Waste Management Inc (WM) — Q2 2019 Earnings Call Transcript

Thank you, Christine. Good morning, everyone and thank you for joining us for our second quarter 2019 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; and Devina Rankin, Senior Vice President and Chief Financial Officer. We will hear prepared comments from each of them today. Jim will cover high level financials and provide a strategic update. John will cover an operating overview, and Devina will cover the details of the financials. 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 and subsequent Form 10-Qs. Jim and John will discuss our results in the areas of yield and volume, which, otherwise stated, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim and Devina will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and they'll also address operating EBITDA, which is income from operations before depreciation and amortization and operating EBITDA margin. Jim and Devina will also be discussing the planned acquisition of Advanced Disposal Services, Inc., which they may refer to as Advanced or ADS. Any comparisons unless otherwise stated will be with the second quarter of 2018. Operating and SG&A expenses, operating EBITDA, net income, and EPS for the second quarter of 2019 have been adjusted, and projected 2019 results are anticipated to be adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations, including costs related to the pending acquisition of ADS. These adjusted measures in addition to free cash flow are non-GAAP measures. Please refer to the earnings press release and the tables, 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 and non-GAAP projections. 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 August 8. 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 4598118. Time-sensitive information provided during today's call, which is occurring on July 25, 2019, may no longer be accurate at the time of the replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now, I'll turn the call over to Waste Management President and CEO, Jim Fish.

Thanks, Ed, and thank you all for joining us. Once again, our employees delivered strong operating performance in the second quarter, continuing to demonstrate our strategic focus on leveraging our asset network to serve our customers and drive growth. Just like in the first quarter, the strength of our collection and disposal business was the main contributor to our success. In the second quarter, we generated more than 7% organic revenue growth in our collection and disposal business with yield of 2.7% and volume of 4.4%, and we had strong core price of 5.4%, which translated into total company operating EBITDA of more than $1.13 billion, an increase of almost 7% from the second quarter of 2018. We also saw operating EBITDA margin expand 30 basis points for the total company and 60 basis points for the collection and disposal business. As we've said many times, operating EBITDA is the best measure of the health and performance of our business; and in the second quarter, all indicators point to excellent health. Our operating EBITDA growth translated into free cash flow of $440 million. We're pleased with our year-to-date results which we will discuss in a moment, but first, I'd like to provide an update on the progress we're making towards the ADS acquisition. At the end of June, the ADS stockholders voted overwhelmingly to approve Waste Management's acquisition of the company. This stockholder approval is an important milestone in the process towards closing the transaction. In addition, and as expected, we received a second request from the Department of Justice, and we will continue to work with them to satisfy this request. We remain on track to complete the acquisition during the first quarter of 2020. We will keep you informed as we continue our progress towards closing this transaction. We have a dedicated team working to position us to successfully integrate ADS upon close. These efforts are important, and we're pleased with the progress we're making on that front. Our team is also focused on a number of additional efforts to accelerate our growth and continuously improve our business. We continue to invest in our people, technology, our customer experience, and our asset network. On the people side, we opened our second driver and technician training facility in Glendale, Arizona in June, and we continue to expand our program with Caterpillar to remotely operate equipment at one of our landfills in Denver. While this is a technology investment, it's also an investment in our people as technology like this modernizes the jobs for our workers, improves safety, enables us to work more efficiently, and provides us with an opportunity to expand our workforce in the future. On both the technology and customer experience fronts, in June, we launched an upgraded wm.com that allows customers to order and manage service with modernized navigation and increased functionality. We redesigned the site with input from our customers, and so far it's been really well received. In the first month, we had a 20% increase in customers shopping on the website and an 11% increase in overall online sales revenue. E-commerce is a small but growing channel for us, and we're in the early innings of maximizing its value. Another benefit we get from e-commerce is improving customer loyalty, because most online customers enroll in convenient billing and payment options. Finally, on the asset network front, we're seeing great results from our increased focus on enhancing our post-collection business model. Our team is securing expansion air space capacity in key markets, partnering with communities to ensure that they understand the role that landfills can play in achieving their waste management goals, and optimizing our pricing methods to improve profitability and return. In the second quarter, core price in the landfill line of business was 4%, and MSW yield was 3.6%, which exceeded 3% for the second consecutive quarter. This is the highest MSW yield in a decade. It's important for us to drive discipline in landfill pricing to ensure that we earn appropriate returns on this capital-intensive part of our business. Our efforts to drive greater discipline in the pricing of our post-collection businesses start with the transfer station, which is often referred to as a remote gate to the landfill. This focus is also showing strong results with our second quarter transfer station yield improving to 3.4%, an increase of 70 basis points sequentially and 160 basis points from the prior year period. We will continue to focus on maximizing our asset utilization to generate strong returns on all of our assets. We've had a great start to 2019. In the second half of 2019, we expect our collection and disposal business will continue to generate strong earnings growth and more than offset the decline we now expect in our recycling line of business. John will give a bit more color, but suffice to say we're confident in our ability to execute our strategy, and we are reaffirming our full year 2019 guidance of adjusted earnings per diluted share of between $4.28 and $4.38, adjusted operating EBITDA of between $4.4 billion and $4.45 billion, and free cash flow of between $2.025 billion and $2.075 billion. And with that, I will turn the call over to John.

