Morning. My name is Janisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management First Quarter 2014 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I will now turn the call over to Ed Elbel, Director, Investor Relations. Thank you. Mr. Ed Elbel, you may begin your conference.
Thank you, Janisha. Good morning, everyone, and thank you for joining us for our Q1 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, you will hear forward looking statements, which are based on current expectations, projections or opinions about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in 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 Q1 of 2013.
During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share. David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the schedule for today's press release. For purposes of comparison to the prior period, our Q1 2013 EPS, income from operations margin, operating EBITDA and operating EBITDA margin have been adjusted to exclude items that management believes do not reflect our fundamental business are not indicative of our results of operations. These measures in addition to free cash flow are non GAAP measures. Please refer to the earnings press release footnote and schedules, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non GAAP measures.
This call is being recorded and will be available 24 hours a day beginning approximately 1 p. M. Eastern Time today until 5 p. M. Eastern Time on May 8.
To hear a replay of the call over the Internet, access the Waste Management Web atwww.wm.com. To hear a telephonic replay of the call, dial 8558 592,056 and enter reservation code 105,000,000,000,000,000,000,000 Time sensitive information provided during today's call, which is occurring on April 24, 2014, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without 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.
Our Q4 conference call, we said that January results indicated the strength of our business. That strength continued in February March and led to a strong start for the year. The momentum in our yield and cost control programs continued throughout Q1. Our field operations teams also did a great job of managing the effects of the severe weather that pervaded the quarter. As a result, we earned 0.49 dollars per share, an increase of more than 22% when compared to the Q1 of 2013.
We saw good improvement in all areas: income from operations, operating EBITDA, margin and free cash flow. We're encouraged by the strong start and we expect the momentum to continue as we enter our seasonal upturn. Our yield programs continue to drive our margin expansion. For the Q1, our collection and disposal yield was 2.6%, which is the 7th consecutive quarter sequential yield improvement. The effect of low inflation rates on our CPI based contracts is certainly a headwind, but we overcame that headwind to drive yield to its highest level in 3 years.
Core price increased to 4.2%, a year over year improvement of 100 basis points and the highest level we've ever seen. Each of our lines of business had positive yield except C and D, which was impacted by higher priced Superstorm Sandy tons we received in 2013. Average rates per unit for MSW, commercial and industrial are also the highest rates that we've ever seen. When compared to the Q1 of 2013, average rates increased 5.6% in the industrial line, 4.9% in the commercial line and 4% in RMSW line. This is a tremendous accomplishment by our team.
As we've repeatedly stated, we need yield at about 2% to see margin expansion, and we will execute our yield programs to continue to drive that Clearly, this has some effect on volumes, but the trade off remains very positive. Turning to volumes. In the Q1, volumes were negative 1.8%, which is an improvement of 40 basis points from the 4th quarter. The losses in our commercial volumes improved 30 basis points from the 4th quarter, but I wouldn't yet call that improvement a trend. Roll off volumes were down about 200 basis points from the 4th quarter, but we would expect those losses to moderate as we enter our seasonal upturn.
Our landfill volumes, particularly special waste, were strong in the Q1. However, they were offset by declines in the collection lines of business. As we said in the past, we're not focused on getting the most volumes. We're focused on getting the best volumes. We're looking for the best mix of yield and volumes to drive income from operations, dollars and margin.
Jim will give more details, but despite negative volumes, overall income from operations grew more than 13% and our income from operations margin grew 140 basis points. Operating EBITDA increased about 7% and operating EBITDA margins increased 100 basis points. Our traditional solid waste businesses performed very well in the Q1. We saw strong income from operations and margin improvement in our commercial, industrial, landfill and transfer station lines of business. And our overall traditional solid waste income from operations margin grew 50 basis points.
Our recycling operations drove a little less than a $0.01 decline in earnings per share compared to the Q1 of 2013. This decline is due to the 1.8% drop in average commodity prices for the quarter and weather related operating challenges. We've seen our operating costs improve as we tighten our enforcement on contaminated loads and modify the methods for calculating rebates to customers. We're also engaged in broad based efforts with our recycling customers, consumer brand owners and others to educate them about the evolving recycling and commodities markets and how to reduce contamination. Overall, we still expect to achieve our recycling guidance of flat earnings per share when compared to 2013.
Turning to our Waste to Energy business. In the Q1, operating results were essentially flat when compared to 2013, but overall results benefited from a spike in electricity prices in the quarter driven by the colder than normal winter. In April, we're seeing electricity prices moderate as warmer weather has arrived on the East Coast. So we expect earnings from our waste to energy operations to be similar to 2013 in the remaining three quarters. Looking at free cash flow.
The Q1 of 2014 is the highest free cash flow quarter since 2,008 at $484,000,000 driven by our strong results and working capital management, supplemented by $166,000,000 of divestitures, primarily our waste to energy joint venture in China. So 2014 is off to a strong start and we have the momentum to achieve our full year goals of adjusted earnings per share of between $2.30 $2.35 per fully diluted share. With the strong first quarter free cash flow, we now expect full year free cash flow between $1,400,000,000 $1,500,000,000 As we move through the 2nd quarter and see the seasonal upturn, we will likely refine the various elements of our guidance in connection with our Q2 results. But for now, we've demonstrated that our field and corporate managers can execute our pricing and cost control program and through their efforts, we're confident we can achieve our goal. I'll now turn the call over to Jim to discuss our Q1 results in more detail.
