Morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management Third Quarter 2012 Earnings Release Conference Call. After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Ed Eggle, Director, Investor Relations.
Sir, you may begin.
Thank you, Nicole. Good morning, everyone, and thank you for joining us for our Q3 2012 earnings conference call. With me this morning are David Steiner, 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 of 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 our statements, any comparisons, unless otherwise stated, will be with the Q3 of 2011. Before we get started, let me remind you that in addition to our earnings press release that was issued this morning, we have filed a Form 8 ks that includes the earnings press release as Exhibit 99.1 and is available on our website at www.wm.com. The Form 8 ks, the press release and the schedules for the press release include important information that you should refer to. During the call, you will hear certain forward looking statements 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 and net income as well as income from operations margins, operating SG and A expenses and expenses as a percent of revenue have been adjusted to exclude items detailed 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 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 reconciliations 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 stated otherwise, please note that any references to yield or volume results are more specifically referring to internal revenue growth from yield or volume. 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 November 14. 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 30012751.
Time sensitive information provided during today's call, which is occurring on October 31, 2012, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's CEO, David Steiner. Thanks, Ed. Good morning from Houston.
In the Q3 of 2012, we earned $0.61 per share. We're particularly pleased by those results given that the headwinds from commodity prices exceeded our previous expectations. Our income from operations margin grew 30 basis points compared to the Q3 of 2011 and our income from operations margin excluding depreciation and amortization grew 90 basis points. Collection and disposal yield was 0.8% and grew sequentially for the first time in 6 quarters, despite the anniversary of our environmental fee in the quarter. And on a workday adjusted basis, our volumes in the core solid waste business were positive for the 3rd consecutive quarter.
So as has been the case through the year, our core solid waste business continues to perform well and we're seeing some positive trends as we approach 2013. Adjusting for one less workday in the 3rd quarter, volumes were positive 0.5%. We saw positive volume growth in each of our industrial, MSW, C and D, special waste and recycling operations. Year to date, volumes through the Q3 are positive and as such, we still expect to achieve our full year volume guidance of flat to slightly positive volumes. Looking at our yield in the Q3 of 2012, each of our collection and landfill lines of business saw positive yield.
Our MSW, C and D, special waste and roll off segments achieved both positive yield and positive volume. On the collection side, we continue to focus on our core price increases. Core pricing consists of price increases plus all fees other than our fuel surcharge less all price rollbacks. When we look at the core price component of solid waste yield, it increased 2.6% in the quarter, consistent with the last few quarters and indicating our continued commitment to pricing discipline. We improved our rollbacks in the Q3 when compared to the Q3 of 2011.
This is the 4th consecutive quarter of sequential improvement in rollbacks. More importantly, only once since 2,005 has our rollback percentage been lower than it was this quarter. And we expect both core pricing and rollbacks to continue to improve in 2013. In order to see the effects that commodities will have on our full year results, we look at both our recycling and waste to energy operations. With respect to recycling, when we gave our initial guidance at the beginning of the year, we expected commodity prices to have a negative impact of about $0.04 per share for all of 2012.
Through the 1st 9 months of 2012, we've incurred a negative year over year impact of $0.14 per share from recycling commodity prices. In the Q4, we're expecting an additional $0.04 per share of headwinds from recycling commodity prices. So for the full year, recycling commodity prices will create about $0.18 of headwinds versus our expectation of about $0.04 a $0.14 difference. Turning to our waste to energy business, average electricity pricing declined a little more than 12% in the Q3 when compared to the Q3 of 2011. Our waste to energy operations caused a $0.02 drag on earnings per share for the Q3 compared to the Q3 of 2011.
In our original guidance for Waste to Energy, we predicted a negative impact of about $0.05 per share for the full year of 2012. Through the 1st 9 months, we've experienced a headwind of $0.07 year over year or $0.02 more than we expected. In the Q4, we expect our waste to energy operations to be flat to slightly down year over year. So looking at our combined recycling and waste to energy operations, the total negative effect is $0.16 of unexpected headwinds for the full year. If we added that $0.16 to our $2.08 to $2.13 guidance, we would be at $2.24 to $2.29 right in line with our guidance at the beginning of the year.
