Morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management Second Quarter 2012 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.
At this time, I would like to turn the conference over to Ed Egel, Director, Investor Relations. Sir, you may begin.
Thank you, Brandy. Good morning, everyone, and thank you for joining us for our Q2 2012 earnings conference call. With me this morning are David Steiner, Chief Executive Officer Steve Preston, Executive Vice President of Finance, Recycling and Energy Services Jim Fish, newly appointed 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. Steve will cover our revenue growth, including price and volume trends, operating costs and the financial statements.
David and Jim will then discuss the restructuring plan announced today. We will conclude with questions and answers. During their statements, any comparisons, unless otherwise stated, will be with the Q2 of 2011. Before we get started, let me remind you that in addition to our earnings press release and the press release announcing our restructuring plan that were 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 releases and the schedules to the earnings 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 releases and in our filings with the Securities and Exchange Commission, including our most recent Form 10 ks. Additionally, during the call, David and Steve 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 measures of operating expenses, 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 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, GAAP measures and additional information about the use of non GAAP measures. David and Steve 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 to yield or volume results are more specifically referring to internal revenue
growth from yield
and 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 August 9.
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 9,400,48,819. Time sensitive sensitive information provided during today's call, which is occurring on July 26, 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 CEO, David Steiner.
Thanks, Ed, and good morning from Houston. In the Q2 of 2012, we earned $0.52 per share, a 4% increase when compared to the Q2 of 2011 as we grew both our revenue and our net income. Our core solid waste business continues to perform well as the combined income from operations for our collection, landfill and transfer station business grew 3.4% and margins in our core business expanded by 60 basis points. Our core solid waste business has seen steady improvement and we expect that to accelerate into 2013 as a result of our current restructuring and our field based initiatives. We also saw a 2nd consecutive quarter of volume growth in our core solid waste business.
So our core business continues to perform well, but the overall company performance was dragged down by $0.07 per share of headwinds, primarily related to declining commodity prices. Internal revenue growth from volumes was positive in the 2nd quarter and has shown good stability over the 1st 6 months of the year. We saw positive volume growth in each of our industrial, special waste and recycling operations. Our residential business was still negative, but the rate of decline has improved each of the last six quarters. We'd like to see more consistent growth in our MSW and commercial business.
However, our volumes in those lines are trending pretty much as we expected. As such, we still expect to achieve our full year volume guidance of flat to slightly positive, with the most likely scenario having volumes slightly positive for the full year. Looking at our IRG from yield in the Q2 of 2012, each of our collection, landfill and transfer station lines of business saw positive yield. Both special waste and roll off achieved positive yield and positive volume. So we're maintaining our pricing discipline, but we're certainly not satisfied with yield at 1%.
Just like we did in the past, in order to take the mix effects out of our yield calculation, we also analyze core price increases or increases on current customers. Core pricing is basically price increases plus all fees other than our fuel surcharge less all price rollbacks. When we look at the core price component of solid based yield, it increased 2.8%, which was similar to last year. Average recycling commodity prices were 20% lower during the Q2 compared to the Q2 of 2011. This resulted in approximately a $0.03 decline in our earnings per share for the Q2 of 2012.
Through the Q1, we saw commodity prices rise like we expected. However, as we moved into the Q2, the rise in commodity prices stalled and actually began to decline. So we saw a negative $0.06 EPS effect from recycling commodity prices for the first half of the year, which was slightly worse than we expected. For the second half of the year, we originally expected no negative effect from commodity prices. But given current prices and our future outlook, that prediction is no longer valid.
We now project that for the second half of the year, recycling commodity prices will be slightly lower and will have a negative year over year impact on earnings per share of approximately 0 point $5 However, volumes continue to grow as customers continue to demand more recycling services. We've invested in recycling assets in the past and will continue to do so in the future. Turning to our waste energy business. Average electricity pricing declined a little more than 10% in the Q2 when compared to the Q2 of 2011. We experienced headwinds in the Q2 of 2012 from rollbacks on tip fees in South Florida Waste Energy business as well as low electricity pricing.
These drove a $0.03 drag on earnings per share for the compared to the Q2 of 2011. We now expect to see a negative $0.02 per share impact from our waste to energy operations during the second half 2012, which is slightly higher than our original estimate of a negative $0.01 per share impact in the back half of twenty twelve. In summary, through the first half of twenty twelve, we were happy to see that our core solid waste business has grown and margins have continued to improve. This has helped us grow adjusted earnings per share year over year despite larger than anticipated headwinds from recycling, waste energy and fuel commodity prices. In the 3rd 4th quarters, we anticipate seeing benefits from procurement savings, the integration of our acquired Oakleaf operations and reorganization savings, which will help to offset the additional $0.03 of commodities headwinds we experienced in the first half of the year.
