RSG
#Thanks, Don
Second quarter revenue was approximately $2.5 billion, an increase of $176 million or 7.5% over the prior year This 7.5% increase in revenue includes internal growth of 7.2% and acquisitions of 30 basis points
The components of internal growth are as follows: First, average yield increased 2.5%
Average yield in the collection business was 3.1%, which included 4.2% yield in the small container business, 3% yield in the large container business and 1.9% yield in the residential business
Average yield in the post-collection business was 80 basis points, which included landfill MSW of 1.8%
A majority of our third-party landfill MSW business is with municipal customers that have contracts containing pricing restrictions
Total core price, which measures price increases less rollbacks, was 4.1%
Core price consisted of 5.3% in the open market and 2.2% in the restricted portion of our business
Pricing in the restricted portion of our business benefited from an improved inflationary environment and our focus on earning an appropriate return on our contracts as they renew
The second component of internal growth is total volume, which increased 1.9% over the prior year
Volumes in the collection business increased 40 basis points
This included a 1.9% increase in our large container business and a 50 basis point increase in our residential business, partially offset by a 90 basis point decrease in our small container business
Small container volumes included a 140 basis point impact from intentionally shedding certain work performed on behalf of brokers, which we view as non-regrettable
Excluding these losses, small container volumes would have increased 50 basis points
Within our large container business, temporary C&D hauls were up 1.7% and recurring hauls were up 1.9%
The post-collection business, made up of third-party landfill and transfer station volumes, increased 8.7%
Landfill volumes increased 8.4% which included C&D of 17.5%, special waste of 15% and MSW of 1.1%
The third component of internal growth is fuel recovery fees, which increased 60 basis points
The increase relates to a rise in the cost of fuel
The average price per gallon of diesel increased to $2.55 in the second quarter from $2.30 in the prior year, an increase of 11%
The current average diesel price is $2.51 per gallon
The next component, energy services revenue, increased 70 basis points
The growth in energy services revenue is primarily due to an increase in drilling activity in the Permian Basin where we are well positioned
And the final component of internal growth is commodity revenue, which increased 1.5%
The growth in commodity sales revenue primarily relates to increase in recycled commodity prices
Excluding glass and organics, average commodity prices increased 35% to $157 per ton in the second quarter from $116 per ton in the prior year
The average commodity price in June was approximately $160 per ton
Cost of goods sold for recycled commodities increased 49% primarily due to an increase in rebates
Now, I'll discuss changes in margin
Second quarter adjusted EBITDA margin was 28%, which compares to 28.3% in the prior year
The change includes a 40 basis point increase in landfill operating costs
As discussed in the first quarter, we continued to see higher costs associated with the change in operating requirements at one of our sites
We also saw an increase in leachate volumes at a handful of our sites
These costs are temporary in nature and we expect the higher landfill operating costs to abate over the next few quarters
Excluding the increase in landfill operating costs, we had 10 basis points of margin expansion from strong pricing and volume growth, demonstrating the operating leverage in our business
I want to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing
Second quarter 2017 interest was $90 million, which included $11 million of non-cash amortization
Our adjusted effective tax rate was 39.1%
We expect an effective tax rate of approximately 39.5% for the remainder of the year
Year-to-date adjusted free cash flow was $358 million, which represents 6% growth over the prior year
We remain comfortable with our full year adjusted free cash flow guidance of $875 million to $900 million, which represents double-digit growth over the prior year, after adjusting for the change in cash taxes
Now I'll turn the call back to Don
So, so far we spent about 53% of our CapEx first half of the year
As we look at over the rest of the year, obviously we had very strong volume growth first half of the year and therefore because of that we may need to increase our capital spending to fund that growth
And that's why we haven't changed our free cash flow guidance
Yeah
It was obviously accretive to the margins, but keep in mind that when you're talking about the COGS that 20% of the tons that we handled are brokered by us