So you can see that without these headwinds, we would have been soundly on course to achieve our original full year goals, which demonstrates the stability and continued strong performance of our core solid waste business. The reorganization that we announced at the end of the second quarter is progressing as we expected. During the Q3, we had approximately $9,000,000 in savings and we expect to see about $20,000,000 in savings for the Q4. This puts us on track to achieve the full $130,000,000 in annual savings anticipated for 2013. So through the 1st 9 months of 2012, our core solid waste business has grown and margins have continued to improve.
With yield and cost savings accelerating into 2013, we should see continued margin expansion. If we see a recovery in commodity prices, that would accelerate earnings growth, but we will not count on 2013. We will focus on improving those things that we can control, costs and yield, and we expect to drive both in 2013. Of course, we'll give further guidance and assumptions on our 4th quarter earnings
year.
Commodity prices will again be a hurdle in the Q4. And as of today, we expect to see an approximate headwind of $0.04 to $0.05 per share in the Q4. Even with this, we expect full year earnings to be between $2.08 $2.13 per share. If take into account the $0.07 per share incremental headwind difference in the 4th quarter, we'd still be on track to achieve the earnings range of between $2.15 $2.20 per diluted share that was given after the Q2. From a cash flow perspective, we're on track to generate operating free cash flow about $850,000,000 despite nearly $200,000,000 of commodity headwinds in 2012, an increase in capital expenditures of about $200,000,000 and about $100,000,000 of additional cash taxes in 2012.
With our focus on yield and cost improvements in 2013 and with cash impacts from commodity prices expected to abate, we expect to see operating cash flow increase in 2013, while continuing to make investments toward a natural gas fleet. We're building a solid plan for 2013 that I'm confident our team can deliver. I'll now turn the call over to Jim to discuss our Q3 results in more detail.
Thank you, David. I will start by describing the changes in revenue, including yield and volume, and then I will discuss costs and cash flow. Revenue for the Q3 declined by $61,000,000 or 1.7 percent from the prior year period due to lower recycling commodity prices. If commodity prices were at Q3 2011 levels, Q3 2012 revenue would have increased by $115,000,000 or 3.3 percent from the prior year period. The revenue decline from recycling commodity prices was partially offset by acquisitions, improved yield and fuel surcharges.
Yield in our collection and disposal operations grew 0.8% in the 3rd quarter. As David mentioned, this is the Q1 of sequential yield improvement out of the last 6 quarters. Adjusting for the change in pricing at our to energy plants in South Florida, our yield growth for the Q3 of 2012 was 1%. We were able to achieve this with virtually no incremental benefit from our environmental fee, which had a large impact last year. Compared to the Q3 of 2011, in the Q3 of 2012, we had improved pricing and fewer rollbacks in the collection lines of business.
In the collection business, yield grew 1.3% in the 3rd quarter. More specifically, commercial grew 1.5%, industrial grew 1.8% and residential grew 0.8%. All of these were improvements from the Q2 of 2012. In the landfill line of business, all of the waste streams achieved positive yield in the Q3 of 2012. In total, landfill yield was a positive 0.6%.
Workday adjusted internal volume growth was 0.5%, consistent with what we've seen in the first half of twenty twelve. More importantly, this is the first time we've seen 3 consecutive quarters of volume growth since 2,005. This growth was driven by recycling volumes at our MRFs, which grew 5.1 percent and landfill volumes, which grew 4.3%. We've seen strength in recycling volumes all year and it's encouraging to see the MSW landfill volumes turn more substantially positive recently. Specifically in the landfill business, special waste volumes grew 4.9%, MSW grew 3.4% and C and D volumes improved 0.1%.
Landfill volume growth was partially offset by collection volume declines of 1%. More specifically, commercial volumes declined 2 0.5% and residential declined 1.4%. In the industrial business, volumes grew 1.2%. As I mentioned, recycling volumes improved 5.1% organically in the quarter and 10.4% when you include acquisitions. Unfortunately, commodity prices were down in the quarter, but we remain committed to recycling to extract value from the materials that we collect.
