Waste Management Presents at Wunderlich Securities, Inc. Investor Summit at WasteExpo (Transcript)

May.20.13 | About: Waste Management, (WM)

Waste Management, Inc. (NYSE:WM)

Wunderlich Securities, Inc. Investor Summit at WasteExpo Conference Call

May 20, 2013 09:00 AM ET

Executives

James C. Fish, Jr. - EVP and CFO

Ed Egl - Director, IR

Analysts

Michael Hoffman - Wunderlich Securities

Michael Hoffman - Wunderlich Securities

So joining me now on the stage is Waste Management. If you all remember, it’s about a $13.9 billion revenue company. Does about $3.4 billion to $3.5 billion in EBITDA and has a target of around $1 billion to $1.1 billion in free cash flow, largest operator of solid waste in North America.

With us, we have Jim Fish, who is the EVP and Chief Financial Officer; and Ed Egl who is Vice President of Investor Relations. Jim, why don’t you tell us a little bit about your background, how you came to be with Waste Management? I think it’s quite an interesting background coming in from what you were doing previously.

James C. Fish, Jr.

Right. So, good morning. I’ve been with the Company since 2001 and really didn’t start in the industry, came out of – started initially with KPMG. Went through – stand with the airlines, LTL trucking with Yellow Corporation, kind of followed Maury Myers around a little bit. Maury came too, I was with America West Airlines for a period of time and Maury came into the airline. I left, went to Yellow with Maury and then came to Waste Management with Maury. So I followed Maury a little bit, but after getting to Waste Management in 2001, I spend some time in pricing. First came in as Director of Financial Planning, and spend some time in pricing, asked to go out to the field and really understand the field operations. So, I worked for Jim Trevathan, who is someone in the audience there, but Jim took me under his wing and put me out in the field, ran our Massachusetts and Rhode Island operations; some pretty small operations at that time, and then moved around a little bit from there into Pennsylvania and West Virginia and ultimately back to Houston in this role.

Michael Hoffman - Wunderlich Securities

Okay. And Ed you want to share?

Ed Egl

Sure. I’ve been with the Company for about 18 years now, spent most of my time as a field controller, and I worked my way up the field controller organization. Moved to Houston about nine years ago as the Director of Financial Analysis, and about 2.5 years ago moved into IR.

Michael Hoffman - Wunderlich Securities

Great. And I have to admit one of the things I like about what Waste Management does in this regard is they treat IR as a strategic position and a career path as opposed to place to push off somebody through in the twilight, so I think that’s actually useful. There is some who would suggest that Waste Management is trying to position itself – it’s a different company and (indiscernible) has been. Talk a little bit about that, if you will, about what – how do you think about the business and how you’re approaching the way the business is being run coming into 2013 versus the last few years?

James C. Fish, Jr.

I think that’s a fair statement. I think in some respects we are different because the industry is different, and in our respects, we’re different totally because we’ve felt the need to change internally as the industry changes, and we’ve all seen landfill tons drop off quite a bit over the last five or six years through a whole host of – for a host of reasons, the Green Movement has caused some of that, I kind of call it the de-industrialization in the United States, that has taken waste overseas. So, there is a number of things that have caused our volume to drop off permanently, some of it has been temporary with the ebb and flow of the economy.

So, we had a change as a result of that and we’ve got some more changes in front of us, I think going forward which we can talk about, but in 2013 we’ve – I think put some discipline into things like SG&A. I having been in both in corporate and on the fields, I’d say that Waste Management wasn’t overly disciplined on SG&A, and we’ve really tried to instill that, Jim and I spend a lot of time together working on things like operating costs and SG&A and capital expenses. And so, really it’s not hugely complex, it’s just some discipline that we’ve put in into the Company that maybe wasn’t there previously.

Michael Hoffman - Wunderlich Securities

Well, so why don’t we pull on that a little bit, because one of the obvious things to compare is if you look at two peers and you start looking at numbers, and at a simplest level, one company has 25% EBITDA number and other has a 29%, so how much of that is Waste Management could do some things differently versus Waste Management structured differently? There is some of – it is recycling for instance isn’t actually not a bad business, but essentially lower margin and it’s a big percentage of Waste Management.

James C. Fish, Jr.

