Waste Management's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Waste Management, (WM)

Waste Management, Inc. (NYSE:WM)

Q1 2014 Earnings Conference Call

April 24, 2014 10:00 AM ET

Executives

Ed Egl – Director, IR

David Steiner – President and CEO

Jim Fish – EVP and CFO

Analysts

Hamzah Mazari – Credit Suisse

Joe Box – KeyBanc Capital Market

Michael Hoffman – Wunderlich

Derek Sbrogna – Macquarie

Al Kaschalk – Wedbush

Corey Greendale – First Analysis

Tony Bancroft – Gabelli & Company

Barbra Alborene – Morningstar

Operator

Good morning, my name is Jenisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management first quarter, 2014 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. (Operator instructions)

I will now turn the call over to Ed Egl, Director, Investor Relations. Okay, Mr. Ed Egl, you may begin your conference.

Ed Egl

Thank you, Jenisha. Good morning everyone, and thank you for joining us to our first quarter, 2014 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer, Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer.

Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedules to the press release include important information.

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

David and Jim will discuss our results in the areas of yield and volume which unless otherwise stated are more specifically references to Internal Revenue Growth or IRG from yield or volume. Additionally any comparisons unless otherwise stated will be with the first quarter of 2013.

During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or Earnings Per Share. David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the schedule for today’s press release. For purposes in the past and into the prior period [ph], our first quarter 2013 EPS, income from operations margin, operating EBITDA, and operating EBITDA margin have been adjusted to exclude items that management believes did not reflect our fundamental business performance were 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 foot note and schedules which can be found on the company’s website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures.

This call is being recorded and will be available 24 hours a day beginning at approximately 1:00 p.m. Eastern Time today until 5:00 p.m. Eastern Time on May 8. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, dial 855-859-2056 and enter reservation code 10543459.

Time-sensitive information provided during today’s call which is occurring on April 24, 2014, 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 will turn the call over to Waste Management’s President and CEO, David Steiner.

David Steiner

Thanks, Ed, and good morning from Houston. Our fourth quarter conference call we said the January results indicated the strength of our business. That strength continued in February and March and lead to a strong start into the year. The momentum in our yield and cost control programs continued throughout Q1. Our field operations teams also did a great job of managing the effects of the severe weather that probated the quarter.

As a result, we are in $0.49 per share, an increase of more than 22% when compared to the first quarter of 2013. We saw good improvement in all areas, income from operations, operating EBITDA, margin and free cash flow. We’re encouraged by the strong start and we expect the momentum to continue as we are heading in our seasonal upturn.

Our yield programs continue to drive our margin expansion. For the first quarter, our collection and disposal yield was 2.6% which is the seventh consecutive quarter of sequential yield improvement. The effect of low inflation rates on our CPI based contract are certainly a headwind, but we overcame that headwind to drive yield to its highest level in three years.

Core price increased to 4.2%, a year-over-year improvement of 100 basis points and the highest level we’ve ever seen. Each of our lines of business had positive yield except C&D which was impacted by higher price Super Storm Sandy time we received in 2013.

Average rates per unit for MSW, commercial and industrial are also the highest rates that we’ve ever seen. When compared to the first quarter of 2013, average rates increased 5.6% in the industrial line, 4.9% in the commercial line and 4% in our MSW line. This is a tremendous accomplishment by our team.

As we’ve repeatedly stated, we need yield at about 2% to see margin expansion. And we will execute our yield program to continue to drive that expansion. Clearly this has some effect on volumes. But the tradeoff remains very positive.

Turning to volumes, in the first quarter, volumes were negative 1.8% which is an improvement of 40 basis points from the fourth quarter. The losses in our commercial volumes improved to 30 basis points from the fourth quarter. But I wouldn’t yet call that improvement of trend.

Roll off volumes were down about 200 basis points from the fourth quarter, but we would expect those losses to moderate as we enter our seasonal upturn. Our landfill volumes, particularly special waste, were strong in the first quarter. However, they were offset by declines in the collection lines of business.

As we’ve said in the past, we’re not focused on getting the most volumes, we’re focused on getting the best volumes. We’re looking for the best mix of yield and volume to drive income from operations, dollars and margin. Jim will give more details, but despite negative volumes, overall income from operations grew more than 13%, and our income from operations margin grew 140 basis points.

Operating EBITDA increased about 7%, and operating EBITDA margins increased 100 basis points. Our traditional solid waste business has performed very well in the first quarter. We saw a strong income from operations and margin improvement in our commercial, industrial, landfill and transportation lines of business. And our overall traditional solid waste income from operations margin, grew 50 basis points.

Our recycling operations drove a little less than one set decline in our earnings per share compared to the first quarter of 2013. This decline is due to the 1.8% drop in average commodity prices for the quarter and weather related operating challenges.

We’ve seen our operating cost improved as we tighten our enforcement on contaminated loads and modify the methods for calculating rebates to customers. We’re also engaged in broad based efforts with our recycling customers, consumer brand owners and others to educate them of the evolving recycling in commodities markets and how to reduce contamination. Overall, we still expect to achieve our recycling guidance of flat earnings per share when compared to 2013.

Turning to our waste energy business, in the first quarter operating results were essentially flat when compared to 2013. But overall results benefited from a spike [ph] in electricity prices in the quarter, driven by the cold and the normal winter [ph]. In April, we’re seeing electricity prices moderate as warmer weather has arrived on the East Coast. So we expect earnings from our waste energy operations to be similar to 2013 in the remaining three quarters.

Looking at free cash flow, the first quarter of 2014 is the highest free cash flow quarter since 2008 at $484 million, driven by our strong results in working capital management, supplemented by $166 million of divestitures, primarily our waste energy joint venture in China.

So 2014 is up to a strong start. And we have the momentum to achieve our four-year goals of adjusted earnings per share between $2.30 and $2.35 per fully diluted share. With the strong first quarter free cash flow, we now expect 40 to free cash flow [ph] between $1.4 billion and $1.5 billion.