However, we also expect to see the continued decline of recycling commodity prices and a negative impact from our waste to energy business in the second half of the year. Consequently, the unexpected $0.07 of headwinds in the second half of the year have made us more conservative on our full year adjusted earnings per diluted share guidance. We now see our full year being between $2.15 $2.20 per diluted share. So we expect our core solid waste business to continue to perform pretty much as we expected at the beginning of the year. The change in our guidance is not driven core operations, but is driven by our expectation that commodity prices will be lower in the second half of the year.
Of course, commodity prices are inherently unpredictable And with recycling commodities dependent on both domestic and foreign markets, we've seen a fair amount of volatility just in the 1st 6 months of the year. So although we expect to see a $0.07 year over year decline in EPS in the back half of the year, that number is merely a current prediction of future commodity markets. As such, it could change if markets improve or deteriorate beyond our current expectations. Consequently, if commodity prices have a different effect on earnings than our predicted $0.07 per share, our outlook would obviously adjust accordingly, either positively or negatively. Finally, as this is Steve's last earnings call, I'd like to thank him for his partnership.
Of course, he'll be with us for the next few months helping with the Oakleaf integration and working with me on other projects. And he's leaving the finance organization in terrific shape for Jim. I'll now turn the call over to Steve to discuss our Q2 results in more detail.
Thank you, David. I'm going to begin by talking about revenue drivers, including yield and volume in the various lines of business. And then I'll get into a discussion of our costs and our cash flow. Revenue for the 2nd quarter increased $112,000,000 or 3.3 percent from the prior year period. This is the 10th consecutive quarter of year over year revenue growth.
While our revenue improvement was largely driven by acquisitions, primarily Oak Leaf, as David mentioned, we also saw positive internal revenue growth from both yield and volume. Some of that growth was offset by significant decrease in revenue from lower commodity pricing. Yield in our collection disposal operations grew 0.6% in the 2nd quarter. But adjusting for the change in pricing at our waste to energy plants in South Florida, our yield growth for the Q2 of 2012 was 1.0%. In the collection business, yield grew 1% in the 2nd quarter.
More specifically, commercial grew 1.4 grew 1.4%, industrial grew 1.7% and residential grew 0.2%. In the landfill line of business, all the main waste streams achieved positive yield in the Q2 of 2012. Overall, landfill yield was a positive 1.4%, which is the highest yield we've seen since the Q1 of 2011. MSW yield grew 1.2%. In addition, C and D yield improved 1.7% and special waste yield was a positive 1.9%.
Internal volume growth was 0 0.6%, which is a slight improvement from the workday adjusted volumes that we saw in the Q1 of 2012. But more importantly, this is the first time we've seen 2 consecutive quarters of volume growth since the 2nd and third quarters of 2,005. This growth was driven by landfill volumes, grew 1.3%. And while MSW waste stream declined 0.7% and C and D volume declined 1.6%, other lines driven by special waste grew 2.8% rather and that is what supported the overall volume growth. Landfill volume growth was particularly it was partially offset by collection volumes, which declined 0.4%.
More specifically, collection volumes declined 2.9% in commercial and 0.6% in residential. And in the industrial business, volumes grew 1.8%. In addition, recycling volumes improved 1.1% organically in the quarter and 11.5% when you include acquisitions. Of course, commodity prices were down in the quarter, but we do remain committed to the recycling line of business as David mentioned. With improved internal growth from both yield and volume, income from operations in the combined collection, landfill and transfer station businesses improved more than 3% when compared with the Q2 of 2011 and operating margins improved 60 basis points.
Operating costs increased $110,000,000 in the Q2 to 65 percent of revenue compared to $63,900,000 in the Q2 of 2011. The largest driver was subcontractor costs, which increased $98,000,000 primarily related to the addition of Oakleaf, which delivers most of its services to third parties. The remaining $12,000,000 of increase consists of labor costs, increasing duty acquisitions as well as new recycling plant start ups. We also saw higher prices in our cost of tires and parts and lubricants, but these increases were partially offset by savings from lower cost of goods sold due to lower commodity prices as well as cost savings in the landfill operating costs and risk management areas. SG and A costs were $372,000,000 in the second quarter, which was an improvement of 10,000,000 As a percentage of revenue, SG and A costs improved 60 basis points.
The main drivers of the improvement in SG and A costs were reduction in consulting fees as well as incentive compensation accruals. So as we pull apart the various items affecting margins, we need to dig a bit further into the various lines of business. So our core collection and disposal lines expanded margins significantly. That contributed 60 basis points of improvement to the overall margin of the company. And SG and A savings added an additional 60 basis points of improvement.