Thank you, David. As David mentioned, we had a strong performance in all aspects of our income statement. Our revenue grew 1.8% in the Q1 to $3,400,000,000 Strong yield and acquisition revenue were the main drivers with volume declines and a negative foreign currency translation, muting revenue growth. The FX impact on revenue was approximately $17,000,000 We continue to see improvement in all our cost lines. With respect to operating costs, operating costs as a percent of revenue improved 50 basis points to 65.7 percent and increased $23,000,000 in the Q1.
Costs associated with recently acquired businesses increased almost $30,000,000 and were partially offset by improvements in disposal and labor costs. SG and A costs improved $15,000,000 to $375,000,000 and improved as a percent of revenue by 70 basis points to 11%. With the strong results in the Q1, we expect us to achieve our full year SG and A goals. Turning to cash flow. For the Q1, we generated $484,000,000 of free cash flow, an increase of $136,000,000 when compared to 2013.
We accomplished this in part by growing our net cash provided by operating activities $7,000,000 to $584,000,000 improving working capital and by maintaining discipline on capital spending. We grew free cash flow despite over $100,000,000 of headwinds from the payment of our annual incentive compensation and the maturity of interest rate swaps related to a planned senior note issuance. Our capital expenditures for the quarter were $266,000,000 the same amount that we spent in the Q1 of 2013. We also had some divestitures in the quarter. Most notably, we monetized our investment in China for about $155,000,000 Even if you exclude the divestiture proceeds, our free cash flow of $318,000,000 was still the highest free cash flow since 2,008.
Looking at internal revenue growth, we continue to execute on the trade off between yield and volume to determine the best mix in order to maximize income from operations dollars and margins. Our strategy worked in the Q1 just as it did for the full year 2013. For the total company, in the Q1, our collection and disposal yield was 2.6% with volumes declining 1.8%. This led to income from operations growing $55,000,000 margin growing 140 basis points, operating EBITDA growing $49,000,000 and operating EBITDA margin growing 100 basis points. Looking at the Commercial and Industrial lines of business, the yield and volume trade off worked well.
In both strong yield results offset volume declines resulting in commercial income from operations growing more than $6,000,000 and margin growing 50 basis points. In Industrial, income from operations grew almost $7,000,000 and margin expanded 110 basis points. This is the 7th consecutive quarter of year over year margin expansion in Industrial. Yield above 2% in those lines of business drove margin expansion despite negative volumes. This did not hold true in our residential line, where yield was 1.1%, driven by low CPI.
In addition, we lost a few contracts where we saw competition significantly lower price to levels that were below our required return on capital. We expect to see margins improve as our cost control programs drive down operating costs and as we add new residential contracts at acceptable returns. In the landfill line of business for the Q1, we saw the benefits of positive volume and positive yield. Total landfill volumes increased 3 0.8%, combined special waste and revenue generating cover volumes were up to 7.9% and MSW volumes grew by 0.9 C and D volume declined 2.2%, primarily due to a tough Sandy comparison. This led to income from operations growing $11,000,000 which is the 4th consecutive quarter of growth and margins grew 130 basis points.
Finally, looking at our other financial metrics, at the end of the Q1, our weighted average cost of debt was 4.9% and our debt to total capital ratio was 62.8%. The floating rate portion of our total debt portfolio was 18% at the end of the quarter. Our income tax rate in the Q1 was 29.6% due to a non cash adjustment to our deferred taxes from state tax law changes. This benefited us by a positive $0.04 per diluted share in the Q1. The year over year benefit was a positive $0.02 per share.
For the next three quarters, we expect our tax rate to be approximately 35%. Our first quarter results have started 20 14 on the right path. We are encouraged by the results, which could not have been achieved without the hard work of our employees. I know they're focused on making 2014 a successful year and I thank them for that. And with that, Janesh, let's open the line for questions.
Your first question comes from the line of Hamzah Mazari of Credit Suisse.
Good morning. Thank you. Good morning. Hey, good morning. Just a question on the volume side.
Do you have a sense of how much of your volume loss is self inflicted in terms of walking away from low margin business versus other competitors in the marketplace being more aggressive? And then separately on the volume side, is the spring slowdown within housing going to push out some of the commercial on those two topics within volume? Yes. So, I think, on those two topics within volume?
Yes. Hamzah on the first one, I don't think the slowdown in housing will push it out. As you know, we've been waiting for that commercial volume to see significant improvement. I don't think that that 1 quarter slowing down in the housing starts or resales will have an effect on that. On the other one, you have to look at the various lines of business, right?
I don't think there's any doubt that in the residential line of business and in the industrial line of business, we walk away from low margin business. There is absolutely no doubt about that. On the commercial side, there's just not a lot of growth. And our strategy is that we aren't going to chase volumes, because if we chase volumes and because there's not a lot of growth, we're going to have to take those volumes from someone else. And that's just not something we're willing to do.
