Good morning. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2016 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.
Thank you. I would now like to turn the conference over to Mr. Ed Egl. You may begin.
Thank you, Rebecca. Good morning, everyone, and thank you for joining us for our Q1 2016 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer Jim Fish, Executive Vice President and Chief Financial Officer and Jim Trebathen, Executive Vice President and Chief Operating Officer. Before we get started, please note that we have filed a Form 8 ks this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8 ks, the press release and the schedules of the press release include important information.
During the call, you will hear forward looking statements, which are based on current expectations, projections or opinions about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and our filings with the SEC, including our most recent Form 10 ks. David and Jim will discuss our results in the areas of yield and volume, which unless otherwise stated, are more specifically references to internal revenue growth, or IRG, from yield or volume. During the call, David and Jim will also discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and David and Jim will address operating EBITDA and operating EBITDA margin as footnotes to the earnings press release.
Any comparisons, unless otherwise stated, will be with the Q1 of 2015. The Q1 2015 net income, EPS, income from operations and operating EBITDA have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non GAAP measures. Please refer to the earnings press release, footnote and schedules, which can be found on the company's website at www.wm.com, for reconciliations to the most comparable GAAP measures and additional information about our use of non GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1 p.
M. Eastern Time today until 5 p. M. Eastern Time on May 12.
To hear a replay
of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephone replay of the call, dial 855 859-2056 and enter reservation code 811-95,417. Time sensitive information provided during today's call, which is occurring on April 28, 2016, 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. I'll turn the call over to Waste Management's President and CEO, David Steiner.
Thanks, Ed, and good morning from Houston. Our Q1 results continued the positive trends that we saw throughout 2015 and our volumes turned positive more quickly than we had originally planned. We also saw the continued strength in our pricing programs and our cost programs continue to gain traction. This focus on disciplined growth, pricing and continuous cost improvement delivered $0.58 per share in the quarter, an increase of more than 18% from our 2015 Q1 results. Our revenue increased for the first time since 2014 and we achieved positive volumes for the first time since 2012.
Our employees are doing a great job of managing cost increases to drive earnings growth and margin expansion. In the Q1, we saw improvement in virtually every financial metric that we track. Our traditional solid waste business income from operations and margin increased 50 basis points. We're very pleased with our Q1 results as they provide a strong start to 2016. Turning to our operations, our pricing programs continued to drive earnings growth and margin expansion.
For the Q1, our collection and disposal core price was 5.3% and yield was 2.6%. Core price improved 90 basis points from the Q1 of 2015 to the highest level that we've achieved. And we also saw the highest core price ever in each of the commercial, industrial and landfill lines of business. Core price in the industrial line was 10.7 percent. In the commercial line, it was 7.5%.
In our landfill line, it was 3.3% and in our residential line, it was 2.6%. As volumes have turned positive, we expect core price to remain strong. With respect to volumes, we saw positive volume growth in the Q1, but we did not chase low margin volumes by lowering price. We continue to drive disciplined growth by adding volumes in geographic areas and lines of business where growth is strongest. Our volumes reflect both a strong solid waste economic backdrop and great work by our sales and operating teams.
Our traditional solid waste volumes were positive 2.4% in the Q1 of 2016, a 3.60 basis point improvement compared to 2015. We had one additional work day in 2016 and after adjusting for this, our traditional solid waste volumes improved 1.8%. We saw some very positive trends in our commercial and industrial lines of business. Our commercial volumes declined only 0.2% in the Q1, an improvement of 50 basis points from the 4th quarter and a 260 basis point improvement from the Q1 of 2015. In the industrial line of business, volumes were more than doubled to 2.7% on a workday adjusted basis when compared to the Q4 of 2015.
We're very pleased with our traditional solid waste volume results in the Q1, although we likely did see some benefit from the milder winter weather that may have led to some Q2 construction and landfill volumes being pulled into the Q1. We certainly expect volumes to remain positive throughout 20 16, but we would like to see the extent of the seasonal uptick before we revisit our full year expectations for volumes. The as Jim will discuss in more detail. However, we've seen a significant increase in the cost of managing the liquids that naturally occur in our landfills. Over the last 3 years, leachate costs have increased between 11% 22%.
And in the Q1 of 2016, the increase was greater than that with costs up about $14,000,000 This trend of increasing leachate costs has been ongoing for a number of years and we believe it's a common issue throughout our industry. With the increase in volumes, we've seen more liquids and the cost to transport and treat those liquids has increased substantially. Of course, the added cost in our landfills affects our profitability and return on capital. So we need to do something to offset those increasing costs. Consequently, this quarter we'll begin to implement a liquids management charge at our landfills.
This charge will be between 4% and 7% of the cost of disposal and it will be applied only to our landfill customers and not to our collection we'll implement the liquids management charge on contracts as they renew. Only by doing this can we maintain an adequate return on the huge capital investments that we make in our landfills. Turning to recycling, we saw a drop of 12% in average commodity prices for the quarter and a 3.1% increase in volumes. The positive volumes are predominantly due to the unusually low broker volumes that we saw in the Q1 of 2015 associated with the slowdown in Western U. S.
Ports. This should normalize and will likely be negative in the second quarter, so we don't expect to see recycling volumes contributing to our overall volume growth. But the volumes that we're losing are generally not profitable volumes, So the negative volumes won't negatively affect profitability. Our employees have done a good job in managing operating costs. As we've seen our recycling operating costs 12% when compared to the Q1 of 2015.
However, the operational improvements have not been enough to offset the decline in commodity prices. So our recycling income from operations was slightly negative in the Q1, but we saw a year over year improvement of almost $0.02 per share. Commodity prices have come off the lows that we saw in January, but they're still below 2015 levels and we do not expect any significant rebound in 2016. So we continue to work with our customers to develop a mutually beneficial solution that allows for a sustainable recycling program in their community. We're committed to recycling and we'll continue to work change the business model and drive out operating expenses.
