Morning. My name is Genesha, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4th Quarter and Full Year 2014 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 I will now turn the call over to Mr.
Ed Elgal, Director of Investor Relations. Thank you, Mr. Elgal. You may begin your conference.
Thank you, Genisha. Good morning, everyone, and thank you for joining us for our Q4 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 Trebasin, Executive Vice President and Chief Operating Officer. Before we get started, please note that we have filed a Form 8 ks this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8 ks, the press release and the schedule for the press release include important information.
During the call, we 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 ks. 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 Q4 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 earnings press release and Form 8 ks filed today. EPS, effective tax rate, income from operations, income from operations margin, operating EBITDA, operating EBITDA margin, SG and A and SG and A as a percent of revenue results discussed during the call have been adjusted and EPS projections are anticipated to be adjusted to exclude items that management believes do not reflect our fundamental business performance or not indicative of our results of operations. These measures in addition to free cash flow are non GAAP measures. Please refer to our earnings press release footnote and scheduled to the Form 8 ks filed today, 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 approximately 1 p. M. Eastern Time today until 5 p. M. Eastern Time on March 3rd.
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 6,415,6817. Time sensitive information provided during today's call, which is occurring on February 17, 2015, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now, I'll turn the call over to Waste Management's President and CEO, David Steiner.
Thanks, Ed, and good morning from Houston. 2014 was a very good year for us. Our primary goals for the year were to continue to drive core price and focus on cost controls to drive growth in earnings, margins and free cash flow. We exceeded all of our goals and we expect the momentum that we've created to carry over into 2015. In 2014, we achieved our highest adjusted earnings per share ever And our traditional solid waste business grew income from operations and operating EBITDA and expanded margins in both of these measures.
For the full year of 2014, we achieved earnings per share of $2.48 and had total free cash flow of $3,400,000,000 If we adjust free cash flow for the divestiture proceeds and an approximate $210,000,000 overpayment of taxes, we produced approximately $1,400,000,000 of free cash flow. During 2014, we set the stage for increasing shareholder value by selling our wheel abrader operations and operations in Puerto Rico and Eastern Canada for proceeds of about $2,000,000,000 Those assets primarily wheel abrader accounted for about $0.18 of earnings per share and $231,000,000 of operating EBITDA in 2014. In 2015, we will be disciplined in our approach to buying assets. We want to buy assets that fit within our business at prices that are accretive to our current trading multiple. We believe that by being patient and disciplined, we can replace the divested operating EBITDA at a multiple of about 7 times, which would leave us about $400,000,000 of proceeds from our wheelerbaiter divestiture to apply to share buybacks or other accretive tuck in acquisitions.
Combined with our strong operating free cash flow, we believe that we can apply significant cash to both of these areas, while maintaining a strong balance sheet. Although we believe that we will identify acquisition targets by mid year, given timing uncertainty of both negotiations and any necessary regulatory approvals, our guidance assumes that we will not close any acquisitions in 2015 other than the previously announced acquisition of Deffenbaugh Disposal and our normal tuck in acquisitions. We'll also hold off on any significant share repurchases until we get a better feel for which acquisitions we'll be able to close and at what price. We would expect that by mid year, we'll be in a good position to begin to buy back shares. And we would expect to buy back enough shares to at least offset any 2015 dilution.
Of course, we'll buy back more if we cannot identify attractive acquisition targets at reasonable prices. Turning back to our operations. Our pricing programs continue to drive earnings growth and margin At the beginning of 2014, we expected yield to be approximately 2% for the full year and we exceeded that target. For the full year, our collection and disposal core price was 4% with yield of 2.3%. We've now seen 7 consecutive quarters with yield of 2% or greater.
Each of our lines of business had positive yield for the full year with the exception of landfill C and D. For the full year, core price in the commercial line of business was 6.2%, industrial was 8.1% and we saw 1.8% in landfills. This has had some effect on volumes, but we continue to see the trade off as positive as the operating margin in our traditional solid waste business was up 130 basis points. Our pricing team in areas have done a fantastic job and they have plans in place to continue that success in 2015. For 2015, we expect that internal revenue growth from yield should again be 2 percent or more and for core price to be about 3.8%.
Core price is more representative of our pricing activities because yield includes geographic and waste stream mix. Ultimately, we're focused on using price to drive dollars to our bottom line and core price best estimates the bottom line impact of pricing. At 3.8% or higher, core pricing will once again drive margin expansion in 2015. As for volumes, we're starting to see some underlying positive trends. For the full year, our volume was a negative 1.4%, right about where we expected it to be.
However, since the Q4 of 2013, we've seen a sequential improvement in volumes, culminating with the Q4 being the best volume quarter of 2014 at negative 0.8%. We also saw volumes in every line of business improve sequentially from the Q3 of 2014. We certainly are encouraged to see movement in the right direction. For instance, volume losses in both commercial yards and residential homes serviced gradually improved during 2014. While we're not ready to say that 2015 will have positive volumes, we do see improvement in 2015 such that volume should be between a negative 0.5% and flat for the full year.
Of course, as recent storms on the East Coast demonstrate, our Q1 volumes can be affected by weather, but underlying trends have improved. So the price and volume trade off continues to be very positive for the full year as the company's income from operations grew more than 10% and our income from operations margin grew 190 basis points. In addition, operating EBITDA increased 4% and operating EBITDA margins increased 140 basis points to 25.9%. We achieved those results despite a negative $0.02 per share impact to 2014 EPS from foreign currency translation due to the impact of the strengthening dollar on our Canadian operations. On the recycling front, our operations performed well in the face of declining commodity prices.
For the full year, our recycling line of business increased about $0.03 per share when compared to 2013. This improvement was driven by better operating cost performance offsetting a more than 5% decline in OCC prices. Our managers did a great job managing their rebates and costs as commodity prices declined throughout the year. Until recently, we had expected our recycling operations to remain flat in 2015. However, the recent slowdown in Western U.