We're not willing to go out and grab volumes at a low price because if we do that that's what starts the downward spiral in price. And so but when we see those volumes pick up, we fully expect to get our fair share of that. So I would tell you that we walk away from residential and industrial business that's low margin. That's when it's low margin, it's generally low return on capital. So we're making a good business decision to walk away from it.
On the commercial side, I wouldn't say that we are intentionally walking away from business. I would say that we're more focused on retaining the business that we have than going out and trying to get new volumes with low price. But once we see the rising tide, when we see those commercial volumes pick up, we fully expect to get our fair share.
And then just on pricing, could you give us your thought process in putting up the pricing bonus structure? You put a pricing gate in place a couple of years ago and then it went away. How permanent is this pricing gate that you've set up? And should we expect is this a signal to the market that you're more disciplined and you were not disciplined previously? How do you how should we think about these pricing gates coming in sporadically and then maybe going out at certain times?
Yes. Look, Amza, I think everybody knows that the strategy at Waste Management is that you're always better off getting yield over volumes, right? And so we're always going to be a yield focused company. Now you can get yield in a lot of ways. You can have the gate which that you mentioned which is sort of a hammer if you will.
You can have look, we meet with our folks every month to see how they're doing and you've got that as sort of a governor on it. And then you can put in place an incentive program. Look, when we saw the yield go down dramatically in 2012, we knew we had to do something dramatic. And so we worked on to just rely on meeting with folks every month and saying, obviously, your job is expected to be driving yield. We wanted to get a little bit more incentive.
So we decided to make it a positive incentive. And as you can see, what quadrupled yield since we put that in place. If that's what we have to do to get it done, it is a great trade off for our shareholders, I can guarantee you. So there will always be something that we will do with respect to yield. Either we'll put in place a gate, we'll put in place an incentive program or we'll make sure that we have our focus on it so that our field managers focus is on it.
We will always do that. So we're going to use those 3 a combination of those three things to continue to drive yield.
Okay. And just lastly, I'll turn it over. Maybe for Jim, could you help us understand why you're not raising earnings guidance, but free cash flow guidance is going up? Is that all asset divestitures? Or maybe give us a little more color on the delta between that?
Yes. So a couple of questions there Hamzah. And I think the reason we're not raising free cash flow guidance is because while we were pleased with the quarter, this is the Q1. And so we've said that we'll refine our guidance in the second quarter. You think about free cash flow, I think that was your question was kind of the components of free cash flow.
And I think that's kind of what you're getting at is which pieces of it are sustainable and which are not. If you think about free cash flow and break it down to its component parts, CapEx was essentially flat, was basically exactly flat actually. And then EBITDA was up $49,000,000 driven by a nice quarter for Witte, driven by some core business improvements and driven by SG and A, cost controls. And then the other piece, the other big mover there outside of divestitures, which was almost exclusively the Chinese divestiture. The other big mover was cash flow from operations.
And we had about 100,000,000 dollars 106 to be exact of headwind there from the termination of the the forward starting swap and then from the bonus payout. And so working in the right direction there was DSO and BPO, which were better by a day 5 days respectively, so year over year. And I think we have some room to improve there. So I would argue that the quality here is pretty strong. Most of what I've talked about, I would argue, is sustainable with the obvious exception of the one time asset divestiture.
Hamzah, I think the important thing is that we did $318,000,000 without divestitures, which is the highest we've had since 2,008. And that's with 100 $1,000,000 of headwinds. And the beauty of it is, those $100,000,000 of headwinds were 1st quarter headwinds, they don't recur in the second and third and fourth quarters. So we had a great first quarter despite the headwinds. We won't have those kind of headwinds in the future quarters.
So obviously, we're very optimistic about free cash flow. But as Jim said, we've always said whether it's a good winter weather or a bad winter weather, it is hard to judge a full year by the 1st 3 months of the year. So we like to see the seasonal upturn before we make a call on how the full year is going to play out. And so we thought that's what would be prudent to do right here, which is say, let's see what the seasonal upturn brings in the Q2 and we'll refine the guidance as appropriate.
Okay, great. Thank you.
You.
Your next question comes from the line of Joe Boggs of KeyBanc Capital Markets. Good morning. Good morning.
Question for you guys on landfill pricing and volume dynamics. Per your release on an active landfill basis, it looks like volumes were up by about 3.4%. 1, can you guys give us a sense on yield for those landfills? And then 2, you had a peer that reported landfill volumes up, I believe it was 9% earlier this week. Can you just help me bridge the gap there?
I'm curious if that's a function
of just geography or maybe if you're seeing a little bit
less volume here,
Lambda volumes, it's driven those big numbers when it happens for us, I won't speak to other companies. But when we get those type of big numbers, it's generally special waste jobs. And you got 2 things going on there. You got year over year comps, right? If we had a great special waste quarter last year, it's harder comp.
And then you've got the fact that those special waste jobs are jobs that they vary from season to season. So what I would tell you is that we are very encouraged by the landfill volumes. We still see a very strong pipeline. So we'd expect them to be positive for the full year. A pricing perspective, as we said, look price doesn't particularly matter as much in special waste and in C and D as it does in MSW.