Finally, in the Q1, our business generated strong growth in operating EBITDA, which in turn translated into significant cash generation. Cash flow from operating activities exceeded $700,000,000 an increase of more than $200,000,000 when compared to the Q1 of 2015. We did have about $156,000,000 in cash flow benefits in the quarter, which Jim will discuss, but even if you adjust for those, cash from operating activities grew by 10.2%. So 2016 is off to a strong start and our results put us firmly on track to meet or exceed our full year guidance of adjusted earnings per diluted share between $2.74 $2.79 We also expect to achieve or beat our full year free cash flow guidance of between $1,500,000,000 $1,600,000,000 Based on first quarter volume results, we'd also expect to beat our volume goal for the year. I certainly believe that this will be the case, but we had favorable weather in the Q1 and we'd expect that volumes will be pulled were pulled forward into the Q1.
As noted previously, we also had higher recycling volumes, which will not continue through the year. We'll get a better feel for the effects of these factors when we see our Q2 seasonal update. After we see volumes normalize, we expect to give more precise volume and financial guidance for the year, but we certainly expect to see continued year over year improvement across all of our operating metrics. It's a reflection of the strength of our corporate and field teams to see our strategy so well executed. Will now turn the call over to Jim to discuss our Q1 results in more detail.
Thanks, David. In the Q1, revenues were $3,200,000,000 an increase of $136,000,000 or 4.5 percent when compared to the Q1 of 2015. We saw $126,000,000 increase in our traditional solid waste business due to the combined impacts of price and volume and an $81,000,000 increase in revenues from acquisitions Looking at internal revenue growth for the total company, in the Q1, our collection and disposal core price was 5.3% and yield was 2.6% with total volumes improving 1.9%. We had one additional workday in the 1st quarter. Adjusting for the additional workday, volumes improved 1.3%.
Volumes turned positive in the quarter for the first time since 20 12. The combined positive price and positive volume led to total company income from operations growing $54,000,000 operating income margin expanding 110 basis points to 16%, operating EBITDA growing $74,000,000 and operating EBITDA margin growing 130 basis points to 25.8%. Our collection lines of business continue to see the benefits of our disciplined pricing programs. Overall, collection core price was 6.5% and yield was 3.4%. Our strong core price reflects a disciplined approach to pricing and a strong demand for our services.
In the Q1, we continue to make progress on reducing the churn through our improved customer service. Our churn in the quarter was 9.2%, a 170 basis 15. The improvement in our churn, strong roll off plans, our focus on disciplined growth, benefited our volume trends in the Q1 as total collection volumes turned positive improving 70 basis points sequentially from the Q4 and 204 basis points from Q3 of 2015. Industrial demand was strong in the quarter with volumes up 4.2% or 2.7 percent on a adjusted basis. Our residential business continues to be a drag on volumes, while commercial volumes are moving towards positive.
For the quarter, residential volumes declined 3.4% and commercial volumes declined 0.2%, a year over year improvement of 2 60 basis points. Strong core price and positive volume in collection line business led to income from operations growing $21,000,000 and operating EBITDA growing $36,000,000 In the landfill line of business, we also saw the benefits of positive volume and positive yield in the Q1 just as we did last year. Total landfill volumes increased 11.6% and 10.3% on a workday adjusted basis. On a workday adjusted basis, MSW volumes grew Manu, these expenses improved 120 basis points to 62.8%. For the Q1, operating expenses increased $47,000,000 when compared to the Q1 of 2015.
Landfill operating costs increased the most at $17,000,000 an increase of more than 27% year over year. $14,000,000 of the $17,000,000 increase was leachate costs, which is one of the reasons that David mentioned the importance of imposing a charge to recover our increase in costs. The remainder of the operating cost increases primarily relate to our increased volumes and costs related to acquired operations. For the Q1, as a percent of revenue, SG and A costs were 11.4% flat when compared to the Q1 of 20 15. On a dollar basis, SG and A costs were $362,000,000 an increase of $14,000,000 compared to 2015.
Labor costs drove the majority of the increase primarily related to acquisitions. We also had higher accruals for incentive compensation costs related to our strong performance. We still expect to improve SG and A costs as a percent of revenue for the full year when compared to 2015. Turning cash flow for the Q1, our operating EBITDA growth of almost 10% translated into strong cash flow growth. Cash provided by operating activities was $706,000,000 a $207,000,000 increase compared to the Q1 of 2015.
Included in the 2016 results was a $67,000,000 benefit from the termination of a cross currency hedge. We terminated the financial hedge because we borrowed money in Canadian dollars, thus providing a natural hedge against fluctuations in the Canadian dollar. The termination of the hedge had a negative $0.01 impact to EPS. In addition, favorably affecting our year over year comparisons were nearly $90,000,000 from timing and size of compensation payments. Excluding those benefits, we had strong growth as cash provided by operating activities grew 10.2%.
During the Q1, we spent $317,000,000 in capital expenditures, an increase of $84,000,000 when compared to the Q1 of 2015. The increase was related to an intentional change in the timing of our truck purchases. However, as David mentioned, the cost of transporting our leachate has increased substantially. So we are building some additional leachate treatment facilities. This will help with costs over the long run, but will increase capital expenditures in 2016 2017.
This makes it very important to implement our liquids recovery charge so we can offset some of these capital costs and generate acceptable returns. Nevertheless, we still believe that we will be within our guidance range of between $1,300,000,000 $1,400,000,000 In the Q1, we also had $13,000,000 in proceeds from divested assets. Combined, we generated $402,000,000 of free cash flow, an increase of $117,000,000 when compared to the Q1 of 2015. This puts us well on our way to achieving or exceeding our free cash flow guidance of between $1,500,000,000 $1,600,000,000 In the Q1, we returned $433,000,000 to shareholders. We paid $183,000,000 in dividends and we repurchased $250,000,000 of shares.
