Progressive Waste Solutions' (BIN) CEO Joe Quarin on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: New Waste (WCN)

Progressive Waste Solutions Ltd (BIN)

Q2 2014 Earnings Conference Call

July 25, 2014 08:00 AM ET

Executives

Chaya Cooperberg - VP, IR and CC

Joe Quarin - President and CEO

Ian Kidson - EVP and CFO

Kevin Walbridge - EVP and COO

Analysts

Flavio Campos - Credit Suisse

Al Kaschalk - Wedbush Securities

Bert Powell - BMO

Derek Spronck - RBC Capital Markets

Rupert Merer - National Bank

Scott Levine - Imperial Capital

Chris Bowes - Canaccord Genuity

Derek Sbrogna - Macquarie

Charles Redding - BB&T Capital Markets

Michael Hoffman - Stifel

Operator

Good morning, my name is Anastasia and I will be your conference operator today. At this time, I would like to welcome everyone to the Progressive Waste Solutions’ Second Quarter 2014 Earnings Conference Call. All lines have been placed on mute in order to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session (Operator Instructions).

Thank you, Chaya Cooperberg, Vice President, Investor Relations and Corporate Communications. You may begin your conference.

Chaya Cooperberg

Good morning, thank you. With me on the call I have Joe Quarin, President and Chief Executive Officer, Ian Kidson, Executive Vice President and Chief Financial Officer and Kevin Walbridge, Executive Vice President and Chief Operating Officer.

We’ll provide some comments on the results of the three months ended June 30, 2014 and then we will open up the call for Q&A. There is a slide deck that we’ll reference during the call and it’s available on our website at www.progressivewaste.com.

Before we get started today, I am going to read our Safe Harbor statement. Our remarks and answers to your questions today may contain forward-looking information about future events or the company’s future performance. Although forward-looking statements are based on what management believes to be reasonable assumptions, the company cannot assure shareholders that actual results will be consistent with these forward-looking statements. The company disclaims any intention or obligation to update or revise any forward-looking statements resulting from new information, future events or otherwise.

We also do not commit to continue reporting on items or issues that arise, either during our presentation or in the discussion that will follow, except as required by applicable securities laws. This information, by its nature, is subject to risks and uncertainties that may cause actual events or results to differ materially and please refer to the bottom of our news release this morning for further information, as for our second quarter MD&A as well as our annual information form for a more complete description of the risks affecting our business and our industry.

On this call, we will discuss some non-GAAP measures, such as adjusted operating income or adjusted operating EBIT, adjusted EBITDA, adjusted net income and free cash flow. And you can refer to our news release for our definitions of these non-GAAP measures. Management uses non-GAAP measures to evaluate and monitor the ongoing performance of its operations and other companies may calculate these non-GAAP measures differently. There is a telephone replay of this conference call and it’s available until midnight on August 8 with all the details available in our news release.

With that, I am going to turn the call over to Joe.

Joe Quarin

Good morning, thank you everyone for joining us today. This is our first earnings call since our Analyst and Investor Day in May, where we introduced our five-year strategic plan for the company including our objectives for capital allocation and operational excellence. Kevin Walbridge is joining us on the call to give some color on how our operations performed in the quarter and Ian will review our quarterly financials in detail. One of the reasons we held our Analyst and Investor Day was to introduce many of our new team members. We have rebuilt much of our management group over the past two years at the corporate, regional and field levels.

The impact that this is having on our company culturally and operationally cannot be underestimated. Our plan to create long term value can now be implemented. Everyone is following the same play book, committed to making the best long term cash decision and delivering on our organic growth. 2014 has been a transition year for us and we expect our second half result to know strengthen and roll over into a stronger 2015. We have a lot of positive activity taking place throughout our company. We are winning new municipal contracts including the recent award of a large residential collection contract and Peel region which is near Toronto.

We will start servicing that contract in January 2016 with automated CNG vehicles. This win demonstrates our ability to bid and win, in a returns based framework and this is a good contract for us. Let me now turn to what happened in our second quarter. We performed well on many measures in the period. Consolidated revenues were strong increasing $9.6 million or 1.9% excluding the impact of foreign currency translation. Our top line was driven by consolidated organic revenue growth of 2%, reflecting higher pricing in our collection and disposal service lines.

Again we had one of our strongest pricing quarters in years with a price improvement of 1.7% in our U.S. business and 2.6% in our Canadian business. Our sales programs are achieving price increase on commercial yards and roll off hauls in many other markets that we serve. These price increases helped partially offset higher costs and fuel expenses in the quarter. Consolidated volumes declined marginally at 0.2% from the second quarter a year ago as we had expected.

I will note to this special waste and MSW volumes were lighter than we had expected at our U.S. Northeast landfills and we are still seeing a lack of disposal of pricing discipline from one of our competitors in the region. Having said that, the underlying volume fundamentals in areas such as Alberta and Texas are encouraging and support our view that consolidated volumes are on track to term positive in the second half of the year. Adjusted EBITDA in the second quarter increased 0.6% excluding the impact of foreign currency translation.

Higher revenue along with lower SG&A costs contributed to our adjusted EBITDA performance, but these improvements were muted by some higher operating expenses in the period. We had higher fuel cost, increased transportation related to the Calgary landfill closure last year, costs related organic growth in our U.S. South segment as well as higher repairs and maintenance expense. Much of these operating costs variances are short term and will be eliminated as we implement our strategic plan. We are pleased with the progress we made on our plant in the quarter. As I said earlier, we are fundamentally shifting the culture of our company to one and which is making the best long-term cash decisions is our governing priority, up in the organization. Behaviors in the field began to adjust early last year when we aligned our fueled incentive programs with revenue and EBIT rather than revenue and EBITDA.

