Waste Management Inc (WM) — Q1 2018 Earnings Call Transcript

Thank you, Kevin. Good morning, everyone, and thank you for joining us for our first quarter 2018 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; Jim Trevathan, Executive Vice President and Chief Operating Officer; and Devina Rankin, Senior Vice President and Chief Financial Officer. You'll hear prepared comments from each of them today. Jim Fish will cover our high-level financials and provide a strategic update, Jim Trevathan will cover price and volume details and provide an operating overview, and Devina will cover the details of the financials. Before we get started, please note that we have filed the 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 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. Jim 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. All volume results discussed are on a workday adjusted basis. During the call, Jim, Jim, and Devina will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and they are also address operating EBITDA which is income from operations before depreciation and amortization and operating EBITDA margin. Any comparisons, unless otherwise stated, will be with the first quarter of 2017. Net income and EPS for the first quarter of 2017 have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release note 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 our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today until 5:00 PM Eastern Time on May 4th. 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 3888516. Time-sensitive information provided during today's call, which is occurring on April 20, 2018, may no longer be accurate at the time of the 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, Jim Fish.

Thanks, Ed. And thank you, all for joining us this morning. The first quarter of 2018 was an excellent quarter that continued the strong growth we saw throughout 2017. Over the past year our traditional solid waste business has proven to be as strong as we have ever seen at Waste Management and the first quarter was a continuation of that trend. Much of the strength can be attributed to our focus on disciplined growth, our commitment to delivering exceptional customer service and our improving cost structure, aided by solid economic growth in the United States and Canada. In the first quarter, we saw collection and disposal revenue grow by more than 6%, total company operating income grow by 9%, and operating EBITDA grow by almost 8%. Once again, our strong operating EBITDA performance translated into excellent free cash flow, which continues to demonstrate the cash generation strength of our strategy. The strong performance in our free cash flow allowed us to repurchase shares and spend $248 million on acquisitions, in addition to our previously announced 9.4% increase in our dividend. The acquisition pipeline remains robust and we continue to look for opportunities that surpass our return criteria and create value for our shareholders. Our operations produced $0.91 of EPS in the quarter, and we have built a strong foundation for the remainder of 2018. Excluding the $0.12 EPS benefit from tax reform, our EPS grew close to 20% when compared to the first quarter of 2017. In the first quarter, revenues from our collection and disposal business grew by more than $183 million with most of this increase being organically driven. A key driver of our revenue growth was the disciplined execution of our pricing programs. In the first quarter, our collection and disposal core price was 4.9% and our yield was 2.3%, in line with our full year goals. Looking at volumes, our traditional solid waste volumes were positive 3.4% in the first quarter, an increase of 200 basis points compared to the first quarter of 2017. The volume growth continues to be driven by our highest return and best margin businesses, commercial, landfill and industrial. Our plan to focus on delivering excellent customer service and directing our sales efforts and growth capital to the portions of the U.S. and Canadian economies that are seeing the strongest economic development is generating the results that we expected. Our traditional solid waste performance is as good as we have seen it. On the other hand, the recycling business is in a state of transformation. In the quarter, recycling commodity prices declined 36% and volumes declined 1% at our recycling facilities. And while recycling is only one-tenth the size of our traditional solid waste business, it still impacted the first quarter EPS by $0.08 on a year-over-year basis. We’ve said for years that recycling is a business that Waste Management is committed to, and we still are. But we simply can’t continue with the model in its current state. The original concept of recycling was to reuse materials either in their existing form or in some other form to minimize the consumption of natural resources. Unfortunately, in North America today the word recycling seems to have been replaced with a new word, diversion. When diversion away from your trash bin is your primary goal, then putting more material in the recycle bin does not necessarily mean that we're saving more natural resources. What it does mean is that the recycle bin almost inevitably has a higher percentage of trash, or as the industry calls it, contamination. Last year, the Chinese government decided that they were tired of importing increasingly contaminated recyclables. So they changed their policy to only accept recyclables with a 0.5% contamination content. Some of our plants see material come in the front door that is 40% trash. So we have to try and pull out almost 99% of that trash from the recycle stream in order to sell it to China as recycled commodities. Even our best-in-class inbound streams, which have only 10% contamination, still have to pull out 95% of the trash before they can sell it. As diversion goals have increased, so too have our contamination percentages, which have increased from 10% to 15% five years ago to 20% to 25% today. In addition to that, China temporarily suspended import licenses, which caused global commodity prices to plummet last fall and they have yet to recover. Clearly, this is not a sustainable recycling business model. We must address higher operating costs in our recycling facilities and shrinking revenues from the sale of recycled products. As a result, we are continuing to educate our customers on how to lower contamination by recycling correctly and partnering with industry stakeholders on expanding these efforts. At the same time, we are auditing loads received at our centers and we are rejecting and charging back for contamination where we can. These efforts should enable us to recoup part of our increased processing costs and residue disposal costs. In our new contracts, we are looking to shift even more of the commodity price risk to our customers and more easily recapture our actual processing costs going forward. We started this shift several years ago by restructuring contracts, and this is the next evolution in that shift. Lastly, we are communicating with our customers on the extent of these global recycling market changes. Our customers appreciate the transparency Waste Management provides and they seem willing to work with us to ensure the longevity of the recycling business. While these are difficult times in recycling, our goal in this transformation is to build a recycling program for both Waste Management and our customers that ensures environmental and economic sustainability for the long term. Ultimately, we hope to see a shift in thinking away from the value being placed on how much gets put into the cart to how much truly gets recycled into new products. So while our recycling results in the first quarter were about what we expected, our recycling outlook for the remainder of 2018 has changed from our original guidance. We're already hard at work to combat contamination and control our costs, but the financial benefits of our actions will likely take time to materialize. And since our previous guidance, OCC prices have declined to nine-year lows and mixed paper has dropped 80% to prices at zero or negative in some markets. So we now believe that the year-over-year decline in our recycling line of business will be between $0.12 and $0.15 per share versus our original guidance of a negative $0.08 to $0.10. To come full circle, in spite of these significant challenges in the recycling line of business, the large majority of our business is hitting on all cylinders. Therefore, we remain confident in our ability to deliver strong performance throughout the remainder of 2018. As a result, just to be clear, we are reaffirming all of our full year guidance including operating EBITDA, EPS and free cash flow. I will now turn the call over to Jim to discuss the first quarter operating results in more detail.

