Good morning. My name is Janisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the second 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 one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Mr. Ed Egl, Director of Investor Relations. Thank you, Mr. Egl. You may begin your conference.
Thank you, Janisha. Good morning, everyone, and thank you for joining us for our second 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. The Form 8-K, the press release, and the schedules to 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-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. Jim will also address operating EBITDA and operating EBITDA margin as defined in the earnings press release. Additionally, any comparisons, unless otherwise stated, will be with the second quarter of 2014. During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share.
EPS, effective tax rate, income from operations, income from operations margin, operating EBITDA, operating EBITDA margin, operating costs, operating costs as a percent of revenue, SG&A, and SG&A as a percent of revenue results discussed during the call have been adjusted, and EPS projections are anticipated to be adjusted to enhance comparability or exclude items that management believes do not reflect our fundamental business performance or results of operations. Specifically, for comparative purposes, the second quarter of 2014 results have been adjusted to exclude certain amounts attributed to divested operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and schedules, which can be found on the company's website at www.wm.com, for reconciliations to the most comparable GAAP measures and additional information about the use of non-GAAP measures.
This call is being recorded and will be available 24 hours a day beginning at approximately 1:00 P.M. Eastern Time today until 5:00 P.M. Eastern Time on August 6th. 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 64809894. Time-sensitive information provided during today's call, which is occurring on July 23rd, 2015, 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. Our strong second quarter results reflect our continued commitment to disciplined core price growth and cost controls, combined with improving volumes, all positive trends that we expect to continue throughout the second half of the year. In the second quarter, we earned $0.67 per share, an increase of almost 16% from the second quarter of 2014 after excluding the earnings from divested businesses and assets. Our net income, operating income and margin, operating EBITDA and margin, and earnings per diluted share all improved when compared to the second quarter of 2014, despite year-over-year headwinds of $0.03 per diluted share from lower recycling commodity prices and the unfavorable impact of foreign currency fluctuations. We also saw our business generate significant cash as our cash provided by operating activities increased 47% and our free cash flow grew 30%.
We're pleased with these results, we expect the positive momentum to continue to build through 2015 and into 2016. Our pricing programs continue to be a big part of our earnings growth and margin expansion, our strategy remains the same: Continue our focus on core price while selectively adding the right new volumes. For the second quarter, our collection and disposal core price was 4.1% and yield was 1.7%. Year-to-date through June, core price was 4.3%, which exceeded our 2015 core price target of 3.8%, and yield was 1.9%. As we've said in the past, core price is a better indicator of true pricing activities because mix issues can affect our yield results, as we saw in the second quarter. It's bottom-line dollars that count, core price reflects the bottom-line impact from pricing.
While we said that yield would be around 2% for the year, we're not concerned with the slight drop in yield as the absolute dollars to the bottom line from pricing remain on track and our core price remains robust. Over the last six quarters, core price has been consistently over 4%. In the second quarter, we saw core price improve 10 basis points from the second quarter of 2014. When compared to the second quarter of 2014, core price in the industrial line was 8.6%. In the commercial line, it was 5.8%. 2.1% in our residential line and 2.3% in our landfill line. As we saw in the first quarter, core price continues to drive margin expansion as our traditional solid waste business operating EBITDA margin increased 40 basis points. Pricing efforts are right on track, we expect that to continue in an improving volume market.
With respect to volumes, we look at our traditional solid waste business volumes, which excludes recycling and non-unit or non-solid waste revenues. Our traditional solid waste business declined 0.6% in the second quarter of 2015 versus a decline of 2.3% in the second quarter of 2014, 170 basis point year-over-year improvement, and a 60 basis point sequential improvement from the 1.2% decline in the first quarter of 2015. Overall volumes, which includes recycling and those non-solid waste volumes, declined 1.3% in the second quarter compared to the -3% reported in the first quarter of 2015, a sequential improvement of 170 basis points. Although overall volumes continue to be negative, we saw some positive signs in the second quarter.
In our industrial line of business, we had very strong new business pricing, yet volume was 270 basis points improved year-over-year, improving from -2.7% to flat in the second quarter 2015, which reflects a robust market. We also saw the rate of decline in our commercial line of business improve again, as the rate of loss in commercial volumes improved 280 basis points compared to the second quarter of 2014, and 60 basis points sequentially from a -2.8% in the first quarter of 2015 to a -2.2% in the second quarter of 2015. The momentum improved throughout the quarter, with June showing better volumes than April or May. We also saw service increases exceed decreases in the quarter. Finally, new business in our commercial and industrial lines combined exceeded lost business for the first time in three years.
