Good morning. My name is Carnitia, I'll be your conference operator today. At this time, I'd like to welcome everyone to the fourth quarter 2015 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would like to turn the call over to Ed Egl, Director of Investor Relations. Thank you, Mr. Egl. You may begin your conference.
Thank you, Carnitia. Good morning, everyone, thank you for joining us for our fourth quarter 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 Trevathan, Executive Vice President and Chief Operating Officer. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. Form 8-K, the press release, and the schedules for 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-K. 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. 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 fourth quarter of 2014.
The fourth quarter and full year 2015 and 2014 results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business 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 be 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 1:00 P.M. Eastern time today until 5:00 P.M. Eastern time on March 3rd. 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 21854213. 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 express written consent of Waste Management is prohibited. I'll turn the call over to Waste Management's President and CEO, David Steiner.
Thanks, Ed. 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 2010. We generated earnings per share of $2.61, in spite of the divestitures of our Wheelabrator Puerto Rico and Eastern Canada operations and headwinds from recycling commodity prices and foreign currency translation. In 2015, we saw the execution of pricing, productivity, and growth strategies strengthen our foundation in a way that will lead to continued growth in 2016 and beyond. During 2015, our strong free cash flow allowed us to return almost $1.3 billion 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 $1.4 billion per year, up from the $1.2 billion to $1.3 billion level that has characterized the last several years. As a result of confidence in our cash flow, our board decided to increase the dividend by 6.5% in 2016 and authorize up to $1 billion 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. The acquisition of SWS and other smaller tuck-ins we expect to close in 2016 should generate between $50 million and $75 million of operating EBITDA in 2016.
As we've 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 2017. 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 seen eight consecutive quarters with core price of 4% or greater. For the full year, core price in the commercial line of business was 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%-2%. Our pricing teams continue to perform at high levels, and we'll continue our focus on price in 2016. Pricing excellence is not a one-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. Importantly, we saw positive trends throughout 2015, with traditional solid waste volumes improving sequentially each quarter, culminating in a slightly positive fourth 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 six consecutive quarters in which the rate of decline has improved. Commercial collection was down only 0.7% in the fourth quarter versus down 1.3% in the third quarter. Our continued focus on disciplined volume growth and customer service is paying dividends. Our churn was 10.1% for the full year, the lowest level since 2012. In the fourth quarter, it was 9%, the lowest level since 2002. We did all of this while reducing rollbacks in 2015. We're keeping our customers through improved service, not price concessions. We saw our new business exceed our lost business for the eighth 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 fourth quarter being the best quarter of the year, declining only 0.9%. For 2016, we expect that traditional solid waste volumes will be positive. However, we do not see a recovery in recycling and non-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. Losing certain volumes in the recycling business is not such a bad thing. 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 decrease 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 contracts where possible to allow us to charge a processing fee where we previously paid rebates.
Without these operational and contractual improvements, we had estimated that the recycling impact could be as much as a negative $0.08-$0.10 per share, as average commodity recycling prices declined 17.5% in 2015. However, the operational improvements lessened that negative impact to negative $0.04 per share. On the recycling commodity price front, 2016 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 seven years since the 2009 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-$0.03 headwind in 2016.
We're committed to recycling and will 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 $1.41 billion of free cash flow in 2015. Included in that free cash flow number was $150 million prepayment of 2016 cash taxes. We had mentioned on the third quarter conference call that we'd make this type of prepayment, given that our cash flow was going to be above the high end of our $1.5 billion range. Consequently, we increased our 2016 guidance to between $1.5 billion and $1.6 billion. When we look at our success in 2015 and our guidance for 2016, we look at three things. First is price.
In 2015, we exceeded our goals. For 2016, it's pretty much locked and loaded and already in process. We're very confident we'll meet our 4% target in 2016. Second is costs. Again, we did well in 2015, and we believe there's plenty of room to improve in 2016. Again, we're very confident. Finally, volumes. In 2014 and 2015, we built momentum. For the first time in many years, I'm very confident that we'll see our volumes turn positive toward the end of 2016. 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 and $2.79. We expect operating EBITDA to grow at the fastest rate in 10 years, up 5% to $3.6 billion.