Thanks, Jim, and good morning. Our results in the first quarter continue the strong trend we saw throughout all of 2017. We saw both price and volume in our traditional solid waste business exceed 2% for the fourth consecutive quarter. As a result, total company income from operations grew $50 million, an increase of 9%, and income from operations margin expanded 110 basis points to 17.3% when compared to the first quarter of last year. Our operating EBITDA grew $69 million, an increase of nearly 8% when compared to the first quarter of 2017. And our operating EBITDA margin expanded 140 basis points to 27.2% when compared to last year. Revenues in the quarter were $3.51 billion. First quarter revenue growth in our collection and disposal business from the combined impact of price and volume was a $160 million. First quarter revenues were negatively impacted by lower recycling commodity prices and lower volumes, which drove a $77 million decline in recycling revenues. Looking at internal revenue growth in the first quarter, our collection and disposal core price was 4.9% and yield was 2.3%. Traditional solid waste volumes improved 3.4%, while total company volumes increased 3%. Volumes in the first quarter included about 40 basis points natural disaster cleanups in Florida and California. Volumes in our transfer station line of business were 6.4%, primarily due to the new New York City disposal contract. Looking at our other revenue metrics, service increases exceeded service decreases for the 17th consecutive quarter, and new business continued to exceed lost business for the 12th consecutive quarter. Our churn rate was 9.6% in the first quarter or 8.9% excluding the expected churn from the implementation of the City of Los Angeles franchise contract. And our rollbacks were 18.8%. Our collection lines of business continue to perform exceptionally well. In the first quarter, commercial core price was 5.9%, with volumes up 2.7%. Industrial core price was 9.9%, with volumes up 3.9% in that first quarter. In the residential line of business, core price was 3.3%. Residential volumes were down 1% in the first quarter, but that is 110 basis points sequential improvement from the fourth quarter of 2017. The combined price and volume increases in our collection line of business led to income from operations growing $64 million, income from operations margin, growing 130 basis points, operating EBITDA growing $68 million, and operating EBITDA margin growing 100 basis points. In the landfill line of business, total volume increased 9.5%, MSW volume grew 2.2%, C&D volume grew 28.1%, and combined special waste and revenue-generating cover volume grew 4.5%. We achieved core price of 3.3% in the landfill line of business. For the first quarter, our landfill line of business grew income from operations by $30 million and income from operations margin by 90 basis points, while operating EBITDA grew $42 million, and operating EBITDA margin rose by 100 basis points. Moving now to operating expenses, in the first quarter total operating costs as a percent of revenue improved 80 basis points to 62.2%. On a dollar basis, cost increased $18 million when compared with the first quarter of 2017. Our cost of goods sold decreased year-over-year, primarily due to the 36% reduction in recycled commodity prices. We also had lower fuel expenses in the quarter due to the 2017 fuel tax credits, which reduced our current quarter costs by about $28 million. The costs of goods sold and the fuel benefit were partially offset by an increase in labor costs due to the $2,000 employee bonus and volume increases in our commercial and industrial businesses. When we isolate the impacts of these items to focus on the operating costs and margins of our traditional solid waste business, we are pleased that our cost control efforts are working in a growing volume environment. If we net the positive impact from the fuel tax credits with the negative impacts to margin from our recycling line of business and the employee bonus operating expense margin from our traditional solid waste business improve over 50 basis points. Overall we are very pleased with our operating performance in the first quarter and I know our employees are hard at work to make 2018 another successful year. I’ll now turn the call over to Devina, to discuss our financial results.