Finally, looking at our other financial metrics. At the end of the Q1, our debt to EBITDA ratio measured based on our bank covenants was 2.77 and our weighted average cost of debt was 4.26%. Floating rate portion of our total debt portfolio was 15% at the end of the quarter. The effective tax rate was approximately 35.4 percent in the Q1. It was a bit higher than expected due to the timing of certain items, but we still believe that our full year tax rate will be 35%.
In summary, the Q1 trends continue the momentum that built throughout 2015. We're well positioned to achieve or exceed our full year goals as our employees performed well to start the year. In the coming quarters, the year over year comparisons become tougher, but we have confidence that our employees can continue to meet or exceed our targets. And with that, Rebecca, let's open the line up for questions.
And your first question comes from the line of Andrew Bischaklia with Credit Suisse.
Hey guys, thanks for taking my question. If you could talk a little bit more about your volumes this quarter, obviously there were some seasonal improvements. So I'm just And what would this quarter have been adjusting for, And what would this quarter have been adjusting for what you said was recycling benefit too?
Yes. If you look at the volumes for the quarter, we think that about, 30 basis points of the improvement was attributable to the recycling volumes, which as we said won't repeat in the following quarters, but that's okay because they're not profitable volumes. And then about 20 basis points to 30 basis points, we estimate would be the amount that was pulled forward sort of from the Q2. It's always a question when you have whether it's good weather or bad weather in the Q1, do volumes disappear when you have bad weather or do they just get pushed into the second quarter? And the same is true with good weather.
Did volumes get pulled in from the Q2 to the Q1 or is there just more economic activity so that there's going to be more volume? And so before we adjust our full year guidance, we wanted to be a little bit more precise on what the we wanted to give a fairly tight range. So waiting until the Q2 seasonal uptick, I think, will allow us to sort of say, okay, here's a more normalized look at what the volumes are going to be. We fully expect those to be positive in the Q2. The question is how positive will they be.
And Andrew, I guess to put those in dollar terms, last year, one of the ways we looked at this was that last year's negative impact from weather was about $12,100,000 in revenue about $8,100,000 in EBIT. So I think it's fair to assume that we didn't have that weather impact this year. But as David said, it's hard to tell how much just moved from quarter to quarter and how much good weather actually expands volume or on the other hand bad weather contracts going.
Okay. That's helpful. Can you I guess can you give a sense of how April was trending then? Seasonally, it probably still was strong, but it's still trending?
Yes. Basically, what we saw in April was that collection volumes sort of continue apace. The landfill volumes come down a little bit. We had some one time the MSW volumes come down. Look, the MSW volumes were really strong in the Q1, but we had a couple of onetime type items.
So for example, some of the waste to energy plants along the East Coast were down for maintenance and so some of those volumes came over to us into our landfills. And so we'd expect the landfill volumes to moderate a little bit, but they'll still they'll continue to be strong. So I would say that so far the trends are pretty much what we expect in the Q2. We continue to see positive volumes and we'd expect that to continue throughout May June.
All right. Thanks guys.
Thank you.
And your next question comes from the line of Jeff Goldstein with JPMorgan.
Good morning. Thank you for taking my questions. Looking at 2016, if you try to put it kind of all together, where do you see the main threat to your 2016 guidance? Where would it be coming from?
Well, to be quite honest with you, I don't see any threats to the guidance. I see some opportunities on the upside. But if there was going to be a threat, clearly recycling is still a little bit volatile. We haven't seen the rebound in commodity prices that you'd expect to see. Look, our core price is pretty much locked and loaded for the year.
I mean that is going to happen. Once we saw the when you see these volumes turn positive and you see that our addition rates exceeding our defection rate, it's hard to see volumes turning backwards. And so the things that are under our control, I think there's only upside, no downside. I guess really the only potential downside would be in a general economic downturn what would happen to volumes. But I think if there is a general economic downturn, it's not going to be led by housing like the last one was.
And so we should see at least a 6 to 9 month lag in any reduction in volumes. And so it's hard to see how 2016 can do anything other than meet or exceed our guidance. Dave, I
might add the issue of the economy itself. We still see positive container weights in the quarter. We have the last couple of quarters and our service increases are exceeding decreases 6 or 8 quarters in a row. So that's pretty good economic sign what's happening in North America.
Jeff, one of the common questions that we get is about the strength of the industrial sector and we best measure that by looking at our special waste pipeline. When you look at special waste for the Q1, it really didn't show a whole lot of impact from weather because in the month of January, we were actually down year over year about 4.5%. We were up about 1% in February, so pretty close to flat. And then March, we were up 6.1%. And when you look at April, April looks like it's up probably double March.
So when you ask about the risk to EBITDA, one of the areas that is somewhat that does fluctuate some is that special waste pipeline and it looks pretty encouraging right now.
That's very helpful. If I can ask one more. Just if you could give a little more color on the geographies and how does performance change in various regions that where you operate?
Yes. It is interesting to see that after the last economic downturn, you saw the trends completely switch from being Sunbelt driven to being more Rustbelt driven. And what we've seen over the last 6 to 9 months is you've seen it sort of revert back to what I would call a pre recession economy where in the Rust Belt. It's why we like having a diversified business. It works in any kind of economy.
Obviously, right now, you're seeing the South do better than the North, but the North continues to drive improved profitability. It just happens to be a little bit stronger in the South. So from a geography point of view, I think you can sort of follow the housing trends and say that we're our business is following that, which is very strong from Florida through the Gulf Coast and into California and then continued strength, but not as strong throughout the Midwest and East Coast.
I would echo what the Waste Connections guys said this morning, which is pretty strong growth universally across the country and in Canada as well, except where you have kind of big E and P operations and those are weak. And so there's those areas of the country have been a little bit depressed, but the rest of the U. S. And Canada looks pretty strong.
This is very helpful color. One last maintenance question for me is just on CapEx. So your total number for CapEx remains the same. You have a little bit of an increase for leachate investments where and then you have more truck investments. What is being reduced as far as capital investment?
