Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management First Quarter 2013 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would now like to turn the call over to Ed Eckel, Director, Investor Relations. Thank you. Mr. Eckel, you may begin your conference.
Thank you, Kimberly. Good morning, everyone, and thank you for joining us for our Q1 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 Trevathan, Executive Vice President and Chief Operating Officer. David will start things off with a summary of the financial results for the quarter. Jim will cover our revenue growth, including price and volume trends, operating costs and the financial statements.
We will conclude with questions and answers. During their statements, any comparisons, unless otherwise stated, will be with the Q1 of Exhibit 99.1 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 that you should refer to. During the call, you will hear certain forward looking statements, which are based on current expectations, projections, estimates, opinions or beliefs 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 detailed in today's press release and in our filings with the Securities and Exchange Commission, including our most recent Form 10 ks. Additionally, 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. Our EPS, net income and income from operations margin have been adjusted to exclude items disclosed in our earnings press release that management believes do not reflect our fundamental business performance or 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 the schedules attached thereto together with Item 2.02 of the Form 8 ks filed today, both of which can be found on the company's website at www.wm.com for the reconciliation to the most comparable GAAP measures and additional information about our use of non GAAP measures.
David and Jim will also discuss our results in the areas of internal revenue growth from yield and internal revenue growth from volume. Unless otherwise stated, please note that any references approximately 1 p. M. Eastern Time today until 5 p. M.
Eastern Time on May 8. 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 website at www.wm. Com. To hear a telephonic replay of the call, dial 855-859-2056 and enter reservation code 2,698, 9,631. Time sensitive information provided during today's call, which is occurring on April 24, 2013, may no longer be accurate at the time of a replay.
Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO, David Steiner.
Thanks, Ed, and good morning from Houston. We had strong first quarter results and see momentum growing in our business as we start the year. Our focus on improved pricing, cost controls and capital discipline are reflected in our results and should improve throughout the year. Our traditional solid waste business continued to improve, driven by our collection line of business, which saw the 1st year over year increase in margins and income from operations since the Q4 of 2011. We achieved the savings from our restructuring plan as SG and A costs improved from 2012 and we also saw a significant improvement in our free cash flow.
For the quarter, we earned $0.40 per share, an increase of over 5% from the same quarter last year. These results are right in line with our internal expectations and give us a strong start toward achieving our full year targets. Looking at our yield in the Q1 of 2013, we saw the positive impact of our pricing programs. Pricing discipline drove our yield to 1.4% from our collection and disposal operations. This is the highest yield since the Q4 of 2011 and we've seen yield improve sequentially for 3 consecutive quarters.
If you adjust for our South Florida waste to energy plants, we achieved yield of 1.6%. We achieved core price of 3%. This is similar to the Q1 of 2011, but an uptick from mid year and higher than the current CPI. Our price rollbacks are at the lowest level we've seen since 2,007 and have improved for 5 consecutive quarters without a noticeable uptick in our churn rate. Both commercial and industrial new business pricing exceeded lost business pricing for the first time in 4 quarters and our churn improved sequentially.
All of these positive factors contributed to the yield improvement in each of our solid waste lines of business in the quarter. So we had a good start in the Q1, but we intend to push our yield programs even harder in the coming quarters. We have yield improvement plans in each of our lines of business. So looking at the commercial and industrial collection business line, we're instituting a new regulatory cost recovery fee of about 2%. We have a huge amount of regulatory costs and other fees like fees and disposal taxes and our pricing programs have not yet paced with these costs.
Regulatory cost recovery fee or RCR is the first step in recovering some of those costs. With respect to our temporary roll off business, we're moving into our busiest time of the year and our supply of cans and trucks will begin to dwindle. Consequently, we've begun to increase prices on temporary roll off customers to balance out supply and demand. And although it's not calculated in yield, we're also recalibrating our fuel surcharge to better capture total fuel cost increases over time. On the residential side, we see deterioration in municipal bid pricing throughout the United States.
This is despite the fact that our residential line is very capital intensive and generally lower margin. So we'll go back to what we did in 2004 to 2,007 when we substantially improved margins in our residential line of business. We will improve our yield and ROIC. We won't bid on new contracts that do not meet our return requirements. We simply will not chase revenue that does not meet our return requirements and we will bid accordingly.
On the landfill side, we've seen the return on capital on our landfills deteriorate. The primary reason is because capital requirements and operating cost inflation have outpaced price increases. Consequently, we intend to increase prices on MSW volumes between 5% 7% when and as allowed by contract. And finally, with respect to pricing on the recycling side, we need to improve margins through adjustment of rebates to reflect reduced market prices and by improving the quality of inbound material that we receive from our customers. We also need to look at other ways to recover the cost of capital in a low commodity price environment.
One method we're looking at is imposing a glass surcharge on those customers that require us to process glass. As many of you know, glass is very tough on our recycling equipment, leading to more wear and tear and higher costs. There are also fewer outlets for glass sales, so we often have to pay to find an outlet. We need to recover those costs from our customers through pricing or some sort of surcharge. We certainly understand the importance of glass in recycling programs and will of course work with our customers on solutions that meet their needs while giving us a fair return.
