Good morning. My name is Cornetia, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4th Quarter 2015 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would like to turn the call over to Ed Eagle, Director of Investor Relations. Thank you. Mr. Eagle, you may begin your conference.
Thank you, Tanisha. Good morning, everyone, and thank you for joining us for our Q4 2015 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 Cherathan, 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. 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 in our filings with the SEC, including our most recent Form 10 ks. David and Jim will discuss our results in the areas of yield and volume, which unless 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 defined in the earnings press release.
Any comparisons, unless otherwise stated, will be with the Q4 of 2014. The Q4 and full year 20152014 results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect performance or results of operations and by excluding amounts attributed to businesses and assets divested in 2014. 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 found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information of our use of non GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1 p.
M. Eastern Time today until 5 p. M. Eastern Time on March 3. 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 218 54,213. Time sensitive information provided during today's call, which is occurring on February 18, 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. Now I'll turn the call over to Waste Management's President and CEO, David Steiner.
Thanks, Ed, and good morning from Houston. 2015 was a very successful year as our commitment to core pricing, disciplined growth and controlling costs generated our highest adjusted earnings per share ever. We grew our income from operations and operating EBITDA and achieved the highest operating margins we've seen since 20 10. We generated earnings per share of $2.61 in spite of the divestitures of our wheel abreator, Puerto Rico and Eastern Canada operations and headwinds from recycling commodity prices and foreign currency translation. 2015, we saw the execution of pricing, productivity and growth strategy strengthen our foundation in a way that will lead to continued growth in 2016 beyond.
During 2015, our strong free cash flow allowed us to return almost 1 point $3,000,000,000 to shareholders in dividends and share repurchases. We've seen solid growth in cash generation in our business over the last few years and we're confident that our free cash flow has reached a new base of at least $1,400,000,000 per year, up from the $1,200,000,000 to increase the dividend by 6.5% in 2016 and authorize up to $1,000,000,000 of share repurchases. We acquired Deffenbaugh and several small solid waste companies in 2015 and in early 2016 we closed on the acquisition of Southern Waste Systems or SWS. 16 should generate between $50,000,000 $75,000,000 of operating EBITDA in 2016. As we previously mentioned, the operating EBITDA from these acquisitions won't translate into earnings per share in 2016, because we'll have corresponding intangible amortization.
However, the transactions will generate cash flow in 2016 and incremental earnings starting in the second half of twenty seventeen. Looking at our operations in 2015, our pricing programs continued to drive earnings growth and margin expansion. When we gave initial guidance for 2015, we targeted core price of 3.8% for the full year and we exceeded that target. For the full year, our collection and disposal core price was 4.2% with yield of 1.8%. We've now 6.1%, industrial was 8.6% and the landfill line of business was 2.4%.
For 2016, we expect core price to be about 4% and our total revenue growth from yield should again be in the range of 1.5% to 2%. Our pricing teams continue to perform at high levels and we'll continue our focus on price in 2016. The pricing excellence is not a 1 year project at Waste Management, it's a way of life. We must get pricing to keep up with inflation and we have the tools and the people to do that indefinitely. Our traditional solid waste volumes, which include our collection, transfer and landfill volumes, were a negative 0.5% for the full year.
But importantly, we positive trends throughout 2015 with traditional solid waste volumes improving sequentially each quarter, culminating in a slightly positive 4th quarter. Although commercial and residential were still negative, we continue to see positive momentum in those volumes, particularly in our commercial line of business. In that line, we've seen 6 consecutive quarters
in which
the rate of decline has improved and commercial collection was down only 0.7% in the 4th quarter versus down 1.3% in the 3rd quarter. Our continued focus on disciplined volume growth in customer service is paying dividends. Our churn was 10.1% for the full year, the lowest level since 2012. In the 4th quarter, it was 9%, the lowest level since 2,002. And we did all of this while reducing rollbacks in 2015.
So we're keeping our customers through improved service, not price concessions. We saw our new business exceed our lost business for the 8th consecutive quarter. These are all positive signs that our volumes are headed in the right direction without resorting to lowering prices. Total company volume, which includes lower margin recycling, brokered and non solid waste volumes declined 1.6% for the full year with the Q4 being the best quarter of the year declining only 0.9%. For 2016, we expect that traditional solid waste volumes, which would lead to overall volumes being about flat.
Of course, some of the recycling volume that we lose is a direct result of our efforts to shed unprofitable volume. So losing certain volumes in the recycling business is not such a bad thing. And we expect that overall volumes will turn positive in the second half of the year. As you can see, the price and volume trade off continues to be very positive. For the full year, the company's income from operations grew 4.6% and our income from operations margin grew 120 basis points.
In addition, operating EBITDA increased about 3% and operating EBITDA margins increased 130 basis points to 26.5%. Our solid EPS growth was achieved despite a $0.09 per share decline from our Energy and Environmental Services business, which has been affected by the sharp in market prices for oil, a negative $0.04 impact from foreign currency translation and a negative $0.04 impact from recycling operations. Looking more closely at recycling, we made significant progress improving operating costs and on renegotiating contractual terms with our customers, including exiting some unprofitable contracts. Our recycling employees worked hard and reduced gross operating expenses by 15% and changed operational and contractual improvements, we had estimated that the recycling impact could be as much as a negative 0 point
$0
lessened that negative impact to negative $0.04 per share. On the recycling commodity price front, 20 16 has seen a continuation of the downward slide and current prices are down $20 per ton or 23% from January of 2015. These are levels that we've not seen in nearly 7 years since the 2,009 recession. If we do not see a normal seasonal uptick in commodity prices and prices remain at January levels, this would be a $0.02 to 0 point 0 $3 headwind in 2016. We're committed to recycling and we'll continue to work to change the business model to generate revenue that covers our processing costs and drive out operating expenses so that the business is sustainable over the long term.