Rodney McMullen:]
We're not really reducing anything. We're actually increasing the number of trucks. That it just moves us within the range, right? The range is $1,300,000,000 to $1,400,000,000 And what we're spending on leachate treatment facilities is well less than the amount of the range. So we are not cutting back on capital for yellow iron, on capital for containers, on capital for trucks.
We're actually increasing that from last year. So it really just moves us a little bit up in the range.
Yes. We're probably going to be if you remember last year, we were $1,230,000,000 in CapEx. We gave the $1,300,000,000 to $1,400,000,000 range this year. We're probably going to be in the middle of that, maybe towards the higher end of it, exactly what David said, which is about 125 extra trucks, about $25,000,000 additional capital invested in our yellow iron fleet, which is in some cases has got some older equipment. And then putting in some wastewater treatment facilities, which will have the payback to them, but they have a big upfront capital cost.
Thank you very much. This is very helpful.
Absolutely.
And your next question comes from the line of Michael Hoffman from Stifel.
Jim, Jim, how are you today?
Doing well. I'm doing fine too, Michael.
Good. I asked. On the MSW, when you talk about that type of a volume number in the landfill, one could go, that's eye popping relative to a 2% GDP. So Jim Travathan, you made a comment earlier that container weights on a same store basis, what's your container weight trend been in your commercial business?
It's been positive the last couple of quarters, Michael.
In that 2%, 3% type zone?
A little below that, a little 1.5% in that kind of range.
Okay. So that's more reflective of underlying consumerism, GDP. And that's how we imagine how we should think about this is good, but we can't get we shouldn't get irrationally exuberant about 13% MSW in 1 quarter.
Agree. Absolutely agree. Michael, we also had Dave mentioned waste to energy plants. We also had a couple of competitor landfills close during the quarter or during really the second half of last year, and we've picked up a good portion, if not all, that volume at one of them. And that's helping that 12%, 13% MSW volume growth.
That will continue, but some of the one timers that Dave and Jim mentioned will not continue.
But Michael, at the peak, we did roughly 130,000,000 tons into the landfill. Now we're probably looking closer to 110,000,000 tons into the landfill. And so the strong MSW volumes to me are indicative that finally we're getting back to where as an industry, we're getting back to where we were pre recession. Most other businesses are already above the volume levels that they were pre recession. And so I don't see that moderating.
I think that's just a reversion back to the norm.
Okay. And when do you think that leveling off point occurs as you look at sort of the economic drivers that drive your business?
Yes, guys. It's hard to see. Again, we're still 20,000,000 tons below where we were at peak. You're seeing a lot of municipalities take some types of materials out of their recycling streams. And so when I look at the future, I think there's more upside potential on the volume than there is downside potential.
And a couple of years before you get that incremental $20,000,000
Yes. I mean, if you look at the pace of change between today and the Great Recession, yes, I would think you'd still see a couple of years. And that's a couple of years of good solid sort of 4% to 7% type volume growth at the MSW line.
Okay. That's what I was trying to get at. And then this liquid management charge, if you took the 3.3% landfill pricing in 1Q and you had had that surcharge in the whole quarter, what would that what would the 3.3% look like?
Yes. Well, look, it's going
to be
slow to see any big results out of that. Look, the point here is that we've got to recover our landfill operating costs. The part of the problem is that a lot of those contracts are long term and we're going to go out and start doing it in some test markets in the Q1. We're not going to just go out and do it blanket across the country. Just to find out what does the reception look like?
If we go out and do a 7% charge across the entire country, you're putting a lot of volumes at risk. And so we're going to go into a couple of key markets and we're going to test it and see what the reaction is in the market. And if I think the whole industry is having the same problem. And so, I would expect the charge to be well received in the market, but, we're going to test it this quarter and then we'll roll it out during the course of the year. But even at its peak, we don't think it's any more than $10,000,000 to $15,000,000 over the next couple of years and that's on an annual basis just because we have so many contracts that are long term.
But if we can get an additional $10,000,000 to $15,000,000 that at least goes a little bit of the way to covering the increased leachate costs.
And is some of this leachate you've had a very wet year Q1 in the middle of the country where you have a lot of landfills?
And so basically what you've got going on here Michael, is 2 different things. Look, we had 11% additional volume going in there. So you've got naturally occurring water from the volumes. And we've had positive volumes now for quite a few years. So you get more liquids out of that.
And then as you say, we've had more rain events. And so there's been a lot more fluid, but the bigger part of it frankly is that the cost to transport and dispose of the liquids has gone up fairly dramatically. And so we sort of had a double whammy, more liquids and higher cost to dispose. Yes.
I mean that's the bigger concern is the last part of David's statement. When you look at some areas of the country, the unit cost of disposal of leachates gone up 400% to 500%. So that's why we're talking about this charge. It's not related necessarily to the rain because look, we could have a dry year at some point too.
Okay, fair enough. And then Jim Fish, on the cash flow from ops, it was 22% of revenues, which is well above your long term average. How do I think about what cash flow for ops should be for the full year as a percent of sales, given the adjustments you talked about?
Brown:] Boy, on a percent of sales, and I don't normally look at it that way, but I think it will be it will moderate a bit because the drivers of that the primary driver of that is EBITDA. And while we thought EBITDA was fantastic, as David said in his opening comments, we need to see what EBITDA does or all of our financial metrics do when we transition from this pretty mild winter quarter into spring summer. With that said, and even honestly, Mike, when we look at this on an EPS basis, we were up $0.09 versus prior year. Historically, we've been up kind of $0.02 to $0.03 over the last 5 years, dollars 0.02 to $0.03 per quarter. So $0.09 felt like a great quarter, but also felt like we don't want to straight line that.
So when I think of cash from operations, I think we're going to wait reserve comments until we see how that transition from the mild winter Q1 into the spring quarter, how it looks.
Okay. Churn is at 9.2%. Is that about the floor?
Yes. I mean that's right about the lowest we've ever had.
Okay. So the good news is, is your replacement costs have come down meaningfully because you've reduced the churn. So that's helped in the overall pricing as well and that anniversary. So I get 2 and 3Q and then it anniversaries in the 4th quarter because you're around 9% in the 4th quarter.