However, the recycling and waste energy headwinds that David mentioned reduced margins 120 basis points and our acquisition of Oakleaf further reduced margins 70 basis points. And then fuel impacted margins negatively by additional 10 basis points. So as a result, our core business margins improved 60 basis points, but our overall income from operations declined 30 basis points when compared to the Q2 of 2011. Updating our initiative progress during the Q2 of 2012, our procurement program delivered $0.02 of earnings per share, which helped offset costs incurred to roll out our routing and logistics programs. At the end of the second quarter, our weighted average cost of debt was 5.1% and our debt to capital ratio was 60.2%.
Our floating rate portion of total debt of the total debt portfolio was 10% at the end of the quarter. Our income tax rate as reported in the Q2 of 2012 was 34.3%, largely in line with the rate of 34.5% in 2011. Turning now to cash flow. 2nd quarter 2012 net cash provided from operating activities was $669,000,000 This is an increase of $191,000,000 from the Q2 of 2011. The increase is primarily related to improved working capital, which includes the impact of terminating certain interest rate swaps.
Some of that increase also relates to the timing of tax payments and interest, which should even out over the next three quarters. Our capital expenditures for the 2nd quarter were 3 $51,000,000 resulting in free cash flow for the quarter of $332,000,000 Free cash flow improved $126,000,000 when compared to the Q2 of 2011. And as the year progresses, we still expect to generate between $1,100,000,000 $1,200,000,000 of free cash flow for the year and we expect to divest certain non core assets to help offset higher CapEx and higher cash taxes anticipated in 2012 compared to 2011. We returned $165,000,000 to shareholders to the 2nd quarter dividend and we invested $25,000,000 in acquisitions. As I close, as David mentioned, I will be turning over the CFO range to Jim Fish, continuing to work on the Oakleaf integration as well as selected projects.
I have to say I leave this role with a smile on my face not only because my brief time here at Waste Management has been so fulfilling, but also because I'm confident that there are many great things in store for this company. Now I'd like to turn it back over to David and Jim Fish to discuss the changes structure.
Thanks, Steve. As you all know, we've been investing in a number of initiatives to streamline our organization and to get closer to our customers. Today, we took a big step in our efforts to streamline our operations and we consolidated a reporting layer to move field operations closer to our corporate initiatives. We're focused on 3 areas of our business: improving our yield, improving the efficiency of our operations and getting closer to our customers through our segmentation The restructuring is designed to improve the implementation of these initiatives by creating a direct line of communications between the field and the corporate staff. And by the way, most of the corporate leaders of these initiatives are people that came out of our field operations.
So we expect to have more alignment quicker reaction time as we implement our strategies. Certainly, the actions we're taking will move more responsibility to our area of vice presidents and their staff. Our new structure is designed to drive performance and accountability from the area vice presidents to our 2 new SVPs of field operations, Jeff Harris and John Morris. Consequently, there'll be a heightened level of accountability for our area Vice Presidents for all aspects of performance from yield and volume to implementation of our initiatives. So the reorganization should not only save money in the short term, but it should also lead to improved performance over the long term.
We now have our 17 best leaders running our area operations, supported by a talented and efficient staff. I have complete confidence in the people that will lead our operations and our support functions and look forward to working closely with them to achieve our goals. Our new senior leaders are ideal for their new roles. Jim Trevathan has been at Waste Management for over 30 years and has served in roles ranging from sales to operations. Aligning the 2 field SVPs with Jim is a natural extension of his current role, which includes responsibility for our field based initiatives like service delivery optimization and customer focused growth.
Jeff Harris has been in our company for over 12 years and in the industry for 30 years. Jeff has run operations from New York to Canada and most recently served as the Head of our Midwestern Group, which has been our top performing group. Going forward, Jeff will manage the areas in the former Midwest group, but will add operations on the East and West Coast. John Morris has been at Waste Management for 15 years and in the industry for nearly 20 years. John has extensive experience in field and has all the experience and capabilities to take on the role.
John and has all the experience and capabilities to take on the role. John will manage the more southern areas of our company, stretching from California to Florida. Through the restructuring, we've created a number of other opportunities at all levels of the organization, and I know our people will excel in their new roles. So we head towards 2013 with renewed energy and commitment to our strategy. With that, I'll let Jim Fish go over the reorganization in more detail.
Thanks, David. As I
mentioned 3 weeks ago when we announced my new role, I come to the CFO position with a field based operational focus. When I discussed the new role with David, I told him the areas I'd like to focus on were growing the business, reducing its cost structure and efficiently allocating capital to increase our returns. Today, we announced a plan to streamline the organization and reduce SG and A costs. We have been analyzing the cost structure and staffing requirements needed to support our frontline personnel and our long term strategies. We will continue to focus on reducing costs through our procurement efforts and our technological improvements in routing and logistics.