So as you can see, we've built up some momentum in pricing and we expect that to continue. We certainly have some yield headwinds during the year as some of our fees anniversary and as pricing at our South Florida waste to energy plants continues to reset, we have good momentum and expect that to continue. On the volume side, adjusting for the 2 workday difference in the Q1 compared to last year, volumes were a positive 0.8 percent. This is the largest overall volume growth we've seen since 2,005. We saw positive volume growth in our recycling roll off and all landfill lines of business.
Although volumes in our commercial and residential lines of business remain negative, we saw sequential improvement in the rate of decline in those volumes. Winter weather this year had a negative impact on volumes when compared to the mild winter last year offsetting the slight benefit we saw from Hurricane Sandy volumes in the quarter. Volumes in early April have not seen any substantial pickup from March as late winter weather has hit in large parts of the country, but we expect to see a normal seasonal uptick in the Q2. As a result, we remain comfortable with our full year volume guidance of between 0.5% 1%. In our recycling line of business, average recycling commodity prices were 12% lower during the Q1 when compared to the Q1 of 2012.
We had an approximate $0.03 decline in our earnings per share for the Q1 of 2013 from our recycling operations. Our recycling team is currently focused on continuing the business improvement plan or BIP process with our existing recycling customers by increasing prices and managing rebates on underwater customers. In the Q1, we did see improvement in our rebate management and we expect that performance will accelerate through the remainder of 2013. We expect to see a negative year over year impact on earnings per share from recycling of approximately $0.03 in the 2nd quarter and to show improvements in the 3rd Q4. For the full year, we still expect to see a negative $0.02 year over year impact on earnings per share from recycling operations.
But given the unsettled nature of the commodity markets, I would not be surprised to see that number increase after the Q2. Turning to our waste to energy business, average electricity pricing improved almost 8% in the Q1 when compared to the Q1 of 2012. We also saw improved operating and SG and A expenses. These benefits were partially offset by headwinds from rollbacks on tip fees in our South Florida waste to energy business, where our competitor has bid disposal prices at about a $25 per ton reduction from current rates. Overall, the waste to energy business was basically flat when compared to the Q1 of 2012.
We still expect the full year impact on earnings per share from our waste to energy operations to be approximately a negative $0.02 per share compared to 12 due to the timing of outages, maintenance and the effect of lower tip fees at our South Florida plant. In summary, we're on plan through the Q1 and encouraged by the positive momentum that we see in our pricing, cost savings and cash flow performance. Of course, the Q2 is always pivotal as we see how seasonality kicks in. Once we see how solid waste volumes, commodity pricing and our yield programs perform in the Q2, we'll have a better read on how the full year will turn out. But we're still optimistic that we can achieve our full year earnings guidance of between $2.15 $2.20 per share.
On a final note, although we had a very good quarter financially, that was completely overshadowed by the loss of 1 of our directors, Pastora San Juan Capri, who recently passed away. Pastora was with the company for many years and was our longest serving director, having joined the Board in 1994. She's seen this company through thick and thin and provided sound and sage advice throughout. Pastora was a champion of diversity at Waste Management leaves a legacy as both a director and a mentor. Pastora was also a lover of knowledge and in part of that love of knowledge to countless students as a professor at the University of Chicago.
But most of all, Pastora was a friend and she will be dearly missed by me, our Board and all of the employees of Waste Management. With that, I'll turn the call over to Jim to discuss our first quarter results in more detail.
Thank you, David. I will begin by expanding on David's discussion of yield and volume in our various lines of business. Then I will talk to our other big initiatives of cost savings and capital discipline. Revenue for the Q1 increased by $41,000,000 or 1.2% from the prior year period. We grew revenue in spite of tougher winter weather and lower recycling commodity prices when compared to the Q1 of 2012.
The revenue improvement was driven by positive yield and acquisitions. Yield on our collection and disposal operations grew 1.4% in the Q1, in line with our expectation of 1% to 1.5% for the full year. Our yield growth for the Q1 of 2013 would have been 1.6% after adjusting for the change in pricing at our waste energy plants in South Florida. This is the 3rd consecutive quarter of sequential yield growth and demonstrates our commitment to price improvement. Combined internal revenue growth from yield in our collection businesses was 2.2% in the Q1 with 3.5% growth in industrial, 1.9% growth in residential and 1.8% growth commercial.
This is the highest yield for the residential and industrial in 2 years and the highest commercial yield for the first quarter highest commercial yield since the Q1 of last year. In the landfill line of business, we achieved MSW yield of 1%. However, the combined landfill yield was negatively affected by C and D and special waste. Overall, landfill yield was 0.1%. Moving to volumes.
Internal volume growth was negative 0.4% in the quarter, but a positive 0.8% when you adjust for the 2 fewer workdays in 2013. The growth was primarily driven by an increase in recycling volumes, landfill tons and the industrial line of business. Specifically in the landfill business, C and D volumes grew 14.6 percent influenced by Hurricane Sandy. Special waste volumes improved 2.9% and MSW grew by 3.7%. This is the 3rd consecutive quarter of MSW growth.
