Waste Management Inc (WM) — Q1 2015 Earnings Call Transcript

Thank you, Tanisha. Good morning, everyone, and thank you for joining us for our first quarter 2015 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedule for the press release included important information. During the call, you will hear our forward-looking statements, which are based on current expectations, projections or opinions about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K. David and Jim will discuss our results in the areas of yield and volume, which unless otherwise stated, more specifically references to internal revenue growth or IRG from yield or volume. Additionally, any comparisons, unless otherwise stated, will be with the first quarter of 2014. For comparative purposes, our first quarter of 2014 results have been adjusted to exclude certain amounts attributed to divested operations. Please see the tables attached to our press release for additional information. During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share. David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the earnings press release in the Form 8-K filed today. EPS, effective tax rate, income from operations, income from operations margin, operating EBITDA, operating EBITDA margin, operating cost, operating cost as a percent of revenue, SG&A, and SG&A cost as a percent of revenue results discussed during the call have been adjusted and EPS projections are anticipated to be adjusted to exclude items that management believes do not reflect the fundamental business performance or are not indicative of our results of operations. These measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and the schedule for the Form 8-K filed today, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 p.m. Eastern Time today until 5:00 p.m. Eastern Time on May 13. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, dial (855) 859-2056 and enter reservation code 16632898. Time-sensitive information provided during today's call, which is occurring on April 29, 2015, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO, David Steiner.

Thanks, Ed, and good morning from Houston. We're very pleased that we earned $0.49 per share in the first quarter, an increase of almost 9% from our 2014 first quarter results, when adjusted to exclude the earnings from divested businesses and assets. Our EPS increased despite $0.03 of year-over-year headwinds from lower recycling commodity prices and the unfavorable impact of foreign currency fluctuation. Our field and corporate teams overcame those headwinds through continued improvement in our pricing and cost control programs. This led to growth in income from operations, operating EBITDA, margin, and free cash flow and marked a strong start to 2015. These results were in line with our internal expectations and we expect to see continued improvement as we progress throughout the year. During the first quarter, we reinvested a portion of the proceeds from the sale of our waste-to-energy business. We completed the acquisition of Deffenbaugh Disposal at a pre-synergy operating EBITDA multiple of just under 8. Once fully integrated, the acquisition should add about $52 million of annual operating EBITDA. On the acquisition front, we continue to have discussions with sellers, but will remain disciplined and not overpay for assets. If we cannot identify core businesses to acquire at reasonable prices, we'll buy the business that we know the best, ours, by doing a share buyback. Even if we do identify acquisition targets at reasonable prices, we will still purchase at least enough shares to offset dilution and we'll begin buying those shares in the second quarter. Turning back to our operations. Our pricing programs continue to drive earnings growth and margin expansion. For the first quarter, our collection and disposal core price was 4.4% and yield was 2%. We've now seen eight consecutive quarters of yield at 2% or better. In the first quarter of 2015, each of our lines of business had positive yield. In the first quarter, we also saw core price improve 20 basis points from the first quarter of 2014 to the highest level that we've achieved. We also saw the highest core price ever in each of the commercial, industrial, and landfill lines of business. Core price in the industrial line was 9.4%, 6.6% in the commercial line, 2.3% in our landfill line, and 2.1% in our residential line. This is a tremendous accomplishment by our team in light of depressed CPI levels. So we continue to use core price to drive margin expansion. And in the first quarter, our traditional solid waste business income from operations margin increased 110 basis points and our operating EBITDA margin increased 130 basis points. Clearly, the trade-off of emphasizing core price over obtaining lower margin volume remains very positive for us. Turning to volumes, our traditional solid waste volumes declined 1.2% in the first quarter of 2015 versus a decline of 3.2% in 2014. We saw some very positive trends in our commercial and industrial lines of business. The losses in our commercial volumes improved 200 basis points from the first quarter of 2014 and industrial volume losses improved 520 basis points. Both the commercial and industrial lines of business saw the lowest rate of decline in seven quarters. So the volume trends are very positive. The revenue trend was not as positive, but it reflects the loss of low margin work that we intentionally shed. Total company volumes declined $95 million or 3% in the first quarter. The overall volume decline stems from a $51 million decline in national account contracts and residential business as we shed this low-margin business, consistent with our revenue strategy. We also saw a $43 million decline in our commodity driven businesses, from lower recycling commodity sales driven by the West Coast port slowdown and to a lesser extent, lower landfill gas-to-energy sales. Consequently, although total volumes are down more than we expected, it's due primarily to volumes in lower margin lines of business. While the volume trends in our most profitable lines of business are encouraging and we expect the positive momentum to improve as we see our normal seasonal upturn. Our recycling operations resulted in a $0.02 decline in earnings per share compared to the first quarter of 2014. This decline is due to the more than 14% drop in average commodity prices for the quarter and an 8% decline in volumes associated with the slowdown in Western U.S. ports and contractual losses as we renegotiate contracts to include improved processing fees and rebate structures. On a positive note, we've seen our operating cost improve as we tighten our enforcement on contaminated loads, and our capacity utilization is at the highest level that we've seen. However, the operational improvements have not been enough to offset the decline in commodity prices. So we will continue to look to improve operations and rationalize our recycling assets until we see the market improve. Given the continued weakness in overall recycling commodity prices and lower volumes, the full-year impact from our recycling business is now anticipated to be closer to negative $0.10 per share when compared to 2014 versus our original outlook of between negative $0.03 and negative $0.05 per share. We also expect foreign currency translation to continue to be about a $0.01 per share headwind per quarter for the remainder of the year. So 2015 is off to a strong start and we have the momentum to achieve our full year goals of adjusted EPS of between $2.48 and $2.55 per share despite lower-than-expected recycling results and foreign currency translation headwinds. We also expect to achieve our full-year free cash flow guidance of between $1.4 billion and $1.5 billion. As we move through the second quarter and see the seasonal upturn, we expect to see continued improvement in our volumes. Combined with our focus on costs and pricing, this should lead to continued growth in earnings and free cash flow. I'll now turn the call over to Jim to discuss our first quarter results in more detail.

