Waste Management (WM) David P. Steiner on Q4 2015 Results - Earnings Call Transcript

| About: Waste Management, (WM)

Waste Management, Inc. (NYSE:WM)

Q4 2015 Earnings Call

February 18, 2016 10:00 am ET

Executives

Ed Egl - Director-Investor Relations

David P. Steiner - President, Chief Executive Officer & Director

James E. Trevathan - Chief Operating Officer & Executive Vice President

James C. Fish - Chief Financial Officer & Executive Vice President

Analysts

Scott Justin Levine - Imperial Capital LLC

Corey Greendale - First Analysis Securities Corp.

Patrick Tyler Brown - Raymond James & Associates, Inc.

Jeffrey Y. Volshteyn - JPMorgan Securities LLC

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Sean J. Egan - KeyBanc Capital Markets, Inc.

Al Kaschalk - Wedbush Securities, Inc.

Charles Edgerton Redding - BB&T Capital Markets

Tony Bancroft - Gabelli & Company

Barbara Noverini - Morningstar, Inc. (Research)

Operator

Good morning. My name is Karnethia and I will be you conference operator today. At this time, I'd like to welcome everyone to the Fourth Quarter 2015 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

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 - Director-Investor Relations

Thank you, Karnethia. Good morning, everyone, and thank you for joining us for our fourth quarter 2015 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 at our website at www.wm.com. 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. During the call, David and Jim will also discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the earnings press release. Any comparison, unless otherwise stated, will be with the fourth quarter of 2014.

The fourth quarter and full year 2015 and 2014 results have been adjusted to enhance comparability, by excluding certain items that management believes do not reflect our fundamental business performance or results of operations and by excluding amount attributed to businesses and assets divested in 2014.

These adjusted measures in addition to free cash flow are non-GAAP measures. Please refer to the earnings press release footnote 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 of our use of non-GAAP measures.

This call is being recorded and will be available 24 hours a day, beginning approximately 1:00 PM Eastern Time today until 5:00 PM Eastern Time on March 3. 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 21854213.

Time-sensitive information provided during today's call, which is occurring on February 18, 2016, may no longer be accurate at the time of 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 P. Steiner - President, Chief Executive Officer & Director

Thanks, Ed, and good morning from Houston. 2015 was a very successful year as our commitment to core pricing, disciplined growth, and controlling cost generated our highest adjusted earnings per share ever. We grew our income from operations and operating EBITDA and achieved the highest operating margins we've seen since 2010.

We generated earnings per share of $2.61 in spite of the divestitures of our Wheelabrator, Puerto Rico and Eastern Canada operations and headwinds from recycling commodity prices and foreign currency translation.

In 2015, we saw the execution of pricing, productivity and growth strategy strengthen our foundation in a way that will lead to continued growth in 2016 and beyond.

During 2015, our strong free cash flow allowed us to return almost $1.3 billion to shareholders in dividends and share repurchases. We've seen solid growth in cash generation in our business over the last few years, and we're confident that our free cash flow has reached a new base of at least $1.4 billion per year, up from the $1.2 billion to $1.3 billion level that has characterized the last several years.

As a result of confidence in our cash flow, our board decided to increase the dividend by 6.5% in 2016 and to authorize up to $1 billion of share repurchases. We acquired Deffenbaugh and several small solid waste companies in 2015. And in early 2016, we closed on the acquisition of Southern Waste Systems or SWS. The acquisition of SWS and other smaller tuck-ins we expect to close in 2016 should generate between $50 million and $75 million of operating EBITDA in 2016.

As we previously mentioned, the operating EBITDA from these acquisitions won't translate into earnings per share in 2016 because we'll have corresponding intangible amortization. However, the transactions will generate cash flow in 2016 and incremental earnings starting in the second half of 2017.

Looking at our operations in 2015, our pricing programs continued to drive earnings growth and margin expansion. When we gave initial guidance for 2015, we targeted core price of 3.8% for the full year, and we exceeded that target. For the full year, our collection and disposal core price was 4.2% with yield of 1.8%. We've now seen eight consecutive quarters with core price of 4% or greater. For the full year, core price in the commercial line of business was 6.1%, industrial was 8.6% and the landfill line of business was 2.4%.

For 2016, we expect core price to be about 4% and total revenue growth from yield should again be in the range of 1.5% to 2%. Our pricing themes continue to perform at high levels, and we'll continue our focus on price in 2016. But pricing excellence is not a one-year project at Waste Management, it's a way of life. We must get pricing to keep up with inflation, and we have the tools and the people to do that indefinitely.

Our traditional solid waste volumes which include our collection, transfer and landfill volumes were a negative 0.5% for the full year. But importantly, we saw positive trends throughout 2015, with traditional solid waste volumes improving sequentially each quarter, culminating in a slightly positive fourth quarter. Although commercial and residential were still negative, we continue to see positive momentum in those volumes, particularly in our commercial line of business. In that line, we have seen six consecutive quarters in which the rate of decline has improved. And commercial collection was down only 0.7% in the fourth quarter versus down 1.3% in the third quarter. Our continued focus on disciplined volume growth and customer service is paying dividends.

Our churn was 10.1% for the full year, the lowest level since 2012. In the fourth quarter, it was 9%; the lowest level since 2002. And we did all of this while reducing rollbacks in 2015. So, we're keeping our customers through improved service, not price concessions.

We saw our new business exceed our lost business for the eighth consecutive quarter. These are all positive signs that our volumes are headed in the right direction without resorting to lowering prices. Total company volume which includes lower margin recycling, brokered, and non-solid waste volume decline 1.6% for the full year, with the fourth quarter being the best quarter of the year, declining only 0.9%.

For 2016, we expect that traditional solid waste volumes will be positive. However, we do not see a recovery in recycling and non-solid waste volumes which will lead to overall volumes being about flat. Of course, some of the recycling volume that we lose is a direct result of our efforts to shed unprofitable volume. So, losing certain volumes in the recycling business is not such a bad thing. And we expect that overall volumes will turn positive in the second half of the year.

As you can see, the price and volume trade-off continues to be very positive. For the full year, the company's income from operations grew 4.6%. And our income from operations margin grew 120 basis points. In addition, operating EBITDA increased about 3%. And operating EBITDA margin increased 130 basis points, to 26.5%.

Our solid EPS growth was achieved despite a $0.09 per share decline from our energy and environmental services business, which has been affected by the sharp decrease in market prices for oil, a negative $0.04 impact from foreign currency translation, and a negative $0.04 impact from recycling operations.

Looking more closely at recycling, we made significant progress improving operating costs and on renegotiating contractual terms with our customers, including exiting some unprofitable contracts. Our recycling employees worked hard and reduced gross operating expenses by 15%, and changed contracts where possible to allow us to charge a processing fee where we previously paid rebates. Without these operational contractual improvements, we had estimated that the recycling impact could be as much as a negative $0.08 to $0.10 per share ,as average commodity recycling prices declined 17.5% in 2015. However, the operational improvements lessened that negative impact to negative $0.04 per share.