We specifically designed this restructuring with the primary goals of streamlining our delivery of corporate support, while not disrupting our frontline operations. More than 90% of the cost reduction is expected to come from corporate and support functions. Going forward, I will be helping to design and implement the programs to achieve our goal of an additional 200 to 300 basis points of cost reductions. Not only are we taking action to remove cost, but the reorganization is designed to improve alignment between our corporate initiatives and the field implementation of those initiatives. We now have a direct line of communication between the corporate support teams and the areas that are responsible for executing on the strategies.
A simpler and flatter organization will not only have lower SG and A cost, but also should result in sharper focus as we identify and execute upon our opportunities and deliver the value to our shareholders. Clearly, this reorganization is designed to save money in the short term, but our goal is to drive improved performance in the longer term as well. Overall, the reorganization is anticipated to eliminate approximately 700 significant reductions in our corporate office. We are also reducing the number of our areas from 22 down to 17. A year ago, we had 25 areas.
The company anticipates a 3rd quarter pre tax charge earnings in the range of $50,000,000 to $60,000,000 primarily from employee related costs. The charge does not include facility lease or other charges that cannot be estimated today, but that we will likely incur as we move forward. The cost savings from the reorganization will occur over time, with a small amount anticipated in results by tracking headcounts and associated benefits and costs and we will track other expense categories such as consulting fees to make sure we don't merely replace employee costs with 3rd party costs. So we are going to work for the remainder of the year to position the company to get the full benefits of the reorganization in 2013 with no backtracking. Taking these costs out is the equivalent of a down payment.
We are still on target for the implementation of routing and logistics and with the increased efficiencies created from the reorganization. We will be able to move forward more quickly into centralization of additional back office functions. Over time, this should allow us to achieve an additional 200 to 300 basis point improvements that we are targeting. And with that operator, we can open the line for questions.
Our first question comes from the line of Lance Edelson with Morgan Stanley.
Great. Thanks a lot. I may have missed it, but could you provide the dollar amount to the environmental fees in the quarter? And can you comment maybe on what the expectation is for environmental fees in the Q3? I'm just wondering the impact that has on pricing.
Yes. We had about just a little bit over $80,000,000 of environmental fee in the Q2. I wouldn't expect that number to go down in the Q3. Remember last year in August, we raised the environmental fee from 7.5% to 10%. And so you've got the anniversarying of that this year, but I wouldn't expect that number.
It's been very consistently around 80,000,000 dollars since mid last year.
Okay. That's very helpful. And could you also provide a feel for the pace of residential contracts rolling off? Is there an accelerated pace starting this month and continuing into the fall? Just trying to again gauge the impact there?
From a pricing perspective?
Sure.
Yes. So what we've got in the back half of the year for CPI on our contracts is roughly 2%. And so it's 1.5% to 2%, Ed, as I recall it. And so that's what we're counting on for the back half of the year.
Okay, great. And just one more real quick question on the non core asset liquidations. Can you tell us anything
about what that relates to? Pardon me?
On the non core asset liquidations,
can you
tell us what the non core assets were?
Yes, absolutely. As you all know, we've had a lot of different investments in energy. We've made some investments in energy assets to offset fuel costs. And so those are pretty valuable assets, and we'll look to monetize some of them.
Great. Okay. I'll leave it there. Thanks a lot. Thank you.
Our next question comes from the line of Al Koshock with Wedbush Securities.
Good morning.
Good morning.
Just to follow-up on the sale of non core assets. If you've kept the free cash flow guidance at $1,100,000,000 to $1,200,000,000 if you take a look out and exclude potential or what they're contributing today, what does free cash flow look like?
What the non core assets are contributing today?
Well, David, you're in the process of restructuring again and trying to get the run rate and free cash flow for the business. Correct. And you certainly lowered EPS for the commodity headwinds that are out there.
Right.
But I don't it didn't seem like there was a drop down in free cash flow. And I would think with sale of some of these assets, I got to believe they're contributing some cash to the business there.
Yes, they're
contributing some cash. But in the back half the year, Steve may remember, as I recall in the back half of the year that would be around $20,000,000 so not a huge amount for the back half of the year.
But going forward on a pro form a basis for the business, I mean is it 100,000,000 dollars or what are we
Yes.
So what we've got going on here is we've got these energy assets that as you drill out, so we're spending capital to drill out these assets too. And so as they continue to produce, you continue to drill out. So you've got 2 things going on. You've got capital going out. You've got some income coming in.
So net net from a cash flow point of view, even current production, you would pick up cash because you as we sell the assets, we'd have less than you would pick up cash because you as we sell the assets, we have less of a capital commitment. So net net going into 2013 that should actually be a positive contributor to free cash flow.
