITDA margins of about 30%. Monthly revenue is up as much as 20% from its low earlier this year, with margins almost 500 basis points above the trough. As a landfill-oriented business, any revenue growth resulting from increases in drilling activity should flow through at high incremental margins.

Moving onto the Progressive Waste acquisition, as noted earlier and in our press release, results continue to track at or above the increased expectations we communicated in August and we are extremely pleased that safety, pricing and operational improvements continue ahead of schedule. October safety related incident frequency for Progressive's legacy operations is currently trending about 40% lower than pre-acquisition levels. To put that in perspective, in September and October, as a total Company, we had fewer incidents than Progressive Waste had a standalone company in many months throughout 2015.

Pricing improvement initiatives within Progressive's footprint are also well underway, resulting in price increases within these markets expected to range between 2.5% to 3% in Q4, up from less than 1% in Q1. Our focus remains on improving the quality of revenue within Progressive's operations to drive higher EBITDA from less revenue, reduce the CapEx intensity necessary to generate the EBITDA and therefore convert a higher percentage of EBITDA to free cash flow.

As mentioned already, this involves a heavy focus on price improvement but an equally heavy focus on shedding unprofitable volumes. The adjusted EBITDA margin of Progressive's operations before corporate overhead was about 30% in the third quarter. We are extremely pleased to have reported over $200 million of adjusted free cash flow in Q3, which was the first full quarter of combined operations since completing the Progressive Waste acquisition.

Regarding other potential M&A activity, acquisition dialogue is near record high levels. These opportunities include new market entries and tuck-ins, competitive and exclusive markets, integrated and non-integrated opportunities. In some instances, concerns over potential post-election tax laws are driving the timing.

Additional transactions in the pipeline that may get completed either later this year or early next year should easily surpass the $120 million of acquired annualized revenue we thought we would complete in average year based on our expanded footprint following the Progressive merger. Similarly, interest in market divestitures or asset swaps remains very high and we will look to complete that process by Q1 of 2017.

We currently expect to rationalize about $225 million in annual revenue and through swaps obtain approximately $100 million to $125 million of annual revenue in return, but with greater EBITDA coming in than what is going out. Once completed, this should at about 100 basis points to consolidated Company margins and reduce our CapEx as a percentage of revenue, driving even higher conversion of EBITDA to free cash flow. We currently have two to three options on each of the potential asset rationalizations.

Finally, as also announced yesterday, our Board of Directors authorized a 24.1% increase in our quarterly cash dividend, our sixth consecutive double-digit annual increase since commencing the dividend in 2010. Even with this increase, our dividend remains less than 20% of our expected annual free cash flow following the merger, providing tremendous flexibility to fund our growth strategy and further increase the return of capital to shareholders. Now I'd like to pass the call to Worthing to review more in depth the financials highlights of the third quarter and to provide you an outlook for Q4.

Thank you, Ron. In the third quarter, revenue was $1.085 billion, or about $10 million above the upper end of our outlook for the period. Acquisitions completed since the year-ago period contributed about $538 million of revenue in the quarter, with Progressive Waste accounting for $513 million of that amount.

Adjusted EBITDA, as reconciled in our earnings release, was $342.3 million, or 31.6% of revenue, and in line with our margin outlook for Q3. The year-over-year adjusted EBITDA margin reported for the third quarter declined by almost 300 basis points, primarily due to the comparative lower margin profiles of the Progressive Waste operations acquired since the year-ago period and, to a lesser extent, the impact of lower E&P activity. Fuel expense in Q3 was up 3.7% of revenue and we averaged approximately $2.33 per gallon for diesel, which was down about $0.46 per gallon from the year-ago period and $0.16 per gallon sequentially from Q2.

Depreciation and amortization expenses for the third quarter were 14.1% of revenue. The 155 basis points year-over-year increase as a percentage of revenue was primarily due to acquisitions completed since the year-ago period, as D&A expenses was about 15.6% of incremental revenue contributed from the Progressive Waste acquisition, or over 300 basis points higher than legacy Waste Connections. Acquisition accounting typically increases our D&A as a percentage of revenue following a material transaction, due primarily to the expensing of that portion of the purchase price allocated to both intangibles and landfills. But as we've noted before, while a higher D&A percentage impacts GAAP results, it has no impact on free cash flow generation.

Interest expense in the quarter increased $11.3 million over the prior-year period to $27.6 million, due to the additional debt outstanding resulting from acquisitions completed since the year-ago period and higher interest rates associate with fixed-rate notes issued since the prior-year period. Debt outstanding at quarter end was about $3.66 billion and our leverage ratio, as defined in our credit facility, decreased to less than 2.8 times debt to EBITDA.

GAAP and adjusted net income per diluted share in the third quarter were $0.50 and $0.72, respectively. Adjusted net income in Q3 excludes the impact of almost $38 million, after tax, of acquisition-related items such as amortization of intangibles and certain items related to the Progressive Waste acquisition, including severance-related costs, accrued synergy bonus and professional fees.