Recycling and landfill volume growth was partially offset by collection volume declines of 1.5%. More specifically, commercial volumes declined 2.8% and residential declined 1.3%. In the industrial business, volumes grew by 0.8%. Operating costs increased by $43,000,000 the Q1 to 66.2 percent of revenue compared with 65.7% in the Q1 2012. The majority of the increase is related to increased operating costs from acquired operations, primarily GreenStar, labor costs and transfer disposal costs.
Overall, our income from operations margin increased 10 basis points to 12.4% when compared to the Q1 of 2012. Note that our margin increase would have been 80 basis points, but for the 70 basis point decline in the quarter from our recycling operations. We are recalibrating our fuel surcharge to improve the recovery of our higher fuel costs. Historically, we have not fully recovered the increases to our fuel expense. So early in the Q2, we adjusted the rate to better capture total fuel cost increases over time.
This will not impact our yield, but it will allow us to fully recover increased fuel costs and will have a positive effect on the bottom line. SG and A costs $390,000,000 in the Q1, an improvement of $17,000,000 and a 70 basis point improvement compared to the Q1 of 2012 as a percent of revenue. The 2 biggest areas of savings came from labor and non labor savings due to our restructuring last year. These savings were partially muted due to an accrual for a true up of a 2010 through 2012 long term incentive compensation plan that could not be estimated at year end. GreenStar acquisition costs and a bad debt reserve for past due accounts receivable in our Puerto Rico operations.
Without these expenses, our SG and A costs would have improved almost $39,000,000 These accruals totaled about 0 point developed our business plan. So we were pleased that we were able to overcome this $0.03 per share headwind in the quarter. With respect to bad debt, we took an EBS charge of about $0.01 or $8,000,000 from our Puerto Rico operations. Although we've reserved for this receivable because it's 120 days old, we continue to pursue collection and we are optimistic we will collect the receivable. If we do collect, we will reverse the charge in a future period.
So the $0.01 EPS charge in the quarter could become a benefit in a later quarter if our efforts are successful. The quarter puts us on track to achieve our full year SG and A goals. At the end of the Q1, our weighted average cost of debt was 5.1%, and our debt to total capital ratio was 59.8%, consistent with our target ratio of about 60%. The floating rate portion of our total debt portfolio was 11% at the end of the quarter. Our income tax rate, as reported for the Q1 of 2013 was the same as reported in 2012 or 32.8%.
We expect recurring rates to be approximately 35% the full year. Turning to cash flow. Q1 2013 net cash provided by operating activities was $577,000,000 This is an increase of $102,000,000 compared to the Q1 2012. The increase is primarily related to changes in working capital related to a lower bonus payout. We noted on the Q4 call that any 2013 incentive compensation accrual would negatively impact our 2013 earnings, but the impact on cash from operations would be in 2014.
Our capital expenditures for the Q1 were $266,000,000 a decrease of $113,000,000 compared to the Q1 of 2012 and we continue to aggressively manage our capital spending. We remain focused on ensuring that we spend capital on assets that are performing the best and fit within our long term strategy. As we mentioned in February, we're analyzing our asset base to rationalize assets. This process is currently on track. Included in that analysis a detailed review of landfills that have seen a permanent decline in tons over the past 5 to 6 years, a few of which will become cash flow negative.
You combine the improvement in net cash provided from operating activities and lower capital spending, our free cash flow for the quarter was $348,000,000 This is a 2.40 $6,000,000 improvement from the Q1 2012 and puts us well on the way to achieving our goal of generating between $1,100,000,000 1 point $2,000,000,000 of free cash flow for the year. We returned $170,000,000 to our shareholders through our Q1 dividend and we invested $180,000,000 on acquisitions, primarily GreenStar. So far, the year is proceeding as expected and we're on track to achieve our full year objectives. We've taken further steps to continue the positive momentum from the Q1 and we expect that our pricing programs, our continued focus on reducing costs and diligent capital management will allow us to achieve our goals. And with that, Kimberly, let's open the line for questions.
Your first question comes from the line of Adam Thalhimer of BB and T Capital Markets.
Hey, good morning guys. Nice quarter. Good morning. Thank you.
With regards to the Q1 CapEx, do you still forecast CapEx for the year $1,300,000,000 to $1,400,000,000
We do. We CapEx for the quarter was a good story for us and we've managed it closely. Have cut back on several categories of expense specifically landfill capital and landfill gas energy OGG, a couple of those categories. Really probably more categories that we've trimmed back than not. The one category we have not touched, as we've said in the past, was going to be fleet and we really didn't touch that for the Q1.
But we still think we're on track to finish where we expected, which was in that $1,300,000,000 $1,400,000,000 range.
Okay. And then David as you look at the business
as a whole, like you said some of the volume and pricing metrics are as good as
you've seen since 2,005. I mean how do you
think that will trend as we move through 2013?
Yes. Look, we always say it every year in the Q1 that the first quarter generally isn't very indicative of how the year turns out because you haven't seen seasonality kick in. And so so we saw some great statistics on both yield and volume in the quarter, but we're certainly not ready to declare victory for the year until we see how the second quarter plays out. We've got a lot of things that we're doing in the Q2 from a yield perspective. We need to see how that plays out.