S. Ports has had a dramatic effect on the movement of commodities over seas. We would join with others to encourage the federal government to take a more active role in the slowdown, which is not only having an effect on commodity prices, but on the entire U. S. Economy.
Lower demand out of China has also affected commodity prices. In the last few weeks, we've seen another drop in commodity prices such that we now expect recycling to have a negative effect on 2015 earnings of between $0.03 $0.05 per share. That assumes that we do not see another drop in commodity prices and given current uncertainty in the market that's certainly possible. In the face of weaker commodity prices, we must continue to take actions to ensure the viability of recycling over the long term. Jim will talk about some of the specific actions to improve our recycling operations.
Turning to free cash flow. Our 20 14 guidance was $1,400,000,000 to $1,500,000,000 and we generated $3,400,000,000 of free cash flow in 2014. However, we had 2 Q4 events that we would adjust out to get a more normalized free cash flow number. First was our sale of Wheelabrator. 2nd, we overpaid about $210,000,000 of 20.14 cash taxes that will directly reduce 2015 cash tax requirements.
Jim will go into more detail, but absent these actions, 2014 free cash flow would have been about $1,400,000,000 We expect that free cash flow will once again be between $1,400,000,000 $1,500,000,000 in 2015 as we continue to focus on disciplined capital spending and driving earnings growth in our core business. Cash flow could be even higher if we're able to close any acquisitions to replace our wheel abreator EBITDA other than Deffenbaugh. So 2015 will be a transition year in which we continue our pricing and cost efforts while focusing on redeploying our wheel abraded proceeds. Nevertheless, our guidance of full year adjusted EPS of between $2.48 $2.55
represents an increase
of between 8% 11% when 2014 is adjusted for divestiture earnings, which is in line with our long term target for EPS growth of between 8% 12%. Free cash flow is expected to be robust and our redeployment of wheelerbaiter proceeds will set the stage for accelerated earnings and free cash flow growth in 20 16. I'll now turn the call over to Jim to discuss our Q4 results and our 2015 outlook in more detail. Thanks, David. I will review the results of the Q4 and expectations for 2015.
First, SG and A cost discipline has been a major focus for the company in the past year. At the beginning of 2014, we expected that SG and A dollars would be flat when compared to 2013 and that SG and A margin would improve. The results for SG and A in 2014 were better than we expected. I'm pleased with the overall results as SG and A costs for the full year improved almost $40,000,000 to $1,430,000,000 and improved as a percent of revenue by 30 basis points to 10.2%. For the Q4, SG and A costs were 3 $76,000,000 essentially flat compared to 2013.
As a percent of revenue, SG and A costs rose 20 basis points to 10.9%. In the 4th quarter, we saw approximately $18,000,000 in SG and A savings from our 3rd quarter restructuring. Savings were offset by increases to long term incentive compensation accruals and certain legal settlements. These settlements not only affected SG and A, but they also reduced free cash flow by almost $30,000,000 Without these accruals, SG and A expense as a percent of revenue would have been 10.3% in the Q4. Based on preliminary information, for January, we saw SG and A expenses improve $10,000,000 when compared to January of 14 on a base of $124,000,000 This is a good start to the year.
And for 2015, we anticipate saving $60,000,000 from the restructuring. And thus we expect SG and A as a percent of revenue to be below 10% for the full year. Turning to cash flow. For full year, we generated $3,400,000,000 of free cash flow. Without the divestitures and overpayment of cash taxes that David mentioned, free cash flow would have been about $1,400,000,000 The $210,000,000 of tax overpayments is composed of 2 parts.
1st, because passage of the tax extenders legislation was after our 4th quarter estimated tax payment had been made, the approximately $60,000,000 cash tax benefit of bonus depreciation was not reflected in our cash tax calculations for 2014. The $60,000,000 will result in a cash tax reduction in 20.15. The remaining $150,000,000 of because of the close date of the Wheelwriter transaction and the impacts from impairments. Therefore, we ended the year in an over paid position. This will be a free cash flow benefit in 2015, but will be largely offset by free cash flow from divested operations.
For the Q4, we returned $172,000,000 to our shareholders through our dividend. For the full year 2014, we returned about $1,300,000,000 to our shareholders, consisting of $693,000,000 in dividends and share repurchases of $600,000,000 Our Board has indicated its intention to increase dividends in 2015 by 2.7% to $1.54 per share on an annual basis. This is the 12th consecutive year of increasing the dividend. For 2015, our anticipated annual dividends will result in approximately $700,000,000 being returned to our shareholders. We also have authorization from our Board of Directors to repurchase $1,000,000,000 of our shares.
However, as David mentioned, our preference is to replace the divested operating EBITDA from Wheelrator at attractive multiples before we repurchase shares. We believe we can accomplish this in 2015. At a minimum, however, we would expect to be in the market repurchasing shares in the back half of the year to offset dilution. During 2015, we expect capital expenditures of approximately $1,200,000,000 to $1,300,000,000 and free cash flow in 2015 is expected to be between $1,400,000,000 $1,500,000,000 Looking at internal revenue growth for the total company in the 4th quarter, our collection and disposal core price was 3.9% and yield was 2% with volumes declining 0.8% for an organic revenue growth of 1 point 2%. This led to total company income from operations growing $54,000,000 operating income margin expanding 190 basis points, operating EBITDA growing $34,000,000 and operating EBITDA margin growing 140 basis points.
Our collection lines of business continue to see the benefit of the price volume trade off. Our commercial core price was 6% with yield of 3.9%. Our industrial core price was 8% with yield of 3.7%. And residential achieved 2.1% core price and 1.1% yield. Overall collection core price was 5.1% and yield was 2.8% with volumes declining 2.5%.
The volume change was 110 basis point improvements from the 3rd quarter. This core price and volume led to income from operations growing $16,000,000 and margin expanding 130 basis points. In the landfill line of business, we saw the benefits of both positive volume and positive yield in the 4th quarter, just as we have all year. We saw same store average MSW rates increase year over year for the 8th consecutive quarter, up 1.3% from Q4 of 2013. This also was the highest 4th quarter MSW rate that we've seen since 1998.