Our effective tax rate for the third quarter was 32.3%, which included a $2 million impact to the provision associate with the change in deferred tax liabilities resulting from the Progressive merger. Excluding the acquisition-related deferred tax item, our effective tax rate was closer to 30.8% in the period. We still anticipate our effective tax rate to be between 30% and 31% subject to some variability depending on the percentage of total profitability contributed by operations in the US versus Canada.

I will now review our outlook for the fourth quarter. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and filings we've made, and Waste Connections US, Inc. has made, with the SEC and Securities Commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully.

Our outlook assumes no change in the current economic and operating environment. It also excludes any remaining severance, integration costs or other items resulting from the Progressive Waste acquisition and any additional acquisitions or potential divestitures that might close during the period.

Revenue in Q4 is estimated to be about $1.02 billion. We expect core price plus volume growth for solid waste to be between 3% and 3.5%. Adjusted EBITDA in Q4 is estimated to be almost $315 million, or about 30.8% of revenue.

Depreciation and amortization expense for the fourth quarter is estimated to be about 14.4% of revenue. Amortization of intangibles in the quarter is estimated to be about $27.4 million, or a little more than $0.10 per diluted share, net of taxes. Operating income for the fourth quarter is estimated to be almost 16.5% of revenue.

Interest expense in Q4 is estimated to be about $27.1 million. As mentioned earlier, our effective tax rate in Q4 is estimated to be up to 31%, subject to some variability. Non-controlling interest is expected to reduce net income by about $200,000 in the fourth quarter and finally, our fully diluted share count in Q4 is estimated to be about 176 million shares.

Now let me turn the call back over to Ron for some final remarks before Q&A.

Thank you, Worthing. Again, we are quite pleased that our financial results continue to track at or above the increased expectations we communicated in August. We are extremely pleased that safety, pricing and operational improvements within recently acquired operations continue ahead of schedule.

Our adjusted free cash flow remains notably strong over at $200 million in Q3 alone, the first full quarter of combined operations following the Progressive merger. Our strong free cash flow profile enables us to announce a record increase our quarterly cash dividend while also maintaining tremendous flexibility to fund our growth strategy, particularly important given record M&A dialogue.

In addition, our revenue and EBITDA look for Q4 is consistent with the sequential Q3 to Q4 expectations we provided back in August and we have no reason at this point to alter the early thoughts for 2017 that we also had provided. We'll be better positioned in February when we provide our formal 2017 outlook to incorporate the impact of any acquisitions and divestitures either signed or completed by that date.

We appreciate your time today. I will now turn the call over to the operator to open up the lines for your questions. Operator?

Thank you.

(Operator Instructions)

Tyler Brown, Raymond James.

Good morning, guys. Nice quarter. Ron, I believe post the deal you guys had talked about getting back to call it a 32% EBITDA margins by maybe 2018 or so. This quarter, you guys posted about a 31.6%.

I get it, that Q3 is probably one of the better quarters, but it sounds like you have 100 basis points of margin uplift potential from divestitures. You've got some additional opportunity from heres and theres with insurance and safety. It really doesn't even contemplate E&P or even a full round of pricing at Progressive. I guess my question is, why shouldn't we start to think about 2017 margins coming in closer to that 32% and maybe even 33% into 2018?

Well, Tyler, you just laid out what we believe is achievable. You laid the building blocks out properly. It's hard to argue, since we did just do 31.6%. We did just say there's another 100 basis points through the rationalization, so that takes you to 32.6%. We said there's about 50 basis points in safety. We're on track for that. That takes you to 33.1%. That is before we really improve pricing and other operating things. Now, that also takes you to that in the best seasonal quarter of the year, too.

In fairness, I think we now believe, cautiously, that we can get 2017 to a 32%-type EBITDA margin, where we thought that would take us a fully into 2018. I think it's reasonable to think that we can get well beyond that, probably approaching 33% in 2018, and that is without E&P help. If we get E&P help, then that number is north of 34% pretty quickly, which is where we were, as you know, before the deal and before some declines in E&P. It's a long way around the bend to say we thought ultimately post deal because of the lower margin profile of Progressive overall that if we got back to 32% would be happy. We now see a pathway to get to 33% to 34% on the margin side.

Very, very helpful. Worthing, one follow-up here. Hoping to deconstruct free cash flow next year. If we start with, call it, that [1.365] or so in EBITDA and you take out maybe [mid-400s] for CapEx, you got some cash interest, some cash taxes. Is it crazy think about free cash approaching that $700 million mark sometime next year for the full year next year?

There is math that gets you at least $700 million for calendar year 2017.

Okay. Perfect. Thanks guys.

Derek Spronck, RBC Capital Markets.

Thanks for taking my question. On the acquisition front, is the environment an opportunity lending itself more towards tuck-ins or are there more material acquisitions that could develop?

Derek, again, as we just said in the call, we have got all of the above. We have standalone platform transactions. We've got tuck-ins. We've got integrated opportunities. We've got franchise opportunities. We are really seeing a variety of things come available in part due to a potential fear of tax raises depending on who wins the White House this year in November.