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 fourth 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've 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 two 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. We're in the fourth 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 headwind in the recycling line of business would be between $0.08 and $0.10 of EPS. However, the full-year impact ended up only $0.04 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 million improvement in SG&A costs when compared to 2014. I'm pleased with our 2015 results, as SG&A costs for the full year improved $68 million to $1.34 billion and improved as a percent of revenue by 20 basis points to 10.4%.
For the fourth quarter, SG&A costs were $343 million, an improvement of $27 million compared to 2014. As a percent of revenue, SG&A costs improved 70 basis points to 10.6%. For 2016, we will continue to focus on managing anticipated wage increases, cost inflation, and incremental SG&A brought on from the acquisitions. Despite these increases, we anticipate that SG&A costs should be flat when compared to 2015. Turning to cash flow. For the full year, we generated $1.41 billion of free cash flow. As we mentioned on our third-quarter 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 fourth quarter, we prepaid $150 million of 2016 cash taxes.
For 2016, we now anticipate between $60 million and $70 million 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 $1.3 billion-$1.4 billion. In 2016, the impacts of organic earnings growth, bonus depreciation, acquisitions, and higher capital spending should drive free cash flow to between $1.5 billion and $1.6 billion. In the fourth quarter, we returned $172 million to our shareholders through our dividends. For the full year 2015, we returned about $1.3 billion to our shareholders, consisting of $695 million in dividends and share purchases of $600 million. Our board has indicated its intention to increase dividends in 2016 by 6.5% to $1.64 per share on an annual basis. This is the 13th consecutive year of increased dividends.
For 2016, our anticipated annual dividends will result in approximately $730 million being returned to our shareholders. We expect to spend around $100 million-$200 million on tuck-in acquisitions in 2016, with the remainder of free cash flow allocated to share purchases. We have authorization from our board of directors to repurchase $1 billion of our shares. We've already repurchased $150 million and expect to spend an additional $500 million for the full year. Fourth quarter revenues were $3.25 billion. We saw a $59 million increase in revenues from acquisitions and a $50 million increase in our traditional solid waste business due to the combined impacts of pricing and volume. We saw an overall revenue decline of $163 million from divestitures, $43 million in lower fuel surcharge revenues, a $34 million decline from lower recycling revenues, and a $33 million decline in foreign currency.
Looking at internal revenue growth for the total company in the fourth quarter, our collection and disposal core price was 4.2% and yield was 1.7%, with total volumes declining 0.9%. This led to total company income from operations growing $42 million, operating income margin expanding 150 basis points to 17.7%, operating EBITDA growing $37 million, and operating EBITDA margin growing 150 basis points to 27%. For the full year, income from operations grew $97 million, operating income margin expanded 120 basis points, and operating EBITDA grew $86 million, and operating EBITDA margin grew 130 basis points to 26.5%. Our collection lines of business continued to see the benefits of our disciplined pricing programs in the fourth 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 fourth quarter as volume declined only 0.6%. The volume change was a 90 basis point improvement sequentially from the third quarter and 190 basis point improvement from the fourth quarter of 2014. This core price and volume led to operating EBITDA growing $11.7 million 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 fourth quarter, 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%. C&D volume grew 15.8%, 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 yield led to income from operations growing $15 million, margins growing 160 basis points, operating EBITDA increasing $14 million, operating EBITDA margins increasing 120 basis points. Moving now to operating expenses. These expenses improved by $50 million in the fourth quarter, as a percent of revenue, improved 80 basis points to 62.4%. For the full year, operating expenses improved $328 million as a percent of revenue, improved 100 basis points to 63.1%. In 2015, our focus on improving operating costs saw significant traction. We expect that to continue into 2016.