Total landfill volumes increased 6.4%. Combined special waste and revenue generating cover volumes were positive 8.9%. MSW volumes grew by 6.5% and CMD volume grew 17.7%. This led to income from operations growing $13,000,000 which is the 7th consecutive quarter of growth. Margins grew 80 basis points.
Turning to recycling. As David mentioned, we need to further our current actions to ensure the long term viability of recycling. When we look at recycling, we look at 3 phases: inbound product, processing and outbound product. With respect to inbound product, we will be more aggressive in setting contractual limitations on contamination levels and impose contractual remedies for contamination in excess of such limitations. Contamination above 10% leads to higher processing costs, and we need to continue to get insurances from our customers that they will either give us clean material or compensate us for higher processing costs.
This will ensure that we only pay a rebate for the net volumes produced and not pay our customers for residue. Glass has always been a difficult commodity to recycle and an economic challenge. Unlike other recycled materials, recycled glass must compete with an abundant supply of virgin materials. As a result, glass recycling does not provide the same environmental benefits recycling. In addition, glass is difficult to handle, hard on equipment and as of today, only one company takes recycled glass from MRFs, so our options are significantly limited.
With most commodities, we get paid to deliver recycled materials. Glass is the only commodity where we aren't paid for the outbound product. We actually have to pay to send it to a processor. We certainly recognize that our cities and communities want to divert glass, because it is the 2nd largest recyclable by weight. But given the many challenges associated with glass, we need to charge extra if a customer to recycle it.
Next, with respect to processing costs, we need to take a stronger stance to ensure that we recover our full processing costs. Processing costs increase due to circumstances beyond our control like the Chinese green fence, we need to recover those costs. So as we've said in the past, our strategy in pricing our recycle business is to recover our processing costs before we split the commodity value. Our contracts will also contain force majeure language to cover increases in processing costs beyond our control. And if our processing costs are higher than the commodity values, our customers will have to pay for the difference.
With respect to outbound volumes, we need to ensure that our customers are paid their rebates based upon the rate we receive for tons sold and not on an indexed price that may or may not reflect reality. Finally, we need force majeure language for issues like the current port slowdown that can affect prices for commodities. These actions will support the long term financial viability of recycling, which will not only benefit Waste Management, but will also benefit the environment and our customers by motivating us to continue investing in our recycling assets. Moving now to operating expenses. Expenses improved by $97,000,000 in the 4th quarter and $110,000,000 for the full year.
For the full year, $50,500,000 of savings were for costs associated with recently divested businesses. On a component cost basis, fuel cost for the year improved by $47,000,000 As fuel surcharge levels decline with diesel prices, it will have a dampening impact on revenue, but will continue to benefit margins. As a percent of revenue, operating expenses in the 4th quarter improved 170 basis points to 63.1%. For the full year, operating expenses as a percent of revenue improved 90 basis points to 64.3%. In 2014, our focus on improving operating costs saw significant traction and we expect that improvement to continue into 2015.
Finally, looking at our financial metrics. At the end of the 4th quarter, our weighted average cost of debt was 4.91%. The floating rate portion of our total debt portfolio was 9% at the end of the quarter. The decline in the floating rate portion of our debt from the 3rd quarter relates to the repayment of outstanding borrowings under our revolving credit facility. Lastly, in January, we redeemed 3 series of senior notes with a weighted average coupon rate of 7% and paid the related make whole premium.
We used proceeds from the Wheelabrator divestiture to fund this transaction pending consideration of potential debt refinancing options. The recorded effective tax rate was approximately 0.3% in the 4th quarter and 23.6% for the full year. The rates were lower than our expected rate of 35%, primarily due to the tax implications of divestitures. The tax benefit from divestitures is removed from our as adjusted results. We did include in our as adjusted earnings per share a $0.02 tax benefit $0.02 per share tax benefit from adjustments to accruals and related deferred taxes and audit settlements.
Adjusting the recorded rate for such items would have resulted in a rate of approximately 33%. In conclusion, 2014 was a very good year for Waste Management as our employees did a great job of focusing on pricing, costs and cost controls. And for that, I want to say thank you. We were also able to successfully divest several operations in the year, which served to both refocus the company on the core business and generate significant proceeds. As David mentioned, we will look to put those proceeds to work in 2015 with the intention of replacing the wheeler breeder operating EBITDA by early 2016.
We're excited for continued growth in 2015 and look to accelerate that growth into 2016 and beyond. And with that, Janisha, let's open the line for questions.
Your first question comes from the line of Alex O'Shea of Goldman Sachs.
Thank you. Good morning, guys.
Good morning. Good morning, Alex.
On the cost saves, you talked about $60,000,000 benefit on the SG and A line. Is there any target for the cost of goods line for 2015 and expected cost saves from the cost initiatives you have in place right now?
The cost of goods sold line, we certainly have seen an improvement in that line as we've taken aggressive steps. But I don't have an exact number for you there Alex. I think we can get something to you though. But you know the key Alex is that as we manage those rebates better, our cost of goods sold as a percent of the commodity price that we achieve continues to improve. And so we would expect that to continue to improve in 2015.
As Jim said, we got to take some steps to really fix the recycling business, because if you look at not just at Waste Management, but across the entire recycling industry, viability
of recycling in the United States, we
have to have some core fundamental changes that the viability of recycling in the United States, we have to have some core fundamental changes that Jim described to make the business long term viable.
Makes sense, David. And on the Deffenbaugh acquisition, can you say when you expect it to close and what you expect the contribution should be to the 2015 earnings number?
Yes. We'll give the contribution number once we actually close it. And we would expect to be able to close it likely within the next 30 days.
Very good. Thank you. I'll turn it over.
Thank you.
Your next question comes from the line of Joe Box of KeyBanc Capital Markets.
Hey, good morning guys.
Good morning, Joe.