Thanks, Jim and good morning. Second quarter results were strong, particularly in the collection and disposal lines of business. Collection and disposal organic growth on revenue growth topped 7%, driven by strong execution on our core price program, continued progress of our strategy around customer differentiation, and robust post-collection volumes at our transfer stations and landfills. On the landfill volume front, in the second quarter, growth was driven by the continued strength of MSW volumes, an increase in special waste volumes from our pipeline that remains strong and very strong C&D volumes as we were able to position ourselves as a community partner to assist with fire cleanup activities in California. The strong volumes that we're seeing in our landfills are also at attractive prices; MSW volumes grew 6.1% and yield was 3.6% in the second quarter. MSW yield of 3.4% and 3.6% in the first two quarters of the year represents a step change improvement from the last several years, and we expect this trend to continue. Our post-collection lines of business are seeing increased operating cost pressures, as well as higher capital investments as the cost of constructions rise. We will continue to focus on disciplined pricing to recover these costs and generate appropriate returns on our investments in these assets. Turning to our customer focus metrics. Churn was 8.8% in the second quarter. Year-to-date churn is 8.5%, a 60-basis-point improvement over last year. Additionally, service increases continue to outpace service decreases. The strong collection and disposal organic growth and great operating performance led to operating EBITDA growth of $112 million and a 60 basis point improvement in the margins in those lines of business. In the second quarter, total Company operating EBITDA was the highest that we have ever generated. In the second quarter, total operating costs as a percentage of revenue were 61.5%, a 40 basis point improvement over last year, as our operations have been able to improve their efficiency and manage their spending as volumes increase. We still have opportunities for further improvement, particularly around labor, maintenance, and leachate management costs, and our team is focused on identifying and making these improvements. For example, our M100 program provides our frontline supervisors a view of each segment of their routes throughout the day, which will allow for improved efficiency and additional labor savings. We saw early benefits from this initiative in the second quarter as efficiency improved in all three collection lines of business, driving a 25 basis point reduction in labor costs as a percentage of revenue. We expect to drive even greater efficiency improvements in our collection lines of business, as we continue the deployment of these tools across the enterprise. Turning to recycling, there was a $21 per ton or 33% drop year-over-year in our blended average commodity price, down to $43 per ton, but operating EBITDA improved $6 million. We're very pleased with the outcome of our team's hard work to improve the recycling model by lowering costs, restructuring contracts, and assessing fees for contamination. Looking at the remainder of the year, we anticipate that commodity prices will continue to be well below the $70 per ton commodity price we expected when we gave our 2019 outlook. And as a result, we no longer anticipate a full-year tailwind from recycling. We now expect that our recycling business will be a $0.01 to $0.02 headwind for the full year. As we mentioned previously, the traditional formula that a $10 move in commodity prices changes annual EPS by $0.04 no longer holds, due to our successful efforts to change and improve the business model. To emphasize this point, without our team's proactive steps to evolve the recycling business model, the full-year impact from depressed commodity prices would likely be closer to a negative $0.09, rather than a negative $0.01 to $0.02 that we're forecasting. We remain focused on changing the business model for recycling with improved MRF technology and contract structures that recoup processing costs and protect us from commodity price downside. To that end, we are on track to open our recycling plant of the future by the end of this year. With this plant, we expect to achieve labor and operating cost savings while creating the best quality material for sale. Impressively, we fully expect the performance of our collection and disposal business to overcome the headwind from lower recycling commodity prices. As we passed the halfway mark for the year, we anticipate that continued strong organic growth and a focus on operating efficiencies will keep us on target. Our employees have delivered a strong performance throughout this year. I want to thank them for the fantastic job they continue to do serving our customers and producing breakthrough results. As a leadership team, we are absolutely confident they will continue to perform at high levels to achieve our full 2019 guidance. I'll now turn the call over to Devina to discuss our second quarter financial results in more detail.

Thanks, John. And good morning, everyone. As you heard from Jim and John, the strong performance of our collection and disposal business continued to overcome the impact of a weak recycling environment. In our second quarter, we again delivered solid financial results. Collection and disposal operating EBITDA grew by over 9% when compared with the second quarter of 2018, driving total Company operating EBITDA growth by almost 7% and positioning us well to deliver our full year targeted growth of about 5%. We view operating EBITDA growth as the single most important measure of our performance, and we're very pleased to see our operations deliver these results. In the second quarter of 2019, cash flow from operations grew 3.6% to $1.10 billion. When you normalize the year-over-year comparison for the impact of the fuel tax credits that we received in the second quarter of 2018, the increase would have been 6.7%. We are pleased with this result and see our efforts to convert more of each revenue dollar to cash working. With cash from operations of the percentage of revenue improving 30 basis points on a year-to-date basis to 24.9%. This is particularly impressive when you consider that we achieved this result in spite of a $66 million decrease in revenues from yield in our recycling business due to the 30% decline in market prices for the commodities in South. During the second quarter, we spent $578 million on capital expenditures. This compares to $436 million in the second quarter of 2018. The increase in the current year is related to timing differences in our spending for landfill construction, trucks, and containers. The difference in timing is the result of intentional steps we have taken to invest in our growth by pulling forward some of our planned capital spending. We remain disciplined in allocating capital dollars to our highest margin and return businesses and have proactively managed our capital spending in 2019 to address our robust volume growth. Volume in our landfill and commercial collection businesses exceeded expectations in the first half of the year, and our operators and their corporate partners have worked hard to accelerate construction and asset deliveries to meet our customers' needs. With the strength of our volume growth, our full-year capital expenditures will be at the upper end of our guidance of between $1.65 billion and $1.75 billion. In the second quarter of 2019, our business generated $440 million of free cash flow. For the first six months of the year, free cash flow was $871 million. The timing difference that I just discussed for capital expenditures is the primary driver of the decline in the measures from the prior year. Additionally, our second quarter of 2018 included $28 million of fuel tax credits, as well as nearly $80 million in proceeds from the divestiture of non-core businesses. When you normalize for these two items, the year-over-year comparisons for both the quarter and year-to-date period more clearly reflect our strong operating EBITDA growth. We continue to expect our strong operating performance and disciplined capital spending will yield full year free cash flow in line with our guidance of between $2.025 billion and $2.075 billion. In the second quarter of 2019, we used our free cash flow to pay $217 million in dividends, and we repurchased $180 million of our stock. When combined with our first quarter share repurchase activity, we expect this level of share repurchases to meet our goal of offsetting dilution from stock-based compensation. Given the pending acquisition of ADS and our efforts to position our balance sheet for the close, we no longer expect to repurchase additional shares over the remainder of the year. We continue to estimate that this will have up to a negative $0.06 impact on full year EPS. During the quarter, we successfully executed a $4 billion debt financing, which positions us to close on the acquisition of Advanced Disposal. The offering proceeds have largely been invested in stable money market fund that we also used a portion of the fund to retire several of our higher priced senior notes. We are happy with the results of both transactions. Our pre-tax average cost of debt is now below 4%, which is instrumental to executing well on achieving our targeted returns for the pending acquisition. We estimate that the incremental interest will have a negative $0.03 impact to 2019 EPS. We plan to adjust for both the impact of lower share repurchases and incremental interest costs through the ADS acquisition closing. Our debt to EBITDA ratio measured based on our bank covenants was 2.95 times at the end of the second quarter. This is higher than where we have been in recent years, so well within our targeted levels, which is particularly impressive given that the measure does not yet have the benefit of ADS EBITDA. Our strong balance sheet continues to afford us the financial flexibility to pursue strategic acquisitions at the right price. Turning to SG&A. For the second quarter, our SG&A costs as a percentage of revenue were 9.8%, in line with the second quarter of 2018, despite the increased investment we are making in technology. For the full year, we continue to target SG&A expenses as a percentage of revenue of about 10%. In our business, the second quarter is often an important indicator of how we will perform for the full year, as we observe seasonal increases in certain parts of our business. With the strength of our second quarter results and the positive momentum that we are seeing early in the third quarter, we are positioned well to deliver on our 2019 priorities. With that, Christine, let's open the lines for questions.