We aren't predicting a dramatic and fast turn to positive volumes, but we continue to see the light at the end of the volume tunnel and would expect volumes to strengthen through the rest of 2015 and into 2016. Turning to recycling, as you've heard us say many times, the current recycling model is broken and we and the entire industry need to fix it. We've seen progress in our recycling operations, but the issues are complex and there's not an overnight fix. We're also working together with our customers, vendors, and industry groups, and we've made progress as we're finding some acceptance for better contract terms and higher fees to offset the higher processing costs that we're experiencing. We are working with customers and municipalities on educating the public on what and how to recycle to bring down contamination levels and on the true cost of recycling.
We and our entire industry realize that recycling is the right thing for our customers and the environment. We need to make sure that it's not only the right thing to do, but it's also a sustainable business. Moving to current results from our recycling operations, in the second quarter, we had a $0.02 decline in earnings per share compared to the second quarter of 2014. This decline is due to the more than 13% drop in average commodity prices for the quarter and a 5.7% decline in volumes associated with contractual losses as we shed unprofitable volumes. Our recycling employees continue to perform at high levels, working to reduce operating costs. In the second quarter, operating costs continued to improve as we saw an 8% improvement in operating cost per ton compared to 2014.
We expect to continue to see improvements in the second half of the year, low commodity prices will continue to be a challenge. With respect to the deployment of our free cash flow from operations and our Wheelabrator divestiture, we will continue to seek a balanced approach to buying solid waste businesses, repurchasing shares, and maintaining a strong yield through our dividend. With respect to acquisitions, we believe that in 2015, we can execute agreements to add an additional $50 million-$75 million of operating EBITDA. We would likely close those acquisitions in 2016. In the second quarter, we repurchased $300 million of our outstanding shares, and we will repurchase an additional $300 million in the third quarter. Because I had a 10b5-1 trading plan in place, in the second quarter, I personally purchased $2 million worth of Waste Management shares.
Of course, we will continue to maintain a strong dividend and a strong balance sheet. In conclusion, we are pleased with the strong results through the first half of 2015. When we combine the first half results with our outlook for continued price and cost control discipline and improving volumes, we are confident that we can achieve our full-year guidance. We now expect that our 2015 adjusted earnings per diluted share should be at the high end of our previously announced guidance of between $2.48 and $2.55 per share, despite negative headwinds to diluted earnings per share of between $0.07 and $0.10 from recycling operations and about $0.04 from the impact of foreign currency translation adjustments.
We also expect to achieve the upper end of our free cash flow guidance of between $1.4 billion and $1.5 billion. The year is playing out pretty much as we expected, our people are doing what they need to do to offset the recycling and currency headwinds. Their efforts have been extraordinary, on behalf of the entire senior leadership team, we thank them for their excellence. I'll now turn the call over to Jim to discuss our second quarter results in more detail.
Thank you, David. In the second quarter of 2015, our focus on reducing SG&A costs continues to bear fruit. Overall, SG&A costs declined $31 million compared to the second quarter of 2014. When you adjust 2014 for the operations that we divested, our year-over-year SG&A cost improvement was $18 million, consistent with our expectations for savings from our reorganization. As a percent of revenue, SG&A costs were 9.7%, an improvement of 40 basis points compared to the second quarter of 2014. With the strong results in the first half of 2015, we expect to achieve our full-year SG&A goals of reducing SG&A costs by $60 million. Turning to cash flow for the second quarter.
Net cash provided by operating activities was $816 million, compared to $555 million in the second quarter of 2014, an improvement of $261 million with a reduction in cash taxes accounting for $216 million of the increase. Free cash flow was $579 million in the second quarter of 2015, an increase of $245 million when excluding free cash flow from operations divested in 2014. Our capital expenditures for the quarter were $296 million, $88 million more than the second quarter of 2014, as a portion of our expected increased fleet spend occurred in the second quarter. Excluding the cash tax benefit, free cash flow grew almost 9% compared to the second quarter of 2014, despite an increase in capital spending. Given the level of expenditures in the first half of 2015, we expect capital expenditures to be at the high end of our guidance range of $1.2 billion-$1.3 billion.
Despite that, free cash flow for 2015 is also expected to be at the high end of our guidance range of between $1.4 billion and $1.5 billion. Second quarter revenues were $3.3 billion. We saw a $54 million increase in revenues from acquisitions and a $34 million increase in our traditional solid waste business. The overall revenue decline stemmed from $193 million decline from divestitures, a $59 million decline from lower recycling revenues, $45 million in lower fuel surcharge revenues, and $27 million in foreign currency fluctuations. Looking at internal revenue growth in the second quarter, our collection and disposal core price was 4.1%, with total volumes declining 1.3%. This led to total company income from operations growing $12 million, operating income margin expanding 60 basis points, operating EBITDA growing $11 million, and operating EBITDA margin growing 80 basis points.