We saw many examples behavioral changes. Our operators identified underutilized assets and we put these to use elsewhere in the company or sold for cash. Such as when industrial volume demands spiked last year, our teams repaired existing roll-off trucks and containers rather than spend money on new assets. As we built up the functional leadership in our company bringing in talent to support our local teams, we added senior expertise in our purchasing fleet and maintenance group. We are establishing constancy of our best practices and making better expense versus capital decisions for the fleet every single day.

There is a tangible cultural shift underway and intensified at the start of this year when we unified the company under a single Chief Operating Officer. In the role now just six months, Kevin has done a tremendous job. He is helping to drive our transition from a holding company of the asset we have acquired over the past 14 years to a true best in class operating company.

First and foremost, Kevin’s priority has been to review all of our capital spending to ensure we are buying and allocating the right assets to drive operational excellence. While our capital budgets were set at the end of 2013, we reevaluated all of the trucks and equipment in the plant.

As Kevin outlined at our Analyst and Investor Day, we have an opportunity to expand EBITDA margins improve returns by converting our fleet in many markets to automated versus manual collection vehicles, diesel fuel to compressed natural gas.

Our initial capital budget for 2014, which was rolled up from the field operators did not fully reflect this strategy. So we adjusted it and this has led to some delays in the receipt of new trucks and higher costs than initially expected in the first half of this year.

However, it is absolutely the right decision for the long term to change the rear-load trucks that we had planned to purchase to automated and some diesel vehicles to CNG. We also decided to redirect some of the trucks to different operating locations.

In one example, in February, we were awarded a new seven year municipal contract in Frisco, Texas that started up just last week. The contract, which we bid with automated CNG vehicles, requires new trucks and given the short start up time frame, we took trucks that were otherwise scheduled for replacement in our original plan and used them for this new contract.

Of the 330 replacement vehicles on order and scheduled for delivery this year, in the first half, we have received only a 150. As these trucks arrive in the third quarter and fourth quarters, particularly those slated for the U.S. South region which had the most delays due to new contract starts. We will benefit from lower maintenance expenses, improved productivity and margin improvement.

In a moment Kevin will provide more detail around our repairs and maintenance programs and pleased decisions that are being made. We’re well positioned to normalized our replacement in capital spend next year in fact 2015 replacement capital budget has been mostly developed and we are planning to represent 8.5% and 9% of next year revenues. The orders are being submitted early so that we can hit the ground running and start the year with the benefit of new assets.

In other areas of our capital allocation program, we closed one small acquisition in the quarter but we did evaluate several opportunities and we divested some non strategic assets. We sold excess land in Western Canada which was around our Calgary landfill and we saw the transfer station facility in New York.

Our net gain on asset sales in the quarter was about $20 million or $0.13 per share of adjusted net income. With our priority on generating cash, we’re constantly evaluating all assets to ensure that we are in fact the best on our each asset before investing additional capital if there in fact is a better owner. We are not afraid to divesting the asset and redeploy the proceeds to earn higher returns.

We will only allocate capital where risk adjusted return exceed our targets. I will now turn the call over Kevin to update on some of the progress we are making in the quarter. Kevin?

Kevin Walbridge

It’s a pleasure to be here for the first time. I’m very pleased with the changes I’m seeing in our field operations. We are implementing standards and best practices that are critical to our future success. We are taking action on the operating expense reduction opportunities we talked about at our Analyst Day. We’re centralized purchasing increasing automation and leveraging our CNG infrastructure.

Each of these opportunities has many components and we’re making progress on each one. The average rate for receipt of net trucks and ordered by the light equipment and support our fleet strategy of converting to automated and CNG vehicles. I can tell you that in the first of half of this year we did not installed any of the replacement trucks contemplated in our budgets and we look forward to the operational benefits as we get to roll amount in Q3 and Q4.

An example is adjustment period to Louisiana and there you may recall we indentified has been an opportunity for automation. We receive our first automated trucks there this week as we take delivery of our new vehicles it will reduce R&M in labor cost and we will see some improvement in Q3 and more in Q4 resulting in good jump up point for 2015.

There have been some other timing related issues to our CNG deployment, a three of our CNG fueling stations plan for construction this year there have been zoning and permitting delays. These facilities will be completed in operational in the next few months but the timing had an impact on fuel and labor cost in the second quarter.

The critical message here is that we’re making the right capital on operating expense decisions. To give you an example in the past quarter we indentified from residential trucks coming off contracts in Canada that could be put the productive use in our U.S. South operations. Culturally, this is significant for us and speaks to how we operate as one team. The operations in Canada did have some additional cost to get these trucks in running condition for the U.S. South district so they would to hit the road ready to go.

It’s a good example of us taking operating expense rather spending on replacement capital. As Joe mentioned we have a very strong maintenance group focused on making sure we spend money in the right areas and managing R&M to our standard not just budget.

We can and will manage our total operating cost, we are acting on the $50 million to $60 million of cost reduction opportunity we told you at our Analyst Day is available to our company within the next three years.

I will not turn the call over to Ian for the financial review.

Ian Kidson

Thank you Kevin. I’m going to begin with review of our revenue performance in the quarter and as usual I will be referencing the slide presentation available on our website. Before that I would like to make one macro comment on the subject of foreign currency exchange and the increasing strength we saw in the Canadian dollar during the quarter.