So when we look at the yield components, we look at MSW. When we look at the average unit price on the MSW line, we grew at 4%. So we're well on our way to getting what we've said is sort of that 5% to 7% price increase to landfill. At 4%, we're well on our way to getting there.
Perfect. That's helpful. Thank you. And David, I want to process this question by just saying, I think that pricing discipline out of you guys is critical. But I'm just curious, when you started your pricing strategy about a year ago, were you expecting your peers to buy into raising rates?
And then maybe what's your view on sustaining this strategy? If the waste recovery continues to be relatively slow, is this something that you could stick with this magnitude for another year or 2?
Yes. Look, I can't speak to what we expect or don't expect out of our competitors. All I can tell you is what we're going to do. And it goes back to what I said earlier. Look, when you've got sort of a fixed buy, there's only one way you can get volumes and that is to go out and steal them from someone else.
And we've seen what happens when we do that. Look, we've done that in the past, where we steal volumes from someone else, what do they do? They steal them from us. And before you know it, you have a down price spiral. And you all have heard me say it a 1000000 times.
It's a 2 to 1 or 3 to 1 trade off. You can get 1% of price and lose 2% to 3% of your volume and you're still ahead of the game. And so you just can't chase that downward spiral because you can never get enough volumes to make up for the drop in price. So you're not going to see that strategy change for us. Now, look, would we rather have more volumes?
Absolutely. But what I'm saying is, when we get more volumes, it's not going to be because we're going out and stealing them at a lower price. It's going to be because everyone's getting more volumes and we fully expect to get our fair share of the increase in volumes. And so what we've seen is that we think the economy has moderated. We don't expect to see the volumes improve dramatically, Q2 with the seasonal upturn.
So I would say that we have a sort of a muted sense of optimism on volumes, but that you're not going to see us change our strategy because it's a strategy that drives shareholder value. And that is we're always going to favor yield over volume.
Right. Just one quick one. Jim, can you remind us what the flow through is for that $27,000,000 variance for electricity?
So most of that electricity was from rates, Joe. In fact, I would say it was exclusively from rates. Our kilowatt hours were actually down slightly due to some permanent plant shutdowns, reduced load and some operating changes. So I would say that the top line benefit we saw was exclusively from rates and so that ends up flowing through the bottom line.
Great. Thanks for your time guys.
Thank you.
Your next question comes from the line of Michael Hoffman of Wedbush.
Good morning.
Good morning,
Michael. David, Jim and Jim. So I need a little clarity because there's numbers being thrown around and I may have confused myself. In your release you show and it's a data point I think is a terrific one you show. Do you show having done 21,300,000 tons at the landfill in 2014 versus 2021.1 and then that a year ago and 2021 had Sandy in it.
So to get to the I mean that's just about 1%, which I thought was great given the Sandy comparison, but everybody's talking about 3% or better. Help me understand how I'm understanding volume at the landfill, if I could.
Yes. Look, Michael, as you know, when we look at internal revenue growth, we don't look at it on a mix and price. And then when we look at at mix and price. And then when we look at least at C and D I'm sorry, when we look at special waste, we put all of it into volume because you can't really pull out the price. And so you might get some little deviations there.
But when we look at it, we say the numbers are obviously indicative of the trend. And I think you hit the nail on the head. The trend is obviously positive, particularly given the Sandy comparisons, particularly given that so many of our operations were shut down during the quarter that the landfill trends are clearly positive.
Okay. So the $3,800,000 when that was given earlier that's actually the revenue growth. Is that how you're I just want to I actually think it's great that you showed a 1% volume the way you've put it in the chart, given all of the headwinds issue you just described.
Right. So what I'm Yes. The 3.8% is the total growth from volume. But again, with waste, because special waste prices and transportation costs move around a lot, we don't split out price and volume in special waste. We put it all into volume.
So that skews the numbers a little bit. But again It's a ton. But directionally, you can see they're both positive directionally.
Perfect. So the follow on to that would be, if you recall out of the 21.1 that total tons that you showed in disposal, how much of that was Sandy? So in reality, the landfill in 1Q 'fourteen weather aside saw better than a 1% volume growth? Yes. Tons growth.
Yes. That's absolutely right. Okay. And so the next question would be, if you were looking at who's driving across the scales, do you have a sense that this is more construction or it's actually maybe more commercial? And where I'm getting to is, are we starting to see that secular recovery of volume in the container, the commercial market that somewhere out here in the next quarter or 2 starts converting into that operating leverage from service intervals?
I think that's right. I think if you ask our folks on the field, they tell you that special waste and C and D are where they see this real strength in the pipeline. Obviously, MSW has been a strength now for many quarters in a row. But I think what they tell you, they're very optimistic is about special waste and C and D. I mean look, the reality is that you had a lot of pent up demand built particularly in the Northeast and the Midwest.
You had a lot of pent up demand built up during the winter and you see a little bit of that. But we also think that we're seeing a secular pickup obviously in the construction industry.
Okay. On the free cash flow and I appreciate that you're being clear that you can add or subtract the asset sale number to do the calculation. But on a if I looked at it on a cash from ops less capital spending approach, what does it take for this business to do $1,500,000,000 on those metrics? And because asset sales come and go. Where is the leverage without getting help from volume?