The decline in recycling commodity prices also impacted our operating costs as a percent of revenue. As a percent of revenue, operating costs increased to 64.2 percent of revenues compared with 63.9% in the Q3 of 2011. We did see savings in cost of goods sold due to lower recycling commodity rebates. Without these savings, our operating costs would have increased when compared to the Q3 of 2011. 3rd quarter subcontractor cost added 120 basis points and repair and maintenance cost added an additional $17,000,000 or 60 basis points of cost.
Maintenance costs have been up all year due to our waste energy operations and increases in cost of tires, parts and loops. As we add newer trucks to our fleet and improve our maintenance processes, we should see maintenance costs improve. SG and A costs were 3 $32,000,000 in the 3rd quarter as an improvement of $48,000,000 As a percent of revenue, SG and A cost improved 120 basis points on an adjusted basis. The main drivers of the improvement in SG and A costs were a reduction in incentive compensation accruals and SG and A savings from our restructuring should increase from $7,000,000 in the 3rd quarter to approximately 17 $1,000,000 in the 4th quarter. Overall savings from the restructuring was $9,000,000 in the 3rd quarter and should increase to $20,000,000 in the 4th quarter.
The incentive compensation savings will not repeat in the Q4. And in the Q4, seasonal revenues decline seasonal revenue declines typically cause SG and A costs as a percent of revenue to increase. In the Q4 of 2012, we do not expect to be at the 3rd quarter level of 9.6%. However, we do expect to see an improvement when compared to the Q4 of 2011. We expect to end the year on track to achieve the $130,000,000 in annualized savings from our restructuring in 2013, most of which comes out of SG and A.
Our income from operations improved 30 basis points when compared to the Q3 of 2011. This is a good result, particularly given that we had to overcome recycling and waste energy headwinds, which reduced margins 140 basis points and our Oak Leaf operations, which further reduced margins 30 basis points. Our Oak operations have greatly improved from the 2nd quarter when we saw a negative seventy basis point impact. At the end of the 3rd quarter, our weighted average cost of debt was 5.1 percent and our debt to total capital ratio was 60.2%. The floating rate portion of our total debt portfolio was 6% at the end of the quarter.
Our income tax rate as reported for the Q3 of 2012 was 36.1%. In the Q3 of 2011, it was 32 3%. The increase is related to non deductible losses and a return to accrual adjustment. Our recurring rate is approximately 33.8 percent, which is what we expect to see in the 4th quarter. Turning to cash flow.
Q3 2012 net cash provided by operating activities was $574,000,000 Cash from operations was impacted by 2 issues, which lowered it by about $150,000,000 First, the temporary increase in DSO reduced cash flow by approximately 100,000,000 dollars 2nd, we had a settlement for the termination of forward starting swaps related to our recent debt issuance, which decreased cash from operations by approximately $59,000,000 Without these two factors, we would have seen an increase of about $75,000,000 in net cash from operations or an increase of more than 11%. Our capital expenditures for the Q3 were $402,000,000 resulting in free cash flow for the quarter of $180,000,000 The previously discussed impact of the cash from operations change and an increase in capital expenditures drove the free cash flow changes. The increase in capital spending was primarily for fleet capital of which 90% was for CNG vehicles. We are on track to achieve the cash from operations and capital expenditure components of our free cash flow range, which would generate between $800,000,000 $850,000,000 of cash for the full year despite the combined $300,000,000 in headwinds from commodity pricing and cash taxes and $200,000,000 in additional capital. As discussed on the Q2 conference call, our full year free cash flow range assumed the sale of selected assets.
We are in the process of evaluating opportunities to sell these assets. If we determine not to sell them at this time or we do not complete the sales before year end, it will reduce the proceeds from divestitures component of our free cash flow, but it will not affect cash flow from core operations. We returned 164 $1,000,000 to our shareholders through 3rd quarter dividend and we invested $24,000,000 in acquisitions. In summary, we are pleased and balanced with the results of our operations. And for that, I thank all of our employees.
Their dedication and hard work allows us to generate solid earnings and return cash to shareholders despite the headwinds we have confronted. While we still have work ahead of us, we look forward to a more rewarding 2013. Coupled with the daily efforts of our employees, we anticipate our earnings and free cash flow to grow in 2013 and beyond. And with that, Nicole, we can open the line for questions.