For the full year, we saw improvements of $187 million in fuel costs, $102 million in cost of goods sold, $35 million 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 fourth quarter, our debt to EBITDA ratio was 2.66. 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% in the fourth quarter 32.3% for the full year. Taxes were a $0.01 headwind to EPS in the fourth quarter. In conclusion, 2015 was a very good year for Waste Management as our employees did a great job of focusing on price, disciplined growth, and cost controls.
I want to say thank you to our employees for their hard work in delivering a successful 2015 positioning us to continue that into 2016. We're excited about continued growth in 2016 and beyond. With that, Carnitia, let's open the line for questions.
If you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star, then the number one on your telephone keypad. We'll pause for just a moment to compile the community roster. Your first question is from Scott Levine with Imperial Capital.
Hey, good morning, guys.
Good morning, Scott.
It seems like steady as she goes, in terms of the organic growth trends, that the pricing environment's pretty healthy, that the volume environment's generally improving and is expected to improve, albeit gradually, with volumes inflecting positive by the end of this year. Anything surprising, either to the positive or the negative on the macro or the industry front, either geographically or relative to your expectations? Really are things just kind of continuing to improve at a gradual pace, and there's no real change in the operating environment in general?
Yeah, 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. You can pretty much say the business is firing on all cylinders, save two areas, and that's recycling and energy services. 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. 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. We were pleasantly surprised when you look at the construction business. I mentioned we were up over 15% in C&D waste stream, and that really to us, is kind of a foreshadowing of good things there in 2016.
Understood. It sounds like you're baking in an expectation here of $50 million-$75 million. 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? Maybe a little bit more commentary regarding the M&A landscape in general and whether we may see some upside here, $100 million-$200 million spend or valuations in the marketplace, a little bit more color there.
I would say 80%-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. 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. 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. The more of those that we can do, the better.
We thought there might be a few more of those in the pipeline, but those, call them those $400 million-$500 million transactions, we really don't see a lot of those on the near horizon right now. I think 2016 will be a year where it's mostly driven by tuck-in acquisitions. Again, we'd love to do some larger acquisitions like those three 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. 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 6-7 times EBITDA.
Got it. As a follow-on to that, assuming, is there any change in your interest level in energy and industrial? Or if we get a floor in commodity prices on the energy side, could we see your interest pick up as 2016 plays out? Or are you still focused predominantly on solid waste?
Yeah, we're focused predominantly on solid waste, 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. 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.
Got it. Thanks, Dave.
Thank you.
Your next question is from Corey Greendale with First Analysis.
Hey, good morning, everyone.
Good morning, Corey.
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 you're guiding to a $300 million-$400 million increase. EBITDA, you're guiding to $160 million. Just what's accounting for the rest of the increase?
Yeah. 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, if that doesn't answer your question, let me know. If I talk about free cash flow for 2016, 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 million in EBITDA growth year-over-year, 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 $70 million.
Our CapEx is going to be a bit higher this year. I mentioned the $1.3 billion-$1.4 billion range, back out $100 million in added CapEx, I arrive in the middle of that range of $1.5 billion-$1.6 billion. Keep in mind there, Corey, that the prepayments that we made in cash taxes is really offsets by the benefit we got from the Q1 2015 debt transaction. Those two kind of offset each other, that walk forward works without the cash tax difference.
That did answer my question. Thank you. One clarification, I think you said this, the EBITDA that you're expecting to get from acquisitions, the number that you gave, is that only from Southern and new acquisitions? In other words, you're not including rollover effect of acquisitions in 2015?
Yeah, there's a small rollover effect from 2015, but the bulk of it would be the SWS and the tuck-ins we do in 2016.
Next question, you addressed the environment in general when you were answering Scott's questions. Given that we have a low 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?
Well, look, we've done it the last three years consecutively. We've seen our churn rate come down while we've maintained that core price at 4% plus. It really comes down to making sure that you service your customer. If your customer's happy, they completely understand that our costs go up every year, and you've got to get those price increases. We've always said that it's a fairly small portion of our customer's overall cost structure. 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. 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. 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. Like I say, we've got it sort of clicking on all cylinders, but we can always do better.