As we move to the second quarter and see the seasonal upturn, we will likely refine the various elements of our guidance in connection with our second quarter results. But for now, we’ve demonstrated that our field and corporate managers can execute our pricing and cost control program. And through their efforts, we’re confident we can achieve our goal.

I’ll now turn the call over to Jim, to discuss our first quarter results in more detail.

Jim Fish

Thank you, David. As David mentioned, we had a strong performance in all aspects of our income statement. Our revenue grew 1.8% in the first quarter to $3.4 billion. Strong yield and acquisition revenue were the main drivers with volume declines and a negative foreign currency translation yielding revenue growth. The effects impact on revenue was approximately $17 million.

We continue to see improvement in all our cost lines. With respect to operating cost, operating cost as a percent of revenue improved 50 basis points to 65.7%, an increase $23 million in the first quarter, both [ph] associated with recently acquired businesses increased almost $30 million and were partially offset by improvements in disposal on labor cost [ph].

SG&A cost improved $15 million to $375 million, and improved as the percent of revenue by 70 basis points to 11%. With the strong results in the first quarter, we expect us to achieve our full year SG&A goals.

Turning to cash flow, for the first quarter we generated $484 million of free cash flow, an increase of $136 million when compared to 2013. We accomplished this in part by growing our net cash provided by operating activities, $7 million to $584 million, improving working capital and by maintaining discipline on capital spending.

We grew free cash flow despite over $100 million of headwinds from the payment of our annual incentive compensation and the maturity of interest rate swaps related to a plan senior note issuance. Our capital expenditures for the quarter were $266 million, the same amount that we spend in the first quarter of 2013. We also had some divestitures in the quarter, most notably we monetized our investment in China for about $155 million. Even if you exclude the divestiture proceeds, our free cash flow, up $318 million was still the highest free cash flow since 2008.

Looking at internal revenue growth, we continue to execute on the tradeoff between yield and volume to determine the best mix in order to maximize income from operations, dollars and the margins. Our strategy worked in the first quarter just as it did for the full year 2013. For the total company, in the first quarter, our collection and disposal yield was 2.6% with volumes declining 1.8%. This lead to income from operations growing $55 million, margin growing 140 basis points, operating EBITDA growing $49 million, and operating EBITDA margin growing 100 basis points.

Looking at the commercial and industrial lines of business, the yield and volume tradeoff worked well. In both cases, strong yield results offset volume declines resulting in commercial income from operations growing more than $6 million, and margin growing 50 basis points. In industrial, income from operations grew almost $7 million and margin expanded 110 basis points. This is the seventh consecutive quarter of year-over-year margin expansion in industrial.

So yield above 2% in those lines of business drove margin expansion despite negative volumes. This did not hold true in our residential line where yield was 1.1% driven by low CPI. In addition, we lost a few contracts that we saw – where we saw competition significantly lower price the levels that were below our required return on capital. We expect to see margins improved as our cost control programs drive down operating costs and as we add new residential contracts at acceptable returns.

In the landfill line of business for the first quarter, we saw the benefits of positive volume and positive yield. Total landfill volumes increased 3.8%, combined special waste and revenue generating cover volumes were positive [ph] 7.9%. And MSW volumes grew by 0.9%.

C&D volume declines 2.2% primarily due to a tough Sandy comparison. This lead to income from operations growing $11 million which is the fourth consecutive quarter of growth, and margins grew 130 basis points.

Finally, looking at our other financial metrics at the end of the first quarter, our weighted average cost to debt was 4.9%, and our debt to total capital ratio was 62.8%. So pulling away portion of [ph] our total debt portfolio was 18% at the end of the quarter.

Our income tax rate in the first quarter was 29.6% due to a non-cash adjustment to our differed taxes from state tax law changes. This benefited us by a positive $0.04 per diluted share in the first quarter. Our year-over-year benefit was a positive $0.02 per share.

For the next three quarters, we expect our tax rate to be approximately 35%. Our first quarter results have started 2014 on the right path. We are encouraged by the results which we could not been achieved without the hard work of our employees. I know they are focused on making 2014 a successful year, and I thank them for that.

And with that Jenisha, let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) We’ll pause for just a moment to compile the Q&A roaster.

Your first question comes from the line of Hamzah Mazari of Credit Suisse.

Hamzah Mazari – Credit Suisse

Good morning. Thank you. Just – hey, good morning. Just a question on the volume side, do you have a sense of how much of your volume loss is self-inflicted in, in terms of walking away from low margin business versus other competitors in the market as being more aggressive? And then separately on the volume side, is the – is the spring slow down within housing going to push out some of the commercial new business formation in your business? What’s your view on those two topics within volume?

David Steiner

Yes, Hamzah, on the first one, I don’t think the slowdown in housing will push it out. As you know, we’ve been waiting for that commercial volume to see significant improvement. I don’t think that that one quarter slowing down, when the housing starts, our re-sales will have an effect on that.

On the other one, you’ll have to look at the various lines of business, right? I don’t think there’s any doubt that in the residential line of business and in the industrial line of business, we walk away from low margin business. There is absolutely no doubt about that.

On the commercial side, there is just not a lot of growth. And our strategy is that we aren’t going to chase volumes because if we chase volumes and because there’s not a lot of growth, we’re going to have to take those volumes from someone else. And that’s just not something we’re willing to do. We’re not willing to go out and grab volumes at a low price because if we do that, that’s what starts the downward spiral in price. And so, when we see those volumes pickup, we fully expect to get our fair share of that.

So I would tell you that that we walk away from residential and industrial business that’s low margin. When it’s low margin, it’s generally low return on capital. And so, we’re making a good business decision to walk away from it.

On the commercial side, I wouldn’t say that we are intentionally walking away from business, I would say that we’re more focused on retaining the business that we have than going out and trying to get new volumes with low price. But once we see the rising tide, when we see those commercial volumes pickup, we fully expect to get our fair share.

