Morning. My name is Janisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4th Quarter and Year End 2013 Earnings Release Conference Call. Investor Relations. Thank you.
Mr. Eckel, you may begin your conference.
Thank you, Genisha. Good morning, everyone, and thank you for joining us for our Q4 2013 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 Trebathen, 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 schedules to the press release include important information.
During the call, you 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 stated otherwise are more specifically references to internal revenue growth or IRG from yield and volume. Additionally, any comparisons unless otherwise stated will be with the Q4 of 2012.
During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share on an as adjusted basis. David will also address operating EBITDA margin as defined in our traditional solid waste business have been adjusted to exclude items that management believes do not reflect our fundamental business performance or are not indicative of our results of operation. 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 March 4. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com.
To hear a telephonic replay of the call, dial 855-859-2056 and enter reservation code 315 00809. Time sensitive information provided during today's call, which is occurring on February 18, 20 14, may no longer be accurate at the time
of a
replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now, I will turn the call over to Waste Management's President and CEO, David Steiner.
Thanks, Ed, and good morning from Houston. Looking at 2013, we built strong momentum in the 1st 3 quarters of the year and that momentum continued into the 4th quarter results, particularly 4th quarter EPS results can be impacted by accruals, sometimes positive and sometimes negative.
In the Q4
of 2013, we had $0.11 more expense from accruals than in $2,012.02 of that $0.11 was offset by tax benefits, so we had a net of $0.09 more from these type of accruals per share than we had in 2012. This $0.09 consists of about $0.06 from incentive compensation and $0.03 from risk management. Without these accruals, our earnings would have continued to show strong year over year growth in the 4th quarter. So our traditional solid waste business is strong and our earnings momentum continues. Indeed, we have seen that momentum extended to January as preliminary results show income from operations improving 12% and income from operations margins expanding about 110 basis points when compared to January of 2013.
Looking at the full year, we had a very successful 2013 as we met all the goals that we set out to accomplish. Our plan to increase yield, better manage costs and have disciplined capital spending paid off in 2013 and should lead us to continued success in 2014. In 2013, we achieved full year earnings per share of $2.15 and free cash flow of $1,320,000,000 all despite $0.10 of unanticipated headwinds from our recycling business. In 2013, we expected yield to be between 1% and 1.5% and we exceeded that target. For the full year, our collection and disposal yield was 2.1% with each quarter sequentially higher than the previous one, culminating with the 4th quarter at the highest level for the year at 2.4%.
Each of our lines of business had positive yield for the full year with the exception of Landfill C and D, which was impacted by Superstorm Sandy last year. Core price increased to 3.8% in 2013, an improvement of 90 basis points and average landfill rates per unit for MSW ended the year with the highest rates that we have seen, increasing about 3.5% compared to 2012. This is a tremendous accomplishment by our team and they have plans in place to continue that success in 2014. We expect that internal revenue growth from yield should be approximately 2% for 2014. As we have said before, we need to get about 2% yield to offset cost inflation and grow margins.
We did that in 2013 and we expect to do so again in 2014. In the 4th quarter, about a third of our volume decrease resulted from the year over year effect of volumes from Superstorm Sandy. We also lost national account business that was not willing that we were not willing to keep at low rates. Looking at 2014 total volumes, we expect internal revenue growth from volume for 2014 to be very similar to 2013, about 1% negative. We will see lower national account volumes in 2014 as we drive pricing at our low margin customers.
We need to be more aggressive on those specific national accounts where we are providing platinum service at bronze pricing. The winter weather is definitely having a negative impact on volumes in the Q1, but we expect our normal seasonal upturn to occur as winter is recedes. So when we look at volumes, we are more focused on getting the right volumes, not the most volumes. We are looking for the best mix of yield and volumes to drive income from operating margins and dollars. And in our industry, that mix always favors yield.
Jim will give you the numbers, but despite negative volumes, we increased income from operations dollars and margins in every collection line, which demonstrates the importance of yield. Turning to landfill volumes, all categories of our landfill volumes were positive for the full year and we expect that to continue into 2014. This strong demand should allow us to continue to see better pricing at our landfills. So once again, traditional solid waste business performed very well in 2013 with strong margin improvement in all three of our collection and landfill lines of business. Our income from operations margins grew 90 basis points and operating EBITDA margins grew by 80 basis points in the traditional solid waste business.
In 2014, we expect to grow earnings and margins in our traditional business through pricing, cost controls and increased deployment of our productivity initiatives. On the recycling front, we had a $0.12 decline year over year in earnings per share compared to the $0.02 decline that we anticipated
at the beginning of 2013.
As we outlined on our Q3 conference call, we are taking steps to improve the profitability of our recycling business. When contracts come up for renewal, we plan to increase processing fees, include tighter contamination limits with provisions that allow us to audit the inbound material, add language that allows us to recover increased cost due to unforeseen events and increase consumer education through our Recycle Often, Recycle Right program. These initiatives are starting to work. We have audited virtually all of our municipal contracts and have found numerous opportunities to charge customers for exceeding contractual contamination limits. And we have seen residue as a percentage of tons sold decrease for 3 consecutive months.
But even with these improvements, we want to be cautious in predicting such that we expect to have no year over year EPS impact from our recycling line of business. Turning to our waste energy business, in 2013, our operations were essentially flat when compared to 2012. With long term natural gas and electricity prices projected to remain low, the outlook for growth in our waste energy business is limited. This as well as lower disposal tip fees and volumes resulting from contract transitions are the primary reasons why we had to record a non cash write off of a significant portion of the goodwill of our waste to energy business. But the charges are the result of projected long term cash flows, not short term issues.