Thanks, Jim, good morning, everyone. In the first quarter, we continued to see our strong operating EBITDA translate into free cash flow growth. We generated $809 million of cash from operations and that’s an increase of 12% from the prior year period. Our cash flow from operations as a percentage of revenue grew more than 200 basis points from the prior year to 23%. We continue to demonstrate the ability to convert more of our operating EBITDA into cash from operations, positioning us very well to continue our commitment of investing in growth and returning cash to our shareholders. During the first quarter, we spent $400 million on capital expenditures, that’s an increase of $68 million from 2017. It is in line with our expectations as we intentionally spent more of our fleet capital early in the year to support our growth. As we have said before, we have seen significantly organic growth in our business and we’re investing in our fleet and our landfills to respond to the needs of our customers. We continue to expect that our capital expenditures will be between $1.6 billion and $1.7 billion for 2018. We generated $423 million of free cash flow in the first quarter, that’s an increase of $26 million or more than 6% from the first quarter of 2017. In the quarter we converted more than 44% of our operating EBITDA into free cash flow. This strong performance puts us well on our way to achieving our free cash flow guidance of between $1.95 billion and $2.05 billion for 2018. In the first quarter we returned more than 100% of the free cash flow we generated to shareholders, as we paid $206 million in dividends and paid $250 million to repurchase shares. In addition, we spent $248 million on traditional solid waste acquisition, demonstrating our commitment to identifying accretive transactions in growth markets. That will allow us to more effectively leverage our people and our assets to service our customers. Turning to SG&A, for the first quarter as a percent of revenue SG&A costs were 10.6%, a 70 basis point improvement from the first quarter of 2017. On a dollar basis SG&A costs were $373 million in the first quarter or $17 million lower than the prior year period. The reduction in SG&A costs is due to our continued focus on managing our discretionary funding, as well as a decrease in our labor expenses that can largely be attributed to prior year executive severance costs. Our effective tax rate for the first quarter of 2018 was approximately 23% and we now expect our full year 2018 tax rate to be between 24% and 25%. Each of these rates is a little more than 1 percentage point less than we previously expected; this revised outlook is due to additional clarity we now have on the impacts of tax reform. The EPS benefit of this revised tax outlook was $0.01 per share for the first quarter of 2018 and is projected to be about $0.06 per share for the full year. Our key financial metrics remain strong, as we continue to see the benefits of earnings growth and disciplined allocation of our free cash flow. At the end of the first quarter our debt to EBITDA ratio measured based on our bank covenants was 2.4 times and our weighted average cost of debt for the quarter was about 4%. The floating rate portion of our debt was 17% at the end of the first quarter. In summary, 2018 is off to a strong start, with the first quarter reflecting the continued execution of our core operating objectives and focus on continuous improvement. Our strong traditional solid waste business performance overcame headwinds from recycling to produce a healthy increase in both cash and earnings. We expect that trend to continue throughout 2018. The Waste Management team has once again demonstrated that our disciplined focus on serving the customer, while optimizing our business generates strong operating results and we look forward to that continuing throughout the year. With that Kevin, let’s open the lines for questions.