Turning to free cash flow, our strong operating results coupled with continued discipline in capital spending allowed us to generate $1,410,000,000 of free cash flow in 20 15. Included in that free cash flow number was $150,000,000 prepayment of 2016 cash taxes. We had mentioned on the Q3 conference call that we'd make this type of prepayment given that our cash flow is going to be above the high end of our $1,500,000,000 range. Consequently, we increased our 2016 guidance to between $1,500,000,000 $1,600,000,000 So when we look at our success in 2015 and our guidance for 2016, we look at 3 things. 1st is price.
In 2015, we exceeded our goals. And for 2016, it's pretty much locked and loaded and already in process. So we're very confident we'll meet our 4% target in 2016. 2nd is costs. Again, we did well in 2015 and we believe there's plenty of room to improve in 2016.
So again, we're very confident. And finally, volumes. In 2014 and 2015, we built momentum. And for the first time in many years, I'm very confident that we'll see our volumes turn positive toward the end of 2016. So we go into 2016 with a lot of confidence and look forward to another strong year.
We expect that our continued execution of these strategic priorities will drive 2016 adjusted EPS to between $2.74 $2.79 And we expect operating EBITDA to grow at the fastest rate in 10 years, up 5% to $3,600,000,000 But we can't do it without our people. I'd be remiss if I didn't thank them for their hard work and professionalism. And I know they will once again prove their value in 2016. I'll now turn the call over to Jim to discuss our 4th quarter results and our 2016
outlook in more detail. Thank you, David. We produced solid growth in earnings and cash flow in 2015, and it would have been even better when you realize that recycling is down $0.30 per share from its peak. That is why we need to maintain our focus on fixing recycling. As David said, we're committed to recycling.
And for the last 2 years, we've been working to improve our recycling business. We want to see recycling thrive because it's the right thing for our environment and it's the right thing for our customers. We just want to make sure it's the right thing for our shareholders. We performed well in 2015 navigating the recycling headwinds, which I'll discuss in a moment. But we're in the 4th year of low recycling commodity prices and we are currently seeing these commodity prices at the lowest levels we've seen since the 2009 recession.
Since there's little we can do to affect global market conditions, we're doubling down on those areas we can control. We've tightened our belt on investments. We're driving operational efficiencies. We're working with our community partners to reduce the amount of expensive contamination at our MRFs. We're optimizing our MRF network and we're tackling the slow difficult but necessary process of changing the terms of our contracts.
Together these actions produce real measurable results in 2015 and are expected to make recycling profitable over the long term. Initially, we expected the $4 negative. That was not driven by an improvement in commodity prices, but was due to the actions that we took to improve recycling operations. Recycling was one of several market factors we overcame in 2015. In addition to the $0.04 impact from recycling, we had a $0.09 per share headwind related to low demand for energy and Environmental Services, a $0.04 impact from foreign currency changes.
Despite these market pressures, our EPS grew more than 13% to $2.61 per share in 2015. We overcame those headwinds through cost controls and strong growth in our traditional solid waste business and those efforts will continue into 2016. At the beginning of 2015, we expected to see a $60,000,000 improvement in SG and A costs when compared to 2014. I'm pleased with our 2015 results as SG and A costs for the full year improved $68,000,000 to $1,340,000,000 and improved as a percent of revenue by 20 basis points to 10.4%. For the Q4 SG and A costs were $343,000,000 an improvement of $27,000,000 compared to 2014.
As a percent of revenue, SG and A cost improved 70 basis points to 10.6 percent. For 2016, we will continue to focus on managing anticipated wage increases, cost inflation and incremental SG and A brought on from the acquisitions. But despite these increases, we anticipate that SG and A cost should be flat when compared to 2015. Turning to cash flow. For the full year, we generated 1 $410,000,000 of free cash flow.
As we mentioned on our Q3 earnings call, we expected we would have a strong year of free cash flow and that we would likely make tax payments assuming the tax extenders were not going to be enacted. Therefore, in the Q4, we prepaid $150,000,000 of 20.16 cash taxes. For 2016, we now anticipate between $60,000,000 $70,000,000 of cash tax savings from the impact of bonus depreciation, which was reinstated by Congress at the 11th hour. During 2016, we expect capital expenditures of approximately $1,300,000,000 to $1,400,000,000 In 2016, the impacts of organic earnings growth, bonus depreciation, acquisitions and higher capital spending should drive free cash flow to between $1,500,000,000 $1,600,000,000 In the 4th quarter, we returned $172,000,000 to our shareholders through our dividends. For the full year 2015, we returned about $1,300,000,000 to our shareholders consisting of $695,000,000 in dividends and share repurchases of $600,000,000 Our Board has indicated its intention to increase dividends in 2016 by 6.5 percent to $1.64 per share on an annual basis.
And this is the 13th consecutive year of increased dividends. For 2016, our anticipated annual dividends will result in approximately $730,000,000 being returned to shareholders. We expect to spend around $100,000,000 to $200,000,000 on tuck in acquisitions in 2016 with the remainder of free cash flow allocated to share repurchases. We have authorization from our Board of Directors to repurchase $1,000,000,000 of our shares. We've already repurchased $150,000,000 and expect to spend an additional $500,000,000 for the full year.
4th quarter revenues were $3,250,000,000 We saw a $59,000,000 increase in revenues from acquisitions and a $50,000,000 increase in our traditional solid waste business due to the combined impacts of pricing and volume. We saw an overall revenue decline of $163,000,000 from divestitures, dollars 43,000,000 in lower fuel surcharge revenues, a $34,000,000 decline from lower recycling revenues and a $33,000,000 decline in foreign currency. Looking at internal revenue growth, for the total company in the 4th quarter, our collection and disposal core price was 4.2% and yield was 1.7 percent with total volumes declining 0.9%. This led to total company income from operations growing $42,000,000 operating income margin expanding 150 basis points to 17.7 percent growing $37,000,000 and operating EBITDA margin growing 150 basis points to 27%. For the full year, income from operations grew $97,000,000 operating income margin expanded 120 basis points and operating EBITDA grew 80 $6,000,000 and operating EBITDA margin grew 130 basis points to 26.5%.