Thanks, David. In the first quarter of 2015, we opted to refinance a significant portion of our high-coupon senior notes. This involved a combination of make-whole redemption and a cash tender offer to acquire certain senior notes, resulting in the issuance of $1.8 billion in new senior notes. Consequently, we reduced our portfolio's weighted average interest rate by 100 basis points, extended the average duration of these debt obligations by 3 years, and decreased senior note debt by $181 million. The after-tax charge for the early extinguishment of debt related to these refinancing activities amounted to $344 million. We also encountered two items on our balance sheet this quarter. We had a true-up from the sale of our Wheelabrator subsidiary, which lowered our gain on sale, and we wrote down a short-lived landfill asset. These two factors negatively impacted our earnings by $0.03 per share but did not affect free cash flow. In this quarter, our efforts to reduce SG&A costs have been fruitful. Overall, SG&A costs fell by $27 million compared to the first quarter of 2014. After adjusting for the operations we divested in 2014, our year-over-year SG&A cost improvement was $15 million, aligning with our expected savings from our reorganization. Given the strong performance in the first quarter, we anticipate achieving our full-year SG&A goal of reducing costs by $60 million. Looking at cash flow for the first quarter, free cash flow was $285 million, an increase of $22 million compared to the first quarter of 2014, excluding the $221 million of free cash flow from operations divested in 2014. Our capital expenditures for the quarter totaled $233 million, $33 million lower than the first quarter of 2014. However, we spent a similar proportion of capital relative to revenue for both years. Given our strong start this year, we still expect capital expenditures to be around $1.2 billion to $1.3 billion, and free cash flow for 2015 is forecasted to be between $1.4 billion and $1.5 billion. First-quarter revenues reached $3 billion. Alongside a $220 million impact from divestitures and a $25 million effect from foreign currency fluctuations, the lower fuel surcharge adversely affected revenues by $36 million. In terms of internal revenue growth for the first quarter, our collection and disposal core price rose by 4.4% while volumes declined by 1.2%. This resulted in total company operating income increasing by $21 million, with the operating income margin expanding by 130 basis points and operating EBITDA growing by $11 million, with its margin improving by 140 basis points. Our collection business lines continue to benefit from the price-volume trade-off, with commercial core prices at 6.6%, industrial core prices at 9.4%, and residential core prices at 2.1%. Along with our strong pricing momentum, we observed some positive trends in volume. Commercial volumes experienced a decline of 2.8% in the first quarter of 2015, a significant improvement from the 4.8% decline of 2014, marking the best result in seven quarters. Industrial volumes improved from a negative 5.7% in Q1 2014 to a negative 0.5% in 2015. In April, we expect industrial volume to turn positive for the first time since Q1 2013. Residential volumes dipped by 3.1% in Q1 2015 compared to a 3.5% decline in 2014, although these losses were somewhat intentional as we prioritized price over volume in our residential line. Overall, collection core prices stood at 5.7%, with volumes decreasing by 2.3%, representing a 220 basis point improvement from Q1 2014. This core price and volume dynamic led to nearly $14 million growth in operating income, with margins expanding by 140 basis points. In the landfill sector, we experienced positive volume and core price growth in Q1. Same-store average MSW rates increased year-over-year for the eighth straight quarter, rising by 1.2% from Q1 2014. Combining special waste and revenue-generating cover volumes, we achieved positive growth of 2.3%, with MSW volumes increasing by 5.7% and C&D volume climbing by 10.9%. Total landfill volume rose by 1.8%, resulting in $2.5 million growth in operating income, marking the eighth consecutive quarter of growth, with margins expanding by 40 basis points. While we believe that weather has had some impact on landfill volumes, the special waste pipeline appears strong, giving us confidence in positive landfill volumes throughout the year. Turning to our recycling business, we faced challenges due to low commodity prices and decreasing volumes, which negatively impacted earnings by $0.02 per share when compared to Q1 2014. That impact would have exceeded $0.05 per share without our initiatives to improve contracts and reduce operating costs, which included auditing inbound materials for compliance, renegotiating contracts to recover appropriate processing costs, and enhancing material quality through consumer education. We also improved our plants' operating efficiency. As previously mentioned, we expect our recycling operations to be a challenge all year, but we are now starting to see some positive results from our efforts. When commodity prices recover, we will be well-positioned for significant earnings improvements. Meanwhile, we will limit capital expenditures in our recycling operations, allowing us to allocate more of our anticipated $1.2 billion to $1.3 billion in capital spending toward core solid waste assets. Regarding operating expenses, we have made progress across all cost categories. For total operating costs, the percentage of revenue improved by 130 basis points to 64% and decreased by $131 million in Q1 after adjusting for divestitures. Of this improvement, $83 million came from lower diesel costs and a reduction in recycling commodity rebates to our customers. Our service delivery optimization program continues to benefit labor costs, leading to enhanced efficiencies across all collection lines. Labor and related benefits costs decreased by $17 million compared to Q1 2014, with the remaining savings primarily stemming from improvements in subcontractor costs. Looking at our other financial metrics, our debt-to-total-capital ratio stood at 62.3% at the end of the first quarter. Our expected weighted average cost of debt for 2015 is 4.3%, with the floating rate portion of our total debt portfolio accounting for 9% at quarter's end. In the first quarter, we returned $176 million to shareholders through dividends. As noted, we anticipate returning more cash to shareholders in the second quarter as we plan to repurchase shares to mitigate dilution. Our income tax rate for the first quarter was 41%. Adjusting for items excluded in our as-adjusted results, the tax rate was 34.2%, which aligns closely with our expected full-year tax rate of around 35%. In summary, aside from recycled commodity prices, nearly all of our financial and operational metrics exceeded our internal expectations and previous guidance. We anticipate this positive trend to continue throughout 2015. I would like to express my gratitude to our employees for their hard work in the first quarter and their commitment to making 2015 a successful year. Now, let's open the line for questions.