Hamzah Mazari – Credit Suisse

And then just on pricing, could you – could you give us your thought process in putting up the pricing bonus structure? You put a pricing gate [ph] in place a couple years ago, and then it went away. How prominent is this pricing gate [ph] that you’ve set up? And should we expect – is this a signal to the market that you’re more disciplined and you were not disciplined previously? How do you – how should we think about these pricing gates [ph] coming in sporadically and then maybe going out at certain times?

David Steiner

Yes, I think – look, Hamzah, I think everybody knows that the strategy at Waste Management is that you’re always better off getting yield over volumes, right? And so, we’re always going to be a yield-focused company.

Now, you can get yield in a lot of ways. You can have the gate [ph] which that you mentioned which is sort of a hammer if you will, you can have – look, we meet with our folks every month to see how they’re doing, and you’ve got that as sort of an honor on it [ph]. And then you can also put in place an incentive program. You know, look, when we saw – when we saw the yield go down dramatically in 2012, we knew we had to do something dramatic.

And so, we weren’t going to just rely on meeting with folks every month and saying obviously your job is expected to be driving yield, we wanted to get a little bit more incentive. So we decided to make it a positive incentive. And as you can see what we’ve – look, we’ve quadrupled yield since we put that in place. If that’s what we have to do to get it done, it is a great tradeoff for all our shareholders, I can guarantee it.

So there will always be something that we will do with respect to yield. Either we’ll put in place a gate, we’ll put in place an incentive program or we’ll make sure that we have our focus on it so that our field mangers focuses on it. We will always do that. And so, we’re going to use those three – combination of those three things to continue to drive yield.

Hamzah Mazari – Credit Suisse

Okay. And just lastly, I’ll turn it over, maybe for Jim. Could you help us understand the – why you are not raising earnings guidance but free cash flow guidance is going up? Is that all asset divestitures or maybe give us a little more color on the delta between that?

Jim Fish

Yes. So couple of questions there, Hamzah. And I think the reason we’re not raising free cash flow guidance is because while we were pleased with the quarter, this is the first quarter. And so, we’ve said that we’ll refine our guidance in the second quarter. The – when you think about free cash flow, I think that was question was kind of the components of free cash flow, and I think that’s kind of what you’re getting at is which pieces of it are sustainable and which are not.

Hamzah Mazari – Credit Suisse

Right.

Jim Fish

You know, if you think about free cash flow and break it down to its component parts, CapEx was essentially flat, it was based – exactly flat actually. And then EBITDA was up $49 million driven by a nice quarter for weedy [ph], driven by some core business improvements and driven by SG&A, cost controls. And then the other piece, the other big mover there outside of divestitures which was almost exclusively the Chinese divestiture, the other big mover was cash flow from operations. And we had about $100 million – $106 million to be exact of headwind there from the termination of the – or from the core starting swap [ph] and then from the bonus payout.

And so, working in the right direction there was DSO and DPO [ph] which were better by a day and five days respectively, so year-over-year. And I think we have some room to improve there. So I would argue that that’s – the quality here is pretty strong. Most of what I’ve talked about, I would argue is sustainable with the obvious exception of the onetime asset divestiture.

David Steiner

Hey, Hamzah, I think the important thing is that we did $318 million without divestitures which is the highest we’ve had since 2008, and that’s with $100 million of headwind. And the beauty of it is those $100 million of headwinds or first quarter headwinds, they don’t recur in the second and third and fourth quarter.

So we had a great first quarter despite the headwinds. We won’t have those kind of headwinds in the – to three quarters [ph]. So obviously we’re very optimistic about free cash flow. But as Jim said, we’ve always said, whether it’s a good winter weather or a bad winter weather, it is hard to judge a full year by the first three months of the year.

So we like to see the seasonal upturn before we make a call on how the full year is going to play out. And so, we thought that’s what the – we thought that’s what would be prudent to do right here which is to say, let’s see what the seasonal upturn bring in the second quarter, and we’ll refine the guidance as appropriate.

Hamzah Mazari – Credit Suisse

Okay, great. Thank you.

David Steiner

Thank you.

Operator

Your next question comes from the line of Joe Box of KeyBanc Capital Market.

Joe Box – KeyBanc Capital Market

Good morning.

David Steiner

Good morning.

Joe Box – KeyBanc Capital Market

Question for you guys on landfill pricing and volume dynamics. Before you release on an active landfill base is it looks like volumes were up by about 3.4%. One, can you guys give us a sense on yield for those landfills? And then two, you had a peer that reported landfill volumes up, I believe it was 90% earlier this week, can you just help me bridge the gap there? I’m curious if that’s a function of just geography or maybe if you’re seeing a little bit less volume here because of your pricing strategy as well?

David Steiner

Yes, look, the landfill volume it’s driven those big numbers but when it happens for us, I got – I won’t speak to other companies. But when we get those type of big numbers, it’s generally special waste jobs. And you got two things going on there, you got year-over-year cost, right? If we had a great special waste quarter last year, it’s harder comp. And then you got the fact that those special waste jobs are jobs that they vary from season to season.

So what I would tell you is that we are very encouraged by the landfill volumes, we still see a very strong pipeline. So we’d expect them to be positive for the full year. From a pricing perspective as we said, look, price doesn’t particularly matter as much as special waste, and then C&D as it does and MSW.

So when we look at the – at the yield components, we look at MSW, when we look at the average unit price so that – in the MSW line, we grew at 4%. So we’re well on our way to getting what we’ve said is sort of that 5% to 7% price increase in the landfill, at 4% we’re well on our way to getting there.

Joe Box – KeyBanc Capital Market

Perfect, that’s helpful. Thank you. And, David, I want to practice [ph] this question by just saying, I think that pricing discipline out of you guys is critical. But I’m just curious when you started your pricing strategy about a year ago, were you expecting your peers to buy into raising rates? And then maybe what’s your view on sustaining the strategy if the waste recovery continues to be relatively slow, is this something that you could stick with to this magnitude for another year or two?