These results are strong and that much more encouraging when you consider about $30 million of benefits we realized in the second quarter of 2014 that did not repeat in 2015. Our collection lines of business continue to see the benefit of the price volume trade-off. As David said, our industrial core price was 8.6%, our commercial core price was 5.8%, and residential achieved 2.1% core price. In addition to the continued strong momentum in pricing, we saw some positive momentum in volume. Commercial volumes were down 2.2% in the second quarter of 2015 versus a decline of 5% in 2014, a 280 basis point improvement. Industrial volumes improved 270 basis points from a negative 2.7% in the second quarter of 2014 to flat in 2015. Outside of energy services, our industrial volumes were positive.
Residential volume declined 3.6% in the second quarter of 2015 versus a decline of 3.8% in 2014. The residential line of business remains competitive, and we remain focused on retaining and growing where our return on investment is accretive to shareholders. This core price and volume led to income from operations growing more than $3 million and margin expanding 30 basis points, and operating EBITDA growing more than $8 million and margin expanding 70 basis points. In the landfill line of business, we saw the benefits of both positive volume and positive core price in the second quarter. We saw same store average MSW rates increase year-over-year for the ninth consecutive quarter, up 1.4% from Q2 2014. Combined special waste and revenue-generating cover volumes were a positive 4.3%. MSW volumes grew by 7.2%, and C&D volume grew 7.3%. Total landfill volumes increased 3.2%.
This led to income from operations growing $9 million. Operating margin grew 70 basis points. Operating EBITDA grew $16 million. Margin expanded 140 basis points. Moving to operating expenses. As a percent of revenue, operating costs improved 60 basis points to 63.6%. Lower diesel costs and lower recycling commodity rebates to our customers improved by $68 million. Labor and related benefits improved $21 million when compared to the second quarter of 2014, as we continue to see the improvement of our Service Delivery Optimization program. These savings were partially offset by increased disposal costs related to our improved volumes and an increase in risk management costs. Overall, operating costs improved $56 million in the second quarter after adjusting for the divestitures. Finally, looking at our other financial metrics.
At the end of the second quarter, our debt-to-total capital ratio was 62.7%. Our weighted average cost of debt is 4.4%. The floating rate portion of our total debt portfolio was 9% at the end of the quarter. In the second quarter, we repurchased 6.1 million of our outstanding shares for $300 million and paid $175 million in dividends. The $475 million reflects our confidence in the cash generation of our business and commitment to return cash to our shareholders. Our income tax rate in the second quarter was 29.6%. Adjusting for items excluded in our as-adjusted results, tax rate was 30.9%. In the second quarter of 2015, a reduction in deferred taxes and utilization of state net operating losses benefited earnings per share by $0.02.
In summary, our second quarter results continue to show the momentum that we saw in the first quarter and positions us well to achieve our full-year guidance. This would not have been possible without the hard work and dedication of all of our employees. For that, I want to thank them. We're more than halfway through the year. We're very confident we'll have a successful year. With that, Janisha, let's open the line for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star and the number one. Your first question comes from the line of Corey Greendale of First Analysis.
Hey, good morning.
Good morning.
Hey, just a few questions. First of all, appreciate the update on progress and some of your discussions on the structure of your recycling contracts. Just wondering, given that commodity prices have come off the bottom somewhat, is that impacting those conversations or customers' willingness to engage in changes?
No, really, the prices haven't come off the bottom. To the extent they've come off the bottom, it's been very marginal. We're still relatively close to sort of break even when it comes to processing cost versus commodity sales. No. In fact, if anything, I think the discussions have become more pronounced with the customers. I think more and more as you see more folks like you all in the financial community and more folks in the general press understanding the issues facing recycling, I would say those issues are more and more coming to the front rather than going back.
Corey, when you look at the weighted average commodity price, it was about $83 in Q1 and $83 in Q2. Really, the improvement we're seeing is through our cost efforts on cost of goods sold and operating costs.
Okay. Yeah, at least the numbers I've seen, it's more in July that it came more meaningfully off the bottom. I'm looking at OCC and newsprint primarily, maybe the whole mix.
Yeah. OCC seems to have stabilized a little bit, still at low levels.
Okay. The next question, David, clearly the tenor on the volume environment is getting increasingly positive. I just want to make sure I'm hearing you correctly. I think you're saying you would expect volumes to get kind of increasingly less negative each quarter in the back half, but you're not necessarily calling for it to go positive, just want to clarify that.