Right. That's right.
Okay. And then Jim sorry, go ahead, David.
Yes. We were at what 9.2% in the
4th quarter? We were almost identical. Yes. 9.1%
in Q4.
But I'll tell you, Michael, we've touched 12% over the last couple of years. Most of those numbers have been double digit. Those two quarters are the lowest in over a decade. So this is substantial for us in the process of retention and we're making real headway in that
significantly lowers the pressure on your pricing reported yield because to replace that customer is much lower cost price than what you lost.
And the important thing, Michael, is that the addition rate was 9.6%. And so you can see the rollover effect of that positive addition rate. That's just that's we always follow the rule 72 here and you can sort of see it as it creates that sort of annuity policy for us that addition rate just continues to roll and roll and roll throughout the quarters. And so that's why we say it's hard to see our volumes going negative again because we've got that addition rate above the defection rate. Michael, as you know that addition rate and defection rate are based on number of customers.
We're net positive.
Rate are based on number of customers. We're net positive in dollars as well and have been now for the 3rd consecutive quarter. So, that roll forward effect will continue. Again, numbers matter. Number of that roll forward effect will continue.
Again, numbers matter. Number of new customers, but dollars are the ultimate measurement.
And Michael, one last point on your question about cash from operations. When you say 22% of revenue, that includes the $67,000,000 benefits to cash from operations from the termination of the swap. It includes the one less pay period, cash pay period that we had. We had a pay period that fell on January 1 this year. So we actually had we paid it out on December 31, 2015.
So we actually had one more cash pay period in 2015 and one less in 2016. So that 22%, even if we take out the effect any effect of kind of a mild winter quarter, you still have a few things in that 20 2% that don't repeat.
Yes. That was my question. I'm assuming the 22% benefited by the non recurrings, but your long term average has been 17. It appears you're trending better than your average even for the adjustments. That's what I was trying to get at.
Yes. I didn't do a good job of answering that, but that's I think you're right. That's we feel good about the trend. We're not looking at a 22% trend because of the one timers.
Right. And which leads to I get you're not raising guidance, but if you take the midpoint of your capital spending and your trend works up by percentage points on cash flow from ops, we're beating free cash flow guidance too.
Yes. Look, I mean, I think what we'd say is that, we want to wait for the Q2 to understand the seasonal upticks. But if there's going to be an adjustment, it's certainly going to be an adjustment upward.
Right. And then last one for me, Jim. Fish, you would led this year with objective to have a flat dollars of EBITDA or not sorry, not EBITDA, SG and A. Is that still the intention given some of the strength in the business?
Well, look, our goal is to stay as close to flat as possible. But keep in mind, we added $90,000,000 $92,000,000 in acquisitions, which came with some SG and A, primarily S, right? A lot of the G and A has come out of those, but the S stays and that's a good thing for us. And similarly, the other half of our increase in dollars in SG and A was incentive compensation related to strong performance. So I look at that as being a good thing as well.
One thing I would say is in addition to saying that we will try to get as close to flat as we can, is that on a percent of revenue basis, one kind of aspirational number we've had out there for probably a decade has been 10%. On an annual basis, we were at 10.4% last year. I think we have a decent chance of getting to or below 10% for the year. So we'll shoot for flat, may not get there, but I think we're getting pretty close to 10% for the year on a percent of revenue basis.
Okay. That's very helpful. Thanks for answering my questions.
Absolutely.
And your next question comes from the line of Al Cashak of Wedbush Securities.
Good
Just wanted a couple of housekeeping items. For 2016, how much acquisition revenue is included in your expectations?
Yes. When we looked at the beginning of the year, we thought we'd do $100,000,000 $200,000,000 of tuck ins. I would say that we're probably on pace for the lower end of that right now. And then obviously, we sort of used the midyear convention for that. And so and then of course, we got the SWS revenue.
So we had what 80 some odd I'm sorry 90 some odd $1,000,000 $92,000,000 and then net out from a divestiture. Yes, exactly $92,000,000 and then you take the divestitures out. But I would guess that that $90,000,000 run rate is probably good for the year.
It might be a little high just because we anniversary death and loss. So what you're going to get is a full year of SWS, a full year of Enviroser, which is a little smaller
out west. So you replace that with a small tuck ins, right? Yes. So it could be.
It kind of depends on how those tuck ins go throughout the year.
Okay. So it's a good point. Death and Ball has anniversaried already or is there a No.
Well, yes, it's anniversaried at the very end of Q1. Okay. We had a full first quarter of kind of gain, if you will, in Deaf and Ball, but then nothing in the Q2. It's all kind of integrated in anniversaries.
Okay. In a constructive light, if you don't mind, I ask this question, understanding that the volume was strong and there were a couple of the extra work day, one other thing that just escaped my mind. But the messaging, David, around volume seems to be a little misplaced. And I said, and taking this in the light of what I'm intending it, you've been pushing for getting to flat. It now seems you're going to be substantially above that flat level.
Yet we all know that the underlying business doesn't really change all that much. So for lack of a better word, what are we miss on our on looking at the business or directionally, where were you a little too conservative on the trend there for volume?
Yes. Look, I would say the underlying business actually has changed fairly dramatically. I mean, you see it not only in our numbers, but you see it in everybody's numbers. The roll off volumes right now have been nothing short of spectacular. And our roll off volumes doubled quarter to quarter and that's with the energy services being down.
And so roll off has been really strong. C and D has been very strong. MSW has been very strong. Special waste has continued to be nicely positive. And then on the commercial side, I think you're seeing sort of the cumulative effect of the new business and new commercial construction that we've seen over the last few years.
So I really think the underlying trends in our business are more as positive as they've been since 2007.
Okay. That's helpful. Finally, if I just may pick a little bit on the SG and A, Jim Fish. I saw some recent headcount reduction announced. I think there was more for outsourcing.