David Steiner

Yes, look, I can’t – I can’t speak to what we – what we expect or we don’t expect that of our competitors. All I could tell you is what we’re going to do. And it goes back to what I said earlier, look, when you got sort of stick pie [ph], there’s only one way you can get volumes. And that is to go out and steal them from someone else. And we’ve seen what happens when we do that. Look, we’ve done that in the past where we steal volumes from someone else, what do they do? They steal them from us. And before you know it, you have a downward ice spiral. And you all have heard me say it a million times, it’s a two to one or three to one tradeoff. You can get 1% of price and lose 2% to 3% of your volume and you’re still ahead of the game.

And so, you just can’t chase that downward spiral because you can never get enough volumes to make up for the drop in price. So you’re not going to see that strategy change for us. Now, look, will we rather have more volumes? Absolutely, but what I’m saying is when we get more volumes it’s not going to be because we’re going out and steal them at a lower price, it’s going to be because that everyone is getting more volumes, and we fully expect to get our fair share of the increase in volume.

And so, what we’ve seen is that the – we think the economy has moderated. We don’t expect to see the volumes improved dramatically, but we don’t expect to see them decreased dramatically either. And obviously we’re going to see improvement during the second quarter with the seasonal upturn.

So I would say that we have a sort of a muted sense of optimism on volumes, but that – you’re not going to see us change our strategy because it’s a strategy that drives shareholder value. And that is we’re always going to favor yield over volume.

Joe Box – KeyBanc Capital Market

Right. Just one quick one, Jim, can you remind us what the flow through is for that $27 million variance for electricity?

Jim Fish

Well, so most of that electricity was from rates, Joe. In fact, I would say it was – it was exclusively from rates. Our kilowatt hours were actually down slightly due to some permanent plant shutdowns, reduced load and some operating changes.

So I would say that that’s a top line benefit we saw was exclusively from rates. And so, that ends up flowing through the bottom line.

Joe Box – KeyBanc Capital Market

Great. Thanks for your time guys.

David Steiner

Thank you.

Operator

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

Michael Hoffman – Wunderlich

Hey, good morning, David, Jim and Jim.

David Steiner

Good morning, Michael.

Michael Hoffman – Wunderlich

So I need a little clarity because there’s numbers being thrown around and I’m – I mean, I may be confused myself. In your release, you show – and the data point I think is a terrific one you show. But you show having done 21.3 million tons at the landfill and 14 versus 211 and then at – a year ago, and 211 has Sandy in it.

So to get to the – I mean, that’s just about 1% which I thought was great given the Sandy comparison, but everybody is talking about 3% or better, help me understand how I’m understanding volume at the landfill as I could.

David Steiner

Yes, look, Michael, as you know, when we look at internal revenue growth, we don’t look at it on a tonnage basis. We look at it – there’s a lot of different mix issues that go into it. And so, when we’re giving those numbers, you’re looking at mix and price. And then when we look at, at least at C&D, I’m sorry. When we look at special waste, we put all of it into volume because you can’t really pull out the price.

And so, you might get some lower deviations there, but when we look at, we say, the numbers are obviously indicative of the trend, and I think you hit the nail on the head. The trend is obviously positive, particularly given the Sandy comparisons, particularly given that so many of our operations were shut down during the quarter, but the landfill trends are clearly positive.

Michael Hoffman – Wunderlich

Okay. So the 3.8 when that was given earlier, that’s actually the revenue growth or is that how you – I just want to – I actually think it’s great that you showed the 1% volume the way you’ve put it in the chart given all of the headwind issue you just described.

David Steiner

Right.

Michael Hoffman – Wunderlich

So what I’m – I just –

David Steiner

You know, the 3.8 is the total growth from volume. But again, with special waste because special waste prices and transportation cost move around a lot, we don’t split out price and volume and special waste, we put it all into volume. So that excuse the numbers a little bit. But again –

Michael Hoffman – Wunderlich

[Indiscernible]

David Steiner

[Indiscernible] but directionally you can see they’re both – they’re both positive directionally.

Michael Hoffman – Wunderlich

Perfect. So the follow on to that would be, do you ever recall [ph] out of the 211 that’s total tons and that you showed in disposal, how much of that was Sandy? So in reality, the landfill in 1Q ‘14 weather aside saw better than a 1% volume growth, tons [indiscernible]?

David Steiner

Yes, that’s absolutely right [ph].

Michael Hoffman – Wunderlich

Okay. And so, the next question would be, if you were looking at who’s driving us the scales, do you have a sense that this is more construction or it’s actually maybe more commercial? And where I’m getting to is are we starting to see that secular recovery of volume in the container, the commercial it’s somewhere out here in the next quarter or two starts converting into that operating leverage from service intervals.

David Steiner

No, I think that’s right. I think if you ask our folks on the field, they’ll tell you that special waste and C&D are where they see this real strength in the pipeline. Obviously MSW has been strength now from many quarters in a row. But I think what they’ll tell you out there, very optimistic is about special waste and – about special waste and C&D.

You know, I mean, look, the reality is that you had a lot of pent up demand felt [ph] particularly in the Northeastern and Midwest, you had a lot of pent up demand built up during the winter, and you see a little bit of that. But we also think that we’re seeing a secular pickup obviously in the construction industry.

Michael Hoffman – Wunderlich

Okay. On the free cash flow – and I appreciate that you’re being clear that you can add or subtract the asset sale number that do to calculation. But on a – if I look at it on a cash from up less [ph] capital spending approach, what does it take for this business to do $1.5 billion on those metrics? And – because asset sales come and go, where is the leverage without getting help from volume? This is you running the business better, how – where do – where do we see that? Where should we look for that as we progress? And how quickly could you get it?

Jim Fish

Boy, how quickly can we get it? I don’t know. I think we’re making pretty good progress here. If you exclude – what you’re excluding that divestures piece which we look at that as well. And then you – then you get to the progress we’re making on working capital. David, and I both have kind of have touched on that today. And we still have some room there, Michael, be or so improved by really only a day, and DPO [ph] by five days.