It is. It’s hard to compare company margins. I mean, clearly these competitors do a great job of managing their businesses, and we’re trying to do the same, but it’s a bit hard to compare us to anybody, it’s been hard to compare them to us as well. So, I think what I’ve looked at is what can we do to improve ourselves not necessarily relative to a competitor, and that’s why coming in I felt like first of all from a – from an SG&A standpoint, we were a bit bloated and needed to take some of that out, and I still think we need to take some out. I think on the operating cost side as you’ve heard us talk a lot about, we need to become more efficient and that’s the whole premise behind service delivery optimization. Having been on the field, we’ve all and probably those operators in the room have seen operations that are less efficient and they could be and we’re no exception there. We’ve got to become more efficient. We have brought a guy in who is a long time Vice President, who run in the field to run that efficient – efficiency program. I think he will really do a great job with it, but – so I think we will -- we may catch up, I don’t know whether we catch up or not with those guys, it’s not really the objective. The objective is to make us better than we are today.

Michael Hoffman - Wunderlich Securities

Okay. So on that thing, how much of – when you look at the business model, how much do you think can actually be pulled out because you’re going to run it better, and let’s talk about in basis points as opposed to dollars?

James C. Fish, Jr.

Sure. We’ve talked about 200 basis points on the call in the past, and that’s a combination of kind of shared services consolidation, and this efficiency program that I mentioned, and I’m not sure – I’m not so sure that that efficiency isn’t a bigger chunk of that, 200 I’m not sure it’s put down in the middle. Shared services, when we consolidate call centers and consolidate billing, there is certainly some savings there, but if I had to guess between the two, it’s probably more heavily weighted towards efficiency. I mean, that’s where a big chunk of your cost is.

Michael Hoffman - Wunderlich Securities

And efficiency is another way of saying productivity …

James C. Fish, Jr.

Correct.

Michael Hoffman - Wunderlich Securities

The equipment, more frequent (indiscernible).

James C. Fish, Jr.

We kind of talk about is efficiency, you’re right productivity.

Michael Hoffman - Wunderlich Securities

Right. And so on that being, I mean this is things like you have too many helpers on the truck get to know helpers could increase automation things?

James C. Fish, Jr.

Well, it was a couple of things. I mean, look at – I will give a quick example that we talk about in the Company a lot. One of our – I talked to one of our Director of Operations who is out on the East Coast before the hurricane last year, so he told his team the hurricane is blowing in on and as you recall that hurricane was coming in on Monday, and so he said look we want to be finished with operations by 4 o’clock this afternoon, because the hurricane is coming in this evening. I want to do it safely, but don’t want to – so we don’t have any safety instances , but we want to make sure we are through with the operation by 4, and they finished by 2, every truck was off the street by 2, and this is kind of in the Baltimore area. Every truck was off the street by 2, and when he went back after the hurricane and after kind of working through all the craziness of the storm, went back and looked at where his operation was for that Monday compared to the four previously Mondays, he was an hour per route better -- hour per route faster if you want to call it that than the four previous Mondays combined. Now how is that? How does he save an hour? That’s a lot, it’s a huge number. And it’s simply by telling his team we’ve got to get off the road sooner and by the way he was adamant about them, this isn’t about driving faster, this is about being efficient, not taking the extra brakes or whatever. Having been on the field, I’ve seen it a 100 times, I mean, I used to drive around in the Boston area, and I see guys taking breaks, and you kind of wonder how much are they – how much of that is an excess break, how much is just a normal standard break.

Michael Hoffman - Wunderlich Securities

Right.

James C. Fish, Jr.

Look these guys have paychecks that they take home each week and they have to pay bills, and the best way to – for us to pull efficiency out of the system is to say you’re going to take the same paycheck home, but the guy at the bottom of the totem pole, the guy that is the worst performer, we all have those, that guy goes away and we take his work and redistribute it. So, you become more efficient, you still take home the same paycheck, it’s just we’re doing it with fewer people.

Michael Hoffman - Wunderlich Securities

Right, and so is it – do you have to lead with some capital spending to do that as well or is this just a cultural change?

James C. Fish, Jr.

Yeah, it’s almost purely a cultural change. There is some capital spending related to onboard computing. We’ve been talking about onboard computing a lot. But honestly I tend to think, and I think our new Vice President, his name is Steve Batchelor, and Steve would tell you that it’s really more the blocking and tackling piece than the automation piece that gets you the lion’s share of the benefit. We didn’t have any capital spending associated with cutting that hour off on that Monday before the hurricane. That was all just making sure everybody was operating as efficiently as they could, and the [carrot] at the end of that stick was you get to get on to your family before the storm hits. So, I think we can squeeze that hour, maybe we’ve only talked about 20 minutes per day to squeeze out, but you absolutely know it's there, you see it not only before the hurricane, you see it before a three-day weekend, I mean, amazingly these guys somehow finish their routes …

Michael Hoffman - Wunderlich Securities

Right

James C. Fish, Jr.