What we're trying to do, in order to give you all even a little bit more clarity, is to separate it between what we're calling sort of our core solid waste volumes and then overall volumes. When we look at it, we look at those core solid waste volumes, which were negative 0.6% in the quarter. We would expect that to improve in the third quarter and in the fourth quarter so that Look, we aren't going to try to predict a turn to positive volumes. We said this year that we didn't think volumes were going to get positive. I would expect us by the end of the year to be at a run rate where we're actually flat to positive on volumes.
Okay, great. A question on the free cash flow. I'm just trying to understand the moving pieces, particularly related to cash tax payments. I think last year you had a $210 million hit from early payment of taxes and that benefits this year. Can you kind of clarify, is that the right number? Have we already seen that whole benefit, and what should we expect in the free cash flow breakout between Q3 and Q4?
That's right, $210 million was kind of the early payments in Q4 of last year. We kind of backed out 216, To get to a number where we think that for the year, and particularly, by the way, when you look at cash from operations and free cash flow, both of those, if you normalize those for those taxes, and then if you normalize free cash flow for CapEx, we're in a position where we've actually overcome the Wheelabrator divestiture, which is pretty amazing in and of itself. For the remainder of the year, if you tack on what we think is achievable, which was last year's cash flow from operations, and essentially that's what we did for the first two quarters.
If you tack that on, and that's what we're forecasting, then you get to a number that's in that $1.5 range for free cash flow.
Jim, without asking for kind of operational guidance for 2016, if you just look at movement in cash taxes, would you expect the free cash flow would be up in 2016 or could it be down because of a movement in cash taxes?
If I take our guidance for this year of $1.5 billion and I normalize that for the cash tax benefits and CapEx a little bit, it's hard to say exactly what CapEx is going to be next year. I get to a pretty good starting point of about $1.35 billion-$1.4 billion. Not that we're going to give you a lot of guidance just yet but
Your next question comes from the line of Alex Ovshey of Goldman Sachs.
This is actually Usha Bundelapally on for Alex. How are you?
Good morning. Doing well.
Great. One more question on recycling. Assuming commodity prices stay flat at current levels, you are obviously working on reducing costs in this business. When you expect the business to turn earnings positive at current commodity prices?
Yeah. Well, we're earning positive actually at current prices, just slightly EBIT positive and certainly positive from an EBITDA point of view. We didn't lose money in recycling in the quarter. We just did $0.02 worse than we did last year. It's the year-over-year comparison. We are slightly EBIT positive, but certainly not EBIT positive enough to earn our return on capital, to earn our weighted average cost of capital. That's why we've got to get those earnings up.
Got it. That's helpful. On the yield, yields seem to have slowed in the second quarter, and you did mention part of it was just mix. Could you give us more color on what was driving that mix?
Yeah. When you look at yield versus core price, it's why quite a while ago we started talking more about core price because really core price is what drives dollars to the bottom line. When you look at yield, there's a lot of different factors that can play into that. I guess the point is that yield is indicative of pricing, but it's really sort of directional, whereas core price is truly indicative of what's going on in our pricing programs. I'll let Jim talk a little bit about the difference between yield and core price. Yeah, I think probably a good example of that is our energy services business. Typically, that business has a quite a bit longer length of haul than our ordinary business.
Due to that longer length of haul, that business has a higher unit price and a higher yield, but not a higher core price or profitability per unit. As the energy services business has slowed due to the fall in oil prices, we've seen a decline in yield, but not a decline in core price or unit profit.
Dave and Jim, you also mentioned that we improved in the new business side on a net basis. When we add new business in markets that have a lower average unit rate, not a lower profitability measurement, not a lower margin, but a lower average unit rate, and that's what happened in Q2, and/or we lose business in markets with higher or lower average unit rates. That affects yield, and that's what happened in Q2. It has no effect on margin or core price.
Yeah, you can imagine, just to sort of put some color around what Jim Trevathan's saying. You can imagine that right now there's a lot of growth in Texas, and Texas has lower landfill rates than you have in the Northeast, and hence you've got a little bit lower pricing, but you also have very high profitability. It's not a profitability issue, it's just the fact that because you have lower landfill pricing in Texas than you do in the Northeast, you'll have lower unit cost and unit pricing for when you offer new services. As you've seen more growth in places like Texas, where it's very profitable, but it's just a lower unit rate versus the Northeast, that's what drives sort of those mix issues.
When we look at that, we say, "Okay, the yield is down, but profitability is up." That's not such a bad thing. That's why we say, really what you have to look at is overall across our entire business, what are we doing from a price increase point of view? Because price increases takes mix out of the mix. Core price is really the true indication of what we're doing. As you saw with core price at 8.6% in industrial and 5.8% in commercial, it's still running at a pretty hefty rate.
Your next question comes from the line of Joe Box of KeyBanc Capital Markets.