It is a combination. Again, I would caution, materials, and everybody defines material differently, but what we said is that we thought an average year would be $100 million to $120 million in our new platform a year, and we're saying that the number ought to be well north of that. There obviously is some reasonable sized, in our model, standalone transactions to get to those kinds of numbers.

Is that partly why you were not really that active with your NCIB the past few months after announcing the 8.8 million share buyback?

That is right. As we've always said, we think properly priced, strategically consistent acquisitions are our highest and best use of excess capital. Given what we see in the pipeline, we stayed out of the market during Q3 while we see what deals actually do get across the finish line.

That makes sense. Can you do more material acquisitions or larger scale acquisitions as you are currently in the midst of integrating the BIN assets?

People forget that we already did $2 billion-plus of revenue this year.

Derek, again we're not sitting here saying we're doing -- as you know, we're not sitting here saying we're doing something the size of Progressive, because that doesn't exist. Can we do numbers north of our $120 million by 1.5 to 2.5 times? Yes, we can.

That level, that speaks to our divisional and our regional field infrastructure. They can absorb those types of things, especially as it's spread out, whereas the Progressive merger has put obviously tremendous resources, constrained on the corporate group because of the size of it, but our field infrastructure can do several hundred million dollars and continue to still deal with the integration of Progressive.

That's great. One more, quickly. Are you able to leverage -- being now domiciled in Canada, are you able to leverage that better for US acquisitions?

We may -- we do that evaluation on every deal we do. To the extent there is some planning we can do, we will pursue it. It is really on a case-by-case basis.

That's great. Thanks a lot, guys.

Al Kaschalk, Wedbush Securities.

Good morning, guys. It looks like you sent a new -- set a new benchmark for free cash flow as well as the conversion of EBITDA to free cash flow for not only yourself but for the industry, so keep up the good work.

Thank you.

Ron, I had a question on your M&A comments and portfolio commentary. It sounds like you are, without putting words in your mouth, exiting the New York area based on the commentary. But you also said that there are some competitive markets that you are looking at from an M&A perspective, which is slightly different than the legacy Waste Connections, but I'm sure still very focused on the right returns. If you could add a little more commentary around those comments.

Al, are you exiting the securities research industry? We have not publicly mentioned any markets at all, so I wouldn't put words in our mouth with regards to New York City.

I was going to say, I don't think we said we were leaving New York. People may draw that conclusion because obviously it's a heavily urban-centric market but I will tell you that the margins in New York are up over 2.5 times since April. Just as a cautionary word on people guessing what we are or are not doing.

And the safety performance has been nothing short of exceptional.

We don't talk about any markets we may or may not be in until we're not there or we are there. I will tell you our New York team has done an incredible job since before the close. Having said that, Al, as you know, we have always tried to do a couple of different things in our market model. That is enter markets where we can ultimately have the business perform less like a commodity than it might otherwise, where we can create a greater sustainable pricing platform and a more predictable volume platform and therefore in margin profile and therefore free cash flow profile.

That is ultimately what we do. When we can get into -- we do that through contract markets, which is a hallmark of the Western US and off of that, outside of the Western US, we go into competitive markets. They may not all be urban-centered, and in fact aren't, but competitive markets where we can get large collection positions and an integrated disposal position and those are the things we look for in competitive markets.

The transactions we looking at doing continue to fit that profile. We're not deviating. We've said all along the larger profile -- footprint profile of Progressive, that 85% plus of it was consistent with our market platforms, the 15% that wasn't we would take a hard look at and we are doing that. But we're not changing our market strategy or our return strategy because we have a bigger profile footprint now. I guess that's a long way around the barn to tell you nothing has changed in our M&A thought process. What has changed is we have a larger platform and we have less competitors competing for that M&A opportunity. That's what has changed.

That's very helpful. I didn't mean to imply what you'd heard. On a follow-up question, Worthing, on the tax rate, I know it's obviously about jurisdiction and where revenue is coming in, or income, but 31% seems a little bit above maybe what thoughts were. Is that still something you are working on? Is that where we will be level setting going forward? What are the thoughts there?

The range of 30% to 31% is still consistent with what we said in our last call. We also have reminded people since the day we announced the transaction, really, is that the more improvement we get into the US operations and Progressive and raise the profitability in the US, that tax rate will click up a little bit. For us to have already gotten Progressive to a 30% EBITDA margin, you are starting to see us move that tax rate to the upper end of that. It's a good problem to have, not a bad problem.

I agree. We'll watch. Good luck, guys. Thank you.

Bert Powell, [BMW] Capital Markets.

It's actually BMO. Good morning, guys. On the CapEx number for the quarter, if I think about the seasonality of it, usually Q4 is a little heavier. This quarter looked a little lighter. Can you help us understand that a little bit better? Is there a bit of a CapEx holiday or is this just timing? How should we think about CapEx in the fourth quarter?

It's more of a timing issue. Last call we had laid out an expected CapEx spending for the second half of the year of about $225 million or so. The fact that about $95 million got done in Q3 just tells you that Q4 will be a little heavier than that at about $120 million, $125 million. Purely timing.

Okay, that is helpful. When you think about next year in terms of overall cash flow, you're still thinking about CapEx as a percentage of revenue in that 10%,10.5% range?