Generally, our rollbacks are lower in the Q1 than they are in the Q2. So we need to make sure that we continue to manage those down. And so we saw some good numbers. I wouldn't call them great, but we'll wait and see how the Q2 plays out before we make
a call on the full year.
Okay. Thanks very much.
Thank you.
Your next question comes from the line of Michael Hoffman of Wunderlich.
Good morning, David, Jim. On the volume on the 80 basis points, how much of that is share gains on a year over year basis versus true growth of volume in the of waste generated?
Yes. I don't think Michael that we're seeing any particular share gain. The only place where we may be seeing some share gain is at the landfill where as you know, we've used our Oakleaf acquisition to bring in those vendor haulers into our landfill. And so obviously, that would that volume has got to come from somewhere. So we saw some as you saw, we saw some good volumes at the landfill.
On the collection side, look, you all know that the game we're playing is not a market share game. The game we're playing is a yield game. And so I don't think we gained any market share. And I wouldn't expect to see us gain any market share during the course of the year.
Okay. And then the I think I picked up the explanation for the weaker gross margin is mix and then labor cost increases. Is that accurate? Your gross margins are down sequentially and they're down year over year and you pick up and make up the difference in G and A. But is that because of GreenStar and then wage increases?
Yes. I would say largely because of 2 things. GreenStar, which where we added about $25,000,000 in revenue and $24,000,000 of cost and we're well on the way to pulling some of that, trimming some of that cost out. So that was a big driver of it.
Okay. And then can you share with us on automation? How do you sort of characterize where you are on having automated the residential fleet and sort of the opportunities for those kind of ongoing productivity gains? What percentage of the fleet is automated today? And if you looked out 3 to 5 years, where
do you think that target is? Michael, we've it's Jim Turbate and Michael. We've executed the onboard computers and roughly 90% of our fleet. That's the first part of the process. You've heard Dave in the past that all of us say there are 3 parts to that versus putting the technology in the truck.
The second part is a standard process. And then the third part is just execution from a management accountability perspective. And we have rolled out that process to 4 of our 17 areas. We've touched in the last few weeks a couple of more areas. We're very early in that process, Michael, of rolling that out.
It will be over 2, 3 year period that we get the value, but you'll see it over time each month and each quarter as we execute service delivery optimization.
Okay. So and that's a point I'd love to focus a little bit on. I mean, this is a big positive. It gives you a place to turn productivity on a continual basis for several years. So it's an angle on that turning to capital smarter.
So if you framed its early innings, so we're sort of in the 1st 3 innings kind of this and so you got a lot of the game left to play. Is that how to frame it?
I think that's exactly right, Michael. I think we're in that couple of innings of the game. Although we're far along with the direction of the process, the execution is what is in early stages.
Okay. And then same thing on CNG. If I recall, you're about 11% of fleet today. What's the practical limit of what you can take the fleet to?
Yes, it's a great question. Look, we're going to take it everywhere we can with the fuel differential that we have. We're going to take it everywhere we can. And basically what that comes down to is where do you have the massive trucks where you can have a fueling station, right? And so early on in the game, we're building our own fueling stations where we have enough trucks.
I would expect as you see CNG become more and more popular for over the road vehicles that there'll be an infrastructure built out for CNG. And so I would think Michael that over time we're going to be able to convert the whole fleet. But over the next 5 years, it will probably go at about 1,000 trucks a year. Right now, we are at about 12 point 5 percent on the fleet. And so we're going to 90% to 95% of the trucks we're going to buy every year are going to be CNG.
And we're going to have to find a way to get to those areas that are more rural, the sort of the 1 and 2 and 3 truck operations to make sure that we can move them to CNG. But I would tell you Michael that I think we can get to 90% of the fleet in the next few years.
Okay. And then one last question. Working I assumed you were going to have working capital benefit for the Q1. And I think you should be able to manage to a net neutral for the year given the bonus cash payment issue in this year. Is that a good way to think about working capital for 2013?
Yes. I think, Michael, we knew this was a headwind coming. We've talked a lot about it. We saw the headwind in the Q1 on the working capital side. We've got some work to do as we've talked about in prior quarters on managing things like SDOs not SDO.
So that will help us out and DPO as well. But certainly, we knew that we were going to have that big working capital Q1, and I think we did a decent job of overcoming it.
Okay. Thank you very much. Thank you.
Your next question comes from the line of Al Kasakh of Wedbush Securities.
Good morning.
Good morning.
My first question is, can you explain how 2 extra days of work goes from a negative 40 basis points of volume to positive 1.2?
It's actually positive 0.8. But I mean it's
Well, the delta of those 1.2. You're correct. Sorry.
Yes, yes. Yes, the delta is 1.2. I mean look you've got 2 extra work days where you are not taking in Lamco volumes. You're not sending off roll off trucks. And so it's I can't tell you the specifics of how our accounting department computes that.
But it's basically the effect of having 2 days where you're not sending trucks out on the road and you're not taking in line plant build volumes or transfer volumes.