At June 30th the dollar was US$93.67 and we translated our Canadian results of the average of $91.7 for the quarter. Although the Canadian dollar is much weaker than the same quarter a year ago when the second quarter average was US$97.72 the annual guidance outlook we provided in February contemplated a $0.19 for the year. While our translated results do strengthen with the rise in the Canadian dollar, we are keeping our outlook pay to $0.90 as this is consistent with consensus forecast for the currency for the full year.

If you can look at six you will see that our total current period revenue was about $3.3 million or 0.6% to 513.5 million versus the same period last year.

Foreign currency translation had a significant impact resulting in a decline of nearly $13 million in consolidated revenues. Excluding the impact of FX, revenues grew organically by $9.6 million or 1.9% and that growth came across all business lines. Reviewing revenue by segment and starting with Canada, revenue grew 6.6 million or 3.3% excluding the impact of FX. Higher price of 2.6% and stronger commodity pricing of 0.6% were the primary contributors to revenue growth in the quarter. We achieved higher price in every service line while volumes in Canada were near flat and we had higher commercial and industrial collection as well as transfer station volumes. In our US south segment revenue was up $8.3 million or 3.7% to more than $229 million. While pricing was higher in our collection and disposal businesses this segment’s revenue growth remains the volume story at our transfer stations and landfills. New contract wins in Florida last year contributed to our first transfer station and landfill revenue.

Looking at the US Northeast, revenue declined about $5.2 million compared with the year ago quarter. A portion of the decline related to lower transportation revenues as we had lower volumes go into the Seneca Meadows landfill. Some of the revenue decline was due to the sale of certain assets last year in Long Island and commodity revenue was a negative $600,000 in this region, this quarter as export prices came under pressure. The most significant revenue impact though was our ongoing targeted reduction of less profitable collection volume. On the other side pricing was strong in every service line as we achieved pricing increases on our book of commercial, industrial and residential collection and purposely held landfill pricing flat in spite of the ongoing disposal volume challenges in the region. Price improvements in total contributed approximately $3.3 million to revenues period over period, with the overall decline being the result of lower volumes just discussed.

On Slide 7 you can see the components of consolidated revenue in the quarter. Our pricing improvements support our expectation for a stronger second half performance along with our expectation for higher disposal volumes due to special waste projects that we have contracted and committed to us coming through by year end. For the full year, we expect consolidated 2014 revenues to be at the top end of a guidance range we provided in February. You can turn now to operating and adjusted SG&A expenses in the quarter which are shown on Slide 8 and 9. For the second quarter, total operating expenses were about $2.4 million higher to $321.2 million. Excluding the impact of FX operating expenses increased about $9.9 million. Roughly 3.6 million Canadian was related to the closure of our Calgary landfill and a significantly higher transportation cost we now incur to move these volumes.

Operating costs increased about $6.1 million in the US south. A portion of this was related to higher safety insurance and claims cost but the largest operating cost increases were in the areas of transportation and labor due to organic growth including contract wins. Although repairs and maintenance costs were slightly higher year-over-year they were much higher than are planned due to the timing of receipt of new capital assets which Joe and Kevin discussed. In our US Northeast segment, operating cost declined about $3.9 million. Lower transportation costs to transport volume to Seneca Meadows contributed as did the strategic reduction of certain unprofitable customers. As a percentage of revenue consolidated operating costs increased 90 basis points to 62.6%. In Canada operating costs increased about 200 basis points relative to revenues which is largely related to the Calgary closure which we had discussed in the past.

In the US Northeast operating cost relative to revenues were flat. But this result included a drag of about 60 basis points related to a transfer station that we sold late in the quarter, and in the US south the mix of organic growth resulted in some operating margin compression.

Turning to adjusted SG&A expense on Slide 9 you can see that adjusted SG&A decreased $2.7 million to 60.4 million. The change in FX lowered adjusted SG&A cost by about 1.6 million and as a percentage of revenue adjusted SG&A was 11.8% in the quarter versus 12.2% a year ago. Adjusted EBITDA and margins are provided on Slide 10. In the second quarter consolidated adjusted EBITDA was nearly $132 million a decline of about 2.2% from a year ago. Excluding a currency translation drag of 3.8 million adjusted EBITDA increased by 0.6%. Consolidated adjusted EBITDA margins were 25.7% in the quarter compared with 26.1% in the year ago period.

In Canada, adjusted EBITDA margins were 33.8%, which is 150 basis points lower than the same period a year ago again primarily reflecting the impact of the Calgary landfill closure as well as higher costs for fuel and the delay in the opening of a CNG station. We expect margins in Canada will improve as the CNG station is completed and our new Quebec gas plant comes online, which is now scheduled to begin operating and injecting gas into pipeline at the start of November, rather than early in the second half of this year as we had originally planned.

In the U.S. South, adjusted EBITDA margins were 26.8%. Below the year ago period, due to composition of new revenue and the higher prior year claims cost. As Kevin noted, as we take receipt of the new trucks on order, we expect to lower fuel and repairs and maintenance costs in the region and improve margins in the second half of 2014.

In the U.S. Northeast, adjusted EBITDA margins in the second quarter were 20.6% and these results are in spite of a 40 basis points drag on margins from the transfer station we divested late in the quarter. The margins also reflect the decline in commodity pricing versus last year. Fortunately, the disappointing level of commodity prices appear to be localized in the U.S. Northeast as pricing has otherwise been in line with our expectations in both Canada and U.S. South segments.

Overall, U.S. Northeast segment margins improved significantly on a sequential basis and we do had strong expectations for further improvement in the third and fourth quarters. We still anticipate special waste volumes to be backend loaded in this region. At this point, it’s our view that margins were build to a strong exit run rate in the U.S. Northeast. We expect consolidated adjusted EBITDA for 2014 to come in around a low end of the guidance range we provided, resulting in consolidated margin of approximately 26.3%.