So for 2014, we expect income from operations to be flat when compared to 2013 from our waste to energy operations. Turning to free cash flow, our disciplined approach to managing expenses and capital spending in 2013 allowed us to generate $1,320,000,000 of free cash flow, an increase of almost 60% compared to 2012. Excluding divestitures, free cash flow grew 51% when compared to 2012 to $1,180,000,000 In the Q4, we prepaid $51,000,000 of accrued expenses to help offset some cash flow headwinds in 2014. Excluding that payment, our 2013 free cash flow without divestitures would have been $1,240,000,000 well within our range of $1,200,000,000 to $1,300,000,000 In 2014, we expect that free cash flow will be very similar to 2013 at over $1,300,000,000 We should achieve this despite anticipated headwinds of approximately $125,000,000 from the expiration of bonus depreciation and the payment of incentive compensation.
We should
be able to overcome these headwinds through a combination of increased earnings, improvements in working capital and capital spending discipline. The strong free cash flow that we generated in 2013 allowed us to return over $900,000,000 to our shareholders in in the form of dividends and share repurchases. This is the highest amount of cash returned since 2011. For continuing to grow the amount that we return to shareholders. So, in summary, when we look back at 2013, we adjusted EPS of between $2.30 $2.35 per fully diluted share and free cash flow of greater than $1,300,000,000 I'll now turn the call over to Jim to discuss our 4th quarter results and our 2013 outlook 2014 outlook in more detail.
Thank you, David. I'm going to review the results of the Q4 and expectations for 2014. I will start by discussing our SG and A costs and cash flow performance. Then I'll expand on David's comments about the results of operations, yield and volume in our various lines of business. I will conclude with a discussion of our financial metrics.
The results for SG and A were better than we projected at the beginning of the year. We anticipated cost being flat when compared to 2012 and for SG and A cost as a percent of revenue to improve 10 basis points. I'm pleased with the overall results as SG and A costs for the year improved $4,000,000 to $1,470,000,000 and improved as a percent of revenue by 30 basis points to 10.5%. For the 4th quarter, SG and A costs were $376,000,000 an increase of $20,000,000 As a percent of revenue, SG and A costs rose to 10.7%. Both increases are a result of the accruals that David mentioned.
This will not be our 2014 run rate as we expect that SG and A dollars will remain flat in 2014 and that SG and A as a percent of a percent of revenue will improve from 2013. We saw that in January as SG and A improved $8,000,000 as compared to January of 2013. Turning to cash flow. For the full year, we generated $1,320,000,000 of free cash flow, an increase of almost $500,000,000 when compared to 2012. We accomplished this in part by growing our net cash provided by operating capital spending.
Our capital expenditures for the year were $1,270,000,000 If you exclude divestitures, free cash flow for the year grew nearly $400,000,000 to $1,180,000,000 Without the prepayment that David mentioned, free cash flow would have been $1,240,000,000 In the Q4, we returned $410,000,000 to our shareholders through a combination of $171,000,000 for dividends and $239,000,000 in share repurchases. We also invested $26,000,000 in tuck in acquisitions in the 4th quarter. For the full year 2013, we returned $922,000,000 to our shareholders consisting of $683,000,000 in dividends and share repurchases of $239,000,000 Our Board has indicated its intention to increase the dividend in 2014 by 2.7 percent to $1.50 per share on an annual basis, which would result in a dividend yield of approximately 3.4%. This is the 11th consecutive year of increasing the dividend. For 2014, the anticipated annual dividends equate to $700,000,000 to be returned to our shareholders.
We also have authorization from our Board of Directors to repurchase $600,000,000 of our shares. During 2014, we expect capital expenditures of approximately $1,200,000,000 to $1,300,000,000 which is between 8.3% 9 percent of revenue and free cash flow in 2014 is expected to be in excess of $1,300,000,000 assuming $100,000,000 of divestitures and despite the $125,000,000 in headwinds that David mentioned. For 2014, we expect to spend between $100,000,000 $250,000,000 on solid waste tuck in acquisitions. I will now review internal revenue growth components and operating customers to create more garbage. If we were in an industry that could create incremental volume by lowering price like the consumer products industry, we might look at yield and volume mix differently.
But in our industry, we can't do that. When we look at the trade off between yield and volume, we look at them together to determine the best mix in order to maximize income from operations dollars and margins. This strategy worked in the 4th quarter and full year in every line of business where we increased income from operations dollars and margins despite negative volumes. So for example, in the 4th quarter, commercial yield was 4.9% which is the highest yield since the Q2 of 2,008 and volumes declined 5%. With this yield and volume trade off, income from operations grew $21,000,000 and margin grew 200 basis points.
For the full year, commercial yield grew 3.3% and volumes declined 3.4%. But despite the volume income from operations grew $42,000,000 and margin expanded 70 basis points. For industrial, 4th quarter yield grew 4.3% and volumes declined 3.7% and still income from operations grew $15,000,000 and margin expanded 2 30 basis points. For the full grew 4.5% and volumes declined 1.9%. Despite the volume loss, income from operations grew $48,000,000 and margin expanded 140 basis points.
Similarly, the residential line of business also grew despite contractual restrictions on raising prices. In the Q4, yield for the residential linings business grew 1.7% and volumes declined 2 0.9%, which resulted in income from operations growing $4,000,000 and margin expanding 60 basis points. For the full year, residential yield grew 1.8% and volumes declined 1.7%, which resulted in income from operations increasing $14,000,000 and margins expanding 40 basis points. So as you can see, the price and volume trade off worked in all lines of our collection business. The income from operations trend improved in the Q4 and we expect this trend to continue into 2014.
I will now review the landfill line of business for the Q4 where we saw the benefits of positive volume and positive yield. Volumes were positive 5.6% after adjusting for Sandy volumes. MSW yield was 1.7% with revenue per unit increasing 3 0.5%. Sandy adjusted MSW volumes grew by 1.6% and C and D volume rose 6.6%. Combined special waste and revenue generating cover volumes were a positive 3.9%.
Income from operations grew $25,000,000 and margin grew 2.50 basis points. Our overall internal volume growth was negative 2.2% in the quarter and negative 1.5% if you adjust for the Sandy Storm volumes. I will now discuss operating costs. Operating costs increased by $43,000,000 in the 4th quarter 64.8 percent of revenue, which was flat with the Q4 of 2012. For the full year, operating costs increased $233,000,000 to 65.2 percent of revenues compared to 65.1% 2012.
