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Executives

Ed Egl – IR

David Steiner – President and CEO

James Fish – EVP and CFO

Analysts

Hamzah Mazari – Credit Suisse

William Fisher – Raymond James

Corey Greendale – First Analysis

Usha Gunthapally – Goldman Sachs

Joe Box – KeyBanc Capital Markets

Michael Hoffman – Wunderlich Securities

Adam Thalhimer – BB&T Capital Markets

Jeffery Osborne – Stifel Nicolaus & Co.

Al Kaschalk – Wedbush Securities

Waste Management, Inc. (WM) Q2 2013 Earnings Call July 30, 2013 10:00 AM ET

Operator

Good morning, my name is Rochelle and I will be your conference operator today. At this time I would like to welcome everyone to the Waste Management Second Quarter 2013 Earnings Release Conference Call. (Operator Instructions).

After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Ed Egl, Director of Investor Relations. Thank you. Mr. Egl, you may begin your conference.

Ed Egl

Thank you, Rochelle. Good morning, everyone, and thank you for joining us for our second quarter 2013 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer. David will start things off with a summary of the financial results for the quarter, including internal revenue growth from yield and volume. Jim will cover our revenue growth, price and volume trends, operating costs and the financial statements. We will conclude with questions and answers.

During our statements, any comparisons, unless otherwise stated will be with the second quarter of 2012.

Before we get started let me remind you that in addition to our earnings press release that was issued this morning we have filed a Form 8-K, that includes the earnings press release as Exhibit 99.1, 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 that you should refer to.

During the call you will hear certain forward-looking statements which are based on current expectations, projections, estimates, opinions or beliefs about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of those risks and uncertainties are detailed in today’s press release and our filings with the Securities and Exchange Commission, including our most recent Form 10-K.

Additionally, during the call David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share on an as-adjusted basis. David will also discuss operating EBITDA as defined in our Form 8-K filed today. Our EPS and operating EBITDA have been adjusted to exclude items disclosed in our earnings press release that management believes do not reflect our fundamental business performance or are not indicative of our results of operations. These measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and the schedules attached thereto together with Item 2.02 of the Form 8-K filed today, both of 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.

David and Jim will also discuss our results in the areas of internal revenue growth from yield and internal revenue growth from volume. Unless otherwise stated please note that any references to yield or volume results are more specifically referring to internal revenue growth or IRG from yield or volume.

This call is being recorded and will be available 24 hours a day beginning at approximately 1:00 p.m. Eastern Time today until 5:00 p.m. Eastern Time on August, 13. To hear a replay of this 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 97883740.

Time-sensitive information provided during today’s call which is occurring on July 30, 2013, may no longer be accurate at the time of a 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’s President and CEO, David Steiner.

David Steiner

Thanks, Ed and good morning from Houston. During the second quarter, our earnings per share grew to $0.54, overcoming $0.03 of unexpected headwind. We had a negative $0.02 additional headwind from our recycling operations and a negative $0.01 from litigation settlements. Without these headwinds we would have earned $0.57 per share close to 10% earnings growth. Our disciplined approach to improving price, reducing cost and managing capital expenditures is reflected in this earnings growth and in our free cash flow.

So we are pleased with our results of the second quarter and year-to-date which are right on plan despite the negative impact from our recycling business. The story of our quarter is that we had very strong results in our traditional solid waste operations but overall results were muted by unexpected headwinds in our recycling business. Even with these headwinds our operating EBITDA margins grew by 20 basis points.

In our traditional solid waste business we grew income from operations margins by 80 basis points driven by our yield and cost program. We expect this margin expansion to continue throughout 2013 and to accelerate into 2014. Volumes improved sequentially in all of our collection lines of business, except recycling and roll-off. We offset roll-off volumes losses with very strong yield which drove 90 basis points of margin expansion in our roll-off business. In our recycling business we expected the second quarter impact to be a negative $0.03 to earnings per share. The actual result was a negative $0.05.

Looking out to the third and fourth quarters we originally expected a positive $0.04 impact on earnings per share when compared to 2012 from our recycling operations. We now think that the impact from our recycling operations will be flat year-over-year in the second half of 2013. Thus, we now expect the full year negative impact of $0.08 per share versus the negative $0.2 per share we had originally anticipated.

Many of you heard about the Chinese Green Fence which is affecting our recycling operations. The Chinese government has recently begun to enforce limits on moisture and non-conforming materials in imported fiber and plastics. The higher quality expectations have translated into additional labor and maintenance costs to remove residual waste from the recycle of materials that we process for our customers. It has also resulted in fewer volumes to sell because of the higher residual material that in turn has reduced revenue and increased residual disposal costs. So you can see why the green fence has had a negative effect on the results of our recycling operations.

As we discussed we have been implementing a business improvement plan in our recycling line of business. First, we will be working with our customers to improve the quality of the inbound streams of material. Our contracts with many large customers limit the amount of residue in the recyclables they delivered to us. We will be working with them to ensure compliance with these limits or we will charge them to cover our increased costs.

Second, we are modifying our operating procedures to reduce costs and residual waste. Finally we will also look at each of our recycling facilities and rationalize those that continue to lose money. Our municipal, commercial and industrial customers want to recycle their waste materials. We have the best assets in the industry to support that desire but we will do so with the pricing and operating strategy that supports both our customers and our shareholders.

Our solid waste pricing programs had a very positive impact in the second quarter of 2013. Yield from our collection and disposal operations was 2.1%. This is the highest yield since the first quarter of 2011 and we have seen yield improve sequentially for four consecutive quarters. If you add in our fuel surcharge and adjust for our South Florida waste-to-energy plants, we achieved yield of 2.6%. We achieved core price of 3.6%, an increase of 110 basis points in the second quarter of 2012. It’s worth noting that the uptick in yield more than offset the reduction in volumes. So our pricing program is working very well.