Hi, good morning everyone.

Good morning, Brian.

Hey, Jim, I appreciate your comments on the recycling markets these days, and it sounds like you guys are taking a leadership position there as you should and trying to clean up the industry and change some of the habits, practices being employed just into the new environment all seems very logical. Just some questions around the impact in 1Q from because I noticed you said there was a $0.08 hit to EPS on I think it was about $77 million of sales. I think last year’s total benefit was around $0.085 on roughly 3 times the sales amounts so just wondering if you could maybe dig into that a little bit more why the sensitivity in the margin is a little bit different on the way down than it was last year on the way up.

The EBITDA impact for the quarter was approximately $46 million. This was influenced by the significant decline in the OCC mix, with paper down 85%. Unlike previous years, we are now experiencing a substantial increase in operating costs due to China's 0.5% contamination limit. A year ago, we were exporting about 30% of our cardboard to China, but that figure has now fallen to around 2%. Fortunately, we still have alternative markets, such as India and Vietnam, though these routes involve higher transportation costs due to the longer distances compared to shipping to China. Looking forward, there is a case to be made for both the challenges and opportunities in recycling. While we are taking steps to enhance our business in the short term, it's important to note that China needs cardboard, with an expected 5% growth in cardboard demand for 2018. They have primarily three sources: imported OCC, which we are currently not supplying, and the domestic OCC market in China is significantly insufficient to meet their needs, leading them to turn to pulp instead. This shift has caused prices to surge due to the shortfall in OCC supply. Additionally, we are considering updates to our technology and processes to better manage incoming contamination. I hope that addresses your question regarding the situation.

Jim, maybe for Brian's benefit mentioned too that alliance with your bull case right now that $0.12 to $0.15 revised guidance is based on about $80 a ton for our commodities. We’re now at about $70, $72, $73 in that vicinity. So it’s not a huge upside that’s built into that guidance on the commodity side we have some upside expected, but we truly see that because of Jim’s bull case we not fully expect that to happen. In addition, if you just look at the commodity trends right now domestic OCC and we see it trending up from that April level that we saw that’s exceptionally low as Jim pointed out. The export OCC we also see that trend up for the Jim’s bull case example, export OMP, we see moving up from the April level significantly and that’s in our guidance number. And really down one is that mixed paper that we’ll see moving forward as we move forward. But the point is that in that new revised guidance we got about $10 of commodity price that we built in on the upside into that guidance.

The main issue we are facing is the operating cost. That's the short answer to your question. While you can analyze commodity prices, the real challenge lies in the operating costs, which we haven't seen significantly increase, and that's what accounts for the discrepancy.

That's a great answer. Just do you think then we need to maybe update the sensitivity that we've been using the $0.04 per $10 move? And then just sort of to Jim's point on what's baked into the guidance, it looks like an incremental $0.04 to $0.07 hit for the rest of the year after the $0.08 this quarter. It seems awfully low considering I think the 2Q comp will be even tougher. I would think that 2Q number would be even bigger than the $0.07 high into that range. So are you sort of assuming that it's a year-over-year good guide for the second half of the year is that what I'm hearing?

So Brian, I would start by saying with regard to the guidance that we've always provided with respect to that $0.04 impact for the $10 shift in prices. What's important there is to reiterate Jim's point that is the commodity price piece only. And so that speaks to revenue sensitivity. The operating expense sensitivity is the other piece of the equation. So we wouldn't break with that guidance because they're not necessarily connected. So what we did see in the first quarter is that in addition to the EPS impact, which were about 75% to 80% of the $0.08 of negative impact that we saw in the quarter from commodity price changes, we also saw that OpEx be about 20% to 25% of an impact. With respect to the last part of your question, I think what's important to remember is first quarter was really the strongest quarter for recycling in the prior year. And the comps and the decline in commodity prices we really started to see in the fall of 2017. And so the more positive outlook for the remainder of the year relative to what we saw in the first quarter really has to do with the impacts of those year-over-year comps, and then to some extent starting to see some benefits of the specific action that the company is taking.