And you'll see it coming through that a lower CapEx line just to take forward a little
bit of what David said.
Okay. With these restructuring some new hires or replacement now having a COO, two questions. 1st, do you anticipate some potential goodwill impairment? I assume some of this headcount reduction, 700, has to be coming from Oakleaf operation. And then secondly, could you touch on why the change in strategy or this philosophy on getting back in place as COO?
I think some of us have our own views on that, but would welcome the opportunity
to hear you. So the 700 includes nothing from Oakleaf. And the 700, by the way, includes nothing from the consolidation of our former national accounts into Oakleaf. It's completely and absolutely 100% separate from Oakleaf. No, there won't be and we don't anticipate any type of goodwill write off from the Oakleaf operations.
When you talk about the COO role, we brought Jim in here now what Jim? Jim. A little over a year ago to basically take all of our field based initiatives. Look, Jim, as I think one of you all very appropriately said, Jim is an operator's operator. Jim's been in this industry a long time.
Jim's forgotten more about this industry than I'll ever know. But, so we brought him in here about a year ago in order to drive the big corporate initiatives that we had going on, primarily service delivery optimization and customer focused growth. So as you take out these 4 geographic groups, the layer of management and you're left with 2 operators, those 2 operators need some support staff. Those folks out in the group weren't doing nothing. They were doing a lot of things to help those folks manage their business.
So they're going to need some staff to help them out. And by the way, they're going to be here in Houston. And so it made perfect sense to have them align themselves with Jim's corporate staff to provide the support they need to manage those lines of business. And so it made absolutely perfect sense. If you're really going to try to drive these initiatives folks that are responsible for the responsible for the implementation in the field of those initiatives.
And so, it made absolute perfect sense to have them all reporting to Jim. And I'm start to see them drive some real savings into the business.
Okay. Thank you, David.
Certainly.
Our next question comes from the line of Phil Fisher with Raymond James.
Good morning. Good morning. Just want to follow-up on the question on the pricing. On the outlook for the second half in terms of your guidance, can you touch on the factors that impact whether it moves up or is constant like the anniversary of the environmental fee and the CPI and whatnot?
Yes. It's a great point. I do see it sort of benefit coming from the CPI increases. But as you all know earlier in the year, we renewed a lot of contracts at lower rates. So that affects it a little bit.
But what we're seeing frankly in pricing are a lot of positive signs. We're seeing the volume firm. We're seeing net service increases pick up. And so from my perspective, it's time for us to get a little bit more aggressive on new business pricing. And so that doesn't hit yield on the bottom line overnight.
But moving into 2013, you should see our yield pick up from its current one
percent. Okay, great. And just on Oakleaf, how far along are you in the process of on the 3rd party haulers either using your landfill or potentially bringing some of that volume in house?
Yes. We've actually we've made a lot of really good progress in the last quarter. And I think on the last earnings release call, we mentioned that, that second quarter was going to be an important time for us to advance our negotiations with the vendors. So we've made good progress really at the top of the list when you think about how we're sequencing this at the top of the list are the larger regional and sort of multi regional providers. They've got the most volume and negotiating with them moves the needle most quickly because you can get at them a lot more easily.
And we've gotten through most of those negotiations and feel pretty good about it. And that probably gets us about 2 thirds of the way to our EBIT run rate. Now we're beginning to we're sort of concluding those discussions and jumping into discussions with the smaller vendors that takes more time because the volume is smaller and a result there are a lot more of them out there, but there's still a tremendous amount of opportunity in that chunk of providers. So our integration team is pretty optimistic that we're going to hit our run rate. It's probably going to move somewhat into the Q1 of next year.
We'd hope to hit it really kind of Jan 1. I think it's probably going to move to February, but we'll have a lot of it going into January 1. So from that perspective, it's been a pretty good quarter for us.
Okay, great. Thank you. Thank you.
Our next question comes from the line of Hamzah Mazari with Credit Suisse.
Good morning. Thank you.
Good morning, Hamzah.
Good morning. Dave, the first question is just on your CPI exposure. Maybe if you can help us think about how much of your business resets each year? Is it different talk about it qualitatively, however you want. And then also maybe just about it qualitatively, however you want?
And then also maybe just update us on your churn rate.
Yes. The churn rate first off actually dropped in the quarter to 9.6%. And Hamzah as you know, with the CPI based revenue, it rolls off in January July. About 7% of our revenue will be repriced in the back half of the year. As I said, that's about 2% CPI.
Got you. And then, Dave, maybe if you could you've made a lot of management changes clearly this year. All of them have been internal. Maybe if you could just talk about why you didn't do this earlier? Maybe also touch on is there any disruption to the operations with the management changes?
Is it a pretty smooth transition? How should people be thinking about all these management changes?