Correct.

Okay. The volumes, the specialty waste or C&D volumes you mentioned that got pushed off or will be more of a 2017 impact, can you give us a sense of magnitude? How material is that?

Again, in the quarter it was about $3.5 million revenue in Minnesota alone. That was 70 basis points. We've been highlighting this kind of election malaise so to speak within some state government spending, especially on infrastructure projects. The timing was curious, but there's a cover piece in the Wall Street Journal that covers that specific topic of how states have cut back dramatically on infrastructure spending. We didn't place that article the same day as our call. It's just coincidental, by the way.

Okay. Last question. Worthing, we chatted about this a bit but I wanted to revisit leachate. It was mentioned on the Waste Management call. It seemed to be indicating a little bit more problematic for the whole industry. I was wondering how you had positioned your leachate relative to peers, based on where your footprint is.

We're now in 40 states. Relative to our peers, Waste Management, Republic obviously are complete national companies as are we, being in 40 states now. There's no really geographic differences in any of our companies. There's no real change in leachate. What there are changes to is the enforcement standards of the various POTWs or treatment facilities throughout the US that are happening because of various localized or state reasons requiring lower particulate and other concentration matters in leachate to meet the discharge standards. That comes at a greater cost.

If you look at -- if you were to take an example, a state like Washington for example has a very high standard for the discharge into the POTWs of leachate compared to other states perhaps not on the West Coast or not on the East Coast. The coasts tend to be concentrated in population. They tend to be concentrated with a lot of development. They have higher discharge standards. You tend have more costs where you have landfills on the coasts. If you get into the central part of the country, where there is more space available and it's not quite as concentrated, you tend to have lower costs.

This is really an evolutionary issue. There is no real change in what is going on with leachate, other than you have larger landfills now in the US that are more regionalized with greater waste footprints and therefore when rain falls on them, you have a greater amount of leachate coming off. It's just a geometry issue. There is no real change going on.

Okay. I think the positioning, or at least the indications were that it was a little bit of a step change and you are not saying that's the case.

Again, that's a geographic issue and a landfill-specific issue. I think overall the step change is that you are seeing greater enforcement activity and therefore more stringent self-policed treatment standards that we must put and that does come at a higher -- a nominally higher cost.

Okay.

This has been going on for several years.

Okay, that's perfect. Thanks, Ron. Thanks, Worthing.

Noah Kaye, Oppenheimer.

Good morning. As a New Yorker, thank you to your New York team for the improved safety performance. Much appreciated. I'd like to ask about -- sticking with special waste, I'd like to ask about the coal ash opportunity. It's been a minute since we talked about this. Just wondering how you are seeing that opportunity set heading into 2017. Can that be a tailwind for you at this point?

Any coal ash we get is a tailwind because we have very little to none of it right now. We have consistently said, for us we view this as something that is two to three years out. The utilities are first trying to address some critical ponds ASAP. Longer term, they're trying to figure out what's the best way to either minimize the cost to themselves or shift as much to the rate base as possible. When certain areas get addressed that are proximate to our landfills, I'm sure he will get our share of that waste stream, but those actions are not going on right now at proximate locations.

For us, I don't see it as a 2017 opportunity. If it happens, that's great. We've always viewed this as a 2018, 2019, 2020 opportunity for us. North Carolina is ground zero for a lot of this and our assumption is that the mandated date of which these things need to be addressed will ultimately get pushed out as most of these sorts of things do over time. I'm sure this will be no different.

Thank you. Then a question about the volume growth mix. You had another nice 7% growth in roll-off. As you talked before about the 1%- to 2%-type volume growth, how do think about the mix of that on a sector basis? Is the type of volume growth that you are expecting -- how would you think about the relative margin profile of where you are expecting the growth? Thanks.

First and foremost, I know you've talked about volume growth but obviously our focus has been on price, price and price. Many of the markets, given our market shares that we have, the numbers you see on volume growth are purely a reflection of the underlying economy and how well or not it's doing. Obviously, as we've talked about, the Progressive Waste operations are trying to shed some $50 million to $70 million of unprofitable or unsafe or broker-related business. As Progressive comes into the volume mixture and calculations starting June 1, you'll see that negative volume be incorporated into our reported volume growth and so that will give a cloudy picture on volume growth and potentially some incorrect takeaways as to what's really going on, but first and foremost, focus on the price.

I'll tell you, with regards to flow through, again our business is no different than others in our sector. Flow through, if it's coming at the landfill is coming in at 60% to 70%-plus type incremental margins. If it's coming off of the front-load commercial system, it's coming in at as much as 40% incremental margins. If it's coming in on residential, it could be a 20% to 25% incremental. If it's roll-off on the collection side it's going to about 10% or 15% incremental. It depends on where you see the economy firing next year.

Sure. I think we'd love to get your views on that at this point. We did have a competitor talking about it yesterday. Just curious; this isn't really a macro question, right?

You mean, Noah, a macro question about where the economy is going?