Hey, John, obviously landfill volumes continue to impress. At this point, you're running maybe north of 120 million tons of landfill volumes, but it feels like there's a couple of discrete projects in there like the wildfire cleanup. I know you mentioned the pipeline is robust, but how should we think about those landfill volumes moving into next year? Is there maybe a few million tons that won't recur or anything there would be helpful.

No, I think -- fair question. I mean, we certainly have looked at that and I think there's a lot of puts and takes with that volume. I mean, we're pointing to the California wildfires this year, which is obviously an unfortunate event to say the least. But if you go back last year and the year before, although the geography changes, we've seen these events year-in and year-out. It's hard to predict, obviously, where they're going to show up. But I think the other thing you should look at is, aside from just that is our special waste volumes continue to be strong and we referenced that in some of the prepared remarks. So we feel good about the landfill volume. We also look through the transfer stations as Jim mentioned, the remote gate to the landfill, we continue to see both price and volume performance there. So we feel good about where – we’re around the post collection side.

Okay, that's very helpful. And then, Jim?

Well, I was just going to add to that. It really -- it really is almost like event work for us. I mean, and to John's point, it's -- it's extremely unfortunate, when you have these big natural disasters. We were there to help -- help clean up. We were actually up -- Tara and I were up last week in Northern California driving through Paradise, it's devastating. But -- but really when you boil it down to how it impacts our volume or how it impacts our EBITDA or revenue or free cash flow, as John said, it's a lot of puts and takes, it's very lumpy, hard to predict on an area-by-area basis but -- but we seem to have whether it's a big event or a big construction project or a natural disaster cleanup or whatever it is every year, and so we just look at it as part -- as just simply part of our overall business, albeit part that's tough to predict.

Yeah, no that's. I appreciate that. But Jim, maybe kind of coming back to the economic data. I mean, if you look at it across the board, it kind of remains disparate. Obviously, your business is doing extremely well right now, but you also tend to be a bit late cycle. So I'm just curious, what you're seeing out there and maybe what are the KPIs that you and the Senior Management team really watch that might foretell a trend change in that organic growth metric?

Yeah, you're right. Tyler, about the fact that our industry tends to be considered more of a lagging indicator for the macroeconomy. I would tell you that waste management specifically is a pretty good indicator overall because we service virtually every sector of the economy. What I would say is, there are a couple of leading indicators within our numbers. First and foremost, our commercial collection business is somewhat of a proxy for how small business is doing. When you see service increases outpacing service decreases repeatedly and strongly, to us that's a pretty good leading indicator of how small business is looking at the future in terms of the economy. And then secondly, John mentioned, special waste. Our special waste pipeline is very strong. We've seen double-digit numbers now again and -- and the reason special waste is a leading indicator is because a lot of North American companies, the confidence in the economy shows up in their special waste project work. When they see signs of a slowing economy, they tend to pull in the reins on that event work and wait until times look a little rosier. So the fact that our special waste pipeline looks as good as it does, and the fact that our special waste volumes in the quarters both second and first have looked good is a good leading indicator for us. And then the last one, of course is just C&D volume and of course, part of our C&D number is driven by fire volume but -- but even without the fire volume, our C&D number has been very strong for at least five quarters. Every city I go to seems to have a sea of cranes on the horizon. So, it looks like C&D is still quite strong and that is also a pretty good leading indicator of the overall economy.

Okay. Yeah that's helpful. And then maybe, Devina, real quick. What was the divestiture made in the quarter. So one, you noted it was ancillary, maybe what was it? Two, is it in that other revenue line? And then three, just how should we think about divested revenue in the second half versus the $82 million in the first half just for modeling.

So the $82 million was actually in the first half of 2018, and divestiture activity in the second quarter of 2019 was very immaterial at about $8 million, and that's just normal course asset divestitures.

Okay, sorry I got my numbers all mixed up, but is there a lot -- going to be a lot of back half divestitures or no?

There is not currently an expectation of any meaningful back-half divestitures. We certainly look all the time for underperforming assets and assets that we can shed in order to be sure that we're optimizing the business model. We're really looking at the reverse side of that and thinking about acquisitions, and you'll see that in the second quarter, we acquired almost $50 million of additional traditional solid waste businesses. And when we think about that in terms of acquired revenue, you're looking at about $120 million of acquired revenue thus far in 2019. What you're seeing is somewhat of an offset associated with divestitures from the prior year. And so, there were divestitures both in front half of 2018 and the back half of 2018 that are somewhat offsetting that strong acquisition growth, but you'll see some of that normalize in the back half of the year.

Okay, that's helpful. All right, thanks guys.