Our collection lines of business continue to see the benefits of our disciplined pricing programs in 4th quarter. Our commercial core price was 5.8%
with yield of
2.9%. Our industrial core price was 8.7% with yield of 2.3% and residential achieved 2.2% core price and 1.5% yield. Overall collection core price was 5.3% and yield was 2.2%. Our focus on customer service which helped reduce our churn and disciplined growth also benefited our volume trends in the 4th quarter as volume declined only 0.6%. The volume change was basis point improvement sequentially from the Q3 and a 190 basis point improvement from the Q4 of 2014.
This core price and volume led to operating EBITDA growing $11,700,000 and margin expanding 30 basis points. In the landfill line of business, we saw the benefits of both positive volume and positive yield in the Q4 just as we have all year. We saw same store average MSW rates increase year over year by 2.4% from Q4 of 2014. This is the 11th consecutive quarter of year over year MSW rate increases. Total landfill volumes increased 0.5%.
MSW volumes grew by 11.1% and C and D volume grew 15 0.8%, while special waste and revenue generating cover volumes declined 7.4%. The special waste decline was predominantly driven by the decline in our Energy Services business. The positive volume and yields led to income from operations growing $15,000,000 margins growing 160 basis points, operating EBITDA increasing $14,000,000 and operating EBITDA margins increasing 120 basis points. Moving now to operating expenses. These expenses improved by $50,000,000 in the 4th quarter and as a percent of revenue improved 80 basis points to 62.4%.
For the full year, operating expenses improved $328,000,000 and as a percent of revenue improved 100 basis points to 63.1%. In 2015, our focus on improving operating costs saw significant traction and we expect that to continue into 2016. For the full year, we saw improvements of $187,000,000 in fuel costs, dollars 102,000,000 in cost of goods sold and $35,000,000 in labor costs as we continue to see the benefits from our routing and logistics program. Finally, looking at our other financial metrics. At the end of the 4th quarter, our debt to EBITDA ratio was 2.66 and our weighted average cost of debt was 4.32%.
The floating rate portion of our total debt portfolio was 8% at the end of the quarter. The effective tax rate was approximately 32.4 percent in the 4th quarter and 32.3% for the full year. Taxes were a 0 point 0 $1 headwind to EPS in the 4th quarter. In conclusion, 2015 was a very good year for controls. I want to say thank you to our employees for their hard work in delivering a successful 2015 and positioning us to continue that into 2016.
16. We're excited about continued growth in 2016 and beyond. And with that, Karnisha, let's open the line for questions.
Your first question is from Scott Levine with Imperial Capital.
Hey, good morning guys.
Good morning, Scott.
So it seems like as steady as she goes in terms of the organic growth trends that the pricing environment is pretty healthy, that the volume environment is generally improving and is expected to improve, albeit gradually with volumes inflecting positive by the end of this year. But anything surprising either to the positive or the negative on the macro or the industry front either geographically or relative to your expectations or really or things just kind of continuing to improve at a gradual pace and there is no real change in the operating environment in general?
Yes. Scott, when I look at the business, you can sort of say, I think you're right, the growth is fairly muted from the economy. But you can pretty much say the business is firing on all cylinders, save to 2 areas, and that's recycling and energy services. And I think we all know what the macro environments are for that. I mean, it's low commodity prices, not just oil, but cardboard and plastics.
So, I think you hit the nail on the head. It's steady as she goes. We continue to see the other lines of business doing very well and we don't expect that to end in 2016. Scott, I
would say that the only thing that was surprising was kind of a positive. We weren't surprised obviously by the headwinds with recycling or energy services, but we were pleasantly surprised when you look at the construction business. I mentioned we were up over 15% in C and D waste stream. And that really to us is kind of a foreshadowing of good things there in 2016. Understood.
And then it sounds like you're baking in an expectation here of $50,000,000 to $75,000,000 EBITDA, you've been talking about this for a while. Could you tell us how much of this have you closed on with the SWS acquisition? How much remains to be closed? And maybe a little bit more commentary regarding the M and A landscape in general and whether we may see some upside there
there? Yes, I would say 80% to 90% of it's locked in with SWS. I mean that's going to be the big acquisition that we do in 2016. When I look at acquisitions, we've done RCI in Montreal, we did Deffenbaugh in Kansas City and now we've done SWS in South Florida and those were spectacular acquisitions for us because they're a fairly large amount of revenue, but they're also straight tuck ins into our business. So we know exactly how to do them, we know exactly how to get the dollars out, takes a little bit of time, but we know exactly how to do them.
So the more of those that we can do, the better. We thought there might be a few or more of those in the pipeline, but those call them those $400,000,000 to $500,000,000 transactions, we really don't see a lot of those on the near horizon right now. So I think 2016 will be a year where it's mostly driven by tuck in acquisitions. But again, we'd love to do some larger acquisitions like those 3 that we did in Montreal, Kansas City and South Florida. Pricing, I don't think it's changed dramatically.
We've said it many times, we generally pay a little bit lower price for those smaller tuck ins. And it's because you can pay a little bit higher price when you get that bigger bulk of business like we did down at SWS. Although even with SWS on a post synergy basis, we'll end up paying sort of 6 to 7 times EBITDA.
Got it. And then as a follow on to that, assuming is there any change in your interest level in energy and industrial? And or if we get a floor in commodity prices on the energy side, could you see your interest pick up as 2016 plays out or you're still focused predominantly on solid waste?
Yes, we're focused predominantly on solid waste. And I think we've said it the last two conference calls, which is, look, long term, I think energy services will be a great business, but we're not out there looking for businesses. I think it's going to be a prolonged flattening of oil prices. And so in energy services, if we buy something in energy services, it would be opportunistic. We're not actively out searching for businesses in that line of business.
Your next question is from Corey Greendale with First Analysis.
Hey, good morning, everyone.