What you are seeing right now. Are you expecting -- we had folks talking yesterday about still lagging on housing starts versus a steady run rate. The idea that, that could drive growth and the idea that commercial could follow. I'm just curious for your views at this point, that's right.

Okay. Thank you. Sorry for the clarification. We said today on the script that we see the economy in a 1% to 2% volume range. That's not coincidental that, that approximates what GDP is. Everything we've seen, it's been running about 1% to 2%. Sometimes it's higher but then it's re-corrected downward.

At, I'm going to call it, that 750,000 to 1 million housing starts, that is about a 1.5% to 2% type volume environment on an historical basis for our industry. To get into that 2.5% plus, we need to be, as an industry -- as a nation, doing about 1.5 million to 1.7 million annual housing starts. If you go back to when that happened last, which was back in 2006 to 2008, we ran that the sector was actually getting 3%-plus volume growth.

The reason is, is because at those levels of housing, that leads to new infrastructure requirement development and it leads to new commercial and retail development and ultimately, we're getting that across our system. We're getting construction. We're getting -- which feeds our roll-off system and our landfill. We're getting commercial starts and we're getting new residential starts. Every leg is getting fed there and outpacing competitive poaching.

There is a step change that happens if we get another 500,000 to 750,000 homes a year being built. It does take us probably to that 2.5% to 3% volume growth as a sector and us as a company. But we're just not seeing that at this point in time. We are seeing half of that.

Great. Thank you very much. I appreciate it.

Joe Box, KeyBanc Capital Markets.

Hi, guys. Can we just go back to the comment on volume at BIN? Can you give us a little color on the $50 million to $70 million that you said needs to be replaced. I'm curious, is it going away altogether or is that a repricing opportunity? Ultimately what I'm trying to understand here is how much of their books should be repriced so a nice positive there and how should we think about the volume declines over the next couple of years as you go through and update that book?

Yes. Joe, as Worthing said, there is probably ultimately $50 million to $75 million of business. If you take that off of a $2 billion footprint, that's 3% to 4%, or 3% to 3.5%, of business that needs to go away. What I mean by that is, unless we materially can change the price, we're not going to do business for zero to 10% EBITDA margins that's not going to our landfill. That's a waste of time, it's a waste of capital, it's a waste of risk allocation and it's a waste of overhead. We're happy to give that to someone else.

There is brokerage business that we are actively shedding or giving notice to that upon expiration we are done doing it unless it's materially repriced. There are unsafe stops that we have directed the field that they are free to get rid of and allocate another competitor. There is non-integrated business that the margins are unacceptable and we've said either materially raise the price or do the same. That is an active process that is going on right now.

It is not something that happens overnight. It's going to take time. It's going to take us a couple of years to get through that. I think we will probably shed, I'm going to round, $30 million to $50 million of that business in between now and the end of 2017. To do that, we will probably -- there is double that business we will look at shedding and we will improve it through price or another service mechanism and get it to an acceptable return. That means we probably attack $100 million to get to $30 million to $50 million we ultimately shed.

This should be -- when we say replace it, as we have said all along, we believe within Progressive that we're going to take what was a $480 million EBITDA business at close on $1.95 billion of revenue and we're going to turn into a $600 million EBITDA business on $1.8 billion of revenue or less by the end of 2017. We don't really look at it as replacing. We look at as there is some very good business within there that was being clouded by some very poor business.

Got it. Just to clarify on the volume front, then, so once you do work through that, and I get that it's going to take time, should we think about the BIN volume backdrop migrating toward a market growth type backdrop or will it still be a little bit light just because you'll be pushing price higher?

I think that you should think of it as a market type volume growth. It's going to be our sales force. It's going to be the approaches have generated what Waste Connections has done over time. I do not think that, that's going to change.

When we can start shedding business, we will obviously report what reported volume is but we will give you underlying volume is and what the business we drove out personally is, or purposely is, so that you really know what is happening in the underlying volume environment. Said another way, if we come through and we report a negative half in a quarter on the total footprint but we drove out 2.5%, we're going to tell you, here's what volume really was.

Got it. That'd be helpful. Thanks, Ron.

Michael Hoffman, Stifel.

Hey, Ron, Steve, Worthing. Thanks for taking my questions. In 2Q in August, you were asked about the free cash flow trend for the second half of 2016 and you responded it was about $300 million. My sense is we're now more in a $330 million to $350 range for the second half. Is an accurate conclusion?

It depends on some timing of a few things at the end of December or late December. You're probably at the low end, $315 million or so for the second half of the year. At the upper end you could get to the kind of number you laid out. It's more of a timing late December versus early January on a couple items

Timing meaning capital spending and acquisition stuff?

Capital spending, timing of some working capital payments, timing of tax payments and amount of tax payments in December, things like that.

Okay. Then you got asked earlier and did say yes, 2017 should be $700 million or better, but you've also talked about getting to a $4.50 to $4.75 a share type free cash flow number which, if you assume normal -- go back to some level of normal buyback, call it 2% a year, that puts you in $780 million to $800 million kind of number by 2018. Is that sort of -- we're going have this step up from where we are to $700 million then towards to $800 million and then settle into a long-term growth rate. You add in the buyback and where a low double-digit per share growth and free cash. Is it the right conclusion?