During the first quarter we mentioned the steps that we’re taking to improve yield and in the second quarter we saw positive results. Average rates for both commercial and industrial new business pricing exceeded lost business pricing for the second consecutive quarter. Service increases on our commercial business exceeded decreases for the first time since the third quarter of 2010. And price roll backs are down almost two-thirds from the peak in the fourth quarter of 2011.

Our pricing momentum continued to build in the second quarter. In our commercial line of business we have the highest yield that we’ve seen since 2011 at 3.1%. Importantly our pricing actions didn’t reduce in the commercial line. In fact volumes improved slightly over the first quarter of 2013. On the industrial side we did not see volume growth in our industrial line, with volumes down 1.2% for the quarter. What we did see in our industrial line of business was a yield of 4.8% which is the highest yield since Q1 of 2007.

We also saw the highest new business pricing that we have ever seen in our roll-off line of business. The (inaudible) roll-off customers, some value service and quality and some value price. We are clearly more focused on obtaining higher margin customers that value service and quality. And we simply won’t chase low margin roll-off business. And the trade up is very positive, in both our commercial and industrial lines of business we saw margins expand by a 100 basis point.

So we’ve focused on core price increases and we’ve moved core price close to 4%. In future quarters we will continue that focus but we will also turn our attention to fees and surcharges. When you look at our average customers overtime the combination of fees and surcharge is between 20% and 30% of the total bill. So every time we waive the fees and surcharges it’s the equivalent of giving a 20 to 30 price decrease versus the opportunity.

Increasingly we’ve seen our competition offer to waive fees and surcharges, particularly in the roll-off line of business. When we matched that action it equates to the 20% to 30% roll back of prices which dwarfs a 4% core price increase. So in the second half of 2013 we will focus on obtaining the fees and surcharges. With fuel and environmental compliance cost growing drastically over the years this is the only way that we can ensure we cover our increasing cost, so that our other program margin can drive margin expansion.

Overall volumes were negative 0.6% in the second quarter. But it’s important to note that one of the main drivers of the declining volume was under a cycling business. Recycling volumes were down almost 1%, a notable swing from recent increases in the range of 6% to 8%. Volumes have been impacted by China’s Green Fence initiatives. And we’ve also seen several large new plants pass their first year anniversary.

In both our commercial and residential lines of business we saw a sequential improvement in the rate of declining volumes for the third consecutive quarter. For the second half of the year we don’t expect volumes to change much from the second quarter. That assumes slightly negative collection volumes. But our increase in yield should more than make up for the lower volumes. In our waste to energy business average electricity pricing improved almost 5% in the second quarter when compared to the second quarter of 2012. We also saw improved SG&A expenses. These improvements basically offset an increase in repair and maintenance cost due to the timing of outages.

Overall the waste-to-energy business was basically flat for the quarter and the first half of 2013, when compared to the second quarter and first half of 2012. We still expect the full year impact on earnings per share from our waste-to-energy operations to be approximately a negative $0.02 share compared to 2012.

In summary we had greater than expected recycling headwinds from the second quarter, but we overcame. Consequently we’re on plan for the first two quarter of 2013. We overcame the headwinds through good cost controls and an IRG that is more weighted to price than volume. We expect that our continued execution on yield and cost will help us manage against the $0.08 per share of recycling headwinds that we anticipate for the full year.

Accordingly we still expect to achieve full year guidance of between $2.15 and $2.20 of adjusted fully diluted earnings per share and free cash flow of between $1.1 billion and $1.2 billion. This quarter clearly shows how well our field operations can perform when they are focused on the right items. In the past few years we diluted some of the messages to our field operations but this year we asked them to focus on two things, yield and cost and in the second quarter they delivered on both.

Our overall IRG was right where we expected it to be but weighted more toward price than volumes which is a very positive fact. Jim will talk about our cost programs. When it comes to yield we put the plans in place and our core business field leaders are doing a superb job in executing the plan. We are focused on adding volumes in the higher margin lines of business like our Landfill and Commercial lines. In our lower margin lines of business we are either going to improve their profitability or we are going to disinvest in them.

Given cost inflation, we must have better pricing to drive sustainable margin expansion in these lower margin lines. We simply will not chase volumes at inadequate prices. For example we have not bid on a number of residential contracts and in those that we do bid we are generally bidding higher prices. This may cost us some volumes. But losing volumes on a low margin line of business can be a very smart move to drive returns on capital. This is particularly true in the residential line of business that on a non-integrated basis contributes about 15% of our collection earnings but takes up over 40% of our fleet capital spend.

In the temporary roll-off business, many competitors are willing to put their teams to work at a low price. We will not do that. As I mentioned our new business pricing in our roll-off line has hit its highest level in the history of our company. The 100 basis points improvement in margins in our collection business reflects the success of this trade-off of price versus volume. Obviously if we are going to charge higher prices we need to provide greater value by being a service leader and we have a number of programs designed to give great value to those higher priced customers.

We are constantly trying to improve the value delivered to the prices we charge and we will continue to add programs for those customers to make their experience the best in the industry.

I will now turn the call over to Jim to discuss our second quarter results in more detail.

James Fish

Thank you, David. I will start by discussing our strong SG&A and cash flow performance then I will expand on David’s comments about results of operations from our traditional solid waste business and yield and volume in our various lines of business. I will conclude with a discussion of our financial metrics.

In our SG&A cost category we continue to see results of our restructuring and focus on controlling cost. SG&A cost were $353 million in the second quarter and 10% of revenue, an improvement of $21 million and an 80 basis point improvement compared to the second quarter 2012 as a percent of revenue. The two biggest areas of savings came from labor due to our restructuring last year and our focus on lower controllable cost. These savings were partially muted by $30 million incremental compensation plan accrual that did not occur in 2012.