In both the Q4 and the full year, the majority of the increases were for costs associated with recently acquired businesses and labor increases. Finally,
looking at our
other financial metrics. At the end of the 4th quarter, our weighted average cost of debt was 4.97 percent and our debt to total capital ratio was 63%. The increase in this ratio from 58.9% in the 3rd quarter is primarily the result of the impairment charges. The floating rate portion of our total debt portfolio was 15% at the end of the quarter. Our recurring income tax rate was 34.6% for both the Q4 and the full year.
For 2014, we expect our tax rate to be approximately 35%. One last item that I'd like to address is our asset impairments and unusual items. These non cash charges are primarily related to goodwill associated with our waste energy business and other post collection assets and related goodwill. David mentioned the impairment of historical goodwill in our Waste Energy business. The second category relates to asset impairments from our asset rationalization program.
As we've discussed, we've been reviewing our post collection assets to determine where we have cash flow negative or poor performing assets that do not fit into our strategic plan. The impairment of assets in the Q4 resulted from our analysis and led to our decision to mothball certain post collection facilities. This includes deferring active pursuit of expansion permits at 4 landfills. In our review, we determined that we're able to move volumes to other waste management facilities increase in the future, we can reactivate expansion permitting efforts or operations at those facilities. I would be remiss if I did not close by thanking all of our employees.
They made 2013 as successful as it was and we appreciate their hard work. With that, Janisha, let's open the line for questions.
Your first question comes from the line of Hamzah Mazari of Credit Suisse.
Good morning. Thank you. Just a question on volume. If we adjust for the low margin national account business that you're walking away from and maybe some weather impact, could you maybe comment on what the underlying volume growth is for 2014 that you're guiding through? And also maybe comment on how you balance volume loss with negative operating density?
Yes. When we look at 2014, Hamzah, probably about 60% to 65% of the volume loss in 2014 is going to be from national accounts. And as you know, that's generally very low margin business. We just recently lost our largest national account, which was low single digit margin, because we didn't want to reduce or stay flat on the price. We wanted to get a price increase because our margin was low single digits.
And so, we knew that was coming and it was the right business decision to make. The other so that's going to account for roughly 50% to 2 thirds of the volume in 2014. The remainder, we have the Q1 is going to have a tough Sandy comp still from Superstorm Sandy and obviously we have got bad weather. So you have got a little bit of an effect there. And then we still expect that our pricing programs are going to drive out a bit of our commercial volume.
So most of what you see in 2014 is calling out that low margin business and then the year over year comps in the Q1. As far as the density goes, look, that's a fundamental premise of this business that if you can create route density, obviously, you can service the customer at a much lower cost. But we can't let that benefit that we get upset our pricing program, right? We've got to be the pricing leader. And if we aren't, then no one else is going to do it.
And so, we're going to be the pricing leader. We recognize that you get benefits from density. We certainly are looking to grow our commercial volume, but we will not grow our commercial volume at the we won't grow our commercial volume at the expense of
price. Very helpful. And a question on SG and A. If we assume that bonuses continue into the future, how should we think about SG and A going forward? Is it fair to say that it should run up to 10.5%, 11% on a normalized basis if we assume that management continues to get bonuses?
So, Hamz, on the SG and A, look, I think I was pretty pleased with how we turned out in 2013. We were actually we said we'd be flat. We were actually down a little bit about $4,000,000 And we've guided to flat in dollars in 2014. So when you think about it on a percentage basis, look as the top line increases, we expect that, that percentage will start to get down to the 10% and potentially below 10% range. To really be in the low 9s, I think you're going to need to see a pretty robust rebound in the overall economy.
I mean, that's for us, that has to be the big driver of top line growth. The pricing strategy is clearly the right strategy as you heard from my numbers, But in order to get revenue to really take off, it's got to be from robust economic growth. We can't afford that pricevolume trade off in the wrong direction. So when we think about SG and A as a percent of revenue, I would expect that the flat SG and A will produce obviously, it's going to produce a lower percentage because of some increase in top line. Are we going to get down to 9%?
Not going to get down to 9% until we really the overall economy take off. But I'll tell you, there's still room for dollars on SG and A, both on the labor front and the non labor front. We're not giving any guidance for 2015, but I would expect they'll hear the same message when we talk next year about being flat year over year.
Great. And just last question, I'll turn it over. Any update on the divestitures? It seems like you had some this quarter. How should we think about where you are in that process?
Yes.
When we look at the divestitures, as we said, we are looking at we are assuming $100,000,000 of divestitures during during the year. We have got a few in the pipeline, particularly in the non core business. We have looked at our Chinese joint venture and we may look to monetize that this year. And so that $100,000,000 I would tell you, I think there is some upside to that. But the bulk of that divestiture would be non core solid waste.
We do have we should have $50,000,000 to $100,000,000 of dispositions in the core solid waste business, but the upside would be all those non core asset sales.
Okay, great. Thanks a lot.
Your next question comes from the line of Derek Sabragna of Macquarie.
Great. Hey, guys. Thanks for taking my question. I was just wondering if you good morning If you could talk a little bit about very encouraging to see the internal revenue growth stay strong in the Q4 at 2% and you're guiding flat for 2014. Can you just talk about some of the things you're seeing and doing which gives you confidence that you'll be able to offset some of the CPI headwinds with some of the business that's not linked to CPI?
Yes. It's a great question because when we look at yield, frankly, we don't look at the number, the 2% the 2.4% in the quarter, the 2% for 20 14. We don't particularly look at that yield number. What we when we build our plan, we build our plan to determine the amount of dollars that will drop to the bottom line from all of our pricing actions, because pricing actions are not just core price increases, but it's also rollbacks, it's also the effect of lost business. There's a lot of different effects that go into what drops to the bottom line from pricing.