Good morning,
Corey. So, two questions. First, Jim, I was hoping Jim Fish, I was hoping you could help bridge the cash flow from ops guidance from 2015 to 2016. I calculate your guiding to a $300,000,000 to $400,000,000 increase EBITDA you're guiding to $160,000,000 So just what's accounting for the rest of the increase?
So when we look at cash flow from ops or if I look at free cash flow because I want to include in there CapEx. If I talk about free cash flow, and if that doesn't answer your question, let me know. But if I talk about free cash flow for 20 16, I have a starting point of, let's call it, 1.41 from this year. And then I'm adding in EBITDA growth. You mentioned 160, we're kind of calling it $170,000,000 in EBITDA growth year over year, which includes that includes organic growth, that includes some of the benefit of acquisitions.
I add in the impact of bonus depreciation, which I mentioned was, let's call it, dollars 70,000,000 And then our CapEx is
going to be
a bit higher this year. I mentioned the $1,300,000 to $1,400,000 range. So back out $100,000,000 in added CapEx, and I arrive in the middle of that range of 1 $5,000,000 to $1,600,000 And keep in mind there, Corey, that's the prepayments that we made in cash taxes is really offset by the benefit we got from the Q1 'fifteen debt transactions. So those 2 kind of offset each other, so that walk forward works without a cash tax
difference. That did answer my question. Thank you. And one clarification, I think you said this, but the EBITDA that you're expecting to get from acquisitions, the number that you gave, is that only from Southern and new acquisitions? So in other words, you're not including rollover effect of acquisitions in 2015?
Yes, there's a small rollover effect from 2015, but the bulk of it would be the SWS and the tuck ins you do in '16.
Okay. Then next question, you addressed the environment in general when you're answering Scott's questions. But given that we have a lower CPI environment, you're committed to continuing, like you said, pricing is not a temporary thing, it's the culture. I guess the question is how confident are you that you won't be pushing away more volumes as the year goes on given that CPI will be quite low?
Yes. Well, look, we've done it the last 3 years consecutively. We've seen our churn rate come down while we've maintained that core price at 4% plus. And so look, it really comes down to making sure that you service your customer. I mean if your customer is happy, they completely understand that our costs go up every year and you've got to get those price increases.
And we've always said that it's a fairly small portion of our customers' overall cost structure. So getting that price increase to maintain inflation plus really hasn't been difficult as long as you can maintain the service levels to the customers. And so that's really where we're focused this year. We know how to get the 4% core price. We've got those plans, like I said, locked, loaded, and we're already executing them.
So we know we can do that. The key is having that great customer service, which allows you to keep that low churn rate, also keep price rollbacks down and get that positive core price. And so like I say, we've got it sort of clicking on all cylinders, but we can always do better.
Great. And then on the kind of competitive and acquisition front, David, I'd just love to get your thoughts on whether the proposed connections acquisition of Progressive has an impact on those markets whether you and also whether you might be interested in some of the potential swaps that may be coming out from that?
Yes. Look, I think Ron did a spectacular job in picking up that business. And everywhere that we compete with Waste Connections, they are a tough competitor, but they are a fair competitor. And so we certainly welcome them into the markets. I don't know how to say welcome in Canadian, but we welcome them into the markets.
But the other thing is, I would love I'm glad you brought it up. I owe Ron a phone call to let him know that to the extent that they have to get rid of any business that we would certainly be interested in buying any pieces of those business that we can buy. So I'll make sure to give them a call today and let them know that.
Great. Let me know if you need his phone number, I can send that to you. And then just one last quick one, if you don't mind my whip flying back to Jim Fisher. Given the EBITDA guidance, I'm coming out at a slightly different place on EPS. So you might be able to give us some sense of what you're assuming interest expense and share repurchases?
Interest expense will be up slightly. We finished the year at $384,000,000 in interest cash interest. It'll be up slightly, not a lot, maybe call it $5,000,000 And then share repurchase, look, we said that we'd probably repurchase. We've already done $150,000,000 We said we'll probably do another 500 on top of that for a total of 650, which kind of approximates what we bought last year. We bought $600,000,000 last year.
We have authorization for $1,000,000,000
equity income in the equity income or loss line or anything else below the line that's changing meaningfully from 2015?
No, not that I can think of. We can maybe we can reconcile it for you. If I look at EPS, I mean, that's what you're concerned about, right, is EPS.
Yes.
If I look at EPS from $2.47 to $2.61 we had divestitures of that were worth $0.18 So I'm backing those out. And then we had and I'm reconciling $14,000,000 to $15,000,000 for a year, but then we had shares and interest. We had traditional solid waste growth of $0.08 We had some unusual items, specifically our Energy Services business $0.09 And then when I look at moving from $2.61 up to our range of $275,000,000 to $279,000,000 I'm really adding in the kind of our traditional solid waste growth that we expect and we talked about on the EBITDA line. So hopefully that helps.
Yes, that's fine. I'll let you move on if someone else has a question they could ask, otherwise I'll follow-up offline. Thanks for the time.
Thank you.
Your next question is from Tyler Brown with Raymond James.
Hey, good morning guys.
Good morning.
Hey, David, just want to dig in
a little bit more on the relationship between core price and yield. So if we go back and look over the last few quarters, including Q4, it looks like the spread between core price and average yields actually widened out. And at least from an outside perspective, it just looks like you're keeping less and less of that core price increase. Can you guys talk a little bit about that relationship and why that spread is widening out? I mean, it sounds like churn is actually trending well and the gap between new and lost businesses isn't widening.
So is it mix or what's going on there?
Yes, I think you hit that the nail on the head with mix. So the reason we've moved to core price is because core price is really an indicator of the price increases that we put across our current customer base. To go from core price to yield, you then put in because we do it on a per unit basis, you then come in to a lot of things like mix. And so, the biggest thing that we think drove the disparity between the core price and yield was the fact that our energy services business was down fairly dramatically and those are very high priced hauls. Compared to if you look at an energy service haul compared to an industrial container at a shopping mall, the price per haul difference is dramatic.