Bad debt expense improved SG&A cost by $8 million due to the partial collection of a receivable at our Puerto Rico operation. Additionally, DSO improved sequentially. In fact we improved DSO sequentially for three consecutive quarters. We are pleased with the second quarter SG&A results but we still have a lot of work in front of us to achieve our full year goals.

In the third quarter we expect approximately $45 million of headwind in SG&A from incentive compensation accruals. We only have $30 million in the second quarter of 2013. However for the full year we still anticipate achieving our goal of flat SG&A costs when compared to full year of 2012.

Turning to cash flow, second quarter 2013 net cash provided by operating activities was $545 million. This is a decrease of $124 million compared to the second quarter of 2012. In 2013 we had $117 million increase in taxes paid based on our higher income and the timing of estimated tax payments. In 2012, we benefited from $72 million of proceeds from swap terminations. Cash from operations was very strong. Net of those two items cash from operations would have been up $65 million.

Our capital expenditures for the second quarter were $235 million, an improvement of $116 million compared to the second quarter of 2012. We remain disciplined on ensuring that we spend capital on assets that fit within our long-term strategy. As we have mentioned in the past we are also looking at rationalizing our asset base. For instance, during the quarter we recorded an impairment charge on a disposal facility that was cash flow negative. When we closed the facility we will move the volume to another waste management facility so that we maintain the associated revenue.

Putting all of this together our free cash flow for the quarter was $347 million, an increase of $15 million compared to the second quarter 2012. Year-to-date free cash flow increased $261 million to $695 million. If you exclude proceeds from sale of assets free cash flow was $621 million year-to-date and puts us well on the way to achieving our goal of generating between $1.1 billion and $1.2 billion of free cash flow for the year.

We returned $171 million to our shareholders through our second quarter dividends. We invested $30 million on acquisitions and we repaid $290 million in debt. Our pricing programs are improving each of our collection lines of business as well as our overall results. Yield on our collection in disposal operations grew 2.1% in the second quarter. Our yield growth for the second quarter of 2013 would have been 2.6% if you include the fuel surcharge and adjust for the change in pricing at our waste energy plants in south Florida.

In the third quarter we will see a portion of our contract reset price again on tip fees in our South Florida waste energy business where a competitor took some volumes at about 40% per ton reduction from our rates. Combined internal revenue growth from yield in our collection business was 2.9% in the second quarter with 4.8% growth in industrial, 3.1% growth in commercial and 1.5% growth in residential.

The industrial yield is the highest that we have seen since the first quarter of 2007 and for the commercial line of business it’s the highest since 2011. The increase in yield has not had a significant impact on collection volumes as the commercial and residential lines of business saw sequential improvement in the rate of decline of volume loss. In landfill line of business we achieved MSW yield of 1.8%.

Moving to volumes, internal volume growth was negative 0.6 in the quarter. The decline was primarily driven by a decrease in recycled volumes as David mentioned. We saw collection volume decline by 1.4% although the rate of decline on collection volume slowed. More specifically commercial volumes declined 2.7%, industrial volumes declined 1.2% and residential declined 1.1%.

In our landfill line of business volumes were positive 6.6%. MSW volumes grew by 6.3% primarily from increased Oakleaf vendor hauler volumes and special waste volumes grew 5% as our pipeline for jobs remains strong. We also saw strong volumes from revenue generating cover and C&D tons. When you look at our overall operating results our income from operations margin was flat at 14.8% when compared to the second quarter 2012.

As David mentioned our traditional solid waste business Collection, landfill, and transfer stations had a very good quarter. Income from operations in those lines of business increased $47 million and income from operations margins increased 80 basis points. The collection lines of business drove most of the income from operations increase.

Both our commercial and industrial lines of business improved when compared to the second quarter of 2012. Residential business continues to be a challenge primarily in the South where contract changes in Florida related to the waste energy business drove a slight decline in income from operations.

So the 80 basis point improvement in the traditional solid waste business was offset by a decline in recycling business. We have been very clear with our field operations that we must pass through the recycling increases to our customers in the coming quarters.

Turning specifically to operating expenses, the improvement that we saw in our traditional solid waste business was muted by an increase in operating expenses primarily from increased cost in our recycling operations and the timing of repair and maintenance at our waste energy facilities. These items were $35 million of our $51 million increase.

We remain focused on controlling cost and expect to see improvement as we progress through the remainder of 2013. In fact when you look at our traditional solid waste business our maintenance costs were essentially flat when compared to the second quarter of 2012.

Finally looking at our other financial metrics, at the end of the second quarter our weighted average cost of debt was 5.1% and our debt to total capital ratio was 58.9% consistent with our target of about 60%. Floating rate portion of our total debt portfolio was 10% at the end of the quarter. Overall the results of proceeding is expected as our pricing and cost control programs have allowed us to overcome that recycling headwinds in the first two quarters and remain on plan.

The results of the first six months of 2013 have put us in position to achieve our yield, SG&A and earnings per share and free cash flow goal. We continue to take a strong stance on controlling SG&A cost. We saved $38 million year-to-date when compared to 2012, our stated goal for SG&A is to remain flat with 2012. Even though the third quarter comparison would be tough at $45 million of compensation accrual headwinds we still expect to meet our full year target.

Similarly we’re applying a very disciplined approach to capital management. Combining this with our focus on yield SG&A and our improvement in working capital and earnings we’ve already generated $621 million of free cash flow exclusive of failed assets. This puts us more than half way to our goal. We will continue this disciplined approach in order to achieve our free cash flow goal of $21.1 billion and $1.2 billion for 2013. And with that Rochelle let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first line comes from the line of Hamzah Mazari with Credit Suisse.

