Waste Management Inc (WM) — Q2 2015 Earnings Call Transcript

Thank you, Ginnisha. Good morning, everyone, and thank you for joining us for our Second 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 schedules to the press release include important information. During the call, you will hear 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, are more specifically references to internal revenue growth or IRG from yield or volume. Additionally, any comparison, unless otherwise stated, will be with the second quarter of 2014. 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. 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 as a percent of revenue results discussed during the call has been adjusted and EPS projections are anticipated to be adjusted to enhance comparability will exclude items that management believes do not reflect our fundamental business performance or results of operations. Specifically, for comparative purposes, the second quarter of 2014 results have been adjusted to exclude certain amounts attributed to divested operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and schedules, 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 the use of non-GAAP measures. This call is being recorded and will be available 24 hours a day, beginning at approximately 1 p.m. Eastern Time today until 5 p.m. Eastern Time on August 6. 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 64809894. Time-sensitive information provided during today's call, which is occurring on July 23, 2015, may no longer be accurate at the time of the replay. Any redistribution or retransmission or rebroadcast of this call in any form without express 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. Good morning from Houston. Our strong second-quarter results reflect our continued commitment to disciplined core price growth and cost controls, combined with improving volumes, all positive trends that we expect to continue throughout the second half of the year. In the second quarter, we earned $0.67 per share, an increase of almost 16% from the second quarter of 2014 after excluding the earnings from divested businesses and assets. Our net income, operating income and margin, operating EBITDA and margin, and earnings per diluted share all improved when compared to the second quarter of 2014, despite year-over-year headwinds of $0.03 per diluted share from lower recycling commodity prices and the unfavorable impact of foreign currency fluctuations. We also saw our business generate significant cash as our cash provided by operating activities increased 47% and our free cash flow grew 30%. We're pleased with these results, and we expect the positive momentum to continue to build through 2015 and into 2016. Our pricing programs continue to be a big part of our earnings growth and margin expansion, and our strategy remains the same: continue our focus on core price while selectively adding the right new volumes. For the second quarter, our collection and disposal core price was 4.1% and yield was 1.7%. Year-to-date through June, core price was 4.3%, which exceeded our 2015 core price target of 3.8% and yield was 1.9%. As we've said in the past, core price is a better indicator of true pricing activities because mix issues can affect our yield results, as we saw in the second quarter. It's bottom line dollars that count, and core price reflects the bottom line impact from pricing. So while we said that yield would be around 2% for the year, we're not concerned with a slight drop in yield, as the absolute dollars to the bottom line from pricing remain on track and our core price remains robust. Over the last six quarters, core price has been consistently over 4%. In the second quarter, we saw our core price improve 10 basis points from the second quarter of 2014. When compared to the second quarter of 2014, core price in the industrial line was 8.6%; in the commercial line, it was 5.8%; 2.1% in our residential line and 2.3% in our landfill line. As we saw in the first quarter, core price continues to drive margin expansion, as our traditional solid waste business operating EBITDA margin increased 40 basis points. So pricing efforts are right on track, and we expect that to continue in an improving volume market. With respect to volumes, we look at our traditional solid waste business volumes, which excludes recycling and non-unit or nonsolid waste revenues. Our traditional solid waste business declined 0.6% in the second quarter of 2015 versus a decline of 2.3% in the second quarter of 2014, a 170 basis point year-over-year improvement and a 60 basis point sequential improvement from the 1.2% decline in the first quarter of 2015. Overall volumes, which includes recycling and those nonsolid waste volumes, declined 1.3% in the second quarter, compared to the negative 3% reported in the first quarter of 2015, a sequential improvement of 170 basis points. Although overall volumes continue to be negative, we saw some positive signs in the second quarter. In our industrial line of business, we had very strong new business pricing, yet volume was 270 basis points improved year-over-year, improving from negative 2.7% to flat in the second quarter of 2015, which reflects a robust market. We also saw the rate of decline in our commercial line of business improve again, as the rate of loss in commercial volumes improved 280 basis points compared to the second quarter of 2014 and 60 basis points, sequentially, from a negative 2.8% in the first quarter of 2015 to a negative 2.2% in the second quarter of 2015. And the momentum improved throughout the quarter, with June showing better volumes than April or May. We also saw service increases exceed decreases in the quarter. Finally, new business in our commercial and industrial lines, combined, exceeded lost business for the first time in three years. So we are predicting a dramatic and fast turn to positive volumes, and we continue to see the light at the end of the volume tunnel. And we'd expect volumes to strengthen through the rest of 2015 and into 2016. Turning to recycling. As you've heard us say many times, the current recycling model is broken and we, and the entire industry, need to fix it. We've seen progress in our recycling operations, but the issues are complex and there's not an overnight fix. We're also working together with our customers, vendors and industry groups, and we've made progress as we're finding some acceptance for better contract terms and higher fees to offset the higher processing cost that we're experiencing. We're working with customers and municipalities on educating the public on what and how to recycle to bring down contamination levels and on the true cost of recycling. We, and our entire industry, realize that recycling is the right thing for our customers and the environment. We need to make sure that it's not only the right thing to do, but it's also a sustainable business. Moving to current results from our recycling operations. In the second quarter, we had a $0.02 decline in earnings per share compared to the second quarter of 2014. This decline is due to the more than 13% drop in average commodity prices for the quarter and a 5.7% decline in volumes associated with contractual losses as we shed unprofitable volumes. Our recycling employees continue to perform at high levels, working to reduce operating costs. In the second quarter, operating costs continued to improve as we saw an 8% improvement in operating cost per ton compared to 2014. We expect to continue to see improvements in the second half of the year, but low commodity prices will continue to be a challenge. With respect to the deployment of our free cash flow from operations and our Wheelabrator divestiture, we will continue to seek a balanced approach to buying solid waste businesses, repurchasing shares and maintaining a strong yield through our dividend. With respect to acquisitions, we believe that in 2015, we can execute agreements to add an additional $50 million to $75 million of operating EBITDA. We would likely close those acquisitions in 2016. In the second quarter, we repurchased $300 million of our outstanding shares, and we will repurchase an additional $300 million in the third quarter. Because I had a 10b5-1 trading plan in place, in the second quarter, I personally purchased $2 million worth of Waste Management shares. In the fourth quarter, we will determine if we have additional acquisition candidates likely to occur or if we want to deploy cash to repurchase shares. And of course, we will continue to maintain a strong dividend and a strong balance sheet. In conclusion, we're pleased with the strong results through the first half of 2015. When we combine the first half results with our outlook for continued price and cost control discipline and improving volumes, we're confident that we can achieve our full year guidance. We now expect that our 2015 adjusted earnings per diluted share should be at the high end of our previously announced guidance of between $2.48 and $2.55 per share, despite negative headwinds to diluted earnings per share of between $0.07 and $0.10 from recycling operations and about $0.04 from the impact of foreign currency translation adjustments. We also expect to achieve the upper end of our full year free cash flow guidance of between $1.4 billion and $1.5 billion. So the year is playing out pretty much as we expected, but our people are doing what they need to do to offset the recycling and currency headwind. Their efforts have been extraordinary. And on behalf of the entire senior leadership team, we thank them for their excellence. I'll now turn the call over to Jim to discuss our second quarter results in more detail.

