Good morning. My name is Rashay and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management third quarter earnings release conference call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Egl. You may begin your conference.
Thank you, Rashay. Good morning, everyone, and thank you for joining us for our third quarter 2014 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer, Jim Fish, Executive Vice President and Chief Financial Officer, and Jim Trevathan, Executive Vice President and Chief Operating Officer. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules for 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, in 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 stated otherwise, are more specifically references to internal revenue growth, or IRG, from yield or volume. Additionally, any comparisons, unless otherwise stated, will be with the third quarter of 2013. During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share. David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the Form 8-K filed today.
EPS, income from operations, income from operations margin, operating EBITDA, operating EBITDA margin, SG&A, and SG&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 results of operations. These measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and schedules in the Form 8-K 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 1:00 P.M. Eastern time today until 5:00 P.M. Eastern time on November 12th.
To hear a replay of the call over the Internet, access the Waste Management website at wm.com. To hear a telephonic replay of the call, dial 855-859-2056 and enter reservation code 8203798. Time-sensitive information provided during today's call, which is occurring on October 29th, 2014, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO, David Steiner.
Thanks, Ed. Good morning from Houston. We saw strong results in the third quarter that are a continuation of what we saw through the first six months of the year. Yield and cost control programs driving strong improvement in our core business. We saw growth in our income from operations, operating EBITDA, and margins in both our traditional solid waste business and our overall business. In the third quarter, we earned $0.72 per share, an increase of over 10% when compared to the third quarter of 2013. When we started the year, we had high expectations for our performance, and through the first nine months, we've met all of our expectations. Our employees have executed their business plans exceptionally well this year, and we recently took additional steps to align the corporate functions to the needs of the field to further drive performance.
This should serve us well as we begin to look forward to 2015. Jim will discuss the financial benefits of our corporate realignment, but I'd like to touch on the strategic implications. We realize that growth and everything else in our business occurs on the front lines with support and oversight from our corporate teams. Our reorganization ensures that our corporate and field teams are aligned and working together and focuses our field and corporate resources to drive performance. Our corporate teams will work with the field to improve operations of our business by targeting volumes that support our yield focus and reducing costs. The corporate and field teams will have joint accountability in achieving these goals. We think of this as an extension of the 2012 reorganization, where one of the main outcomes was a more direct line of sight from corporate to the field.
Turning to our waste energy business, Jim will give you more detail on the results of operations, but I wanted to give an update on the sale and use of proceeds. The transaction is progressing as we anticipated. We should receive Federal Energy Regulatory Commission approval and close on the transaction at the end of this year or early in 2015. Regarding the use of proceeds, our philosophy has not changed. We would prefer to replace the $220 million of divested operating EBITDA at attractive multiples. As we recently announced, we entered into an agreement to acquire Deffenbaugh Disposal, which will enable us to replace a portion of that operating EBITDA. Our agreement limits what we can say now, but once the transaction closes, we will provide additional financial details.
We're certainly excited about the deal because Deffenbaugh is a very well-run company with both collection and disposal assets and with an excellent market position in Kansas City, where we currently have virtually no presence. This transaction is subject to the Hart-Scott-Rodino Act and is expected to close later this year or in the first quarter of 2015. We're still looking at other potential targets, but if we do not find assets at reasonable prices, we'll use the proceeds to repurchase our stock and maintain leverage neutrality. If we do purchase shares, we would likely begin at the end of the first quarter of 2015, after the expiration of our current accelerated share repurchase program. Returning to our third quarter results, our yield program continues to be a significant driver of our margin expansion.
The third quarter, our collection and disposal yield was 2.3%, which is the sixth consecutive quarter of yield above 2%. Our core pricing remains solid at 3.8%. When compared to the third quarter of 2013, same-store average rates in the commercial line of business increased 5.2%. Industrial increased 4%, and we saw a 2.5% increase in our residential line. This has had some effect on volumes, particularly with regard to lower margin national accounts and residential contracts. We continue to see the trade-off as positive, as the operating margin in our traditional solid waste business was up 60 basis points. Volumes in the third quarter were a negative 1.3%, which is an improvement of 10 basis points from the second quarter and the third consecutive quarter of sequential improvement. About 100 basis points of the 130-basis point decline came from lost low-margin national accounts.
In the third quarter, we once again saw positive landfill and transfer station volumes more than offset by declines in the collection lines of business. Despite negative volumes, the company's income from operations grew more than 3%, and our income from operations margin grew 60 basis points. In addition, operating EBITDA increased, and operating EBITDA margins increased 30 basis points to 26.6%. Our recycling operations also performed better in the quarter, despite an average OCC commodity price decline of 17.1%, reflecting our continued focus on enforcement of restrictions on contaminated loads and modifications to customer rebate structures. We've seen three successive strong quarters in 2014. We expect the strength to continue into the fourth quarter and into 2015. We're confident that we can meet or exceed the analyst consensus of $0.60 of adjusted earnings per diluted share for the fourth quarter.
A $0.60 fourth quarter would lead to full-year adjusted earnings per diluted share of $2.41, $0.06 above the high end of our previous range. Cash flow has also been strong through the first three quarters. We expect that we will also exceed the $1.5 billion high end of our free cash flow guidance. As we did last year, we may look at ways to invest some of this excess cash flow by pulling forward some 2015 spending into 2014. In summary, we're very pleased with the results so far in 2014. We expect that momentum to continue into 2015. We will be judicious with our use of proceeds from our Wheelabrator divestiture as we look to replace $220 million of operating EBITDA using the proceeds to create long-term shareholder value and not merely to create short-term earnings.
This will likely have a negative effect on earnings and cash flow in the first half of 2015 as we look to offset the loss of $0.18 of EPS and $120 million in cash flow from the divestiture of Wheelabrator. Given the timing of the transaction, it's unlikely that we would close on the purchase of new businesses or shares before the end of the first quarter of 2015, so we would not replace the $0.05 of earnings that Wheelabrator produced in the first quarter of 2014. However, with respect to our core solid waste operations excluding Wheelabrator, we will continue to drive margin expansion and double-digit earnings growth, and we will invest the Wheelabrator proceeds so that we can continue that growth well into the future.
I'll now turn the call over to Jim to discuss our third quarter results and the reorganization of corporate SG&A in more detail.