So when we look at that, when we look at dollars to the bottom line, we think dollars to the bottom line will be very similar in 2014 to where they were in 2013. Now,
you've hit
the nail right on the head. In order to get that, we're going to have to do more robust price increases to offset the CPI. That CPI is what's going to drive the yield down toward the 2%. So as we look at 14, we don't think there will be a material difference in the amount of dollars given to the bottom line, but CPI will mute the numbers a little bit as far as yields goes.
Okay. That's helpful. And just one more, it's good to see the CapEx guidance essentially in line with 2013 levels. Is there anything we should be thinking about with regards to that number? I actually would have assumed it would have gone a little bit higher just kind of thinking that you would have seen some cost inflation with regards to capital purchases and some of the initiatives you guys are putting in place with the onboard computers and stuff like that?
Yes. When you look at CapEx, what we're doing in 2014 is making sure that we put the right amount of capital into our core solid waste business, right. We've talked about it in the past. We've got to make sure that we aren't under investing in the core business and we aren't. But so primarily what you'll see in 2014 is that we're going to cut back on those types of investments that haven't been getting us the kind of returns that we want over the last few years, primarily recycling.
And so we're not going to starve the core business. The CapEx will be a little bit down because of what we call sort of growth capital for the last 2 years.
That's very helpful. Thanks very much.
Certainly.
Your next question comes from the line of Bill Fisher of Raymond James.
Thank you. Good morning. Just on the EPS growth, I think at the midpoint's around 8%, and obviously you mentioned your organic growth around 1%. Can you touch on some of the drivers there? Obviously, you have a possibly lower share account acquisitions.
I think, David, you mentioned the pricing actions, but it seems like you're got to have some good cost controls because gross margins would seem to have to rise.
Yes. Well, look, when we look at 2014, just to try to sort of put it in context, I think that there is some potential upside on yield. I think there is some potential upside on free cash flow. But as you well know, Bill, the last 2 years, we have predicted our recycling operations to be last year $0.02 negative, they ended up $0.12 negative. The year before, we had a similar type of result.
And so, we wanted to be very cautious on predicting. We have said it before, we can drive sort of 8% to 12% earnings growth through the pricevolume combination. But in order to get up into that low mid teens, we've got to get help from waste to energy and from recycling. We haven't done that in the last few years. And so when we put together the plan, we said, let's assume that we're going to be very cautious on getting any benefit from it.
And frankly, when you look at the beginning of the year with slower growth in China, with the weather that's been impacting recycling volumes, I think that's a good assumption. So, we wanted to be conservative because of those 2 big tailwinds or headwinds that we've had in the last couple years. Hey, Bill, one of
the reasons we talked about January, which we've really never done before, but one of the reasons we talked about January is because we didn't want folks to and two reasons. 1 is we were encouraged by our own results, but most importantly we didn't want folks to mistake the kind of the accruals there at the end of the year
for a change in trend.
And January clearly showed to us that 10 months of the year is continuing into next year. So when we think about 2014, so for whatever it's worth, right, I mean January is 1 month out of 12, but we felt good about what we saw. I mentioned SG and A costs being better by $8,000,000 We felt good about what we saw really overall. I mean even in light of a really tough weather month, our core business was actually better than prior year. So I think we've got a pretty good start going here and we'll see what February brings.
February has been a tough weather month as well.
Okay. Thanks. And wanted to follow-up. David, you're keeping the yield north of 2%. I think last year you had some good success on that regulatory fee.
Are there any new incentives or strategies this year? I noticed the commercial price is really strong for you in Q4.
Yes. No, I mean frankly 2014 is going to be sort of the same. It's a repeat of 2013. It's going to be the same things that drive it. Again, we talked a little bit about the CPI headwind that we have to overcome, but it's going to be the same types of things.
But Bill, we'll never rule out doing something during the course of the year. We didn't build in any plans to increase that, but we'll see how the year plays out. And look, the reality is that as we've gone through the various cycles, we've never seen a dramatic amount of pushback to the fees. I think customers get the point that our cost structure is going up every year and so we have to recover that. So, could it happen in 2014?
Absolutely. Is hitting our target dependent upon it? No.
Okay, great.
Thank you. Certainly.
Your next question comes from the line of Corey Greendale of First Analysis.
Hey, good morning. Good morning, Corey. I think, David, that you said something like a half to 2 thirds of the volume decline that you're projecting for 'fourteen is of national accounts. I'm just trying to get a sense, what do you think is underlying market growth volume growth in the market in 2014? And then on top of that, how much are you projecting that you're losing because of your being aggressive and being the price leader?
Yes. I mean, again, I think 2014 from an overall volume perspective is going to be fairly similar to 2013. Look, we've said it now for the last couple of years that what we need to see in order to really get robust volumes is we need to see an economy that's driven by housing starts, by new business starts and by industrial production, right. We can't see an economy where growth is driven by non infrastructure government spend and by the service sector, right? And so, I think that's the big question for 2014.
Are we going to start to see are we going to continue to see the rebound in housing and are we going to start to see new business generation? Again, we plan for 'fourteen, we're planning like we aren't, like we aren't going to see a dramatic uptick. And so from an overall volume point of view, I think what you'll see in 20 14 will be similar to what you see in 2013 with collection volumes, at least for us, with collection volumes remaining negative and landfill volumes remaining positive.
Okay. And on volume, just to help set the expectations, do you given all the things you are saying Q1, do you expect that Q1 will be the worst year over year comp environment and improves as you get to the end of the year?
Yes, I would be surprised if Q1 is not the worst year over year. Now the large national account that I talked about, we lost about $90,000,000 of national account business last year. Our largest national account will lose in sort of mid year this year. So, you will get a little bit of that effect in the back half, but because of the weather effects and because of the Sandy effects and because of the national accounts, yes, I would expect the Q1 to be the toughest comp quarter and for it to improve going forward.
Okay. And by the way, is that competition on national accounts, is that coming from your large national competitor? Are you seeing new businesses like Oakleaf forming?
I think it's a combination of both. And look, from a it doesn't matter where it's coming from, because even if it's a broker, it's coming from our large national competitors. We don't do business with brokers, right? I mean, from our point of view, we don't see why we would strengthen a competitor by acting as a subcontractor for these new brokers in various markets. We don't understand why you would help a competitor.