I apologize for the mechanical nature of my question, but in the press release, are the internal growth numbers you provided adjusted to exclude divestitures from the corresponding period last year?

Yes, we are pulling out divestitures, yes.

Yes.

Okay, so in other words, if you pull out divestitures, volume was down 3% just based on the operations that you still have?

That's correct.

That's correct, yes.

I'm getting a different number and I'm not sure why. Anyway, my question is about the core business, which seems to be moving in the right direction. Can you provide more detail on the areas where volume is declining, such as national accounts? Are you seeing increased competition there? Do you think you've reached the limit on what you can achieve with pricing?

Yes. Basically, Corey, that's the carryover of our largest national account that we lost last year and then two residential franchise contracts that we lost in our Southern group last year. And as you can imagine, all of those contracts were single-digit margins and not revenue that we wanted to keep without significant price increases. So that was business that we pretty much intentionally shed.

And the volume decline didn't accelerate in Q4, correct?

Pardon?

The volume was not down as significantly in Q4 as it was in Q1 of '15, is that correct?

When we analyzed the specific lines of business, we found that the commercial and industrial segments actually improved from the fourth quarter. In commercial, we saw a decline of 3.5% in the fourth quarter compared to a decline of only 2.8% in the first quarter. For industrial, the decline was 0.9% in the fourth quarter, and just 0.5% in the first quarter. This reflects the trends in our operations. What we aim to convey in both our scripts and press release is that we're experiencing increased volumes in our most profitable sectors. Conversely, we are observing decreased volumes in our less profitable sectors, such as recycling and residential. However, in residential, there's a slight year-over-year improvement of 40 basis points, and it decreased only 20 basis points from the fourth quarter to the first quarter.

Okay, yes. What I'm trying to understand is given the overall improving environment. David, I see that things are progressing positively in the commercial and industrial sectors. Is it becoming more competitive in the residential sector for some reason compared to the past year?

I wouldn't say it's becoming more competitive. Residential has always been a very competitive business. These contracts represent significant revenue and typically attract a variety of bidders. There have always been aggressive players in the residential sector. In fact, I would say we are witnessing a bit more stability in this area as those who have accepted low-margin contracts from us over the past few years are beginning to realize they can't earn much from them.

Especially, Dave, when you look at the capital that's necessary to fund those new contracts, people are starting to look at it a little more diligently than we think in the past.