It sounds like a leading question, but that is right. You are right.

I wasn't trying to be that obvious.

We've always talked about $4.50 to $4.75 or so free cash flow per share target internally in 2018. Obviously if we can do at least $700 million next we have got a $4 a share number, assuming no buybacks next year in 2017. It puts us well on track to that kind of number for 2018.

Okay. On all of the deal stuff, both selling and buying, how do you think about where valuations are today? Are people being rational? Is it a buyer's market for what you want to buy but it's a seller market for what you want to sell? How you see that?

I think, Michael, that when we -- let's break into two buckets. As we said on divestitures or rationalizations that we are looking at, much of that we're doing in swaps so that is really an EBITDA [for] EBITDA-type swap. Perhaps if there is some CapEx or other differences, that is trued up. There's really not a multiple -- and that is happening between public companies and large regional companies. I would just say that, that doesn't really affect the swaps.

On the acquisition environment, I would tell you that you have typically seen that out of Waste Connections that we have probably been a, I'm going to round, a 5 to 7.5 times EBITDA buyer between tuck-ins and a highly integrated or franchise standalone at the end. What you've seen is that upper end is probably moved up a turn or little more than a turn over the course of the last several years. Why? Because market multiples have moved up, public company multiples have moved up, interest rates have come down. A variety of reasons.

The long-term cost of debt capital allows it to move up that much and still get the same type returns on capital. There are sellers out there that think they ought to get our multiple. We've told them, go public. That tends to end that conversation. For the most part, I think you would find that we're going to be right in line on an historical basis with where we have been on a multiple less some of those larger transactions might be a turn a turn to turn-and-a-half higher

Okay, that's great. Last one for me, you have accrued about $5.5 million for bonus. If I double that, that says you're doing [105 to 110] for the synergies in the July program you rolled out. Is that right conclusion?

It says we are trending above [100]. Obviously we need to wait and see how Q4 plays out, but we are clearly trending above [100].

Michael, I would remind -- I know you're aware of this, just for those listening, when you say synergies, that is synergies and cash tax benefit.

It's just the SG&A portion, because remember, pricing improvement is not in the number, operational improvements, safety improvements. This is, again, just focused on SG&A and cash tax savings.

Juxtaposed against the [85] you told us in June.

That's right.

(Multiple speakers) One last on the volume to try to and bring some clarity. You are not -- you are looking at structural same-store volume trends and BIN assets that are priced correctly versus Waste Connections are doing the same things. They are participating in market volume in the same manner.

Yes. If you look at, for instance, at the underlying Progressive operations as an example in Q3 and Q4, you've heard that their pricing is now trending towards ours in that mid-2% or better range. We've seen their volume again in that low 1% range. They are trending in that 1% to 2%. Remember, that low 1% range includes some impacts, as Ron talked about, about turning away some existing revenue. The trends are very similar.

Also, I'll tell you where -- again, we talked about weakness in the E&P-influenced economies, or coal-influenced economies. Alberta is no different in Canada. They see similar sorts of weakness up there until you see the crude economy recover.

Michael, as a comparison again, if we looked at where Progressive was running prior to the deal, they were running between 0.7% and 1% price and 2.5%-plus volume. We have completely inverted that. (Multiple speakers) We have driven the price to 2.5%-plus and the volume down to about 1% and we want that tradeoff. We've said from day one, we will take that tradeoff all day long

Remember, at Q1 there were 4%-plus volume and sub-1% price. That's unwieldy.

Which all comes back to how you'll do $700 million or better in free cash and almost $800 million in 2018. It's that, that is one of the drivers.

That is a material driver, getting greater profitability through price, servicing customers that we can be safe at and cost effective at and driving down the CapEx as a percentage of revenue. All three of those flow to free cash.

Great. Thanks for taking my questions.

Hamzah Mazari, Macquarie Capital.

Good morning. Thank you. Ron, you mentioned a lot of comments around drivers for volume. I was wondering if you could sort of frame for us where we sit in today's cycle. You talked about fourth year of positive MSW volume. Is that, in past cycles is that generally a trend to look at? Is it six years of positive volume or are we in the eighth inning or the fifth inning of the waste cycle, if one wants to call there being a cycle in waste? Any sort of color around that. I realize what the drivers of volume growth are.

Yes, Hamzah, good to talk to you. I would generally tell you historical past cycles, the volume increases run four to six years and then you tend to see some sort of economic change. As you know, we are a laggard in that effect. We tend to still have positive volumes a year, year and a half into a contraction. I don't know that, that is a good indicator. We also thought interest rates would rise six to seven years ago and they have gone the other way and there is no indication that, that's going to change. As long as the government's going to continue to print money and make things free, you're going to continue to see this slow growth train continue along.

It's not about what inning we're in, it's just these innings are longer innings.

In that way I would tell you we're in the fifth or sixth inning, not the eighth.