So they don’t have to run the full Saturday route. So, I think it’s out there.

Michael Hoffman - Wunderlich Securities

So did the guy in Baltimore keep the hour?

James C. Fish, Jr.

He kept the hour for that Monday and ...

Michael Hoffman - Wunderlich Securities

But that was it …

James C. Fish, Jr.

Well, he recognizes, he is trying to net what he is working against, but unless you pull that 13th driver out, really it is very, very difficult to get that time savings out, because these guys all have a way to no matter what company and this is not unique to Waste Management have a way to manage their paychecks and I understand that. These folks are not making a huge amount money. So, it’s really about taking the 13th driver out. So when you hear our – an area Vice President or Area Manager say, gosh I can’t hire drivers, this is one answer to that question or if you hear a guy say well I cant get rid of a driver who had a bad -- has a bad safety record because I just -- the hiring market is too difficult. This is a way to help him or her out.

Michael Hoffman - Wunderlich Securities

And I’ve heard in bits and pieces the anecdotes about hiring, is it in fact a tight market for drivers?

James C. Fish, Jr.

I think it depends on where you’re, South Texas is incredibly tight. Most of the areas where we have energy services is very tight because we’re competing against not just other – not just competing against other waste companies, but competing against companies that are moving NGLs and moving condensed or frac water or drill cutting. So, it depends on where you’re, but certainly I think about Pennsylvania, when you think about South Texas, when you think about Colorado, all those areas are very, very tough to hire drivers.

Michael Hoffman - Wunderlich Securities

Talk a little bit about, I mean garbage local business, when we get there, we tend to fall into the trap of – you’re a national company, so get back to a local, can you frame sort of how do you see what’s happening in the economy and housing and therefore how that’s trickling through into your business and where would you – might we get pleasant surprises because something is happening?

James C. Fish, Jr.

Look I think the great recession, if you want to call it, that was driven by housing, no secret there, and our business as it relates to housing has dropped off by probably half and really hasn’t, it’s starting to come back a bit, but I’m not sure it gets back any time soon to where it was pre-recession. So the good news, the silver lining there is that because of – so let me give you a number, 3%, about 3% of our business is C&D, and then you’ve got your roll-off business, and some portion of that is related to housing. But just purely the best kind of barometer for us in terms of how the housing is doing is that C&D part, and C&D ticked up a bit as a result of the hurricane, but it’s – we’ve seen a come up a little bit due to housing, but I think the good news, the silver lining in this is that the next recession, which eventually will come along. I mean, the economy does go through ebbs and flows and eventually will go through another recession, and we think that the next recession will not be driven by the housing sector, it will be driven by some other factor that will have less of an impact, and we’ve kind of took a disproportionate hit as did all the waste companies, because we were – we had C&D volumes and roll-off volumes that were down 20%, 25% during that really rough patch in ’8, ’9 and ’10. So, I think the next recession that hits us will be more likely a typical recession where we kind of lag going in and lag coming out.

Michael Hoffman - Wunderlich Securities

Right. And so that’s – so I’m clear, you’re starting to see an uptick in C&D activity because there are – the number of housing starts have picked up …

James C. Fish, Jr.

Yeah, and we’re seeing some, I wouldn’t say it’s pronounced, but we’re seeing some.

Michael Hoffman - Wunderlich Securities

And so, with that sum, are you seeing any of the secondary benefits -- you can build on that, and that’s the first volume, but then you got to sell it and get the residential volume?

James C. Fish, Jr.

Correct.

Michael Hoffman - Wunderlich Securities

And hopefully they’d sell enough of them that somebody builds a restaurant or stripmall or something of that nature, are we seeing any of that business formation?

James C. Fish, Jr.

I will tell you what we’re not seeing that we would like to see is the commercial business around growing economy. You do see it in patches, I mean, you see it in places like Houston, because Houston is growing so much, and so what you’d really like to see are those commercial businesses, the drycleaners, and the grocery stores, and those businesses that’s kind of attached themselves to a growing community. The resi business, the growth from truly kind of new home starts, we’re seeing some of that, but that resi business is not as higher margin as the commercial business. What we’re really anxious to see, and our commercial volume has been down somewhere between 1% and 4% for gosh as long as I’ve been out in the field I think, and I’m anxious to see that return, but we don’t want to do it at the expense of price, so we’ve got to do it based on just kind of organic growth.