And so the fact that Energy Services dropped off, as we said, 0.09 dollars for the year, when you saw that dramatic drop off in Energy Services, you lost a lot of those very high priced poles and that's where the biggest chunk of the disparity between core price and yield comes in.
And then Jim Fish, just can you help us out a little bit on cash taxes? You got lots of moving pieces here. So first off, just simply what was cash taxes paid in 2015? And then what is exactly contemplated in the guidance, just the total dollar number, just ballpark?
2015 was $434,000,000 So if you assume that we've got the offsets for 2016, 2016 is going to look like kind of that's $433,000,000 will get a benefit of about $70,000,000 from bonus depreciation and then a piece of kind of incremental taxes on earnings gets us to a cash tax figure of around $400,000,000 is our expectation for 2016.
Okay, good. That actually answered my next question. So I'll kind of move on here. But just David, really quick, can you guys talk about where you are on the coal ash front? And is this well, first off, how much did you move in 'fifteen, if any?
And then is this a key driver in your confidence in back half volume growth?
Well, so we're seeing it was a piece of our growth in 'fifteen, not a huge piece. We've got one customer that has started with us. We've got 3 different plants that we're working with them on. Really, one of them was started in June. The other one started kind of November, December and then the 3rd will start in 2016.
So not a huge impact for us. And we're kind of seeing the public utilities move at varying paces here in terms of remediation on that side of their business. Recall, there is this there's another side of their business, which is the perpetuity. And so we can use either on-site management for their continuing needs. We can manage it off sites through our landfills or we can offer them beneficial reuse.
We're equipped to handle all 3. We think that will ramp up in 2016, but not a huge impact in 2015.
Okay, okay, good. And then just Jim, lastly, how much did you pay for SWS? Just what will we see on the cash flow statement in Q1?
We paid $500,000,000 $5.16 for SWS.
Okay, perfect. Thanks guys.
Thank you.
Your next question is from Jeff Buschaitin with JPMorgan.
I wanted to ask around the industrial side of the business. Industrial waste is doing well. What I wanted to find out is just kind of an update on how much of your business is directly linked to the industrial economy? And when you look at the portions of the industrial volume, firm business, stem business, what do you see in 2016?
Well, it's interesting when you look
at our
industrial line of business, as we look at it, includes a couple of different business types. It It includes large retailers, it includes manufacturing and industrial, includes construction and it includes energy services. And those really were there was a wide spectrum there. Construction, as I mentioned earlier, really finished the year on a high note. So we're very happy with that, and it looks like it's going to do well going forward.
The large retailers were pretty solid as was manufacturing and industrial. It looks like industrial production figures came out today and looks like they're decent. And that's kind of what we saw as well, pretty solid in manufacturing Industrial. The one real soft spot, and you'll hear it several times today, was Energy Services, and it got worse throughout the year. So we were down 32% in our Energy Services business, albeit on kind of a small base there, but down 32% and down 45% in the 4th quarter.
And looking through that kind of small lens, we don't see Energy Services getting much better in 2016. But overall, if you want to think about how we talk about industrial, it was more than compensated for the downturn in Energy Services.
I think everybody gets concerned that there is going to be some kind of industrial recession. I mean, look, in our business, what you had happened last year was obviously you had the inventory build and then working off the inventory. And that's what I think drove everybody to say, oh, gosh, what's going on in the manufacturing sector. As Jim pointed out, you saw some good numbers from it today. But when they build up the inventory and then they work down the inventory, they don't shut down their plants.
They still operate their plants. And so that really just doesn't have that big of an effect on us. It doesn't have an effect on us until they shut down the plants. And I don't think anyone's seen a shutdown of plants. I think they're seeing a little bit of a slowdown at the plants.
And so when we look at our industrial waste, it really isn't going to be affected by the manufacturing and industrial space. And then the final piece is that, a lot of the low energy prices are a big boon to a lot of the manufacturing industrial customers that we have in the chemical corridor all the way from Beaumont, Texas up through the Midwest. And so we see the manufacturing and industrial volumes actually being very strong. As Jim said, we've got a wide spectrum from extremely strong construction to weak on the energy services side and manufacturing industrial, I'd say, would come in on sort of the slightly positive side of that spectrum. So we don't see that particularly slowing in 2016, and we expect Industrial volumes to continue to be positive 2016.
That's very helpful. Just following up on the commentary, I think, from last quarter. You talked about some situations with shortage of drivers in the industrial side of the business. Is that a material headwind heading into 2016?
No, I'll jump in, Jeff. It is a headwind, but it's a weakened headwind. We are doing much better in that regard. The oilfield services decline in 2015 has helped us in that regard in those markets where that kind of business exists as drivers have become more available. It's still in some of the larger, the higher growth markets.
It's an issue for us, but we're working through it much better in late 2015 and then we expect to in 2016 better than in that 2013 2014 period when the oilfield service business was booming. We'll manage right through it and we'll continue to grow our business on that industrial side with new drivers.
But look, it's a good problem to have, right? I mean that tells you there's strong demand out there and that's we'll take that problem 6 days to Sunday rather than the alternative.
One more question for me, if I may, on the CapEx side of the business. Looking into 2016, are there any sizable differences in sort of the net buckets of investments compared to 'fifteen?
No, not anything sizable. We'll spend a little bit a little more on fleet capital, probably $20,000,000 more on fleet capital. We've got about 15,000,000 dollars that is related to the Dethanba and SWS acquisition that we'll spend. And then part of the reason we were little lower than our guidance back at the end of Q3 in CapEx for 2015 was that we had some CapEx that was accrued that and the cash didn't actually go out the door until Q1. So we'll have a little bit of carryover, and that's really what gets us from that $1,000,000 $2,000,000 CapEx number for $15,000,000 up to kind of the range of $1,300,000,000 $1,400,000 Jim, maybe just a
little more color around the fleet side of our business. Our supply chain folks and our field people worked really well together. We in 2015, for example, we purchased 12% more trucks than we did in 2014, but for the same total dollars as we expended in 2014. In 2015, we bought 11.24 trucks, about 11% average reduced price per truck than 2014. So we're doing some standardization around the It's helped us in that regard and some commitments to our suppliers that helped us with that reduction.