Hey, good morning, guys.
Just want to review the capital deployment strategy post Wheelabrator. Obviously, you guys have Deffenbaugh under your belt, I know you've got $50 million-$75 million of EBITDA lined up from deals that are going to go next year. Just curious if you've gotten all the deals done that you've expected, because externally it looks like, or it seems like you guys are shooting for more deals when you sold Wheelabrator. Just as a quick follow-up to that, the items that you mentioned in the pipeline, are those solid waste companies, or are they outside of solid waste?
Yeah. When we're looking at companies, they're all going to be solid waste. We really wouldn't look to stretch outside of sort of our core business when we're doing acquisitions. The acquisition, you always think that you're going to have this money to spend, and there's plenty of people out there to sell, and it should be fairly easy to replace the EBITDA. Then once you get into the market, you realize there's 100 different issues that affect sellers, right? Sometimes they're family businesses, and it's hard to get the family over. Sometimes there's higher expectations for pricing. So when we went into it, we said, "Look, if we can replace the Wheelabrator EBITDA at good accretive multiples, we'll do it." The good news for us is if we can't, we can still buy back stock, and it would still be accretive to where we were with Wheelabrator.
We're sort of in a win-win situation. Rather than run out and sort of in an undisciplined manner, just pay whatever we needed to pay to replace the Wheelabrator EBITDA, we decided to take a little bit more of a disciplined approach, focus on our core solid waste business, and see if we can't go out and do deals that are nicely accretive for our shareholders. Would we prefer to buy businesses that replace the EBITDA rather than buying back shares? Sure, we would, because that's a little bit more accretive for our shareholders. We've got to maintain our discipline on pricing, and we've got to realize that sometimes these acquisitions have to brew for a little while before they're ready, and sellers have to come around to the fact that they're ready to sell.
We certainly think that over time, we will replace that roughly $200 million of EBITDA from Wheelabrator. It's just not going to happen overnight.
Joe, as I said earlier to Corey's question, we've kind of afforded ourselves the luxury of really being disciplined here because we really have. If you look at our second quarter, you look at our net cash from operating activities, and you back out the cash tax benefit, we're $45 million in the second quarter of last year, and that quarter includes all the divested businesses. On the net cash from operating activities line and on the free cash flow line as well, you got to normalize the free cash flow for CapEx. On both those lines, we have essentially replaced Wheelabrator and Puerto Rico and the Maritimes. Really the only acquisition we've done is Deffenbaugh, and we've had it in the company for a quarter now.
What we'll do in terms of capital allocation is continue to opportunistically buy back shares here, which we did in Q2 and again in Q3, and look to use those proceeds to buy companies at attractive prices.
Got it. Thanks for the color on that. Switching gears over to the New York City contract, I know it potentially is coming a little bit closer. Can you guys maybe just talk to what your current contracts are? I know you guys have some transfer stations in the market. Maybe talk about if you are participating in the new RFP and how you kind of sit in that market.
Yeah, Joe, I'll address the bid that's out now, the RFP that's out. We have provided a proposal for that volume. We are on the short list along with Progressive. It appears the city has begun discussions with Progressive, and we're awaiting what the next steps are. Progressive, as you remember, was the incumbent for that volume. What happens to it, I guess, will occur over the third and fourth quarter. We still have the transfer stations in place, receiving volume from New York City and a couple of those big transfers, Joe, and nothing has changed with regard to that volume.
Your next question comes from the line of Scott Levine of Imperial Capital.
Hey, good morning, guys.
Morning.
Just looking back at your initial guidance for this year, I think assumes a $0.03-$0.05 year-over-year hit from recycling, and obviously your current guidance is assuming much more than that, and I'm guessing a little bit bigger hit from FX. Really just trying to get a sense, you're guiding to the upper end of the range here. Where is the upside versus your initial expectations coming from to more than offset the greater headwinds in recycling and FX?
Yeah, it's really coming sort of across the board, right? On the volume side, although the actual percentage decline in the volumes isn't as good as we thought it would be, frankly, the flow-through that we're getting from the new volumes is better than we thought it would be. The point is that we're getting the right volumes. We've consistently hit or beat our targets on our SG&A numbers and on our operating costs. Really, what I've said is that everything that we've got going on from an operational point of view seems to be working, other than recycling. Obviously we've got the interest savings and the share count going down from the share buyback, and that's benefiting the year.
When we look at our business, we'd say everything is sort of clicking on all cylinders other than recycling, and so what is it that we can do to fix recycling? Like we say, that's a long-term issue, but we're making good progress on it.
Thanks. To be clear, I don't know if you mentioned, is there a tax rate assumption implicit in your guidance for this year now or has that changed at all or no?