So Jim, thanks for the rundown on the recycling business. I guess, I'm just curious what your guys' views are on the market. If you look a couple of years out, it looks like hypothetically commodity prices remain at this low level. I know a lot of operators are kind of intermingled their businesses. So if you start to see guys really struggle in the recycling space, what does the space look like a couple of years from now?
And how does that impact you?
So Joe, as David mentioned in his script, I mean, the we've done a good job of compensating for some of these price declines. In fact, he said that we just recently changed it to this $0.03 to $0.05 negative guidance. And that was because for the month of January, we felt pretty good about compensating for what was at the time about a $10 decline in pricing. We've seen an additional decline in February and hence the negative guidance for recycling. As far as what it looks like going forward, Boyce, we have not been real successful in projecting the outlook for recycling over years.
So the only thing we can do to control that is take aggressive an aggressive stance on changing these contracts and then take a touch stance on cost control, projecting the commodity price is something we haven't been very adept at. And Joe, again, look, the viability of recycling is at its core very simple. You sell the commodity for a certain price, right? In the past, what the industry has done is said, we'll sell the commodity for a certain price and then whatever our processing cost is, we'll be able to pocket the difference. The reality is as commodity prices have come down, you've got instances where our processing cost is higher than what we are selling the commodity for.
And so you can't have the business model where it says we'll sell the commodity, split the proceeds and hopefully cover our operating costs. The way we're changing the contracts is to say, look, we are going to recover our operating costs, whatever those might be and however those might be affected by things that we can't control like the Chinese green fence. So we're going to recover our processing costs. And if we're able to sell the commodity for more than our processing costs, then we'll split the proceeds with the customer. If our processing costs are higher than what we can sell the commodities for, we're going to have to charge our customers in order to recycle.
And that's the only way that we can make recycling viable for the long term. Joe, we might add one other quick point and that's that the commodities that are being recycled over the long term we think need to change. An example is a substantial city in Pennsylvania that just announced not recycling glass in the future. They recognize that the value of recycling the material doesn't it's just not positive. There's no real market for it.
And they've decided not to recycle
Can you guys talk about your Can you guys talk about your coal ash business and maybe how it's different versus some of your other peers? And then I've seen a couple of awards for coal ash to be shipped to some of your landfills. I'm just curious what the quoting pipeline looks like right now for coal ash. Are utilities starting to look at remediating old surface impoundments outside of South Carolina and North Carolina? Or is it still too soon to start thinking about that?
It's really too soon to really try to put numbers around the coal ash. But what I'd tell you Joe is that we saw this coming 3 years ago, 2.5 years ago when the regulations were first proposed. And we've been in front of customers trying to work on solutions ever since. And so we're not new to the party here. We've been doing it for a long time.
We've developed those customer relationships. And so we would expect to do I mean to the extent that there is revenue generated from the new coal ash regulations, we would expect to get more than our fair share.
Thanks for the color guys. Take care.
Thank you.
Your next question comes from the line of Corey Greendale of First Analysis.
Hey, good morning.
Good morning.
First, I had more of a historical question. So you touched on the cost of ops. I'm not sure that I have a complete grasp of why the cost of ops was down so much. So I know the press release cites divestitures. I think Wheelabrator wasn't divested until the very end of the quarter.
So could you just maybe elaborate a little on what drove the strong improvement in cost of ops both on a dollar basis and as a percent of revenue?
Yes. I think there are a couple of things that drove the cost of operations down. First of all, we've taken a tough stance on but the right stance to take on managing labor in operations. That will continue going forward. We've used some routing technology and that has started to bear some fruit.
Additionally, of course, as everyone knows fuel prices affect the cost of operations. And so while you see it coming off of the operating expense line, you also see it coming off the top line in the form of the fuel surcharge. Yes. Corey, Jim Trevathan here. We're about halfway through at implementing our what we call service delivery optimization, the onboard computers that we put on all of our routed trucks and getting the value out of those through the routing tools that Jim mentioned and the labor reductions.
We've done a much better job recently at getting both labor and routes out as volume changes have occurred and you see the results of that in addition to fuel.
So Jim or Jim then, if you look at the 20 15 guidance, you said you expect SG and A to be below 10% of revenue. Can you give some sense of what cost of ops assumption is baked into the guidance?
Cost of operations. Look I think for 2015 operating costs will we expect that we will be able to continue the progress we've made in 2014. I don't see a big increase in OpEx as a percent of revenue. Yes. We would expect to see some modest improvement in cost as a percent of revenue.
The big issue that we've got is volume, right? I mean, I think you all know that the ability to leverage costs from new commercial volumes is dramatic. We haven't seen commercial volumes turn positive. So we would expect to see some modest improvement in cost of operations as a percent of revenue, but we'll really see that improve as we start to see commercial volumes pick up in 2015 going through 2016. And then we'd also expect to continue to see improvement in our operating costs at the recycling line.
So we'll see some modest improvement in operating costs. As Jim said, we'll see some good improvement on SG and A. So we should see that 100 basis point plus improvement to margins next year.
Okay, great. And then David to your point on volumes. First of all, I think you made a comment about storms in the East. Does that suggest that we should be expecting a somewhat softer than the trend line on volume in Q1? And then the comment you just made about volumes improving on the commercial side, does that suggest that you think overall volumes could go positive at some point during 2015 and then in 2016?
Yes. I wouldn't be surprised at all to see at the back half of twenty fifteen that we start to see the trend line turning from a volume point of view, probably not till later in the year. But given what we've seen from the economy and housing starts, I wouldn't be surprised to see that at all coming out of 2015 and into 2016. With respect to the Q1, no, look, we see volume reports on a very frequent basis. You've seen a little bit of a drop off in volumes.
But as you know, sometimes those volumes bounced back real quickly in March because of the weather. So no, we're not trying to say that we will definitely see down volumes in the Q1. But given what you all particularly up on the East Coast in Boston and other parts of the East Coast, what you're going through, we just wanted to make sure that everybody understands that you really can't judge the full year by Q1 volume.
Yes. Understood. Thank you.