What other benefits are there in terms of trying with the goal of keeping the dollar level flattish that was just asked previously?
Yes. First, let me correct one thing. What you saw was probably in Phoenix, and we moved by the way, difference between outsourcing and offshoring there. They're still employees. We just have now employees at our own host office, back office in indoor in India.
So they're still considered employees and still carried under our payroll as opposed to true outsourcing as I said to Michael were acquisition related, which we think is a good thing. We will make sure that we try and take as much of the, kind of duplicate SG and A out of these acquisitions as we always do. But the sales component is very important. I mean, if you think about Dethanville, that was an area that we had no operations. If you think about EnviroServe, it's an area where we had operations, but they had a niche business.
So the sales component of SG and A there is will stay on and is very important to us in terms growing top line dollars. And of course, the other piece is just a true up of incentive compensation plans.
Hey, Al, if the concern is just creep into our SG and A, Jim and I both and Dave are still on track. We look at all increases and make sure that or even replacements and make sure that's the absolute right thing to do and there are very few of those. On the sales side even, although Jim's right, we retain the Deffenbaugh additions. We have added some sales hits in early 2015 and but fewer in 2016 and we look at those on a return basis. Are they generating the value or we don't do them?
Brown:] Right.
But I would tell
you, Al, nobody is more cognizant of the danger of SG and A creep. When things look good on all other financial metrics, the one that can get away you is SG and A. So as Jim said, we are scrutinizing every single not only headcount addition, but even replacements to make sure that we're only adding where we need to add and where it adds top line or bottom line.
Excellent. Great. Appreciate it. Thanks. Good luck.
Thank you.
Your next question comes from the line of Corey Greendale with First Analysis.
Just a couple from me. First of all, the so the pricing the core price in industrial has been strong, got even stronger. Is that reflective of what you're seeing in temporary roll off? Or is that being driven more by permanent work?
That's temporary roll off. I mean, we had a roll off season that started very early. We had an unseasonably warm construction season. And virtually across the board, we heard from our folks out in the field that they're not able to they don't have the trucks and the containers to meet the drivers and you raise your price and that's basically what we saw. And not only do you raise your price, but all of a sudden those cans that are only being pulled once a month, you take them back and you put them out into another customer where they're pulled more often.
And so, we saw an unusually strong roll off season and again that's continued through April.
I'll just
say, free and add to that. That doesn't diminish the increases that we're getting on the permanent business as well. It just says most of that came from the answer that Dave gave you.
Yes. So the data suggests that the market is absorbing it well with the low churn. If you had told me 2 years ago that you're going to get 10% core price in industrial, I would have said you're going to shock the market by doing that. Is there so it sounds like not happening. Is there any sign that that could be starting?
Or is it that there's so much demand and you've got the capacity by virtue being waste management and some of the smaller local providers just don't have capacity. So you're able to do that now but maybe more capacity comes in over time?
That's exactly right. I mean, I think you hit the nail right on the head that, there is limited roll off capacity and it got stretched in the construction season, not everywhere, it's regional. But and so we haven't seen that slowdown. Down. And again, it's not just raising prices, it's making sure that you're getting the most efficient use out of that container and that driver.
And I think we've done a pretty good job of that out in the field of making sure that we're getting the maximum number of poles out of our can.
And it almost sounds, Corey, like when you talk about a 10% increase as if there's concern that we lose permanent roll off business and that's why David pointed out that this is largely a microeconomic certain geographies.
Understand. And then, I understand that the leachate related charge you're talking about not a big dollar amount, but you remind me, have you done other kind of specific cost offsetting fees at landfills? Or have you only done that on the collection side before?
No, we've applied the environmental charge at the landfill, certainly not as much across the board as we have on the collection line of business. And that's why this one is going to be landfill focused. I mean it really is a landfill particular problem. The environmental charge when you look at our costs for environmental compliance that stretches across all aspects of our business. This is peculiar to the landfill.
Again, I think if you look at everybody in the industry, you'd see both industry players and private players. You'd see that their leachate costs are going up. I mean it's just a function of higher volumes and higher transportation costs. And so I think the industry has 2 choices, right? You either watch that return on capital shrink at the landfills, which it has been doing over the last few years or you do something to reverse it.
We've decided to do this liquids management charge. I can't speak for anyone else, but that's the way we're going to drive that return on capital because look, we invest more capital in the landfill than any other single asset that we have. Now we got to get the return on
it. Yes, I understand. And I realize kind of market conditions change, so maybe not a good analog. Where I was going with that, I was wondering if you could make draw an analogy what the reaction was when you implemented the environmental charge at the land sales? Have you found competitors kind of following along or if they use that as an opportunity to try to take volume from you?
No. I mean I would say for the most part, again, the environmental charge is not widespread on our land build customers. But for the most part, we've seen the market react quite favorably.
And then just one last quick one. You've already addressed the volume question a bunch of different ways. But when you reported last quarter, you said that you thought volume gets stronger in the back half of the year. Do you still think that is likely to be the case?
Yes. Well, the couple of headwinds that we have going into the back half of the year are the recycling volumes, right? And that was about a 30 basis point benefit in the Q1. But if those volumes go negative like we expect them to go in the back half of the year, it's probably a little bit more of an effect because it will go from positive 3.1 percent to negative a couple percent in the back half of the year. So it could be a little bit more than 30 to 40 basis points.
But the underlying macroeconomic trends that we see in the industrial and the commercial line are strong. And so I would expect look, we've always said we don't look at volumes for volume sake. We look at volumes to try to add profitable volumes. And what I would say is that the trend line on the profitable volumes that we're going to add is going to be very positive throughout the rest of the year. Some of those negative volumes like landfills, maybe some residential contracts, some of those things might moderate the volume growth a little bit, but I expect that we'll continue to see good strong growth in the landfill line and the industrial line and the commercial line.
Got it. Thank you and congratulations on the good start to the year.
Thank you. Thank you.
And your next question comes from Tyler Brown with Raymond James.