So we don't do business with the national brokers. So even if it's even if the bid isn't won by our large national competitors, they're doing business with those brokers, so they're getting some of that business. So I think the answer would be, yes, predominantly we're losing it to the large national players either directly or indirectly because they're working for the brokers.
Okay. And one quick one for Jim. There was a in the press release, you talked about the $0.09 impact. Some of that's the bonus accruals, but some of it is also risk management. Can you just elaborate a little on that?
What is that a one time adjustment of what your expectations for risk management expense going
forward? Right. So the risk management benefit was a benefit actually prior year. We typically expect with our safety improvements, we've been seeing $0.01 to $0.02 per year. This year, we actually went the other way.
We had a couple of incidents. So we ended up with a $0.01 charge. Last year, it was a $0.02 benefit on risk management adjustments. So is it a one timer? Certainly, the trend would say that we wouldn't see a repeat of that, but it's hard to say it's a one timer.
Yes, when you look at our safety numbers, our safety numbers are actually improving, which would lead you to believe that we would have gotten a positive accrual. The problem is we had a couple or a few large incidents that we accrued for in the Q4. So again, like Jim said, you'd expect it to be positive, but you just never know when these large incidents are going to happen.
Your next question comes from the line of Adam Gaffner of BB and T Capital Markets.
Hi, good morning guys.
Good morning.
Thanks for the detail you provided in terms of the yield and volume in your various businesses. I'm curious from your perspective, is the yield volume trade off working better on the industrial line than the commercial line? Because on the commercial line, it looks like you're getting 5% price, but then giving up 5% volumes, whereas on the industrial side, you're getting a lot of price, but not giving up as much volumes.
Yes. And when you look at it from a pure dollars point of view, maybe you'd say the commercial is doing better. But I think you're right. Look, and it goes back to the earlier question about route density. You don't have the same issues with route density on the roll off side that you do with the commercial side.
But look, in this business, there is a few large chunks of business that you can go after very quickly. You can get large residential contracts, you can get large national accounts and you can get temporary roll off business. You can sort of flip a switch and get any of those 3. The problem is you're going to get those 3 at very low margins. And we know that if we go out, look, if the large player goes out and grabs a bunch of volume at low margin, what's the rest of the industry going to do?
And so, from our perspective, we've got the right trade off. What we're expecting to see is our volumes recover with the economy, not for our volumes to recover because we keep our price flat. We are going to continue to push our price and make sure that we get above that 2%, so that we can expand margins.
Adam, it's also worth mentioning that some piece of our volume loss is not a function of price. We don't know exactly how much that is, but some piece of it is related to customer service. We are really focused at this point on customer service and improving the experience to the customer. And that doesn't getting volume back has no negative impact on the price side as we would if we were simply lowering price to get volume. But we're keenly focused on that.
Got it. Okay. That's very helpful. And then just as a follow-up, in terms of the you guys are obviously being aggressive on pricing, which is probably a good thing for the whole industry. What are you what exactly are you seeing in terms of how your competitors are responding to that?
Yes. Look, I would say that we'd love to see all of our competitors, large and small, lead rather than follow. But we recognize that generally they aren't going to lead. So mostly what we've seen is what I would call rational behavior. Like there always is, there are pockets where you see some unusual actions.
Generally, those are end markets where you've seen a lot of stress put on volume. So we just recently saw a competitor lower their own price by $4,000,000 in the Northeast on a disposal contract sort of bidding against themselves. We saw a competitor drop price by at the landfill by 20% to 25% in South Florida, because both of those markets are fairly challenged. But that's the kind of behavior that for us is going to cost us a lot of volumes. And again, we can't go out and do that type of behavior because look, if you look, I've always said we can lead the industry in 1 of 2 ways.
We can't control what they do. I mean, we have absolutely no control over what anyone else in the industry does other than us. But as the largest in the industry, we can take 1 of 2 stances. We can say, we're going to go after volume and give away price or we can say we're going to go after price and give away volume. And both of those can lead to what we call sort of a spiral effect, either downward or upward.
We long ago look, Jim said it, you can't lower price and create demand. Sherry Rice used to be with our company, used to say, with shoes, if you lower the price of shoes, people buy more shoes. When you lower the price of garbage, people don't create more garbage. So when you're working with a fixed pie, you're always going to be benefited by driving yield up because you can't steal enough volume to make up for that yield. And if we go out and start stealing volume, then it creates that domino effect of everybody stealing everybody's volume and that's not a path that we're willing to go
down. Got it. Okay. Thanks for the color. Thank you.
Your next question comes from the line of Al Kaulcek of Wedbush Securities.
Good morning, David.
Hey, Al.
Could you just clarify on the Sandy headwind, what that is for 2014 in terms of a comp on a volume basis?
Yes. Again, that's primarily in Q1. If you look at it in Q4, you saw that it was 0.6%. I would it to be a little bit more muted in the Q1, but probably somewhere between that sort of 0.3% to 0.6%.
Okay. And then should we assume the balance is national accounts?
Yes. Look, so and then so you got national accounts and you've got the commercial business going down, but all that is offset by landfill volumes going up. And again, look, that goes back to the trade off, right? If you tell me that my low margin national account business is going to go down and my landfill business is going to go up, I'll take that trade off 6 ways to Sunday. Alex, Ed,
if you haven't heard it from the other guys, which you probably have, the weather is throwing volumes out of whack. Now, we were pleased with the results as we said in January, but boy, when you we've had several operations, especially in February, where we've been shut down in a big part of the South. I mean, you expect to be shut down in the North and the Midwest, but when Atlanta shuts down for 2 days, generally is not expected going into the winter. So I think there's going to be an impact from the weather that that is yet to be determined.