Thank you.
Your next question comes from the line of Al Koshawk of Wedbush Securities.
Good morning.
Good morning, Al.
Just wanted to follow-up on the volume question. It just strikes me as I don't know if it's sending out a warning sign or what, but you guys are collecting trash or rubbish. So I don't think the weather has never stopped you before. So what's behind that comment David?
There is absolutely nothing behind that comment other than the fact that we say it every year, which is when you start to see the seasonal uptick from March through June, we'll get a real good feel for the prior question, which is will we see positive volumes in the back half of the year. The only point we're making is that we're not going to make any assumptions on full year volumes based on the Q1, because the Q1 always has the weather impact.
Great. Okay. And then on the volume side again, just what's ticking higher better than your expectations? Because I would have thought the volume guidance range would have been a little bit wider than 50 basis points to flat. In other words, closer to the down 1% to flat.
So what's ticking up for you? And obviously, it showed up in the 4th as well.
Yes. Look, when we look across the various lines, let's take them one line at a time. On the commercial line, we're seeing net service increases improve. We're seeing pounds per yard improve. And I think we're seeing generally sort of overall economic improvement, whether it's new business starts or new housing starts.
And so we've been waiting for the pickup in commercial volumes for a long time. And I guess for the first time in the last three years, what I would say is, we're pretty optimistic they're going to improve. Now we're not going to try to say they're going to turn positive in 2015, but we haven't said in 3 years that we're pretty optimistic that they're going to improve in 2015. On the industrial line, again looking at the general economy, looking at housing starts, that's all good. Looking a big part of our industrial line is our energy services.
And I think everybody would acknowledge that Energy Services is a big question mark for 2015. But we've done a spectacular job in Energy Services of increasing our market share where we have assets. And so we expect to see increased market share at least partially offset some of the volumes on the industrial line of business. So we're fairly positive there. On the residential side, we've lost a lot of residential contracts in the last few years, some of those intentionally, some of those not intentionally.
And so the contracts that we wanted to lose on the residential side, we've basically gone through those. And so we should start to see some year over year at least a decline or an improvement in the rate of decline on the residential line. And then finally, looking at our national account business, again, the national accounts that we wanted to lose, we've lost. We've got some, what I'd call low margin national accounts that we'll still look at in 2015. But we would expect our national account volume to begin to stabilize and grow toward the back half of twenty fifteen.
So what I would say is that overall, we're very optimistic that we're going to see an improvement in volumes. Look, you're absolutely right about the 50 basis points. Is that a narrow range? Yes, it's a narrow range. But what we really wanted to impart was that we're seeing volumes moving back closer to flat.
And again, going back to the prior question, we would expect them to actually start to turn positive toward the back half of the year. And so we gave that narrow range, because we didn't want people to think they were going to turn positive. So you've got to start out with flat. And we wanted people to know that we think they're improving. So we didn't want to say negative one percent.
So the point of going 50 basis points, I think it's a great question. The point is we wanted to impart that we're seeing improvement, but we're not ready quite yet to call positive volumes for 2015.
Now I think
the fact that a lot of that volume growth is coming on the collection side of the business highlights why it's so important on operating expense to really make sure that we continue with the efforts on that Jim has put into place to really improve our operating expenses as a percent of revenue. Because as you know from 2014, really for us not a great year on collection volumes, a decent year on landfill volumes. But collection volumes come with a bit higher operating cost as a percent of revenue. So it is very important for us that we continue those efforts on the OpEx side.
And that was sorry Jim, that was to drive or recover collection volumes to gain the operating leverage. Was that the point?
Right. As we see collection volumes start to improve, which is what we've seen with 110 basis point sequentially from Q3 to Q4. We need to make sure that we have all of the pieces in place operating wise to control costs. Collection volumes have a higher operating cost, variable operating costs than do landfill volumes. So we feel good about going into 2015 with those pieces in place.
Okay. And finally if I may, I don't know if I heard correctly what the benefit in Q4 was on fuel, but what maybe have you baked into 2015 whether that's a dollar volume or a dollar level or a margin benefit? And then secondly, with regards to that, how do you expect the competitors to react, particularly in your in the highly competitive markets on this lower fuel price because isn't that simply an incentive for them to perhaps even lower price? So do you see that as a particular option? And then finally, I think David congratulations to you on this past weekend's performance.
Thanks.
So setting aside that congratulations, So setting aside that congratulations. Let me address the We beat you to it already. Let me address the first question Al. Look as far as fuel goes, I mean look large price declines as we've seen recently large price spikes put us into an under recovery or an over recovery position. Large price declines put us into an over recovery position.
But over time, our fuel surcharge program fully recovers cost increases for us. So for the most part, we're generally agnostic with respect to the price of fuel. In 2015, we expect there will be a slight benefit to margin maybe 10 basis points from lower fuel cost. But for the most part, we would expect that that fuel surcharge which has a lag to it will catch up and we'll be in kind of a full recovery position where we aren't over recovering or under recovering depending on the direction of fuel. And to the competitive question, I think generally what we've seen in declining fuel markets is that the competition doesn't generally take that as an opportunity to go out at lower price.
They take it as an opportunity to improve their bottom line. And the other part is that for the most part, our largest competitors already also have a fuel surcharge. So it shouldn't have any difference to them whatsoever.
Thank you, David and Jim.
Your next question comes from the line of Tyler Brown of Raymond James.
Hey, good morning guys.
Good morning.
Hey, Jim, just at a very high level, can you just kind of bridge the $2,400,000,000 in pro form a operating cash flow to the midpoint here in $15,000,000 to $2,700,000,000 I mean I'm just kind of looking for the big puts and takes. I mean presumably you've got a drag from commodities, FX, but then you do have some offsets with Deffenbaugh, the tuck ins, internal growth, the cash taxes, etcetera. But just trying to help us understand the components of that $300,000,000
Yes. So as you said, there's going to be a number of pluses and minuses there. On the minus side, as we talked about, we've got some recycling challenges potentially. We have a little bit of added capital expenditures versus where we finished the year, mostly related to big contracts coming on board. We have a year over year working capital hit from the fact that last year we accelerated bonus, but we also have some working capital pickup as well.