Great. 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 any impact on those markets, and also whether you might be interested in some of the potential slots that may be coming out from that.
Yeah, look, I think Ron did a spectacular job in picking up that business. Everywhere that we compete with Waste Connections, they're a tough competitor, but they're a fair competitor. We certainly welcome them into the markets. I don't know how to say welcome in Canadian, but we welcome them into the markets. The other thing is, 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. I'll make sure to give him a call today and let him know that.
Great. Let me know if you need his phone number. I can send that to you. Just one last quick one, if you don't mind my whip swaying back to Jim Fish too. Given the EBITDA guidance, I'm coming out at a slightly different place on EPS, I was hoping you might be able to give us some sense of what you're assuming on interest expense and share repurchases.
Interest expense will be up slightly. We finished the year at $384 in cash interest. It'll be up slightly, not a lot, maybe call it $5 million. Share repurchase, we said that we'd probably repurchase, we've already done $150. 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 last year. We have authorization for $1 billion. Probably won't spend the full $1 billion in 2016.
Okay. That actually moves me in the wrong direction. Is there anything going on 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. 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 that were worth $0.18. I'm backing those out. I'm reconciling 2014 to 2015 for you here, 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 was $0.09. When I look at moving from $2.61 up to our range of $2.75-$2.79, I'm really adding in kind of our traditional solid waste growth that we expect and we've talked about on the EBITDA line. Hopefully that helps.
Yeah, that's fine. I'll let you move on. If someone else has a question they can ask, otherwise I'll follow up offline. Thanks for the time.
Thank you.
Yeah, next question is from Tyler Brown with Raymond James.
Hey, good morning, guys.
Morning.
Hey, David, just want to dig in a little bit more on the relationship between core price and yield. 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, 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? It sounds like churn is actually trending well, and the gap between new and lost business isn't widening. Is it mix, or what's going on there?
Yeah, I think you hit the nail on the head with mix. 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. 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. If you look at an energy service haul compared to an industrial container at a shopping mall, the price per haul difference is dramatic.
The fact that energy services dropped off, as we said, $0.09 for the year, when you saw that dramatic drop-off in energy services, you lost a lot of those very high-priced hauls, and that's where the biggest chunk of the disparity between core price and yield comes in.
Okay. Yeah, no, that's very helpful. Jim Fish, just can you help us out a little bit on cash taxes? You got lots of moving pieces here. First off, just simply what was cash taxes paid in 2015? What is exactly contemplated in the guidance, just the total dollar number, just ballpark.
2015 was $434 million. If you assume that we've got the offsets for 2016 is going to look like that $433, we'll get a benefit of about $70 million from bonus depreciation, and then a piece of kind of incremental taxes on earnings gets us to a cash tax figure of around $400 million is our expectation for 2016.
Okay, good. That actually answered my next question, so I'll kind of move on here. Just David, really quick, can you guys talk about where you are on the coal ash front? First off, how much did you move in 2015, if any? Is this a key driver in your confidence in back half volume growth?
We're seeing it was a piece of our growth in 2015. Not a huge piece. We've got one customer that has started with us. We've got three 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 third will start in 2016. 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's another side of their business, which is the perpetuity. We can use either on-site management for their continuing needs. We can manage it off-site through our landfills, or we can offer them beneficial reuse. We're equipped to handle all three.
We think that will ramp up in 2016, but not a huge impact in 2015.
Okay. Good. 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 $516 for SWS.
Okay, perfect. Thanks, guys.
Thank you.
Your next question is from Geoffrey Belsher with JP Morgan.