Hamzah Mazari – Credit Suisse

Good morning. Thank you.

David Steiner

Good morning Hamzah. And happy birthday by the way.

Hamzah Mazari – Credit Suisse

Hey, thanks a lot. Appreciate it. The first question David is just on volume. It seems like the recycling business is 12% of revenue. It’s not that big. You guys said that it’s 1% down on volume. Is all of the volume loss or below volume relative to expectations, given what you’re seeing with the rest of the sector. Is that all you guys just walking away from lower margin roll-off business or is there something else in that as well.

David Steiner

Yeah, I think that’s basically – Hamzah I mean as we mentioned we got the highest new business pricing that we’ve ever seen in the roll-off line of business. When you think about it, if you look at the roll-off line of business, as a 20% call or 20% margin business every time you get a new can, 20% of it drops to the bottom line, every time you get 1% price, a 100% drops to the bottom line. So you have to get 5% volume in order to make up for 1% price.

What we saw in this quarter was basically you saw the quarter-to-quarter change in yield was 1.3%. In order for that to equate to a fair trade-off we have to get 7% volume. You can’t do that in this business. And so we went around and talked to our folks out in the field and they said look we can go get roll-off volume if you want us to. But what we’re going to do is we’re going to mess up the market at a lower price and we’re going to get low margins on it.

We would much rather go out at higher price, offer good quality for what we’re doing. And get that higher price roll-up volume, and as you can see that trade-off worked very well with 100 basis points of margin expansion.

Hamzah Mazari – Credit Suisse

Okay. And maybe if you could give us a sense of the lag that it may take the field organization in making the adjustments on the recycling business to get the surcharges and fees, how much of a lag do you think it’s going to take the field to get rid – the recycling from sort of not being a margin headwind. Is this more of a two quarter lag or any sense of expectation there?

David Steiner

Yeah, I mean there are two sort of two pieces to the recycling business. There is the commercial recycling that as this closes we can get sort of the spot recycling if you will. And on those types of transactions we can change the price today and we got folks and teams out in the field just doing that.

In other cases we have long term contracts with municipalities and other folks and we need to get through those contracts we need to understand what our rights under those contracts and We need to go and talk the customers. So it’s there are pieces of it that we can do quickly, there are pieces of it that take time. I would say frankly Hamzah overall it’s going to take little bit of time. But what we’ve told our field operations is we don’t have luxury of time right now. I mean we are losing money in our recycling operations, in most of our recycling operations we’ve got to turn that around. We’ve got to turn around now.

Hamzah Mazari – Credit Suisse

And just last question from me. I’ll turn it over. The land fill pricing it seems like that decelerated at 1.8% relative to sort of the mid 2% it was running. Could you maybe comment on that? Thank you.

David Steiner

Actually it was up in the quarter from prior quarters. Last time we saw yield that high was Q1 of ‘12 on the MSW line. But look, we talked about it very vocally that we need to get that sort of 5% to 7% increase of the land fill. That is like the recycling business in that you got lot of long term contracts. You have to work through those issues. And we’re absolutely working through those issues. We will not back down on our 5% to 7% price increase.

Hamzah Mazari – Credit Suisse

Thanks a lot.

David Steiner

Sure.

Operator

Your next question from the line of Bill Fisher with Raymond James.

William Fisher – Raymond James

Good morning.

David Steiner

Good morning, Bill.

William Fisher – Raymond James

Hey, first of, Jim, you mentioned I think, I just want to make sure I had the numbers right of operating cost increase like 30 million of it was Wheelabrator maintenance and recycling, is that roughly right?

James Fish

About 35 million was a combination of the one-time Wheelabrator advance maintenance events and recycle.

William Fisher – Raymond James

So the rest of it you did a math roughly was the cost was only up 1% or so you had good cost control on the rest of it.

James Fish

Yeah, you know, one thing, Bill that we have talked a bit about in previous quarters was maintenance cost. Actually in our traditional on our core business, maintenance costs have improved by 11 basis points, so while it’s not where we want to be, we are starting to move in the right direction.

William Fisher – Raymond James

Okay, great, then quickly on the acquisitions and divestitures did you – I thought I saw in that Quebec papers, did you guys were able to close that RCI transaction?

David Steiner

Are you able to read the Quebec papers?

William Fisher – Raymond James

Yeah, I had to translate it but that’s what it looked like.

David Steiner

Yes, we did, we closed it early July.

William Fisher – Raymond James

Okay, and any rough hand on what the annualized revenues on that would be?

David Steiner

Yeah, the annualized revenue is roughly a 170 million.

William Fisher – Raymond James

Okay.

David Steiner

Bill, when we had actually intended to close that, we had an agreement to close that for quite a while. When we gave our full year guidance we actually expected to close that at the beginning of the year, not in the middle of the year. So it is baked into our guidance but it will be a great acquisition for us. Lucien Remillard built a spectacular business up there and we are looking forward to leveraging the great company that he built.

William Fisher – Raymond James

Okay, you have some decent overlap on the hauling side too, or do you not have that?

David Steiner

Well, you know frankly this is sort of a minnow swallowing the whale, we have a fairly small presence from a collection point of view in the Montreal market area. RCI had a much bigger presence. So we are going to keep the RCI brand in Montreal.

William Fisher – Raymond James

Okay, great thank you.

Operator

And your next question from the line of Corey Greendale with First Analysis.

Corey Greendale – First Analysis

Hi, good morning.

David Steiner

Good morning.

Corey Greendale – First Analysis

First question I want to ask about the price, so given that it is moving in the right direction would you say that you have most of the pricing actions kind of fully baked in Q2 so we should expect a similar level price in Q3 or would there still be some acceleration as you keep implementing that stuff.