Thanks, David. I'll start by discussing our SG&A, which improved $3 million to $346 million when compared to the third quarter of 2013. We have a goal of SG&A cost as a percent of revenue being below 10%, and for the second consecutive quarter, we achieved this goal. SG&A costs as a percent of revenue were 9.6% in the third quarter. During the quarter, we took steps that are intended to better align our corporate leadership staff cost with the needs of the field operations, which resulted in approximately 650 positions being eliminated and a restructuring charge of $0.09 per diluted share in the third quarter. This is a natural progression from the 2012 restructuring of our field organization, which focused on more directly aligning our corporate and field leadership with the elimination of the geographic group functions and empowering our customer-facing employees.
The anticipated saving in excess of $100 million annually from these actions implemented in 2015, but the main reason for this action is to better align and thus strengthen our corporate and field teams to execute our strategy. We will see the full run rate benefit of labor savings starting in the first quarter of 2015, while the non-labor savings, about 20% of the total savings, should be realized throughout 2015. We plan to be at the full run rate of our savings as we start 2016. Turning to our third quarter results. Our revenue declined to 0.5%, or $19 million, to $3.6 billion. Price volume trade-off continues to generate positive results. The divestitures of our operations in Puerto Rico and a portion of Eastern Canada, and a negative foreign currency translation led to a negative revenue comparison in the third quarter.
The divestitures affected revenue by $24 million. The foreign exchange impact on revenue was approximately $12 million. We were pleased with the improvement in our major operating cost lines. Operating cost as a percent of revenue improved 40 basis points to 63.8% and improved $26 million in the third quarter, despite a negative $5 million impact from the accounting effect of lower 10-year Treasury rates on our environmental remediation reserves. The operating cost improvement was primarily driven by improvements in both our solid waste and recycling operations. On the solid waste side, we were able to flex labor costs down as our volumes declined. In recycling, we saw the benefit of continued focus on enforcement of restrictions on contaminated loads and modifications to customer rebate structures. Turning to cash flow.
For the third quarter, we generated $418 million of free cash flow, which is very strong, but down slightly when compared to 2013. The difference was driven by an increase of $58 million in cash taxes, due mostly to the expiration of bonus depreciation and the repatriation of earnings from the divestiture of our operations in Puerto Rico. Our capital expenses for the quarter were $307 million, a decrease of $16 million from the third quarter of 2013. We also had $53 million in divestiture proceeds, primarily from the sale of certain assets in our Eastern Canada markets in the quarter. Year-to-date 2014, we've generated $1.35 billion in total free cash flow and $1.03 billion excluding divestiture proceeds. This is the highest free cash flow we've generated through the first nine months of a year since 2007.
It puts us on track to exceed the upper end of our full-year free cash flow forecast goal of between $1.4 billion and $1.5 billion. Looking at internal revenue growth for the total company. In the third quarter, our collection and disposal yield was 2.3%, with volumes declining 1.3%. This led to total company income from operations growing $20 million, operating income margin expanding 60 basis points, operating EBITDA growing $5 million, and operating EBITDA margin growing 30 basis points. Our collection lines of business continue to see the benefit of the yield volume trade-off. Our commercial yield increased 50 basis points sequentially to 4.7%. Our industrial yield was 3.5%. Residential was 1.4%. Overall collection yield was 3.2%, with volumes declining 3.6%.
The volume change was a 50 basis point improvement from the second quarter. As David mentioned, most of our volume loss was related to the loss of low margin national account business. This yield and volume led to income from operations growing $3 million and margin expanding 60 basis points. The industrial line of business, including energy services, drove the growth in income from operations. In the landfill line of business, we saw the benefits of both positive volume and positive yield in the third quarter, just as we have all year. Total landfill volumes increased 4.2%. Combined special waste and revenue-generating cover volumes were a positive 4.4%. MSW volumes grew 5.7%. C&D volumes grew 15.2%. MSW yield rose to 1.6%. This led to income from operations growing $16 million, which is the sixth consecutive quarter of growth. Margins grew 130 basis points.
Our waste energy operations were essentially flat in the third quarter when compared to the third quarter of 2013. Since we moved the business to asset held for sale status, the suspension of depreciation expense added $0.01 per share. The sale is progressing as we anticipated. We still believe we're on track to close the transaction in late fourth quarter or early first quarter. David already discussed the use of proceeds, but I want to reiterate that we'll be disciplined with the use of that cash to create long-term shareholder value. Finally, looking at our other financial metrics. At the end of the third quarter, our weighted average cost of debt was 4.92%, and the floating rate portion of our total debt was 16% at the end of the quarter. The effective tax rate was 32.1%, compared to 34.3% in the third quarter of 2013.
The rate was lower than our expected rate of 35%, due primarily to state audit settlements and adjustments to our accruals and related deferred taxes resulting from the filing of our 2013 returns. This benefited the quarter by approximately $0.03 per diluted share. We expect our tax rate to be approximately 35% for the fourth quarter. The results through the first nine months of the year put us on track to exceed our full-year targets. We're looking forward to the continued improvement in the fourth quarter and throughout 2015, now augmented by our recent corporate actions. As always, I want to thank our employees for their hard work. They've made the first nine months of 2014 very successful. With that, Rashay, let's open the line for questions.
At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star, then the number one to ask a question. We'll pause for just a moment to compile the Q&A roster. Your first question's the line of Corey Greendale with First Analysis.
Good morning.
Morning, Corey.
Morning.
First of all, I appreciate all the detail in the script about the Wheelabrator impact and the timing of the cost savings. My first question, I know it's early to be talking about 2015, can you just give us some sense of how you're thinking about the price volume environment going into 2015? Do you expect, assuming economic conditions remain stable, a similar trend in 2015 as we're seeing in 2014?
Yeah. It's a great question, Corey. When we look at 2015, I think everybody recognizes what we've done with our yield program over the years. As I think everybody knows, in 2013, we had a very strong incentive plan to drive yield above 2%. In 2015, we're likely to go back to where we were from 2007 to 2010, where we have what we call the pricing gate, so that folks have a substantial portion of their bonus at risk if they don't hit their pricing targets. There's one thing I can tell you is that our pricing target will be over 2% for 2015. With respect to volumes, it's a little early to call, I would say, Corey, look, this is not going to change overnight. I think what you've seen during 2013 is a very slow progression toward flat volumes for us.
I don't expect that to dramatically change. The signs that we're seeing from a volume point of view are more positive than we've seen, frankly, in the last three or four years. I would expect the volumes to continue to improve, I wouldn't expect to see them turn positive, at least in early 2015.