For the remainder of the year, I would assume that will be at 35%. That's what we've baked into the guide.
Got it, 35%. Okay, as a follow-up, I think, David, you mentioned that the acquisitions you're contemplating here in the back half into 2016 are all solid waste. Just wanted to confirm that that's right, just to see if your thoughts had changed in any way regarding the energy waste business in particular and/or industrial waste since we've had the breakdown in commodity prices and the landscape's changed so dramatically.
Yes. What we are looking at in the back half of the year is most certainly solid waste assets. When you look at things like energy services, we're going to be a player anytime one of those transactions becomes available. We think long term, that's a good space to be. Clearly, short term, it has some challenges, so you've got to look at it from a long-term valuation point of view, recognizing that short-term valuation might not be what the sellers are trying to sell it on. So, we'll play in every one of those bids, we're not going to Look, everybody wants to get paid based on when things were blowing and going, and they say, "Well, this is just a short downturn." Well, we're not going to make that assumption.
When we look at it, we're going to make an assumption on where we think the business is going to go over the next five to 10 years, and we're going to value it accordingly. We haven't bought anything new in the oilfield service space because seller expectations on price haven't come down as much as our view of value. I would expect that if you look at what we're going to buy over the next year, it will be focused primarily on solid waste.
What are sellers' expectations there in general? Is that market kind of more rational in your view than oil services or not?
Look, we've always said that for us, it's pretty simple on the solid waste side. If you assume that our long-term multiple is somewhere around 8x, right? It's been higher than that, it's been lower than that, but let's call our sort of long-term view of our multiple at 8x to 9x EBITDA. Why would I pay someone more than 8x EBITDA when I can buy a business I know real well, our own business, at 8x EBITDA? Look, we have lost a lot of deals right out of the chute because sellers are expecting 10x to 12x EBITDA, and that's just a number that doesn't work with our model. Could we buy more businesses? Absolutely. We'd be buying those businesses at very high multiples, which obviously reduces the benefit to our shareholders.
We'll continue to look for those deals that we can buy pre-synergies at 8x or less, then post synergies, hopefully at sort of, as we've always said, 5.5x to 6x EBITDA. If we can do that, we're pretty much guaranteed that come hell or high water, it's going to be accretive to our shareholders.
Got it.
I think the opportunity landscape here in terms of what sellers are looking for is pretty broad. There's some folks that are looking for, and in some cases getting, 12 to 15 times. We're not talking to those folks. There are folks that are much more reasonable, and obviously Deffenbaugh was one that he felt we got at a very attractive multiple. We'll continue to talk to companies like Deffenbaugh.
Got it. Great. Thank you.
Your next question comes from the line of Al Kaschalk of Wedbush Securities.
Morning, Al.
Good morning.
Morning.
David or Jim, I just wanted to clarify. On these deals that you've laid out to $50, $75, are these close? Are we at the goal line or are these things that still have a few hurdles to get over? I'm just questioning why put this type of color out there today?
Yeah. Well, I'm going to define the goal line for you, Al.
Good.
There's two goal lines. There's getting a deal signed, then the second goal line is getting a deal approved by the government. Getting the deal signed is a pretty simple process. For some reason, the government has been taking a long time. Look, you saw our Kansas City deal, it took them 8 months to approve a deal where we weren't even in the market, right? It didn't seem like it should take that long to approve it took a very long time for the government to approve it. They've got a lot of big deals in the pipeline at the Department of Justice and at the FTC, I assume that's what's causing the delays. What I would tell you is the first goal line is getting the deals signed up. The second is regulatory approval.
We will be past that first goal line very short-term. As far as getting the deals signed up, we're pretty much there. Now the question is, how long is it going to take us to get those deals approved, and what constraints will we have around getting those deals approved? That's just such a wild card that that's why we wanted to let you all know, we've pretty much got these deals signed up for $50 million-$75 million of EBITDA. Now we've got to get it across the regulatory goal line, the due diligence goal line. As you know, from signing to closing is complicated, not only from a business and a due diligence point of view, from a government point of view. We're pretty much past the first goal line. We're now marching toward that second goal line.
That second goal line, Al, that's not an easy one to get over. We had a deal recently where we'd crossed the first goal line. We'd agreed on purchase price months ago, the HSR process was daunting enough for these folks that they just decided, for now, we're going to back away. We both agreed to what we both agreed was a reasonable purchase price, we just felt like that second goal line was not going to be achievable, at least in the near term. We decided to part ways for now.
Great. It sounds like this is multiple, several acquisitions as opposed to a single transaction.
The $50 million-$75 million that we're talking about is comprised of one larger transaction that would generate the bulk of that, and then obviously some smaller bolt-on.