Your first question comes from the line of Hamzah Mazari with Credit Suisse.
The first question is just on SG and A. Is it possible for you to break out how much of the decline was due to lower incentive comp accruals and how much was the restructuring? And then going forward, Dave, maybe you can comment on your conviction level in executing on beyond the $130,000,000 which you talked about and maybe talk about some of the risks in not getting to that in not getting there?
Yes. When you look at the number with respect to the bonus accrual that was about 0 point 0 $3 for the quarter. When you look going forward Hamzah, the $130,000,000 we have I can guarantee you we have locked down to the $0.01 We know exactly where it came from and we know exactly how to keep it from coming back and we're monitoring that every day. We've also put a couple of folks in charge of trying to increase that $130,000,000 We fully expect that we'll see some dollars from that. We haven't built that into our plans yet, but we fully expect that we'll see more than that $130,000,000 But the $130,000,000 is locked and loaded for 2013.
Got it. And then on the asset get rid of and this is just a timing issue? Or are you still debating whether or not to sell those assets? And then maybe talk about your talk about maybe buybacks. You didn't buy back any shares this year.
Is that something that we can expect next year for you to buy back stock? Or is this just a new GAAP allocation policy where you're more focused in on just the dividend?
Yes. When you look at the asset sales, as you can imagine, the asset sales, there's a number of them and they're all in various stages of completion. So we have a couple where we have letters of intent and we're pushing to get them closed by the end of the year. We have a couple where we're looking at letters of intent. And then frankly, have we did not get offers that we found attractive enough.
And as you all know, we don't have to sell those properties. And so we probably will not sell those properties. And so with having those asset sales at all points across the spectrum from letter of intent to assets that we pulled off the table, we just wanted to make sure that folks realize that we may or may not get to that full run rate by the end of the year. With respect to the capital allocation policy that hasn't changed. We'd like to add to that mix between dividends and share repurchases.
We'd like to add to that mix, making sure that we have stability on our balance sheet from a coverage point of view. But as far as our philosophy goes that hasn't changed.
And just last
Yeah. That's so when we look at it, we're probably running Jim
2% Yes. That's so when we look at it, we're probably running Jim $200,000,000 to $300,000,000 above our running 5 year average. Obviously, we were $200,000,000 higher than we were last year. So I would say, yes, we are running a little bit above average. But the good news is that the reason we're doing that is to invest in that natural gas fleet, which as we've discussed before is not only good for us from a new fleet point of view, from a maintenance point of view, but clearly with the differential between natural gas and diesel creates some immediate economic benefit.
Great. Thank you.
Your next question is from the line of Scott Levine with JPMorgan.
Hi, good morning guys.
Good morning. Good morning.
So it sounds like generally speaking the pricing news was pretty positive across the business overall. And I was hoping you might be able to provide some color with regard to how much of that was really a function of internal initiatives on your part as well as your comments and thoughts on the operating landscape in general And what helped you compensate for the anniversary of the environmental fees in the quarter?
Yes. From the pricing environment point of view, I'd say it's a fairly stable environment. When you look at our churn rate, you don't see the churn rate going up. When you look at the rollbacks, the rollbacks have been very positive. And that all points to a very stable pricing environment.
When you look at what drove it in the quarter, as usual, it's core price increases. It went up obviously because rollbacks went down and that's where the focus is on 2013. When you look at 2013, there's 3 big components that are going to drive our yield. First, that the core price increase, the price increase that we put out on the Street. 2nd, the rollback percentage.
And then 3rd, making sure that we have compliance with all of our fees and surcharges. We've seen that slip a little bit in the last few years. And so we've gotten together with the group leadership and with every one of our 17 AVPs. And I can promise you they've got a laser focus on pricing going into 2013.
Thanks. And I think there was an expectation there might be some increase in the contribution from fuel surcharges in the quarter. It looks like that wasn't the case. Should we expect that going forward? Or maybe a little color there.