Okay. Given what you're seeing now in price, David, knowing you, that you're never going to be totally happy with this, but it sounds like you're generally happy with where the yield is, why you're thinking about putting the pricing gate back in place, and what you expect to be different when you do that?
Yeah. Look, you're absolutely right, Corey. We can always do better. On the other hand, as you well know, that 2%, 2.3% yield can translate into 8%-10% price increases across certain customer bases because we have some restricted customers. Look, I think everybody knows that the one year in recent memory that we sort of fell off on yield was 2012. We said that's not going to happen again. We have a lot of confidence in our field managers doing the right thing. We have a lot of oversight of our field managers to make sure they do the right thing. I've always been a believer that you need to support those price programs with some type of carrot or stick. In 2012, we didn't do that. We saw what happened. We had a great carrot for the last two years.
Folks are going to do very well by hitting their pricing targets. Next year, we're going to go back to a little bit more of a, if you will, of a stick. I would say, Corey, I'm not concerned about these folks not hitting their core price targets. Having those guardrails in place through the incentive plans supports the program.
Just one more last quick one, if you're willing to talk about this in 2015. With all the moving pieces between Wheelabrator and potentially charges and the cost savings and the bonus depreciation, can you just give us a directional sense of where you expect free cash flow to go in 2015, whether you expect it's going to be up from 2014?
Yeah, Corey, I guess the way we talk about 2015 at this point, because you're exactly right, there's so many moving pieces. What are we going to do with the divestiture proceeds? When is the divestiture going to close?
When we look at it, we say, "Okay, we've got $0.18 of EPS and $120 million of free cash flow that, assuming Wheelabrator were to be gone on January 1st, that's going to be gone in 2015." What we're doing right now is we're saying, "Let's make sure we do the right thing with the proceeds, then let's take a real good look at the core solid waste business and make sure that what we're doing in the core solid waste business is driving that double-digit earnings growth and driving free cash flow growth." You should absolutely see free cash flow growth in the core solid waste business next year. Obviously, you'd see that much stronger if we saw bonus depreciation for 2015.
Great. Thank you very much.
Absolutely.
Your next question comes from the line of Al Kaschalk with Wedbush Securities.
Good morning.
Morning, Al.
I want to focus on the volume topic here. We just posted another 1.3% decline. You've, I think now, arguably have anniversaried the pricing story. What fundamentally is not going on in your end markets that volume can't get closer to positive sooner than exiting 2015?
Yeah. Well, let's look at the various lines of business. Obviously, let's start at the landfill. The landfill volumes have been positive for quite some time, and we would expect those to continue to be positive in 2015. Those volumes are our highest margin and have a great return on capital. If we're going to have volumes growing anywhere, that's where we want them growing, is at the landfill, and we've seen that in the last two years. We expect to see that into 2015. On the collection side, you've got the residential line of business, which generally is our lowest margin, lowest return on capital. We've been pretty judicious in not bidding those residential contracts, particularly because they take so much capital, not bidding those residential contracts at a lower margin. You'd expect to see volumes down there.
On the commercial side, my point is that on the residential side, look, would we love to have more volumes on the residential side? Yes. Are we going to get more volumes by dropping price and lower margins just to get volumes? Absolutely not. You look at the industrial side, the industrial side's actually started to turn fairly well for us. I would not be surprised to see the industrial volumes turn positive in 2015. Again, those are great margin, great return on capital volumes. The only area where I'd say I'd like to do a little bit better is on the commercial side. As you all know, when you get commercial volumes, you can get great incremental margins because of the route density that you create with commercial volumes. Again, we're not going to go out and get commercial volumes by giving up price.
To see those commercial volumes, we've seen sequential improvement all year, and that's a good thing. To see those commercial volumes turn, you've got to get sort of sustained healthy starts and sustained new business starts. We've started to see that in 2013. I'd expect to see that continue in 2015. Again, we're not just going to go out and throw a bunch of salespeople on the street and drop pricing to get new commercial volumes, because if we do that as the largest in the business, that's going to have a dramatic effect on our pricing program. It's what I said in the script. We're going to go after volumes that don't have a dramatic effect on our yield program.
There's a lot of great volumes we can get at the landfill, in energy services, on the industrial side, that are going to be high margin volumes for us. We don't need to go after low margin commercial business by dropping price or low margin residential business by dropping price. We view that price volume trade-off as very positive. We expect to see it continue to improve in 2015, and that's what's going to drive margin expansion for us.
Al, I might give a little additional color, too, to what David said about the industrial line of business. As I mentioned in my script, that's the line of business that shows a lot of the energy services impact. It happens to be one of the few areas in the overall economy where we feel like we have really good long-term visibility, even with declining oil prices. We happen to be in our strongest presence in energy services, is in basins where the production cost for the E&P companies happens to be the lowest. We'll be the last to feel the downturn there. We like the prospects for energy services. Revenue's been growing at about a 20% clip. We're going to be on track to be $225 million-$250 million in revenue this year, and we think we can continue to grow that at a fast pace.
Thank you for the color, Jim. Is there any additional update on the M&A environment as it relates to that particular secular change?
Yeah. There's always assets for sale. The multiples are fairly high. As you know, we did a couple transactions in that field, fairly small transactions. That would absolutely be one of the places where we would look to invest some of the proceeds. Again, whether it's energy services or hazardous waste or core solid waste, we're not going to overpay for the business just to use the proceeds, right? The way we look at it, Al, is we've got sort of a base case of buyback shares and leverage neutrality that would be slightly accretive with the use of proceeds. If we can do better than that by investing in businesses, we'll absolutely do it, but we're not going to invest in businesses where we have to pay a higher multiple than our own stock.
The reality is we have two choices: buy our company or buy another company. We would never buy another company at a higher multiple than we can buy our company. We're going to be fairly judicious in how we look at these acquisitions. If they occur, that's great. If they don't occur, we still think we can buy our stock pretty cheap.
Okay. Thank you. Finally, if I may, just to follow up on the pricing story or the pricing gate. I don't understand, it comes across that there's a change in how you're going to approach the market. Maybe that's a misinterpretation or understanding on my part, why are you altering at least the cadence on pricing here, or reinstalling, for lack of a better word, a pricing gate?
Yeah. No offense, Al Kaschalk, but I think that is a misunderstanding of where we're going with the pricing program.
That's fair. Clarify for us, David. Thank you.