So fairly pleased with the improvement of DPO [ph], but not necessarily pleased with the improvement of DSO. And both of them still have room for improvement. So I would argue that that’s an area for continued improvements. The EBITDA – $49 million in EBITDA, and growth there is strong in light of kind of before we faced [ph] in the winter season. Our woody [ph] business did a nice job of offsetting the weather impact in our core business. But our core business still grew which I think is an important thing to mention.

Our core business grew, and we had – look, we have some challenges, and we didn’t – we didn’t mention it in our scripts because we just don’t want to blame anything on the weather. But we felt pretty darn good about the growth in EBITDA when at the same time we were shut down in Houston for a couple of days, we were shut down at Atlanta I think for four days in a quarter.

So that clearly was some impact on the operation. But it does speak to a couple of things, and that is – that’s Jim Trevathan and his team did a nice job of pulling some cost out when we knew we were going to be shut down.

So I think back to your original question though, hard to say when exactly we will get to a number in the 15 range excluding divestitures. But I sure think we’re on the right path with our cost control program, with our yield program and then continued work on CapEx discipline and working capital.

David Steiner

Hey, Michael look, just to add to that, from a sustained $1.5 billion point of view and you said, talk about it without volume. The reality is you can’t get there without volume, right? I mean, look, we can – we said that a million times, we’ve said once which is you can’t get margin expansion unless you get 2% yield, right?

And so, if you don’t get the yields, you have no chance in getting there. You can’t get there on cost alone, right? So you got to get above 2% yield or else you have not shot at getting there. So we’ve done that. We’ve driven our yield up to 2.6%. You know, if we – if we got back the money the money that we lost from the lose volumes which is mostly intentionally lost volumes, we’re there, right?

And so, I would tell you that from a sustained long-term point of view, $1.5 billion happens when we see our commercial volumes turn back to flat, when we stop seeing the leakage of cash from lost volumes. Now look, you can’t have – I think you need it too [ph]. So you can’t – right now like I keep saying, in this fix volume environment, you can’t have both. You can’t have both 2.6% yield and 2.6% volume. We did that – remember we did that in 2012, we had positive volumes and 1% price. We all saw what that got us. That doesn’t get you $1.5 billion in free cash. It doesn’t get you margin expansion.

So what I would tell you, Michael is you can’t look at this without volumes, you got to look at it as the right mix of price and volumes. And until we see that commercial pie start to grow so that we can get back to flat volumes, you’re going to see us generate somewhere between $1.3 billion and $1.5 billion. Once we get – once you see those volumes starting to turn, that’s when you get $1.5 billion plus.

Michael Hoffman – Wunderlich

Okay. So to that end, on the landfill side of your business, do you feel good about the nature of the pricing that you’re instilling discipline in that commercial collection market by the private guy as supposed to subsidizing their ability to approach you [ph]?

David Steiner

Yes, look, again, you’ve heard me talked about that a million times. That’s absolutely critical to the long-term strategy. And yes, I feel – I actually feel very good about that.

Michael Hoffman – Wunderlich

And do it about it in the sense [ph] that the market is starting to follow as well as supposed to you –

David Steiner

No, look, again, we – look, we don’t pay attention to what the market does frankly because what the market does is not going to influence what we do. We are going to do what we do because we – because look, I’ve been here 10 years and I’ve seen it both ways. I’ve seen us play the volume game and I’ve seen us play the price game. And there’s only one way that we can grow the bottom line and that is by playing the price game.

So I’m encouraged by it because we go through a monthly and a quarterly review with each of the folks that re managing those businesses, and we have started to ask them tell us about your top 10 customers and what are we doing with price. And so, we’re seeing what we’re doing out in the field. And so, I’m encouraged because we’re sitting down with those folks and actually seeing the results.

Michael Hoffman – Wunderlich

Okay. Thank you very much for taking my questions.

David Steiner

Thank you, Michael.

Operator

Your next question comes from the line of Derek Sbrogna of Macquarie.

Derek Sbrogna – Macquarie

Hey, good morning guys. Thanks for taking my question.

David Steiner

Good morning.

Derek Sbrogna – Macquarie

It was just – it was great to see the yield in your collection and transfer business continue moving higher. I’m wondering if you could talk as you guys have a little bit in the past about some of the things you’re doing to retain the volumes without lowering price. And then if you can maybe kind of assess how successful you think some of these programs have been?

David Steiner

Yes, it’s a great question. And frankly, it’s where the bulk of our focus is right now because the reality is that most customers whether it’s solid waste or cable or telephone or water service or electricity, most customers don’t switch just because you put a 3% price increase on them. They understand that everybody has to get price increases to see their – because their cost base goes up. And so, they get it.

So they don’t leave you because you raise the price. But if you raise the price and then have a service issue, that’s when they leave you, right? So if your cable repeatedly goes out, that’s when you start going and looking for another provider.

And so, we need to be 100% focused on providing that best service to our customer and not give them a reason to leave. We’ve done the studies, everyone says, well, your leave you over price, we’ve done the study. They don’t leave you over price. That is not the number one reason they leave you. The number one reason they leave you is leave you with service issues.

And so, that’s why we’ve dedicated a lot of human capital and a lot of technology to making sure that we can have the best service. And so we were glad to see that as we went through the pricing progress in 2013, our churn rate did pick up. We were glad to see that in the first quarter of 2014, the churn rate actually moderated and was down sequentially from the fourth quarter so we’re encouraged by that. But look, we still have a long way to go.

Derek Sbrogna – Macquarie

Okay, that’s very helpful. And just one more if I can. With the stronger free cash flow it doesn’t look like you guys bought back any shares in Q1 but instituted the $600 million buyback last quarter, can you talk about your appetite for buy backs here given the stronger free cash flow?

Jim Fish

Yeah, you’re right. We didn’t buy back any shares in Q1 but I would expect to see us back in the market buying shares sometime in Q2.

Derek Sbrogna – Macquarie

Okay. And can you just remind us, there has been some talk about extending the bonus appreciation. Can you just remind us on what that headwind is and what that can potentially add to free cash flow if that is reversed in 2014?