Got it. Okay. That is helpful. On the divestitures and rationalization, I think you mentioned there are couple of options around asset rationalization. I was wondering if you could walk through those. Also, how should investors think about the risk to that 100 bps of margin expansion. I realize one of the risks is a deal doesn't get done, but any sort of confidence level around that margin expansion? Thank you.

As far as more color on divestitures rationalizations, we're not going to provide specifics on that. A, because of the competitive nature of that and B, the sensitivity of that, both on our side as well as those that we're discussing this with. We really just are not at liberty to do that at this point in time. We really are just not at liberty to do that at this point in time. What I will tell you is that what I meant by there were two to three options, I meant that in each of our potential rationalizations, we are talking to several players, or have talked to several players, and had discussions of what those options look like that they may or may not be interested in. We've identified a lead option for each of our rationalizations and swaps and we're going to work through that and if that doesn't work, we're going to go option two.

How confident am I in the 100 basis points? I'm very confident in the 100 basis points. We're going to get that done either through swaps or we're going to get it done through exiting that business in some manner or another. Either way, the 100 basis points is going to happen. I'm highly confident that it will happen in the manner that we have outlined.

Remember, the 100 basis points, if you go through the math of what Ron laid out before, it is just math. If we are getting the same or slightly higher EBITDA dollars but having been able to do that on $100 million to $125 million of less revenue, the math is you've got 100 basis point margin expansion.

It's not like consolidated margins go up 100 on the same revenue or higher. The key is obviously if you can keep the same $1 of EBITDA and actually shrink the revenue by $100 million, $125 million, you're pulling off $10 million to $12 million of CapEx related to that EBITDA and dramatically improving the EBITDA minus CapEx conversion of that to free cash flow. It's 100 basis points to consolidated margins is just the output of math. The key thing is lower the free cash flow profile.

I want to emphasize, the whole key in these what I'll call rationalizations or swaps is these are not bad businesses or markets. These are markets where our position is not good. There whole opportunity here is can we get something where one and one equals three and whoever is getting what we have one and one equals three for them. We're fixing market positions for, meaning improving the market position for, our self and for our competitor. That's the challenge. These are not bad markets. These are just positions that are not optimal for whoever owns the assets, in this case us, on these assets.

Great. That's very helpful. Good talking to as well, guys. Thank you.

Corey Greendale, First Analysis.

Good morning. Most of my questions have been answered, so I'll just ask a quick one. The Q4 guidance implies less seasonality in EBITDA margins than you've seen before. I'm assuming that's because you ramp up in some the things you're working on with Progressive and once all the moving pieces anniversary you'd expect more traditional seasonality? I'm looking for some thoughts on how to model seasonality once everything normalizes.

Yes. The seasonality that we are expecting is the same seasonality we laid out in the August call with regards to the sequential change Q3 to Q4. Any comparison to what I call the old Waste Connections, obviously Progressive has less landfill revenue as a percentage of the total and obviously the landfill side of the business is where you see more of a seasonable dip Q3 to Q4, so the extent that the mix of our P&L looks different now post combination, that might be what is influencing some of the outcome here.

Great. Since the call is going long, I'll turn it over. Thanks and nice work.

Chris Murray, AltaCorp Capital.

Thanks, guys. Good morning. Quickly on the E&P business, I guess a couple pieces of this. One, you've talked in the past about the fact that the margin coming back comes back pretty strong, high double digits, definitely. Can you give us some idea of what the guys are seeing in the field right now? I know it's almost on a daily basis that we see changes in rig counts and some activity levels coming back. Any thoughts around that?

Then I guess if we think into 2017, if for whatever reason we do see some stabilization and improvement, is this an area where you guys would look to more acquisitions or do you think you have got enough for what you have right now?

First on the activity side, as the rig count data may suggest we're seeing the most improvement in the West Texas Permian. We're seeing a few things, a few rigs click into the New Mexico side. Obviously when it gets into the [Mexico] side, it's a bigger impact on us because there the state regulation requires all the volume to go to a landfill. Louisiana is seeing some improvement as well. We're looking potential improvements, believe it or not, in Eagle Ford or South Texas as some gas drilling has come back into play. We've actually seen a return of a rig or two in Oklahoma, again in the Fayetteville. I'd say the Bakken is probably the least active for the obvious reasons right now.

We are seeing it but again, the Permian is where we're seeing the most activity. Our asset positioning is still what we believe is the best in the industry. From an M&A standpoint, while we have looked at a couple of one-off assets that might expand our geographic footprint, the -- a lot of our efforts have been historically on greenfield permitting and we're still pursuing four to five new greenfield permits to try to expand our footprint because where we want to be, there are no assets right now. You got to work heavily on the permitting side.

Great. Moving -- one of the things that I know I've always been focusing on is the safety performance. You've got the human impact of what that does in the environment but there's also been the cost impact. I think if we go back to pre the announcement, I think the comment that you made is that BIN was running roughly three to four times your absolute safety cost. We've heard some good stats on incident rates and things like that and I think that's a great leading indicator. You made the comment that you are a little ahead of plan in terms of safety performance. How would you actually -- how should we start thinking about where you are along this journey to get what the BIN rate was in terms of a cost back down to where Waste Connections was historically?