This is you running the business better. Where do we see that? Where should we look for that as we progress and how quickly could you get it?
How quickly can we get it? I don't know. I think we're making pretty good progress here. If you exclude what you're doing is excluding that divestitures piece, which we look at that as well. And then you get to the progress we're making on working capital.
David and I both have kind of touched on that today. And we still have some room there, Michael. DSO improved by really only a day and VPO by 5 days. So fairly pleased with the improvement in DPO, but not necessarily pleased with the improvement in DSO. I think both of them still have room for improvement.
So I would argue that that's an area for continued improvement. EBITDA, dollars 49,000,000 in EBITDA and growth there is strong in light of kind of what we faced the winter season. Our Witte business did a nice job of offsetting the weather impact in our core business, but our core business still grew, which I think is an important thing to mention. Our core business grew and we had we had some challenges and we didn't mention it in our scripts because we just don't want to blame anything on the weather. But we felt pretty darn good about the growth in EBITDA, when at the same time, we were shut down in Houston for a couple of days.
We were shut down in Atlanta, I think, for 4 days in the quarter. So there clearly was some impact on the operation. But it does speak to a couple of things and that is that Jim Trevathan and his team did a nice job of pulling some cost out when we knew we were going to be shut down. So I think back to your original question though, hard to say when exactly we will get to a number in the 1.5 range excluding divestitures. But I sure think we're on the right path with our cost control program, with our yield program and then continued work on CapEx discipline and working capital.
Yes. Michael, look, just to add to that, from a sustained $1,500,000,000 point of view and you said talk about it without volume, the reality is you can't get there without volume, right? I mean, look, we can we've said it a 1000000 times, if we've said it once, which is you can't get margin expansion unless you get 2 percent yield, right? And so if you don't get the yield, you have no chance of getting there. You can't get there on cost of the loan, right?
So you've got to get above 2% yield or else you have no shot at getting there. So we've done that. We've driven our yield up to 2.6%. If we got back the money that we lost from the lost volumes, which is mostly intentionally lost volumes, we're there, right? And so I would tell you that from a sustained long term point of view, dollars 1,500,000,000 happens when we see our commercial volumes turn back to flat, when we stop seeing the leakage of cash from lost volumes.
Now look, you can't have your cake and eat it too. So you can't right now like I keep saying in this fixed buy environment you can't have both. You can't have both 2.6% yield and 2.6% volume. We did that remember we did that in 2012. We had positive volumes and 1% price.
We all saw what that got us. That doesn't get you one $500,000,000 in free cash. It doesn't get you margin expansion. So what I would tell you Michael is you can't look at this without volumes. You've got to look at it as the right mix of price and volumes.
And until we see that commercial pie start to grow so that we can get back to flat volumes, you're going to see us somewhere between $1,300,000,000 $1,500,000,000 Once we get once you see those volumes starting
to turn that's when you get $1,500,000,000 plus. Okay. So to that end, on the landfill side of your business, do you feel good about the nature of the pricing that you're instilling discipline in that commercial collection market by the private guy as opposed to subsidizing their ability to poach you?
Yes. Look, again, you've heard me talk about that a million times. That's absolutely critical to the long term strategy. And yes, I actually feel very good
about that. And good about it in the sense that the market is starting to follow you as well
as opposed to you during the quarter? Look, we don't pay attention to what the market does frankly, because what the market does is not going to influence what we do. We are going to do what we do because we because look I've been here 10 years and I've seen it both ways. I've seen us play the volume game and I've seen us play the price game. And there's only one way that we can grow the bottom line and that is by playing the price game.
So I'm encouraged by it because we go through a monthly and quarterly review with each of the folks that are managing those businesses. And we have tried to ask them, tell us about your top 10 customers and what are we doing with Trifections. So we're seeing what we're doing out in the field. And so I'm encouraged because we're sitting down with those folks and actually seeing the results.
Okay. Thank you very much for taking my questions.
Thank you, Michael.
Your next question comes from the line of Derek Dibarno of Macquarie.
Hey, good morning guys. Thanks for taking my question. It was great to see the yield in the collection and transfer business continue moving higher. I'm wondering if you could talk as you guys have a little bit in the past about some of the things you're doing to retain the volumes without lowering price? And then if you can maybe kind of assess how successful you think some
of these programs have been?
Yes. It's a great question. And frankly, it's where the bulk of our focus is right now. Because the reality is that most customers whether it's solid waste or cable or telephone or water service or electricity, Most customers don't switch just because you put a 3% price increase on them. They understand that everybody has to get price increases to see their because their cost base goes up and so they get it.
So they don't leave you because you raised the price. But if you raise the price and then have a service issue, that's when they leave you, right? So if your cable repeatedly goes out, that's when you start going and looking for another provider. And so we need to be 100% focused on providing that best service to our customer and not give them a reason to leave. We've done the studies.
Everyone says, well, if the customers leave you overpriced, we've done the studies. They don't leave you overpriced. That is not the number one reason they leave you. The number one reason they leave you is service issues. And so that's why we've dedicated a lot of human capital and a lot of technology to making sure that we can have the best service.