David Steiner

Yeah, you know, the regulatory cost recovery fee we did not, we did not get a full quarter benefit out of it in this quarter because we implemented it sort of in mid quarter. But we will also have you know, some head wins coming in the back half of the year from CPI, from the reset contracts in Florida. All in all I will call it sort of a wash. We said in the beginning of the year that we would be at sort of 1 to 1.5 % yield for the first half of the year we were at 1.7%. I now expect that for the full year we would probably be at that 1.5% to 2 % type of range.

You know, there are a couple of factors that come into the second half of the year that lead me to not try to say we are going to see dramatic acceleration but I can promise you from a total dollars to the bottom line we haven’t taken our foot off the pedal.

Corey Greendale – First Analysis

In the sense how much of that 2% yield from the regulatory recovery would be?

David Steiner

Just about $8 million in a quarter.

Corey Greendale – First Analysis

Right. And you talked about the non-compliance in some cases with the fees and surcharges, can you put some kind of parameters on that, like how much of an – what percentage the customer base is compliant with that and what kind of opportunities to get to get closer to 100% compliance?

David Steiner

Yeah, I mean look the opportunity is tremendous, when I talked about it especially at 20 to 30% price decrease when you waive fees and surcharges. On a commercial line of business we are about 85% compliant, on the roll off line of business we are only about 55%, because basically what you have got, the roll off line of business, you know, it is a little bit baffling to me in the low margin line of business you see folks out there waiving fees and surcharges on the roll off line of business.

So it is very competitive in the roll off line of business our compliance is about it, 55%, so you know just take 20% to 30% price roll back and add it back into that and you can see the dramatic effect that has on earnings.

Corey Greendale – First Analysis

On that front as you trying to see new entrants into that business or is it primarily the entrenched players that you are seeing being more aggressing and wait and see.

David Steiner

Well, you know, I think it is, I think that one is sort of across the board, I think there is obviously a lot of competition in the roll off line, it’s very low barrier to entry. But I would say that it is sort of across the board. Generally what you have seen is that the smaller players sometimes don’t even have the fees and surcharges, the larger players generally are the ones that will roll it back.

Corey Greendale – First Analysis

Okay, and then just a quick housekeeping one for Jim? Jim, what would you suggest the tax rate for the back half of the year?

James Fish

We obviously we are going to approach the statutory rate of 35% and I will stick to that.

Corey Greendale – First Analysis

Okay, great. Thank you.

Operator

Your next question comes from the line of Alex Ovshey with Goldman Sachs.

Usha Gunthapally – Goldman Sachs

Good morning. This is actually Usha Gunthapally on behalf of Alex Ovshey. How are you?

David Steiner

Good morning, doing well.

Usha Gunthapally – Goldman Sachs

Great. Just on the CapEx expectation for full year 2013 the run rate so far seems to be below your initial guidance. How do you think about a lower bound?

James Fish

Well I would say that we are still on track to hit our guidance of 1.3 to 1.4. Typically we see an acceleration of capital spending in the second half of the year. So it may look like if you straight line it you are going to get 1.3 to 1.4 range. We will more than likely see an acceleration in the second half as we always do and end up right within the range.

Usha Gunthapally – Goldman Sachs

Got it, and one more. So on roll back in second quarter they were lower by 45% year-on-year without increasing the churn rate. Does this imply improved pricing discipline in the industry generally?

David Steiner

No, I don’t think there is any doubt. You know I mean look, we can’t particularly speak for the industry. We can only speak for what we do and I can promise you that there is absolutely no doubt there has been increased discipline with our folks as far as rolling back prices and look it’s a tribute to our sales folks and to our training folks who you know this doesn’t happen just by putting an edict out that we are not going to rollback prices. There is lot of training that goes into it, lot of preparation goes into, there is lot of work by our customer service reps that go into it and they have done a phenomenal job turning it frankly that fast.

Usha Gunthapally – Goldman Sachs

Got it, and any expectation for second half on roll-off fees?

David Steiner

Yeah, generally roll-off or rollbacks?

Usha Gunthapally – Goldman Sachs

Rollback. Sorry.

David Steiner

Yeah, generally rollbacks do pick up a little bit in the back half of the year but we are doing a nice job of holding the line and I wouldn’t expect to see it materially change. It could pick up a little bit but I wouldn’t expect to see it materially change.

Usha Gunthapally – Goldman Sachs

Got it, thank you.

David Steiner

Thank you.

Operator

And your next question comes from the line of Joe Box with KeyBanc Capital.

Joe Box – KeyBanc Capital Markets

Really nice job on the SG&A front. I understand you guys reiterated your flat year-over-year guidance and I guess that makes sense with comps getting tougher in 3Q and accruals sequentially ramping. I am just curious if you maybe give us a little more color on how much flexibility you have toward that flat guidance? You know is that a stretch or are you thinking you could actually put up better SG&A margin given improvement you have seen so far?

David Steiner

You know Joe I would say it’s not a huge stretch but it’s also I don’t think we have a whole lot of room there either. I think we are probably pretty comfortable with flat year-over-year which is saying something considering you know the comp headwinds that we have faced. So I think we are probably on track to hit the flat guidance with 2012 that we have given.

Joe Box – KeyBanc Capital Markets

Okay and switching gear to the recycling side. I am sure we could probably back into the so I just want to check. Can you just flush out with the swing in recycling volumes ended up contributing to the 60 basis points of volume degradation that you had?

David Steiner

Yeah we will run that calculation for you and check it and get the number to you.

Joe Box – KeyBanc Capital Markets

Okay, yeah that will be helpful. And then…

David Steiner

But frankly speaking I don’t know how to do that complicated math.