Hey guys, thanks for taking my question. Just on the MSW yield. The 3.6% second straight quarter, can you just help us understand, what is out there in the market right now that should give us confidence that there is momentum there that we could kind of look at that number going forward rather than stepping back into the old years, in old cycles where pricing was a little bit more competitive. Is it something with the cost pressure seeing at the landfill that -- that the market now can start passing that through. Is it disruption on the recycling front, is it some consolidation that's played out? Help us understand some of the factors that is really putting together two straight consecutive quarters of good yield at the disposal.

Yeah, Michael, I think you've touched on a couple of pieces there. It's -- part of it is an increased focus through the use of data and analytics. We brought that to the collection side of the business probably seven years or eight years ago, and we've really transitioned that over to the landfill line of business. And now, there is not only a use of data and analytics, but there is a real focus on it from our Senior VPs as they work with their teams in the field. So that certainly is having an impact. I think, there may be some of it that is kind of necessarily as a result of few other cost categories going up, specifically transportation-related costs and leachate management certainly are climbing at a rate higher than CPI, but but I think some of it is just sort of recognition on our part that that these are really critical assets that we have to earn a better return on them, they're very capital intensive. And so I would say that that 4% core price in landfills and 3.6% MSW yield on the heels of 3.4% is good, but I still think there is opportunity to increase that at our landfills and transfer stations, not just to keep up with inflation in certain cost categories, but to help us expand margins and to me, that's kind of a breath of fresh air after -- it feels like it's a decade of 1% yield at the landfill.

That's helpful. And then just lastly, I mean, this year, had a nice little benefit from the inflation pick up last year. This year, though inflation has kind of disappointed at least on the headline numbers. Can you just talk about what that might mean for us, thinking about that going to 2020 and are some of your business lines clearly seeing cost inflation above CPI and the market is going to still have to try to raise pricing to offset that? Thank you.

Yeah, sure, Michael, I will -- really on inflation and CPI specifically, it's really been flat for the flattish. I mean, it was down, I think, 10 basis points for the quarter. But we didn't see really much in the way of tailwinds from CPI as it was creeping up over the last few quarters and now, it started to reverse course a little bit. We're not anticipating much in the way of a headwind. As you said, we do have some cost categories that are outpacing inflation. And so as a result, we've tried to transition some of our pricing of contracts over to that water sewer trash index that is more representative of our overall cost structure, but there also, there are also a few cost categories that are, that are not increasing at the same rate, such as fuel. So overall, I think, we're kind of a bit above that CPI, but we don't expect to see much of a headwind as we move out towards the latter half of '19 and into '20, unless something really changes dramatically. I don't anticipate much of a headwind on the price side from CPI softening.

Thank you.

Hi, team. Thanks for taking my questions. First one for me is just on ADS and the HSR review. I can fully appreciate that there's only so much you guys would want to disclose in the middle of this process, but it would be helpful if you could let us know, how this review has been tracking relative to initial expectations. And then maybe lay out kind of a rough timeline on what to expect in terms of next steps, coming out of this second request from the DOJ?

Yeah, fair enough. This is John. I think, in terms of what we've experienced to-date. I think, it's tracking about as we expected from a timing standpoint, a process standpoint. Clearly, we're not far enough along where we can really start to add any more color or detail as we said in the prepared remarks, we still think the first quarter of 2020 is on track. I will tell you, the process so far has not yielded any surprises. We're continuing to do everything we can from a regulatory standpoint to make the process with the DOJ go as expeditiously as it can. So in terms of next steps, again, we're not far enough along in the process for us to really add any additional color. But I would expect probably in the next 60 days to 90 days, we're going to be further along to the point where we'll be able to add a little bit more color.

Sean. I think we all can empathize with you on the -- hear in patience here because, but unfortunately when it comes to things like synergies, we gave that original $100 million number, but we don't know any more at this point, because they are still operating as a separate company and we have not -- besides that, we have a team in there kind of diving in right now, that team won't go in and dive in until -- until we close the transaction. And then in a very short order, we will know whether that $100 million is conservative or not. But we're -- we're kind of equally impatient, where we're waiting for this to run through its cycles with the Department of Justice. And once it does, we expect that things will move along pretty quickly.

Yeah, I get that. And I wasn't really trying to prod at an updated synergy number necessarily, I just wanted to understand kind of even just procedurally, what the next step is in terms of what will be released by the DOJ or filed by you guys and kind of when that next sort of filing or update would be?

Well, as you've seen, the second request is in process right now. That's probably the only update since the last call, we're obviously working our way to satisfy that request from the regulators.

Okay, that's great, thanks.