Yes. I think it's a great question, Hamzah. And I'm glad you asked it, because when I joined this company, think we had 110 areas. And when you have 110 areas, you have absolutely no choice but to have an intervening layer to manage those 110 areas. And so you've seen us drop those areas from 110 down to 25 at the beginning of this year and now we've dropped them down to 17.
And so when you look at what we did, it's frankly, it's the culmination of what we've been doing now for the last 6 years, right, is basically we've been consolidating the structure below the group level so that at some point in time we'd be able to take out that group level and have it direct report directly to corporate. And so and to the second question, look whenever you do something like this, it is the first and only question you ask yourself the whole time, which is, can we get this done without affecting our frontline operations? And I will tell you, if there's been one theme to this reorganization, it has been, let's make sure that we get this done without affecting frontline operations. So as Jim pointed out, 90% of the cost savings are going to come from support functions above the district level where our operations occur. And so we made sure that when we did that that we could cover those functions.
I'll just give you a quick example. Our view of it was take accounting for example. We had an accounting structure in our corporate group structure, right? We also have accounting in our corporate structure here in Houston and we have a big accounting structure in the areas at that time, each of the 22 areas. And so we said, look, if we have that much support from an accounting point of view, both at the area and at corporate, do we really need that group based accounting support?
And so we took a very logical approach to say, if there's a lot of support for that function in the area and in corporate, we would be able to either eliminate that function at the group level or at least consolidate down from 4 in each of the groups to a fewer number. So we took a very methodical approach to making sure that everything we did not only didn't disrupt our delivery operations, but it didn't disrupt our corporate operations.
Thank you, Dave. Just a last question from me. Does the restructuring plan change any of your SG and A targets going forward? Or how should we think about you guys had SG and A target out there. I don't remember when, but does this change that thinking?
Can you update us on that?
Yes. No, it doesn't change the thinking at all. Our ultimate target is 9% or below for SG and A. Obviously, this takes 100 basis points out of that, but we're still too high. I mean, anyone that looks at this business knows that we're still too high.
And so the second phase is to make sure that we can start consolidating some of those back office functions that drives SG and A down further. Now that's going to take a a couple of years for us to do that. In the meantime, we're going to be focused on operating costs through our efficiency and routing programs. All right. Great.
Thank you. Thank you.
Our next question comes from the line of Scott Levine with JPMorgan.
Hi, good morning guys.
Good morning.
So with regard firstly to the guidance, it looks like you're lowering $0.07 for incremental commodity headwinds in the back half and the midpoint of your EPS guidance is coming down like $0.085 So is it right to think that with the exception of the commodity deterioration that the remainder of your outlook for the business is effectively intact with what it was at the beginning of the year? Or have there been any other puts and takes from your perspective impacting your guidance change?
Yes. I think that's absolutely correct, Scott. I think you hit the nail on the head. And when we look at it, the core business again is operating just fine. And when we look at the full year, it's not just the $0.07 in the back half of the year, but we're $0.03 to the negative in the first half of the year from commodities and recycling and waste to energy.
So we've got to make up that $0.03 in the back half of the year, while fighting that $0.07 of headwinds. And so look, we thought it was a little bit we thought it was appropriate to get a little bit more conservative on the guidance.
And we're going to overcome that $0.03 of headwinds by
all the programs that we've been talking about in the
back half of the year. Cash
flow. So good cash flow. So good quarter, but still well below 50% of the way through your target for this year. What gives you the confidence you could still hit that 1.1, 1.2? And then as a follow-up to that, is there a certain amount of divestiture proceeds from that divestiture program that's included in the 1.1 to 1.2 target?
Yes. We've got a couple of divestitures that we're working on, but we've been working on them for quite a while. So it's not certain that those will happen. The non core assets are the primary driver of the cash flow in the back half of the year.
And how much is that additive to the is in the 1 point how much is embedded within the 1.1 and 1.2 for asset sale proceeds?
Yes. If you look at the schedules to our press release, we've said that likely around $250,000,000 would be
the minimum number that we'd sell.
$250,000,000 got it. And
got it. And okay. And then maybe lastly, in terms of uses of cash, so no buyback activity in the quarter. Are you still committed to your target for this year? Should we think about lower numbers, the M and A pipeline more active?
How should we think about cash flow deployment?
Yes. As we said last quarter, we wanted to we front loaded a curious how before we made any commitments for our free cash flow. Our capital deployment strategy hasn't changed at all. If we can find good accretive investments, at this point in time, I think it's more likely well, I won't say it's more likely. At this point in time, I will tell you we're not looking for non core investments.
We're either going to buy solid waste tuck ins or recycling facilities. If we can find good targets in that arena, we spend that cash. If not, then we're going to return it to our shareholders.