Okay. Second, can you remind us what the SG and A goal for 13 is? I forget if we're talking gross dollar savings or margin savings, but could you reiterate what your outlook is based on please?
Yes. So what we said in February was that we would be flat year over year in absolute spend and an improvement of 10 basis points. We're still on track to do that. And then keep in mind, there's a fair amount of headwind that we're compensation related headwind that we're fighting against there in order to remain flat. But we still are confident that we'll hit our targets.
And importantly, Al, the point is that the good news is that when we did the reorganization and we talked about $130,000,000 in savings, about 90% of that is SG and A, so a little bit over $100,000,000 in SG and A. So cash wise, we're going to save that $100,000,000 to $130,000,000 of SG and A, but we give it away on the accrual side for compensation. So from a cash point of view, we put those dollars in the bank. From an earnings point of view, it stays flat.
Okay. And maybe my last and then sort of a clarification. But first a clarification. Can you just confirm that your tax rate is still 35% for the full year? And it looks like it was a little benefit in the quarter.
But secondly, this cost concern obviously that I'm expressing leading to lack of margin expansion particularly on EBITDA, it seems to still be a struggle for 13, yet you're talking about getting price in a market where volume arguably is modestly up on some acquisitions. So I'm just trying to see how those things work together and can drive EBITDA margin up from what looks like probably a low for the year here. But the math just doesn't seem to hang together right now David.
Yes. I guess I would say on the operating cost side and we talked about a little bit last quarter that we knew we had some things to work on. We have been working on them and shown some real progress, specifically on things like maintenance costs, where we've been seeing some pretty big year over year negatives. We've started to turn that corner. Keep in mind that operating expenses, while they were up $43,000,000 we talked a bit about GreenStar.
And GreenStar added kind of a disproportionate amount of that with $25,000,000 in additional revenue and $24,000,000 in additional OpEx. So and right now, we're in the process of carrying that back. So I think the operating expense story, while we still know that there's work to be done, is improved.
Look, Al, the simple point is that when you look at our full year, you've got yields that we expect to continue to maintain at that 1% to 1.5% level. And we talked about the pricing programs. We don't expect to lose a significant amount of volume from the pricing program. So yield is the primary driver of margin, has been for us for a number of years. On the cost side, we'll continue to manage those SG and A costs.
You should see the volumes uptick in the second and third quarter with seasonality. And then finally, we had 70 basis points of headwind from recycling in the quarter and you see that abate in the back half of the year. So I'm not sure what kind of math you're doing, but my math tells me that we're going to have a pretty good second half of the year.
Great. My math says that $25,000,000 of revenue and costs from GreenStar doesn't translate into it doesn't explain the sequential difference in gross margin and that's why I'm struggling.
Look, we just bought GreenStar and it takes you some time to get those costs out. And so that's another it's going to be another positive for recycling in the back half of the year. You're going to be able to consolidate the facilities and lower the SG and A at GreenStar, which is going to be another benefit for the back half of the year.
Yes. One last point there, Alan, and that is that and I mentioned it in my prepared remarks, but we did have about $22,000,000 in really unexpected expenses. I mentioned the true up accrual related to a 2010 to 2012 long term incentive comp plan. We really it really wasn't at the beginning of or at the end of the year. So we ended up taking it in 2013, but it's really related to 2012.
And then, of course, we weren't expecting the bad debt hit that we took with Puerto Rico. We expect to recover that. So there's some costs there that really we regard as non recurring.
Great. Thanks a lot guys.
No problem.
Your next question comes from the line of Joe Brox of KeyBanc Capital Markets.
Hey, good morning guys.
Good morning, Joe. Good
morning. Quick question for you on the free cash flow side. If you go back to 2,007, looks like free cash flow in 1Q has averaged about 20% in the full year. Granted it's been volatile, but this quarter it came in at about 30% of your full year guidance. Can you just talk to this and then maybe note if there's anything outside of working capital or CapEx that could potentially detract from some of the momentum you're seeing?
I think you kind of hit it on the head there. There was a working capital component to that. Aside from that, I wouldn't say there's anything unusual there. I think we're pleased with the capital expense management that we've been working on and that has provided a benefit. So I would say there's not anything hugely surprising there to us.
Well, the other thing I'd say Joe is you can't discount the effect that Jim and Jim have had on maintaining our capital discipline. I mean they've done a phenomenal job down to the dollar of making sure that we don't spend the capital until we make sure the EBITDA comes in. Traditionally in the past, we'd see a lot heavier CapEx in the 1st couple of quarters from pent up demand from the prior year. And so you'd see the CapEx sort of come out of the gate pretty strong. This year, Jim and Jim have managed that very closely to say, look, we're going to we're not going to spend the capital in the first half of the year until we make sure that we can hit our cash flow target.
And once we do that, then we can try to get to that $1,300,000,000 to $1,400,000,000 in capital. But you can't discount the amount of work that those two guys have done managing our capital at the beginning of the year. Understood. Thanks.
The rollbacks look pretty good in the quarter. Two questions there. How do the rollbacks actually compare relative to a normalized environment? And then what do you think is really different in the market that allowed for the lower rollbacks, but yet no change in churn?