Thanks, Jim and good morning. Second quarter results were strong, particularly in the collection and disposal lines of business. Collection and disposal organic growth -- on revenue growth topped 7% driven by strong execution on our core price program, continued progress of our strategy around customer differentiation, and robust post collection volumes at our transfer stations and landfills. On the landfill volume front, in the second quarter, growth was driven by the continued strength of MSW volumes, an increase in special waste volumes from our pipeline that remains strong and very strong C&D volumes as we were able to position ourselves as a community partner to assist with fire [ph] cleanup activities in California. The strong volumes that we're seeing in our landfills are also at attractive prices, MSW volumes grew 6.1% and yield was 3.6% in the second quarter. MSW yield of 3.4% and 3.6% in the first two quarters of the year represents a step change improvement from the last several years, and we expect this trend to continue. Our post collection lines of business are seeing increased operating cost pressures, as well as higher capital investments as the cost of constructions rise. We will continue to focus on disciplined pricing to recover these costs and generate appropriate returns on our investments in these assets. Turning to our customer focus metrics. Churn was 8.8% in the second quarter. Year-to-date churn is 8.5%, a 60-basis-point improvement over last year. Additionally, service increases continue to outpace service decreases. The strong collection and disposal organic growth and great operating performance led to operating EBITDA growth of $112 million and a 60 basis point improvement in the margins in those lines of business. In the second quarter, total Company operating EBITDA was the highest that we have ever generated. In the second quarter, total operating costs as a percentage of revenue were 61.5%, a 40 basis point improvement over last year, as our operations have been able to improve their efficiency and manage their spending as volumes increase. We still have opportunities for further improvement, particularly around labor, maintenance, and leachate management costs and our team is focused on identifying and making these improvements. For example, our M100 program provides our frontline supervisors a view of each segment of their routes throughout the day, which will allow for improved efficiency and additional labor savings. We saw early benefits from this initiative in the second quarter as efficiency improved in all three collection lines of business, driving a 25 basis point reduction in labor costs as a percentage of revenue. We expect to drive even greater efficiency improvements in our collection lines of business, as we continue the -- the deployment of these tools across the enterprise. Turning to recycling, there was a $21 per ton or 33% drop year-over-year in our blended average commodity price down to $43 per ton, but operating EBITDA improved $6 million. We're very pleased with the outcome of our team's hard work to improve the recycling model by lowering cost, restructuring contracts and assessing fees for contamination. Looking at the remainder of the year, we anticipate that commodity prices will continue to be well below the $70 per ton commodity price, we expected when we gave our 2019 outlook. And as a result, we no longer anticipate a full-year tailwind from recycling. We now expect that our recycling business will be $0.01 to $0.02 headwind for the full year. As we mentioned previously, the traditional formula that a $10 move in commodity prices changes annual EPS by $0.04 no longer holds, due to our successful efforts to change and improve the business model. To emphasize this point, without our team's proactive steps to evolve the recycling business model, the full-year impact from depressed commodity prices would likely be closer to a negative $0.09, rather than a negative $0.01 to $0.02 that we're forecasting. We remain focused on changing the business model for recycling with improved MRF technology and contract structures that recoup processing costs and protect us from commodity price downside. To that end, we are on track to open our recycling plant of the future by the end of this year. With this plant, we expect to achieve labor and operating cost savings while creating the best quality material for sale. Impressively, we fully expect the performance of our collection and disposal business to overcome the headwind from lower recycling commodity prices. As we passed the halfway mark for the year, we anticipate that continued strong organic growth and a focus on operating efficiencies will keep us on target. Our employees have delivered a strong performance throughout this year. I want to thank them for the fantastic job they continue to do service on our customers and producing breakthrough results. As a leadership team, we are absolutely confident they will continue to perform at high levels to achieve our full 2019 guidance. I'll now turn the call over to Devina to discuss our second quarter financial results in more detail.

Thanks, John. And good morning, everyone. As you heard from Jim and John, the strong performance of our collection and disposal business continued to overcome the impact of a weak cycling environment. In our second quarter, we again delivered solid financial results. Collection and disposal operating EBITDA grew by over 9% when compared with the second quarter of 2018, driving total Company operating EBITDA growth by almost 7% and positioning us well to deliver our full year targeted growth of about 5%. We view operating EBITDA growth, as the single most important measure of our performance, and we're very pleased to see our operations deliver these results. In the second quarter of 2019, cash flow from operations grew 3.6% to $1.10 billion. When you normalize the year-over-year comparison for the impact of the fuel tax credits that we received in the second quarter of 2018, the increase would have been 6.7%. We are pleased with this result and see our efforts to convert more of each revenue dollar to cash working. With cash from operations of the percentage of revenue improving 30 basis points on a year-to-date basis to 24.9%. This is particularly impressive when you consider that we achieved this result in spite of a $66 million decrease in revenues from yield in our recycling business due to the 30% decline in market prices for the commodities in South. During the second quarter, we spent $578 million -- $578 million on capital expenditures. This compares to $436 million in the second quarter of 2018. The increase in the current year is related to timing differences in our spending for landfill construction, trucks, and containers. The difference in timing is the result of intentional steps we have taken to invest in our growth by pulling forward some of our planned capital spending. We remain disciplined in allocating capital dollars to our highest margin and return businesses and has proactively managed our capital spending in 2019 to address our robust volume growth. Volume in our landfill and commercial collection businesses exceeded expectations in the first half of the year, and our operators and their corporate partners have worked hard to accelerate construction and asset deliveries to meet our customers' needs. With the strength of our volume growth, our full-year capital expenditures will be at the upper end of our guidance of between $1.65 billion and $1.75 billion. In the second quarter of 2019, our business generated $440 million of free cash flow. For the first six months of the year, free cash flow was $871 million. The timing difference that I just discussed for capital expenditures is the primary driver of the decline and the measures from the prior year. Additionally, our second quarter of 2018 included $28 million of fuel tax credits, as well as nearly $80 million in proceeds from the divestiture of non-core businesses. When you normalize for these two items, the year-over-year comparisons for both the quarter and year-to-date period more clearly reflects our strong operating EBITDA growth. When you -- we continue to expect our strong operating performance and disciplined capital spending will yield full year free cash flow in line with our guidance of between $2.025 billion and $2.075 billion. In the second quarter of 2019, we used our free cash flow to pay $217 million in dividends and we repurchased $180 million of our stock. When combined with our first quarter share repurchase activity, we expect this level of share repurchases to meet our goal of offsetting dilution from stock-based compensation. Given the pending acquisition of ADS and our efforts to position our balance sheet while for close, we no longer expect to repurchase additional shares over the remainder of the year. We continue to estimate that this will have up to a negative $0.06 impact on full year EPS. During the quarter, we successfully executed a $4 billion debt financing, which positions us to close on the acquisition of Advanced Disposal. The offering proceeds have largely been invested in stable money market fund that we also used a portion of the fund to retire several of our higher-priced senior notes. We are happy with the results of both transactions. And our average pre -- our pre-tax average cost of debt is now below 4%, which is instrumental to executing well on achieving our targeted returns for the pending acquisition. We estimate that the incremental interest will have a negative $0.03 impact to 2019 EPS. We plan to adjust for both the impact of lower share repurchases and incremental interest costs through the ADS acquisition closing. Our debt to EBITDA ratio measured based on our bank covenants was 2.95 times at the end of the second quarter. This is higher than where we have been in recent years, so well within our targeted levels, which is particularly impressive given that the measure does not yet have the benefit of ADS EBITDA. Our strong balance sheet continues to afford us the financial flexibility to pursue strategic acquisitions at the right price. Turning to SG&A. For the second quarter, our SG&A cost as a percentage of revenue were 9.8%, in line with the second quarter of 2018, despite the increased investment we are making in technology. For the full year, we continue to target SG&A expenses as a percentage of revenue of about 10%. In our business, the second quarter is often an important indicator of how we will perform for the full year, as we observe seasonal increases in certain parts of our business. With the strength of our second quarter results and the positive momentum that we are seeing early in the third quarter, we are positioned well to deliver on our 2019 priorities. With that, Christine, let's open the lines for questions.