I will give you some actual numbers and that hopefully that puts it in perspective. At the closing, Waste Connections had what in our industry we look at as an incident rate. That effectively measures how many of your employees per year are going to have an accident or an injury, statistically, based on what is actually occurring. Ours was about 1 in 8, or an incident rate of 12 or 13. BIN was 1 in 2, so an incident rate of 50. We have the combined Company back down into the mid-20s and we will have the combined Company by the anniversary date under 20. To put that in perspective, that will yield a 60%-plus reduction in incidents in the first 12 months at BIN.

Okay. If you were to put a number on it, I think your safety cost was running something in the 1%-plus range of revenues pre the acquisition? You thinking that -- you sort of use that, was that a fair way to think dimensionalizing off the incident rate would be a good proxy?

It's a little different. Obviously, in the US, where we have workers comp and auto, BIN was running about 220 basis points higher than us as a percentage of revenue. That's why we've always targeted at least a $25 million savings as we thought about the overall reduction. Could it hit a number closer to $30 million if we are truly successful across all markets? Sure, but $25 million is still the bogey we've targeted as a cost reduction.

Understand that part of this, also, while we believe safety reduction was we get the i-rate down into the low teens, you can do math and get to a number that is closer to $40 million. Part of our program, we give back safety improvements to those driving it, meaning the front-line employees. They share a greater percentage as we improve. You can't just look at the pure savings and say, we're going to take all that, because we are going to give part of that back to the employees driving it.

Okay, great. But you feel like you are well on track to hit that number?

We are well ahead. We were hoping by year end to get to a 20% to 25% reduction. We're at 40% in October. We are on track to approach a 50% reduction by year end. That's almost double where we thought we would be

Again, as we've talked about in the past, how it comes through is more of a timing issue. You get more of a cash flow savings immediate because we're not hitting things or people are not hitting us. With high deductible programs, we're going out of pocket with less frequency, right, because we're not having as many incidents.

From an actuarial standpoint, because we still have legacy Progressive in the trailing analysis, you don't really see the flow through yet on the actuarial analysis coming through the P&L accruals until you get beyond the anniversary of the closing and we start anniversarying these improvements. We've always said the GAAP benefit is more of a second half 2017 timing, where the cash benefit is immediate.

Okay, great. Thanks, guys.

Andrew Buscaglia, Credit Suisse.

A quick one for me. Can you talk a little bit about BIN operationally in the quarter on a standalone basis? How did they do? I know you talked about some pricing and volume stuff for them, but can you talk about what they -- what the margins would've been or how they would've done?

We laid it out in the prepared remarks that the Progressive operations did about 30% EBITDA margin in the period.

Okay.

That's obviously before any incremental corporate overhead allocation from this office.

Okay. Can you talk a little bit about -- it sounds like they actually were doing fairly well or a little bit more on track to improve. How much of -- as you've now see them for a full quarter, how much of their operations have they started to turn around and that your benefiting from as well at this point?

I think --

All hands on deck.

Canada had an exceptional quarter. They did not have turnaround, per se, to worry about because they've been performing well for a long time, but they, even on their standard, had a very good quarter. We are seeing -- we've seen very nice improvement in the Eastern -- the East Coast of Progressive's operations really dating back to beginning of the merger.

Where the laggard had been, which is the Southern region, which is the largest piece of the Progressive footprint in the United States, we have seen nice improvements in Florida. We've seen nice improvements in parts of Texas. We've seen nice improvements in parts of Louisiana. Arkansas has continued to be strong and Missouri has continued to be strong. There is really not a part of the US footprint that has declined performance wise. All of the operations in the macro, or market areas in the macro in the US, are improved since the closing.

All right, that's helpful. Nothing else for me. Thanks, guys.

(Operator Instructions)

Barbara Noverini, Morningstar.

Good morning, everybody. Jumping off the comments that there is some improving activity in certain North American oil and gas areas, are you starting to see any signs of life on the MSW waste side in the communities that surround the oil and gas regions, or would you say that it's still too early to really see that? Is there any difference in the activity you see in the communities near the US-based oil and gas areas versus the Canadian-based areas?

Barbara, we have. We have started to see the US, particularly when you look at North Dakota, you look at parts of New Mexico, parts of south Texas, parts of the Gulf Coast and Louisiana and then really large parts of Oklahoma, those are the areas that took the crude decline hard in their local communities, large losses of jobs and large impacts on the commercial and the retail front in those markets. We saw that bottom in Q1 and start to show some signs of improvement in Texas, New Mexico and Louisiana in Q2 and again -- a step up again in Q3.

We have not really yet seen those improvements flow through in, for example, North Dakota or in Oklahoma. Those markets are still, have been on the MSW side, pretty impacted. But in the others, we are starting to see the MSW as jobs come back and some small businesses are able to come back, we're starting to see some of that flow through.

Excellent. Thanks for that and nice quarter.

There appears to be no further questions on the phone lines at this time.

If there are no further questions, on behalf of our entire management team, we appreciate your listening to, and interest in, the call today. Both 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 for to speaking with you at upcoming investor conferences or on our next earnings call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.