Corey, you asked about the volume in Q4 compared to Q1 and the difference between our traditional solid waste volume loss of 1.2% and the 3%. To address the latter first, the 0.8% difference is primarily due to commodities, with 0.2% attributed to renewable energy and another 0.2% from oil and gas. Additionally, we have 0.6% linked to national accounts, which accounts for $21 million, with $18 million coming from Walmart. The shift from 1.2% to 3% is mainly driven by commodities, national accounts, and energy services, including oil and gas. When we look at the change from Q4, where the volume was down 0.8%, to Q1 with a 3% decrease, it doesn't appear drastically different. In fact, collections have increased slightly by 0.2%. However, energy services decreased by 0.5%, renewable energy was down 0.4%, oil and gas saw a decline of 4%, and recycling dropped by 0.4%. Moreover, landfills were down a bit from Q4, mainly because the special waste was softer than expected, likely due to the significant difference in weather conditions between Q1 and Q4.

Yes, that's really helpful, Jim. One more quick question before I pass it on. Do you have an estimate of the year-over-year impact that the lower fuel cost, net of the lower surcharges, might have had? I'm assuming there was some benefit.

Yes. That was about $0.02 in the quarter. But from our perspective, you get lower fuel because you get the recovery from the fuel surcharge. But we also have some oil and gas assets that we maintain. And so when you look at the overall effect, it was about flat.

A couple of questions for you, guys. First, thinking about the impact of the CPI on pricing. Do you expect the impact from CPI to change on pricing as we move through the balance of 2015?

No. I don't think that we'll see a significant change in CPI. But when we look at our pricing programs, we try to look at them holistically. And if CPI is lower, then we just have to get those dollars from somewhere else. And so if we get a bump from CPI, that would be great. But if we don't get that bump, we're just going to have to pull those dollars from somewhere else, and that's what we've been doing the last few years and that's what we'll do this year.

Got it. Thanks, David. And then in the recycling business, I'm not sure if you mentioned this, but is there any EBITDA in that business right now?

Right now, it's...

There's EBITDA due to the depreciation. There's a significant amount of EBITDA.

The impact of EBITs indicated that income from operations was negative $11 million year-over-year, Alex.

Okay, okay. Got it, got it. And then just lastly, is there any visibility on potentially seeing a benefit from coal ash volumes, either towards the end of this year or into '16?

Yes. We have a good contract that starts in the second half of the year. It won't have a significant impact, but it's a solid contract worth a few million dollars. We are also in ongoing discussions with various utilities, and I expect this to provide a steady stream of volume for the next 5 to 10 years.

So I just want to focus on, I think, Jim, you mentioned a 60 basis point volume headwind from national accounts and Walmart. To be clear, is that all associated with contract changes within the past 12 months or were there any additional changes this quarter? And then maybe a little bit more elaboration on your thoughts on that business in general going forward.

So I'll take that and then maybe Jim can add to that. Yes, for the quarter, and we expect that as we approach May, we won't face the same challenges from Walmart that we've experienced previously. This is not an issue affecting our bottom line but rather our revenue. We did lose some other contracts, some of which were intentional and some not. We lost a few due to aggressive pricing, and it's certainly a competitive marketplace.

Jim, what I would just add to that is that we are also winning new contracts. We have won some business, some additional business from current customers as well as some additional businesses that you'll see in future quarters. But that roll forward, in fact, from some of those large losses like Walmart will continue for, at least, first half of the year.

And when we look at that business from a philosophical point of view, look, we completely understand that sort of like the residential business, there's some stiff competition there. But particularly, where we can get that front-end small container work that we can tuck right into our operations and create that route density, that's really the kind of work that we want to pick up. The compactor work, like the Walmart business, is generally lower margin and it doesn't really help us from a route density point of view. And so our focus will be on that small container business. But we're obviously going to remain competitive in national accounts and we expect to continue to be the biggest player.

Got it. And just to be clear, and strictly for modeling purposes, was Walmart half of that 60 basis point volume impact or less than that? Or is it just to make sure we model the volumes right for the rest of the year.

I think it was a little more than half, Scott.

Little more than half, got it. And then as my follow-up. I think you mentioned plans to repurchase stock to offset dilution, share dilution in the second quarter. Just kind of, are you still holding off on, call it, the larger repurchase activity as you assess M&A prospects and maybe a little bit more elaboration on your thoughts on the acquisition landscape?

Yes. No, that's exactly right. So when we look at 2015, there's really two pieces to it. There's what I'd call sort of our normal recurring stock buyback. We generate a lot of free cash flow, a good portion of that goes back to our shareholders through the dividend and traditionally, the remainder goes back to our shareholders through a share repurchase and some of it goes into small tuck-in acquisitions. In 2015, we're getting back to that. And so what we're talking about doing in the second quarter, I would characterize as part of our sort of normal, recurring, returning of cash to our shareholders. On the redeployment of the Wheelabrator proceeds, as we talk to sellers, it's sort of interesting. You've got, really, two things happening. You've got expectations of price multiples, which are probably a little higher than we expected. But then you've also got some timing events, right? You've got private sellers that might have family or estate issues and then you've got private equity sellers that might have funds that they want to hold for a number of years that have sort of a liquidation time frame on them. And so what we're battling is price expectations and timing expectations. My guess is that by midyear, we will know whether we can meet both timing and price expectations. If we can't do that, then we'll buy back stock. Now that doesn't mean that we're not going to ultimately talk with those sellers and buy their business. If they have timing expectations that don't mature for 1 year or 18 months, we'll be talking to them in 1 year or 18 months and we'll buy them as part of our normal acquisition process. And so in the middle of the year, by sort of the end of the second quarter, we would expect to be in a position where we're going to make a call where we say we will either buy those businesses with the proceeds or we'll buy back stock with the proceeds. And if we don't buy those businesses with the proceeds, you'll probably see us continue to look to buy them over the next couple years as their timing gets better.