Jim Fish

So we estimated it about $70 million to $80 million was the headwind. So obviously, if that law changes, if we get the extenders then we would see that reversed. But for now, we’re expecting to see about $70 million to $80 million of headwind as a result of no-bonus appreciation.

Derek Sbrogna – Macquarie

Yeah, understood. Nice job. Congratulations.

Jim Fish

Thank you.

Operator

Your next question comes from the line of Al Kaschalk [ph] of Wedbush [ph].

Al Kaschalk – Wedbush

Good morning.

David Steiner

Good morning, Al [ph].

Al Kaschalk – Wedbush

Just to follow, David, on a lot of the price-to-volume discussion, if you’re prepared to continue the dial [ph] on the price and implement that, what expectations should you have for investors in terms of the volume comp, in terms of – are you getting to a point where you’re going to annualize that and therefore volume declines will be getting closer to flat or should we start to still see some of these, the numbers that you’re posting down 2%, 3%?

David Steiner

Yeah, well, that’s a great question, Al [?], and it goes back to one of the things I said in the script which – if fundamental to our strategy, which is, we aren’t looking for the most volume. We are not the company that you’re going to – if you want the company that’s getting the most volume, you need to look somewhere else. We’re going to be the company that gets the best volume, right, the best volume mix that can get us the highest income from operations dollars and margins.

And so, I would certainly expect to see as the economy continues to improve, I would certainly expect to see those volumes get better. Now, having said that, remember, in the second quarter as Jim mentioned, we lost a couple of resi contract that folks bid at prices that we weren’t willing to go to. And then, we have our largest national account that quite frankly was a low single-digit margin and someone came in and undercut the price on that even though ours was low-single digit and we weren’t going to go there. We said – look, we’d rather not have the work than have the volumes. Oh, we lose that volume starting April 1 so you’ll see a little bit tougher comp in the second quarter.

The good news is we lost that volume, it came with virtually no earnings. And so, we’ll take that tradeoff every day. We now can redeploy those trucks to going out and getting a higher margin business which from an earnings point of view will be accretive to us. And so, look, that’s our deal, is that when we lose volumes – and I’m not telling you we’re 100% perfect because we’re not perfect by any stretch. But the intention is that when we lose volumes we want to lose those volumes that are lower margin and then take those assets that we freed up and go allocate those to higher margin business. That’s how you get the best volumes rather than get [?] to the most volume.

Al Kaschalk – Wedbush

Right. Your competition is telling us you are 100% perfect, so I’ll have to correct them on that, okay.

David Steiner

Well, I wish we were but we’ve got a long way to go.

Al Kaschalk – Wedbush

All right. Fine. Okay.

David Steiner

See, what I would tell you, Al, is my folks out in the field are perfect. I’m nowhere near.

Al Kaschalk – Wedbush

Okay. That’s probably what they were saying, sorry. Fair enough. I appreciate the color. What about, I mean, maybe you don’t want to share this given the nature of the call but where are you seeing – I won’t say the perfect volume or the incremental dollar volume that you want to get but where are you focusing or where are we looking for the incremental volume to come from? Even if on a [indiscernible] basis you’re down as a company.

David Steiner

Right. Again, you’ve got to sort of look at it by line of business. And what I would tell you is that on the landfill side, we’re very comfortable with where we are, right. On the collection side, again, on the residential side, we all know what’s going on there. It’s a lot of capital that you’ve got to invest and so we have to look at that purely from a return on capital point of view. And so we’re not going to bid contracts that are low return on capital. But we’ve certainly want to retain the contracts that we have. On the industrial side, I would tell you that generally we’re going to get better margins on permanent roll offs than we’re going to get on temporary roll offs and we’ll allocate dollars there.

On the commercial side, look, there’s a lot of volume to be had if you want to go after these large school districts for example. But we’ve had very little school district business because we see competitors coming in at a $1 to $1.50 a yard and we’re just not going to go there. And so, what I would tell you is that we know where the higher margin customers are and that’s where we’re going to fish. We’re not going to go fish just to put our cans out. We’re not going to go take a school district at $1 a yard.

Al Kaschalk – Wedbush

Okay.

Jim Fish

I’ll have one quick, one addition there is that when you think about volume that we like, our energy services volume is volume that we like. It’s been a good growth story for us. March was the strongest month from a revenue standpoint and from a margin standpoint, but particularly from a revenue standpoint that we’ve ever had. We were up 25% year-over-year for the quarter even with a little bit of weather impact there. I mean, it was awfully cold in North Dakota and still with that we saw a 25% top line growth in that business. It’s good business for us.

In addition, I think the – we expect that EPA at some point will promulgate coal ash disposal standards and we’re well-positioned there to help that industry manage its coal combustion byproducts. So that will be good business for us as well.

Al Kaschalk – Wedbush

Right. Just – thanks for that color, Jim. To clarify though, where are those businesses being reported by line of business or –?

Jim Fish

Yeah, are you talking about energy services, that all flows just through our core business.

David Steiner

And through the industrial line on the collection side, generally –

Al Kaschalk – Wedbush

Yeah, okay.

David Steiner

– through the special waste line on the landfill side.

Al Kaschalk – Wedbush

All right. Can you – you brought up a good point about coal ash. Can you just give us an update on what’s your expectations are there on regulation and when do you expect to hear?

David Steiner

Yeah, I believe the EPA has a court order to issue something by the end of the year. So we would expect that because we’re well positioned, we would expect that sometime in kind of the 15, 16 period we’ll start to see this materially move the needle.

Al Kaschalk – Wedbush

So is that the relationship with utility customers and because of landfill and the expectation that this will be Subtitle D disposal or Subtitle C?

David Steiner

Yeah, I don’t think anybody believes it will be Subtitle C but there’s a number of things that they’re looking for including beneficial reuse, including management of their own landfills as a number of them have landfills. We can help them manage their landfills. And then, of course, if they care to take it offsite we can obviously handle that as well.