Yes, Al, we say it every year that you can't make a call on full year volumes based on the Q1 because of the seasonality, right. And so we have said that every year since I have been here, to Jim's point, more so this year than ever before because it has been a ridiculously brutal winter, not just in those places where we always have a brutal winter, but in places where you don't have brutal winter. We had 2 days of school shutdowns in Houston, Texas from the winter weather. You saw what happened in Atlanta. So what I would say, Al, is we have no idea what Q1 volumes are going to be.
We'd expect them to not be robust. But again, I don't think that's an indicator of what you're going to see for the full year. We'll really know what full year volumes are going to do once we see the seasonal upturn in
March, April, May. Here's the broader question, David, and I appreciate the color from both you and Jim. You're guiding us for 1% volume decline and better than 2% pricing. If I look at the others in the industry, all the other metrics those metrics are flipped. And I certainly appreciate you going out and focusing on price.
But can you explain why that is such a diverse message coming from you or why there I prefer you talk about your business, but why you are seeing metrics that are different than the rest of the crew?
Yes. Look, I think we are seeing a lot of metrics that are different than competitors. And again, you got to take out the 4th quarter accruals, but let's take a look at the full year. And again, when we talk about metrics, what we are talking about is income dollars and margins. So take a look at those metrics.
In every line of business, we increased dollars, we increased margins. I can only speak for us, but we did it in every line of business. I can give there is only one thing I can tell you. We have seen what happened when we had 1% yield and 1.5% volume. We saw it.
We saw it in 2012. I guarantee you what's going to happen. Margins go down and income from operations dollars go down, particularly when the volume that you're picking up is low margin business. You just can't you can't get enough yield in order to make up for you can't get enough volume in order to make up for lower yield. I think everybody in this industry would acknowledge that you need to get sort of 1.8% to 2% yield in order to expand margins.
So that's the question. Do you want to expand income from operations and margins or do you want to see them go backwards? You have to get the yield in order to do that. Again, we've seen many times what happens in our business when we give away price to get volume and it's not a healthy trade off when it comes to income from operations dollars and margins.
So it's fair to say that not that you want to quantify our guidance for 14, although it would be helpful. How much in basis points do you expect margins to EBITDA margins, excuse me, there's only one margin, to improve in 2014 'fourteen relative to 'thirteen on an apples to apples basis.
Yes. And again, remember, as we looked at 2013, we had to sort of look at the core solid waste business because of the negative effects from recycling and waste energy and that was 150 basis points. Next year, we shouldn't get detriments from those two businesses and we think that if that plays out like that, we should get 50 to 100 basis points of margin expansion.
Finally, on this waste energy business, you take the impairment charge. Why be in that business? Why aren't we thinking about or maybe you are, but what strategic nature does that provide to your portfolio?
Yes. The waste to energy business is really 2 different businesses, right. The waste to energy business is electricity, which is what they sell out of the back end of the plant and it's basically a landfill at the front end of the plant, right. They take in waste and they charge tip fee. And so when we look at it, we say that the electricity certainly is not core to us and it's not something that we have deep expertise in.
Obviously, our folks at Wheeler Brater have expertise, but we're not a power company. So we don't as deep an expertise as folks whose primary business is power. And so you're absolutely right. On the power side, it's not strategic. On the tip fee side, it's absolutely strategic.
We always call the wheeler breeder plants the bottomless landfills because they can take it and keep taking in waste and they never fill up. And so when we look at it from that point of view, it's absolutely strategic.
Okay.
Thank you.
Thank you.
You have a question from the line of Michael Hoffman of Wunderlich.
Good morning, gentlemen. We have a question from the line of Michael Hoffman. We will have many questions from the line of Michael Hoffman. How are you doing, David?
How are you doing? Great.
Well, I got to I've got to live up to that now. I only really had one written down, but
I guess I'll make the bunch more up. Don't feel like you have to live up.
Okay. So if I can follow on the last question, the way that was answered would say a creative thought about maintaining that Yes. Look, when we look at the
electricity Yes. Look, when we look at the electricity side, we're always looking at what we can do to improve it. In the past, we've hedged it. But yes, we're always looking for ways that we can take that where we can take the volatility out of the earnings stream.
Okay. On the volume side, where should when we you give us some great tables. So one of them is called operating revenues by lines of business. And when we think about where things are gone because of like a lost national account or Sandy, can you point out like is the lost national count coming out of the industrial line or is that coming out of commercial? Because there's a pretty steep decline in both.
Yes, a little bit of both. It depends on what type of national account customer you have, but it's going to come out of both. I'd say roughly sort of fifty-fifty, maybe a little bit more leaning toward the permanent roll off side.
Okay. So one of the things that hasn't been discussed and I have to believe you're seeing this is that if you own a same store basis in your commercial business, which is that small container business, which is if you're going to get what you pointed to earlier, housing starts leads to new household formation, which leads to new business formation, this volume shows up there. How do you or how would you characterize the volume in the container that's still there year in and year out?
Yes. Well, let's talk a little bit about the commercial business because I will tell you, Michael, when we look at the lines of business, what I would tell you is, look, if we're going to lose low margin temporary roll off business, I'm not going to lose a heck of a lot of sleep over that, right? If we're going to lose low single digit national account business, I'm not going to lose a lot of sleep over that. Now don't get me wrong, I would love to have that volume. The problem is what does that do to the pricing dynamic.
But when I'm losing those low margin lines of business, I'm not particularly upset by it. I would tell you that the commercial line of business is the one if you could tell me what which one line of business do we want to get focused on to stem the losses, I would tell you it's the commercial line. And it's because again, going back to that earlier question, the route density is, the benefit you get from route density is incredible. And that's like, as Jim said, that's why we're sort of putting some more effort into customer retention without using price, right. So, but when you look at that small container business, what you have seen over the last couple of years, it's sort of the amount of waste going in the container varies sort of mildly from negative 2% to positive 2%.
So, we just haven't seen that real kick start that's going to dramatically change those commercial volumes. Again, I think in the natural economic cycle, you'll see it, right? As new houses get built, no one builds a new gas station in the middle of nowhere. No one builds a new grocery store in the middle of nowhere. But as new subdivisions start getting built, then they've got to build a gas station, they've got to build a dry cleaner.