This reflects the higher expenses in Q2 along with the weather related costs we experienced in the first quarter. It also reflects the two months delay of our gas plant opening and the lower commodity pricing in the U.S Northeast. The key items that could compress adjusted EBITDA margins relative to our expectations this year are the timing of disposal volumes and commodity pricing.

Moving down to the income statement on slide 11, you can see amortization expense for the second quarter decreased 1.5 million from the prior year to about 72 million largely due to foreign exchange. On slide 12, we note the net gain on sale of capital assets in the second quarter which amounted to a pre-tax gain of approximately $20 million.

As Joe mentioned earlier we continue to evaluate our network of assets as part of our returns based framework. Interest expense on slide 13 was $15.8 million which is on track with our guidance for the full year. The increase in interest expense reflects the series of interest rate swaps that we entered into between August 2013 and March 2014 and represent the fixed rate on notional borrowings of about $805 million.

At the end of the second quarter, we had roughly $949 million drawn on our revolving credit facility and $493 million outstanding on the Term B portion of our facility. Total funded debt to EBITDA was 2.95 times at June 30, 2014 versus 2.91 times at March 31, 2014.

Our tax expense is outlined on slide 14. In the quarter, income tax expense was $14.5 million. We continue to expect our effective tax rate for the year to be within the outlook range we’ve provided of 30% to 32%.

On an adjusted basis, net income for the quarter was up almost 34% to 47.2 million or $0.41 per diluted share versus 35.3 million or $0.31 per diluted share in the comparative period. Adjusted EPS benefitted from the gain on sale of assets by approximately $0.13 per share.

I will turn it now to capital expenditures on slide 16. Total replacement capital in the second quarter was 47.6 million and total growth capital was 25.7 million, which included $4.5 million of spending related to the building of the gas plant and 6.5 million related to purchases of trucks and carts and container for the Frisco contract start up.

Our 2014 CapEx guidance of $212 million to $216 million excluding infrastructure investment did not contemplate the growth capital for the new contract. But we are maintaining our range as a result of offsets in other areas.

As you can see on slide 17, we generated free cash flow of $60.9 million excluding infrastructure investments in the second quarter, representing 11.9% of revenue. We still expect to deliver on our free cash flow guidance range of $210 million to $225 million even at the low end of our EBITDA range and with the additional growth capital we are spending for the Frisco contract.

With that, I will the turn the call back over to Joe to wrap up.

Joe Quarin

Thanks, Ian. Our outlook for 2014 contemplates a stronger second half performance and we are gearing up for an even stronger start to 2015. We expect higher disposal volumes in Q3 and into Q4 and this along with our pricing initiatives, operating expense reductions and gas plant startup will result in our higher margin run rate by year end. We remain focused on cash and are reaffirming free cash flow for the year.

With our solid free cash flow profile, we’ve returned almost $11 million additional to shareholders through share repurchases in second quarter and this will continue in the absence of significant M&A transaction. And I am also pleased to announce that we are increasing our dividend once again, raising it by 6.7% to C$0.64 per share annually with the first payment of C$0.16 per share on October 15.

Operator, you can now start the Q&A portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Hamzah Mazari - Credit Suisse. Your line is open.

Flavio Campos - Credit Suisse

Hi, there. This is Flavio on the behalf of Hamzah. Thank you for taking my question. Just wanted to get some color on the volumes in the Northeast and on your strategy there. Can you give some detail on the selective volume and how long has that been going on and how that is driving pricing and if you guys are done with the shales and if you think that your current asset footprint is the one that you guys are going to have for the foreseeable future?

Joe Quarin

Yes, our Northeast strategy really changed dramatically once John Lamanna’s team and he is our Regional Vice President leading the team, basically the approach we took was to look at every line of business in every market and evaluate where we were underperforming and the reasons for it. And it was really quite simple. When you start to stratify your customer base, you realize that there is the profitable accounts and profitable roles and then the one who is better or not. So the team has done a real nice job and it’s been a very targeted approach to move the pricing up on accounts where we weren’t making any money.

So this started really started in earnest of both the Q3 of last year and has rolled over into the first half of this year. I’d say a lot of the work is behind us but the team remains focused on ensuring that any due business we go to solicit or retain is done at profitable rates. So that’s really what’s driving the change in the Northeast.

The volume losses were most significant last year in the third and fourth quarter and it’s really all the roll over effect from that. We’ve seen the -- we’ve actually seen the volume losses start to taper off more recently and we were seeing pricing moving up in the region as well.

I forget the last part of your question Flavio.

Flavio Campos - Credit Suisse

Just if your current asset footprint is the one that you guys want to keep on a go-forward basis if you are done with asset rationalization like when you said you sold some of your Long Island assets?

Joe Quarin

Yes. So we take a look at every single asset on a standalone basis, so we continue to look and right now we have a lot of improvement plans underway. So that’s really what we want to do first and foremost and make sure that we’re maximizing the value, we can generate out of an asset and then what are the returns and do we want to continue to make investments or is there somebody else and the whole team is working on this, Kevin, Ian, myself as well as Dan who is sort of leading the charge. So at this point, we haven’t identified anything for sale and we can -- the team continues work it.

Flavio Campos - Credit Suisse

Perfect. And just a quick follow-up, when you kept your CapEx guidance despite the new CapEx needs with the new contract, which were the projects that were a lower priority that you guys are not planning on taking on anymore?

Joe Quarin

A part of our ability to keep the gap, the CapEx level is when we sell assets, that obviously produces cash and our CapEx guidance is net of asset sales. And it’s really what we realized on the asset sales as well, that supporting the growth capital.