And so we were glad to see that as we went through the pricing programs in 2013, our churn rate did pick up. We were glad to see that in the Q1 of 2014, the churn rate actually moderated and was down sequentially from the Q4. So we're encouraged by that. But look, we still have a long way to go.
Okay. That's very helpful. And just one more, if I can. With the stronger free cash flow, it doesn't look like you guys bought back any shares in Q1, but instituted the $600,000,000 buyback last quarter. Can you talk about your appetite for buybacks here given the stronger free cash flow?
Yes. You're right. We didn't buy back any shares in Q1. But I would expect to see us back in the market buying shares sometime in Q2.
Okay. And can you just remind us there has been some talk about extending the bonus depreciation. Can you just remind us of what that headwind is and what that could potentially add to free cash flow if that is reversed in 2014?
So we estimated it about $70,000,000 to $80,000,000 was the headwind. So obviously, if that law changes, if we get the extenders, then we would see that reverse. But for now, we're expecting to see about $70,000,000 to $80,000,000 headwind as a result of no bonus depreciation.
Okay. Understood. Nice job. Congratulations.
Thank you.
Your next question comes from the line of Al Kaschalk of Wedbush.
Good morning.
Good morning, Al.
Just to follow-up David on a lot of this price volume discussion. How if you're prepared to continue the battle on the price and implement that, we what expectations should you have for investors in terms of the volume comp, in terms of are you getting to a point where you're going to annualize that and therefore volume declines will be getting closer to flat? Or should we start to see still see some of these the numbers that you're posting down 2%, 3%?
Yes. Look, that's a great question, Al. And it goes back to one of the things I said in the script, which look is fundamental to our strategy, which is we aren't looking for the most volume. We are not the company that if you want the company that's getting the most volume, you need to look somewhere else. We're going to be the company that gets the best volume, right?
The best volume mix that can get us the highest income from operations dollars and margins. And so I would certainly expect to see as the economy continues to improve, I would certainly expect expect to see those volumes get better. Now having said that, remember in the Q2 as Jim mentioned, we lost a couple of resi contracts that folks bid at prices that we weren't willing to go to. And then we have our largest national account that quite frankly was a low single digit margin and someone came in and undercut the price on that even though ours was low single digit and we weren't going to go there. We said, look, we'd rather not have the work than have the volumes.
So we lose that volume starting April 1, so you'll see a little bit tougher comp in Q2. The good news is we lost that volume. It came with virtually no earnings. And so we'll take that trade off every day. We now can redeploy those trucks to going out and getting higher margin business, which from an earnings point of view will be accretive to us.
And so look that's our deal is that when we lose volumes and I'm not telling you we're 100% perfect because we're not perfect by any stretch. But the intention is that when we lose volumes, we want to lose those volumes that are lower margin and then take those assets that we freed up and go allocate those to higher margin business. That's how you get the best volumes rather than just the most volumes.
Right. Your competition is telling us you are 100% perfect David, so I'll have to correct them on that, okay?
I wish we were, but we've got a long way to go.
All right. Okay. What I would tell
you, Al, is my folks out in the field are perfect. I'm nowhere near.
Okay. That's probably what they were saying. Fair enough. I appreciate that color. What about I mean, maybe you don't want to share this given the nature of the call, but where are you seeing I won't say the perfect volume or the incremental dollar volume that you want to get, but where are you focusing or where are we looking for the incremental volume to come from even if on a net basis you're down as a company?
Right. Again, you've got to sort of look at it by line of business. And what I would tell you is that on the landfill side, we're very comfortable with where we are, right? On the collection side, again, on the residential side, we all know what's going on there. It's a lot of capital that you've got to invest.
And so we have to look at that purely from a return on capital point of view. And so we're not going to big contracts that are low return on capital. And but we certainly want to retain the contracts that we have. On the industrial side, I would tell you that generally we're going to get better margins on permanent roll off than we're going to get on temporary roll off and we'll allocate dollars there. On the commercial side, look there's a lot of volume to be had if you want to go after these large school districts for example.
But we've had very little school district business because we see competitors coming in at $1 to $1.50 a yard and we're just not going to go there. And so what I would tell you is that we know where the higher margin customers are and that's where we're going to fish. We're not going to go fish just to put our cans out. We're not going to go take a school district at $1 a yard. Now one quick one addition there is that when you think about volume that we like, our energy Services volume is volume that we like.
It's been a good growth story for us. March was the strongest month from a revenue standpoint and from a margin standpoint, but particularly from a revenue standpoint than we've ever had. We were up 25% year over year for the quarter, even with a little bit of weather impact there. I mean, it was awfully cold in North Dakota. And still with that, we saw 25% top line growth in that business.
It's good business for us. In addition, I think the we expect that EPA at some point will promulgate coal ash disposal standards and we're well positioned there to help that industry manage its coal combustion byproducts. So that will be good business for us as well.
All right. Now just thanks for that color Jim. Just to clarify though, where are those businesses being reported by line of business or
Yes. You're talking about Energy Services that all flows just through our core business. And through the industrial line on the side and generally through the
special waste line on the
landfill side. All right. Can you you brought up a good point about coal
ash. Can you just give us an update on what your expectations are there on regulation? And when do you expect to hear?