Michael Hoffman - Wunderlich Securities

So, you give me a sideway, where the prices are – going out with operations? I heard interesting anecdote that you fell little bit into the trap of the operator, well things are tough. So talk a little bit about that sort of -- that cycle of (indiscernible) of having led price been in the field and now come back to a discipline at price as a company?

James C. Fish, Jr.

I think it’s a pretty natural inclination to move away from price. So, when you get out in the field you see everything feels like it’s incrementally costed. So, if I look at a landfill, I feel like I have an operation that really I have this huge fixed cost base and if I add a few extra tons its all – it should be basically be incrementally costed. And so it’s pretty easy to fall into that trap. I think what we’ve fell like from a price standpoint is that first of all if we’re not going to take a price leadership role then nobody is and I think the industry has done a pretty good job of recognizing that we’ve got to do a better job on pricing. Right now and we said I think 1% to 1.5%, I mean that is what we said and I think we’ve got a pretty good shot at hitting that – hit into the top end of that range. We’re starting to see that what we actually have taken price increases for holding on to it. We’ve talked a whole lot of that core price and the difference between core price and the metric …

Michael Hoffman - Wunderlich Securities

But you didn’t frame that, because one, say one and half number booked to the market that we see, what did you actually have to put into the steam, because what percentage of the revenues can actually get a piece of a price that leads to when you do all the math there is your one and half.

James C. Fish, Jr.

And probably 75% to 80% of the revenue can actually get some type of price increase and that 40% is tied CPI. You’ve got about 35% to 40% that we can take immediate price increases on. You’ve got some business that’s tied down by contract that you can’t immediately price increase, so it's different kind of tranches that are subject to pricing. But what we’ve seen is a couple of things and one is that, and this is maybe the opinion of one here, but I absolutely believe that what ultimately drives our ability to price on the collection side is the disposal side of the business. If I -- I’ll give kind of an anecdote here but, six years ago -- five, six years ago a small independent hauler may come to me at gross in [Telly] town up in Pennsylvania and say, look I’ve got 50 tons a day that I’d like to bring to you. And my answer is maybe not five years, maybe eight years ago, fine bring it at the gate rate because I’m full everyday.

Today that third party comes us with their 50 tons a day, and then they have more, they may have 75 or 80 tons a day now, and say I want to discount on my volume coming into your landfill and we’re climbing over ourselves to accommodate that guy because we’ve seen our landfill volume drop from 14,000, 15,000 tons a day at those two sites down to 9,000 or 10,000. So now we’re climbing over ourselves and if virtually every market that you look at certainly within the waste management network has see disposal pricing drop over the last five to six years, and you can look at Massachusetts who’s dropped from the mid 70’s to the mid 40s. You can look at Pennsylvania, two of my old areas both of them have dropped, but it's not unique to those areas, I mean Chicago or -- the only one that seems to be going in the other direction is Los Angeles. And I don’t think it's a secret that (indiscernible) is closing down on Los Angeles. So you take a big chunk of capacity out of the marketplace and you start to see that -- that that impacts potentially impacts your ability to price on the collection side. That little small guy has no incentive to price increase his or her collection business if we’re lowering 25%, 30%, 35% of the cost structure; I mean that’s a disposal …

Michael Hoffman - Wunderlich Securities

Where you’re (indiscernible) too.

James C. Fish, Jr.

That’s right.

Michael Hoffman - Wunderlich Securities

So, I mean can you stop doing that?

James C. Fish, Jr.

Absolutely, I mean we’ve talked about and look, I’d say absolutely, I mean I’m kind of speaking universally here for every operator out there, but I think Waste Management is pretty centralized and there’s -- if there’s one clear message that David has been consistent on, and he has never wavered on this one, I mean, I fell under the trap but he has never wavered on it, and that is pricing, I mean he -- and we’re a pretty centralized company. I can’t speak for the other folks, but they -- a lot of companies end up kind of being decentralized and having their managers make independent decisions. Our managers do make independent decisions, but when it comes to pricing we’ve tied them, we’ve tied their compensation, a piece of their compensation to pricing in the past with the price gate. We don’t have a price gate now, but I'll tell you in affect there is almost a price gate out there for -- in order to get your bonus next year. And David is very outspoken, when we got out to these area, financial reviews, he lets Jim and me talk about operating cost, talk about SG&A. When the pricing topic comes up, David starts to talk. And so we’re taking a pretty diligent approach there.