Flavio Campos - Credit Suisse

Perfect, so that significant like asset sales that you had this quarter kind of help offset that as well?

Joe Quarin

Exactly

Operator

Your next question comes from the line of Al Kaschalk with Wedbush Securities. Your line is open.

Al Kaschalk - Wedbush Securities

Good morning, guys. I wanted to focus on the volume question and then the mix and impact on margin. First, I think you said the volumes declined for the quarter 20 basis points. I was hoping you could articulate more of an apples-to-apples basis, in other words for what you walked away from or eliminated particularly in the Northeast and any negative comp you had from Canada. And then secondly as you look at the mix of business as it stands today, can you add some insight into whether you're picking up business that's got better cash flow metrics versus margin return profile?

Joe Quarin

Sure Al good question. So on the volume front in Canada, our volumes were up in our core industrial commercial lines of business we still have little bit of rollover effect from some of the residential contract change that took place early last year but not material probably more significant but it’s really an offset landfill volumes declined related to Calgary closure but directly offset with transfer station increase because now the volumes going to attract with station Calgary and talking us little more its internalize at one of our sites.

So it’s really and then just a year ago we had some equipment sales cards et cetera that took place that’s up just little more volatile and that’s what driven on our core business is showing growth volume growth both in terms of unit and total dollar up in Canada.

So pretty good performance definitely the mix is effecting the margins in Canada and as Ian said about 200 basis points was the impact of the higher transportation cost. When you look at the U.S. our U.S. South volumes are up year-over-year again we did have higher transfer revenues especially down in Florida that’s going to result in our transportation cost as well but we really saw volume appreciate right across the board so good performance on south region not seeing in terms of C&D or some of the other site special waste continues to be lumpy but the core business is improving and the Northeast would be where most significant volume declines were and it was quite honestly pretty much across the board other than our landfills.

Our landfill we took the approach of folding our pricing and we’ve been able to, these attract the volume consist with that. As I said there is continued pricing pressure up in the Northeast right now I don’t understand it quite honestly because there are some gain and if somebody thing go and try to attract the volumes through price it is just doesn’t come out of another site and we cannot fight for that volume and pricing is going to go down. So we’ve taken the approach actually hold pricing when they get the right longer terms strategy I would hoping to see that start to turn in the second half.

The correction side of business is nearly where we saw the most significant impact the more volumes and that very much target in correction like the business in the market.

Operator

Your next question comes from the line of Bert Powell with BMO. Your line is open.

Bert Powell - BMO

Thanks. Joe just wanted to go back to the increased maintenance and fuel costs in the quarter related to the timing of the arrival of capital assets. And I guess I am interpreting your comments in that you spent more than you think you otherwise would've to keep stuff on the road and you didn't get the fuel benefit because of this delay and this is mostly an impact in the US South?

Joe Quarin

So Bert when we do our annual planning historically the way we’ve done it is the field will submit their capital replace and we aggregate an ultimately prioritize where we think they need this, when Kevin was taken over a COO one the first thing he did was actually look at the capital planning and in line with strategy and I’m going to turn it over Kevin who’s going to provide little more color on this.

Kevin Walbridge

Bert, when you look at the issues it’s just not on the south we also had a CNG station in Quebec and Montreal that’s delayed is costing the sum both in the labor and in fuel expense, but what we’ve done is instead of replacing real load trucks are going to automated which did delay deliveries so it’s not necessary on the manufacturing side it was just a conscious decision that we made, but doing that it has driven our maintenance cost to keep that fleet operational to service our customers in the first half, spend more than we would have thought we should spend but it was right decision long-term as we wait for the those trucks to come online.

We have started to receive those orders we have trucks that were deployed, and in last couple of weeks we start to see a good volume of it. They are very much back loaded into July, August, September deliveries but they will have a material impact. And we’ve already went back and look at those nonrecurring maintenance items and feel very, very comfortable with that comes back online and we made the right decision we did the right things necessary to one redeploy some assets and to keep our customer service until this new fleet was on the road.

Bert Powell - BMO

So the real benefit, Kevin, then from this in terms of I think the commentary in the press release says significant EBITDA increase, is maybe it is going to be a little bit more gradual given your timing on delivery through 3Q and the real benefit comes in Q4?

Kevin Walbridge

I think that’s right, we had those fleets, the fleet gets out we ramp up, the other benefit that’s in there obviously is, it’s a lower labor cost to operate these vehicles because we reduce the headcount that’s actually servicing the customer. So that’s also a gain that we’ll get and it will ramp up steadily from 3 to 4 but we really like the jump off point that it gives us going into ’15.

Bert Powell - BMO

Right, okay, Thanks for that clarification. Ian, just back to the OCC pricing in the US Northeast. Can I assume that $600,000 would have been all EBITDA?

Ian Kidson

Yes.

Bert Powell - BMO

Okay. And so the outlook for -- have you seen any change in that? Is the current outlook for your EBITDA expecting stable at current levels or are you expecting some uptick in that as the year goes along?

Ian Kidson

No, we -- when we look forward we just contemplated that pricing is flat for the rest of the year.

Bert Powell - BMO

Okay and just to be clear you said it was 40 basis points was the impact on EBITDA margins in the northeast because of the asset sale late in the quarter?

Ian Kidson

Yes.

Bert Powell - BMO

Okay and just and really what was -- why did that have an impact?

Ian Kidson

Because we were losing cash at it.

Bert Powell - BMO

Okay.

Ian Kidson

And we -- our original plan was to actually sell it in January this year and it just got held up in the regulatory approval process.

Operator

(Operator Instructions) Your next question comes from the line of Derek Spronck with RBC Capital Markets, your line is open.