Yes, Brian, we also on the operating costs side we expect that it's built into that guidance. We expect to see operating costs improvement versus the first quarter. We've got some strong actions underway. We look by Murf at where their commodities are being shipped. And then address the contamination cleanup level to the end marketplace. And perhaps in the first quarter we weren't as good at that as we implemented that Chinese new standard. And you'll see operating costs on the recycle side get better that will help us meet that new guidance number versus the trend for Q1.

I know we've spent a lot of time on this question, but it's really the main issue; everything else was quite strong this quarter. We anticipated some questions regarding recycling, and while we can discuss the solid waste strength, I want to mention something about the second quarter and our guidance for the rest of the year. When China takes these kinds of steps, they typically do it in the first quarter. That’s the quarter where they can manage an OCC drop from 30% to 2% from Waste Management or any other source. However, as I mentioned, they do have a need for cardboard, and their options are limited. I outlined three options, with the second being less viable as domestic OCC. Therefore, we will have to rely on imported OCC, which is why we believe there is more potential for price increases, as Jim noted, than for declines.

Okay, appreciate the detailed answer. Sorry to lead off with this quirky wheel you will, but appreciate the color.

Hey, good morning. The first question is just around more work you plan to do with your cash, leverage is at an all-time low, free cash flow is at an all-time high, does it probably antitrust issues in growing in the core business. So the question really is do you return 100% of your free cash flow back like one of your competitors or are there better options for that cash?

So Hamzah, I would say the first quarter is a really good indicator of our confidence in the free cash flow generation and the balance sheet strength that you mentioned. And as I mentioned we allocated more than 100% of free cash flow through a combination of share buyback and the dividend and then on top of that acquired $248 million of solid waste businesses. And so I think that's a really good indication of how we think about capital allocation going forward. We’re continuing to commit to growing the dividend over the long term as we did this year with a 9.4% increase on a year-over-year basis. And then we’re looking at $750 million baseline of share buyback for the year, so committed to that strong allocation, as we have always been.

Hamzah, those $248 million of acquisitions that Devina mentioned are seven or eight transactions in Q1 of excellent tuck-ins that are in really good markets for us, where we’re asset strong and can internalize and get some synergies out of that material. So we’re excited about that revenue that was added. Early pipeline for 2018 is strong as well, and we’ll still look for really good acquisitions at a fair price, they are accretive to our business and expect to do more of them in 2018.

Great. And then just second question, I know you gave a lot of detail on recycling, but my question is a little more specific around recycling, is, overtime you have restructured some contracts, you have tried to derisk that business. But I guess the question is, is the real issue that you need to restructure contracts to get processing costs back or is it protection of downside of pricing and is the issue is more municipalities that you are dealing with? Question is more from a contract structure perspective, can you do anything?

Yes, Hamzah, we are doing something about that, this week in fact a few of us from the SLT met with our public sector team they work from each of our 17 areas. We had already rolled out a three-phase plan to do just that and look at contracts in their existing form, where we can make operating changes around contamination and then look for opportunities to renegotiate current agreements. Some will have to wait till the end of the term and take a hard look, but our customers fully understand the situation that we’re in with contamination and we’re taking strong action in that regard. The last action, what three or four years ago, is primarily around floor pricing and getting the price right. What we’re having to do now because of the reset button of the recycling business is take a look at that contamination and make sure that we’re getting that fair payment for processing. And as Jim mentioned in his earlier statements, make sure that the customer is taking the risk on commodity price not just us.