On the recycling commodity price front, 2016 has seen a continuation of the downward slide, and current prices are down $20 per ton, or 23%, from January of 2015. These are levels that we've not seen in nearly seven years, since the 2009 recession. If we do not see a normal seasonal uptick in commodity prices and prices remain at January levels, this would be a $0.02 to $0.03 headwind in 2016. We're committed to recycling, and we'll continue to work to change the business model to generate revenue that covers our processing costs and drive out operating expenses so that the business is sustainable over the long term.

Turning to free cash flow. Our strong operating results, coupled with continued discipline in capital spending, allowed us to generate $1.41 billion of free cash flow in 2015. Included in that free cash flow number was a $150 million prepayment of 2016 cash taxes. We had mentioned on the third quarter conference call that we'd make this type of prepayment, given that our cash flow is going to be above the high end of our $1.5 billion range. Consequently, we increased our 2016 guidance to between $1.5 billion and $1.6 billion.

So, when we look at our success in 2015 and our guidance for 2016, we look at three things. First is price. In 2015, we exceeded our goals. And for 2016, it's pretty much locked and loaded and already in process. So, we're very confident we'll meet our 4% target in 2016.

Second is costs. Again, we did well in 2015. And we believe there's plenty of room to improve in 2016. So, again, we're very confident. And finally, volumes. In 2014 and 2015, we built momentum. And for the first time in many years, I'm very confident that we'll see our volumes turn positive toward the end of 2016.

So, we go into 2016 with a lot of confidence, and look forward to another strong year. We expect that our continued execution of these strategic priorities will drive 2016 adjusted EPS to between $2.74 and $2.79. And, we expect operating EBITDA to grow at the fastest rate in 10 years, up 5% to $3.6 billion. But we can't do it without our people. I'd be remiss if I didn't thank them for their hard work and professionalism. And I know they will once again prove their value in 2016.

I'll now turn the call over to Jim to discuss our fourth quarter results and our 2016 outlook in more detail.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Thank you, David. We produced solid growth in earnings and cash flow in 2015. And it would've been even better when you realize that recycling is down $0.30 per share from its peak. That is why we need to maintain our focus on fixing recycling. As David said, we're committed to recycling. And for the last two years, we've been working to improve our recycling business. We want to see recycling thrive, because it's the right thing for our environment and it's the right thing for our customers. We just want to make sure it's the right thing for our shareholders.

We performed well in 2015, navigating the recycling headwinds, which I'll discuss in a moment. But we're in the fourth year of low recycling commodity prices, and we are currently seeing these commodity prices at the lowest levels we've seen since the 2009 recession.

Since there's little we can do to affect global market conditions, we're doubling down on those areas we can control. We've tightened our belt on investments. We're driving operational efficiencies. We're working with our community partners to reduce the amount of expensive contamination at our MRFs. We're optimizing our MRF network and we're tackling the slow, difficult, but necessary process of changing the terms of our contracts. Together, these actions produce real, measurable results in 2015, and are expected to make recycling profitable over the long term.

Initially, we expected the headwind in the recycling line of business would be between $0.08 and $0.10 of EPS. However, the full-year impact ended up only $0.04 negative. That was not driven by an improvement in commodity prices, but was due to the actions that we took to improve recycling operations.

Recycling was one of several market factors we overcame in 2015. In addition to the $0.04 impact from recycling, we had a $0.09 per share headwind related to low demand for energy and environmental services, a $0.04 impact from foreign currency changes. Despite these market pressures, our EPS grew more than 13%, to $2.61 per share in 2015.

We overcame those headwinds through cost controls and strong growth in our traditional solid waste business, and those efforts will continue into 2016.

At the beginning of 2015, we expected to see a $60 million improvement in SG&A costs when compared to 2014. I'm pleased with our 2015 results, as SG&A cost for the full year improved $68 million to $1.34 billion, and improved as a percent of revenue by 20 basis points, to 10.4%. For the fourth quarter, SG&A costs were $343 million, an improvement of $27 million compared to 2014. As a percent of revenue, SG&A costs improved 70 basis points, to 10.6%.

For 2016, we will continue to focus on managing anticipated wage increases, cost inflation, and incremental SG&A brought on from the acquisitions. But despite these increases, we anticipate that SG&A costs should be flat when compared to 2015.

Turning to cash flow. For the full year, we generated $1.41 billion of free cash flow. As we mentioned on our third quarter earnings call, we expected we would have a strong year of free cash flow and that we would likely make tax payments, assuming the tax extenders were not going to be enacted. Therefore, in the fourth quarter, we prepaid $150 million of 2016 cash taxes.

For 2016, we now anticipate between $60 million and $70 million of cash tax savings from the impact of bonus depreciation, which was reinstated by Congress at the 11th hour. During 2016, we expect capital expenditures of approximately $1.3 billion to $1.4 billion. In 2016, the impacts of organic earnings growth, bonus depreciation, acquisitions, and higher capital spending should drive free cash flow to between $1.5 billion and $1.6 billion. In the fourth quarter, we returned $172 million to our shareholders through our dividends.

For the full year 2015, we returned about $1.3 billion to our shareholders, consisting of $695 million in dividends and share repurchases of $600 million. Our board has indicated its intention to increase dividends in 2016 by 6.5% to $1.64 per share on an annual basis and this is the 13th consecutive year of increased dividends. In 2016, our anticipated annual dividends will result in approximately $730 million being returned to our shareholders.

We expect to spend around $100 million to $200 million on tuck-in acquisitions in 2016 with the remainder of free cash flow allocated to share repurchases. We have authorization from our board of directors to repurchase $1 billion of our shares. We've already repurchased $150 million and expect to spend an additional $500 million for the full year.

Fourth quarter revenues were $3.25 billion. We saw a $59 million increase in revenues from acquisitions and a $50 million increase in our traditional solid waste business due to the combined impacts of pricing and volume.

We saw an overall revenue decline of $163 million from divestitures, $43 million in lower fuel surcharge revenues, a $34 million decline from lower recycling revenues, and a $33 million decline in foreign currency.

Looking at internal revenue growth. For the total company in the fourth quarter, our collection and disposal core price was 4.2% and yield was 1.7%, with total volumes declining 0.9%. This led to total company income from operations growing $42 million, operating income margin expanding 150 basis points to 17.7%, operating EBITDA growing $37 million, and operating EBITDA margin growing 150 basis points to 27%. For the full year, income from operations grew $97 million. Operating income margin expanded 120 basis points, and operating EBITDA grew $86 million, and operating EBITDA margin grew 130 basis points to 26.5%.

Our collection lines of business continue to see the benefits of our disciplined pricing programs in the fourth quarter. Our commercial core price was 5.8% with yield of 2.9%. Our industrial core price was 8.7% with yield of 2.3%, and residential achieved 2.2% core price and 1.5% yield. Overall, collection core price was 5.3% and yield was 2.2%.

Our focus on customer service which helped reduce our churn and disciplined growth also benefited our volume trends in the fourth quarter as volume declined only 0.6%. The volume change was a 90-basis point improvement sequentially from the third quarter and a 190-basis point improvement from the fourth quarter of 2014. This core price and volume led to operating EBITDA growing $11.7 million and margin expanding 30 basis points.