Derek Spronck - RBC Capital Markets

Yes, good morning. What are the $50 million to $60 million in cost extraction over the next three years you pointed to in your Investor Day, how much of it would you say you could extract in year one, or what sort of cadence could we expect on that?

Ian Kidson

Kevin, why don’t you take this?

Kevin Walbridge

When we look at that -- we talked about those trucks that are coming in and we’ve identified already basically every route that we believe we can get those benefits by changing out the equipment and in fact we have already play for 2015 truck orders as Joe alluded to in his comments so that we are going to try to frontload those gains in 2015. Not really in a position to quantify what amount of that savings comes and during what period, but I can assure you that the plans we have and we’re using our regular fleet replacement schedule to gain the benefit instead of going through an accelerated process. There’s two reasons for that; one, we need to make sure we can digest and act on all those items and achieve and make them sustainable; two, it does take time to get those equipment and we’ve looked out five years at our CapEx spend, feel very comfortable that we can just have a steady diet of replacement and achieve all our targets using those capital assets.

Derek Spronck - RBC Capital Markets

That's great. Just on another topic, a little bit more theoretical I would assume, but asset and volume swaps -- are you active in those conversations with your counterparts? Is this something that we could see actually occur in the future and would this be an enhancement to your strategy?

Joe Quarin

Derek, absolutely, when we talked about the best owner strategy, we are looking at markets where we’ve got very small position it just doesn’t fit anymore, we don’t have the right assets for whatever reason and we’re -- you know our first preference is always to find somebody that we can swap an asset and so rather declining our revenue base, we actually had one of those take place this quarter in the second quarter. It was very small but it’s still just indicative of the approach we want to take.

Derek Spronck - RBC Capital Markets

So people are receptive to this in the industry? Is this relatively new, or has this always been the case but just now you are more focused on your improvement of your asset and volume base?

Joe Quarin

Yes I know that this is something that this industry has always looked at, where the best owners are and I think everybody is receptive to doing it, the challenge is, you’re trying to make a deal, right. So it has to work with both sides and that’s always -- takes time to try to figure it out.

Derek Spronck - RBC Capital Markets

Okay, great, thanks. And super quick I just want to make sure I got the information right, but the Peel contract, it's a great contract, did you say it is starting in mid-2016?

Joe Quarin

It starts January ‘16 so once we put out our guidance next year we do have to make sure the trucks are on the ground in December of ’15.

Derek Spronck - RBC Capital Markets

Okay makes sense, and the trucks are going to be automated?

Joe Quarin

Automated CNG, which is consistent with the strategy that we want to move away from rear loaders.

Derek Spronck - RBC Capital Markets

And then how much collection tonnage would it be.

Joe Quarin

Can’t remember exactly it’s 50 some odd routes I think.

Kevin Walbridge

And also that all the tonnage in that contract flows through the Peel’s directed resources, so there’s no benefit from tonnage, it’s purely an operating contract with returns involved.

Operator

Your next question comes from Rupert Merer with National Bank. Your line is open.

Rupert Merer - National Bank

Good morning, everyone. M&A activity seems to be relatively light. Can you talk about the market for M&A, how it is evolving and how you might allocate capital to M&A versus share repurchases over the next few quarters?

Joe Quarin

Sure. I’d say this past quarter actually it was quite active for M&A group. We looked at a lot of opportunities. We see a lot more on the docket in terms of looking at them going forward, but we are maintaining the discipline and we had several that we just couldn’t get there. So we initiate the share buyback late in the quarter and expect to continue to buyback our shares and if we can find better returns through growth.

Rupert Merer - National Bank

Are you seeing any evolution in pricing in the market or prices might be a little high on the acquisition if you are looking at, but is the pricing environment evolving at all?

Joe Quarin

It’s an interest environment because you’ve got private equity out there chasing the industry. I think time will tell on their given success given some of the prices that we want to pay, but there are also who want to take leverage at 5.5 to 6.5 turns, we don’t want to do that. So if they want to pay up, they can pay up. One the other hand, I think all of us are also learning from our past experience. The best companies in this industry are the ones that have been running a business and a built business over many, many years. We are not interest in buying companies that had a quick roll up over four five years, because but I think you just don’t know what you are getting and I am not going to suggest this is a sustainable business model and we are not going to pay a high price for it. So I think everybody in the industry is coming to the same realization and it’s going to be good for the industry because it is going to bring a lot more discipline and ensure that any M&A that does take place is successful and that’s ultimately what we want.

Rupert Merer - National Bank

Are you seeing any regional differences in pricing expectations?

Joe Quarin

Not really. It’s across the board and it’s really about if somebody’s uncle sold a business for eight times EBITDA, they think they should get eight times EBITDA and even though their business fundamentally completely different. So there are so many factors that go into it and that’s part of the process we engage with potential sellers is making sure that they understand that we’re buying a cash flow stream ultimately and we are looking for sustainability over the top line, we’re looking for what’s the condition of their business, what line of business are they in, all those factors matter and a multiple EBITDA is somewhat irrelevant to put honestly.

Operator

Your next question comes from Scott Levine with Imperial Capital. Your line is open.

Scott Levine - Imperial Capital

Hey, good morning guys. So on the fleet initiative, it sounds like some puts and takes and certainly appreciate the fact that you are committed to this program for the long haul. But just maybe a question with regard to I know you laid out five-year targets at the Investor Day, that's a long way off, this is one quarter. But how should we thinking about that and then maybe tracking your progress, are you expecting that to be a ratable process to those five-year targets, or front or back loaded? Maybe a little bit more color there one quarter in after the Investor Day here.