Look, I would say, I think everybody on this phone, and certainly everybody at Waste Management, would say that the pricing programs are my core focus, right? Again, look, I have total confidence that our field managers are going to do the right thing, and I have total confidence that the staff here at the corporate office are going to ensure they do the right thing. Anytime you have something that's that important, like our pricing programs, you've got to have everything in your company directed to making sure it happens. Having confidence in the field managers is great, but that's not everything we can do. Having confidence that the corporate teams are going to support them is great, but that's not everything we can do. You got to have the compensation programs aligned also, and that's really what it's all about.
It's saying, "Look, the yield program is the most important thing that we do at Waste Management. Everything we do, from the compensation programs to the oversight to the field managers, everything we do is going to be structured to ensure that we drive that yield above CPI and above 2%. It's really just, if you will, an insurance policy to make sure that everybody understands that this is going to be the most important thing that we do. Now, having said that, we do want to improve our volumes, we don't want to improve our volumes at the price of reducing our yield focus. That's what happened in 2012.
We said, "Look, we want to get volumes." We went out and got some low margin volumes in some lines of business that affected our yield programs, but also got us positive volumes at low margins. We're not going to do that again. Where we're going to look for volumes are places where we can get good high margin volumes and not have those volumes create a competitive dynamic in our markets such that the market says, "Wow, they're going to lower price in order to get volumes." We think there's plenty of places where we can do that in the manufacturing industrial sector, in the energy services sector. We can go after good high margin volumes without affecting pricing, for example, at the commercial line.
Okay. I appreciate the color, David.
Sure, absolutely.
Your next question comes the line of Adam Baumgarten with Macquarie.
Yes, thanks for taking my question. Could you just give us an update on the progress of some of the various cost initiatives you've had over the last couple of years? I'm just trying to see going forward how much more we should still expect in cost savings from those programs outside of the $100 million you announced today.
A couple different approaches here. One is operating costs, where we felt like we made a lot of improvement on operating cost, both on recycling and on core operations. We will continue to work those costs down. Jim and Puneet Bhasin and their teams are spending a tremendous amount of time in the field with developing some real efficient operations. Really on the recycling front, it's no state secret here that commodity prices have not been good to us over the last two years. We've had to approach, and I guess the good news is there, that it's forced us to approach it from a cost standpoint. We've done that. We saw a bit of improvements year-over-year in Q3, once commodity prices do return to more normalized levels, we think we're in a great position in the recycling line of business.
SG&A costs, yes, we took about $100 million. The long-term run rate will be about $100 million. About 80% of that is labor, 20% non-labor. About $10 million of it will come out in Q4, and we'll be pretty much done with that labor piece in Q1 of 2015. The non-labor has a bit longer tail to it, but that will all come out by second half. For the most part, it'll be all out by the end of Q2 of next year, for a total of $100 million impact overall. Is there additional SG&A savings out there?
We're always looking, I think with what we've done in 2012, predominantly consolidation in the field, and then in 2014 with more closely aligning our SG&A to fit our strategy, I think you probably see us at this point going forward, trying to just hold labor costs flat.
Hey, Jim, I might add for Adam's benefit. Adam, on the collection side of the business, we now are at about 25% of our collection companies that we are certified. They have the technology, the onboard computer in place. They also have the culture and the accountability process and the dollar improvement to their P&L that's hitting the bottom line. You saw that in that 60 basis points improvement in operating margin. We're progressing through the 400 or so collection companies and should complete that effort mid next year. You'll continue to see that improvement in OpEx as a percentage of net revenue as we roll out not just the technology, but the culture, the accountability, and get the dollar value out of that initiative.
Okay, great. What kind of run rate are we at for some of the other programs you've announced in the past, such as the routing and logistics and the back office stuff? Is that sort of what you just spoke about, that sort of still a work in progress, or are we at that kind of full run rate?
Well, Adam, that's what I just mentioned.
Gotcha.
Jim Trevathan again. We are at about a 20, 25% of the 400 collection companies, the others are in the process of implementation. We're not starting them off fresh and new as we finish one. That process is underway and going on at the other 75, 80% of the locations. It is a process that's about a year, we think a year or so left in the implementation process.
Great.
Along the lines of David's conversation about bonus and pricing, a big component of our bonus, the field's bonus, is tied to a huge component of it. Half of it is tied to operating cost. There's certainly a carrot out there for them if they improve on operating costs we saw a 30 basis point swing this quarter, which we were pleased with, but don't feel like we're done.
Okay, great. Thanks. Just on the acquisition side, have you seen seller expectations on the solid waste side come down at all over the last few months or so, or is it still pretty high?
Yeah, I would say that you really haven't seen it come down. Again, look, I feel about that sort of how I feel about the economy. Nothing we can do about it, but we're going to take a particular approach to it. The approach we're going to take is that when we're buying core solid waste type of operations, we know those operations very well. We know exactly what we can do with them when we tuck them into our operations, what kind of synergies we can get. So we can get a real good idea of what that company is going to look like once we bring it into our company and integrate it. Again, there's one business that I know better than any business we can buy, and that's ours. So it basically comes down to a pretty simple fact.
Why would I pay any more than our current multiple? Frankly, I can't imagine we would pay our multiple. We would pay substantially less than our multiple for any business that we don't know as well as ours. So, when it comes to acquisitions, if seller expectations are too high, we've certainly proven in the past that we're willing to walk away from those. I think there's going to be plenty of targets out there that we can look at where we can get that great post-integration synergy that we can hopefully replace some or all of that $220 million of Wheelabrator EBITDA.
Great. Thanks, guys.
Absolutely.
Your next question comes on the line of Scott Levine with Imperial Capital.
Hey, good morning, guys.
Scott.
On the volume side, I think you'd mentioned, I don't know if it was Jim, 15% growth in construction demolition. I was hoping maybe a little bit more color regarding this outlook for C&D, also special waste, the pipeline there, and maybe some additional thoughts on coal ash and how that opportunity is potentially progressing.
Sure. Keep in mind when we talk about C&D, it's a small percentage of our overall revenue. We increased it substantially in percentage terms, 15.2%, but it still is an overall small piece. However, we like the direction. A lot of that came from parts of the South where we're seeing heavy construction, Florida, and Texas to name a couple. We think to the extent that this housing recovery and the recovery in general are intact and don't start to retrace their steps, we think C&D will continue to show nice improvements year-over-year. Special waste for us is a bigger category. It includes energy services, it includes manufacturing and industrial type waste. We feel very good about that. We feel like the barriers to entry in that line of business are higher than they would be in a business like commercial.