Really Hamzah, this is Jim, and I want to emphasize the point Jim made. Contamination is at the heart of this issue, and it relates back to my earlier statement that we've shifted from recycling to diversion. There is a disconnect between recycling, which means repurposing material or converting a plastic bottle back into another plastic bottle, and diversion, which involves diverting more waste from the trash bin to the recycling bin. This often results in increased trash being found in recycling bins, which we have observed. The numbers I've shared indicate that five years ago, our single-stream contamination was between 10% and 15%, and now it has risen to 20% to 25%. This is likely what prompted China to stop importing our waste, urging us to improve our practices. While this may not be a pleasant message for our customers, we are not the source of the contamination. It originates from the inbound materials, and with contamination levels as high as 40% in the inbound stream, this situation cannot persist.

Hamzah, I would like to point out that the contract renegotiations we undertook over the last three to five years provided significant value to the company. In 2018, we anticipated delivering value throughout the year, and things could have been much worse. Considering our Q1 results, which reflected a $46 million year-over-year decline in EBITDA for the recycling line of business, we estimate that the impact from recycling in 2018 could have been as much as $0.08 to $0.10 worse than what we are currently projecting, had it not been for the efforts of our teams.

Got it, very helpful. Thank you very much.

Thank you very much for taking the question and if I can ask in a different thread on the recycling, because I thought your explanation of the demand was good, but can you help us think about if they use 1Q to do whatever they want to do, what's the pattern look like typically April, May, June, July, August. What do you see and one of your biggest customers is Nine Dragons and they are adding 2 million tons of capacity in the middle of the year, how does that layer into some of the thinking? Can you get a little more color around that?

Yes, I mean I think Michael, first of all the pattern tends to be as they prepare cardboard for shipping for the Christmas season, it tends to be kind of Q2 and Q3, it's not Q4. So we've typically seen pricing, commodity pricing drop off in Q4. Couple of years ago it did not and that was somewhat unusual, but historically you've seen kind of the low course be Q1 and Q4 and the stronger quarters be Q2 and Q3.

Okay. And so your anticipation is given the fundamentals and all the little brown boxes that show up in all of our houses, that demand driver is going to be good in 2 and 3?

It’s clear that China will continue to ship cardboard boxes. If their growth rate is projected at 5% year-over-year, they will need to source cardboard. While we acknowledge their concerns about contamination—since heavily contaminated materials increase their costs—it's evident they have taken a firm position on this issue. Once we start to address the stream of materials, which we have invested in, we anticipate that they will begin to import more, a trend we are already observing. Consequently, we believe that prices will respond accordingly. Although we are not expecting prices to rise to the levels seen in 2017, as Jim mentioned, we anticipate a rebound from the levels recorded in March.

Michael, we think we'll come out of this reset even stronger than before. Our brokerage business is a great example of that; what we shipped to China in Q1 for example, two-thirds of it came from our brokerage volumes very clean materials. And that we could combine with materials from our MRF that we appoint appropriately. So, we think that we'll come through this fine and that demand has to be there. We expected to grow and as I mentioned earlier with Brian’s question that export OCC, we think has some real upside over the April numbers and we bake that in and we see signs of it.

And are you still approximately 50-50 brokerage versus your own MRF revenue when the revenue dollar?

Might be a little bit higher or our own but more like 60-40 maybe, but yes, I mean, in that neighborhood.

Okay. And then switching gears to solid waste business, a year ago you had a 19% year-over-year growth in C&D and you come back in 2018 and done 28% and we had a regular winter. Can you talk about what's going on across your 17 regions and what you are seeing because that's really good?

Yes, Michael, you've covered a lot in your reporting. If we look at housing starts, they have been consistently trending upwards, with March showing the highest numbers we've seen in recent years at around 1.3. While that’s not as high as the 2.1 we saw in 2006, it is a steady improvement. This trend is benefiting our C&D business. To give you an insightful number about the solid waste business, we've seen significant growth in EBITDA, with an increase of $69 million for the quarter. This figure includes an $18 million bonus and accounts for a $46 million headwind in recycling, as well as a positive impact of $28 million from the fuel tax credit. If we adjust for those items to focus purely on the traditional solid waste operations, we see $105 million in growth, which amounts to an 11.9% increase, nearly all from organic growth, even amidst a 2.5% economic environment. The numbers on the free cash side are impressive as well. I may have touched on a question you didn't directly ask, but I want to emphasize that although we've discussed recycling at length, it's worth noting that recycling is only one-tenth the size of the solid waste business, which is currently performing exceptionally well.