And so I think new business starts naturally trend behind housing starts. And so if we continue to see housing starts positive into 'fourteen, I would hope that we'd start to see more new small business creation. And if we can get that 2% to 3% GDP, hopefully, that at a very minimum will at least stabilize those volumes.
So if I take what I'm hearing, what you're saying is that there is a slightly positive trend line that's starting to replicate or match this improving housing start number, but not enough yet to change the economic model, but there's but the direction is moving it's moving in the right direction.
I think that's absolutely right.
Okay. Changing gears, capital spending, would you break up the 1.2 to 1.3 or take the midpoint 1.25? How does that break out when you in your definition of growth versus maintenance?
Yes. Michael, we said last year that we had kind of redefined that. There was some growth what had otherwise been considered growth capital previously that we retitled to maintenance capital. If we had a contract that came up for rebid, previously that would have been considered growth capital as we went through the process of evaluating it. That now is considered maintenance capital, I mean, even if the contract requires new vehicles.
So at this point, the growth capital number has shrunk pretty considerably. And what we're left with is a maintenance capital number that's probably in the $900,000,000 to $1,000,000,000 range. Growth capital is the $200,000,000 to 3 $100,000,000 Jim and I have taken a very discriminating view. As David said, when we look at when we make capital expense decisions, we discriminate and we discriminate against those that provide lower returns.
Michael, when you look at what I traditionally call growth capital, I'll divide it into 3 categories, right? You've got landfill gas to energy, you've got alternative technologies and you've got recycling. Those are sort of the 3 big buckets that we've spent what we'll call growth capital on in the last 5 years. In 2014, you're not going to see a lot of spending in recycling or in alternative technologies. You're going to see more you'll see some spending in landfill gas to energy, but you're not going to see it in those two areas.
And the obvious question is why. Well, because we aren't seeing the returns in those areas. And so again, as Jim said, we certainly aren't starting business. We think we're at a good level of CapEx, and we don't expect to see that dramatically go up over the next few years.
Okay. Speaking of recycling, when you think about your efforts on going back to the customer like you did post this great recession and establishing sort of pricing floors, what's the reception been on we really need to talk about the quality you're sending us and what and if you don't send better quality, we got to charge you more?
Yes. I think the reception has been, I would say, has been fine. I more hard conversations to have. I think the more important thing, Michael, is what's going to happen going forward, right? I mean, I liken this to what we did in the early 2000s with the fuel surcharge.
When we first started the fuel surcharge, Retta, municipalities said, well, we don't have a fuel surcharge in our contracts, so we're not going to allow you to bid if you take an exception for the fuel surcharge. And we said, fine, we're not going to bid. After a while, that became an industry standard. Other industry players said, well, gosh, we're getting killed by fuel too. So, we're not going to bid if there's not a fuel surcharge.
And now virtually all contracts have been with a fuel surcharge. And so going forward, the question is, we're not going to bid these contracts if they don't have the types of provisions that we need in order to make money. The question is, is the industry going to do like they did with the fuel surcharge and say, gosh, we aren't making any money either. So we're going to we're not going to bid these contracts. That's going to be the big question going forward.
Is someone going to be optimistic enough that they're going to bid contracts without the protections that they need in order to make sure they make a return on the investment? Or are they going to do like we do and say, look, we want to do we want to be the largest recycler in North America. We don't have any intention of not being. But we also are not in this to lose money and we've got to systemically change the way our contracts work going forward so that we can make sure we make an adequate return. The contamination level only gets to a certain amount of dollars.
The rebate is a big part of it too. So, you have and then again educating the consumer. So, you have to go at it from all of these angles. And so, I would tell you, the reception has been fine, but just getting a good reception from municipalities and changing those contracts doesn't get us anywhere near where we want to be from a return point of view. The only way we get there is if we fix these contracts going forward.
Okay. And then, Jim Fish, on cash flow from operations, what's it going to is it just margin that gets you from 17.6% of revenues to a 20% target? Or is there working capital as well?
Yes. So there's probably four things. And we saw them in January and I think we'll see them for the rest of the year that drive cash flow from operations and ultimately
free cash flow.
Those four things, well, I ultimately free cash flow. Those four things well and I guess I'm speaking about free cash flow here because I'm including capital in there. But cash flow from operations, yield of course and cost control, both SG and A cost control and operating cost control. And then when you take that to free cash flow CapEx. And then of course, as you mentioned, working capital, and it's an item we haven't talked about on this call, but it's been an area of focus for us, particularly in the last two quarters of the year.
To give you a couple of numbers, we improved our DSO by 2 days, not happy with that. Patty, it's in the right direction, but not happy with the number. We've got improved DSO more than that. And I think you'll see that in 2014. Our days to pay, we really didn't start working on that in earnest until August.
And from August through December, we improved our days to pay by we increased that metric by 3 days. And really, there's quite a bit more to come there in 2014 as those pay cycles cycle through. We didn't change payment terms until November, December timeframe. So I think you'll start to see a benefit in working capital from continued improvement in DSO and then a full year of improvement in days to pay.
Okay, that's great. And then just a couple of housekeeping items. In your guidance, what share count are you using to do the $2.30 to $2.35?
What we'd expect, Michael, is that we offset dilution that we buy back at least enough shares to offset dilution.
Yes. I think we were at $470,000,000 at the end of the year. So, we would buy back shares, as David said, in 2014 to offset dilution and then
make the decision to move forward. And your dilution runs about 2% to 3% of share count?
Correct.
That's about right.
Yes. Okay. And then the tax rate in 2013 was relatively lumpy in the quarters. How do we think about that in 2014? Because it tends to have a pretty since you've given an EPS number, it tends to have pretty dramatic impact on EPS by quarters?
Yes. We can get you the quarterly number that the annual number is basically flat at about 35%.
Right. Okay, great. I hope I didn't disappoint you. I could come up with some more if you want, but I'm good.
That was excellent.
Thanks, guys.