Thank you, David. In the second quarter of 2015, our focus on cutting SG&A costs has continued to yield positive results. Overall, SG&A costs decreased by $31 million compared to the second quarter of 2014. Adjusting for the operations we divested in 2014, our year-over-year SG&A cost improvement was $18 million, which aligns with our expectations for savings from our reorganization. SG&A costs represented 9.7% of revenue, which is an improvement of 40 basis points from the second quarter of 2014. Due to the strong results in the first half of 2015, we anticipate meeting our full-year SG&A reduction target of $60 million. Regarding cash flow for the second quarter, net cash from operating activities was $816 million, an increase from $555 million in the same period of 2014, reflecting a $261 million improvement, with $216 million of that attributed to reduced cash taxes. Free cash flow reached $579 million in the second quarter of 2015, up by $245 million when excluding free cash flow from operations divested in 2014. Our capital expenditures for the quarter totalled $296 million, which is $88 million higher than the second quarter of 2014, as some of our anticipated increased fleet spending took place in the second quarter. Excluding cash tax benefits, free cash flow grew nearly 9% compared to the second quarter of 2014, even with higher capital expenditures. Given our spending levels in the first half of 2015, we expect capital expenditures to be at the top end of our guidance range of $1.2 billion to $1.3 billion. However, we also anticipate free cash flow for 2015 to reach the higher end of our guidance range between $1.4 billion and $1.5 billion. Second quarter revenues were $3.3 billion, including a $54 million increase from acquisitions and a $34 million uptick in our traditional solid waste business. The total revenue decline was driven by a $193 million decrease from divestitures, a $59 million drop in recycling revenues, a $45 million reduction in fuel surcharge revenues, and $27 million from foreign currency fluctuations. Looking at internal revenue growth in the second quarter, our core price for collection and disposal rose by 4.1%, while overall volumes fell 1.3%. This resulted in a $12 million increase in total company income from operations, a 60 basis point expansion in operating income margin, an $11 million gain in operating EBITDA, and an 80 basis point improvement in EBITDA margin. These results are robust and more encouraging when considering the $30 million of benefits we gained in the second quarter of 2014 that were not repeated in 2015. In our collection services, the benefits from the price-volume trade-off continue. As mentioned, our industrial core pricing was 8.6%, commercial core pricing was 5.8%, and residential core pricing reached 2.1%. Alongside the strong pricing momentum, we observed some positive movement in volumes. Commercial volumes were down 2.2% in the second quarter of 2015, improving from a 5% decline in 2014, showing a 280 basis point improvement. Industrial volumes improved by 270 basis points, moving from a 2.7% decline in the second quarter of 2014 to flat in 2015. Aside from energy services, our industrial volumes were positive. Residential volumes dropped 3.6% in the second quarter of 2015 compared to a 3.8% decline in 2014. We are maintaining competitive focus in the residential sector and are committed to retaining and growing our investments where they yield returns for shareholders. The rise in core price and volume resulted in income from operations increasing by over $3 million, with a 30 basis point margin expansion, and operating EBITDA growing by more than $8 million, with a 70 basis point margin expansion. In the landfill sector, we experienced both volume and core price benefits in the second quarter. We saw year-over-year increases in same-store average MSW rates for the ninth consecutive quarter, up 1.4% from Q2 2014. Combined special waste and revenue-generating recovery volumes rose by 4.3%; MSW volumes increased by 7.2%; and C&D volumes grew by 7.3%. Overall landfill volumes grew by 3.2%, leading to a $9 million increase in income from operations and a 70 basis point increase in operating margin. Operating EBITDA also rose by $16 million, with a margin expansion of 140 basis points. Shifting to operating expenses, as a percentage of revenue, operating costs improved by 60 basis points to 63.6%. Lower diesel prices and reduced recycling commodity rebates contributed to a $68 million improvement. Labor and related benefits improved by $21 million compared to the second quarter of 2014, thanks to enhancements in our service delivery optimization programs. These savings were partly counterbalanced by increased disposal costs related to improved volumes and an uptick in risk management costs. Overall, operating costs decreased by $56 million in the second quarter after accounting for the divestitures. Lastly, reviewing our other financial metrics, our debt-to-total capital ratio at the end of the second quarter stood at 62.7%, and our weighted average cost of debt was 4.4%. The floating rate component of our total debt portfolio was 9% at the end of the quarter. During the second quarter, we repurchased 6.1 million shares at a cost of $300 million and paid out $175 million in dividends. This $475 million demonstrates our confidence in the cash generation of our business and our commitment to returning cash to our shareholders. Our income tax rate for the second quarter was 29.6%. After adjusting for items excluded in our as-adjusted results, the tax rate was 30.9%. In the second quarter of 2015, reductions in deferred taxes and the use of state net operating losses benefited earnings per share by $0.02. In conclusion, our second quarter results continue to reflect the momentum we observed in the first quarter and put us in a strong position to achieve our full year guidance. This progress would not have been possible without the hard work and dedication of all our employees, and I want to express my gratitude to them. We're over halfway through the year, and we're very confident in a successful outcome. Now, Ginnisha, let’s open the line for questions.