Yes. With fuel prices coming down, obviously, there wasn't as raw dollars, but we actually were positive. Remember, at the beginning of the year, we were running a little bit behind on the fuel surcharge where we were losing a couple of $1,000,000 This quarter, I think we made $4,000,000 on the fuel surcharge. So we said it early in the year that we'll start to see it even out as prices come down and that's exactly what's happened.
Got it. One last one if I could. The release indicates you expect earnings and cash flow to grow year. I was wondering if you could provide a little bit more color in terms of what gives you the confidence to make that statement. It looks like commodities have moved up here in the month of October.
And then also with respect to the outlook for cash flow, maybe a little bit more color with regard to the impact from the issues like commodities, like CapEx, like cash tax that were incremental headwinds that you foresee in 'twelve and what your expectations would be for those items for 'thirteen?
Yes, exactly. We'll give a lot of detail on that when we do our guidance after the Q4. And obviously, we'll have a lot more visibility into the year as we go through our business plans right now. But when you look at next year, there's 2 things that I would say are going to drive the cash flow. Obviously, the first is our cost programs and pricing.
And that should drive an incremental a minimum of $200,000,000 straight to the bottom line. And so you'll see cash generation go up nicely. That's assuming that we get no benefit from commodities. Obviously, this year, we had a drag from commodities. And then if we get any types of benefits from bonus depreciation or anything like that, that, it's gravy on top.
I would not expect us to see a dramatic change in CapEx next year. We are committed to changing over our fleet to CNG. And so we won't pull down that CapEx environmental conditions change such that the earnings power isn't there because of changes in the economy, we certainly have the ability to pull that down a good $200,000,000 to $300,000,000 without affecting our business operations at all. So we should see some pretty strong cash flow generation increases next year.
Got it. Thanks, Dave.
Your next question comes from the line of Vance Edelson with Morgan Stanley.
Just answer the earlier fuel surcharge question from the angle of what's the willingness on the part of customers to accept these surcharges most recently? Any change in their behavior versus past fuel cycles?
No. It's I think everybody understands the nature of our business from a transportation point of view and the fuel that we use. And so frankly what we've seen is a slight uptick in our compliance with the fuel surcharge. And we've put some process in place out in the field to make sure that we aren't waiving that fuel surcharge. When we talked about the pricing environment, I would say that we've got a very stable pricing environment.
What we have seen from some competitors is that they've waived fuel and environmental. And frankly, some of our folks started to do the same in order to keep up with the competition. What we've told them is we're not going to do that. We're not going to waive fuel and environmental. That's just putting too much risk into our business plan going forward.
You can get away with waiving fuel and environmental on day 1. You can't get away with it for a year, 2 years or 3 years or 7 years, the time that we like to keep these customers. And so you've got to see increases as you see go up from both environmental compliance and the fuel. So we put processes in place to make sure that we aren't waiving fuel and environmental And obviously, those will continue into 2013. So we see nothing but increased compliance from that point of view.
And we haven't seen a pushback from customers really at all.
Okay, got it. And could you just elaborate a bit on the labor dispute? What's the nature of the issue there? And is it mainly behind us now?
Yes, it is. I mean, look, as you know, anytime you have a labor dispute, there are a lot of different issues. This was primarily economic. I mean, it was a disagreement as to what we thought wage increases should be in this economic environment. It only lasted less than a week, so we were able to get that out of the way.
And we put some reserves in for some liquidated damages for some of the communities up there to make sure that we take care of our customers. But other than that, it's certainly behind us and we continue to have very good relationships with our unions throughout the country.
Okay. That's helpful. Thank you, David.
Your next question is from the line of Michael Hoffman with Wunderlich Securities.
The question on free cash flow, David, your comment about it growing. So is it fair based on the way you've characterized some of the data, we should be north of $1,000,000,000 on a comparative basis of that 850
dollars I know we'll obviously yes, we'll give a lot more guidance when we give our 2013 guidance. But yes, I mean if you take the $800,000,000 to $850,000,000 that we're talking about this year and you add that incremental $200,000,000 that I'm talking about from cost and yield, it absolutely should be over
Okay. And then Jim, the DSO hit this quarter, when does that reverse? What quarter? Or
So Michael, there were 2 components there of that. And the first was really a handful of our municipal customers who effectively made 3rd quarter payments in Q4 because their payments came in on the 1st and second October. So that will reverse itself in the Q4. The second component was really a number of our large customers, national account customers and energy services customers who basically did a better job of managing their DPO than we did of managing our DSOs. So I expect that that will be an area of focus for us.