The fact that hopefully we won't have another big legal settlement this year. And we're making quite a bit of progress on working capital as well on DSO and DPO. So on the plus side, we've got the restructuring impact. We have lower interest expense. We've got those working capital items.
And then really at that point you get to our core business, which includes the aggressive approach to cost control. It includes pricing. And so I think when you combine all of those, while there's a lot of kind of puts and takes, I think we feel comfortable with getting to the cash from operations growth figures.
Okay. And so of that $300,000,000 though, how much of it is this the prepayment on the cash taxes?
I mean is that effectively
a $200,000,000 benefit in 2015?
$210,000,000
Okay. Okay, good. And then on CapEx, how does that break down between maintenance and growth? And then can you break it down between trucks, landfill development, containers, etcetera, etcetera?
Yes. I mean, on the first question, maintenance and growth, probably, Jim, I would guess $900,000,000 In both fleet and in landfill, approximately $900,000,000 $950,000,000 split relatively equally, Tyler, with collection. We're moving it forward slightly versus the last 3 years. But on average, we bought about a1000 a little over 1,000 trucks the last 3 years. And in 2015, we'll buy out 10 20 trucks.
So the plans moving forward, so roughly evenly split.
Okay, perfect. That's very helpful. And then I think in the press release you guys noted that you would do a normal pace of tuck ins. What exactly is that? I mean how much are you looking to deploy there on the this would be excluding and Ball?
Yes. I mean excluding kind of use of proceeds for wheelerbrighter, it's typically between $100,000,000 $200,000,000 Okay, perfect. All right. Thank you. Thank you.
Your next question comes from the line of Michael Hoffman of Stifel.
Hi. Thank you very much for taking my questions this morning. Nice end to the 2014. On recycling, just so I understand all the data you're sharing with us, on your guidance giving the negative 3% to 5%, but there's an offset. And if I look at the offset you recorded in and the offset you running the trying to run the business better that you recorded in the Q4 down about proportionally the same in 4Q as I we are sort of going into 2015.
So am I right in you've got about $0.12 you're trying to drive savings or I mean sorry, there's $0.12 of loss from a paper and there's $0.07 to $0.09 of savings that you're trying to drive. So the question is, how much more do you have to play on that sort of $0.07 to $0.09 range to work with going forward if we're structurally in a long term low paper price environment? And we got a long tail on the solution. I get you're working on the solution, but how much more do you have to play with in driving incremental improvements?
Yes. I guess Michael when I look at this on a blended basis, so I don't I'm not breaking it out. My answer won't be on a OCC versus plastics versus versus other commodities. But on a blended basis, we finished the year 2014 at $98 and we saw January drop about $10 so to $89 And that was that impacts us on the 6,000,000 tons that we actually pick up and take to our MRFs about $60,000,000 in revenue, which equates to somewhere in that $0.03 to $0.05 range on the EPS line. We think in January, the cost controls that we put into place fully compensated for that, which is why we were prepared to come on a call and say we thought it'd be flat.
And then with the February decline, we just have not been able to put the more stringent contract changes and cost controls in place yet. So can we do that? That is our plan. But at this point, we're trying to be a little conservative because of the falling knife here so to speak. So we think there's probably $0.03 to $0.05 in the $80 number which is where we may finish the month of February in that blended rate.
If things go to heck from there and fall to $60 then I think all bets are off with respect to that $0.03 to $0.05 But right now we feel good about the contract changes that I went through in detail in my script. We feel good about the cost controls that we put into place not only in January, but in all of 2014.
Okay. Fair enough. If the port strike and I know this is a tough one because it's too much guessing I suppose. But if the port strike ends say at the end of this month lots of things can change quickly. But how long does it if the port strike is prolonged, how long can it go before you miss the seasonal uptick in your mind?
And like if it runs into March even to the middle of March, have we just missed the seasonal window because Asia has to find a source of paper and they go looking elsewhere?
Yes. A couple of things, Michael. First of all, it's difficult to disaggregate the effect of the port strike in that into its component parts in that $0.03 to $0.05 So it's tough to tell. There are a couple of different moving parts. There's a weaker Chinese economy.
There's quality issues with outbound product and there is of course the port strike. One of the concerns we have honestly about the port strike is that there's a lot of products sitting idle at this point. When that does eventually get resolved that all that product ends up out on the market which could have a dampening effect on commodity pricing. So I didn't do a very good job of answering kind of your seasonal uptick question there. And I'm not sure I know how to answer that, because it's hard to predict what's going to happen with the port strike.
It's also hard to separate the port strike in that $0.03 to 0 point 5 negative guidance that we gave you because there's a couple of different swing parts. Fair enough. Yes.
Hi, David.
Back when we saw the energy price drop, I heard an oil man say something that I thought was a pretty good quote. He said nothing solves low energy prices like low energy prices, because at some point in time the market stabilizes and you find equilibrium. And I would say nothing solves low commodity prices like low commodity prices. I mean, you're seeing a pretty stark disinvestment in recycling assets and you're seeing a lot of the smaller players starting to close-up shop that gives us a great opportunity to restructure the recycling business, to restructure it to where we can make a guaranteed return every year, which means we can invest in recycling assets. Look, we cannot invest in recycling assets in a situation like what you and Jim were just talking about where nobody has any idea where commodity prices are going.
And so we're going to use the opportunity to make sure that we restructure our business such that we can make it profitable come hell or high water. And so that's really where our focus is, is driving out the operating costs that we can today and then reorganizing the business and only bidding contracts that follow our statement of how we need to make a profitable business out of recycling. We're just not going to sign contracts that put so much risk of commodity prices on our back.