Just a few questions. So first of all, I appreciate the update on progress on some of your discussions on the structure of your recycling contract. Just wondering, given that commodity prices have come off the bottom somewhat, is that impacting those conversations and your customers' willingness to engage in changes?

No, the prices haven't really increased. If there has been any change, it's been very slight. We're still quite close to breakeven regarding processing costs compared to commodity sales. In fact, if anything, discussions with customers have become more intense. As more people in the financial community and the media understand the challenges in recycling, these issues are increasingly being highlighted rather than fading away.

Corey, when you look at the way that average weighted commodity price, it was about $83 in Q1 and $83 in Q2. So really, the improvement we're seeing is through our cost efforts on cost of goods sold and operating cost.

Okay. Based on the numbers I've seen so far in July, there has been a more significant change. I'm mainly looking at OCC and newsprint, so perhaps the...

Yes, OCC seems to have stabilized a little bit, but it's still at low levels.

Okay. The next question, David, it seems that the volume environment is becoming more positive. I just want to confirm that I understand you correctly. I believe you're indicating that you expect volumes to gradually become less negative each quarter in the second half, but you're not necessarily predicting a return to positive volumes. I just want to clarify that.

Yes. To provide more clarity, we plan to distinguish between what we refer to as our core solid waste volumes and the overall volumes. In examining the core solid waste volumes, we saw a decline of 0.6% this quarter. We anticipate improvement in the third and fourth quarters. While we do not expect to see a return to positive volumes this year, I believe that by the end of the year, we will achieve a run rate that is either flat or slightly positive in terms of volumes.