Got it. Thanks, Dave. Thank you.
Our next question comes from the line of Michael Kaufman with Wunderlich Securities.
Good morning, David. Thank you for taking my call. On the free cash flow, if we could go back to that table you referred to, that's that cash flow reconciliation B. One of the adjustments is you go from a cash from ops from $2,450 to $2,300 Can you talk through what's in that $150 change, so we can understand how much of that might be working capital versus net income and get a better feel for where that ends up? Is there restructuring for instance in that from a cash standpoint?
Why don't I jump in. We've got
a number of kind of chunks in this if you want to call it that. If you remember, we with the elimination of bonus depreciation or 100% bonus depreciation coming into this year, we've got a fairly significant increase in the amount of taxes, cash taxes we paid this year relative to last year. And that's a fairly significant item. And then the other issue is, as David mentioned, we are trending somewhat higher on CapEx. Some of that is going to higher fleet purchase as well as some investment into the growth assets, which are being offset in large part with the divestitures.
So it's really Michael, it's mostly And the underlying kind of cash generation ability in the business.
And the restructuring, Michael, is not included in those numbers. As I recall of the charge, I think we're saying about 40% of it will be cash out this year and the rest will be cash out next year.
Which should
be sort of $20,000,000 to $25,000,000 So it's not really a significant number.
All right. But if I could drill in it a little bit, Steve. In your prior guidance, you assumed your cash from provided from operating activities would be $24.50 You've now lowered that to $2,300,000 dollars What is in that $150,000,000 That's the cash taxes now are higher, is that what I'm hearing? So cash taxes are materially different than what you had estimated because of the bonus depreciation. What else is in that that causes that $150,000,000
Well, so we've I'm sorry, Michael, what bridge are you looking for again? I know for example So
on Page 11, I think it's Page 11, it's your table called full year 2012 free cash flow reconciliation B. And you have a scenario 12.
I think primarily what you've got going on there is working capital and then don't forget the $0.07 of earnings that comes out of that's another $50,000,000 if that's true.
Okay. So because what I'm trying to get a feel for is, I think structurally there's about $950,000,000 to $1,000,000,000 of cash from the core business and that's going to get better because you're taking $130,000,000 in cost saves or maybe it's up to $150,000,000 of account 12's impact in 13. So that's what I'm trying to get a feel for is that I got to step back, but I got a visible step forward is what I'm trying to understand.
Yes. So what you've got going on this year, Michael, is CapEx up and cash taxes dramatically up, right? And so next year, when we go to put together our budget for next year, we're going to take into a take all of that into account to generate the cash that we need to generate. This is not a business that is that what we're saying is this is not a business that systemically produces $950,000,000 to $1,000,000,000 of free cash. The number is higher than that, and we're going to manage it to make sure that we keep it there.
Okay. And then one of the investments you have been making is in the recycling side. And admittedly, it's added volatility to the model, but there's high returns at a
certain price. What price of
the commodity does that investing either get pulled back or stop?
Yes. When we look at our models, we assume average 5 year pricing. And frankly, that's about where prices are right now. It's about at average 5 years. At average 5 year, they're very accretive to return on capital.
And I don't remember what percentage below it. Frankly, I don't remember the percentage below it have to go in order for it to not be, but I'm just going to think off the top of my head here Michael. Thinking back into the models, I would guess that you have to see an additional 20% plus decrease in pricing before you get there. And I'm saying that just because our models are generally in the 20% range at average 5 year pricing. So you'd have to come back down 20% to 30% in order to get it down to below the 15% IRR that we generally look at.
Okay. And then as part of the restructuring, are you eliminating the old silo structure as well? Is that one of the other actions that's happening?
Yes. Well, so you're exactly right. What we're doing here is we're getting everything aligned around 3 people frankly. It's Jim Trevathan and those two Senior Vice Presidents of Field Operations.
Okay. And then lastly, if the business environment you have right now existed in 2013, how would you describe your outlook for 2013?
Yes. Michael, I got to tell you, we see a heck of a lot of encouraging signs in this business. You see the volumes for us being pretty stable and we expect that to continue. We're going to take out this $130,000,000 of cost. That's obviously a real accelerator going in.
As Steve mentioned, you've got Oakleaf going sort from the $50,000,000 run rate to the $80,000,000 run rate in 2013. Commodity prices again are going to be a big wildcard, but you would hope that you won't see any further deterioration in that. The one thing that we've got to get laser focused on in 2013 is yield. I mean, look, that's where the dollars drop to the bottom line. And I will tell you that if the business environment stays like the way it is today, and what I mean by that is if we continue to see positive volume, we're going to positive volume, we're going to have to get more aggressive on price.