In the landfill line of business, we saw the benefits of both positive volume and positive yield in the fourth quarter just as we have all year. We saw same-store average MSW rates increase year-over-year by 2.4% from Q4 of 2014. This is the 11th consecutive quarter of year-over-year MSW rate increases.

Total landfill volumes increased 0.5%, MSW volumes grew by 11.1%, and C&D volume grew 15.8%, while special waste and revenue generated cover volumes declined 7.4%. The special waste decline was predominantly driven by the decline in our energy services business. The positive volume and yield led to income from operations growing $15 million, margins are growing 160 basis points, operating EBITDA increasing $14 million, and operating EBITDA margins increasing 120 basis points.

Moving now to operating expenses. These expenses improved by $50 million in the fourth quarter and as a percent of revenue improved 80 basis points to 62.4%. For the full year, operating expenses improved $328 million and as a percent of revenue improved 100 basis points to 63.1%. In 2015, our focus on improving operating costs saw a significant traction and we expect that to continue into 2016. For the full year, we saw improvements of $187 million in fuel costs, $102 million in cost of goods sold, and $35 million in labor costs as we continue to see the benefits from our routing and logistics program.

Finally, looking at our other financial metrics. At the end of the fourth quarter, our debt-to-EBITDA ratio was 2.66 and our weighted average cost of debt was 4.32%. A floating rate portion of our total debt portfolio was 8% at the end of the quarter.

The effective tax rate was approximately 32.4% in the fourth quarter and 32.3% for the full year. Taxes were a $0.01 headwind to EPS in the fourth quarter.

In conclusion, 2015 was a very good year for waste management. As our employees did a great job on focusing on price, disciplined growth and cost controls. I want to say thank you to our employees for their hard work in delivering a successful 2015 and positioning us to continue that into 2016. We're excited about continued growth from 2016 and beyond. And with that, Karnethia, let's open the line for questions.

Question-and-Answer Session

Operator

Your first question is from Scott Levine with Imperial Capital.

Scott Justin Levine - Imperial Capital LLC

Good morning, guys.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Good morning, Scott.

David P. Steiner - President, Chief Executive Officer & Director

Hi, Scott.

Scott Justin Levine - Imperial Capital LLC

So, it seems like steady-as-she-goes in terms of the organic growth trends, that the pricing environment is pretty healthy, that the volume environment is generally improving, and is expected to improve albeit gradually with volumes inflecting positive by the end of this year. But anything surprising, either to the positive or the negative on the macro or the industry front either geographically or relative to your expectations – or really, are things just kind of continuing to improve at a gradual pace, and there is no real change in the operating environment in general?

David P. Steiner - President, Chief Executive Officer & Director

Scott, when I look at the business, you can sort of say, I think your right, the growth is fairly muted from the economy. But you can pretty much say, the business is firing on all cylinders save two areas, and that's recycling and energy services. And I think we all know what the macroenvironments are for that. I mean, it's low commodity prices, not just oil but cardboard and plastics. So, I think you hit the nail in the head. It's steady-as-she-goes. We continue to see the other lines of business doing very well and we don't expect that to end in 2016.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Scott, I would say that the only thing that was surprising was kind of a positive, we weren't surprised obviously by the headwinds with recycling or energy services. But we were pleasantly surprised, when you look at the construction business, I mentioned we were up over 15% in C&D waste stream. And that really, to us, is kind of a foreshadowing of good things there in 2016.

Scott Justin Levine - Imperial Capital LLC

Understood. And then, it sounds like you're baking in an expectation here of $50 million to $75 million EBITDA. You've been talking about this for a while. Could you tell us how – how much of this have you closed on with the SWS acquisition? How much remains to be closed? And maybe a little bit more commentary regarding the M&A landscape in general and whether we may see some upside to your $100 million or $200 million spend or valuations in the marketplace, a little bit more color there.

David P. Steiner - President, Chief Executive Officer & Director

Yeah. I would say 80% to 90% of it is locked in with SWS. I mean, that's going to be the big acquisition that we do in 2016. When I look at acquisitions, we've done RCI in Montreal. We did Deffenbaugh in Kansas City. And now, we've done SWS in South Florida. And those were spectacular acquisitions for us because they're a fairly large amount of revenue but they're also straight tuck-ins into our business.

And so, we know exactly how to do them. We know exactly how to get the dollars out. It takes a little bit of time but we know exactly how to do them. So the more of those that we can do, the better. We thought there might be a few more of those in the pipeline but those, call them, those $400 million to $500 million transactions, we really don't see a lot of those on the near horizon right now. So, I think 2016 will be a year where it's mostly driven by tuck-in acquisitions. But again, we'd love to do some larger acquisitions like those three that we did in Montreal, Kansas City and South Florida.

Pricing, I don't think it's changed dramatically. We've said it many times, we generally pay a little bit lower price for those smaller tuck-ins and it's because you can pay a little bit higher price when you get that bigger bulk of business like we did down at SWS although even with SWS, on a post-synergy basis, we'll end up paying sort of 6 to 7 times EBITDA.

Scott Justin Levine - Imperial Capital LLC

Got it. And as a follow-on to that, assuming – is there any change in your interest level in energy and industrial and – or if we get a floor in commodity prices on the energy side, could we see your interest pick up as 2016 plays out or you're still focused predominantly on solid waste?

David P. Steiner - President, Chief Executive Officer & Director

Yeah. We're focused predominantly on solid waste and I think we've said it the last two conference calls which is, look, long-term I think energy services will be a great business. But we're not out there looking for businesses. I think it's going to be a prolonged, flattening of oil prices. And so – and energy services, if we buy something in energy services, it would be opportunistic. We're not actively out searching for businesses in that line of business.

Scott Justin Levine - Imperial Capital LLC

Got it. Thanks, David.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Corey Greendale with First Analysis.

Corey Greendale - First Analysis Securities Corp.

Hey. Good morning, everyone.

David P. Steiner - President, Chief Executive Officer & Director

Corey.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Hi, Corey.

Corey Greendale - First Analysis Securities Corp.

So, two questions. First, Jim, I was hoping – Jim Fish, I was hoping you could help bridge the cash flow from ops guidance from 2015 and 2016. I calculate your guiding to a $300 million to $400 million increase EBITDA, your guiding to $160 million, so just what's accounting for the rest of the increase?

James C. Fish - Chief Financial Officer & Executive Vice President

Yeah, so when we look at cash flow from ops or if I look at free cash flow because I want to include in there, CapEx, if I talk about free cash flow – and if that doesn't answer your question, let me know, but if I talk about free cash flow for 2016, I have a starting point of let's call it $1.41 billion from this year. And then I'm adding in EBITDA growth. You mentioned $160 million, we're kind of calling it $170 million in EBITDA growth year-over-year which includes – that includes organic growth, that includes some of the benefit of acquisitions. I add in the impact of bonus depreciation which I mentioned was let's call it $70 million. And then our CapEx is going to be a bit higher this year. I mentioned the $1.3 billion to $1.4 billion range, so back out $100 million in added CapEx, I arrive in the middle of that range of $1.5 billion to $1.6 billion.