Yes. This is the lowest rollback percentage that we've seen in a number of years. And that's a tribute 100%. It has nothing to do with the market. It has 100% to do with our folks out in the field and our sales department.
When we saw the rollback numbers starting to bump up the last couple of years, we decided that we needed to get to our folks at the SaveDesk and get them some training to make sure that we maintain the pricing discipline. And I will tell you, it was shocking to me that they were able to do it so fast and so effective. It's truly a tribute to our training department, to our sales department.
And then David, just a question on landfill pricing. Could you just put some color around what percentage of your overall landfill business could be eligible for the 5% 7% increase? And then maybe just talk about the cadence of the rollout given I'm sure a lot of it is contractual?
Yes, exactly. About 90% of the volumes coming into our landfill are under contract and so 10% are spot. And so you've hit the nail right on the head. We generally on the commercial side, we generally have sort of standard 3 year type contracts. On the landfill side, it's a lot different.
Those contracts can range anywhere from short term to 1 year to long periods of time. And so generally, we're going to have to wait for those contracts to come up before we can manage the the as far as the percentage that comes up under contract, I think the average life of the contract is 3 to 4 years. So we'd expect to see 25% to 33% of the volume affected each year.
Great. That's helpful. I'll leave it at that. Thanks.
Thank you.
Your next question comes from the line of Alex Afshay of Goldman Sachs.
Thanks. Good morning, guys. Good morning. Good morning.
On the pricing side, when you initially provided your outlook for the year at the end of Q4 1% to 1.5%, were you expecting to implement the 2% environmental fee surcharge potentially higher pricing on the landfill side? Or does that not present upside risk to your pricing outlook for 2013?
Yes. When we developed the plans for the year, we looked at it from a core pricing point of view not from the new fees. So the new fees just recently went in. We'll know at the end of the second quarter how they've been received by the market. But no, we did not have that built into the plan at the beginning of the year.
We looked at it as the way that we're going to guarantee that we hit the plan, right? I mean nothing ever goes like you planned during the year. And so from my point of view on the yield side, if we can overshoot the target, it gives us a better chance of hitting our goals.
Okay. Thanks, David. And I think I heard you say on the recycling side that perhaps there is some risk that the total impact on the business from the commodity side this year may be a little bit more than $0.02 And I'm just curious what the driver why do you think that do you potentially expect OCC prices to soften in the back half of this year?
Yes. Not so much soften, but maybe not strengthen as much as we expected. What you're seeing right now is a little bit of unsettled nature in the commodity markets both domestically and internationally. And so basically right now the pricing is pretty much playing out as we expected it for the year. But you do have some unsettled nature in the Chinese markets and in the domestic markets that make me worry that there's more downside risk than upside benefit, right?
And so right now, we're right where we thought we would be, but I would just say there's a little more downside risk than upside benefit at this point in time.
That makes sense. And my last question is on capital allocation. If you hit your free cash flow target, you should have a lot more free cash flow than what they expect the dividend payout will be in 2013. Can you just talk about what the appetite for share buyback currently is?
Yes, absolutely. When we look at our capital allocation plan, I don't think our capital allocation plan has ever changed since I've been here. Basically, what we've said is that we're going to continue to return cash to our shareholders through the dividend and we would expect to continue to increase that over time. We're then going to take excess cash and use it for share buyback and paying down debt or acquisitions as they become available. So you've got obviously the dividend is sacrosanct and we don't expect that to ever go away.
In fact, we expect to continue to increase it over the years as we continue to increase free cash flow. And so you've got these three other components of acquisitions, of debt pay down and share repurchases. And in the past, one has been more important than the other. And at times, it's been acquisitions, at times, it's been share repurchases. Right now, I would say that we have our focus a little bit more on paying down debt.
And then if we have excess cash, we would then move more toward buying back shares. What I'd like to see us do is generate enough cash to where we can pay down a little bit of debt. And then we've talked about doing the free cash is $1,100,000,000 to $1,200,000,000 without divestitures. And if we can generate some cash from divestitures, I would love to be able to at least buy back enough stock to offset dilution for the year.
Got it. Thanks, David.
By the way, we do have $500,000,000 of authorization for share repurchase during the year. But again, we certainly don't expect to exercise that till later in the year. Again, as we see how the cash flow plays out, I talked about it from Jim and Jim's perspective on CapEx. I would say the same thing about share buybacks once we see how the year is going to play out and if we can put some divestiture cash on the table then we'll start looking at trying to offset that dilution.
Makes sense. Thanks.
Thank you.
Your next question comes from the line of Bill Fisher of Raymond James.
Just had a quick on that regulatory fee you're implementing, is that separate from the environmental surcharge? And basically if so on say a commercial contract, can you put it on an existing contract? Or do you have to kind of wait until the contract reaps?
Yes, it is an addition to the environmental fee. I mean, it's basically a different animal than the environmental fee. The environmental fee has to do with maintaining our landfills and maintaining environmental compliance in our landfills. This has to do with the very high regulatory fees and taxes that we pay to manage our landfill, our disposal network. And as far as the commercial question goes, we are able to put that in through contracts.