Fair enough. And I get that. I saw that in what you did with Philadelphia. Foreign exchange was $0.02 $0.14 it's about the same change year over year. So thinking it's about $0.02 in $0.15 that's the right way to think
about it? I'm not sure I'd give it $0.02 in $0.15 Again, kind of hard to predict what the dollar will do versus the Canadian dollar. But we didn't put anything in for foreign currency impact in 2015. So I would say it's flat. If we do have an impact then We'll find another way to overcome it.
We'll find a way to overcome it. Got it.
Okay. Fair enough. And then Jim you said that you paid down some debt in January just so we get the right sort of run rate on the interest expense either based on that revised total debt, can you talk about what you think the interest expense number is? Or tell me what the total debt number is? I'll work backwards into it myself.
But what am I looking at starting in January now you paid down more debt?
So cash interest decreased by 17,000,000 dollars in 2014 and that was due largely to a couple of things. First of all, the Q2 recycling of $350,000,000 senior notes. We also had some tax exempt free marketings that came in at lower rates. And then, of course, in January, we made whole those 3 senior notes with a weighted average coupon of 7%. So what will the interest rate be?
It's kind of yet to be determined on what the rates will be on the refinancing. And the cash impact is our cost of debt is coming down. It won't surprise me if the cash impact is similar to 2014.
Okay. All right. And then when you frame wheel operator, are you going to either provide restated numbers on a quarterly basis so we know what it looks like year over year comparing without it? Or can you at least tell us what was the revenue number that I should be pulling out of my quarters, or for at least for the full year in 2015?
Yes. The supplemental schedule that came out pretty much is all it's divested operations. But for the most part, it's wheelerbraters. Revenue the way we've adjusted out to kind of get you to an apples to apples is 852,000,000 dollars Now that's wheel abrader plus Puerto Rico and the Maritimes, but largely wheel abrader. And then adjusting out $231,000,000 in EBITDA, dollars 220,000,000 of that was wheeler breeder.
So again largely on every one of those metrics on that schedule, it's for the most parts a wheeler breeder adjustment. And I think Michael, I think last quarter we mentioned when we announced the divestiture, we mentioned that obviously Wheelabrator the $0.18 that's coming out of earnings comes out doesn't come out equal every quarter. I think we mentioned last quarter that electricity prices last year in the Q1 were very high. So there was a I think it was $0.05 of earnings per share from wheelabrator in the Q1 of last year. And so it won't come out equally every quarter.
It will come out a little bit more weighted toward the Q1 than the other quarter.
Fair enough. And then cash taxes paid in 2014?
Cash taxes in 2014? Yes. Let's see here. Cash taxes in 2014, dollars 763,000,000 and then we expect 2015 cash taxes to be about 5 $17,000,000 something like that.
Right. And that delta on the one well, actually the whole 210,000,000 that's I mean, if we don't get another extension of bonus depreciation and that doesn't repeat. And then the 150 is all about having done divestments. So that's not a that's a one time those are both one time events, right?
That's right.
Okay. And then special waste activity, are you seeing volumes that you would indicate that non residential construction maybe starting to percolate in a positive direction?
Yes. We've seen special waste volume pretty strong all year. And I think it really is the untold story of the lower energy prices. It started out with natural gas and then it moved to oil. You've seen a lot of construction projects particularly along the Gulf Coast where we have great positioned assets.
And so you've seen great strength in it in 2014. We'd expect that to continue in 2015.
Okay. And then I'm surprised you haven't been asked it yet, David, but the price gate for 2015. So you had a different type of bonusing program for the last couple of years. What are you doing differently in 2015? And can you share some of the hurdles that you've set for bonuses and how the bonus accrual would work in 2015?
Yes. It's a great question, Michael. As I've said before, you've got 2 options with the pricing, Kate. You can either well, you can do nothing, but doing nothing for us is not an option. So you've got the opportunity to do the carrot or the stick.
The last 2 years, we had a pretty big carrot out there where we said, if you can get over 2% yield, we're going to basically pay the 2012 bonus that everybody missed out on because we didn't do pricing very well in 2012. And so in 2015, we'll go back, I hate to use the word, but we'll go back more toward the stick side. We paid out those bonuses. Everybody is very happy, but that doesn't mean that you can now sit back and rest on your laurels. And so we'll go back to a price gate, where everybody we basically give a target to every area and every area has got to meet their price target.
And if they don't meet their price target, we can adjust their bonus by up to 50%.
Okay. And will the gate this year include both a landfill driver and a collection or it doesn't matter how they get it?
Yeah. When we do it, we basically go back to what I talked about before core price, right? Look, the reality is as you know we've been putting a lot of emphasis on landfill pricing and we'll continue to put an emphasis on landfill pricing. But from a bonus point of view, what we're really looking for is dollars to the bottom line. And so, one market might be able to drive that with the landfill, another market might be able to drive it through industrial and another market might be able to drive through their commercial business, another one might have to look to their franchise business to drive it.
And so there's as many ways to drive it as there are lines of business. We just want to make sure that they get the total dollars to the bottom line. But I can promise you that from a management focus point of view, we've got a lot of management focus on the landfill line. Michael, Jim Travaithen. I would tell you though that Dave is exactly right that they can get it in any line of business.
However, the targets are comparable to last year by area and they can't get it unless they hit all lines of business. They can't totally load up on 1 as opposed to touching all of the lines of business. So I think you'll see it come in just about the same as last year as 2014.
Got it. Okay, great. And then Jim Fish on cash flow from ops, you finished 2014 at 2,331. If I'm understanding the comments that were made earlier, I can take 90% and say that's a permanent change on a year over year basis and 210% is a one time. And so looking sort of modeling out multiyear cash flow from ops, I'm not going from 16.5 percent to 20% of revs.
I'm still 16.5 percent is improving by about 90 $1,000,000 to maybe 17%. But I'm making improvement, but that's the way to think about it, right?
Yes, I think that's right.
Okay.
Hello, Michael. I think the piece that you wrote hit the nail right on the head. We're going to see good cash flow improvement. We'll start to see great cash flow improvement when we get the recycling business straightened out. Right.