And keep in mind there, Corey, that the prepayments that we made in cash taxes is really offset by the benefit we got from the Q1 2015 debt transaction. So, those two kind of offset each other so that walk-forward works without a cash tax, the cash tax difference.

Corey Greendale - First Analysis Securities Corp.

That did it for my question. Thank you. And one clarification. I think you've said this, but the EBITDA that you're expecting to get from acquisitions, the number that you gave, is that only from Southern and new acquisitions? So, in other words, you're not including rollover effect of acquisitions in 2015?

David P. Steiner - President, Chief Executive Officer & Director

Yeah, there's a small rollover effect from 2015 but the bulk of it would be the SWS and the tuck-ins we do in 2016.

Corey Greendale - First Analysis Securities Corp.

Okay. Then next question, you addressed the environment in general when you were answering Scott's questions. But given that we have a lower – a low CPI environment, you're committed to continuing, like you said, pricing is not a temporary thing, it's the culture. I guess the question is how confident are you that you won't be pushing away more volumes as the year goes on given that CPI will be quite low?

David P. Steiner - President, Chief Executive Officer & Director

Yeah. Well, look, we've done it the last three years consecutively. We've seen our churn rate come down while we've maintained that core price at 4% plus. And so, look, it really comes down to making sure that you service your customer. I mean, if your customer is happy, they completely understand that our costs go up every year, and you've got to get those price increases. And we've always said that it's a fairly small portion of our customers' overall cost structure.

So, getting that price increase to maintain inflation plus really hasn't been difficult as long as you can maintain the service levels to the customers. And so, that's really where we're focused this year. We know how to get the 4% core price. We've got those plans, like I said, locked, loaded, and we're already executing them. So, we know we can do that.

The key is having that great customer service which allows you to keep that low churn rate, also keep price rollbacks down and get that positive core price. And so, like I say, we've got it sort of clicking on all cylinders, but we can always do better.

Corey Greendale - First Analysis Securities Corp.

Great. And then on the kind of competitive and acquisition front, David, I'd just love to get your thoughts on whether the proposed Connections acquisition of Progressive has any impact on those markets and also whether you might be interested in some of the potential slots that may be coming out from that?

David P. Steiner - President, Chief Executive Officer & Director

Yeah. Look, I think Ron did a spectacular job in picking up that business and everywhere that we compete with Waste Connections, they are a tough competitor but they are a fair competitor, and so we certainly welcome them into the markets. I don't know how to say welcome in Canadian but we welcome them into the markets.

But the other thing is I would love – I'm glad you brought it up. I owe Ron a phone call to let him know that to the extent that they have to get rid of any business that we would certainly be interested in buying any pieces of those business that we can buy. So I'll make sure to give him a call today and let him know that.

Corey Greendale - First Analysis Securities Corp.

Great. Let me know if you need his phone number, I can send that to you. And then just one last quick one, if you don't mind. I'm whipsawing back to Jim Fish. Given the EBITDA guidance, I'm coming out at a slightly different place on EPS. I was hoping you might be able to give us some sense of what you're assuming on interest expense and share repurchases?

James C. Fish - Chief Financial Officer & Executive Vice President

Interest expense will be up slightly. We finished the year at $384 million in interest – cash interest. They will be up slightly, not a lot, maybe call it $5 million and then share repurchase, look, we said that we'd probably repurchase – we've already done $150 million. We said we'll probably do another $500 million on top of that for a total of $650 million, which kind of approximates what we bought last year. We bought $600 million last year. We have authorization for $1 billion, probably won't spend the full $1 billion in 2016.

Corey Greendale - First Analysis Securities Corp.

Got it. Okay. That actually moves me in the wrong – is there anything going on in the equity income or loss line, or anything else below the line that's changing meaningfully from 2015?

James C. Fish - Chief Financial Officer & Executive Vice President

No. Not that I can think of. Maybe we can reconcile it for you. If I look at EPS, I mean, that's what you're concerned about, right, is EPS?

Corey Greendale - First Analysis Securities Corp.

Yes.

James C. Fish - Chief Financial Officer & Executive Vice President

If I look at EPS, from $2.47 to $2.61, we had divestitures that were worth $0.18, so I'm backing those out. And then, we had – and I'm reconciling 2014 to 2015 for you here. But then, we had shares and interest. We had traditional solid waste growth of $0.08. We had some unusual items. Specifically, our energy services business was $0.09. And then, when I look at moving from $2.61 up to our range of $2.75 to $2.79, I'm really adding in the kind of our traditional solid waste growth that we expect, and we talked about on the EBITDA line. So, hopefully that helps.

Corey Greendale - First Analysis Securities Corp.

Yeah. That's fine. I'll let you move on. If I come up with a question that I could ask otherwise, I will follow up offline. Thanks, guys. Thanks for the time.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Tyler Brown with Raymond James.

Patrick Tyler Brown - Raymond James & Associates, Inc.

Hey. Good morning, guys.

David P. Steiner - President, Chief Executive Officer & Director

Good morning.

Patrick Tyler Brown - Raymond James & Associates, Inc.

Hey, David. Just want to dig in a little bit more on the relationship between core price and yield. So, if we go back and look over the last few quarters, including Q4, it looks like the spread between core price and average yields actually widened out. And at least from an outside perspective, it just looks like you're keeping less and less of that core price increase.

Can you guys talk a little bit about that relationship and why that spread is widening out? I mean, it sounds like churn is actually trending well, and the gap between new and lost business isn't widening. So, is it mix or what's going on there?

David P. Steiner - President, Chief Executive Officer & Director

Yeah, you hit the nail on the head with mix. The reason we moved to core price is because core price is really an indicator of the price increases that we put across our current customer base. To go from core price to yield, you then put in – because we do it on a per-unit basis, you then come in to a lot of things like mix. And so, the biggest thing that we think drove the disparity between the core price and yield was the fact that our energy services business was down fairly dramatically, and those are very high-priced hauls.

Compared to – if you look at an energy service haul compared to an industrial container at a shopping mall, the price per haul difference is dramatic. And so, the fact that energy services dropped off, as we said, $0.09 for the year, when you saw that dramatic drop-off in energy services, you lost a lot of those very high-priced pulls, and that's where the biggest chunk of the disparity between core price and yield comes in.

Patrick Tyler Brown - Raymond James & Associates, Inc.

Okay. Yeah. No. That's very helpful. And then, Jim Fish, just can you help us out a little bit on cash taxes? You got lots of moving pieces here. So, first off, just simply, what was cash taxes paid in 2015? And then what is exactly contemplated in the guidance, just the total dollar number, just ballpark?

James C. Fish - Chief Financial Officer & Executive Vice President

2015 was $434 million. So, if you assume that we've got the offsets for 2016, 2016 is going to look like kind of that $433 million. We'll get a benefit of about $70 million from bonus depreciation. And then a piece of kind of incremental taxes on earnings gets us to a cash tax figure of around $400 million, is our expectation for 2016.

Patrick Tyler Brown - Raymond James & Associates, Inc.

Okay. Good. That actually answered my next question, so I'll kind of move on here. But just David, really quick, can you guys talk about where you are on the coal ash front? And is this – well, first off, how much did you move in 2015, if any? And then, is this a key driver in your confidence in back half volume growth?