To answer your question though about the number, we expect it to come back down by about 2 days. It was up by about 3 days. In the 3rd quarter, we expect at least 2 days to come back down at the end of the Q4.
At the end of the Q4, okay. And then your comment about the reorg had $9,000,000 I just want to make sure I understood this correctly $9,000,000 in the G and A favorably this quarter $20,000,000 in the 3rd 4th quarters. And that doesn't include David your comment about the $0.03 for bonus or not bonus accruals.
That's right. It was actually $9,000,000 total $7,000,000 in SG and A for the quarter and $20,000,000 total in the Q4 in 2017 that will come out of SG and A.
Okay. And the 4th quarter bonus accrual adjustment should be the same as the 3rd quarter, so we should take that out too?
No, no. We won't have any significant bonus accrual reversal in the Q4.
Okay. And then to be clear, the Board's view on dividends is that they are paying a dividend and it's their intention if they can to grow it. That's clearly their intention still?
That's absolutely correct.
Okay. There's no all right.
And then lastly, can you help us understand the capital you've been investing in the alternative technologies, as you sort of drive the future growth of the company? When should we start to think about those being breakeven on a free cash basis, let alone turning positive?
On a
free cash basis, they are currently breakeven. And so but when we look at it, we look at it from a portfolio point of view as to when will these investments pay off. In other words, they are already cash neutral. The question is, when are we able to monetize those? You might have seen one of our investments had a public offering out this year.
They ultimately pulled it. But we would expect to see quite a few of those investments start to go public in the next 2 years.
Okay. Thank you very much.
Thank you.
Your next question is from the line of Corey Greendale with First Analysis.
Hi. Good morning. Good
morning. First, I just wanted to follow-up on the question Michael was asking about free cash flow. The 200,000,000 dollars drag from commodity prices that's 2012 versus 2011, correct? Correct. So to get back that entire $200,000,000 you would need commodity prices to get back to 20 11 levels on average.
Is that the right way to think about it?
That's right. And look when we put out our plan, I don't expect us to assume any benefits from commodity prices. Look, we think they're at a trough. We certainly think there's more upside than downside at this point in time, but we're not going to build in a dramatic rebound into 2013. We'll build in more flat type prices for 2013 and then hope we get some benefit.
Okay. I understand. Thank you. One a couple questions about the disposal side of the business. So if you just look at the national data, construction activity has been recovering pretty nicely for almost a year now.
And I think in the script Jim said that C and D volume was up 0.1 percent. Do you think is there still a lag effect here where you would expect to see that pickup given what we've seen is somewhat of a recovery in construction? Or do you think this is for whatever reason you're not going to get as robust volume growth as construction activity has been?
Yes. Cory, we hear a lot about the construction activity. And frankly, we're not seeing it dramatically in the volumes yet, but we're certainly starting to hear from our folks out in the field that they see it coming. When I look at the quarter, frankly, the most encouraging thing that I saw in the quarter was that we're starting to see the volumes bounce back in the South and the West. They were the most dramatically affected by the downturn.
And you're starting to see them turn positive from negative in a lot of the lines of business. To me now look obviously that's because they went down pretty dramatically in the down turn. But seeing those volumes start to pick up in the South and the West I think is probably a good sign that we will see some construction pop in 2013.
Okay. And David, I know I think I know how you feel about disposal pricing. But could you just talk a little bit about how much room you think there is for upside in the near term maybe 2013? How much where you think that might be able to get to?
Yes. Look, I mean, you all heard me say it before that disposal pricing is absolutely pivotal to us to sustain all of our pricing programs. And so we need to be more aggressive in 2013. As I've said to many of you, it's hard to be aggressive when you're seeing income from operations going down at your landfills and that's what we saw between 2,009 early 2012. We've now had 3 straight quarters where we've seen improvements at the landfill side of the business.