Thanks, Michael.
Your next question comes from the line of Alex O'Shea of Goldman Sachs. Thank you. Good morning. David, can you
hear me? Yes.
Excellent. So just one question and a follow on to it. Can you talk about how you expect your yield to perform at the landfills relative to the collection business in 2014? And just from a volume perspective, should we expect that volumes at the landfill at some point are going to begin to narrow with what you're seeing on the collection side? Or is there a reason to think you can continue to outperform on the landfill side volume wise relative to collection?
Yes. We certainly expect volumes at the landfill to be positive in 2014. And like we said, particularly in the landfill line of business where you're seeing positive volumes, that should lead to better yield.
Okay. Thank you.
Thank you.
Your next question comes from the line of Barbara Novarini of Morningstar.
Good morning, everybody.
Good morning.
Jim, you referred to asset rationalization in your post collection facilities and specifically mentioned a few cash flow negative landfills. You've talked about this in the past, but how much of this that was just reported was related to recycling assets? And further, is it fair to say that asset rationalization is continuing in your recycling portfolio as you work through these contracts? Or would you say you've got a pretty good handle on projected future cash flows of your portfolio at present?
So a bigger portion of it, of that asset impairment, the biggest portion of it was of we always but we always review our assets and where appropriate we would close facilities. We felt like this year we'd gone through a pretty extensive analysis and by the time we got to the Q4 we were prepared to make a call on those.
Okay, great. And just quickly on the loss national accounts businesses that you were talking about earlier, how much of that is related to disappointment on your end from what they're demanding on the solid waste front versus the recycling front? Have you seen that demand from those customers in recycling is above what you're prepared to give at this
point? No. When you look at the national accounts, most of the national accounts do want recycling. And frankly, that's one of the positives that we have, right, that we have the largest network of recycling facilities. So, the more recycling they want, the better chance we have at winning the bid.
Look, basically what it's come down to is that our primary competition as we talked about is other large national players and then the broker. And I think the brokers are probably they are both very competitive. But the brokers model, which by the way we have a brokerage model too, the brokers model is to go out and try to get very low margin work done by subcontractors and as long as there is folks willing to do that, they are going to be able to continue to reduce price. From our point of view, we always say, we don't need to practice our business. We have got plenty of ways to practice.
We don't need to fill up their capacity with that low margin business, that's quite all right. When the economy comes back and we start seeing better volumes, we'll have that excess capacity that we can stretch in to get new volumes at higher margins and obviously those
And your final question comes from the line of Jeff Altman of Stifel.
Great. Good morning. Just a couple of quick questions from my end. I was wondering, David, on the national account side, you mentioned there was a $90,000,000 headwind in 2013 and the largest customer I think you articulated would come offline mid this year. Would you expect that number to be higher than $90,000,000 in terms of lost revenue in 2014?
You mean as far as new lost revenue or the rollover effect of the 90, You mean new?
It was the new lost revenue is what I was looking for.
Yes. No. That national account is roughly $50,000,000 to $60,000,000 I am sorry, dollars 60,000,000 to $70,000,000 of annual revenue, but again, it's at low single digit margins.
Got
you. And when we look
at other national accounts, look, the way we define national accounts is not just those $60,000,000 $70,000,000 customers. The way we define national accounts is that, if they basically if they cross over geographic market areas, they become a national account. So a lot of those national accounts are regional. And the bulk of our national account business is great business because we can create that route density. And so I wouldn't expect that we're going to lose another $90,000,000 of national accounts in 2014, and we'll continue to add sort of the smaller regional national accounts.
So overall, the net effect will be that we will lose some revenue in national accounts, but we expect that our national accounts EBIT dollars will actually be flat to up.
Understand. And in that same vein, can you just touch on the commercial side of the business in terms of service frequency increases excluding the national account loss sales in 2013? What kind of trajectory is the rhythm was through the year? And maybe touch on January, are you seeing greater frequency increases excluding the lost customers?
Yes, we haven't seen the January numbers. But again, what we saw in 2013 was sort of a fairly narrow band of positive negative, sort of down 2%, up 2%. We had a couple of numbers that were up 2% or 3% or down 2% or 3%. But basically, what I would say is that, the overall trend in 2013 was slightly positive, and would expect that trend to continue, in fact, probably get a little bit better in 2014.
Excellent. My last question is just can you touch on the couple of 100,000,000 in growth CapEx that you mentioned before? I think it was to Michael's question. In particular, I was looking for where you are in terms of your natural gas fleet. Did you
14 added or
just an update as to where that is exiting the 14 added or just an update as to where that is exiting the year and what the plans are for this year would be helpful?
Yes, Jeff. We still Jim Trebathen here. We still plan to buy about 90% of our new trucks will be natural gas trucks. We're installing about 15 new locations across the country where we put the infrastructure in and we'll continue that. The payback is was excellent in 2013 and we expect the very same in 2014.
I don't see any change in that strategy at all around implementing natural gas fleet. Our customers like it. It's obviously cleaner air. They're both residential and commercial customers appreciate it. We'll continue that focus.
And just to put it in perspective, Jim, in terms of the percentage of the fleet today, are you in the mid teens or where about are we?
13%, 13%, 16% now, I'm sorry.
16%, okay. Thank you very much.
16% of the total fleet.
We put about 900 trucks on the road that were natural gas in 13 and it moved that percentage up a couple of points.
Thank you.
Thank you. Thank you.
I would now like to turn the call back over to Mr. David Steiner for closing remarks.
Thank you. As we said, from a business point of view, 2014 is off to a great start. But from a personal point of view, 2014 is not such a great start. We recently lost 2 of our corporate family to cancer. So I wanted to say that our sympathies got to the families of Jim Perry and Scott Stadelman.
I can promise you that they may be gone, but they are not forgotten. Thank you, operator.
Thank you for participating in today's 4th quarter year end 2013 earnings release conference call. Replay dial in number 800 859-two thousand and fifty six international local dial in number 404-537-3406 conference code 315-008. You may now disconnect.