Joe Box – KeyBanc Capital Markets

Was there any difference then between your internal marks, what you saw from the volume basis there or your broker volumes or was it basically one and the same?

David Steiner

It was basically one and the same.

Joe Box – KeyBanc Capital Markets

Great, that’s all from me. Thanks.

David Steiner

Thank you.

James Fish

Thanks, Joe.

Operator

Your next question comes from the line of Michael Hoffman with Wunderlich Securities.

Michael Hoffman – Wunderlich Securities

Good morning and thank you for taking my call.

David Steiner

Hey, Michael.

James Fish

Good morning, Michael.

Michael Hoffman – Wunderlich Securities

How are you doing, David, Jim? Can we just push on the volume subject a little bit? I get the model. You are going to push price and you are willing to push some less marginal volume away but if I look at the business that you have got in place and kept to customer what’s happening on the volume and those customers?

David Steiner

You mean As far as weights or…?

Michael Hoffman – Wunderlich Securities

Yeah like I mean it’s like in your front end water business are you seeing container rates starting to rise? Because I wouldn’t think you would push this pricing forever if you didn’t think the macro volume environment was gradually improving as well.

David Steiner

Yeah I don’t think there is any doubt that we’re seeing improvements in the commercial line of business. Again it’s not dramatic but it’s consistent and so we saw waste up frankly across all of our collection lines in the quarter, obviously was a very wet quarter so that added some to the waste. But the other thing that is very encouraging to me is what we mentioned about service increases and service decreases for the second quarter in row we’ve seen service increases outpace service decreases which tells you that, yeah there was some wet weather in the second quarter but we are seeing the customers start move up to larger containers.

So again like we said in the past we’re not going to declare victory it’s certainly a long slog for us to get there but in the commercial line of business we actually are seeing some very good sign.

Michael Hoffman – Wunderlich Securities

And then if I parsing the customers at the land fill so third party delivering C&D is that on a rise which would be consistent with the sort of improving construction environment?

James Fish

Yeah we saw C&D volumes up in the quarters I recall around 4.5% that side, yes 4.5%. So across the land fill we’re seeing actually very good volumes. We saw volumes up nicely on the MSW side, C&D were both up. And so if you look it comes back to what I said in the script.

If you are going to add volumes let’s add them in the right line of business and if you’re going to be aggressive on the pricing must be aggressive on pricing in those low margin lines of business where the only way you are going to drive look it takes a long time to drive cost out of this system. And so you are never going to get margin expansion if all you are going to do is drive cost. And so in those low margin lines we absolutely have to raise price.

And like I said the five to one trade off in a 20% line of business is well worth it, when you think about residential line of business call it 10 to 15% margin. If there was 10% margin customer you can gain 1% volume and 1% price and lose 10% of your volume and still be equal. By the way price comes without any capital investment. So this is, Michael this is not any different than what we did from 2004 through 2008. It’s what I said – script I think we got the message to the field a little bit mixed the last couple of years and we got them unfocused on price and cost. We got it back. You saw some progress in it this quarter. We still got a long way to go. But I think you are going to see it accelerate throughout 2013 and 2014.

Michael Hoffman – Wunderlich Securities

So where I would connect the dots between your comments and my question, there is a point of operating leverage it just starts to accelerate as macro volumes continue to improve, you continue to be successful on this price as well as the discipline around the G&A what’s your thoughts about the visibility on that? Where are we, are you away from that we just – away from that where is that?

David Steiner

Well look I am encourage that we saw the EBITDA margins turned positive this quarter. Look I will tell you Jim talked about the flat SG&A guidance for the rest of the year. Jim Fish and Jim Trevathan have done a phenomenal job on holding the line on SG&A cost. So I don’t expect to see SG&A cost to go up materially this year or next year frankly.

And so we got to drive operating costs out of the system. We’re starting to get a little bit of traction on that. And I think what we saw was look the biggest leverage is always going to come from yield in this business and I think you saw start to get some traction back in that in the quarter. So all we need is for the economy to continue to improve so that we don’t the dramatic volume drop as we saw in 2009. And I think you’ve begun to see the leverage in the operating model I think you should see that accelerate in the next 18 months.

James Fish

One quick point Michael on operating expenses as David talked about I mentioned that a big slog of that operating expense was related to I think when you think about the leverage going forward if we can’t squeeze that operating cost out that’s related to this quality control from China and we plan to pass it through to our customers. And that in itself helps us to reduce operating expenses as a percent of revenue.

David Steiner

It’s a great point. Every penny we improve in recycling drags straight through the bottom line and there is lot of room for improvement there right now.

Michael Hoffman – Wunderlich Securities

Okay. So my last documentation on this, it sounds like if I take the bonus accruals for this year plus the headwinds from bonus depreciation but net it against the success you are having on G&A, pricing and operating leverage, you should be able to produce flat year-over-year free cash flow maybe even a teeny bit of growth given those two cash headwinds.

David Steiner

You know Michael we are waiting for 2014 to give the guidance but look I said all along this is a business that should generate $1.1 billion to $1.2 billion the free cash flow come hell and high water. You know look we didn’t do that last year, that’s not going to happen again. The other thing that I can say that Jim and Jim have been phenomenal at is the capital discipline and we are going to manage the capital such that we make this at least to $1.1 billion to $1.2 billion free cash flow company every year come hell or high water I wouldn’t expect that to change next year.

James Fish

Michael did you say we are flat for 2014 versus 2013, are you saying flat?

Michael Hoffman – Wunderlich Securities

Yeah.

James Fish

All right.

Michael Hoffman – Wunderlich Securities

Yeah flat so in ‘14 you should do 1.1 to 1.2 again even with those headwinds given the leverage from your price and your cost controls.