In 2016, we'll buy 1234 trucks according to the current plan, and it's about 10% more than 2015, but we'll only spend about 4% more in dollars than we did in 2015. So we're making real progress there, and we're investing in the fleet, but we're just doing it more efficiently.
That's very helpful. Last one for me, I promise. What is the impact of the one of the lead day in the Q1?
The impact on what?
Lead day. Lead day, one extra day.
Yes, we actually have one extra day total in the quarter. We had one fewer in January. We have one extra in both February March. And theoretically, that extra workday probably costs us a little bit of money because our cost structure is a little bit higher than the additional revenue that we'd get, but it shouldn't have a material effect on the quarter.
Your next question is from Michael Hoffman with Stifel.
Thank you very much, David, Jim and Jim for taking my questions. Jim Fish, on the free cash, if you were to pull out cash taxes entirely and looked back over a trend, how would you characterize the growth rate of your free cash ex the variability any given year of cash taxes? What's happening operationally before the tax impact?
I guess, I would focus on EBITDA for that question, Michael, because really that's where that's the biggest components and that's where we spend most of our time is on EBITDA. And we saw EBITDA grow nicely last year, kind of in that 3% range. And we see it replicating that again organically. And then we'll have some EBITDA growth from these acquisitions in 2016.
Okay. With that said then, if I looked at your expectation for the $3,600,000,000 in 2016, what is the underlying margin assumption in the EBIT and the EBITDA?
So EBITDA, look, if you there's always the question of what happens to the top line. If we don't have these kind of top line impacts that are kind of out of our control, such as foreign currency and fuel surcharge, if you assume the top line doesn't have those, then we'd expect to see EBITDA margins improve somewhere between 50 and 100 basis points.
Okay. And EBIT, what about the EBIT margin?
I don't have a number
for you there, Michael. I'll have to get back to you on that. Okay.
Behind that question is, does D and A stay flat on a percent of revenues or is it up or down with the mix shifts that are going on?
Yes. It should stay pretty flat on a percent of revenue basis.
Okay.
And then when I think about the question that's been asked to cut in different ways, what is your share count and your assumption for $2.75 to $2.79?
Share count at the end of last year was $455,000,000 and in our plan we've got 4.45.
Okay. And then if you get did spend the $1,000,000,000 it would imply that you would borrow money to do that. That's the right interpretation, correct?
I guess It depends how the cash plays out during the year and then when you buy the shares, right? And so what we've said is that we're going to basically spend we aren't necessarily going to spend the whole $1,000,000,000 We will spend the difference between dividends and what we do in acquisitions from subtract that from the total cash flow and the remainder will go to the stock buyback. And so we're sort of planning on the 600,000,000 dollars type of dollars on the share buyback. If we go above that, we'd either have to generate more cash or have less capital in the year or we'd have to borrow it. But right now, when we draw down our revolver, we're drawing down at 1%.
Our balance sheet at 2.66x is in great condition. So we don't have any intention to borrow to buy shares, but certainly we'd have the ability to do it.
Well, I guess where I was coming from on that, I don't necessarily think it's a bad thing because you're delevering naturally. And there seems to be logic and leverage in a 2.5% to 3% just from a cash tax planning standpoint. At the rate of improvement, you're delevering pretty quickly.
Absolutely. Yes. I mean, Michael, if you look at our if you look at free cash flow and you just take the middle of the range of $155,000,000 and back out dividends of $730,000,000 let's back out to we've kind of said $100,000,000 to $200,000,000 in tuck ins, so let's back out $150,000,000 for that. That gives you $670,000,000 That's kind of right where we've discussed today would be share repurchase.
Okay. All right. And then the one sort of in the weeds question around the industrial side is you do operate 5 hazardous waste landfills. What's the trend been volume wise there?
Yes. Michael, Jim Trebaat. And it's been as we petrochemical plants gearing up some with a low their low feedstock cost, it's been okay. We've done fine at both Mel in Alabama, Lake Charles in Louisiana. Kettleman's got the new permit and online and adding some volume.
So overall, that business is doing well for us. It's not, as you know, a huge part is doing well
for us.
It's not, as you know, a huge part of our total revenue, but it's an important part because it differentiates us from those large for our those large customers with capability to handle everything from their trash and recycling to their hazardous waste. And they like our balance sheet, as we just talked about, and our capabilities are full for them. So it's been a good part of our company, and we expect to grow
it. It has been very nice for us, Michael. And frankly, if I look at the various pieces of business and think can they get better or worse, this is one that I think can get better, both organically just because of the growth in the volumes, but we can also extend the reach of these landfills. Right now, we've got fairly limited reach without transfer capabilities. And over time, if we can improve those transfer capabilities, we can extend the reach of our hazardous landfills and both grow volumes because we see growth in overall volumes, but also because we can extend our reach and take volumes out of further away geographies.
Yes. And Michael, an example of that of
our commitment to that business is in the Q4, we did a small tuck in kind of transaction and acquisition in California that helps us with internalizing volume at that new Kettlemens permitted space. So we are committed to that business to growing it and looking for opportunities in that regard.
Okay. And then Jim, Terezin, while I've got you, if we're 50 basis point to 100 basis point margin improvement, you're getting 20 out of G and A per Jim Fish, the rest has got to come from ops, Some of it's fuel because they clearly got to come favorable trend. But where would I look in the line items to see that incremental improvement coming from?
One area, Michael, is labor. If you look at all three collection lines of business in 2015, we were positive in efficiency in all three with obviously a couple of them still negative in volume.
That's one excellent indication.