Hey, John, obviously landfill volumes continue to impress. At this point, you're running maybe north of 120 million tons of landfill volumes, but it feels like there's a couple of discrete projects in there like the wildfire cleanup. I know you mentioned the pipeline is robust, but how should we think about those landfill volumes moving into next year? Is there maybe a few million tons that won't recur or anything there would be helpful.

No, I think -- fair question. I mean, we certainly have looked at that and I think there's a lot of puts and takes with that volume. I mean, we're pointing to the California wildfires this year, which is obviously an unfortunate event to say the least. But if you go back last year and the year before, although the geography changes, we've seen these events year-in and year-out. It's hard to predict, obviously, where they're going to show up. But I think the other thing you should look at is, aside from just that is our special waste volumes continue to be strong and we referenced that in some of the prepared remarks. So we feel good about the landfill volume. We also look through the transfer stations as Jim mentioned, the remote gate to the landfill, we continue to see both price and volume performance there. So we feel good about where – we’re around the post collection side.

Okay, that's very helpful. And then, Jim?

Well, I was just going to add to that. It really -- it really is almost like event work for us. I mean, and to John's point, it's -- it's extremely unfortunate, when you have these big natural disasters. We were there to help -- help clean up. We were actually up -- Tara and I were up last week in Northern California driving through Paradise, it's devastating. But -- but really when you boil it down to how it impacts our volume or how it impacts our EBITDA or revenue or free cash flow, as John said, it's a lot of puts and takes, it's very lumpy, hard to predict on an area-by-area basis but -- but we seem to have whether it's a big event or a big construction project or a natural disaster cleanup or whatever it is every year, and so we just look at it as part -- as just simply part of our overall business, albeit part that's tough to predict.

Yeah, no that's. I appreciate that. But Jim, maybe kind of coming back to the economic data. I mean, if you look at it across the board, it kind of remains disparate. Obviously, your business is doing extremely well right now, but you also tend to be a bit late cycle. So I'm just curious, what you're seeing out there and maybe what are the KPIs that you and the Senior Management team really watch that might foretell a trend change in that organic growth metric?

Yeah, you're right. Tyler, about the fact that our industry tends to be considered more of a lagging indicator for the macroeconomy. I would tell you that waste management specifically is a pretty good indicator overall because we service virtually every sector of the economy. What I would say is, there are a couple of leading indicators within our numbers. First and foremost, our commercial collection business is somewhat of a proxy for how small business is doing. When you see service increases outpacing service decreases repeatedly and strongly, to us that's a pretty good leading indicator of how small business is looking at the future in terms of the economy. And then secondly, John mentioned, special waste. Our special waste pipeline is very strong. We've seen double-digit numbers now again and -- and the reason special waste is a leading indicator is because a lot of North American companies, the confidence in the economy shows up in their special waste project work. When they see signs of a slowing economy, they tend to pull in the reins on that event work and wait until times look a little rosier. So the fact that our special waste pipeline looks as good as it does, and the fact that our special waste volumes in the quarters both second and first have looked good is a good leading indicator for us. And then the last one, of course is just C&D volume and of course, part of our C&D number is driven by fire volume but -- but even without the fire volume, our C&D number has been very strong for at least five quarters. Every city I go to seems to have a sea of cranes on the horizon. So, it looks like C&D is still quite strong and that is also a pretty good leading indicator of the overall economy.

Okay. Yeah that's helpful. And then maybe, Devina, real quick. What was the divestiture made in the quarter. So one, you noted it was ancillary, maybe what was it? Two, is it in that other revenue line? And then three, just how should we think about divested revenue in the second half versus the $82 million in the first half just for modeling.

So the $82 million was actually in the first half of 2018, and divestiture activity in the second quarter of 2019 was very immaterial at about $8 million, and that's just normal course asset divestitures.

Okay, sorry I got my numbers all mixed up, but is there a lot -- going to be a lot of back half divestitures or no?

There is not currently an expectation of any meaningful back-half divestitures. We certainly look all the time for underperforming assets and assets that we can shed in order to be sure that we're optimizing the business model. We're really looking at the reverse side of that and thinking about acquisitions, and you'll see that in the second quarter, we acquired almost $50 million of additional traditional solid waste businesses. And when we think about that in terms of acquired revenue, you're looking at about $120 million of acquired revenue thus far in 2019. What you're seeing is somewhat of an offset associated with divestitures from the prior year. And so, there were divestitures both in front half of 2018 and the back half of 2018 that are somewhat offsetting that strong acquisition growth, but you'll see some of that normalize in the back half of the year.

Okay, that's helpful. All right, thanks guys.

Hey guys, thanks for taking my question. Just on the MSW yield. The 3.6% second straight quarter, can you just help us understand, what is out there in the market right now that should give us confidence that there is momentum there that we could kind of look at that number going forward rather than stepping back into the old years, in old cycles where pricing was a little bit more competitive. Is it something with the cost pressure seeing at the landfill that -- that the market now can start passing that through. Is it disruption on the recycling front, is it some consolidation that's played out? Help us understand some of the factors that is really putting together two straight consecutive quarters of good yield at the disposal.