Yes. I believe EPA has a court order to issue something by the end of the year. So we would expect that because we're well positioned, we would expect that sometime in kind of the 2015, 2016 period we'll start to see this materially move the needle.
So is that the relationship with utility customers and because of landfill and the expectation that this will be subtitle D disposal or subtitle C?
I don't think anybody believes there'll be subtitle C, but there's a number of things that they're looking for, including beneficial reuse, including management of their own landfills. There's a number of them have landfills. We can help them manage their landfills. And then of course, if they care to take it off-site, we can obviously handle that as well. All right.
Jay, thanks. Finally, one question here. Your asset sale and the JV in China, I think would maybe prompt a question on international. And David, what's the plan here in terms of maybe growth or a refocused organization in terms of outside of North America?
Yes. Look, I think you hit the nail on the head. The word would be refocused, right? I mean, look we when we went to China, we had a spectacular partner there Shanghai Chengtao, the parent company. Shanghai Environmental Group, the subsidiary that we directly worked with was a great partner.
In fact, even though we took out our equity investment in China, we actually will continue working with them providing technical services. So we'll still provide them people over We just thought that it was a better use of our capital. The other thing about the Chinese market is that it's a fast growing market, but it's also a very competitive market. And we just thought that we could better redeploy the capital into our core business in the United States. Now we still have a waste energy project being built in the United Kingdom and we'd expect to continue to see growth in projects over there.
But look, I think you hit the nail on the head. Where we're completely refocused is on our core solid waste business in North America and we were pretty pleased to see the improvement. Now we got some good benefit from wheelabrator in the quarter. They had a spectacular quarter, but we all know that was driven by electricity prices that primarily by electricity prices that are going to moderate as the weather warms up. So we'll take that additional capital.
We'll refocus on the core business. And as Jim said, we'll use that free cash flow to go off and buy some shares this
year. And just a follow-up on that one. The cash that you get, are you allowed to repatriate that back here? Or is it need to be deployed?
Yes. No, we repatriated the full $155,000,000 back here.
Thank you, guys.
Thank you.
Your next question comes from the line of Corey Greendale of First Analysis.
Hi. Good morning.
Good morning. Good morning.
I'll try to keep it relatively brief. I think you've talked in the past about having a bunch of analytics behind your pricing. Can you just talk and I realize there's difference by customer and market, but can you just talk about how close you are in the field to what you believe the optimum is based on your analytics?
Yes. Gosh, Dorey, I would tell you, we're nowhere close to the optimum. We have so many customers that it's that they're spread out fairly quickly. So I would say that if you look at it from a customer by customer basis, we're nowhere near the optimum. But if you look at sort of what the overall strategic implementation of the pricing plan is out in the field, our folks out in the field completely get it.
Do we make mistakes? Look, look, we made plenty of bids where we thought we were going to earn X and we ended up earning Y. So we're nowhere near perfect. But they all get what the strategy is and frankly they're doing a great job of implementing it.
So then to follow-up on Al's question about kind of that pricevolume trade off. I assume the optimum is not on a company wide basis to have 10% yield and negative whatever would be volume. How close is at a high level that we could see how close are we to what you think the optimum is where you would still be growing maximizing operating income what the price volume look like?
Yes. Again, in this current if you look at a business environment that isn't growing, I would tell you that I think we're right about there, right? If we're going to see above 2% yield, it would be very difficult for us to have positive volumes. It's just the nature of that beast. And so in a if you believe that there's not going to be any volume growth ever again, then I would tell you we're pretty close to optimize.
What we need to see in order to get to the optimization of the overall business is we need to see volume growth. And we're seeing that volume growth in the landfill that's encouraging. We're starting to see that growth get a little bit better despite the Q1, I would say, on the industrial side. And then, commercial stubbornly remains sort of stuck in that negative 3% to 5% range. Corey, I would add that as a matter of course, Jim Trevathan has monthly calls with all of the areas.
And we regularly look at income from operations by line of business. And so we are assessing whether we've pushed too hard. We'll look at specific areas and a specific line of business within those areas and determine whether is income from operations declining in the face of very heavy price increase and very heavy volume loss. And that to us would indicate that maybe we've reached that kind of point of diminishing returns. But I would also add that we've seen very few of those.
I mean, I don't know exactly where we are, but we've seen very few of those. There's a couple of them. But for the most part, we still think we have room there to move ahead on price. And Jim, I would add, we have a couple that are in question, but they're MSAs. They're not entire areas.
They're not one of our 17 areas. It may be one MSA that we're taking a harder look at.
Okay. I appreciate it.
Thank you.
Certainly.
Your next question comes from the line of Tony Van Graft of Gabelli and Company.
Hey, good morning, gentlemen. Thanks for taking my call. Just a quick question on back to the JV monetization. Now are you planning on I know you're saying that you're looking you're getting out of China, but is there if there is a potential opportunity over there that looks good, would you potentially go back into trying to grow more in China? Or what's your sort of long term outlook with that?
Yes. I think everybody has seen sort of a little bit of a moderation in what's going on in China from a growth perspective, right? I mean 3 years ago, China was sort of the dotcom of its time. It was growing so fast. And obviously, we've all seen that growth moderate over the last few years.