If you look at those three lines of business, collection lines on a cost per unit basis, all three of them were in that 1% range. And with inflation, just driver labor cost in the 2%, 2.5% range, that's a pretty good number. And you see that in our labor cost improvement. We've rolled out our SDO initiative across all 17 areas, service delivery optimization. We're focused on 2 things in that regard.
Let's sustain it where we have it working well and let's improve it. Let's find best practices as areas have implemented it now for a couple of years. And we're looking for new ways to utilize some of the logistics and the technology that our corporate operating team is providing us to get more labor cost out of that and continue to improve on the efficiency.
Okay. Thank you very much.
Thank you.
Next question is from Joe Box with KeyBanc Capital Markets.
Hey, good morning, gentlemen. It's on for Joe Box.
Good morning, Joe. I wanted to dig
in a little bit into your pricing guidance for 2016, 16, looking at that 4% versus the 4.2% posted in 2015. Is that sequentially lower simply due to lapping more difficult comparisons? Is it conservatism on your part? Any color there would be appreciated.
Yes. Look, 4% sort of been our target for the last 3 to 4 years. And so, we want to maintain that target. We obviously overshot that target in 2015. I expect that I'm virtually certain we'll get that 4% in 2016.
If we were going to not hit that target, the question is would it be lower or higher than that target? Also very confident that if we miss the target, we're going to miss on the high side, not on the low side.
But I don't think there's anything to read into the difference 4.2 and 4.0.
Great. Thank you. And then kind of piggybacking on that with respect to yield, outside of CPI, can you maybe help us understand what some of the largest drags would be to beating that 2% top of the range? I mean, would it be the mix that you talked about earlier with the energy business? Anything there is helpful.
Yes. The 2 biggest components of that would be mix and then new business pricing versus lost business pricing. Those are the 2 big components that go that don't affect the price increase that you're putting on your current line of business, but that does affect yield. And so that would be it would be mix and the difference between new business pricing and lost business pricing.
And David, if I add a third to that would be rollbacks and we've managed those really well, over the last couple of years. We're positive in 2015 versus 2014 and we expect that trend to continue.
Got you. So what you just alluded to earlier, the new business pricing, how is that holding in, say, compared to a year ago?
Yes. Our goal is to drive that new business pricing to 10% or under. And I would say right now, we're sort of at the high end of that. As the economy improves and as we've seen a good pricing environment, I would expect us to, over time, to be under that. But right now, we're sort of at the high end of that 10% discount.
And Joe, if I had
a little more color, the industrial line of business, the roll off line, we're within that target. The commercial side just outside it and working hard to improve it.
Okay, great. And then, I wanted to talk a bit about recycling volumes. Just curious where, if you know, the recycling volumes might be going that you have shedded in favor of price? Are customers choosing not to recycle? Are they choosing independent operators?
If you have any sense where it's going, that would be helpful.
Yes. Most of the volume that we've lost have been large residential contracts. And that volume is turning into net losses for our competition.
Okay. Understood. I can promise
you we know what those prices were bid at and at these commodity prices there's nobody making money on those contracts that we gave up. Especially, Dave, with the capital required. Exactly.
With the new contract where typically that customer wants new trucks, we make that decision around return on invested capital as well as margin.
And frankly, those contracts, just to be very clear, those contracts generally have not been lost to our solid waste competition. They've been lost to people that are solely in the recycling business. And if you're solely in the recycling business and you take on another underwater contract, you can see that story is not going to end very well for those folks.
Understood. That's all for me. Thank you.
Your next question is from Al Koshak with Wedbush.
David, I have one simple question.
You know you don't.
Why can't Waste Management post positive volumes like their peer group?
Yes. Look, this is an easy question to answer because you can't look at just a volume number. You've got to look at what is that volume made up of, right? If that volume is made up of brokered volumes, you're not making any money on it. If that volume is made up of recycling volumes, you're not making any money on it.
And so when I look at the volumes, I don't say look at the overall volume number. I say look where the volumes are coming from. So for us, we've got positive volumes in the industrial line, which is a very high margin line for us. We've got positive volumes in the landfill line, which is the highest margin business that we have. And we're about to turn the corner to get positive volumes on commercial line.
We're at negative 0.7% in the quarter. I would expect to see that turn positive during 2016. So we're adding volume in the high margin areas. We are losing volume in recycling, we're losing volume in brokered business and we're losing volume in non core, all very low margin businesses. And so if you get positive volume and margins go backwards, I don't see that as a good volume report.
If you get negative volumes and margins go up by 150 basis points, I view that as fairly positive. So I think it's a very easy question to answer. We look for volumes where we can make money on those volumes. We don't look for volumes for the sake of volumes. And so but having said all that, in those money making volumes, we're going to see the overall volume number turn positive in 2016.
And that's what I look forward to. Look, this is a high fixed cost business and layering in that volume on the high fixed cost allows you to drop a big flow through to the bottom line. So I think we've done the right thing. We'll continue to do the right thing. We'll continue to add volumes where we can make money.
Right. Hence the progression on EBITDA margin. Exactly. Exactly. As a follow-up, thank you for that.
I guess I have a second question. The commentary around the industrial environment, economy and yourselves being opportunistic when you can. Why would you not or are you suggesting to keep our eyes open on being more aggressive on that hazardous piece of your business, which I guess would be, I don't know if I'd say this is profitable, but maybe you could articulate that for us. But why wouldn't you get more aggressive on acquisitions on that front?
Well, I'll jump in. I mentioned earlier that we did. As we added airspace at Kettleman in California, we went out and found the right tuck in for us to add volume. So we invested in that business in the second half of twenty fifteen and we'll continue to look for those opportunities that can improve both our margin but our
returns especially. But look, what we need to do in our hazardous waste line of business is we need to develop a national transfer network so that we can leverage our landfills. We would love nothing more than to be able to buy that and go very quickly to do that. But there's just not a lot of businesses out there that meet those needs and that are for sale. So in the meantime, we're going to do it organically.