Yeah, Michael, I think you've touched on a couple of pieces there. It's -- part of it is an increased focus through the use of data and analytics. We brought that to the collection side of the business probably seven years or eight years ago, and we've really transitioned that over to the landfill line of business. And now, there is not only a use of data and analytics, but there is a real focus on it from our Senior VPs as they work with their teams in the field. So that certainly is having an impact. I think, there may be some of it that is kind of necessarily as a result of few other cost categories going up, specifically transportation-related costs and leachate management certainly are climbing at a rate higher than CPI, but but I think some of it is just sort of recognition on our part that that these are really critical assets that we have to earn a better return on them, they're very capital intensive. And so I would say that that 4% core price in landfills and 3.6% MSW yield on the heels of 3.4% is good, but I still think there is opportunity to increase that at our landfills and transfer stations, not just to keep up with inflation in certain cost categories, but to help us expand margins and to me, that's kind of a breath of fresh air after -- it feels like it's a decade of 1% yield at the landfill.

That's helpful. And then just lastly, I mean, this year, had a -- had a nice little benefit from the inflation pick up last year. This year, though inflation has kind of disappointed at least on the headline numbers. Can you just talk about what that might mean for us, thinking about that going to 2020 and are some of your business lines clearly seeing cost inflation above CPI and the market is going to still have to try to raise pricing to offset that? Thank you.

Yeah, sure, Michael, I will -- really on inflation and CPI specifically, it's really been flat for the flattish. I mean, it was down, I think, 10 basis points for the quarter. But we didn't see really much in the way of tailwinds from CPI as it was creeping up over the last few quarters and now, it started to reverse course a little bit. We're not anticipating much in the way of a headwind. As you said, we do have some cost categories that are outpacing inflation. And so as a result, we've tried to transition some of our pricing of contracts over to that water sewer trash index that is more representative of our overall cost structure, but there also, there are also a few cost categories that are, that are not increasing at the same rate, such as fuel. So overall, I think, we're kind of a bit above that CPI, but we don't expect to see much of a headwind as we move out towards the latter half of '19 and into '20, unless something really changes dramatically. I don't anticipate much of a headwind on the price side from CPI softening.

Thank you.

Hi, team. Thanks for taking my questions. First one for me is just on ADS and the HSR review. I can fully appreciate that there's only so much you guys would want to disclose in the middle of this process, but it would be helpful if you could let us know, how this review has been tracking relative to initial expectations. And then maybe lay out kind of a rough timeline on what to expect in terms of next steps, coming out of this second request from the DOJ?

Yeah, fair enough. This is John. I think, in terms of what we've experienced to-date. I think, it's tracking about as we expected from a timing standpoint, a process standpoint. Clearly, we're not far enough along where we can really start to add any more color or detail as we said in the prepared remarks, we still think the first quarter of 2020 is on track. I will tell you, the process so far has not yielded any surprises. We're continuing to do everything we can from a regulatory standpoint to make the process with the DOJ go as expeditiously as it can. So in terms of next steps, again, we're not far enough along in the process for us to really add any additional color. But I would expect probably in the next 60 days to 90 days, we're going to be further along to the point where we'll be able to add a little bit more color.

Sean. I think we all can empathize with you on the -- hear in patience here because, but unfortunately when it comes to things like synergies, we gave that original $100 million number, but we don't know any more at this point, because they are still operating as a separate company and we have not -- besides that, we have a team in there kind of diving in right now, that team won't go in and dive in until -- until we close the transaction. And then in a very short order, we will know whether that $100 million is conservative or not. But we're -- we're kind of equally impatient, where we're waiting for this to run through its cycles with the Department of Justice. And once it does, we expect that things will move along pretty quickly.

Yeah, I get that. And I wasn't really trying to prod at an updated synergy number necessarily, I just wanted to understand kind of even just procedurally, what the next step is in terms of what will be released by the DOJ or filed by you guys and kind of when that next sort of filing or update would be?

Well, as you've seen, the second request is in process right now. That's probably the only update since the last call, we're obviously working our way to satisfy that request from the regulators.

Okay, that's great, thanks.

Thanks, Jim and good morning. Second quarter results were strong, particularly in the collection and disposal lines of business. Collection and disposal organic growth -- on revenue growth topped 7% driven by strong execution on our core price program, continued progress of our strategy around customer differentiation, and robust post collection volumes at our transfer stations and landfills. On the landfill volume front, in the second quarter, growth was driven by the continued strength of MSW volumes, an increase in special waste volumes from our pipeline that remains strong and very strong C&D volumes as we were able to position ourselves as a community partner to assist with fire cleanup activities in California. The strong volumes that we're seeing in our landfills are also at attractive prices, MSW volumes grew 6.1% and yield was 3.6% in the second quarter. MSW yield of 3.4% and 3.6% in the first two quarters of the year represents a step change improvement from the last several years, and we expect this trend to continue. Our post collection lines of business are seeing increased operating cost pressures, as well as higher capital investments as the cost of constructions rise. We will continue to focus on disciplined pricing to recover these costs and generate appropriate returns on our investments in these assets. Turning to our customer focus metrics. Churn was 8.8% in the second quarter. Year-to-date churn is 8.5%, a 60-basis-point improvement over last year. Additionally, service increases continue to outpace service decreases. The strong collection and disposal organic growth and great operating performance led to operating EBITDA growth of $112 million and a 60 basis point improvement in the margins in those lines of business. In the second quarter, total Company operating EBITDA was the highest that we have ever generated. In the second quarter, total operating costs as a percentage of revenue were 61.5%, a 40 basis point improvement over last year, as our operations have been able to improve their efficiency and manage their spending as volumes increase. We still have opportunities for further improvement, particularly around labor, maintenance, and leachate management costs and our team is focused on identifying and making these improvements. For example, our M100 program provides our frontline supervisors a view of each segment of their routes throughout the day, which will allow for improved efficiency and additional labor savings. We saw early benefits from this initiative in the second quarter as efficiency improved in all three collection lines of business, driving a 25 basis point reduction in labor costs as a percentage of revenue. We expect to drive even greater efficiency improvements in our collection lines of business, as we continue the deployment of these tools across the enterprise. Turning to recycling, there was a $21 per ton or 33% drop year-over-year in our blended average commodity price down to $43 per ton, but operating EBITDA improved $6 million. We're very pleased with the outcome of our team's hard work to improve the recycling model by lowering cost, restructuring contracts, and assessing fees for contamination. Looking at the remainder of the year, we anticipate that commodity prices will continue to be well below the $70 per ton commodity price we expected when we gave our 2019 outlook. And as a result, we no longer anticipate a full-year tailwind from recycling. We now expect that our recycling business will be a $0.01 to $0.02 headwind for the full year. As we mentioned previously, the traditional formula that a $10 move in commodity prices changes annual EPS by $0.04 no longer holds, due to our successful efforts to change and improve the business model. To emphasize this point, without our team's proactive steps to evolve the recycling business model, the full-year impact from depressed commodity prices would likely be closer to a negative $0.09, rather than a negative $0.01 to $0.02 that we're forecasting. We remain focused on changing the business model for recycling with improved MRF technology and contract structures that recoup processing costs and protect us from commodity price downside. To that end, we are on track to open our recycling plant of the future by the end of this year. With this plant, we expect to achieve labor and operating cost savings while creating the best quality material for sale. Impressively, we fully expect the performance of our collection and disposal business to overcome the headwind from lower recycling commodity prices. As we passed the halfway mark for the year, we anticipate that continued strong organic growth and a focus on operating efficiencies will keep us on target. Our employees have delivered a strong performance throughout this year. I want to thank them for the fantastic job they continue to do serving our customers and producing breakthrough results. As a leadership team, we are absolutely confident they will continue to perform at high levels to achieve our full 2019 guidance. I'll now turn the call over to Devina to discuss our second quarter financial results in more detail.