Good morning, guys.
Hey, Tyler. Good morning.
Hey, quick housekeeping item. So Jim Fish, I may have missed it, but can you go over the day adjusted collection volumes by line?
Yes. Let me see here. Flip back into the script for a second.
Yes. Sorry about that.
Okay. So roll off was volume was 4.2 percent on a day adjusted basis was 2.7%. I didn't give a day adjusted commercial. It was the same negative point.
Okay. So roughly maybe the same impact on each. Okay. I do want to dig in a little
There was no impact on the commercial line.
No impact. Okay. Perfect. All right. And then I do want to dig in a little bit more on the landfill volume.
So if you look at your actual tons consumed, the 23,600,000 versus 20,900,000 that actually went into the landfill, that was a great number, probably the best physical number we've seen in some time. You noted a number of the one time drivers, but can you isolate maybe how much the burner availability was an issue and was coal ash a driver in that?
Well, yes to both. The coal ash was a driver. By the way, one last point on your first question. Landfill volume on a day adjusted basis was 10.3%. The unadjusted was 11.6%.
So to answer your second question, coal ash was certainly a piece of it because we saw some scheduled maintenance done at Covanta and at Wheeler Breeder that did impact us. We also saw that the coal business, that Duke Energy contract we've talked a lot about, started to really kind of ramp up. We have 3 plants and all three of those are kind of fully up and running and that was growing incrementally throughout 2015. But I would tell you that those I don't know, Jim, if you know the number for the coal ash piece. No, I don't.
But it was improved year over year. Certainly improved.
Okay.
It was part of that,
but that's a long term issue, Tyler. We have that business in 2016 and we'll continue those projects. So that's not part of the one timers.
Okay. Okay. That's helpful. And then David, this is a bigger picture question. You kind of touched on it, but the MSW landfill volumes are very robust.
We saw
it with you. We saw it
with connections, etcetera. The industry seems to be shuttering recycling capacity across the board. And do you think that the woes on the recycling side with some of that material, is it making its way back into the landfill? And do you think that's part of the whole MSW volume story?
Yes. I don't think there's any doubt. I mean, when you see recycling rates going backwards over the last couple of years, that material has to have an outlet. And I do think that some of that material is going clearly to the landfills.
Okay. Yes, very helpful. And then just last one, Jim Trevathan, what did hazardous waste landfill volumes do in the quarter?
They were improved year over year. We had a pretty good year over year improvement at the 2 southern sites that had an event business given good weather that was larger than the prior year's event business, especially at the Alabama site. And then in
our California hazardous site, we actually did an acquisition, our EnviroServe acquisition out there and so we saw pretty good volume growth there too. And we'll continue to see that as we move some of that volume that's still going 3rd party as we get state approvals to bring them into Kettleman, that volume will from that acquisition will improve during the course of this year.
Right. Didn't Kettleman just restart up? Is that right?
Yes. In the second half
of last year. They were running, but they had a very low rate in
the first half. Yes.
Okay. All
right. Thank you, guys. Thank you.
Your next question comes from the line of Joe Box from KeyBanc Capital Markets.
Hey, good morning guys.
Good morning.
So with cash flow expected to be above the range and leverage up some but still below the 3x mark that you're looking for. Can you maybe just give us an update on the buyback? And maybe should we think about another ASR at some point either this year or on the horizon?
Yes. We said that at the beginning of the year that we'd spend $600,000,000 on the share buyback. And I would expect that we would at least hit that number. We've talked about we did $250,000,000 in the Q1. We've talked about doing another $250,000,000 ASR this quarter.
And so we'll certainly spend the $600,000,000 I think there's probably a little bit of upside to that number as we see the cash generation through the year.
Got it. Thanks for that.
On the there's a couple of things there on the leverage ratio and then capital allocation. Leverage ratio finished at 2.77, up a bit from the end of Q4 largely related to the acquisition of SWS. But we think for the year, we'll probably be in that 2.6% to 2.7% range. Long term, we probably expand that range a bit and kind of call it 2.5% to 3.0% just to give us some opportunity there to if we see a big acquisition that looks like it's strategic and reasonably priced, we may go after that. Unfortunately, at this point, we don't see any of those out there.
So we'll just go when we think about capital allocation, we'll go with kind of the $100,000,000 to $200,000,000 in acquisitions. And then we'll maintain that leverage ratio in Got
Got it. Thanks for that Jim. And then one last quick one. So I want to flush out the volume growth a little bit. You're still seeing resi volumes decline.
Can you maybe just talk to the undercurrents that you're seeing within volume and maybe the impact on margin because obviously a solid incremental EBITDA margin this quarter. Is there maybe a double benefit with the volume? You're getting a positive mix and then you're also getting more volume at the landfill. Just any color there would be helpful.
No, I think it's exactly right. When you look at the lines of business from a margin perspective going from top to bottom you go land fill, commercial, industrial, residential, right? And when you see the predominant volumes coming into those to the landfill and the industrial side and you see you saw 3 60 basis points of improvement on the commercial side. It's like I said, we don't go after volumes for volume sake. We try to go after the volumes that actually make money.
So if we lose a little bit of volumes on recycling, lose a little bit of volumes on residential, I'm not going to tell you that we like that, because they do generate some EBITDA. But when you look at it from a mix point of view and from a profitability point of view, I'd much rather be adding volumes on the commercial industrial landfill line than on residential and recycling. Maybe one more point, Dave, is that on the resi side, when you renew a contract or you gain a contract,
it's generally a capital outlay. So we look at return on that invested capital stronger there as the other lines of business are inherently strong on an ROI basis.
Got it. Thanks for the color guys. I appreciate it.
Thank you.
And your next question comes from the line of Hamzah Mazari with Cernergi.
Hi, this is Kevan. I'm filling in for Hamzah. I had a question about the Canadian portion of your business. With the Waste Connections and Progressive Waste merger closing soon, can you give us a sense of your position in the Canadian marketplace and maybe do an M and A there on the U. S.