So just a clarification on volume. Are we still thinking about volumes turning the corner later in the year and either flattening out on the total basis or even being up?

Yes. So let's sort of look at those profitable components that we talked about before. On industrial, we actually saw volumes turn positive in April. They were only negative 0.5% in the quarter. And we actually saw them turn positive in April. So I would expect that we would see positive volumes from the industrial side going forward. The landfill side has always been positive volume. But we would expect to see that get better as we get to the seasonal upturn. We had a little bit of a weather effect in the first quarter. So we'd expect to see those volumes improve. On the commercial side, again, we're 200 basis points better than we were in the first quarter of last year. We're 70 basis points better than we were in the fourth quarter. We would expect that sort of rate of improvement to continue. Such that by the end of the year, I would expect that we'll be closer to flat on the commercial side. So if you look at commercial being closer to flat, industrial and landfill being positive, I think that could lead to positive volumes by the end of the year in those three lines of business. Now the headwinds you have are basically national accounts and the residential line of business. Those will be slight drags, but again, those are low-margin drags, so we're willing to live with those. So when we look at the core solid waste business, the negative 1.2% that we had in the first quarter, we completely believe that by the end of the year, those will be flat to positive such that our guidance for the year of negative 0.5% to flat volumes is still valid.

When considering how the volume translates to top-line revenue, we observed that collection, disposal, and transfer revenue increased by about $25 million, which is almost entirely organic as we had few acquisitions in the past year. However, we faced a negative impact of $70 million from recycled commodity prices and volumes. Additionally, factors like the fuel surcharge, foreign exchange, the lost Walmart contract, and some losses in national accounts contributed to the overall situation. Nevertheless, the improvements in volume numbers within our core business are driving top-line revenue, and we are satisfied with the $25 million gain from those three core areas.

Well, actually, Jim, so to that point, maybe you can help me understand the disconnect here. If I just add up the numbers that I have for collection, disposal, and transfer, acknowledging that there's some component that's going to go to intercompany, if I'm just adding it up, I'm coming up with a flat number versus last year. So are you stripping out FX to get to that $25 million? Or are you stripping out fuel? What am I missing?

No, you're adding in price. When you look at it from a total revenue point of view, you've got to add the price in as well as the volume component.

FX is not included in that $25 million. So I've broken it into a couple of different buckets, which was our core solid waste, collection, disposal, transfer, those, price and volume, excluding divestitures, was up $25 million in revenue. And then the second factor was a negative $70 million in recycling. And the third factor was $36 million negative in fuel surcharge, $25 million negative in FX, and $21 million negative in national accounts.

Okay, great. Thanks for the clarification. So I'm just looking at the core solid waste business and I'm curious, what are you specifically seeing that gives you the confidence that you can offset that incremental $0.05 to $0.07 headwind in recycling? Or is that just a moot point because you guys prefer to address the guidance in 2Q?

We are now much more confident that we will achieve the revenue we anticipate from our pricing program. We continue to see strong improvements in our costs, both in SG&A and operating expenses. Additionally, we are feeling a bit more optimistic about our volume outlook compared to the beginning of the year. This quarter has been quite interesting for us. Initially, when we noticed the revenue decline, we were taken aback. However, upon further examination, we discovered encouraging trends in our profitable business segments. Although we have lost $70 million in revenue from recycling due to commodity prices, our commercial and industrial landfill line shows promising developments. These positive trends emerged despite experiencing adverse weather conditions in the first quarter. Overall, we are quite bullish about volume growth, very confident regarding pricing, and believe we will gain more from our cost initiatives than we initially anticipated for the year.

Got it. One last one for me then. So why does recycling actually get worse as we move through the year sequentially? I mean, it seems like pricing is somewhat bottomed and comps should get easier. So why would the headwind actually get worse?

Yes, I'm not certain if the price has truly hit its lowest point. It is at an all-time low, but we haven't observed any signs of stabilization. The second and third quarters will present some challenging comparisons, although conditions may improve slightly in the fourth quarter. Additionally, we are facing an 8% decline in volume, which we do not anticipate will get better this year. This situation is largely influenced by commodity pricing. We are approaching this with some caution as we don't see any significant catalysts that would lead to a rise in commodity prices.