So, if you actually exclude those volumes and those brokered volumes, then our sale of materials and our COGS went up by a similar rate of approximately 30%
Thank you
So obviously, we posted a very strong revenue first half of the year, so that's where that EPS guidance increase is coming from and then that's been partially offset and what I talked about earlier about the temporary increase that we're seeing in our landfill operating costs, so it's the net of those two
Yeah, we say over the next few quarters, most of that's going to take place this year
Hey, <UNK>
Yeah
So when we look at the back half of the year, obviously we're expecting expansion in the margins and that's really coming from the strong revenue
At the same time, as I had talked about before though, these landfill costs are going to slowly abate
So, we're going to have that headwind associated with also
So as we're looking at the margin, it's kind of longer term
We're thinking that we're going to be flat for the year
But if you take out the landfill operating costs, then that would get us right back to the 30 or 40 basis points of expansion that we had anticipated
Yeah
So, in terms of the incentive comp, keep in mind that we had an adjustment last year to incentive compensation that didn't repeat this year
And so obviously, our incentive is currently at levels that are consistent with our guidance for the rest of the year
Thanks, <UNK> (sic) [<UNK>]
I think you should just drop the mic at that point and we'll walk away
Hey <UNK>
So what happened is that we actually saw some of that acceleration in Q2 and that's why we're able to post a restricted price of 2.2%
So those resets have already started to happen
In addition to that, as I had mentioned before, we were able to actually renegotiate some of our contracts on favorable terms, those restricted contracts
So we've got that coming through under restricted price also
So as we look out for the rest of the year, we think that that restricted price and yield in general is going to be pretty much flat to where it was in Q2.
So there is one less work day and obviously that work day is included in our guidance
And what we had talked, obviously the revenue growth has been very, very strong and commodities has been strong also
If you were to pull there – as I said, if you were to pull out these one-time landfill costs we'd have achieved kind of the high end of our guidance range in terms of our EBITDA margin growth year-over-year
As we look out into the future as these costs abate, there is still nothing structural that we see that'll keep us from getting back to 30% EBITDA margins that we had talked about, so that still demonstrates the leverage that we expect from this business
The other thing I would say also <UNK> is that it's not just the EBITDA that we're focusing on, it's also the cash flow
And I had a very wise man telling me one time that you can't spend EBITDA and we are focusing on the cash
And keep in mind that the cash flow guidance that we gave this year is double-digit when you adjust for cash taxes
So that's a very key metric for us also
<UNK> <UNK> - Macquarie Capital (USA), Inc
Right
That's helpful
That makes sense
Just a clarification question on, did you guys have CNG tax credits that went away or was that impactful at all or not material?
Those credits went away this year, so we did not have those credits this year
<UNK> <UNK> - Macquarie Capital (USA), Inc
No, there's really no cost that we have that are impacting those landfill operating costs that Don had talked about
So, obviously there is leverage there that we had talked about
We expect that we're going to continue to be able grow that top line like we have
You've got the work day in Q3 which is a benefit for us also
So, it's a combination of all those factors
On that one – we are?
Like I said, <UNK>, it could go up a little bit because of the volume growth
Little bit could go up by $5 million, $10 million, maybe in that range
Yeah, somewhere in that range
There is <UNK>, and it goes back to what we had said before, is that if you pull out, just pull out the landfill operating costs, you've got 10 basis points of margin expansion during the quarter
And if you do that for the entire year, you've got 30 to 40 basis points of margin expansion
That's right on top of the guidance that we had given
So, yeah, the leverage is there
Yeah, 30 to 40, right
So, again, we talk about several times on the call, right, mix matters, right
And we are confident that the margins are expanding within the business, we got some of these highlights like recycling and fuel and some of the things that just net things out, but business is strong, the growth is good, pricing is good, operating team's doing a great job
We've got a couple of sort of near-term temporary and unusual things to take care of and then we should really I think end the year strong and move nicely into 2018.
Well, you remember, you have seasonality
And those are seasonal for sure