David, I want to push back on the volume comments here. The stock got absolutely crushed after Q1 and the number that you put up. I don't know if it was 26 or 28, pardon me for not recalling that. You had articulated as a company getting towards that 50 basis points down the flat exiting, I believe exiting 2015.
Yep.
Can you maybe just put a little better refine the sequential trends here? In particular, this was an overall volume comment or was it specific to solid waste about the volume trend?
It was specific to solid waste. Let me put some sort of color around where we see the volumes going for the back half of the year. Let's start out with our industrial volumes. Our industrial volumes were flat for the quarter. The only reason they were flat is because energy services obviously is down. When you look at the rest of the business, industrial is actually positive. When you look at what we would look at before we got into the energy services business as sort of our core solid waste business, industrial volumes are actually positive. We don't see anything on the horizon that would stop that momentum. Even with energy services down, they're flat. We'd expect those volumes to turn positive in the third or fourth quarter.
Looking at the commercial volumes for the quarter, they were down 2.2%. That's a 60-basis point improvement from the first quarter. We would sort of expect that rate of improvement to continue. If you see that rate of improvement continue by the back half of the year, you're sort of at that negative, call it negative 1% on commercial volumes. Residential volumes were down, let's call it down 3%, 3.1%. We don't really honestly even look at residential volumes because when we're losing those volumes, they're generally low profit, very low margin volumes. We're not that concerned about losing those volumes. The landfill continues to be very strong. When I look at volumes for the back half of the year, I'm looking at the volumes that make us money, right?
When you look at the volumes that make us money, it's industrial, commercial, landfill. Industrial is going to be positive, landfill is going to continue to be positive, and commercial is going to get better. When I look at those three components of the volume, I say, look, the rest is all just noise. As Jim talked about, when you're passing through transportation to your customer and you charge your customer $100 for transportation, they pay you $100, and it costs you $100, and you make no margin on it. I don't care if I have that kind of revenue or not. When I look at the revenues that actually make us money, we see some really good trends, and we expect those to continue in the back half of the year.
Al, I would add one thing to that, which is recycle volumes. I'll give you an example. We had a big plant that essentially cut their volumes in half, and by doing that, they improved the quality of the material coming in. They went from, call it, half a million dollar a month loss to break even by doing that. That's similar to the resi volumes in that, yes, we lost volume on the recycling line of business, but not a bad thing for us on the income statement.
Right. Okay. My final question. I want to ask about this whole capital allocation and question why. By the way, is the share repurchase either open market transactions versus an accelerated share repurchase of that?
We haven't made a final call on that, but we did an accelerated share repurchase in the first quarter, and I wouldn't be surprised if we did one in the second.
Okay. I guess to that end, David.
Second quarter.
Yeah. Why quantify a certain one quarter out a share repurchase program target versus, you're in it for the long haul here, and as well as shareholders are, to just not maybe specifically allocate capital to those markets so that you can give yourself some flexibility to either execute on M&A. Maybe the stock gets hit, maybe it doesn't.
I think that's a great point. Where we are right now is we're still sort of in the, what I'd call the final stages of replacing that Wheelabrator EBITDA. I will tell you that, as Jim pointed out, we've basically replaced it through operations. That obviously takes a lot of pressure off of our need to do acquisitions. We want to see what we can get put together in the back half of the year from an acquisition point of view so that then we can make that long-term call on where we are in share repurchases.
Al, I would expect that when we give guidance for 2016, we'll be able to say, "Okay, here's what our expectations are for acquisitions, and here's what our expectations are for long-term share repurchases and an approach to the dividend." I would say that at the beginning of 2016, after we've sort of went through the market and determined what we can buy and what we can't buy, that we would be able to give you a more long-term view of share repurchases.
To be fair, David, I think what you said earlier this year, that by the end of Q2, you would kind of know I guess you're asking for an extension from the outsiders looking in. I think you said earlier this year that by the end of Q2, you would have an idea what the M&A-
Yeah
looked like to execute here.
I'm not sure
Okay. Thank you
I'm not sure that I'm asking for an extension, but I am saying that. Like I said earlier, you go into this process thinking, "Well, this is going to be simple. There's a bunch of sellers out there that want to sell, and we're a buyer, and this should line up fairly easily." At the beginning of the year, it absolutely lined up easily. Jim talked about a transaction, that if we had done the transaction Jim was talking about, we'd pretty much have replaced the Wheelabrator EBITDA, and we'd be moving on and telling you what our long-term share repurchases are. It's only been in the last month where the risk of HSR was too much for the seller to take on, we pushed that aside. I'm not looking for an extension.