Joe, I think what you're probably thinking is why can't you just straight line the $0.02 and come to $0.08 and the reason is that commodity prices dropped throughout the quarter. So we're looking at kind of straight lining from the commodity price in March, which was the lowest of the three months.

Yes, for the quarter in March, it was down 14%, but for the month, it was down 24%. So we're essentially projecting that low price for the rest of the year.

I want to continue discussing recycling. Can you help us understand the mix issue you are facing? Additionally, could you explain the contract structure issue, which likely requires a multi-year resolution? Ultimately, does the macro theme you presented for handling 20 million tons of recycled product still resonate with shareholders?

Yes. So Al, a couple of things. First of all, on the contracts and the mix issue. Each of these contracts has an expectation as to mix of commodities. And when that mix changes, we have to address that with the customer. So for example, we've talked quite a bit about glass over the last couple of quarters. Glass is heavy, so the customers may like it. We don't like it as much. It's only the commodity that we don't get paid for on the back and we actually have to pay to get rid of it. And so as glass goes up, as an example, then we have to address that with the customer, if there are limitations, mix limitations within our contract. Similarly, if there are contamination level restrictions. So for example, if a community has a restriction of 10% contamination levels and when we go through an audit, we find that there are 20%, then we have to recover some of that. So part of what we're doing through our recycling team is really taking a tough stance on holding customers to contracts on contamination levels and material mix.

Jim, I would add that those two issues are absolutely related because some of the mix issues that are caused as cities and counties want to divert more waste add to contamination level in some of those commodities. And many of our older contracts don't allow us to charge. That's what we're changing. We're going in, some of them in mid-contract and having some success, most of them though, we'll wait until the contract ends until we can change the terms and allow us to get paid for their mix issue or their contamination issue.

So it's clearly a multi-year undertaking here?

Yes, there are two parts to address. First, we need to tackle the mix and contract issues, and second, we have to improve operations. We still see opportunities to consolidate plants and reduce operating costs, and we believe we can make further progress in that area. As Jim mentioned, if it weren't for the progress we made in the first quarter, we would have faced a significant issue related to pricing. We still believe there are operating costs we can eliminate. We will need to consolidate some plants and rationalize our assets. It's important for customers to understand that we are not the only ones rationalizing assets; this is happening throughout the industry. If we can't find a way to make recycling profitable in the long term, recycling will struggle to continue. Customers do not want to face that reality. We must ensure that customers realize that if they want glass to be recycled, we need to be compensated for that service. In the last quarter, we incurred a loss of $6 million from recycling glass, which is not sustainable for Waste Management over the long term. We need to collaborate with customers to help them understand the mix issues and the commodity market so we can establish a viable long-term business model for recycling.

The progress so far, David, has been limited. Is that because your larger customers in this area are not prepared to discuss until the contract comes up?

Yes, exactly. Most of these contracts are long-term contracts. And look, it's a long-term contract. We sign the contract, we will live up to the contract. But what they need to realize is, we'll live up to that contract but we're not going to be there when the contract ends and nobody's going to be there when the contract ends. So if they want us to maintain the facilities that we have in those markets, we're going to have to get some relief from these contracts or we're going to just have to shut the plants. And so I would hope the customers would say, 'Let's take a long-term view at it rather than a short-term view.' But as you know, as we generate $1.4 billion to $1.5 billion of free cash flow, there's not a lot of sympathy for our losses in recycling.

Al, I wouldn't say the progress is minimal. What has happened is that it’s been overshadowed by the significant drop in commodity prices. For the past two to two and a half years, our average commodity prices were around $100. In 2014, they finished at $98, but suddenly dropped to $82. We process between six to seven million tons a year, which makes this a substantial decline to manage. While we have made good strides in controlling costs and maintaining customer contracts, the steep decline in commodity prices has made it difficult to overcome.

So, are you not able to take more aggressive action yourself and walk away from these contracts?

Well, we're looking at everything. But it's hard to walk away from a contract at times.

As a follow-up to recycling. Could you address what your expectations are for the commodity market actually in the back half of this year? There seems to be a narrative out there that we're nearing the bottom... But there's obviously a lot of variation in pricing. And the headline numbers are probably masking some positive momentum in certain commodities.

Yes, look, I think that we are still seeing some pressure on the recycling commodity prices. I mean, we are seeing some indications in several specific commodities that there's starting to be some stabilization and some beginnings of improvement, but overall, I agree with you. I've seen some headlines that suggest some others maybe not performing quite as well and drifting downward. So, on net, it's a mixed bag in the recycling world.

As we think about the recycling commodity pricing, again, there's a massive price decline that's occurred in the first quarter. In the second and third quarter, many of the weaknesses will still be in place. It's really about the consumer pricing. There's a lot of pressure from our customers that they'll take the first contract that we have.

I'd say, David, we feel like the recycling operations will remain challenged. But when you look at all the things that we're doing right now, if it becomes a little more favorable environment, we could see some operational efficiencies drive the business when the market turns.