I wanted to ask around the industrial side of the business. Industrial Waste is doing well. When you look at the portions of the industrial volume firm business, stream 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 includes large retailers. It includes manufacturing and industrial. It includes construction, and it includes energy services. Those really there was a wide spectrum there. Construction, as I mentioned earlier, really finished the year on a high note. We're very happy with that, it looks like it's going to do well going forward. The large retailers were pretty solid, as was manufacturing and industrial. Looks like industrial production figures came out today, looks like they're decent, that's kind of what we saw as well. Pretty solid in manufacturing industrial. The one real soft spot, you'll hear it several times today, was energy services, it got worse throughout the year.
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 fourth quarter. Looking through that kind of small lens, we don't see energy services getting much better in 2016. Overall, if you want to think about how we talk about industrial, it more than compensated for the downturn in energy services.
I think everybody gets concerned that there's going to be some kind of industrial recession. I mean, look, in our business. What you had happen last year was obviously you had the inventory build and then working off the inventory. 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. 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. I don't think anyone's seeing a shutdown of plants. I think they're seeing a little bit of a slowdown at the plants.
When we look at our industrial waste, it really isn't going to be affected by the manufacturing and industrial space. 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. 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. We don't see that particularly slowing in 2016, we expect industrial volumes to continue to be positive in 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 on 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.
Look, it's a good problem to have, right? That tells you there's strong demand out there. We'll take that problem six days to Sunday rather than the alternative.
One more question from me, if I may. On the CapEx side of the business, looking into 2016, are there any sizable differences in sort of in the buckets of investment compared to 2015?
No, not anything sizable. We'll spend a little more on fleet capital, probably $20 million more on fleet capital. We've got about $15 million that is related to the Deffenbaugh and SWS acquisition that we'll spend. Part of the reason we were a little lower than our guidance back at the end of Q3 in CapEx for 2015 was that we had some CapEx that was accrued and the cash didn't actually go out the door until Q1. We'll have a little bit of carryover, and that's really what gets us from that one, two, three CapEx number for 2015 up to kind of the range of one three to one four.
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. 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 1,124 trucks, about 11% average reduced price per truck than 2014. We're doing some standardization around the fleet that's helped us in that regard and some commitments to our suppliers that helped us with that reduction. In 2016, we'll buy 1,234 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. We're making real progress there, and we're investing in the fleet. We're just doing it more efficiently.
That's very helpful. Last one for me, I promise. What is the impact of the leap day in the first quarter?
The impact on what?
Leap day. One extra day.
Yeah, we actually have one extra day total in the quarter. We had one fewer in January. We have one extra in both February and March. 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. It shouldn't have a material effect on the quarter.
Okay. Thank you very much.
Thank you.
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 X 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 the biggest component and that's where we spend most of our time is on EBITDA. We saw EBITDA grow nicely last year, kind of in that 3% range. We see it replicating that again organically. We'll have some EBITDA growth from these acquisitions in 2016.
Okay. With that said then, if I looked at your expectation for the $3.6 billion in 2016, what is the underlying margin assumption in the EBIT and the EBITDA?
EBITDA, look, 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 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. 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 G&A stay flat on a % of revenues, or is it up or down with the mix shifts that are going on?
Yes. It should stay pretty flat on a % of revenue basis.
Okay. When I think about the question that's been asked a couple different ways, what is your share count in your assumption for 275-279?
Share count at the end of last year was 455, in our plan, we've got 445.
Okay. If you did spend the $1 billion, it would imply that you would borrow money to do that. That's the right interpretation, correct?
I guess you could say we've got
It depends how the cash plays out during the year, and then when you buy the shares, right? What we've said is that we're going to basically spend. We aren't necessarily going to spend the whole $1 billion. We will spend the difference between dividends and what we do in acquisitions, subtract that from the total cash flow, and the remainder will go to the stock buyback. We're sort of planning on the $600 million 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. Right now, when we draw down on a revolver, we're drawing down at 1%. Our balance sheet at 2.66x is in great condition.
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 de-levering naturally, and there seems to be logic in leverage in a 2.5-3, just from a cash tax planning standpoint.
Yeah.
At the rate of improvement, you're de-levering pretty quickly.