Okay, great. I have a question about the free cash flow. I'm trying to understand the different components, especially regarding cash tax payments. Last year, there was a $210 million impact from the early payment of taxes, which benefits us this year. Can you clarify if that's the correct figure? Have we already realized that full benefit? What can we anticipate for the free cash flow distribution between Q3 and Q4?

Yes, that's correct. The $210 million was from early payments in the fourth quarter of last year. We adjusted that by $216 million to arrive at our annual estimate. Moreover, when examining cash from operations and free cash flow, if we normalize these for taxes and adjust free cash flow for capital expenditures, we have effectively moved past the WTI divestiture, which is quite significant. Looking ahead for the rest of the year, if we consider what we believe is achievable based on last year's cash flow from operations—which is what we applied for the first two quarters—our forecast indicates that free cash flow could reach around $1.5 billion.

And Jim, without asking for kind of operational guidance for 2016, if you just look at movement in cash taxes, would you expect the free cash flow would be up in '16? Or could it be down because of a movement in cash taxes?

If I take our guidance for this year of $1.5 billion and adjust it for the cash tax benefits and CapEx, although it's difficult to predict CapEx for next year, I arrive at a solid starting point of about $1.35 billion to $1.4 billion. While we aren't ready to provide extensive guidance just yet, we are looking in that range.

This is actually Usha Guntupalli on for Alex. One more question on recycling. Assuming commodity prices stay flat at current levels, you're obviously working on reducing cost in this business. But when do you expect the business to turn earnings positive at current commodity prices?

Yes. Well, we're earnings positive, actually, at current prices, just slightly EBIT positive and certainly positive from an EBITDA point of view. So we didn't lose money in recycling in the quarter. We just did $0.02 worse than we did last year. So it's the year-over-year comparison. So we are slightly EBIT positive, but certainly not EBIT positive enough to earn our return on capital, to earn our weighted average cost of capital. So that's why we've got to get those earnings up.

Got it. That's helpful. And on the yield, yield seemed to have slowed in the second quarter, and you did mention part of it was just mix. Could you give us more color on what was driving that mix?

Yes. When we examine yield in relation to core price, it explains why we began emphasizing core price some time ago. Core price is what ultimately contributes to our profits. Yield encompasses various factors, and I'll let Jim elaborate on that. The key point is that while yield reflects pricing trends, core price provides a clearer picture of our pricing strategies. I'll hand it over to Jim to discuss the distinctions between yield and core price.

Yes. A good example of this is our energy services business. This business generally has a significantly longer length of haul compared to our regular operations. As a result of that longer length of haul, it has a higher unit price and yield, but not a higher core price or profitability per unit. Consequently, as the energy services sector has slowed due to declining oil prices, we have observed a decrease in yield, while core price and profitability per unit have remained stable.

Dave and Jim, you mentioned that we saw an improvement in new business on a net basis when we added new business in markets with a lower average unit rate, not lower profitability or margin. This occurred in Q2. Additionally, we lost business in markets with higher or lower average unit rates, which affected yield, also observed in Q2. However, this had no impact on margin or core price.

You can see that there is significant growth happening in Texas, where landfill rates are lower compared to the Northeast. This results in slightly lower pricing, but also very high profitability, so it's not an issue of profitability. The lower landfill prices in Texas lead to reduced unit costs and pricing for new services. As we experience growth in profitable areas like Texas, where the unit rates are lower than in the Northeast, this creates mix issues. Consequently, while the yield may be down, profitability remains up, which is not necessarily a negative situation. What we need to focus on is the overall pricing trends across our business. Price increases mitigate the impact of mix changes, making core pricing a clearer reflection of our performance. As you noticed, core prices are still quite strong, with 8.6% in industrial and 5.8% in commercial.

I would like to discuss the capital deployment strategy following the Wheelabrator transaction. You have Deffenbaugh in place, and I understand there is $50 million to $75 million in EBITDA projected from deals set to close next year. I'm interested to know if all the expected deals have been completed. It seems like you're pursuing more opportunities since the sale of Wheelabrator. Additionally, could you clarify whether the items in your pipeline consist of solid waste companies or if they include companies outside of that sector?