James E. Trevathan - Chief Operating Officer & Executive Vice President

Well, so, we're seeing – it was a piece of our growth in 2015, not a huge piece. We've got one customer that has started with us. We've got three different plants that we're working with them on. Really, one of them was started in June, the other one started kind of November, December, and then the third will start in 2016. So, not a huge impact for us. And we're kind of seeing the public utilities move at varying paces here, in terms of remediation on that side of their business.

Recall there is this – there's another side of their business, which is the perpetuity. And so, we can use either on-site management for their continuing needs, we can manage it off site through our landfills, or we can offer them beneficial reuse. So, we're equipped to handle all three. We think that will ramp up in 2016, but not a huge impact in 2015.

Patrick Tyler Brown - Raymond James & Associates, Inc.

Okay. Okay, good. And then, just, Jim, lastly. How much did you pay for SWS? Just what will we see on the cash flow statement in Q1?

James E. Trevathan - Chief Operating Officer & Executive Vice President

We paid $516 million for SWS.

Patrick Tyler Brown - Raymond James & Associates, Inc.

Okay. Perfect. Thanks, guys.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Jeff Volshteyn with JPMorgan.

Jeffrey Y. Volshteyn - JPMorgan Securities LLC

I wanted to ask around the industrial side of the business, industrial waste space doing well. What I wanted to find out is just kind of an update on how much of your business is directly linked to the industrial economy? And when you look at the portions of the industrial (41:21) perm business, temp business, what do you see in 2016?

James E. Trevathan - Chief Operating Officer & Executive Vice President

Well, it's interesting when you look at our industrial. Our industrial line of business, as we look at it, includes a couple of different business types. It includes large retailers, it includes manufacturing and industrial. It includes construction, and it includes energy services. And those really were – there was a wide spectrum there. Construction, as I mentioned earlier, really finished the year on a high note. So, we're very happy with that, and it looks like it's going to do well going forward. The large retailers were pretty solid, as was manufacturing and industrial. Looks like – industrial production figures came out today, and looks like they're decent, and that's kind of what we saw as well, pretty solid in manufacturing and industrial.

The one real soft spot, and you'll hear it several times today, was energy services, and it got worse throughout the year. So, we were down 32% in our energy services business, albeit on a kind of a small base there, but down 32%, and down 45% in the fourth quarter. And looking through that kind of small lens, we don't see energy services getting much better in 2016.

But overall, if you want to think about how we talk about industrial, it was – it more than compensated for the downturn in energy services.

David P. Steiner - President, Chief Executive Officer & Director

I think everybody gets concerned that there's going to be some kind of industrial recession. I mean, look, in our business, what you had happen last year was obviously, you had the inventory build and then working off the inventory. And that's what I think drove everybody to say, oh, gosh, what's going on in the manufacturing sector. As Jim pointed out, you saw some good numbers from it today.

But when they build up the inventory and then they work down the inventory, they don't shut down their plants. They still operate their plants. And so that really just doesn't have that big of an effect on us. It doesn't have an effect on us until they shut down the plants. And I don't think anyone's seeing a shutdown of plants. I think they're seeing a little bit of a slowdown of the plants. And so when we look at our industrial waste, it really isn't going to be affected by the manufacturing and industrial space.

And then the final piece is that a lot of the low energy prices are a big boon to a lot of the manufacturing and industrial customers that we have in the chemical corridor all the way from Beaumont, Texas up through the Midwest. And so, we see the manufacturing and industrial volumes actually being very strong. As Jim said, we've got a wide spectrum from extremely strong construction to weak on the energy services side. And manufacturing and industrial I'd say would come in on sort of the slightly positive side of that spectrum. So, we don't see that particularly slowing in 2016. And we expect industrial volumes to continue to be positive in 2016.

Jeffrey Y. Volshteyn - JPMorgan Securities LLC

That's very helpful. Just following up on the commentary, I think from the last quarter. You talked about some situations with shortage of drivers in the industrial side of the business. Is that a material headwind heading into 2016?

James E. Trevathan - Chief Operating Officer & Executive Vice President

No, I'll jump in, Jeff. It is a headwind, but it's a weakened headwind. We are doing much better in that regard. The oil field services decline in 2015 has helped us in that regard in those markets where that kind of business exist as drivers have become more available. It's still in some of the larger – the higher growth markets, it's an issue for us, but we're working through it much better in late 2015, and then we expect too in 2016 better than in that 2013-2014 period when the oil field service business was booming. We'll manage right through it and we'll continue to grow our business on that industrial side with new drivers.

David P. Steiner - President, Chief Executive Officer & Director

But look, it's a good problem to have, right? I mean, that tells you there's strong demand out there. We'll take that problem six days to Sunday rather than the alternative.

Jeffrey Y. Volshteyn - JPMorgan Securities LLC

One more question for me, if I may. On the CapEx side of the business, looking into 2016, are there any sizable differences in sort of in the buckets of investments compared to 2015?

James C. Fish - Chief Financial Officer & Executive Vice President

No, not anything sizable. We'll spend a little more on fleet capital, probably $20 million more on fleet capital. We've got about $15 million that is related to Deffenbaugh and SWS acquisition that we'll spend. And part of the reason we were a little lower than our guidance back at the end of Q3 in CapEx for 2015 was that we had some CapEx that was accrued and the cash didn't actually go out the door until Q1. So, we'll have a little bit of carryover and that's really what gets us from that $1.23 billion CapEx number from 2015, up to kind of the range of $1.3 billion to $1.4 billion.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Jim, maybe just a little more color around the fleet side of our business. Our supply chain folks and our field people have worked really well together. In 2015, for example, we purchased 12% more trucks than we did in 2015, but for the same total dollars as we expended in 2014. In 2015, we bought 1,124 trucks, about 11% average reduced price per truck than 2014. So, we're doing some standardization around the fleet. It's helped us in that regard and some commitments to our suppliers that helped us with that reduction. In 2016, we'll buy 1,234 trucks, according to the current plan. And it's about 10% more than 2015, but we'll only spend about 4% more in dollars than we did in 2015. So, we're making real progress there and we're investing in the fleet. But we're just doing it more efficiently.

Jeffrey Y. Volshteyn - JPMorgan Securities LLC

That's very helpful. Last one from me, I promise. What is the impact of the one – or the leap day in the first quarter?

James C. Fish - Chief Financial Officer & Executive Vice President

The impact on what?

David P. Steiner - President, Chief Executive Officer & Director

Leap day.

Jeffrey Y. Volshteyn - JPMorgan Securities LLC

Leap day. One extra day.

David P. Steiner - President, Chief Executive Officer & Director

Yeah. We actually have one extra day total in the quarter. We had one fewer in January, we have one extra in both February and March. And, theoretically, that extra workday probably costs us a little bit of money, because our cost structure is a little bit higher than the additional revenue that we'd get. But it shouldn't have a material effect on the quarter.

Jeffrey Y. Volshteyn - JPMorgan Securities LLC

Okay. Thank you very much.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Michael Hoffman with Stifel.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Thank you very much, David, Jim and Jim for taking my questions. Jim Fish, on the free cash, if you were to pull out cash taxes entirely and look back over a trend, how would you characterize the growth rate of your free cash ex the variability any given year of cash taxes, what's happening operationally before the tax impact?