Al Kaschalk – Wedbush

All right. Okay. Thanks. Finally, one question here. Your asset sale on the JV in China I think would maybe prompt the question on international and, David what’s the plan here in terms of maybe growth or a refocused organization in terms of outside of North America.

David Steiner

Yeah, and look, I think you hit the nail on the head. The word would be refocused, right, I mean, look, when we went to China, we had a spectacular partner there, Shanghai Chang Pal [ph] the parent company and Shanghai Environmental Group, the subsidiary that we directly work with was a great partner. In fact, even though we took out our equity investment in China. We actually will continue working with them providing technical services. So we’ll still provide them people over there.

We just thought that it was a better use of our capital. The other thing about the Chinese market is that it’s a fast-growing market but it’s also a very competitive market, and we just thought that we could better redeploy the capital into our core business in the United States. Now, we still have a waste energy project being built in the United Kingdom, and we’d expect to continue to see a growth in projects over there. But look, I think you hit the nail on the head. We’re completely refocused is on our core solid waste business in North America and we were pretty pleased to see the improvement.

Now we got some good benefit from Wheelabrator in the quarter. They had a spectacular quarter, but we all know that was drive by electricity prices that primarily by electricity prices that are going to moderate as the weather warms up. So we’ll take that additional capital. We’ll refocus on the core business and as Jim said we’ll use that free cash flow to go off and buy some shares this year.

Al Kaschalk – Wedbush

Right, and just a follow up on that one. The cash that you get, are you allowed to repatriate that back here or as – need to be deployed?

David Steiner

Yes. Now, we repatriated the full $155 million back here.

Al Kaschalk – Wedbush

Thank you, guys.

David Steiner

Thank you.

Operator

Your next question comes from the line of Corey Greendale of First Analysis.

Corey Greendale – First Analysis

Hi, good morning.

Jim Fish

Good morning, Corey.

David Steiner

Good morning.

Corey Greendale – First Analysis

I’ll try to keep it really brief. I think you’ve talked in the past about having – about your analytics behind your pricing. Can you just talk – and I realize there’s difference by customer and market. But can you just talk about how close you are in the field to what you believe the optimum is based on your analytics?

David Steiner

Yeah, gosh, Corey, I would tell you, we’re nowhere close to the optimum. I mean, we have so many customers that they are spread out fairly quickly. So I would say that if you look at it from a customer-by-customer basis, we’re nowhere near the optimum. But if you look at sort of like the overall strategic implementation of the pricing plan is out in the field, our folks out in the field completely get it. Do we make mistakes? Look, we made plenty of bids where we thought we were going to earn x and we ended up earning y. So we’re nowhere near perfect, but they all get what the strategy is and frankly they’re doing a great job of implementing it.

Corey Greendale – First Analysis

So then, to follow up on Al’s question about kind of that price-volume tradeoff, I assume the optimum is not on a company wide basis to have 10% yield and negative whatever it would be volume, how close to just – at a high level that we can see how close are we to what you think the optimum is where you would still be growing, maximizing operating income what would the price volume look like?

David Steiner

Yeah, again, in this current – if you look at a business environment that isn’t growing, I would tell you that I think we’re right about there, right? If we’re going to see above 2% yield, it would be very difficult for us to have positive volumes. It’s just the nature of that beast. And so, if you believe that there’s not going to be any volume growth ever again, then I would tell you, we’re pretty close to optimize.

What we need to see in order to get to the optimization of the overall business is we need to see volume growth. And we’re seeing that volume growth in the landfill, that’s encouraging. We’re starting to see that growth get a little bit better despite the first quarter I would say on the industrial side and then commercials stubbornly remains sort of stuck in that negative 3% to 5% range.

Jim Fish

Corey, I would add that as a matter of course, Jim Trevathan has monthly calls with all of the areas and we regularly look at income from operations by line of business. And so we are assessing whether we’ve pushed too hard. We’ll look at specific areas in a specific line of business within those areas and determine whether is income from operations declining in the phase of very heavy price increase and very heavy volume loss. And that to us would indicate that maybe we’ve reached that kind of point of diminishing returns. But I would also add that we’ve seen very few of those, I mean, I don’t know exactly where we are but we’ve seen very few of those, there’s a couple of them but for the most part we still think we have room there to move ahead on price.

David Steiner

And, Jim, I would add, we have a couple that are in question but they’re MSAs, they’re not entire areas.

Jim Fish

Right.

David Steiner

They’re not one of our 17 areas. It may be one MSA that we’re taking a harder look at.

Corey Greendale – First Analysis

Okay. I appreciate it. Thank you.

David Steiner

Certainly.

Operator

Your next question comes from the line of Tony Bancroft of Gabelli & Company.

Tony Bancroft – Gabelli & Company

Hey, good morning, gentlemen. Thanks for getting my call. Just a quick question on – back to JV monetization. Now, are you planning on – I know you’re saying you’re looking – you’re getting out China but is there – if there is a potential opportunity over there that looks good, would you potentially go back in to – to try to grow more in China or what’s your sort of long-term outlook with that?

David Steiner

Yeah, I think everybody has seen sort of a little bit of a moderation in what’s going on in China from a growth perspective, right? I mean, three years ago, China was sort of the dot com of its time. It was growing so fast and obviously we’ve all seen that growth moderate over the last few years. But it’s a great point. It’s one of the reasons why I’m glad of two things. One, that we still have a great relationship with our joint venture partner. And two, we’re going to be continuing to provide them service over there because that will give us not as big a toehold as we have when we were helping them build plants but it’ll still give us a little bit of toehold over there so that if there is an opportunity, we’ll be able to spot it.

Now, I would tell you, I don’t see any of that on the near-term horizon but with China being such a large part of the world economy, I think it would be foolish to say – we never want to go back to China, and I’m actually glad that we’re maintaining the relationship with our partner over there.