Yes. When considering acquisitions, we are focused solely on solid waste companies. We aim to stay within our core business. Initially, it may seem straightforward to replace the EBITDA with available sellers, but once you enter the market, various challenges arise. These can include family-owned businesses that are difficult to negotiate with or higher pricing expectations. Our approach has been that if we can replace the Wheelabrator EBITDA at favorable multiples, we will pursue it. The positive aspect is that if we are unable to achieve that, we can still buy back stock, which remains beneficial compared to our position with Wheelabrator. Thus, we find ourselves in a favorable situation. Instead of acting impulsively and paying whatever is necessary to replace the Wheelabrator EBITDA, we've chosen to be disciplined, concentrating on our solid waste business and seeking accretive deals for our shareholders. While we would prefer to acquire businesses that can replace the EBITDA rather than buying back shares since it is more beneficial for our shareholders, we must remain disciplined regarding pricing and accept that sometimes acquisitions take time to materialize as sellers need to be ready. We believe that over time, we will replace approximately $200 million of EBITDA from Wheelabrator, although it won't happen instantly.

Joe, as I mentioned earlier in response to Corey's question, we have been disciplined in our approach. If you examine our second quarter, you’ll see our net cash from operating activities, excluding the cash tax benefit, was $45 million from the second quarter of last year, which included all the divested businesses. In terms of net cash from operating activities and free cash flow, we have effectively replaced Wheelabrator, Puerto Rico, and the Maritimes. The only acquisition we made was Deffenbaugh, which has been part of the company for a quarter now. For our capital allocation, we will continue to opportunistically buy back shares, as we have done in Q2 and again in Q3, while also looking to use those proceeds to acquire companies at attractive prices.

Got it. Switching gears over to the New York City contract. I know it potentially is coming a little bit closer. Can you guys maybe just talk to what your current contracts are? I know you guys have some transfer stations in the market. And maybe talk about if you are participating in the new RFP and how you kind of sit in that market.

Joe, regarding the current bid and RFP, we have submitted a proposal for that volume and are on the shortlist alongside Progressive. It seems the city has started discussions with Progressive, and we are waiting to find out what the next steps will be. As you recall, Progressive was the previous provider for that volume, and we expect developments to take place in the third and fourth quarters. We continue to operate the transfer stations, handling volume from New York City, and there has been no change in that volume.

So just looking back at your initial guidance for this year. I think I assumed a $0.03 to $0.05 year-over-year hit from recycling. And obviously, your current guidance is assuming much more than that, and I'm guessing a little bit bigger hit from FX. So really, just trying to get a sense. You're guiding to the upper end of the range here. Where's the upside versus your initial expectations coming from to more than offset the greater headwinds in recycling and FX?

Yes, everything is improving across the board. Although the actual percentage for volume has declined and the volume levels are not as high as we initially anticipated, the flow-through from the new volumes is better than expected. The key takeaway is that we are achieving the right volumes. We have consistently met or exceeded our targets for SG&A and operating costs. Overall, our operations are functioning well, except for recycling. Additionally, the interest savings and reduced share count from the share buyback are positively impacting this year. Overall, our business appears to be performing well in most areas, apart from recycling, which remains a long-term challenge, but we are making good progress on that front.

And to be clear, is there a tax rate assumption included in your guidance for this year, or has it changed at all?

For the remainder of the year, I would assume that, that will be a 35%, and that's what we baked into the guide.

Got it, 35%. Okay. And then as a follow-up. I think, David, you mentioned that the acquisitions you're contemplating here in the back half into 2016 are all solid waste. Just wanted to confirm if that's right and just to see if your thoughts had changed in any way regarding the energy waste business, in particular, and/or industrial waste, since you had the breakdown in commodity prices and the landscape's changed so dramatically.

What we are focusing on for the latter half of the year are primarily solid waste assets. Regarding energy services, we intend to engage in any transactions that arise, as we believe it has long-term potential, despite facing short-term challenges. It's important to approach this from a long-term valuation perspective, understanding that short-term valuations may not align with what sellers expect. We will participate in all relevant bids, but we are cautious; many sellers are still looking for prices based on previous highs and consider current conditions to be a temporary dip. We prefer to project the business's trajectory over the next 5 to 10 years and assess its value accordingly. We haven't made new acquisitions in the oilfield service sector because seller price expectations haven't decreased as much as our valuation outlook. Therefore, our acquisitions in the upcoming year will primarily concentrate on solid waste.

And what are sellers' expectations there, in general? Is that market kind of more rational in your view than oil services or not?

Yes. We've always kept it simple regarding solid waste. If we consider our long-term multiple to be around 8 times EBITDA, which has fluctuated, why would I pay more than 8 times EBITDA for a business when I can acquire one that I already know well at that same multiple? We've missed out on several opportunities because sellers expect 10 to 12 times EBITDA, which doesn't align with our model. Could we acquire more businesses? Definitely, but we'd be doing so at much higher multiples, which would lessen the advantage to our shareholders. We'll keep looking for acquisitions that we can purchase at 8 times EBITDA or less before synergies, and ideally at about 5.5 to 6 times after synergies. If we achieve that, we can be confident it will benefit our shareholders regardless of the circumstances.