I mean, obviously, there are some contracts like national accounts and some things like that that we can't. But our standard commercial contract, yes, we can put that in and we're in the process of doing so.
Okay, great. And then actually you partially answered this, but in the review of capital spending, it sounds like with the restructuring you did, there's more benefits to that going through it. But can you touch on like it sounds like the fleet spending is going to be healthy this year. Can you touch on some areas where you see reductions because obviously your overall target is to be down?
Yes. So I mentioned a couple of them Bill, but so one that I didn't mention was recycling. Obviously, spending money on GreenStar has provided some of the growth in recycling. So we expect we won't spend the type of capital that we had originally anticipated or that we spent last year on recycling. Landfill capital, we're taking a very close look at landfill capital.
And I mentioned asset rationalization and part of that process is looking at where we have landfill capital spend that we don't necessarily need to spend. And then landfill gas to energy is an area that we have trimmed back. So there's several as I mentioned, there's probably more areas that we're trimming than holding comps.
Got you. And could you actually sell some of the if you decide some of the landfills aren't meeting the returns, could you possibly sell some of those landfills or small?
I guess you could. I mean you can do any number of things with them. And we've looked at whether we should keep them open, whether we should ask for expansions once they come to the end of their current cell life. So there's a couple of different options. We have actually at several landfills even reduced service pretty dramatically, which is kind of a lesser form of asset rationalization.
So there's a couple of different options there.
Okay, great. Thank you.
Your next question comes from the line of Hamzah Mazari of Credit Suisse.
Good morning. Thank you. David, the first question is just on pricing strategy. Maybe at a high level, you could talk about how this strategy differs from what you've done in the past maybe the pricing gate. You've always talked about being aggressive on the landfill.
How is this different? Maybe talk about at a high level how this strategy is different than the last few years?
Yes. Well, I mean clearly the amount of focus that we put on it is dramatically different than the last few years as well as the dollar amounts, the gross dollar amounts are much different. On the commercial line of business, we've walked a number of you all through what we call the pricing waterfall because on our commercial line of business, we can't price increase all the customers. Some customers are in franchise markets where they go by CPI. And so when you look at what we've done on the commercial line of business from a price increase point of view, the actual number is about 8%.
And so you're pushing 8% price on the commercial customers that you're allowed to push price on, that's a pretty aggressive number. And frankly, it's a number that we need to be even more aggressive with. And so I think the focus has certainly changed. The gross dollar amount has changed. But I would tell you maybe the biggest change from over the last few years is that we have so much better data on how it's working and so much better training on how we can manage the rollbacks.
And so we've gone through every aspect of our pricing program. And again, it's a tribute to our folks out in the field and to our sales and pricing department. They've basically shored up every piece of the pricing department. Look, I've been here 10 years. We know how to do price increases.
What we've gotten better at is doing surgical price increases and keeping those price increases. So I'd expect to see that continue to improve over the next couple of years.
Got you. And then on the sale of non core assets, I assume that's early in the process. And how aggressive or passive are you being there? Has that number gone up since last quarter? You mentioned some landfills there.
You've mentioned Puerto Rico maybe. Just trying to get a sense of whether that where you guys are in that process?
Yes. We've we had about $30,000,000 of sales in this quarter. I will tell you Hamzah that we talked about the bad debt in Puerto Rico. That certainly has an effect on whether we can sell those operations or not. And then the other non core assets the oil and gas arena, you've seen a little bit of volatility in oil prices.
And so I would say from the beginning of the year, I still expect that we'll sell some of that, but we're not going to put that into the bank. And so I would say that we might be a little less optimistic on the sales proceeds that we'll get from non core divestitures. But again, we're going to hit that $1,100,000,000 to $1,200,000,000 in free cash. And so those dollars for us are just excess dollars that we can apply to returning to our shareholders.
Okay. And just last question on the waste to energy business. Is this a growth business for you guys anymore? A few years ago, you were trying to throw capital at that business? Or is this just a disposal mechanism for you guys and energy prices are sort of optionality?
How should one think about this
as far as far as our Chinese operations, we're certainly the leading American company in China, maybe the leading non Chinese company in China. And there's absolutely no doubt that we are the leading American company in Europe and in Great Britain where the bulk of the growth is occurring. And so I will tell you our waste energy folks have done a phenomenal job of developing relationships and winning bids overseas. Domestically, you've got a little bit of growth, but you don't have nearly the kind of growth domestically that you're going to have overseas. So basically, I think you're exactly right.
What you see domestically is that it's a play on natural gas and electricity prices and then the growth will come from overseas.
Great. Thank
you. Domestically, so there's a bit of growth from things like metals recovery and special waste as well, which we think is a nice market for us.
Got you.
Thanks a lot.
Thank you.
Your next question comes from the line of Corey Greendale of First Analysis.
Hi, good morning. It's actually David Warner for Corey. In your Q4 filings, you actually quantified the volume impact of Sandy. Do you know what that was in Q1? Or if you don't have that handy, whether that was larger than Q4?
Yes. No, it wasn't larger than Q4. It was roughly $2,000,000 $2,500,000 Okay.