Joe Quarin

Sure. I will just give you a couple of opening remarks and then turn it over to Kevin, but essentially I think we mentioned at our Analyst Day, we expect a lot of those savings to really be front-end loaded over the first three years and it was part of Kevin’s operating plan once he took over as COO. So Kevin if you want to provide some color.

Kevin Walbridge

Yes. So one of the things that we’ve done is we’ve actually gone out and taken a look at every truck and every rail we operate throughout the company and identified what the opportunity is to improve the return with those assets. So I’ve got Tom Miller in my operations and David West in my purchasing group, done a tremendous job. But we’ve actually stacked rank by return every asset and identified which ones we could get in which order to improve that. So we have gone out and I think my view is we are going to front load this by picking the routes that we can get the best returns first. And in fact, as I mentioned earlier that we’ve focused on getting our 2015 orders in and we prioritize as the truck that can bring us the bring returns is the first one that get’s delivered. So I think we are going to see more front loaded than back loaded. We’re going to take the low hanging fruit where we can and I think that will create a front loaded opportunity.

Joe Quarin

Yes. And Scott just from timing perspective because of the changes that Kevin made to our capital plan this year is to really just push back our capital spend in ’14, so I think ’15, Kevin is trying to say a lot of our capital coming in the first half of the year, so we can get some of the benefits that we outlined.

Scott Levine - Imperial Capital

As a follow up maybe a little bit more color you gave some with regard to Canada, but just in general macro landscape, West and Eastern Central, maybe any changes there worth noting or not?

Joe Quarin

No, not really. It continues to remain a somewhat export driven economy. The West continues to perform well for us, so we are quite happy with the way it’s moving. Central Canada appears to be stable which is great and there is optimism with the dollar where it is now versus a year ago that exports will continue to improve and if the U.S. economy improves that will benefit Central Canada Ontario and Quebec. So really not a lot of change they keep taking balance or a growth expectations but nothing significant. On the fifth side what we’re seeing is some positive trends taking place they’ve done in Florida so that kind of bounces our Texas operations Louisiana and now Florida we’re seeing the early signs of pick up down there and we’re optimistic about with that area.

Operator

As a reminder, please limit your questions to one then re-queue for additional questions due to the one hour time front. Your next question comes from Derek Sbrogna with Macquarie. Your line is open.

Derek Sbrogna - Macquarie

Hey, good morning, gentlemen. Thanks for taking my question. I was just wondering if you could in the context of some of the headwinds you have had in the first half of the year, maybe provide an update on the outlook for margins by region for the back half of the year?

Joe Quarin

Derek, we don’t actually go into that level of detail by region, by just directionally I think we’re going to see stronger margins in every region versus the first of the year certainly the Northeast will continue to improve from here and Canada will get from the gas plan and then our south region will benefit from all the equipment that’s going to come in. So every region should be higher trending going in the ‘15.

Derek Sbrogna - Macquarie

Okay, great. And then just as a follow-up, tailing in on the back end of the last question, can you talk a little bit about what you are seeing in the commercial environment in Canada? Are you seeing net new business formations and then within your existing customers are you seeing service level increases, or are those still kind of net neutral?

Joe Quarin

Gas up in Canada it’s really pretty flat we’re not see new formations other than maybe some in Alberta but other than that is really being pretty flat environment out there and it’s really market by market, the market that are most impacted where they’ve had large plant shut down or clearly that going to have an economic impact, but in general Canada is pretty consistent, pretty flat. Our volumes were actually up in Canada overall but pretty consistent.

Kevin Walbridge

I agree with that and the other in two Derek is that all the volumes are flat there are still good acceptance of price in the Canadian markets and we’ve been solid up there with that, but so the business formations slow down has an impacted price.

Operator

Your next question comes from Chris Bowes with Canaccord Genuity. Your line is open.

Chris Bowes - Canaccord Genuity

Hi, thanks. Just a quick question really on the competition in the US Northeast. I'm just wondering if you can talk to us about what you have seen so far in the third quarter to date and maybe what needs to happen do you think before competition really starts easing in that segment?

Joe Quarin

We are actually encouraged by what we are seeing up in the Northeast, we are seeing a lot more discipline coming into the market and I don’t know what’s driving it other than it’s been a very prolonged downturn and then maybe a little fatigue. So we are seeing that pricing is starting move up, we’re also seeing the economic environment improve as well so people feeling a lot better about their outlook and they’re more receptivity to pricing

So far nothing right home about turns us significantly higher volumes economically but definitely more receptivity to pricing and we certainly pushing that on our business as well.

Operator

Your next question comes from Charles Redding with BB&T. Your line is open.

Charles Redding - BB&T

Good morning, gentlemen. Thanks for taking my call. If you could just maybe talk a little further about core price trends on the aggregate as we go through the next handful of quarters in terms of thinking about inflation and maybe where you pick up a little more core price there from that? And then what was the headwind in the quarter from lower inflation with respect to price?

Joe Quarin

Okay. So we reinitiate a lot our sale programs in 2013 and so we’re really seeing the carryover form that. There is really no change in outlook in terms of what we expect to from the execution perspective, our pricing did move up ready to -- in Q3 of last specially up in Canada, so that going into the next year. But our guidance for the year 1.5% to 2% and really not lot change from our perspective for this year and even going forward anything I think we’re going to try to push pricing a little more aggressively down in the south region. Kevin anything else?

Kevin Walbridge

No, again we’re feeling good about pricing and as you see the economic recovery the acceptance price is getting better. So on our Florida operations we’re continue to get good pricing better than we’ve seen as Joe mentioned I think in the Northeast as well both in the New York markets where we have a parameter presence much more acceptance of pricing we have had historically.