Scott, I believe the opportunity landscape in terms of what sellers are seeking is quite diverse. Some are aiming for multiples between 12x to 15x, but we aren't engaging with those sellers. However, there are others who are more reasonable, and we found Deffenbaugh to be an example where we secured a very attractive multiple. We'll keep pursuing companies similar to Deffenbaugh.

David or Jim, I just wanted to clarify. On these deals that you've laid out, the $50 million, $75 million, are these close? Are we at the goal line? Or are these things that still have a few hurdles to get over? I'm just questioning why put this type of color out there today?

Yes. Let me clarify the goal line for you, Al. There are actually two goal lines: the first is getting a deal signed, and the second is obtaining government approval. Signing a deal is a relatively straightforward process, but for some reason, government approval has been taking a long time. For example, our Kansas City deal took eight months to get approved even though we were not in the market. It shouldn't take that long, but it did, likely due to the many significant deals currently being processed by the Department of Justice and the FTC. So, the first goal line is about getting the deals signed, and we expect to reach that goal very soon. We're almost there in terms of signing the deals. The real question now is how long it will take to get those deals approved and what potential constraints we might face during that process. This is uncertain, which is why we wanted to inform you that we are close to signing these deals expected to generate $50 million to $75 million of EBITDA, but we still need to navigate through the regulatory approval and due diligence stages. As you know, transitioning from signing to closing can be complex, both from a business and due diligence perspective as well as from a government standpoint. We are past the first goal line and are now working towards the second.

And that second goal line is not an easy one to get over. We recently had a deal where we had crossed the first goal line, having agreed on a purchase price months ago, but the HSR process was daunting enough that the other party decided to back away for now. We both agreed on what we considered a reasonable purchase price, but we felt that achieving that second goal line in the near term was unlikely. So, we decided to part ways for now.

It sounds like this involves several acquisitions rather than just a single transaction.

Yes. Well, the $50 million to $75 million that we're talking about is comprised of one larger transaction that would generate the bulk of that and then, obviously, some smaller bolt-on. Yes, yes.

Can you please clarify the sequential trends? Specifically, was this comment regarding overall volume or was it focused on the volume trend in solid waste?

Yes, it was specific to solid waste. Let me provide some insight into our volume expectations for the second half of the year. Starting with our industrial volumes, they were flat for the quarter, primarily due to the decline in energy services. However, outside of that segment, our industrial business is performing positively. If we look at our core solid waste business, which excludes energy services, industrial volumes are actually showing positive growth, and we expect this momentum to continue. Even though energy services are down, the overall industrial volumes are flat, and we anticipate these will turn positive in the third or fourth quarter. Regarding commercial volumes, they decreased by 2.2%, but this represents a 60 basis point improvement from the first quarter. We expect this trend of improvement to persist, potentially bringing the commercial volumes closer to a negative 1% by the year's end. On the residential front, volumes were down approximately 3% to 3.1%. However, we do not focus much on residential volumes since they are generally low-profit and low-margin. Therefore, we aren't particularly concerned about losing them. The landfill business continues to perform strongly. When I assess volumes for the second half of the year, I concentrate on the segments that generate profit: industrial, commercial, and landfill. We project positive growth in industrial and landfill volumes, with commercial volumes also improving. Thus, when I consider these three components, I view most other variations as insignificant. As Jim mentioned, when we pass transportation costs to customers without making a margin, that revenue doesn't matter much to us. Therefore, focusing on the revenues that contribute to our profits shows positive trends that we expect to continue in the latter half of the year.

Al, I'll add one thing to that, which is recycle volumes. I'll give you an example. We have a large plant that essentially cut their volumes in half. By doing this, they improved the quality of the material coming in. They went from a monthly loss of about $0.5 million to breakeven. So that's similar to the residential volumes. Yes, we lost volume on the recycling line of business, but it wasn't detrimental to us on the income statement.

So let me touch on the volume issue. If you look at our commercial same-store performance, we've maintained our customer base, and that volume is up in the container, isn't it?

Yes, that is correct.

Yes, right. So when you have a 7.2% from third party, there's some number that's got to be in that direction in your commercial market same store?

Yes. That's correct.

You are benefiting from the overall improvement in the industry, as our interactions with the economy, both at work and at home, are leading to increased volume in the container.

Yes, we don't want to say that the good times have arrived just yet. As I've mentioned over the past couple of years, we've seen fluctuations in various statistics, and it wasn't until last quarter that we began to observe a clearer trend, which has continued into this quarter. This is really the first quarter where all of the indicators are positive. While that doesn't suggest we'll see a massive leap from a negative 2.2% to a positive 5%, it’s not necessary for us to achieve our targets in the latter half of the year. We are focused on continuous improvement. We have higher weights, service increases outpacing decreases, and a lower churn rate. On the industrial side, we’ve seen robust new business pricing. So overall, this is genuinely the first quarter where I can say all indicators are favorable. However, we understand that this situation can change quickly. But for now, I feel more optimistic about our volumes than I have in the past five years.