James Fish

Yeah I just want to make sure because 2012 to 2013 there is going to be a dramatic improvement in free cash flow.

David Steiner

All right Michael, you snuck 2014 guidance out of us but I will give it to you. We are going to do at least 1.1 to 1.2 in 2014.

Michael Hoffman – Wunderlich Securities

There you go. Thanks a lot.

Operator

Your next question comes from the line of Adam Thalhimer with BB&T Capital Markets.

Adam Thalhimer – BB&T Capital Markets

Hi, thanks. Good morning guys.

David Steiner

Good morning.

James Fish

Good morning.

Adam Thalhimer – BB&T Capital Markets

The green fence cost do you think that is permanent and how long should it take to get to pass those cost on your customers?

David Steiner

Yeah you know we have looked a lot at this and as you can imagine it’s been a big topic of conversation and you know there is so much international trade involved that it’s hard to get really good visibility but we have sort of decided that we need to take the approach that it is going to be if not permanent at least long term.

You know we can’t sit back and say well we are just going to let the business continue the way it’s been in the past and wait for the green fence to clear and everything is going to be alright. We are not going to take that approach. And if we are not going to take that approach we absolutely have to start driving cost out of the system and going back to our customers and getting our customers to pay for the increased cost that we are incurring for the reduced commodity prices.

So you know look I will tell you I don’t even want to try to put guess on the timeframe to when recycling gets back to where we wanted to be. All I can tell us is that we need to see incremental improvement every quarter and we got the plans in place to do that.

Adam Thalhimer – BB&T Capital Markets

And how are the recycling contracts structured? I mean how? Do they come up once every five years so it’s hard to push price or how hard is it to push price I guess is the question?

David Steiner

Yeah I mean it depends on the customer, right? So we have got plenty of commercial recycling customers that are just like our regular commercial customers where we can change the price immediately and then we got other customers that are municipal customers where the contracts are going to be more to three to five year type traditional municipal contracts. And so what we have done is we have asked every one of our operations to get their top contracts.

Let’s start with those, let’s go with the dollars first and let’s go to our biggest contracts in every one of our market areas and start going to those customers and you know most of those contracts are going to allow us in some manner to either pass on increased price lower rebates or high processing cost and so let’s go after the big ones and let’s make sure that we go out and talk with those customers to cover our increased cost. And then on the other side the non-contracted customers like our commercial customers we run a couple of pilots to look at what we can do from a pricing point of view there and we are going to spread those across the country.

Look, from a commercial recycling customer point of view it’s going to be a lot of places where they are going to have a decision to make. They are either going to have to pay us more to recycle or they are going to have to move back away from recycling and just use disposal can and so we got to do that. It’s certainly not something that we relish doing but you know we need to have the customers to make the decision on what they want us to do from a recycling the materials point of view.

James Fish

Adam, one quick point here on these contracts. Well it may sound difficult to change the price, many of these contracts have residual percentages in them and many of these contracts have composition components to them so we’re going to go and look and see whether and we’ll hold these customers for their contracts. If their residual percentage is 10% and we’re getting 20% ahead of their contract then we’re going to go back to them and have a discussion. And similarly if we expect to get the certain percentage of glass by weight out of a municipality we’re getting a much bigger percentage of glass. And then we’ll also go back and have a discussion with them.

Adam Thalhimer – BB&T Capital Markets

Hope you’re successful, right. Because that doesn’t seem like the trend is going to slow down. I mean imagine your commercial customers are going to continue to recycle. Just the matter of you being able to push price, right?

David Steiner

Absolutely they’re going to continue to recycle and we look forward to help them recycle.

Adam Thalhimer – BB&T Capital Markets

All right. And one more question I hate to ask. Because I know you’re not focused for analyst trying to plug numbers into model I mean more of your thoughts on volume growth in the back-half.

David Steiner

Yeah, obviously no one knows of the future holds. But beginning of the year we said we were going to have positive volumes obviously in the second quarter. What you saw in the second quarter was recycling driving the both of the – I don’t know if we got the number yet. But we saw recycling driving the bulk of the decrease in volumes and the only other line of business where we saw negative volumes on the roll off side where volumes were negative 1.2%. Now about half of that was the anniversary of the large national account that we brought up.

So it’s not like you’re seeing volumes follow up the face of the earth and sort of like that. But we didn’t expect the volume decline in recycling. And we don’t expect to see our roll off line bounce back to where we’re getting usual cost of volumes because we’re not just going to change the margin of business. So for the back half of the year I think we’re looking at volumes similar to what we saw in the second quarter.

But look basically what you saw in the second quarter is our volumes went down 0.5% and our price went up 0.5%. And if I can get our price 0.5% and our volume down 0.5% I’ll take that trade off six days to Sunday.

Adam Thalhimer – BB&T Capital Markets

Okay. Great color. Thank you.

David Steiner

Thank you.

Operator

And your next question comes from the line Jeff Osborne with Stifel.

Jeffery Osborne – Stifel Nicolaus & Co.

Good morning two quick questions for you David. On the green sided the rules have been in place for quite some times. My understanding but is the enforcement from China stepped up over the past couple of months. Is that part of the issue of play here?

David Steiner

Yeah with the change in premiers in China you saw, early this year you saw basically a declaration by them across all sort of type of environmental initiatives. And so even though the regulations been on the books they finally just passed I mean not just passed they just mandated that they’re going to enforce those regulations. Basically in February this year.

Jeffery Osborne – Stifel Nicolaus & Co.

Understand. And then on the M&A side just what you’re seeing out there in terms of either tuck ins or potentially getting the oil and gas which I think you talked about at the Waste Expo conference.