You saw that our volumes were pretty strong this quarter. So I would expect that in 2013 that will allow us to be more aggressive at the landfill. I
might add to that, Corey. 0.6%. And we also had an at 0.6%. And we also had an anniversary of our environmental fee on the landfill side of the business. We've talked a lot about it on the collection side of the business, but we had an anniversary of our environmental fee on the environmental fee on the landfill side of the business too, which we've overcome.
So but as David said, really as pricing at the landfill goes, so goes pricing on the collection side of business.
Got it. Thank you.
Thank you.
Your next question is from the line of Joe Box with KeyBanc Capital Markets.
Jim, I think you mentioned earlier that residential collection yields were up about 80 basis points this quarter, which is a pretty nice acceleration from last quarter. You maybe just talk to what some of the biggest drivers were behind that improvement?
Sure. Yes. The biggest drivers of course are going to be twofold. 1 is the absolute price increase. The other is the reduction in rollbacks.
And then of course CPI, when you think about residential, a big chunk of that is CPI driven. Our expectation for CPI is about 1.5% is about right. So we think that residential has is still going through a bit of a competitive battle here, but we also see some encouraging signs on the residential side that possibly some of these contracts we've lost in the past due to price, those folks are not having such a good experience there and we may see them bounce back.
Okay. Great. And to that point on rollbacks, can you maybe just give us a sense of how much overall rollbacks went down in the quarter and maybe what you're targeting for improvement in 2013?
Yes. Rollbacks were down about 30% in the quarter, which obviously is a nice improvement. Look, if we could keep rollbacks at their current level, as I said, it's the lowest level we've seen since 2,005 with the exception of 1 quarter. So we're going to look for improvement next year. I'm not sure that we'll be able to get that 30% improvement, but we're going to target a good 20% to 30% improvement for next year.
Got it. And I haven't heard much of a mention or any mention at all about the potential hurricane impact. I know it's obviously very early, but I'm just curious if you have any either business disruption or potential cleanup work that's baked into your current guidance?
Yes. We'll let Jim Trebathen, our COO, talk about the storm effect. Yes, Joe. I guess the first thing I would mention is that we've done extensive work the last couple of days. We've battered down many of our East Coast operations just in preparation of the storm.
Another piece a good piece of news, our people, our team members are all accounted for and safe. We start there. We're starting to see those operations start back today and will over the next couple of days. Right now, the assessment's underway as to how much damage has been sustained. Generally, Joe, we don't see we see a little bit of impact the 1st couple of days around volume negatively.
And obviously, with facilities down, any rebound in those volumes will occur over the coming weeks months. Too early to really tell, but we have huge effort underway, given our experience in the South and then along the East Coast around hurricane support. We got teams ready to go with equipment, with personnel, technicians ready to go support those areas in their cleanup efforts. I do think it's a little early for us to tell about any volume change though other than the 1st couple of days that will be negative.
Got it. I appreciate the color. Thank you.
Not a problem.
Your next question comes from the line of Alex Oshea with Goldman Sachs.
Thanks. Good morning.
Good morning.
Question for you on thinking about the leverage to the construction recovery. How do you see that playing out over the next couple of years? If you look at what C and D volume is today relative to the entire pie of the business versus what it was when construction is a lot better. As we think about construction activity normalizing, how much incremental volume upside is there in the business for you? And how do we think about the potential incremental margins on that volume?
Yes. The incremental margin on our industrial side of our temporary roll off business is pretty high probably in the 35% to 45 percent range. And when you look at the potential bounce back, the good news is, I think what we've seen over the last 18 months is that the bounce back depends on 2 things, right? Supply and demand. And what we've seen in the last 18 months, I believe, is that we've basically seen the pickup take up all of the supply.
So in other words, in the downturn, you obviously had a lot of the local competitors that were stacking cans in the yard because they had nowhere to put them. What you've seen in the last 18 months is that all of those local competitors have generally used up their cans. They've got their cans and their trucks out on the street. And as you all know, it's pretty difficult right now for a small business to get a big loan from a bank. And so it's hard for them.