Michael, I want to emphasize that this industry has a history of either focusing on price or volume, with little balance in between. We are currently experiencing positive momentum on the price front, as David detailed earlier, and we remain committed to our robust pricing strategy. This is why we provided the explanation of yield versus core price that Jim and I discussed; we are as strong as ever when it comes to pricing. We are beginning to see encouraging signs, possibly influenced by the economy, with our volumes also appearing promising. Although it's still early in the third quarter, July shows promise as well.

Okay. So you've set me up for a perfect follow-on, Jim. I think of waste as having pushed prices to the limit for the last four or five years, and you accepted the volume impact of that knowingly. Are you considering easing that approach so that instead of going at full speed, you're going at a more moderate pace, where you're not turning away potential good business, especially in the commercial sector, now that the volume trend seems to be improving?

Yes. Simply put, to maintain our pricing strategy, we require a 3% increase in volume to offset a 1% decrease in price. It’s clear that you can’t achieve a 3% volume boost by reducing prices by 1%. Therefore, our focus will consistently be on pricing. As the leading player in the industry, if we shift our strategy to pursue volume, it could influence the entire market. We are aware of our dominant position and our goal is to secure our share of growth while also pursuing the right volumes in suitable areas. You won't hear industry players claiming that Waste Management is aggressively chasing volume in specific markets. While there have been cases where we’ve pursued volume in contracts that didn’t exactly please us, this isn't our usual approach. We will continue to prioritize price over volume, but in a growing market, we should also capture a fair share of the volume without impacting industry pricing dynamics. Ultimately, in a stronger economy, we believe we can achieve both price and volume.

And I might add to that, that we've also, because of our price leadership strategy, have begun efforts to improve our service. We realize that there are some improvements that need to be made to make sure we're providing that service that's worthy of our price leadership position, and we're doing a better job of that. You see it in the churn rate. We see it in metrics. We're not done with it, but we have progress in that regard.

Jim, I was just going to say that. Michael, when you mention the shift from about 100 miles to 80 miles an hour on pricing, we've had extensive discussions lately, in line with Jim's point, about a differentiated strategy. You can still maintain a fast pricing pace if you are differentiated. For instance, in our industrial business, we offer unique expertise that others lack, along with the strength of our balance sheet. Additionally, leveraging technology and enhancing customer service, as Jim pointed out, allows us to sustain our pricing momentum.

Okay. So you're retaining more price, too, then.

I think more like 457 million, I think, is the number.

What's the 451.8 million mentioned in the press release in addition to the comp numbers of about 2.8? I can follow up on that. I just want to clarify my starting point. Additionally, regarding the tax rate, just to follow up on an earlier question, should we expect 35% for the third and fourth quarters, and not that the full year will be at that rate?

Correct.

Okay. You didn't mention working capital. What is the current status of DSOs and payables in relation to your plan?

I'm sorry.

DSOs and DPOs?

Yes, we have made significant progress over the last two and a half years. We have improved both sequentially and year-over-year. Specifically, from Q1, we have reduced our Days Payable Outstanding by just under three days and Days Sales Outstanding by just under one day. Looking over the period we've been focusing on this, we have improved the combination of the two by nine days. While it is possible that we could eventually cross over at some point, we are still some distance away from that. In some areas, DPO has already exceeded DSO. Overall, I am pleased with our progress, but I won't be fully satisfied until we achieve the crossover that many companies reach.

All right. So just to put numbers on that. You're still in the mid-40s on DSOs and high 20s on DPOs, days?

We're in the low 40s on DSO, and we've now surpassed 30. Our DPO is above 30.

Okay, I might have missed this, but could you tell me what the special waste trend at the landfill was in the second quarter?

The special waste was 2.4%. Looking at the volume, it was indeed 2.4%. However, when we analyze special waste, construction and demolition waste, and revenue-generating cover, it's important to note that while special waste stood at 2.4%, revenue-generating cover, which is primarily composed of special waste, exceeded 10%.

It was wet in many parts of the country, and since special waste mainly consists of dirt, there's a strong possibility that we could see a significantly higher special waste figure in the third quarter because heavy equipment couldn't be used to move the dirt around.

Yes. We actually had that discussion with our folks out in the markets. And you obviously had some wet down here in the Texas area. You had it up in the upper Midwest. I think what our folks would say is the pipeline looks pretty strong. We don't expect special waste to slow down in the back half of the year. So I think they're pretty optimistic about it.