Look, you all know the model. Back in 2007, we were losing volume, but we were getting a heck of a lot of yield and we were seeing our margins expand handsomely. We've got to get back to that model. Now the whole thing that we've been working on for the last 2 years is to get back to that model, but get back without giving up volume for price. So we've got to do a better job on yield in 2013.
Okay. Thank you for taking the questions. Thank you.
Our next question comes from the line of Joe Ritchie with Goldman Sachs.
Good morning, everyone. So most of
my questions have been asked already, but I just had a couple of points of clarification. Just to be clear on the free cash flow guidance, have you changed your CapEx guidance for the year at all? Is it still $1,400,000,000
If you look at the table on Page 9, the CapEx guidance is $14.50 to $16,000,000 And I think that's up slightly from last quarter to last quarter. I think we're out there with 1.4 to 1.5.
Okay. All right. Thanks. That's helpful. That's part
of the bridge that we were kind of working through with Michael, yes.
Okay, great. And then talking specifically about just your the guidance change on the EPS side, obviously, you've highlighted the change in commodity prices. Just to be clear, though, this doesn't include the $0.07 charges that you took this quarter nor does it include the $0.08 in restructuring for next quarter or the facility closures, correct?
That's correct.
And then on the facility closures, at this point, you've yet to quantify it, but you have quantified the restructuring costs. So help me understand that a little bit more clearly.
Sure. When you think about it, when we do this restructuring, just take the easy example, it's the group offices. Are we going to continue to need those group offices? Now we haven't even started talking to a landlord about subleasing that space or anything of the sort like that. We're going to start that process right now.
So my guess is that we'll find a lot of consolidation opportunities, But we just can't estimate if those are going to generate a charge or not. So we just want to let you know it's probably coming, but we can't estimate the amount.
Okay. That's helpful. And then I guess one last question. I haven't covered you guys for all that long, but for the year or so that I have, it feels like we've been taking restructuring charges every quarter. I guess, for each of the last four quarters and then going into next quarter.
With the changes that you're making today, do you feel like for the foreseeable future, we're going to be through the restructuring charges once we get through the Q3? Or is this something that could kind of prolong into next year?
No, you should see it through in the Q3. So it's a great point. What you've seen from a restructuring point of view, remember what Jim mentioned about where we've come from. We started out the year with 25 areas. We went to 22.
Now we're at 17. So the restructuring charges that you've seen in the prior quarters were essentially related to the prelude to the big restructuring, the movement of 25 to 22 areas. And so that was the prelude to the big restructuring we're doing today. Could you see some charges as we said from lease consolidations and things like that? Yes.
But the bulk of it will all occur in the Q3.
Okay. Thanks for taking my questions.
Our final question comes from the line of Corey Greendale with First Analysis.
Hi, good morning. This is David Warner for Corey. Most of my questions have been answered. But I was wondering if you could speak to the impact on your ability to strategically push through price increases now that the management structure seems to be come more centralized and you've eliminated some of these the regional or geographic management layer?
Yes. It's a great point. And again, with pricing, just like I talked about the other departments, we did the same thing with pricing, which is we said, okay, do we have a lot of pricing support out in the field? And do we have a lot of pricing support in corporate? And if we do, we can eliminate that intervening layer.
If we don't, then we're going to have to do something. So when we looked at our infrastructure for pricing both out in our areas and in our corporate offices, we have a lot of pricing infrastructure. The reality is in order to drive that price, it had to go from corporate to group to the area. Now it doesn't. Now it's going to go straight from the corporate office to the areas.
And so when I talk about accountability for our area of ABPs, that's exactly what we're talking about. There's no longer going to be accountability to somebody out in the field that then has to have accountability to someone here in corporate. There's going to be accountability to Jim Fish, Jim Trebathen, John Morris, Jeff Harris and me. And every quarter we're going to sit in front of them and say, are you implementing the yield programs that we want you to implement rather than having that filter between us and them. So I'm truly excited that it will make us a much more nimble and efficient company.
And I think it will do that not only in pricing, but in all of our initiatives.
Okay. And one more thing. Do you expect that 100 basis point benefit from the restructuring to be spread evenly over 2013 or front half loader, back half loader or what there?
No. That will hit day 1. We will be through everything we need to be through by January 1. That $130,000,000 will hit day 1 through January through 2013. Okay.
Thank you. Thank you.
Thank you all for joining the call.
It's been an interesting time for Waste Management. We certainly have a lot of very talented people that are not going to be with our organization. And I will tell you, I'm going to miss them both from a professional point of view and from a personal point of view. As someone said during this process, if anyone thinks this is easy, they've never done it before. It's not easy, but it's something we have to do for the viability of our business.
And we look forward to generating some excitement and some growth going into 2013. With that operator, we'll give the call back to you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.