And given the state of the economy, a lot of them aren't making big investments in new trucks and cans. And so I think what you've seen in the last 18 months is that we started to eat up that excess supply that was on the market as demand picked up. And so now as demand picks up, I think what you'll see is that the large national companies that have more available assets will start to get more than their fair share. On the downturn, we certainly lost more than our fair share because we wouldn't drop our price to maintain our volume. Those local competitors would do that.
And so you should see if construction bounces back to me that would be the most positive thing that could happen to our business because there is the ability to both get volume and price because of the slack in supply that's out there. So obviously, that's something that we all hope for in 2013. But again, we're not going to build that into plan.
Alex, one quick addition to that. In some ways, our we have replaced some of that lost construction business in some areas of the country with energy services business. So when you look at our volumes, you see that special waste is up pretty significantly, while C and D is basically flat. And it's the same equipment for the most part that we're using. So we're just taking equipment that would have otherwise been dedicated to construction business and redeploying it.
And it shows up when you look at landfill volumes and special waste. It shows up when you look at collection volumes with industrial still being fairly strong.
Okay. That's helpful. And can you just remind us what the environmental fee was last year in Q3 that you had to overcome this year in Q3?
7.5% was the environmental fee a year ago and we bumped it to 10%.
We bumped it to 10% a year ago.
Yes, bumped it to 10%. Right.
Okay, understood. Thank you.
Your next question is from the line of Adam Thalhimer with BB and T Capital.
Dave, what percent of your total business today would you characterize as urban markets? And I'm just curious with GDP growth getting a little bit better in Q3 versus Q2, are you seeing any improvement in the dynamics in urban areas?
Yes. The urban areas have always been more competitive than the rural areas. But as you mentioned, they also have a lot more room for growth. And when I talk about seeing the volumes in the South and the West bouncing back, obviously, that's where a large part of the population is in California and Florida. And so I think you're absolutely right.
I think you will see I think in the downturn you saw probably a relative outperformance in the rural markets. In an upturn I think you see an outperformance in the urban markets. As far as the split between urban and rural, I'll let Ed research that and get that number for us.
Okay. And then one more percentage. Have you ever broken out the percentage of your business that is C and D today versus perhaps the housing peak back in 2,005, 2,006?
Yes. We've looked I will tell you we don't have those numbers at our fingertips, but we've looked at that to see what we think would happen at peak versus trough. We don't have those numbers at our fingertips.
Okay. I'll follow-up. Thanks very much.
Great. Thank you.
And you have a follow-up question from the line of Michael Hoffman with Wunderlich Securities.
Question I forgot to ask. The $130,000,000 in reorg savings, what is your expectation about the timing of when that's fully in the model?
That when you look at the ramp up from $9,000,000 in the Q3 to $20,000,000 in the Q4, you can see it starts to ramp up almost aware it's at that $10,000,000 a month run rate in the Q4. We will hit the ground in 2013, we will hit the ground on day 1 at that $130,000,000
run rate. Okay. So we can count that as if we're modeling it, we can say 100% of that is a benefit in 2013?
That is absolutely locked and loaded. Okay. Great. Thanks. Thank you, Michael.
And thank you all for joining us this morning. I know that many of you on the phone are in the region that was affected by Hurricane Sandy. As Jim mentioned, we have a lot of facilities and a lot of employees up in that region also. I just wanted to let you all know that our thoughts and prayers are with you. And as Jim mentioned, we've got a lot of experience dealing with these types of events.
And there's one thing I can guarantee you. When it comes to Waste Management, for those folks that are in the affected areas, you've got the absolute best in the business that are going to help you as you go about cleaning up after the storm. And with that operator, we'll sign off for this quarter.
Thank you for participating in today's conference call. This call will be available for replay beginning at 1 o'clock p. M. Eastern Standard Time today through 11:59 p. M.
Eastern Standard Time on Wednesday, November 14, 2012. The conference ID number for the replay is 300,000,000,000 1,751. Again, the conference ID number is 300,121. The number to dial for the replay is 1-eight hundred-five eighty five-eight thousand three hundred and sixty seven or 1-four-five 37