Michael Hoffman - Wunderlich Securities

So, we got a couple of quick questions here because we’re getting tight on our time, but with regards to the reorganization you’re coming into, almost the one year anniversary on it, that was a pretty significant, ripped out a whole set of infrastructure and rethink how you talked to the market, your market. Talk about good, bad I mean, there’s not all good about it but what's worked, what's not working, what was the good positive out of it?

James C. Fish, Jr.

Well, so the positive out of that was that I think we, David would say we’ve -- I think we would all say that we’ve improved communication because we took that layer out. That group layer which by the way I kind of missed as I was going through my background. I had about nine month spent in that senior VP …

Michael Hoffman - Wunderlich Securities

(Indiscernible).

Ed Egl

You’re the one basically said you don’t need me.

James C. Fish, Jr.

When I came down to Houston, and so David look I’m probably talking myself out of the job, but you don’t need my job, I mean I’m not adding as much value as – I’m not adding as much value as the area Vice President who’s really managing their business. You really don’t need that group layer. And it was kind of a mezzanine layer of management and he said great, you’re right, thanks for coming and I know by the way I’d like to talk to you about a different job. But I had no idea that he was going to talk to me about that job. So I thought I may go in and talk myself out of the job. That communication now, without having to go through that mezzanine layer has really improved. So that I can have a conversation with area Vice Presidents or Jim Trevathan can have a conversation with area Vice President. It's not that you couldn’t have that conversation, but there was always this kind of group layer that you had to go through. You had to kind of break through that group layer. That has been -- David would say even if there weren’t any SG&A reduction benefit that he would do it again every time because the elimination of that.

Michael Hoffman - Wunderlich Securities

They have a much better feel for the business.

James C. Fish, Jr.

Much better feel for the business.

Michael Hoffman - Wunderlich Securities

Let’s talk about capital spending, free cash flow. This is a company that at a time in it's history can very consistently generate a 10% of revenues in free cash and for the last four or five years you struggled with that, and some of this by your own design you spent more money and others it isn’t running well and hasn’t produced as much. So is it a -- can you make a statement that this should be a 10% free cash flow company and then talk about how you’ll get there?

James C. Fish, Jr.

Yeah, so we’ve said we’re going to be 1.1% to 1.2% this year so less than 10%. We’ve taken a very tough stance on capital spending. So Jim and I have a – nobody wants to commit from the capital committee anymore because – and what we’ve said is, don’t be afraid to come in front of us, you just better bring projects that have good returns. So, we’ve taken a tough stance on capital spending. We’ve not cut back on fleet because we think fleet has probably been underinvested in over the past five to seven years, but we have cut back on landfill capital. We’ve cut back on landfill gas to energy. We’ve cut back on OGG. So I think to answer your question, can we get to a 10% number? I think we can get to a 10%. Look, one of the areas that I think we’ve got to really focus on, Jim and I spent a lot of time on this is, this cash flow from operations I mean it's not just about trimming back on CapEx. I mean trimming back on CapEx is important, but we’ve got to drive better cash flow from operations, and I think that part of that is taking a more responsible approach to SG&A. Part of it is driving out to that operating cost that we talked about and we’ve got maintenance cost that’s been on kind of the upward creep. And interestingly this year when you we through and talk to our area Vice Presidents really inflation which last year was a problem on a year-over-year basis, this year is not, I mean lubes and some of what we kind of categorized as maintenance cost is actually down year-over-year, so it's really just process and labor that has caused us to creep up on the maintenance side. So I think we can get to it at 10% number but we’ve got some work in front.

Michael Hoffman - Wunderlich Securities

And it is a 12 to 24 month window or is this, I mean and really it's not getting you down okay, we’re going to change your guidance for ’13 it's more of -- how quickly can you do something like this. Is this because there are cultural issues in that like and …

James C. Fish, Jr.

I don’t know that I can predict when we’ll get to that number, but I can tell you that, the – that service delivery optimization those kind of efficiency improvements, those are probably 12 to 24 month projects; and to the extent that we can squeeze out that 200 basis points that I talked about, that gets us pretty close to what you’re talking about.

Michael Hoffman - Wunderlich Securities

All right. And then on the capital spending side, if this is the world we’re living in 2% GDP, 1.5% natural inflation, housing is kind of a million plus. Why can’t capital spending come down some not as a source of free cash that’s not the goal, it's just that the business you’d get that much better returning it and the landfill expansions are stretched but the volume isn’t going up 3% or 4% maybe it's going up 1% or 2%.