But it's a great point. It's one of the reasons why I'm glad of 2 things. 1, that we still have a great relationship with our joint venture partner. And 2, we're going to be continuing to provide them service over there, because that will give us not as big a toehold as we had when we were helping them build plants. But it will give us a little bit of a toehold over there, so that if there is an opportunity, we'll be able to spot it.
Now I would tell you, I don't see any of that on the near term horizon. But with China being such a large part of the world economy, I think it would be foolish to say we never want to go back to sort of jump
to jump back to some prior questions about long term growth in lines of businesses. In 5 years, where is sort of the next focus, not so much on your organic operations and trying to fine tune those. But I mean you mentioned about energy waste doing so well. Is a huge asset owner in most of the basins. What do you have any thoughts on that?
And I know we've talked about it before, but maybe there's been quite a bit of growth recently. Is there any more focus on that?
Yes. I think that clearly Energy Services is an area where we have some longer term visibility. And I wouldn't say that about maybe the overall macroeconomic climate. I couldn't tell you what the economy is going to do in the U. S.
And the rest of North America past 2015. But Energy Services sure looks like that is a growth engine not only for the economy, but for us specifically for the next 5 to 10 years. So we think Energy Services and Environmental Services are 2 of those growth areas that you've asked about. And then to dovetail onto that, look Energy Services is all about fracking and energy. That low natural and natural gas pricing, That low natural gas pricing as you can see is going to drive 1,000,000,000 of dollars of infrastructure investment in the chemical corridors and in other areas.
And so it's going to generate a tremendous amount of M and I manufacturing and industrial activity. And so we certainly think that when you look at the Energy Services, not only do you see the growth there, but you see the adjacent growth as people try to take advantage of low energy pricing.
Got it. Thank you. And I guess just I've got to ask if that business grew large enough is that something you want to sort of maybe sort of expose on your in your quarterly reporting or maybe even do something more like spin off or is there any more is there any strategic thoughts about that?
Yes. Well, you know, we generally don't look at until it reaches 10% of our revenue. So I would love to be able to report it. It's a good business, high margin. My guess is that you're going to see great growth, but you won't see that kind of growth where we say, okay, let's go split it off top separately.
Okay. I appreciate it. Thank you so much.
Certainly.
Your final question comes from the line of Barbara Mulvereny of Morningstar.
Good morning, everybody.
Good morning. Good morning.
Regarding recycling, I know that you've mentioned this a little in the past, but have you been successful in charging customers penalties? I suppose that's not a very customer friendly turn, so maybe I'll rephrase that. Have you been successful at increasing fees for contaminated recyclables? Or is this more a matter of educating customers still to give you less of them at the get go? Yes.
It's a combination of both. We've done just that. Now not all of our contracts allow us to do that. But where we've been allowed contractually to do that, we've done just that. But long term, you hit the nail on the head.
Long term, it is an education. We're all better off if the consumer knows how to separate it so that we don't have the contamination to begin with. The consumer doesn't want to be penalized or the customer doesn't want to be penalized for contaminated loads and we certainly don't want to have those higher operating costs from contaminated loads. So the short term solution is to say we're going to charge you. The long term solution is to educate the consumers and our customers.
Barbara, I might add that as Dave mentioned not all of our contracts allow for that charge for contamination. But as we renew contracts, we are absolutely adding it to contracts that we're protected and also
the terms that allow for a surcharge or fee on these contaminants?
Well, I can tell you 100% of the ones that we renew.
Very helpful, thanks.
But I think we'd all be guessing if we told you what percentage have not allowed it. Look, I'd be shocked and you can follow-up with Ed and he'll follow-up with our recycling folks. But I would be shocked if a large customer did not allow some level of contamination clause into the contract.
Got it. Got it. Jim, as you work with your field teams to help them educate customers, are customers getting it? Or is this still a challenge as you guys are working through? I would imagine that in some cases, some larger even some smaller customers are just not really that quick on the uptake.
So what do you do with your field team to help move that process along?
Yes. Look, and again, the customer in this instance ranges from sort of a small customer with a small business to a large national account to large municipality. So all customers are different. But look, the large customers that make up the bulk of the fiber markets absolutely get it. They understand look, they see what's going on with demand out of China.
They see what's going on with commodity prices. And more importantly, they see what's going on with investment in recycling infrastructure, right? I mean, we're not investing in recycling infrastructure. And as far as we know, nobody is making big investments in new recycling infrastructure. So they understand that if you're a large city or if you're a large national account, you've got to make this a long term sustainable business model in order to drive the investment so that you can drive more recycling.
And I think they absolutely understand that. Like anything though markets don't turn on a time, right? So it's going to take some time for that to seep through the market and see sort of a long term systemic change in the way folks do business in recycling.
All right. Sounds good. Thanks very much.
Thank you.
I will now turn the call back over to Mr. David Steiner for closing remarks.
Thank you all for joining us. We certainly want to thank all of our field employees who did a phenomenal job working through a challenging Q1. I'm sure they all like we welcome the seasonal upturn, the warmer weather throughout the United States and we look forward to talking to you all on our Q2 conference call.
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