Thanks, John. And good morning, everyone. As you heard from Jim and John, the strong performance of our collection and disposal business continued to overcome the impact of a weak recycling environment. In our second quarter, we again delivered solid financial results. Collection and disposal operating EBITDA grew by over 9% when compared with the second quarter of 2018, driving total Company operating EBITDA growth by almost 7% and positioning us well to deliver our full year targeted growth of about 5%. We view operating EBITDA growth, as the single most important measure of our performance, and we're very pleased to see our operations deliver these results. In the second quarter of 2019, cash flow from operations grew 3.6% to $1.10 billion. When you normalize the year-over-year comparison for the impact of the fuel tax credits that we received in the second quarter of 2018, the increase would have been 6.7%. We are pleased with this result and see our efforts to convert more of each revenue dollar to cash working. With cash from operations of the percentage of revenue improving 30 basis points on a year-to-date basis to 24.9%. This is particularly impressive when you consider that we achieved this result in spite of a $66 million decrease in revenues from yield in our recycling business due to the 30% decline in market prices for the commodities in South. During the second quarter, we spent $578 million -- $578 million on capital expenditures. This compares to $436 million in the second quarter of 2018. The increase in the current year is related to timing differences in our spending for landfill construction, trucks, and containers. The difference in timing is the result of intentional steps we have taken to invest in our growth by pulling forward some of our planned capital spending. We remain disciplined in allocating capital dollars to our highest margin and return businesses and have proactively managed our capital spending in 2019 to address our robust volume growth. Volume in our landfill and commercial collection businesses exceeded expectations in the first half of the year, and our operators and their corporate partners have worked hard to accelerate construction and asset deliveries to meet our customers' needs. With the strength of our volume growth, our full-year capital expenditures will be at the upper end of our guidance of between $1.65 billion and $1.75 billion. In the second quarter of 2019, our business generated $440 million of free cash flow. For the first six months of the year, free cash flow was $871 million. The timing difference that I just discussed for capital expenditures is the primary driver of the decline in the measures from the prior year. Additionally, our second quarter of 2018 included $28 million of fuel tax credits, as well as nearly $80 million in proceeds from the divestiture of non-core businesses. When you normalize for these two items, the year-over-year comparisons for both the quarter and year-to-date period more clearly reflect our strong operating EBITDA growth. We continue to expect our strong operating performance and disciplined capital spending will yield full year free cash flow in line with our guidance of between $2.025 billion and $2.075 billion. In the second quarter of 2019, we used our free cash flow to pay $217 million in dividends, and we repurchased $180 million of our stock. When combined with our first quarter share repurchase activity, we expect this level of share repurchases to meet our goal of offsetting dilution from stock-based compensation. Given the pending acquisition of ADS and our efforts to position our balance sheet while for close, we no longer expect to repurchase additional shares over the remainder of the year. We continue to estimate that this will have up to a negative $0.06 impact on full year EPS. During the quarter, we successfully executed a $4 billion debt financing, which positions us to close on the acquisition of Advanced Disposal. The offering proceeds have largely been invested in stable money market fund that we also used a portion of the fund to retire several of our higher-priced senior notes. We are happy with the results of both transactions. And our average pre -- our pre-tax average cost of debt is now below 4%, which is instrumental to executing well on achieving our targeted returns for the pending acquisition. We estimate that the incremental interest will have a negative $0.03 impact to 2019 EPS. We plan to adjust for both the impact of lower share repurchases and incremental interest costs through the ADS acquisition closing. Our debt to EBITDA ratio measured based on our bank covenants was 2.95 times at the end of the second quarter. This is higher than where we have been in recent years, so well within our targeted levels, which is particularly impressive given that the measure does not yet have the benefit of ADS EBITDA. Our strong balance sheet continues to afford us the financial flexibility to pursue strategic acquisitions at the right price. Turning to SG&A. For the second quarter, our SG&A costs as a percentage of revenue were 9.8%, in line with the second quarter of 2018, despite the increased investment we are making in technology. For the full year, we continue to target SG&A expenses as a percentage of revenue of about 10%. In our business, the second quarter is often an important indicator of how we will perform for the full year, as we observe seasonal increases in certain parts of our business. With the strength of our second quarter results and the positive momentum that we are seeing early in the third quarter, we are positioned well to deliver on our 2019 priorities. With that, Christine, let's open the lines for questions.