James C. Fish, Jr.

I think it can – I think it can. I would much rather, okay, I’d much rather invest in something like energy services which has much higher margins. We’ve seen a nice organic growth out of energy services than I would in a resi contract that has over three consecutive re-bids seeing the price drop off by 40%, and so now you end up with a resi contract that requires new capital that has 10% or sub 10% margins would I rather invest there or would I rather conceive that and invest in energy services, I mean, I think that’s an kind of …

Michael Hoffman - Wunderlich Securities

And subscribe energy services probably by – because that’s when you say energy services?

James C. Fish, Jr.

So energy services is really, it's a combination of things, it's the hauling of drill cuttings, it's the disposal of those drill cutting into landfills, it's oilfield services. So we’re doing a lot of pad services, well we do pod cleanouts and kind of industrial services not competing against the £800 gorillas like Halliburton, I mean we’re not getting into that space. We do a lot of water treatment, not to the level that ARCH 360 does, but we do a lot of water treatment and that’s been kind of organically grown. We move condensate, we move NGLs so it's ...

Michael Hoffman - Wunderlich Securities

And characterize, I mean is this a $100 million business, $200 million business?

James C. Fish, Jr.

It's probably a couple of $100 million business for us, but I think honestly I think it can be a – I mean look, if you look at what Chairman of Exelon said there’s a lot of shareholders, he thinks that, that this business domestically could add a trillion dollars in the GDP, three million jobs could be, the U.S. could be energy independent by 2025. If you agree with that and I tend to agree with that then I can be a beneficiary of that to the tune of $1 billion or $2 billion over the next 5 to 10 years.

Michael Hoffman - Wunderlich Securities

And when you look that caused that round number 200 is, how much of that is actual disposal versus transportation?

James C. Fish, Jr.

I guess, if you look at it by shale play it's different, I was in the Marcellus when we kind of started this in Pennsylvania. It's a lower percentage or quite a bit lower percentage in Marcellus than it is in some of the other shale plays and in the Eagle Ford is almost all the revenue that we get from energy services and the Eagle Ford is disposal. Same with Niobrara, but less in Utica which is right next door to Marcellus and Ohio and certainly less in Marcellus. On a whole it's, disposal is still a fairly big chunk, hauling and disposals still may up probably 70% of the overall revenue and then that industrial services makes about 25% to 30%.

Michael Hoffman - Wunderlich Securities

And this is not where you’re taking the existing MSW landfill modify the permit, you’re allowed to take C&D volume.

James C. Fish, Jr.

In some cases you’re modifying the permit, I mean that we’ve got a site in central Pennsylvania which was really just a C&D site we had to modify the permit, but this is a site that we were considering selling when I first came in [VA] it was basically surrounded by hunting camps and taken at a very small amount of volume and it's gone from 75 ton a day site to -- it's come back down a little bit, but it was approaching 2000 tons a day.

Michael Hoffman - Wunderlich Securities

Would you, you had a competitor buy a big asset, is that part of the strategy or is this you can see doing this organically given your infrastructure around the country?

James C. Fish, Jr.

I don’t think it's going to be, you’re not going to see waste management make a big acquisition like that, but you’ll see us make small acquisitions to get a foothold into a shale play, there’s I think you’ll see us make small acquisitions periodically over the next few years. I doubt you’d see us make a big acquisition. I’m not going to say never, but I doubt you’d see us make a big acquisition.

Michael Hoffman - Wunderlich Securities

And do you do salt water disposals, do you have injection wells.

James C. Fish, Jr.

We do not have injection wells, we’ve got a couple of injection wells but we don’t use them for salt water disposal.

Michael Hoffman - Wunderlich Securities

For salt water disposal. There’s an argument that the oilfield, the oil industry has no disappointment when it comes to price and the ground we’re standing, so how do you see the service side you’re providing which is really not in oilfield services in my opinion, and then in disposal energy waste is a business that has characteristics that will go out like the garbage business that (indiscernible) how do you think about the market as far as it's behavior?

James C. Fish, Jr.