One last answer for you that you asked initially was revenue for wheelerbrader. Revenue for wheelerbrader $817,000,000 of that $852,000,000 that we show in the schedule. Okay, great.
Thank you so much and good luck in 2015.
Thank you.
Your next question comes from the line of Scott Levine of Imperial.
Hey, good morning, guys.
Good morning.
I just wanted to be clear on the comments regarding thoughts on replacing the wheel breeder or the loss business in general at 7 times multiple. Firstly, should we be assuming that what should we be assuming for share repurchase in your 2015 guidance should I say? And then the 7 times multiple you expect to pay, is that strictly on the solid waste side of the business? Or maybe a little update with regard to your interest in energy waste? And any additional color regarding your assumptions there?
Yes. So to the share repurchase, you can assume that we offset dilution, but that we're going to do it in the back half of the year. So obviously, there will be a little bit of an earnings effect, because you're not replacing dilution right at the beginning of the year. And so we would expect to do share repurchases to offset dilution. And as far as Energy Services goes, look there's 2 things going on with Energy Services right now.
On the price side and I think you may have heard that from some of the other calls earlier or last week I guess. On the price side, we're working with E and P companies on addressing their price concession requests. We'll see where that ends up on the volume side. We do expect to see a slowdown in drilling. I guess the good news is though that it seems to be hitting the big three the hardest those being Permian, Bakken and Eagle Ford.
And we have no exposure in Permian and limited exposure in Bakken and Eagle Ford. So it's also important to understand that our Energy Services business while it's a great business for us is still small as a percentage of our overall business. And while we will feel some price and volume pressures there in 2015, I think we'll be able to make up that in the other parts of our manufacturing and Industrial business such as coal ash and petrochemical plant production things like that. Got it. And then to the question of the replacement of the EBITDA, the acquisitions that we do will be core solid waste or very closely related to core solid waste.
So we feel pretty comfortable that we can look at those type of acquisitions and understand exactly what kind of synergies we're going to get out of those, right? And so what we've always said is that we're not going to go out and pay a higher multiple than what we're trading at. If I'm going to buy something at the multiple we're trading at, we've always used sort of the long term 8.5 times EBITDA, I'd rather buy back our own stock than buying a business I don't know. And so post synergies, we'd expect those type of acquisitions to on the high end come in at sort of the 7 to 8 times EBITDA and on the low end come in at sort of the 5 to 6 times EBITDA. So somewhere between I would say generally when we're looking to replace the wheel abrader, the divested EBITDA, I would say that generally we're looking at larger acquisitions, which trade a little bit higher than normal tuck in acquisitions.
So I would say that the EBITDA there is going to be somewhere between 6 and 8 times. We use 7x for our assumption. And that assumption leads to us being able to replace the full amount of wheelerbrader EBITDA and still have a significant amount of cash proceeds left.
Right. So to be clear, you do see enough within the pipeline of that larger acquisition type you're talking within core solid waste to assign a high probability to your chances of replacing the bulk of that by with good visibility by the middle of the year?
Yes. I would say I wouldn't put high probability on it quite yet. I think by mid year, we'll know if there's a high deal that works for both them and for us. And so we've talked to a few larger acquisition targets that it seems like we're on the same page. We've talked to at least one where we're not on the same page where they wanted more like 11 times to 12 times EBITDA.
And we basically said, look, we've got 2 choices. We can either buy your business at 11 times to 12 times EBITDA or we can go in and buy smaller businesses that mirror your geographic footprint and we can go in and do that. And so we're not going to pay 11 to 12 times EBITDA. Rather go out and buy smaller in that geographic area. We'd rather buy smaller companies.
So we do think there's some targets. But before I say that I'm confident we can replace the wheel abrader EBITDA, we want to make sure that we're on the same page from a valuation point view. And we should like we said, we should have a very good feel for that by mid year.
Okay. Well, stay tuned. Thanks.
Thank you. Your final question comes from the line of Barbara Milverini of Morningstar.
Hey, good morning, everybody. Good morning. When analyzing the acquisition landscape, can you give us a general sense for the health of the recycling operations of tuck in candidates that are similar in size to a definite BAW for instance? So if these businesses come with existing recycling contracts that are unattractive from a rebate standpoint, let's say, you have to wait for these contracts to be rebid or do you or can you improve the recycling economics of these tuck ins immediately just by instituting some of the cost controls you've talked about today?
Yes. Generally, frankly, the acquisitions that we're looking at really don't have a recycling component associated with them. And quite honestly, if they did have a recycling component associated with them, we're either going to pay very little for it or we're actually going to subtract from it. I think you hit the nail right on the head. If they have bad recycling contracts that they can't get out of, we're just not going to pay them for it.
Or we might even reduce the price because of those recycling contracts. So when we look at the acquisition candidates, what we're going to do is we're going to pay for the business that we know. We're going to pay for the business that we can very easily find out what kind of synergies we get and then we're not going to pay for the businesses where we don't have the synergies. But you're also correct that if they did have a recycling component, there's plenty of places where geographically we could then consolidate with our facilities. So what I would say as a quick summation is that most of the assets that we're looking at buying don't have a strong residential recycling component to them.
To the extent that they do, we would take that into account with the in connection with the value we pay for the business.
Got it. That's helpful. And then what is your appetite for acquisitions within Energy Services? So you had mentioned increasing market share. So are you looking at this area in particular to deploy some of the wheel abreter proceeds?
Yes. We're probably looking at it a lot harder at $80 oil than $50 oil. But look over the long term, I think that's going to be a very good business. If we could get assets in that line of business at the right price, we would certainly look at doing that. But I would tell you that the right price today is not what the right price was 6 months ago.
And so it would have to be something where we would feel fairly confident that over the long term we could make the business profitable.
Got it. Thanks and great job this year.
Thank you. Thank you all for joining our earnings call. As you can see, our team here at Corporate and our team out in the field created some great momentum in 2014. We fully expect that 16. So thank you all and we'll talk to you soon.
16. So thank you all and we'll talk to you soon.
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