It's tougher to get into an ExxonMobil refinery if you're not already in there, and we've been in there for 30 years, than it is to get into a small restaurant. We like the special waste category, and that is a real growth opportunity for us going forward. I can't say exactly what the expectation is for the whole waste stream in terms of percentage growth in 2015, but I will tell you that as I mentioned earlier, energy services, which is a component of that, will continue to grow nicely at 20-plus percent over the next several years. Coal ash, the promulgation of coal ash regulation is coming out here in December. Hard to say exactly what that will mean to us, but we've had a number of conversations with big public utilities.
They are starting to take aggressive steps to remediate, and ultimately, they like working with big companies like Waste Management. We feel good about the coal ash opportunity. There really are going to be a couple of different approaches that those utilities might take. One would be moving coal ash to a landfill. We think it'll be a Subtitle D and not Subtitle C. Second would be asking somebody to come in and actually manage and operate their landfills for them. A lot of them have on-site landfills. The third would be some type of beneficial reuse. Clearly, that would be their preference, and we can help them with all three. We like the opportunities across the special waste stream.
Jim, I might also add for Scott's benefit, on the hazardous waste side, we've got facilities that really support our industrial, the M&I sector. We've added some rail capability. We've got projects beginning to move here in the fourth quarter by rail into a couple of our hazardous waste sites, and that's an advantage that we offer to our customers.
Interesting. Thank you. Then one other thing on the volume side before turning to price. I think you mentioned that you are still seeing 100 basis point drag to reported volume from lost national accounts. Can you remind us how that headwind, when might that taper off? Maybe just your thoughts on the national account business in general at this point in time.
Yeah. It should taper off mid-year next year. When we think about the national accounts, frankly, we think about them by splitting them depending on what kind of container they have out back. If you have a compactor out in back, we can't create a lot of route density, and so we've got to look at that sort of on a standalone basis, right? We're not going to bid those large national accounts, those large compactor accounts, at a low margin. When you look at front-end container national accounts, you can create a lot of route density. The ability to make good money on those is a little bit higher because the incremental cost to service them is much lower than servicing a compactor customer. When we look at our national accounts, we're not going to bid anything at a low margin.
We would be willing to accept a lower margin on a front-end customer than we would on a compactor customer because we get such benefits out of the route densification.
Dave, one other point that for national account customers that we see real clear differentiation, again, are those manufacturing and industrial national accounts where our service offering, whether it's solid waste business or special waste or haz waste, add real value, add to it our balance sheet. Those guys like us, and we expect to grow in that sector.
Got it. Thanks. One last one on pricing, just very quickly. If you could remind us how much CPI-linked pricing business as a percentage of total revenue and where CPI was running right now. Do you think that would be a headwind or a tailwind in 2015 if current trends remain constant?
Yeah. Gosh, we're sure looking for the day when CPI becomes a tailwind for us instead of a headwind, right? About 40% of our business is CPI-linked. When we say CPI-linked, remember that can be all over the board. It can be 100% of CPI. It can be some kind of localized CPI. It can be a percentage of CPI. When we look forward, I would tell you, we aren't going to build our yield programs around CPI. It always amazes me that folks say, "Well, we would have gotten X in yield if it wasn't for CPI." We take a little bit of a different approach.
We say, "We are going to get X dollars of price despite CPI." When we look at our pricing programs, we say, "How many dollars are we going to get out of our pricing program to drop to the bottom line?" If we get 0% from CPI, we're going to find those dollars somewhere else. You'll never hear us sort of say that CPI is a drag on yield. Look, that's just a fact of life. What we get paid to do is to drop a certain amount of dollars to the bottom line. If we can get those dollars from CPI, that's great. If we can't get those dollars from CPI, we're going to get those dollars somewhere else.
Got it. Thanks, Dave.
Thank you.
Gonna go to the line of Michael Hoffman with Stifel.
Thanks for taking my call this morning. Congratulations on the progress. Jim Fish, a little housekeeping first. Fourth quarter, what's the starting share count in the fourth quarter? If I read everything correctly, you've spent a $600 million and bought back stock in three Q. What's my starting share count?
I think it's 463 million.
Okay.
I'll verify-
Sorry, say again.
I'll verify that, but I think it's 463 million.
is there a plan to buy back more in the 4 Q, or you did it? You did the $600?
No plan to buy back more in the fourth quarter. We have the $600 million ASR, of which 70% of it took place at the initiation of that. No plans outside of that $600 million ASR.
Okay. You made a comment, I think it was in your prepared remarks, around D&A and about Wheelabrator, and I think that then explains what my question was going to be. The D&A was down, yet your landfill volume is up. That's Wheelabrator as a percent of revenue.
Right.
What's the trend line? Is it 9.1 is the way to think about it?
9.1 on the previous-
Percent of sales. Yeah.
I would say it's hard to say, but I think that's probably about right.
Okay. All right, getting into the meat of this. On the price gate, David, I guess there's some confusion about what a stick means versus a carrot from your perspective. Would you-
There's no confusion out in the field, Michael, about what a
Just for our benefit, I mean, the carrot clearly, we tease you with a number, but the stick in this case, is it an all or nothing meaning if everybody wins or everybody loses, or is it very individual?
Yeah, no, the way we've looked at it, Michael, is that when you've got 17 areas like we've got, right? If 10 of the areas hit their target and seven of them don't hit the target and the company doesn't hit the target, guess who doesn't win? The shareholder doesn't win. We don't pay our folks, including us, unless the shareholder wins. You've got to do both out in the field. We've got to hit it from a corporate point of view, and you've got to hit it at the local point of view. Look, the only way our shareholders win is if the company shareholder doesn't care if 10 out of 17 hit the target if the company doesn't hit the target.
What we've always done is said the company has to hit the target and you have to hit the target in order to not be penalized on your bonus.
Okay. In the past, this has been very focused around collection, but you alluded in 2Q about disposal and subsequent public appearances by the company at various forums have talked about it. What's the mix between landfill and collection in that gate? Are you distinguishing the two so that you incentivize both areas of focus?
No, we don't want to overcomplicate the gate, right? What we're doing in 2015, and I think as everybody on the phone knows that our reported yield number is a very good approximation of where we've gone with pricing. The real number that we look at is the core price number, because that is the measure of how many dollars drop to the bottom line from pricing. Remember what core price is. That's our price increases across all customers, minus rollbacks and plus our fees and surcharges other than the fuel surcharge. Those are the dollars that drop to the bottom line. When we do it, we're going to do it based on core price, because, again, it doesn't matter what our yield is if we don't drop dollars to the bottom line.