Yeah, we have some great relationships with energy services, companies out there. They are tough on price, but what we found is that you’re more likely to be able to pull price out of these folks if you have that kind of full service offering because they really don’t want to – it is all managed locally, I mean when you think about the Chevrons and the Exelons in the Marcellus we’ve see a lot of consolidation it used to be a bunch of independents who really didn’t care about the environment at all, and our strategy is much more environmentally friendly. By regulation you’re still allowed to drop drill cuttings on the ground in Pennsylvania believe it or not. But as we’ve seen this consolidation where the big eyes are coming and bought up all the small guys, even though regulation allows them to drop drill cuttings on the pad if they want they’re taking a more environmentally friendly approach and that benefits us and then the fact that, that we take away the need to work with 15 different small vendors, because we provide the full 360 degree circle of services that helps us from a price standpoint. If all you’re doing is hauling frac water you’re absolutely a commodity and you’re going to be subject to their procurement guide.

Michael Hoffman - Wunderlich Securities

Right, so quickly two add subjects, when people focus on historical capital spending they want to say that you guys invested an off a lot of money in alternative technology, the numbers can get big, help with the audience understand what you’ve really done there, because [Barron] is out there with a piece that’s suggesting you spent $2 billion on stuff that’s not generating good return, that seems like a big number.

James C. Fish, Jr.

It seems like a way big number, I think it's probably closer to a quarter of that.

Michael Hoffman - Wunderlich Securities

So, $400 million or $500 million?

James C. Fish, Jr.

Yeah, it's probably -- $2 billion I’m not sure why they came up with that number. But if you think about those investments that are not performing where we would like them to perform, we’ve talked a whole lot about Oakleaf. Oakleaf is kind of the tale of two cities here, I mean Oakleaf the piece that we’ve spent that most time talking about is bringing third party volume into our sites, so that seems to be working pretty well, that’s helping. Every week when you look at our landfill volume I think that’s been kind of a pleasant surprise for us. Now the integration piece, the systems integration has been very slow and it's moving, but it's moving at kind of a glacial pace, so that is -- that’s taken up some resources for us. There’s a number of areas where we’ve invested really with an eye on the future, that’s what OGG is for us, I mean -- I know we’ve been asked some fairly difficult questions, critical questions on those but we invest for example and some of our OGG investments have been made in concert with Kleiner Perkins and we were out meeting with him a couple of weeks ago. They’re thrilled to have us as a partner not because we bring, I mean they’ve got plenty of capital it's not because we bring capital to the market, we’re not making huge investments with him, but they like the fact that we see this industry changing, it might not change for the next two or three years, it maybe 15 years from now but at some point the industry, the disposal side of the business changes and we’ve got to be -- we feel stronger about the fact that we’ve got to make sure that we’re on the kind of the leading edge.

Michael Hoffman - Wunderlich Securities

But why – so why do you think you have to be a first mover?

James C. Fish, Jr.

I guess, we can be – I think there’s an advantage to being a first mover here. I also think that I’d like to – we’re not taking enough of the risk to jeopardize our earning stream, but we're taking enough of the risk to make sure that if we’re the first mover then we’ve got a big head start and I think we have a head start.

Michael Hoffman - Wunderlich Securities

So is it unfair if I can use that word, for the market lets say at least you missed your free cash flow targets because you’ve been overspending in things that don’t generate adequate returns?

James C. Fish, Jr.

I don’t think it's fair. I really think it's such a small percentage of our overall. I think the reason we’ve missed, the reason 2012 was tough was really two things. One was that commodity pricing really hammered us in 2012, and of course the other piece was, it hammered us both at our waste energy facilities and with our traditional recycling, and the other piece was that, at least for the first half of the year we just didn’t have a good hold on SG&A.

James C. Fish, Jr.

Right, okay. So, last two questions, on paper China and put this Green Fence program and but it seems to me it's more geared towards stuff that’s coming out of Europe and it was running more about plastics. Does it had a trickle over effect on to the fiber market?

James C. Fish, Jr.

Yeah, (indiscernible) sees about this and he’s – where absolutely it has, in fact he would suggest that it's, we don’t -- it's absolutely impacted us much more on the fiber side than on the plastic side. It may have been originally kind of targeted for plastics, but boy it has really impacted fiber. Look, I think long-term I mean, this is kind of a microeconomics problem that long-term it eventually they’re causing the cost structure of all of those in the U.S. that are handling this material and shipping it, the cost structure is going up for us because there’s a quality improvement requirement now. That ultimately ends up in increased price right, I mean we’ve got to pass that back through to them so they can require higher quality, we’re okay with that. There’s going to be a short-term blip here where we’re not able to pass the price through and we just absorb the cost increase, but look over the little bit longer term I think we’ve got to make sure that, that ends up in higher prices.