And Michael, the 28% that you mentioned on C&D you’re right that’s a really strong number. I don’t see that moving forward at that level in future quarters that’s a lot of that volume for the national disaster cleanups in Florida and in Northern California. Yet it will be positive it was last year even before given the construction activity in North America. So it’ll be positive, but it isn’t going to be a 28% in my estimation, I’d love for that to happen. The other point to mention is that C&D is about 10% of our total landfill volume. So although very positive the rest of the lines of business in landfill were really strong as well.

And that was where I was going to go with this is, ultimately this is a very consumer-sensitive business because what happens in commercial collection and when you look at weight on a same-store basis in commercial collection, how do you frame that trend?

Yes, Michael, I don't see it increasing significantly; in fact, it's slightly down per container, which is unusual since the total volume appears quite strong. You can see that across all lines of business, both price and volume were very strong. So I’m not sure that’s what’s driving it; it’s the weight per container that matters, not the overall volume of our business.

Okay. And if weight is not rising there, but you’re getting the level of pricing, so what’s supporting that, because you are heavily urban model. So the level of pricing you’re getting given as urban as you are and as much competition as you have to deal with, is impressive.

Yes, you look Michael at the two lines of business that are driving that, the commercial and the industrial line of business. I think Jim nailed it in his opening comments and that’s we have excellent assets in those urban markets. We have moved some really strong processes and people into those growth markets and are getting at least our fair share of the growth in those MSAs in commercial and in the industrial lines of business. It’s helping the collection side, but it’s also supporting the landfill line of business because we internalize that volume.

So aspirationally we look to expand margins 50 to 100 basis points for the year. We certainly outperformed that in the first quarter, some of the outperformance came from the fuel tax credits, but even if you peel back the impact of the fuel tax credits to traditional solid waste business did see that 50 basis point plus margin expansion for the year, I mean, you really are hitting on it. If you look at price we’ve always known that price is one of the levers that helps us to expand margin. But to Jim’s point when you’re adding volume at a pace that outpaces meaningfully the rate of routes increases and labor costs you’re going to get leverage from that as well. And so we’re certainly seeing that show up.

Some of the key items you mentioned have been controlled, particularly SG&A since I took on the CFO role. As Devina highlighted, the SG&A percentage has decreased. We have managed our SG&A and operating costs, which we have discussed for years through SDO. With our top-line growth in C&I and landfill, we expect this to positively impact our margins. We are also focused on enhancing the customer experience and believe that our efforts are reflected in the growth numbers for our commercial and industrial sectors.

Michael, Jim called it in his early statements of disciplined growth and our term for that what that includes is that point of where we grow and at what price we grow our business. We are very careful to make sure we’re not just adding volume; we are adding it in the right places that add that margin expansion and with where we can internalize that volume. So it’s not just the economic growth, it’s the discipline of growing at the price with the right customer base that adds to that margin expansion.

And lastly I know we touched a little bit on April with recycling price, I am just curious anything on the solid core waste, is it the trends you kind of saw in February and March continue in April and any impact from weather at all?

Yes, I would say that although it's early in April, our volumes are still looking good. Price continues to be a key focus for us, as we have been concentrating on it for the past decade. A strong emphasis on customer experience certainly supports our pricing strategy. The better our customer experience, the more we can differentiate ourselves, making it easier to charge a higher price. What was the last part of your question?

Weather.

Yes, so we didn’t really use the W word because it happens every year, what I would say is that this is a little bit tougher winter than last year, last two years actually were pretty mild. We actually pulled the field and we had 30 more lost days to weather this year and that’s area days. So the areas themselves had 30 more lost days this year than last year. So the weather did affect us, but look we work through that, it’s winter.

Yes, thank you.

Thank you.

Okay, well thank you very much. In closing today look I’d just like to say I know we talked a lot about recycling, I think it was the right thing to talk about, it’s an important part of our business. But as I said it is a smaller part of our business compared to the solid waste and with respect to solid waste I would just say that maybe more than any other quarter my carrier of Waste Management this quarter highlights the strength of core; the core of this business. So we look forward to the rest of the year and we look forward to seeing many of you next week in Las Vegas at Waste Expo. Thank you.