James C. Fish - Chief Financial Officer & Executive Vice President

I guess I would focus on EBITDA for that question, Michael, because really, that's where – that's the biggest component and that's where we spend most of our time, is on EBITDA. And we saw EBITDA grow nicely last year, kind of in that 3% range, and we see it's – we see it replicating that again organically and then we'll have some EBITDA growth from these acquisitions in 2016.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. With that said, then if I looked at your expectation for the $3.6 billion in 2016, what is the underlying margin assumption in the EBIT and the EBITDA?

James C. Fish - Chief Financial Officer & Executive Vice President

So, EBITDA would – you know, look, if you – there's always the question of what happens to the top line. If we don't have these kind of top line impacts that are kind of out of our control such as foreign currency and fuel surcharge, if you assume the top line doesn't have those, we'd expect to see EBITDA margins improved somewhere between 50 and 100 basis points.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. And EBIT, what about the EBIT margin?

James C. Fish - Chief Financial Officer & Executive Vice President

I don't have a number for your there, Michael. I'll have to get back to you on that.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. Behind that question is, does D&A stay flat on a percent of revenues or is it up or down with the mix shifts that are going on?

James C. Fish - Chief Financial Officer & Executive Vice President

Yes. It should stay pretty flat on a percent of revenue basis.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. And then when I think about that question that's been asked a couple different ways, what is your share count in your assumption for $2.75 to $2.79?

James C. Fish - Chief Financial Officer & Executive Vice President

Share count at the end of last year was 455 million shares and in our plan, we've got 445 million shares.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. And then if you did spend $1 billion, it would imply that you would borrow money to do that. That's the right interpretation. Correct?

James C. Fish - Chief Financial Officer & Executive Vice President

I guess...

David P. Steiner - President, Chief Executive Officer & Director

It depends how the cash plays out during the year and then when you buy the shares, right? And so, what we've said is that we're going to basically spend – we aren't necessarily going to spend the whole $1 billion. We will spend the difference between dividends and what we do in acquisitions from – subtract that from the total cash flow and the remainder will go to the stock buyback.

And so, we're sort of planning on the $600 million type of dollars on the share buyback. If we go above that, we'd either have to generate more cash or have less capital in the year, or we'd have to borrow it. But right now, when we draw down on our revolver, we're drawing down at 1%. Our balance sheet at 2.66 times is in great condition. So, we don't have any intention to borrow, to buy shares. But certainly, we have the ability to do it.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Well, I guess where I was coming from on that, I don't necessarily think it's a bad thing because you're delevering naturally and there seems to be logic in leverage in a 2.5 times to 3 times just from a cash tax planning standpoint. The rate of the improvement you're delevering pretty quickly.

David P. Steiner - President, Chief Executive Officer & Director

Absolutely.

James C. Fish - Chief Financial Officer & Executive Vice President

Yeah. I mean, Michael, if you look at our – if you look at free cash flow and you just take the middle of the range of $1.55 billion and back out dividends of $730 million, let's back out – we've kind of said $100 million to $200 million in tuck-ins, so let's back out $150 million for that, that gives you $670 million. That's kind of right where we've discussed today would be share repurchase.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. All right. And then the one sort of in the weeds question around the industrial side, is you do operate five hazardous waste landfills, what's the trend been volume-wise there?

James E. Trevathan - Chief Operating Officer & Executive Vice President

Michael, Jim Trevathan. It's been as we ended the year and as you saw some of the petrochemical plants gearing up some with a low – their low feedstock cost, it's been okay. We've done fine at both Emelle in Alabama, Lake Charles in Louisiana. Kettleman has got the new permit and online and adding some volume.

So, overall, that business is doing well for us. It's not as you know a huge part of our total revenue, but it's an important part because it differentiates us from those large – four of those large customers with capability to handle everything from their trash and recycling to their hazardous waste. And they like our balance sheet, as we just talked about. And our capabilities are full for them. So, it's been a – it's a good part of our company and we expect to grow it.

David P. Steiner - President, Chief Executive Officer & Director

It has been very nice for us, Michael. And, frankly, if I look at the various pieces of businesses and think, can they get better or worse? This is one that I think can get better, both organically just because of the growth in the volumes. But we can also extend the reach of these landfills. Right now, we've got fairly limited reach without transfer capabilities. And over time, if we can improve those transfer capabilities, we can extend the reach of our hazardous landfills, and both grow volumes because we see growth in overall volumes but also because we can extend our reach and take volumes out of further-away geographies.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Yeah, and Michael, an example of that, of our commitment to that business is in the fourth quarter, we did a small tuck-in kind of transaction and acquisition in California that helps us with internalize some volume at that new Kettleman-permitted space. So, we are committed to that business, to growing it and looking for opportunities in that regard.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. And then, Jim Trevathan, while I've got you, if we're 50 to 100 basis point margin improvement, you're getting 20 basis points out of G&A, per Jim Fish, the rest has got to come from ops. Some of it's fuel because they clearly – they've got a favorable trend. But where would I look in the line items to see that incremental improvement coming from?

David P. Steiner - President, Chief Executive Officer & Director

One area, Michael, is labor. If you look at all three collection lines of business in 2015, we were positive in efficiency in all three, with obviously a couple of them still negative in volume. That's one excellent indication. If you look at those three lines of business, collection lines are a cost per unit business, all three of them, are in that 1% range and with inflation, just driver labor cost in the 2%, 2.5% range, that's a pretty good number, and you see that in our labor cost improvement.

We rolled out our SDO initiative across all 17 areas, service delivery optimization. We're focused on two things in that regard. Let's sustain it where we have it working well and let's improve it. Let's find best practices as areas have implemented it now for a couple of years, and we're looking for new ways to utilize some of the logistics and the technology that our corporate operating team is providing us to get more labor cost out of that and continue to improve on the efficiency.

Michael Hoffman - Stifel, Nicolaus & Co., Inc.

Okay. Thank you very much.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

Next question is from Joe Box with KeyBanc Capital Markets.

Sean J. Egan - KeyBanc Capital Markets, Inc.

Hey. Good morning, gentlemen. It's Sean Egan on for Joe Box.

David P. Steiner - President, Chief Executive Officer & Director

Good morning.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Hi, Sean.

Sean J. Egan - KeyBanc Capital Markets, Inc.

I wanted to dig in a little bit into your pricing guidance for 2016. Looking at that 4% versus the 4.2% posted in 2015, is that sequentially lower simply due to lapping more difficult comparisons? Is it conservatism on your part? Any color there would be appreciated.

David P. Steiner - President, Chief Executive Officer & Director

Yeah. Look, 4% has sort of have been our target for the last three to four years. And so, we want to maintain that target. We obviously overshot that target in 2015. I'm virtually certain we'll get that 4% in 2016. If we were going to not hit that target, the question is would it be lower or higher than that target. I'm also very confident that if we miss the target, we're going to miss on the high side not on the low side.