Michael Hoffman - Wunderlich Securities

Okay. Last question before I open up to the audience, I would be a remiss if I didn’t ask this question this manner, which is Ed (indiscernible) because he knows what it is. So I don’t want to debate whether you can or can’t be a REIT, let somebody else figure that out, but if you could would you if you couldn’t be in integrated business. If you could not run the company as an integrated business would you change the corporate structure?

James C. Fish, Jr.

I think if I could, if we were operating into the premise that we could get past all of the hurdles and I think some of those hurdles are not low I mean, but if we could get pass those I think I would I mean …

Michael Hoffman - Wunderlich Securities

You would break the company apart.

James C. Fish, Jr.

Look and you’re asking me speaking for the Company, it’s a tough question.

Michael Hoffman - Wunderlich Securities

Right.

James C. Fish, Jr.

Speaking for Jim Fish, I mean there is a lot of valuer – value to shareholders there, but I think it’s a hypothetical, but it may end up kind of being moved because …

Michael Hoffman - Wunderlich Securities

With the move because it’s pursued whether you could or you can’t be, I get that. But then part of this is you spend 40 years of the business seeking to be integrated and really push the strategy of so if you find yourself with an operating company with collection in the property company, to different Boards, probably the company’s motto is drive cash whenever back to a conversation we had earlier, which is you’re lowering the rental price.

James C. Fish, Jr.

I mean it’s a big strategic question here, because the piece that we’re talking about really is the landfill piece.

Michael Hoffman - Wunderlich Securities

Right.

James C. Fish, Jr.

And I still believe that there is some real significant hurdles there. We’ve gone through and looked at, it’s a non-traditional approach to REIT’s. Can you really make the argument that its rent, some would say yes, some would say no, but so …

Michael Hoffman - Wunderlich Securities

(Indiscernible) debate that, this is really more a …

James C. Fish, Jr.

This is more a question of what you do if you could.

Michael Hoffman - Wunderlich Securities

… if you really run the company that way.

James C. Fish, Jr.

And I think if you’re asking Jim Fish, I think it adds enough shareholder value that it should be closely considered. If you’re asking Waste Management and David Steiner, I think David said several times look we’ve looked at it, for now we’re not taking any aggressive steps towards this. But I think David would say, he is – he would be interested in it. I mean, I don’t think maybe I should answered little less definitively, I mean, I said yes I would, maybe I would say look we’d certainly have to if that were an option for us. If it were an option to ultimately categorize those landfill companies as real estate investment trust, I think you would have to look at it because there is a lot of value creation there.

Michael Hoffman - Wunderlich Securities

Okay. And then lastly if the MLP parity Act actually have passed, does that become an attractive option for (indiscernible) because they’ve now deemed just waste – waste energy is a renewable source and now (indiscernible) produce the waste energy can be an MLP, was …

James C. Fish, Jr.

I think kind of the same answer there.

Michael Hoffman - Wunderlich Securities

It’s sort of a logical conclusion.

James C. Fish, Jr.

Right.

Question-and-Answer Session

Michael Hoffman - Wunderlich Securities

Okay. All right with that what I want to do is open it up for questions. So do we have questions out of the audience, we got a couple of minutes here. Raise your hands if you got. Yep there you go. Back – in the back.

Michael Hoffman - Wunderlich Securities

Hi. Given your strategic pricing objectives, how do you manage the internal pricing between collection units and disposal units to achieve those objectives?

James C. Fish, Jr.

We’ve already surprised internally at what we think is the mark and I mean, typically when I think about myself as a hauling company going to a landfill or the Waste Management landfill, generally that landfill is biggest customers. So I price it as if I were a third-party who would be the third-party with the most volume.

Michael Hoffman - Wunderlich Securities

My question, when you think about REIT versus an MLP and then the vertical integration issue that Michael raised, do you feel like the MLP structure might be more amenable to a vertically integrated waste company given that you would in fact control the GP and the GP generally has exclusive management control over the MLP that would allow you more bigger room from a vertically integrated perspective?

James C. Fish, Jr.

Well, I don’t know I had – I probably don’t know as much about the MLP structure I should to answer that question. So, I’m not going to do justice to your question. But I think that probably both structures, the one that we’ve looked at more honestly has been the REIT’s and we looked at it closely with outside advisors and we think that there is some potential for it, but the hurdles are pretty high to clear. So, I’m not going to do a very good job of answering your question about MLP though.

Michael Hoffman - Wunderlich Securities

All right. Well, with that Jim, Ed, thank you very much for taking the time joining the conversation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!