Charles Redding - BB&T

That's helpful. And then do you see a bump from inflation next year? Is that more of a half 2 2015 event?

Joe Quarin

Certainly, fuel has moved this year so in those areas where you’ve got long-term contracts and fuels part of your index. We will benefit from that. We have quite a few franchise agreements down in our South regions, especially in Texas that will benefit on the reset and typically October. So any contracts that are linked to CPI will definitely get the benefit, but inflation is still pretty low right across the Board and it all depends on whether someone’s got poor inflation, has hit all index and just the formula really drives it and right now we are seeing pretty low inflation out there.

Charles Redding - BB&T Capital Markets

Okay. And then lastly, you may have mentioned this, I know you mentioned volume's positive as we progress sequentially on the aggregate, have you tweaked guidance for the year in terms of volume?

Joe Quarin

No, because we’ve been down in volume in the first half of the year, we are looking to term positive in the second half of the year. So I believe our guidance was flat a positive bias on the volume front and that’s consistent with where we are today.

Operator

We have reached the end of the allotted time. We will take one final question from Michael Hoffman with Stifel. Your line is open.

Michael Hoffman - Stifel

So either asking really fast or asking fairly one or the other.

Joe Quarin

You are on Michael, so go for it.

Michael Hoffman - Stifel

Thank you for taking my questions. I either ask them really fast or ask them thoroughly, one or the other. On the first one, around the CNG can you share with us what your perception of the diesel gallon equivalent is if you could your total annual gallons consumed and then proportionally what you think you are displacing with CNG so we can understand at a high level that contribution?

Joe Quarin

Kevin?

Kevin Walbridge

I don’t have in front of me that I can give it, but we can try to get back with John. From DGE standpoint, one of the things we are doing Michael as you know on the CNG, you’ve got percentage of your costs is under fuel delivery versus a commodity itself. So our strategy and that we’ve already invoked for 2015 is to extent the fuel posts that we already have compression in. So I think our 2015 price on CNG will actually be diluted because we are using existing compression. We have queued up stations to construct in 2016, which also I will give you more run rate CNG equivalent, so we are going to -- again, I talked earlier about picking the low hanging fruit. So our costs for the CNG deployment in ’15 will be better than normal, ’16 back into building some stations. So we are trying to utilize all the investment we have and take the lower price on that.

Of the number of trucks that we will probably in 2015, we are going to overweigh to CNG and I think we are at a point now that we are into overall 100 new posts are under construction as we speak today. There is a little tag on for stations that we own and then we will be looking at our CapEx plan to place those. So when you do the math of it depends on what you look at as the 40 gallons to 50 gallons consumed per day per route depending on what line of business and multiply that by those number of trucks you start getting in the range of where those come in and we should have those fuel posts online by the end of Q1, so that gives you a little bit of visibility to what that truck delivery schedule looks like in the gains.

Michael Hoffman - Stifel

Okay. And then the second -- thank you, Kevin -- the second, you made some comments about the North and pricing but you were going to be disciplined, yet Seneca has got an annual cap. And while it's not in use it or lose it you kind of have to put that ton all the way at the very end of the life to get it back again. So are you going to run Seneca full? And then I guess tied to that, since Seneca is tied to the New York City contract, any news or visibility on the negotiation with the Port Authority?

Joe Quarin

In terms of the volumes up in the North East it’s actually a pretty complicated environment up there right now, there is heightened competition for a while. The weather impact at the first quarter and quite honestly those volumes didn’t just all come back, just the economic activity seem to be lower, special way to probably one stream that is affecting volumes in whole region the most. So assuming they come through that’s where we will fail, but we are not going to chase all the times and just keep taking pricing down in New York City or Long Island or any large markets.

Seneca, yes, to the extent that we can price the perfect pricing, we want to try and maximize utilization of our site. It is the one that’s been, that’s part of our long term plan proposal. In terms of what’s going on there, I really don’t have any update. We continue to cooperatively with other different agencies and the port authority and hopeful that something will be announced about at some point in the near future.

Michael Hoffman - Stifel

Okay, thanks. If I could ask one quick point of clarity, the capital spending numbers are now starting to move around. If you can't do it now, Ian, could we get a new graph that says, okay, here is what 2014 looks like maintenance growth infrastructure and now we are moving some out of 2014 into 2015 and so on and so forth, so we --.

Joe Quarin

Yes, Michael we’re not moving anything out of ’14 into ’15. ’14 is standalone if anything we benefitted from realizing some higher value on the assets that we sold, but we are not pushing anything out of ‘14 into ’15, this is not kicking the candy on the road, this is just making the right decisions. Kevin?

Kevin Walbridge

Michael, only other comment I would make. When you look at ’15 and I think it was mentioned earlier that you will see CapEx for the fuel trucks in Q4‘15 as we have to go operational, Jan 116 but everything else is fairly good run rate and as I mentioned, no new CNG stations in ‘15 so that’s a little bit in our core CapEx plan that makes ‘15 a little bit wider because we’re not going to chasing here those next year.

Joe Quarin

We just assume normal growth Michael, I think we’ve kind of said 8.5 to 9 on the replacement side up to 10 would take up the growth components and then it feels is just a large contract, it’s a 50 some odd roads you got to see in doing everything else that would be joining other than that that may or may not factor into that 1% on the growth side, it all depends on successful we are with other growth.

Operator

This concludes today’s Q&A session I turn the call back over to Joe Quarin.

Joe Quarin

Thank you everyone for taking the time to join us today and we look forward to updating again when we report our third quarter results in October. Have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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