James C. Fish - Chief Financial Officer & Executive Vice President

But I don't think there's anything to read into the difference between 4.2% and 4.0%.

Sean J. Egan - KeyBanc Capital Markets, Inc.

Great. Thank you. And then kind of piggybacking on that with respect to yield, outside of CPI, can you maybe help us understand what some of largest drags would be to beating that 2% top of the range? I mean, would it be the mix that you talked about earlier with the energy business? Any (57:15) there is helpful.

David P. Steiner - President, Chief Executive Officer & Director

Yeah. The two biggest components of that would be mix, and then new business pricing versus lost business pricing. Those are two big components that go – that don't affect the price increase that you're putting on your current line of business but that does affect yield. And so that would be – it would be mix and the difference between new business pricing and lost business pricing.

James E. Trevathan - Chief Operating Officer & Executive Vice President

And, David, if I added a third to that, it would be rollbacks. And we've managed those really well over the last couple of years. We're positive in 2015 versus 2014 and we expect that trend to continue.

Sean J. Egan - KeyBanc Capital Markets, Inc.

Got you. So, what you just alluded to earlier, the new business pricing, how is that holding in, say, compared to a year ago?

David P. Steiner - President, Chief Executive Officer & Director

Yeah. Our goal is to drive that new business pricing to 10% or under. And I would say right now, we're sort of at the high end of that. As the economy improves and as we've seen a good pricing environment, I would expect us to over time to be under that. But right now, we're sort of at the high end of that 10% discount.

James E. Trevathan - Chief Operating Officer & Executive Vice President

And, Joe, if I add a little more color, the industrial line of business, the roll-off line, we're within that target with the commercial side just outside it and working hard to improve it.

Sean J. Egan - KeyBanc Capital Markets, Inc.

Okay. Great. And then I wanted to talk a bit about recycling volumes. Just curious where, if you know, the recycling volumes might be going that you have shedded in favor of price. Are customers choosing not to recycle? Are they choosing independent operators? If you have any sense of where it's going, that would be helpful.

David P. Steiner - President, Chief Executive Officer & Director

Yeah. Most of the volume that we've lost have been large residential contracts, and that volume is turning into net losses for our competition.

Sean J. Egan - KeyBanc Capital Markets, Inc.

Okay. Understood.

David P. Steiner - President, Chief Executive Officer & Director

I can promise you, we know what those prices were bid at. And at these commodity prices, there is nobody making money on those contracts that we gave up.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Especially, Dave, with the capital required.

David P. Steiner - President, Chief Executive Officer & Director

Exactly.

James E. Trevathan - Chief Operating Officer & Executive Vice President

With a new contract, where typically that customer wants new trucks, we make that decision around return on invested capital, as well as margin.

David P. Steiner - President, Chief Executive Officer & Director

And, frankly, those contracts, just to be very clear, those contracts generally have not been lost to our solid waste competition. They've been lost to people that are solely in the recycling business. And if you're solely in the recycling business and you take on another underwater contract, you can see that story is not going to end very well for those folks.

Sean J. Egan - KeyBanc Capital Markets, Inc.

Understood. That's all for me. Thank you.

Operator

Your next question is from Al Kaschalk with Wedbush.

Al Kaschalk - Wedbush Securities, Inc.

Good morning, guys.

David P. Steiner - President, Chief Executive Officer & Director

Hi, Al.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Hi.

Al Kaschalk - Wedbush Securities, Inc.

David, I have one simple question.

David P. Steiner - President, Chief Executive Officer & Director

No, you don't.

Al Kaschalk - Wedbush Securities, Inc.

Why can't Waste Management post positive volumes like their peer group?

David P. Steiner - President, Chief Executive Officer & Director

Yeah. Look, this is an easy question to answer. Because you can't look at just a volume number. You've got to look at, what is that volume made up of, right? If that volume is made up of brokered volumes, you're not making any money on it. If that volume is made up of recycling volumes, you're not making any money on it. And so, when I look at the volumes, I don't say, look at the overall volume number, I say, look where the volumes are coming from. So for us, we've got positive volumes in the industrial line, which is a very high-margin line for us. We've got positive volumes in the landfill line, which is the highest margin business that we have. And we're about to turn the corner to get positive volumes on the commercial line. We're at negative 0.7% in the quarter. I would expect to see that turn positive during 2016.

So, we're adding volume in the high margin areas. We are losing volume in recycling. We're losing volume in brokered businesses and we're losing volume in non-core. All very low margin businesses. And so, if you get positive volume and margins go backwards, I don't see that as a good volume report. If you get negative volumes and margins go up by 150 basis points, I view that as fairly positive.

So, I think it's a very easy question to answer. We look for volumes where we can make money on those volumes. We don't look for volumes for the sake of volumes. And so – but, having said all that, in those money-making volumes, we're going to see the overall volume number turn positive in 2016, and that's what I look forward to. Look, this is a high fixed cost business, and layering in that volume on the high fixed cost allows you to drop a big flow-through to the bottom line.

So, I think we've done the right thing. We'll continue to do the right thing. We'll continue to add volumes where we can make money.

Al Kaschalk - Wedbush Securities, Inc.

Hence the progression on EBITDA margin.

David P. Steiner - President, Chief Executive Officer & Director

Yeah. Exactly.

Al Kaschalk - Wedbush Securities, Inc.

I guess (62:28).

David P. Steiner - President, Chief Executive Officer & Director

Exactly.

Al Kaschalk - Wedbush Securities, Inc.

Right. As a follow-up – thank you for that. I guess I have a second question then.

David P. Steiner - President, Chief Executive Officer & Director

I told you.

Al Kaschalk - Wedbush Securities, Inc.

The commentary around the industrial environment economy, and yourselves being opportunistic when you can, why would you not, or are you suggesting to keep our eyes open, on being more aggressive on that hazardous piece of your business which, I guess would be – I don't know if I'd say is as profitable, but maybe you could articulate that for us? But why wouldn't you get more aggressive on acquisitions on that front?

James E. Trevathan - Chief Operating Officer & Executive Vice President

Well, I'll jump in. I mentioned earlier that we did, as we added airspace at Kettleman in California, we went out and found the right tuck-in for us to add volume. So we invested in that business in the second half of 2015, and we'll continue to look for those opportunities that can improve both our margin, but our returns, especially.

David P. Steiner - President, Chief Executive Officer & Director

But, look, what we need to do in our hazardous waste line of business is, we need to develop a national transfer network so that we can leverage our landfills. We would love nothing more than to be able to buy that and go very quickly to do that. But there's just not a lot of businesses out there that meet those needs and that are for sale.

So, in the meantime, we're going to do it organically. And so, we're going to – we're going to grow that network one way or another. But right now, given the state of the acquisition market right now, we're going to do that organically.

Al Kaschalk - Wedbush Securities, Inc.

Great. Good luck, guys, and thanks for your time.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

James E. Trevathan - Chief Operating Officer & Executive Vice President

Thanks, Al.

Operator

Your next question is from Charles Redding with BB&T Capital Markets.

Charles Edgerton Redding - BB&T Capital Markets

Hi. Good morning, gentlemen. Thanks for taking my question.

David P. Steiner - President, Chief Executive Officer & Director

Good morning.