And you've talked about pushing through price increases on your recycling customers that are underwater. Can you give us a sense of the number of customers you have there, the proportion that are significantly underwater and where you are in the process of getting them back to profitability and what you've seen in terms of churn with those customers?
Yes. We're early enough in the process, but I couldn't give you an exact percentage of how many of them are underwater. And about 50% to 55% of those customers are actually under contract. So it's a little bit harder to move them. And so the VIP process is not going to be an event.
It's going to be a journey. I can guarantee you that our recycling team is focused on it. They made some good progress in the Q1 and I'd expect that momentum to build over the next few quarters.
Okay. And could you give us an update on special waste and drill cuttings? Anything materially different from Q4 that you've seen there?
Yes. We've seen a that business continues to grow. The energy business is a nice growth business for us. We've seen an uptick year over year of we're still in the probably 40% growth range year over year. So and we would expect to continue to grow that business not only in the existing shale plays that we're in, but in some of the other shale plays that we're not.
Thank you. Thank you.
Your next question comes from the line of Stuart Scharf of SNC Capital.
Good morning. Thank you.
Good morning.
Can you just add a little more color on the percentage of glass recycling and surcharges? And how much is comes from glass? And also just generally the C and D waste market and do you see that improving as the housing market is now improving?
Sure. The C and D market actually in the Q1 was very good for us. We don't expect that to slow down. In fact, you saw some still saw some winter weather in the Q1 and the 1st few weeks of April. So we expect to see that continue to be strong throughout the year.
With respect to glass, the issue that you have with glass is that it more than any other commodity, it hurts your equipment, right? As you process the glass, it puts a lot of wear and tear on the equipment. So there is no we look at a uniform processing cost for materials that go into our recycling plant, but there really is no uniform cost for recycling materials because different materials are handled different ways, whether they're in dual stream or single stream plants. And the glass, the many markets for the glass. So in many cases, we actually have to pay to find a market for the glass.
And so that drives a significant amount of the lack of profitability in our recycling operations. Look, what's going on with our recycling team right now is they are basically doing a clean look at recycling and saying, in a low commodity environment, what do we need to do? It's pretty simple to say we need to go back and manage rebates, that's easy. But what else can we do to change the dynamics in the recycling industry so that we can get the return on capital on a more steady basis and not go through the volatilities of commodity pricing. And one of those factors is finding a solution for glass, whether it's having a surcharge for glass or finding better outlets for glass.
We need to do something to make sure that we're recovering that money. What we're looking at right now is a glass surcharge so that for folks that want to maintain glass as part of their recycling program and most municipalities do, we're going to have to charge we're not going to charge a flat processing fee for the glass, we should charge a higher processing fee because of the wear and tear on the equipment. So that's basically what's going on. But with the recycling team, they're sort of doing a soup to nuts review of how do we not only improve profitability in a low commodity price environment, but how do we also try to reduce some of the volatility that we see.
Okay. And what's the percentage of glass out of your recycling business?
Gosh, the percentage of glass, I'd be guessing, but it's probably about 30%. When you look at it by weight, for us, it is the 2nd largest
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Barbara Novarini of Morningstar.
Hey, good morning.
Good morning.
So I just wanted to revisit the E and P sector one more time. Are you guys equipped to offer hauling services for acting drilling sites? Or is this mainly leveraging MSW landfills with specially permitted cells near the active shale plays?
I guess it's somewhat dependent on the site itself, but we're certainly equipped to handling the hauling services. Probably our biggest play is in Marcellus up in Pennsylvania and we handle quite a bit of hauling there of solids also of waters as well. So we're part of the differentiation for us is being able to provide a full service solution, which includes hauling, disposal, industrial services and several other smaller items.
Got you. When you think about the business, would you be able to break it down by percentage? What's collection versus disposal?
Well, it does differ by sites. So it's a bit hard to break it down. And some of these sites are seeing rig movement. For example, Marcellus is seeing a lot of rigs moving over next door to Utica and across the United States over to the Bakken. So in places like Eagle Ford, we're not doing as much hauling because we don't have hauling operations in close proximity.
So But in places where we have hauling operations in close proximity, But in places where we have hauling operations in close proximity to drill sites, we're doing a lot of hauling of solids.
Got you. That's very helpful. Thank
you. Thank you.
We have no further questions at this time. I will now turn the call back over to David Steiner for closing remarks.
Thank you. On a final note, we have a proud member of our family that we want to recognize. Ricky Glover is a highly respected driver in our South Carolina operations that's been providing excellent and safe service to our customers for 15 years. Ricky's daughter is Candace Glover, one of the final 4 contestants on American Idol. Candace has come out on top of thousands of contestants to reach the final 4.
And recently, she performed a song that one of the judges on American Idol called the best performance in the history of the show. So on behalf of Waste Management's 44,000 employees, I want to say go Candace. And we all want to wish her the best of luck tonight as she continues her quest to be the next American Idol.
Thank you for participating in today's Waste Management Conference Call. This call will be available for replay beginning at 1 p. M. Eastern Time today through 11:59 p. M.
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