Okay, thank you.

Yes, thank you.

Yes, we would absolutely consider those types of businesses. We view them as core solid waste operations where we can readily apply our expertise. However, we will not pursue other business types that do not allow us to leverage our solid waste knowledge effectively, as I did five years ago.

Okay. Saving the best for last, Jim Fish, on free cash flow. If I take your $1.5 billion and I look at it on what's the recurring operating cash generation, I got to pull out $300 million, right, $100 million for asset sales, round number's $200 million for cash tax. So I start at $1.2 billion and then you're suggesting you'll be $1.35 billion potentially, not giving guidance. But none of that has any deals in it. So that's a pretty healthy $150 million swing. How much of that's working capital versus the optimization programs, cost saves, organic?

Part of it, Michael, is you pull out $100 million in acquisitions. But we conduct asset dispositions every year, so we always expect to have around $50 million to $100 million in asset sales. Therefore, I'm not sure you should take out the entire $100 million.

And how did you get to the $1.2 billion? I know you pulled out the cash tax piece. What else did you pull?

Well, you have asset sales, so I can't predict that number. I can't create a range between $50 million and $100 million. So if I state it correctly, with the business generating $1.5 billion in cash, subtracting $100 million for assets and $200 million for cash taxes gives us $1.2 billion. That $1.2 billion increases to $1.35 billion, which is a $150 million year-over-year improvement and does not include any deals. I'm just trying to understand...

I am working to provide a clearer picture of our capital expenditures. While I cannot predict the exact amount for next year, I can share that our capital expenditures in 2014 were $1.150 billion and are expected to rise to $1.3 billion in 2015. Keep in mind that our business has changed; we no longer include Wheelabrator, Puerto Rico, or maritime operations. So, I am revising our CapEx figures slightly. We anticipate having some capital expenditures for Oakland next year, similar to this year, but it will likely fall somewhere between $1.150 billion and $1.3 billion.

And Michael, you and Jim are talking the same number. The only difference is the divestiture piece basically. And I think that's the whole point, Michael, is that it's the divestitures and the CapEx that can move around a little bit. So when you look at the sort of the long-term history of what we've done, both on CapEx and on divestitures, you sort of get to that $1.35 billion number.

What I really want to understand is what contributed to the $150 million. Some of it is capital expenditures. How much of that is organic compared to the optimization programs you've started in the past couple of years? How would you...

We'll get into that. I mean, I don't want to try to parse it to the penny, because frankly, we haven't done that. We'll certainly do that next year when we give 2016 guidance. So that's probably a better time to try to parse it down to the penny.

We'd still get asked the starting point though, so we did have that answer.

You talked a little bit about differentiation earlier in order to push price, and I thought we'd focus on the residential business just a little bit. My sense is that Waste Management used to differentiate themselves with recycling services in a bundles contract. But now that you're heavily scrutinizing recycling, how else do you differentiate in residential outside of recycling? Is winning or renewing municipal contracts in this competitive environment increasingly dependent on the bundled services you're able to provide municipalities?

Yes. I believe that bundling recycling with residential services presents a significant opportunity rather than a drawback. Given our unique asset mix, we are one of the few companies capable of making a profit from recycling, which likely gives us a competitive edge in combining recycling with residential services. In our residential business approach, the primary goal is to retain our existing contracts at current or higher rates. Retaining contracts primarily depends on the quality of service provided. Many municipalities that have used our services for a significant time and are satisfied are unlikely to switch just to save a small amount of money. Therefore, our strategy focuses first on maintaining our contracts at the same or increased rates, where we have a strong track record of success. The second aspect involves identifying areas where we have a competitive advantage. For instance, if we are in a market where we can offer recycling services that others cannot, we should bundle those services. Additionally, if we have various disposal options and green initiatives that align with customer preferences, we can leverage those to set ourselves apart. Thus, our strategy consists of two parts: ensuring we keep our existing contracts through excellent service and seeking opportunities where we can win bids not solely based on price. We recognize that if decisions are made solely on price, we may not succeed. Therefore, we aim to identify markets where our service quality, recycling capabilities, and green initiatives can make a significant impact, and we will target those opportunities to secure contracts.

There are several factors to consider. We look at it by line of business because what sets you apart in the industrial sector differs from what does so in the residential sector. We are currently preparing a strategy to present to the board in August, focusing specifically on differentiation by line of business. This may involve introducing different technologies and ensuring operational efficiency, as the residential market is heavily influenced by price, necessitating maximum efficiency in operations.

Thank you all for joining us. We've had a strong start to the year. We expect to finish the year strong, and we'll see you next quarter. Thanks again.