On the industrial side, it certainly sounds like your seeing improvement here. I guess as we look ahead, how do we rectify what looks to be slowing industrial production in a tough market for U.S. exports with the expectation for stronger volume growth?

Well, it was mentioned earlier. You've got the coal ash coming. But you've also got a huge amount of construction being done along the chemical corridors, right? From Houston to Beaumont and up to Baton Rouge and up through Pennsylvania where you've got very low natural gas prices, you've got some huge projects being built. We expect to get good volumes out of that. And then when you look at the residential and commercial construction, those numbers look fairly strong. So we think that the economy's going to be finally a little bit of a help to us on that side. Now remember, we also have a lot of those hauls in our energy services. We really haven't seen a dramatic drop on the energy services side. And so we've got well-positioned in still some good shale plays there. So we see pretty positive trends throughout the various sectors that drive industrial hauls for us.

Okay, and then I guess just a little follow-up on Canada. I realize it's relatively fractional for you. But can you speak to, perhaps, what you're seeing there? And then I guess, has the macro pullback had a material impact on the recent volume growth in the region?

I think it's kind of the tale of kind of two parts of the country. Western Canada is, particularly Alberta, suffering a bit from the energy price decline. Eastern Canada seems to be reasonably strong, similar to kind of Northeast U.S. cities.

Just, Jim, can you help us out on the cadence of cash flow and just why Q1 was such a large working capital drag? I don't know if that was the cash taxes paid on Wheelabrator? Or if your cash conversion cycle creeped? And then maybe how do we think about the full year impact of working capital in your cash from ops guidance?

Several factors affecting working capital are worth noting. First, you may remember that for our bonus payouts, specifically the annual incentive compensation payout that was scheduled for March 2014, we accelerated part of that into December 2013. This meant that while it was for the 2013 fiscal year, some of it was paid out in 2013. This year, however, we did not take that approach, which led us to anticipate a working capital negative headwind in March. This headwind amounted to about $65 million, primarily due to the acceleration from the prior year and, in part, because of a higher payout for 2014 compared to 2013. Additionally, there was about $21 million in mostly nonrecurring cash payout related to the 2014 restructuring. We have approximately $12 million remaining that will be distributed over the next three quarters, but we incurred $21 million in the first quarter, largely as a result of that restructuring effort. Furthermore, in 2014, we benefited from a $36 million settlement of a forward-starting swap which did not occur again this year. In terms of year-over-year comparison, those were the negative impacts, while a positive aspect was that EBITDA increased. Additionally, we made strides in managing working capital, particularly in Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO), with DPO improving by 2.1 days and DSO increasing by 0.6 days, showing significant progress compared to a couple of years ago.

Okay. So is working capital a drag in cash from ops guidance or is it neutral?

Working capital was definitely a challenge in the first quarter. However, we expect some favorable developments as the year progresses. For instance, the San Jacinto settlement from last year won't occur again, which will positively impact our working capital. Additionally, we anticipate that the cash impact from the restructuring will significantly decrease in the second quarter. Also, the headwinds from the incentive compensation payouts won't be a factor moving forward.

That's helpful. I want to understand CapEx a bit better. Looking at the trailing 12 CapEx, even after adjusting for divestitures, it's about 8.5% of sales. There's a common belief that you need to be above 9% of sales for pure maintenance. Am I missing something, or how do you explain the difference in the CapEx?

We've indicated a range of 8.3% to 9%, which we mentioned last year. The first quarter is typically slow, and the revenue for this year's first quarter was 7.7%. If I compare it to Q1 of 2014, which was 7.8%, and Q1 of 2013, which was 7.9%, we're not far off from those previous years. For 2015, we anticipate revenue to be between $1.2 billion and $1.3 billion, which poses a bit of a challenge for our free cash flow since we only spent $1.150 billion last year. This means we will invest between $50 million and $150 million more in CapEx, and without the Wheelabrator assets, this will represent a higher percentage of revenue. Therefore, not only will 2015 see an increase in total dollars spent, but it will also rise as a percentage of revenue.

Okay, that's helpful. And then just maybe if I can squeeze in one last in here. Thinking about capital structure. But you guys have kind of swept some of the Wheelabrator proceeds, the net proceeds, I should say, maybe to Deffenbaugh, you had your note repayment, maybe you've deleveraged a little bit. But I've got you at about, call it, 2.7 on the leverage. You've got $300 million in cash. So when we think about future capital deployment, is the idea that you would relever to do so? And if so, what is the kind of the level of leverage you're willing to go to or what's your kind of optimal capital structure?

Yes. So if I think of us as being in kind of that 2.78 leverage ratio range, yes, I would expect that to increase slightly as we acquire some businesses to replace Wheelabrator going forward.

Jim, can we break down the 2014 EPS and the guidance for 2015? If I understand your information correctly and I appreciate the data you provided, it seems I should subtract $0.18 from last year's figure due to the divestments, then subtract $0.10 for recycling costs and $0.04 for currency effects. That gives me a starting point, and if I include the impact of buybacks, I can see growth from there. Is that the correct way to approach it?