Our shareholders don't get rewarded unless we drop dollars to the bottom line. What we're going to do is we're going to set a target, just like we have over the last few years. We're going to set that core price target both at the company and at the local level. That's the number that we're going to use as part of the gate.
Michael, my guess is that part of your question is related to MSW pricing there and landfill pricing in general. If you look at MSW pricing over the last 8 quarters, on the yield side, we've been in the 1%-2% range. This quarter was 1.6%, and I'm talking about MSW now, was 1.6%, kind of in the upper end of that range, with volume over that same period of time being somewhere between flat and positive 5%. The 8 quarters prior to that, so 2011-2012, yield was between flat and 1% in MSW, and volume was between negative 5% and flat. We've essentially seen a doubling of yield in the MSW line, which is where we really look at it most closely when we're looking at landfill pricing.
Okay, fair enough. On volume, can you talk about your weight per yard trends and also the $ per yard trends in front end loader?
Yeah, the weight per yard has been fairly steady. We have seen, Michael, when I talk about the volumes, again, I don't expect to see a dramatic turn, but I'm much more optimistic that we'll continue to see progress than I've been in the past. On the commercial side, we have seen service increases outpace service decreases for the past three quarters and five out of the past six quarters. What we were talking about before, look, commercial volumes follow construction. When you see high C&D volumes and you see improving industrial volumes, the next step is you're going to start to see improving commercial volumes.
I think you've written about this quite a bit, and I think you're absolutely right that I would expect that in 2015, again, we're not going to see a huge dramatic turn, but we're certainly going to see good, steady progress on those commercial volumes.
Okay, great.
Michael, by the way, the other thing, when I talk about commercial volumes, you'll always hear me talk about commercial volumes. I think the large companies have to look at this as what we do on commercial volumes affects the entire market. If you go out and you just drop price to get volumes across your commercial base, everybody else is going to follow you, and before you know it, you have a price war on the commercial side and everybody starts losing money. When we look at our commercial business, we say, let's make sure that what we're doing in the commercial business is improving our volumes, but not upsetting the pricing dynamics in the market. What's the best way to do that? Quit losing your current customers, right? If you're not stealing a customer from someone else, you can't upset the market dynamics.
Jim Trevathan has put a task force together to make sure that our good customer service gets great, so that the best way for us to grow our commercial volumes would be to retain our current customers. I'd expect to see that occur in 2015.
More defense of the business as well.
Look, more defense of the business without using price, right? We've defended the business before by using rollbacks, and we don't want to go there. We want to defend the business by providing value to our customers. What you'll see in 2015, I think, is an improving economy. Again, when volumes are growing Look, the way you upset a competitive dynamic is by going out and stealing everybody else's business. We're big enough across the country that if we do that, we're going to upset the competitive dynamic. The best way to do it is to go get volumes when there's growing volumes, right? When there's growing volumes, we can take some new customers and get our fair share of the growth. That's not going to upset the market dynamics. When we keep more of our current customers, that doesn't upset the market dynamic.
Now that we've seen the economy start to improve and you've started to see commercial volumes grow, I think we can make good progress on commercial volumes without upsetting the pricing dynamic.
Okay, fair enough. Switching gears to recycling, you've all talked about this peak to trough $200 million profit hit. Half of it was priced, half of it was in your control. Can you talk about where you are in that part you control? You clearly have made progress in 2Q, 3Q, but where are we in that $100 million? How much is left to sort of recapture by running it better?
Yeah, I'll take a shot at it, and then maybe Jim, you can add, because really that's an operating cost question, Michael. It's half operating cost and half coaching of our customers to get them to improve the quality of what they bring us. If they're bringing us trash in the front end, it eventually goes out the back end as trash. We incur cost to process it. Part of that is an education process with our customers to help them understand that what they bring us has to be truly recyclables and not just what they call diversion of materials. The other side is operating efficiencies, and I think we've made some nice improvement on operating efficiencies. We've looked at how many lines we should run at various plants, what's the most efficient way to process recyclables. Really, that was the sole improvements for the quarter.
It was not in pricing because, as David mentioned, OCC pricing was down 17% for us. I think the good news is, as I said, we're forcing ourselves to tackle this on the OpEx side as well as the coaching of our customers.
Yeah, Michael, what I would add, there are some residential contracts that don't have the parameters that we look for today in that contract that restrict the amount of residue, for example, that's in the material. That's the parameter that gets to Jim's coaching, if you will. Part of it is just a contractual issue. As those contracts expire, and we have the industry following, we're able to get the right kind of pricing and cost controls in place and the constituents of the waste material is right that lower the OpEx. Those two issues are tied together to add a little color to Jim's statement. If I were picking an inning, I don't think we're quite at the midpoint, but we're approaching the midpoint. Maybe it's 25%-50% of the way there of that $200 million.
The pricing commodity side of it, we can't affect, the $100 million, we can.
It's 25%-35% of the $100 million is kind of-
There's one component, perhaps, on the OpEx side, we're a little further along, on the other side, probably in that 25%-30% range.
Fair enough. There's another piece of this which has been interesting too, where you're going back and trying to get a processing fee. I think it's Philadelphia you've talked about in the past recently, where this really made a meaningful difference. Where are we in the success of some of that activity?
Philadelphia is a great example, Michael. We had that business. It had a lot of material in it that was just not recyclable. The contract expired. We bid it at a profitable level with all the parameters that we've just talked about in mind. We lost it to the other competitor in the Philadelphia area, lost that volume. We've picked up volume from third-party haulers that recycler had in their mix, and we're making money at that plant. It's a great example of that issue, where we're making the money on that third-party volume that's coming in because we can price it correctly.
Okay. Last item for Jim Fish. As I think about free cash flow, if I end the year, this is net of divestitures, $1.25 billion. I take out Wheelabrator, that's $120 million. If I'm using the $100 million as the baseline for the RIF, I'm getting $80 million of it in 2015, so I get to add the $80 million back. Next components would be there's got to be some growth, there's ongoing operating leverage, and then there's working capital. One, is that the right way to think about it? Lastly, I'd really like to hear what you're doing on the working capital, sort of collecting your money faster and paying your bills slower.