Side, how that all relates?
Yes. When we look at the Progressive deal, obviously, we couldn't do that because we have too much business in Canada. Certainly, I think Waste Connections taking over that business is a very positive thing for the industry. Progressive, I would say, was a little bit more of an aggressive volume player than Waste Connections is. So I think it's only going to be positive for all the business in Canada.
From our perspective, we did a large transaction in Montreal, couple of years ago. I think I'd say about Canada exactly what Jim said about the United States. If we could find, a good sized acquisition that's strategic for us and that's priced fairly, we'd go out and do it. But I think the same thing applies to Canada as does the United States. Right now, we just don't see those.
A lot of the sort of what I'd call mid sized acquisitions, call it in the sort of $500,000,000 to $2,000,000,000 type range. A lot of those type of sellers right now expect too high a price for their business. And so we have to pass on them for now. But I see that business certainly not being hurt by the fact that Waste Connections will be our new Canadian neighbor instead of Progressive.
All right, great. Appreciate it. Thanks a lot.
Thank you.
And your next question comes from the line of Michael Finnegan I'm sorry, Finnegan with Bank of America.
Thanks guys for taking my call. I think last quarter you mentioned a 30 bps to 40 bps benefit margin on lower fuel. Did you guys break that out this quarter? What did you see the tailwind on the margin line from the lower fuel price?
Yes. The fuel impact was to be exact here, 13 basis points tailwind for us. When you think about fuel, we had about $33,000,000 lower in fuel surcharge 32,000,000
dollars lower in fuel surcharge
revenues, dollars 33,000,000 in fuel expense. So kind of a push there. And then when you factor in the lower fuel surcharges that we pay to 3rd party transportation providers, that's where you get the 13 bps of tailwind.
Great. And the incremental margin was I think around 50% this quarter, a little over that. I mean is that when we think about this going into this environment where it's kind of looking like the best environment we've seen since 2007, is that 50% incremental margin, is that a sustainable run rate we should be thinking in a market where you're getting really good pricing and starting to see positive volumes?
Yes. Look, I think in a positive volume environment and particularly when those volumes are positive in the landfill and in the commercial industrial line, I don't think that 40% to 50% flow through is an unreasonable number.
Great. Thanks guys.
Thank you.
And your next question comes from Scott Levine with Imperial Capital.
Hi guys.
Good morning, Scott. Good morning.
So just one question really, your core price of 5.3%. Just looking at your last transcript, you guys are guiding for 4% this year. Obviously, this is a huge upside to that number. Just wondering whether informally your expectations for this year would be considerably higher, maybe a little bit more color on the upside in price in the quarter? And then I have a follow on about CPI, which also has been strengthening a bit of late.
And wondering if you could remind us of your exposure to index based pricing and or whether we might see some lift associated with that as inflation continues to pick up?
When you look at CPI on a core basis, you've certainly seen improvement. But when you look on a universal basis, you've actually seen it flat to down because of lower energy prices. So we still think that in the back half of the year, CPI, which is about 40% of our business, CPI could be a headwind, not a tailwind in the back half of the year. With respect to core price, we pushed up a lot of our price increases this year and we're going to be anniversarying some mid year type price increases we did last year. And so, I don't expect the dollars to moderate during the course of the year, but I would expect that the actual number of core price and that the number on yield would probably moderate a little bit, but we still fully expect to be above that 4% core price and atorabovethat2% yield.
Great. Thanks, David.
Thank you.
And your next question comes from the line of Barbara Novarini with Morningstar.
Good morning, everyone.
Good morning, Barbara.
Just a quick clarification question. So once your leachate treatment facilities are built, we're basically looking to see operational cost savings from replacing higher third party costs with your own labor. So is this a longer term goal and that you want most of your major landfills, common wetter areas to be self reliant when it comes to leachate treatment? Or is this basically just targeting specific facilities where this has been a particular challenge?
Yes. So when you look at it, it's really geographies. I mean the biggest expense we'll have this year is a geography where you have a water treatment facility, a POTW that in the past has always taken leachate and from not only from us but from a lot of other third party landfills around the area and they decided not to take leachate anymore. And so that's when Jim talked about costs going up by 500 percent, that's basically what happened in this geography is our outlet for disposal basically disappeared. So now we have to find another outlet and happens to be a lot further away.
So, in that type of case, and this is a fairly rural area in the Southeast. And so in most cases, if one POTW shuts you down, doesn't take leach anymore, you can find another POTW. This happens to be in a more remote type area, so you have to build your own treatment facility. But that's pretty unique to this geography.
Got it, got it. And then out of curiosity, could you then open your own treatment facility to accept 3rd party leachate volumes?
You could if we wanted. I think we'll have plenty. I think it'll be fully utilized with our own capacity, but we could if we wanted to. And I think just to add a little bit to what David said, we don't expect to build these things across the country, across the U. S.
And Canada. We built 1 in Eastern Pennsylvania. The one that he mentioned is in kind of the mid Atlantic area. And we don't have any other plans to build them beyond those unless we see similar cost increases. But that is the concern and that's why we're proposing the charge here.
Yes, makes sense. Okay. Thanks a lot.
I might one little clarification, we can, but we would have to get a permit from the state that would allow us to accept 3rd party materials rather than just our own. We are the current permit not allow that. So it's possible. It's just not part of the current plan.
I think it's moved because we're going to have plenty.
Yes, we'll fill it up.
You got
enough to keep your attention. I understand. Thanks a lot.
Thank you.
At this time, there are no further questions.
All right. Thank you all. Obviously, we're off to a very strong start. We look forward to seeing the seasonal uptick in the second quarter and get back to you with a more precise view of the full year at the end of the Q2. But I would be remiss to say that when we get to report these good quarters, we as a senior team get to report the numbers, we still realize who produces the numbers and that's our folks here at the corporate staff and our folks out in the field that are doing a spectacular job applying our strategies throughout the country.
We'll see you on the road and we'll see you in the next quarter. Thanks.