Charles Edgerton Redding - BB&T Capital Markets

Perhaps just a follow-up on transportation, how should we think about the impact on Northeast landfilling volume from the lower transportation costs? And then with reduced diesel, is it fair to expect collectors to bypass closer incineration units really in favor of the longer haul sites, just based on price alone?

David P. Steiner - President, Chief Executive Officer & Director

Yeah, when you see the transportation costs go down, which is what happens with the fuel, you basically open up landfills that are further away, right? And so, we've actually seen pretty nice growth in our Northeastern landfills. I'm not sure that I'd attribute it 100% to the lower transportation costs, but we've seen nice volumes both in our Northeastern network and then in our Southern network. We would expect that – we'd expect that to continue into 2016. I always say, to a certain extent, low fuel prices are both good for the economy, but they're also good for our business.

Charles Edgerton Redding - BB&T Capital Markets

Great. And just a follow-up, with apologies, on energy services, can you be a little more specific in terms of those types of hauls that are seeing the most pressure from lower spending, and maybe too early to think about any nascent stabilization here year-to-date?

James E. Trevathan - Chief Operating Officer & Executive Vice President

The types of haul that are seeing lower spending – look, we haul – most of what we haul is drill cuttings. And then we haul some waters, we haul a little bit of NGL. So, clearly, the big piece that has declined is drill cuttings. But what's happened is, you're seeing these – the rig count has dropped off by 60%. So, they are not drilling. They may be leasing property, but they're not drilling nearly as much as they were a year ago. And so, as a consequence, the drill cuttings coming out of those holes are not moving to our landfills. So, I think that answers your question. It is – because it's the majority of our energy services business, that is what's causing the biggest drop-off.

Charles Edgerton Redding - BB&T Capital Markets

Great. Thanks for the time.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Tony Bancroft with Gabelli & Company.

Tony Bancroft - Gabelli & Company

Thanks. Could you please add just some little more color maybe on the renegotiations for your recycling some of the lower – the unprofitable recycling contracts and CPI-linked contracts? I realize that you said it's a small portion of the customers' cost structure and you guys in general are more prone to not – you said – you always previously said that if you can't do anything at CPI, you'll go get it somewhere else. But maybe just like, where are we, in a sense, maybe on a percentage, maybe some kind of gauge where on a percentage basis of what needs to be renegotiated and how far along you are? Is there some kind of maybe general big picture, inning type thing of where you are along in that?

David P. Steiner - President, Chief Executive Officer & Director

Yeah. On the recycling front, I would say we're about 75% to 80% through renegotiating the contracts. And the contracts that we haven't renegotiated, we can't do anything more about, because they're basically sort of long term contracts and we just have to eat the losses on those contracts until the contracts come up for bid and hopefully at a higher rate or they will go to someone else who is welcome to lose money on them. And so, on the recycling front, we're probably about 75% to 80% through.

On the CPI front, about 20% of our business – our CPI-related business is either on a floating index that more approximates the Waste Services Index or they're on a fixed price increase track with over 2.5% fixed price increases. In other words, 2.5% is sort of our inflation rate. About 20% of our contracts are either on a CPI-based measure or – that is not CPI but would be, for example, the Waste and Water Index or what we call a Solid Waste Index. And so, that runs at a higher rate generally than our 2.5% inflation.

And then, we've got other contracts where they run higher than our 2.5% inflation because they have fixed price increases at over 2.5%. So, about 20% of our business is under those types of contracts. So, there's still a lot of room to go on the residential and on the national account side to get those CPI contracts moved up but we're about 20% through it.

Tony Bancroft - Gabelli & Company

That's great. Thanks, guys.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Barbara Noverini with Morningstar.

Barbara Noverini - Morningstar, Inc. (Research)

Good morning, everybody.

David P. Steiner - President, Chief Executive Officer & Director

Good morning.

Barbara Noverini - Morningstar, Inc. (Research)

Somewhat related to the last question but if we're looking at a lower-for-longer commodity price scenario for recycling, how much further can you take the operational improvements that you've been speaking about? Would you have to consider more aggressive restructuring actions or is there still a lot of runway for this sort of operational cost saving, customer education, et cetera, that you've been describing?

David P. Steiner - President, Chief Executive Officer & Director

Yeah. When we look at recycling, we've made some great improvements. I think there's still plenty of room for improvement. But at this point in time, basically what we're down to is we have a series of plants and those series of plants generally revolve around a large contract, a large municipal contract or other contracts. So if we lose that large municipal contract, absolutely, we would probably have to shut down that plant because we don't have enough volume going through that plant.

We don't have any that we have on the early time horizon where we think that will happen but that's basically how we'll have to respond to a low-for-long commodity price. We still have operational improvements we can make. We think we can pull out sort of that 5% to 10% operating cost for a few years. But then any bigger restructuring, we don't have any planned right now. If we did any of that, it would be based upon large contract losses that we would have if we have those.

James E. Trevathan - Chief Operating Officer & Executive Vice President

And just a reminder, we have consolidated over the last two years roughly 20% of the total number of facilities. Most of them smaller, but where we've either lost on profitable volume and can move the remaining good volume into a larger facility in the same MSA. So, we've already done some of the physical rationalization. And we're working towards the operational side of efficiency now.

David P. Steiner - President, Chief Executive Officer & Director

But let's not lose sight of the fact that if the industry changes, what we've said is we won't bid contracts unless we can be guaranteed that we recover our processing cost, and then we'll split – and a margin of profit, and then we'll split any excess with the customers. But if there is no excess, then the customers are going to have pay for the processing and profitability. If we can get contracts on those terms, we're not going to be shutting down plants. We'll be adding plants.

And so, what we're trying to get to is how we can make this business sustainable for the long run. I think we've done a spectacular job with our recycling folks of doing that. I'm a firm believer that the industry is going to follow just because the economics don't allow them to do anything different than what we're doing. And so, I think over the long haul, even in a lower, longer commodity price environment, I think we can grow recycling. So, we're looking forward to doing that over the next few years rather than shrinking our footprint.

Barbara Noverini - Morningstar, Inc. (Research)

Yeah. That makes sense. Thanks for the additional detail.

David P. Steiner - President, Chief Executive Officer & Director

Thank you.

Operator

At this time, there are no questions.

David P. Steiner - President, Chief Executive Officer & Director

Thanks. Well, just in closing, as we said, we're real confident that we can hit our targets in 2016. For the most part, everything seems to be clicking on all cylinders. But you can't do it just because you have a good economic environment, or you can't do it just because you have the best assets in the business.

You absolutely have to have the right team to execute. And so, I'd say all the way from our senior team here in Houston and out in the field, all the way down to our leadership out in the field, all the way down to our frontlines, we've got the right team, and that's why we're so confident that we're going to grow this business in 2016 and well into the future. Thank you.

Operator

Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1:00 P.M. Eastern Time today through 11:59 P.M. Eastern Time on March 3, 2016. The conference ID number for the replay is 21854213. Again, the conference ID number for the replay is 21854213. The number to dial for the replay is 855-859-2056.

This concludes today's Waste Management conference call. You may now disconnect.

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