Second question first here on working capital. Working capital was down slightly for the quarter. We showed some improvement in DSO of a half day versus Q3 2013, not the same improvement that we showed last year on the DSO front. Last year, we showed a day and a half improvement. I still think there's quite a bit of opportunity on DSO. On DPO, we did show nice improvement in DPO on how quickly we pay. We improved that by 2.1 days. Less value to improving DPO than improving DSO, both are very valuable to us, and we're moving in the right direction. I would have preferred to move a little quicker on DSO than we did, but I still think we've got both of those as improvement opportunities going forward.
Free cash flow, there's a couple things that affect free cash flow as we think about 2015. While we're not prepared, obviously, to give a number, we know that the cash taxes related to the repatriation of Puerto Rico earnings, that will not recur in 2015. That's somewhat of a tailwind, if you want to think about it that way. I think, we're still TBD on what happens with bonus depreciation. We didn't have it, obviously, this year. There's rumors that we will have it next year, but we're not counting on it. Of course, the big impact on free cash flow will be the divestiture of Wheelabrator. As David mentioned, that's $120 million in free cash flow that goes away, call it January 1, 2015.
We're going to have to kind of reorient everyone to think about 2015, whether it's EPS or free cash flow or EBITDA, any of those financial metrics, think about it excluding Wheelabrator as we go through a process of replacing. We've said we want to replace at reasonable prices the EBITDA and free cash flow, if we can't, then we'll go about it with other means by way of share purchase and leverage neutrality.
Remember, Michael, on the reorg, we're basically getting four months of benefit
In 2013
'14
From the reorg. You get basically, 2014, you get basically eight months of benefit next year. It won't be $100 million next year, it'll be a little less than 100.
Well, I think Jim mentioned you're getting $10 million of it in the fourth quarter. If it's $100 million, I'm planning with, I got 90 next year, and there's sort of 15 or 20 of that's the non-labor, the rest is labor.
Yeah, I'm just going year-over-year.
Okay. All right, thanks.
Thank you.
Your next question on the line of Joe Box with KeyBanc Capital Markets.
Yeah, David, just to follow up for you on the competitive dynamic. We're going on our second year of volume recovering in the industry. With commercial picking up now, we've pretty much seen all the waste streams get better. I'm just curious, in your historical context, do you think that 2015 is the year where maybe some of your peers start to get behind pricing and we see a nice step up there? Do you think that we're probably looking at just a continued slow recovery and just overall industry pricing?
Yeah, it's a great question. Look, I think an improving volume environment is always good for pricing. Whether you're selling widgets or garbage. I do think that what you'll see is more rational pricing behavior. I do think what you'll see is the larger companies saying that it's a little easier to take the risk on losing volumes by using price. We all know that you get a much bigger effect on the bottom line from price than volume. Yeah, I would say that as you see the volume environment improving, you should see the pricing environment stabilize.
Not to put words in your mouth, probably more of a slow recovery than a step function up?
Look, I can't control what anyone else does. I can only control what we do. To the earlier question, we're pretty good at 2%-2.5% yield. We can still improve, don't get me wrong. We know how to get that 2%-2.5% yield. Now it's time for us to say, "Okay, how do we get that yield?" We're not going to give up on that yield, but how do we get that yield and stem some of these volume losses? Frankly, I think some of our competition is in a position where they need to do a better job of getting higher margin volumes and focusing more on price, because I think that we all know that's what helps the bottom line.
What I would say is I think you'll see more balance in the overall industry, where everybody's doing a little bit better on volume, but everybody's doing better than 2% yield. Again, I can't tell you what they're going to do. I can promise you what we're going to do. We're not going to go below that 2% yield, sort of that 3.5%-4% core price. We're not going below that no matter what effect it has on volumes. What I'm saying is, I would expect the effects for us on volumes to be better in 2015 than it was in 2014.
Great. Appreciate that. Maybe changing gears to the restructuring real quick. I completely understand the need to align corporate with some of your customer-facing employees. Can you maybe just walk through an example of the type of position that was eliminated, or maybe some of the various efficiency gains that you guys are pursuing that will help align the company?
Yeah. When we look at the reorganization look, what we did, these were very good folks, a lot of them with the industry a long time, very smart, all doing good things for the company. What you find when your organization, we call it the funnel. One person sends something out to the field and says, "I need you to work on X." If that was all that went out to the field, the field wouldn't be distracted, life would be good. The problem is, when you've got 30 people doing that, 30 things goes out to the field, all of a sudden the field gets distracted because they have too many things coming at them from too many directions. We call it the funnel. That there's too many things going into the funnel and heading out to the field.
When we did the reorganization, we said, "We're not going to look at it from a people point of view. We're going to look at it from a function point of view." When you look at it from a function point of view, if it's not driving one of what we call our five swim lanes, and those, as you can imagine, revolve around customer service and pricing and costs. If it's not driving one of our five swim lanes, if that function is not driving it, then it's a function that we can do without for now. It's a nice to have, not a must-have. That's the way we looked at it. We looked at it, frankly, from a functional point of view.
How do we make sure that everything that we're doing at corporate is driving performance out in the field rather than slowing down performance out in the field? That was the philosophy we took, and I think what you'll see is that philosophy will lead to much more alignment between our corporate staff and our field operations.
Understood. Thanks for the color there.
Absolutely.
Your next question on the line of Charles Redding with BB&T Capital Markets.
Hi, gentlemen. Thanks for taking my call. Just a brief follow-up on national accounts. Is it fair to assume that this segment does give you some degree of visibility with respect to forward expectations, and what are you seeing fundamentally in terms of spending trends among the larger customers?
Yeah, look, again, as Jim Trevathan pointed out, those national accounts span a lot of different types of businesses, from front-end container to compactors to industrial clients. I'm not sure that you see a dramatic change from those large national accounts. Those large national accounts are just like us, which is, we're looking for ways to drive down costs through efficiency. Right?
When we work with large national accounts, what we try to tell them is, "Look, you can look at this based on price if you want, but the way we look at it is we're going to start out with a particular price, and then we're going to figure out how to save you money." For example, if you take that compactor customer, if our competition is picking up that customer three times a week and we're picking them up once a week, it's going to cost us a lot less to do it. How do we figure out how to pick up that container when it's full rather than picking it up when it's half full?
When we deal with national accounts, our view is, look, we want to help you save money, but we can help you save money while we continue to make money. You can't take a national account view that we're just going to cut the price and make less money. That's what we will not do because that just doesn't work for our business. What we can do is find ways for each of those types of customers, the front-end container, the compactors, those large industrial companies. We can find ways where we can make the margins we want to make, and they can lower their costs. For example, at a manufacturing industrial customer, you might recycle materials like metals that help them lower their overall cost, and we can do that better than anyone.