David Steiner

Yeah. We just closed as we mentioned our RCI deal in Montreal that was obviously a fairly a large deal for us. Other than that we’re just looking at sort of our typical smaller tuck in acquisition. On the oil and gas side we closed the small acquisition there. We’re constantly looking for further acquisitions. But that’s been a fairly pricing market. So I don’t anticipate that we’ll spend a lot of money there.

At this point in time I’d say we’re through the largest acquisition that we had in the pipeline. RCI was basically the final one of those. And now we’ll back to sort of our typical $100 million to $200 million of tuck in acquisition.

Jeffery Osborne – Stifel Nicolaus & Co.

Very good. Thank you very much.

David Steiner

Thank you.

Operator

Your final question coming from the line of Al Kaschalk with Wedbush.

Al Kaschalk – Wedbush Securities

Good morning, David. Good morning, Tim.

David Steiner

Hey, Al.

Al Kaschalk – Wedbush Securities

David, in terms of – I apologize I joined the call late. But have you commented on how the integration of RCS is going I know it’s one month. But could you just comment.

David Steiner

Yeah, we didn’t specifically comment it. But what we got in Montreal is that we have fairly small collection operation. And so we’re basically tuck in operation into RCI. So far that’s gone very well. RCI had some very high quality management there. So they’ve done a great job of tucking our operations into theirs.

Al Kaschalk – Wedbush Securities

And the interest of the acquisition was largely predicted on what. In terms of the opportunities that you see going forward. Besides that previously having a lot of collections operations there.

David Steiner

Yeah, I mean Montreal was a very fairly unique market for us. In that we had a lot of disposal capacity. But very little in the way of collection operations. We tried build up those collection operations over time but frankly they got some, they have one spectacular company there in RCI that made a difficult for us to get into the collection business and so we had a landfill that pre-recession was actually find because there was an excess of tonnage in the market and our landfill is fine.

After the recession frankly there wasn’t enough a tonnage in the landfill in the market to fill all the landfill and so we had a choice to make. We could either get deeper into the collection business to help feed our landfill network or we were going to see volumes deteriorate at our landfill and we were going to be at the mercy of other collection companies.

And so it was a perfect tuck in acquisition for us it’s a great market we’ve been looking at it for a long time – I’ve said earlier ran a great business and we look forward to continuing this success.

Al Kaschalk – Wedbush Securities

This is an MSW landfill David or is there other ways can take?

David Steiner

No, it’s MSW.

Al Kaschalk – Wedbush Securities

Okay. And then finally if may and sorry this has been a topic that I missed. But on the SG& front you have talked about cost savings on the growth side of 120 million you did 10% I believe as a percentage of revenue in the quarter, how much of that benefit lock of better word is due to the lower recycling volumes and how much are you really on track to hit that growth target number?

James Fish

Due to the lower recycling volumes I wouldn’t say any of its due to the lower recycling volumes. It’s really due to two things, if I say there is several things in play but certainly the restructuring has had a big impact and we’ve kind of gone over and above the restructuring by taking out a chunk of none labor SG&A as well throughout the year. So those are the two big components of our SG&A and we’ve talked about not only holding flat from 2012 to 2013 but looking to hold flat from 2013 to 2014 in absolute dollars.

Al Kaschalk – Wedbush Securities

So 353 dollar run rate is what you’re suggesting we should think about in terms of Q3 forward.

James Fish

Well so Q3 has ad we talked about this a bit earlier but Q3 and Q4 have a bit of headwind with respect to compensation accruals year-over-year. So while we’re up for the first two quarters of the year we expect we’ll have a little bit of headwinds and that’s why I think where we’re comfortable saying that we’ll be flat year-over-year.

Al Kaschalk – Wedbush Securities

Jim my point about recycling is that. If prices are down then I would think that would hurt the operating margin on that business and there may be some I won’t say idle cost but let’s say not fully utilized cost. And that’s what I am just giving trying to getting to an EBITDA margin of 25% I think is above that is easy hurdle. And then we just didn’t see the progress in the quarters. So I am trying to decide for that whether that was an SG&A or an operating cost?

James Fish

It was operating cost at our recycling operations. We remember that had a 90 basis points effect on margin. So it was purely solid when it comes to recycling basically the breakdown you had is it the both of the problem with pricing and was pricing commodity pricings down 12.5% for the quarter. Next was operating cost, operating costs are up because we have to get lower residue and then you have the volume and the integration of the acquisitions pieces a little bit small pieces in there too.

So look at the two bigger things are price and operating costs. And those are two things that we can affect and recycling you can affect from price by going and looking at rebate you can affect operating costs by driving the inefficiencies out of the system. So that’s where we’re focused on recycling. When we talked about margin expansion we are 20 basis points of EBITDA margin obviously that would have been back over 100 if we’ve gotten just flat in recycling. Once we get to the point where we are positive from the recycling operations that’s when you really see the leverage there.

Al Kaschalk – Wedbush Securities

Okay. And you’ve looked what’s the assumption on commodity price David or Jim for the sort of back half of ‘13?

James Fish

We expect to be pretty much flat for the rest of the year you had to make your run up and we’re expecting it sort of flat for the rest of the year.

Al Kaschalk – Wedbush Securities

Okay. Thanks for taking my questions.

Operator

Thank you Mr. Dave Steiner, do you have any closing remarks?

David Steiner

No, thank you all for joining us in the quarter and I know Jim and Jim will be out on the road in New York next week. So look forward to seeing you out on the road.

Operator

Thank you for participating in today’s waste management conference call. This call will be available for replay beginning at 1’o clock pm Eastern Standard Time today through 11:59 pm Eastern on August, 13, 2013. The conference ID number for the replay is 97883740. Again, the conference ID number for the replay is 97883740. The number to dial for the replay is 1800-585-8367, or 1404-537-3406. Thank you and you may disconnect at this time.

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