Absolutely.
Yeah. Michael, if you look at free cash flow, you just take the middle of the range of $155 and back out dividends of $730. Let's back out, we've set $100-$200 in tuck-ins, let's back out $150 for that. That gives you $670 million. That's right where we've discussed today would be share repurchase.
Okay. All right. Then the one sort of in the weeds question around the industrial side is you do operate five hazardous waste landfills. What's the trend been volume-wise there?
Michael, Jim Trevathan. It's been as we entered the year, as you saw some of the petrochemical plants gearing up some with their low feedstock cost, it's been okay. We've done fine, at both Emelle in Alabama, Lake Charles in Louisiana. Kettleman's got the new permit online adding some volume. Overall, that business 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 for those large customers with capability to handle everything from their trash and recycling to their hazardous waste. They like our balance sheet, as we just talked about, our capabilities are full for them. It's a good part of our company, and we expect to grow it.
It has been very nice for us, Michael. Frankly, if I look at the various pieces of the 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. 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.
Yeah. Michael, an example of our commitment to that business is in the fourth quarter, we did a small tuck-in kind of transaction and acquisition in California that helps us with internalizing volume at that new Kettleman permitted space. We are committed to that business, to growing it and looking for opportunities in that regard.
Okay. Jim Trevathan, while I've got you, if we're 50-100 basis points margin improvement, you're getting 20 out of G&A, per Jim Fish, the rest has got to come from ops. Some of it's fuel, because clearly, they got a favorable trend. Where would I look in the line items to see that incremental improvement coming from?
Well, 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 are in that 1% range, and with inflation just driver labor cost in the 2%-2.5% range, that's a pretty good number. 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 two things in that regard. Let's sustain it where we have it working well, 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 Sean Egan on for Joe Box.
Good morning.
I wanted to dig in a little bit into your pricing guidance for 2016, 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.
Yeah, look, 4% sort of been our target for the last three to four years. We want to maintain that target. We obviously overshot that target in 2015. 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? I'm also very confident that if we miss the target, we're going to miss on the high side, not on the low side. I don't think there's anything to read into the difference between four two and four oh.
Great, thank you. 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.
Yeah. The two biggest components of that would be mix and then new business pricing versus lost business pricing. Those are the two big components that don't affect the price increase that you're putting on your current line of business, but that does affect yield. It would be mix and the difference between new business pricing and lost business pricing. 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. What you just alluded to earlier, the new business pricing, how is that holding in, say, compared to a year ago?
Yeah. Our goal is to drive that new business pricing to 10% or under. 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. Right now, we're sort of at the high end of that 10% discount. Joe, if I add 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. 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 of where it's going, that would be helpful.
Yeah, most of the volume that we've lost have been large residential contracts. That volume is turning into net losses for our competition.
Okay. Understood.
I can promise you, we know what those prices were bid at. At these commodity prices, there's nobody making money on those contracts that we gave up. Especially Dave, with the capital required. Exactly on a new contract where typically that customer wants new trucks. We make that decision around return on invested capital as well as margin. Frankly, 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. If you're solely in the recycling business and you take on another underwater contract, you can see that story's not going to end very well for those folks.
Understood. That's all for me. Thank you.
Your next question is from Al Kaschalk with Wedbush.
Good morning, guys.
Hey, Al.
David, I have one simple question. Why can't
No you don't.
Why can't Waste Management post positive volumes like their peer group?
Yeah, 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. 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.
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. We're about to turn the corner to get positive volumes on the commercial line. We're at negative 0.7% in the quarter. I would expect to see that turn positive during 2016. We're adding volume in the high margin areas. We are losing volume in recycling, we're losing volume in brokerage business, and we're losing volume in non-core, all very low margin businesses. 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. 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. 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. I think we've done the right thing. We'll continue to do the right thing, and we'll continue to add volumes where we can make money.
Right. Hence the progression on EBITDA margin, I guess.
Exactly.