Yes. And there's some interest expense savings in there too.

Interest expense would be included in that. Now, returning to the growth aspect of the solid waste segment, you may have shared this data, and I apologize if I missed some details. However, I recall that the weight per yard trends in your front-end loader business ended 2014 on a positive trajectory. How is that trend developing in the first half of this year? Additionally, how do you perceive the cycle of service interval upgrades contributing to your operating leverage?

Michael, when we look at the commercial line of business, I'll give you a few reasons why we're optimistic. First is you're right, the weights continued through the first quarter. We saw improvement there. We saw service increases exceed service decreases. So there's some good news there. But frankly, the best news that I've seen on the commercial line of business, we just went through reviews with our 17 market areas. And 12 of our 17 market areas had net positive new business in the first quarter. The other good part of that news is that over two-thirds of that new business was greenfield projects, new businesses that are created, not stealing share from somebody else. And so I think what you're seeing is a better secular trend. And what you're seeing is that we're taking advantage of that better secular trend.

Okay. So following through with that then, on your C&D side of the business. On the pulls, what's the trend in absolute number of pulls and in revenue per pull? How's that trend look like?

Yes. The revenue per pull is nicely improving. On the number of pulls, frankly, I don't have the actual number of pulls. I know what the percentage increase was. But you saw a 10.9% volume in the landfill. And so I would assume that equates to a pretty healthy increase in the number of pulls.

Revenue was slightly down, which aligns with the volume numbers we discussed. Part of this decline is due to the significant reduction in rigs, as David noted earlier, with a 50% drop in energy services. Fortunately, we managed to offset some of that revenue loss, so our decline isn't as severe as the rig count suggests. However, it did impact the hauling aspect of our business.

Well, okay. So what I was really trying to get at too is, and you alluded to this to one other question, if I remember correctly, pretty much the whole industry assumed going into this year that residential construction would hold about 1 million starts. Some of us were looking for it to be better. But so far, the data set would suggest that maybe that trend is better, one. And two, the non-residential construction x oil and gas and energy, broadly, if you will, power and oil and gas, which had been positives in the '14, all of the other components, commercial, lodging, office and what have you, actually, just struck a bottom in '14 and it started to turn a corner. Are you seeing that corner turn? In both...

Yes, I think that's exactly right, Michael. We're not predicting a dramatic change, but for the first time in two years, we're willing to acknowledge that there is a positive long-term trend that we expect to continue.

Okay, all right. On the recycling side, if $98 was the number for blended commodities at the end of December and $82 is for the first quarter, what is the blended commodity dollar figure needed under the current cost structure of your recycling business to break even on an EBIT basis? What do you need that to be?

Breakeven is probably in the $78 to $80 range.

Okay, regarding free cash flow, when will I see the impact of the $200 million in the nonrecurring tax situation through the cash flow from operations? Will it be spread out over the year, or is it tied to tax filings in the second and fourth quarters?

Yes, we are making payments in all three quarters. We will make double payments in the second and fourth quarters. You can expect to see this in the second quarter, and it will continue throughout the rest of the year.

Okay, so I should see a little bit of a above-average cash flow from ops as a percent of revenues in 2Q?

Yes. I mean, none of that $210 million, Michael, showed up because we didn't make any federal tax payments in Q1.

Right. So stripping that away and looking at the sort of recurring number, $1.2 billion to $1.3 billion, what do you think, based on what you're looking at the business today, the embedded recurring growth rate of that $1.2 billion to $1.3 billion would be as I look forward? Is that mid-single digits? High single?

I think you're looking at, basically, sort of that 5% to 7% compounded growth rate.

Okay, that's very helpful. And then, two housekeeping questions just because I'm a little confused. On Page 6 of your 8-K, you have a nice table...

Yes, Michael, that's a little bit obtuse for us.

Right, sorry. But you have these great tables you've given and you talk about landfill volume up. But the tons number you have in the document, actually, has it down versus 1 year ago. You were 21.3 a year ago and you're 20.9. So I'm trying to reconcile the script and the data that's in the document.

Michael, that's all intercompany volume based. The intercompany volume's down, third-party volumes are up. That's the difference.

Perfect. That's great. As I consider the fuel, I had more cost savings than revenues in the first quarter, but I expect that gap to narrow throughout the rest of the year. It will become more of a net offset as I manage through the year.

Yes, that's correct.

Okay. And I should try and just smooth that out to the remainder of the year, and it kind of nets itself out by the end of the year?

Correct.

Thank you. Well, obviously, we at Waste Management had a very good quarter. But when we look beyond Waste Management and look at the overall industry, as we said with Michael, we see improving industry fundamentals with the pricing environment stable and the volume environment improving. So we look forward to capitalizing on those improving industry fundamentals and continuing to gain momentum throughout 2015 and into 2016. And with that, we'll see you next quarter. Thank you.