When we approach those national accounts, we do look at it as how do we save them money, but how do we save them money while maintaining our profitability?
That's helpful. Thanks. Quickly, in terms of fleet spend, does the drop in crude really have any impact on the current appetite for CNG? I guess if not, is there a price on crude that might impact how you kind of approach future purchases?
Right now that differential is still over $1.50, and so I would say it doesn't affect what we're doing on fleet purchases. As you've seen, oil's come down a little bit sharper, but natural gas has come down also. We're still a long way away from the tipping point where we'd say we want to be diesel. Even with neutrality, this is also about our customers. Our customers are demanding a cleaner truck, and clearly natural gas is going to be cleaner than diesel.
Great. Thanks, Dave.
Absolutely.
Your next question comes from the line of Alex Sakkestad with Goldman Sachs.
Thank you. Good morning, everyone.
Morning.
I wanted to ask about the acquisition landscape. You talked about the multiples, the folks are asking, can you put a little bit more color around where the relevant ranges are for multiples? Then I think you implied that they seem elevated. What do you think is driving that? Because looking at the underlying fundamentals in the business, CPI is pretty low, and so that's tough for pricing and volumes are still sluggish. What's sort of driving that elevated multiple for deals out there?
Yeah. It's not just an elevated multiple, it's also that folks are doing better, just like us. Everybody's doing better from an EBITDA point of view. The valuations have gone up both from a performance point of view and any time that you're in an improving market and folks have a lot of confidence going forward on their business. Look, it comes down to this. What we're trying to do is to buy their business at trailing earnings. If they're looking forward into the future and saying, "Gosh, trailing earnings, I'm not sure if those earnings are going to get much better. Trailing earnings looks good to me," they'll sell at a certain multiple. If they say, "Gosh, those forward earnings look really good to me," they'll sell at a different multiple.
For example, we aren't buying businesses in the recycling business, but there's not a lot of people feeling greatly confident about their recycling business, and that's going to drive to a lower multiple because they say, "Look, I'll take five to six times for my business because I don't see my EBITDA going up dramatically over the next five years." On the solid waste side, it's a little bit different. I think people are seeing EBITDA going up, and if you look at it from just a discounted cash flow model point of view, if you think your business is going to get a lot better over the next five years, you're going to want a higher multiple for your business. It's really just pure sort of finance and what you believe about the market going forward.
I still think back to the original part of the question, I still think that we can buy good local businesses at call it a post synergy number of five to six times EBITDA. As you're buying larger sort of regional type of competitors, that multiple is going to be a little bit higher because you get a bigger slug of business with one transaction. Post synergies, I'd expect those to be sort of six to seven and a half times earnings, six to eight times earnings, I mean EBITDA, I'm sorry. Anytime you can buy a business at five to seven times EBITDA or six to eight times EBITDA, you're buying it at below our current market multiple, and that makes it accretive to our shareholders.
Got you, Dave. I appreciate all that color. Just one last question from me on the collection volume side. It's been asked a couple different ways, but had a little bit of a follow-up there. As I look at the last four quarters, I think specifically the commercial collection volume number has been down 3%-5%. The fourth quarter of 2014 will really be the first quarter where we're going to be comping a material volume decline in that segment. How are you guys thinking about commercial collection volumes going forward? Is the expectation that you should see the volume erosion moderate there even as you pursue your pricing initiatives, or is the expectation that we'll continue to see that 3%-5% volume decline in the commercial collection business as we go forward over the next 12 months?
Yeah. Again, look, it would be very easy for me to sit here and say to you all, we're going to see that commercial volume turn positive. We could do that tomorrow. The problem is, in order to do that, we've got to put a lot of feet on the street, take a lot of business from a lot of people, and we all know what's going to happen to the competitive dynamic if we do that. We're taking a little bit more of a measured approach toward the commercial business. That is, let's make sure that we get our fair share of growth, and let's make sure that we don't lose our customers, that we can reduce the churn rate. If we can do that, we can get volumes without upsetting the competitive dynamic.
That means that the turn in commercial volumes is slower than it would be if we put 1,000 salespeople on the street and started trying to upset competitive market dynamics. I would absolutely believe that we're going to see that trend. I'd be disappointed if we see that trend coming out of 2015 still at the negative 5%. We haven't put pencil to paper to see, do we believe it's going to go below that negative 3%, but I certainly expect the trend line on that to be positive throughout 2015.
Okay. Got it, Dave. Thank you very much.
Thank you.
Your next question in line, Barbara Noverini with Morningstar.
Hey, thanks for taking the extra time this morning. Can you just give us a quick reminder of how the organizational structure of the recycling business might have changed as a result of your restructuring actions? How has field and corporate level responsibility for the business shifted, and where does recycling fit into these lines of sight that you've described? Is it a more integrated way of managing the business than it might have been pre 2012?
Yeah. What we did with the recycling operations is right now, I think we all know that the biggest challenge in our recycling operations is an operational challenge. How do we make sure that we continue to make money when we're getting more contaminated loads? What we did with recycling was we didn't do anything at the field level. The responsibility at the field level didn't change. At the corporate level, we said, "This is really a process improvement organization that we have here at the corporate level, let's run it like that." We took our recycling operations, and we basically put them under the gentleman, Puneet Bhasin, who is running our operating programs. Right? Whether it's driving efficiency in our routing system or driving efficiency in our recycling plants, they're both about driving efficiency.
We basically took that operating portion and put it under our operating officer. The ultimate responsibility remained in the field. The ultimate responsibility for the profitability of that recycling facility remains out in the field.
Got it. Nice to see some positive changes coming through there. Thanks.
Thank you.
We're now turning the call over to our CEO, David Steiner, for closing comments.
Thank you all for joining us. Just as in Houston, we're starting to see the good weather from a weather point of view, we're starting to see very good weather from our business point of view. I would tell you that given the state of our business and given the way that we've aligned our organization, I think everybody in our company is more optimistic about 2015 than we've been in many years. We look forward to having you all on our fourth quarter conference call, where we'll tell you about our expectations for 2015. Thank you.
Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1:00 P.M. Pacific Time today through 11:59 P.M. Eastern Time on November 12th, 2014. The conference ID number for the replay is 8203798. Again, the conference ID number for the replay is 8203798. The number to dial for the replay is 1-800-585-8367, 855-859-2056, or 1-404-537-3406. This concludes today's Waste Management conference call. You may now disconnect.