Tony Bancroft – Gabelli & Company

Yeah, thank you. And then just to sort of jump back to some prior questions about long-term growth in lines of businesses. In five years, where is sort of the next focus, not so much on your organic operations in trying to fine tune those but, I mean, you mentioned about energy waste doing so well. You’re a huge asset owner in most of the basin. Do you have any thoughts on that and I know we’ve talked about it before but maybe there’s been quite a bit of growth recently. Is there anymore focus on that?

David Steiner

Yeah, I think that clearly energy service, this area where we have some longer term visibility and I wouldn’t say that about maybe the overall macroeconomic climate. I couldn’t tell you what the economy is going to do in the US and the rest of North America past 2015. But energy services sure looks like that as a growth engine not only for the economy but for us specifically for the next 5 to 10 years. So we think energy services and environmental services are two of those growth areas that you’ve asked [ph] about.

Jim Fish

And then to dovetail on to that, look, the energy services is all about fracing and energy, that low natural – and natural gas pricing. That low natural gas pricing as you can see is going to drive billions of dollars of infrastructure investment in the chemical corridors and in other areas. And so it’s going to generate a tremendous amount of M&I, manufacturing and industrial activity. And so we certainly think that when you look at the energy services, not only do you see the growth there but you see the adjacent growth as people try to take advantage of low energy pricing.

Tony Bancroft – Gabelli & Company

Got it. Thank you. And, I guess, just, I’ve got to ask you. If that business grew large enough, is there something that you want to sort of maybe sort of expose [ph] on your quarterly reporting or maybe do something more like spin-off or is there anymore – is there any strategic thoughts about that.

David Steiner

Yeah, well, we generally don’t look at that until it reaches 10% of our revenue. So I would love to be able to report it. If it’s a good business, high margin, my guess is that you’re going to see great growth but you won’t see that kind of growth where we’d say – okay, let’s go split it off separately.

Tony Bancroft – Gabelli & Company

Okay. I appreciate it. Thank you so much.

David Steiner

Certainly.

Operator

Your final question comes from the line of Barbra Alborene [ph] of Morningstar.

Barbra Alborene – Morningstar

Good morning everybody.

Jim Fish

Good morning.

David Steiner

Good morning.

Barbra Alborene – Morningstar

Regarding recycling, I know that you’ve mentioned this little meta site [ph]. Have you been successful in charging customers penalties, well, I suppose [indiscernible] a very customer friendly terms so maybe I’ll rephrase that. Have you been successful at increasing fees for contaminated recyclables or is this more a matter of educating customer still to give you less of them at the get-go?

David Steiner

Yeah, it’s a combination of both. We’ve done just that and not all of our contracts allow us to do that, but where we’ve been allowed contractually to do that, we’ve done just that. But long term, you’ve hit the nail on the head, long term, it is an education. We’re all better off if the consumer knows how to separate it so that we don’t have the contamination to begin with. The consumer doesn’t want to be penalized or the customer doesn’t want to be penalized for contaminated loads and we certainly don’t want to have those higher operating costs from contaminated loads. So the short-term solution is to say we’re going to charge you. The long-term solution is to educate the consumers and our customers.

Jim Fish

Barbara [ph] I might add that as Dave mentioned, not all of our contracts allow for that charge for contamination, but as renew contracts, we are absolutely adding it to contracts that we’re protected and also the customer is protected and know what to expect from our charges.

Barbra Alborene – Morningstar

Got you. Would you be willing to share a percentage? How many of these contracts have from renewal actually accept the terms that allow for a surcharge or fee on these contaminants?

David Steiner

Well, I can tell you 100% are the ones that we renew.

Barbra Alborene – Morningstar

That’s very helpful. Thanks. Okay.

David Steiner

But I think we’d all be guessing if we told you what percentage have not allowed – look, I’d be shocked and you can follow up with that and he’ll follow up with our recycling folks. But I would be shocked if a large customer did not allow some level of contamination clause into the contract.

Barbra Alborene – Morningstar

Got it. Got it. Jim, as you work with your field teams to help them educate customers, are customers getting it or is this still a challenge that you guys are working through? I would imagine that in some cases, in some larger – even some smaller customers are just not really that quick on the uptake. So what do you do with your field team to help move that process along?

David Steiner

Yeah, look, again, the customer in this instant ranges from a sort of a small customer with a small business to a large national account to large municipalities. So all customers are different, but, look, the large customers that make up the bulk of the fiber market absolutely get it. They understand, look, they see what’s going on with demand on China. They see what’s going on with commodity prices. And more importantly, they see what’s going on with investment in recycling and infrastructure, right. I mean, we’re not investing in recycling and infrastructure and as far as we know nobody is making big investments in new recycling infrastructure.

So they understand that if you’re a large city or if you’re a large national account, you’ve got to make this a long-term sustainable business model in order to drive the investment so that you can drive more recycling. And I think they absolutely understand that. Like anything though, markets don’t turn on a time, right, so it’s going to take some time for that to seep through the market and see sort of a long-term systemic change in the way folks do business in recycling.

Barbra Alborene – Morningstar

All right, sounds good. Thanks very much.

David Steiner

Thank you.

Operator

I will now return the call back over to Mr. David Steiner for closing remarks.

David Steiner

Well, thank you all for joining us. We certainly want to thank all of our field employees who did a phenomenal job working through a challenging first quarter. I’m sure they all like we welcome the seasonal turn, the warmer weather throughout the United States and we look forward to talking to you all in our second quarter conference call.

Operator

Thank you for participating in today’s Waste Management conference call. This call will be available for replay beginning at 2 PM Eastern Standard Time today through 11:59 PM Eastern Standard Time on Friday, May 9th. The conference ID number for the replay is 10543459. Again, the conference ID number for the replay is 10543459. The number to dial for the replay is 1800-585-8367 or 855-859-2056 or 1404-537-3406. This concludes today’s Waste Management conference call. You may now disconnect.

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Waste Management (WM): Q1 EPS of $0.49 beats by $0.05.

Revenue of $3.4B (+1.8% Y/Y) misses by $10M.