And so we're going to grow that network one way or another. But right now, given the state of the acquisition market right now, we are going to do that organically.
Great. Good luck guys and thanks for your time.
Thank you. Thanks,
Your next question is from Charles Redding with BB and T Capital Markets.
Hi, good morning, gentlemen. Thanks for taking my question.
Good morning.
Perhaps just a
And then with reduced diesel, is it fair to expect collectors to bypass closer incineration units really in favor of the longer haul sites just based on price alone?
Yes. When you see the transportation costs go down, which is what happens with the fuel, you basically open up landfills that are further away, right? And so, we've actually seen pretty nice growth in our Northeastern landfills. I am not sure that I would attribute it 100% to the lower transportation costs, but we've seen nice volumes both in our Northeastern network and then in our Southern network. We would expect that that to continue into 2016.
I always say to a certain extent, low fuel prices are both good for the economy, but they're also good for our business.
Great. And then just a follow-up with apologies on Energy Services. Can you just be a little more specific in terms of those types of hauls that are seeing the most pressure from lower spending and maybe too early to think about any nascent stabilization here year to date?
The types of hauls that are seeing lower spending, look, we haul most of what we haul is drill cuttings. And then we haul some waters, we haul a little bit of NGL. So clearly, the big piece that has declined is drill cuttings. But what's happened is you're seeing these the rig count has dropped off by 60%. So they are not drilling.
They may be leasing property, but they're not drilling nearly as much as they were a year ago. And so as a consequence, the drill cuttings coming out of those holes are not moving to our landfills. So I think that answers your question. It is because it's the majority of our energy services business, that is what's causing the biggest drop off.
Your next question is from Toni Berncroft with Gabelli and Company.
Could you please add just some little more color maybe on the renegotiations for your recycling, some of the lower the unprofitable recycling contracts and CPI linked contracts. I realize that you said it's a small portion of the customer's cost structure and you guys in general are sort of more prone to not you say you've always previously said that can't anything about CPI, you'll go get it somewhere else. But maybe just like where are we in a sense, maybe on a percentage maybe some kind of gauge where we're on a percentage basis of what needs to be renegotiated and how far along you are? Is there some kind of maybe general big picture like inning type thing of where you are along in that?
Yes. On the recycling front, I would say we're about 75% to 80% through renegotiating the contracts. And the contracts that we haven't renegotiated, we can't do anything more about because they're basically sort of long term contracts and we just have to eat the losses on those contracts until the contracts come up for bid and hopefully at a higher rate or they'll go to someone else who can who is welcome to lose money on them. And so on the recycling front, we're probably about 75% to 80% through. On the CPI front, about 20% of our business is our CPI related business is either on a floating index that more approximates the waste services index or they're on a fixed price increase track with over 2.5% fixed price increases.
In other words, 2.5% is sort of our inflation rate. About 20% of our contracts are either on a CPI based measure or that is not CPI, but would be, for example, the waste and water index or what we call a solid waste index. So that runs at a higher rate generally than our 2.5% inflation. And then we've got other contracts where they run higher than our 2.5% inflation because they have fixed price increases at over 2.5%. So about 20% of our business is under those types of contracts.
So is still a lot of room to go on the residential and on the national account side to get those CPI contract moved up, but we're about 20% through it.
That's great. Thanks, Jack.
Thank you.
Your next question is from Barbara Novartini with Morningstar. Good morning, everybody.
Good morning.
So someone related to the last question, but if we're looking at a lower for longer commodity price scenario for recycling, how much further can you take the operational improvements that you've been speaking about? Would you have to consider more aggressive restructuring actions or is there still a lot of runway for the sort of operational cost saving, customer education, etcetera, that you've been describing?
Yes. When we look at recycling, we've made some great improvements. I think there's still plenty of room for improvement. But at this point in time, basically, what we're down to is we have a series of plants, and those series of plants generally revolve around a large contract, a large municipal contract or other contract. So if we lose that large municipal contract, absolutely, we probably have to shut down that plant because we don't have enough volume going through that plant.
We don't have any that we have on the early time horizon where we think that will happen, but that's basically how we will have to respond to a low for long commodity price. We still have operational improvements we can make. We think we can pull out sort of that 5% to 10% operating cost for a few years. But then any bigger restructuring, we don't have any planned right now. If we did any of that, it would be based upon large contract losses that we would have if we have those.
And Dave, just a reminder, we have consolidated over the last 2 years roughly 20% of the total number of facilities, most of them smaller, but where we've either lost unprofitable volume and can move the remaining good volume into a larger facility in the same MSA. So we've already done some of the physical rationalization. We're working towards the operational side of it, of efficiency now.
But let's not lose sight of the fact that if the industry changes, what we've said is we won't bid contracts unless we can be guaranteed that we recover our processing cost and then we will split and a margin of profit and then we will split any excess with the customers. But if there is no excess, then the customer is going to have to pay for the processing and profitability. If we can get contracts on those terms, we are not going to be shutting down plants, we will be adding plants. And so what we are trying to get to is how we can make this business sustainable for the long run. I think we have done a spectacular job with our recycling folks of doing that.
I'm a firm believer that the industry is going to follow just because the economics don't allow them to do anything different than what we're doing. And so I think over the long haul, even in a lower, longer commodity price environment, I think we can grow recycling. So we're looking forward to doing that over the next few years rather than shrinking our footprint.
At this time, there are no questions.
Thanks. Well, just in closing, as we said, we're real confident that we can hit our targets in 2016. For the most part, everything seems to be clicking on all cylinders. But you can't do it just because you have a good economic environment or you can't do it just because you have the best assets in the business. You absolutely have to have the right team to execute.
And so I'd say all the way from our senior team here in Houston out in the field, all the way down to our leadership out in the field, all the way down to our front lines. We've got the right team and that's why we're so confident that we're going to grow this business in 2016 and well into the future. Thank you.
Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1 o'clock p. M. Eastern Time today through 11:59 p. M.
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