Right. As a follow-up, thank you for that. I guess I have a second question then.
I told you.
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. 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. We invested in that business in the second half of 2015, and we'll continue to look for those opportunities that can improve both our margin, but our returns especially.
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. There's just not a lot of businesses out there that meet those needs and that are for sale. In the meantime, we're going to do it organically. We're going to grow that network one way or another. Right now, given the state of the acquisition market right now, we're going to do that organically.
Great. Good luck, guys, and thanks for your time.
Thank you.
Thanks, Al.
If you would like to ask a question, please press star then the number one on your telephone keypad. Your next question is from Charles Redding with BB&T Capital Markets.
Hi. Good morning, gentlemen. Thanks for taking my question.
Good morning.
Perhaps just to follow up on transportation, how should we think about the impact on Northeast landfilling volume from the lower transportation costs? 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?
Yeah. 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? We've actually seen pretty nice growth in our Northeastern landfills. I'm not sure that I'd attribute it 100% to the lower transportation costs. We've seen nice volumes both in our Northeastern network and then in our Southern network. We'd expect 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. Just to 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. Most of what we haul is drill cuttings. Then we haul some waters, we haul a little bit of NGL. Clearly, the big piece that has declined is drill cuttings. What's happened is you're seeing the rig count has dropped off by 60%. They are not drilling. They may be leasing property, but they're not drilling nearly as much as they were a year ago. As a consequence, the drill cuttings coming out of those holes are not moving to our landfills. I think that answers your question. Because it's the majority of our energy services business, that is what's causing the biggest drop-off.
That's great. Thanks for the time.
Thank you.
Your next question is from Tony Bancroft with Gabelli & 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 more prone to not. You previously said that, if you can't do anything about CPI, you'll go get it somewhere else. Maybe just where are we, in a sense, maybe on a percentage, maybe some kind of gauge around 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?
On the recycling front, I would say we're about 75%-80% through renegotiating the contracts. The contracts that we haven't renegotiated, we can't do anything more about because they're basically long-term contracts, and we just have to eat the losses on those contracts until the contracts come up for bid and hopefully we can get them at a higher rate or they'll go to someone else who's welcome to lose money on them. On the recycling front, we're probably about 75%-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. That runs at a higher rate generally than our 2.5% inflation. We've got other contracts where they run higher than our 2.5% inflation because they have fixed price increases at over 2.5%. About 20% of our business is under those types of contracts. There's still a lot of room to go on the residential and on the national account side to get those CPI contracts moved up, but we're about 20% through it.
That's great. Thanks, Jim.
Thank you.
Your next question is from Barbara Noverini with Morningstar.
Morning, everybody.
Morning.
Somewhat related to the last question, 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 this sort of operational cost-saving, customer education, et cetera, that you've been describing?
When we look at recycling, we've made some great improvements. I think there's still plenty of room for improvement. 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. If we lose that large municipal contract, absolutely, we would 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. That's basically how we'll 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%-10% operating cost for a few years.
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.
Dave, just a reminder, we have consolidated over the last two 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. We've already done some of the physical rationalization, and we're working towards the operational side of efficiency now.
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 a margin of profit, then we'll split any excess with the customers. If there is no excess, then the customer's going to have to pay for the processing and profitability. If we can get contracts on those terms, we're not going to be shutting down plants, we'll be adding plants. What we're trying to get to is how we can make this business sustainable for the long run. I think we've 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.
I think over the long haul, even in a lower, longer commodity price environment, I think we can grow recycling. We're looking forward to doing that over the next few years rather than shrinking our footprint.
Yep, that makes sense. Thanks for the additional detail.
Thank you.
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. You can't do it just because you have a good economic environment, 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. 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 1:00 P.M. Eastern time today through 11:59 P.M. Eastern time on March 3rd, 2016. The conference ID number for the replay is 21854213. Again, the conference ID number for the replay is 21854213. The number to dial for the replay is 855-859-2056. This concludes today's Waste Management conference call. You may now disconnect.