I'm just saying that it's a fluid process. It's not a one-time event, and it didn't play out as fast as we would've liked it to play out. The back half of the year is going to continue to be a little bit more fluid, and then we can get more certainty going into 2016.
Yeah. I guess you were playing a little analyst earlier in terms of 8 times, 9 times on what you're trading at. If you're down now with the stock price where it's at the level, it sure would seem to make a lot more sense to buy back stock than to chase M&A. I certainly understand the need to grow back the EBITDA level. I think in looking at what the realization is on asset valuations out there, it looks pretty attractive at 8 times here.
Oh, yeah, absolutely. Well, look, you're talking to the person that put $2 million of his own dollars into the stock, so I certainly thought it was attractive.
Great. Thank you, David.
Thank you.
Your next question comes from the line of Tyler Brown of Raymond James.
Hey, good morning, guys.
Morning.
Morning, Tyler.
Hey, Jim. If we could just go back quickly to free cash flow, and you gave some really good color, but I do need a little clarification. If you assume that the cash tax normalizes, I think you noted kind of a run rate base of $1.35, but does that incorporate this $50 million-$75 million of EBITDA that you have kind of lined up?
It does not. That is just growth on top of it. What I'm coming up with
Okay
at $1.35 is really normalizing. By the way, what we'll do is, I didn't want to give 2016 guidance, I kind of gave you a starting point there at my $1.35-$1.4.
Exactly. Okay. You would add on kind of acquisitions, maybe some rollover of debt and BA, and then kind of whatever your growth is in the core business
Correct
plus or minus the other stuff.
That's exactly right.
Okay. Perfect. That's very.
Team models.
Very helpful. Thank you. Can you guys kind of work through or kind of remind us just what % of the book is linked to CPI? I'm just curious how the 0% all-in prints today are going to impact the 2016 pricing. Is that more of a back half issue? Should we expect that core pricing will take a step down in 2016, just mathematically from CPI?
To answer your first question, Tyler, it's about 40% of our business is driven by CPI. I wouldn't say it's a back half issue because I think it's pretty evenly spread. It's kind of a mid-year and then an end-of-the-year adjustment. It's pretty evenly spread for us.
What we've always said about CPI is, to the extent that it hurts us, we'll make it up elsewhere with open market.
When we talk about CPI, there is not one CPI. There's a lot of different CPIs and different contracts. What we've been trying to move toward is more of a industry-specific CPI, what we call the Refuse Rate Index, so that as our costs go up. When CPI is 1% and you're giving people 3% pay raises, CPI just doesn't cover your costs. What we've been trying to do in our contracts is look at different types of indexes that more reflect the true costs in our business and try to get those true costs. I think as an industry, we could probably do a better job of making sure that we don't get linked to some arbitrary type of CPI, that we get linked to something specific to our industry.
When we talk about 40% of our business, a lot of that business, or some of that business is tied to what we call this Refuse Rate Index, and we hope to move that percentage up.
David, we've had some success in doing that in the first half of this year in some renewals where we've moved to more of a Refuse Index rather than just CPI. There's some positive trends occurring.
Is it a big portion of that 40%, or is it just a small slice?
It's probably in the 10%, 15% of that 40%, maybe it's 20%. I don't have the numbers in front of me, Tyler.
Typically-
It is in that range.
Typically, Tyler, where we've seen more success in this is in the franchise markets in California. We've had a couple big franchise agreements that we've moved to Refuse Rate Indexes.
Okay, great.
Tyler, I was talking about at lower end, what we've done in the first half. The Oakland contract is an example of one we did last year that's going into effect this year, that's on that same basis.
Okay, great. Then just lastly, real quick. You guys mentioned that, I think, overall landfill was up 3.2% and MSW landfill was up 7.2%. I think I heard that correct. I'm curious, is that a third-party number?
Yes.
Okay. Any color on why landfill MSW has been so strong?
It's been strong now for two and a half years, and it's probably mostly tied to when we bought the Oakleaf business and we retained that broker model, and we went out to the folks that brokered the collection business for us and said, "Look, we want you to keep that collection business. You're making good money on it. We want you to keep it. But in return, we want you to bring those volumes to our landfill." That was very successful, and that's when we saw the rates go up. Then, look, over the last couple of years, I think we've also seen, as an industry, we've seen MSW grow. I think, the specific actions that we took with respect to our brokers and then the general economy have both been good drivers of MSW.
I tell you, Tyler-
Your same-
The encouraging part about not only the volume piece there, but really the price piece. If you look at unit rates at our landfills, I was looking at it last night, over the last five years, we've really increased unit rates at our landfills by waste stream, whether it's MSW or C&D or special waste. I was kind of thinking along the same lines as you, does this volume mean that we're seeing a deterioration in price, as I think about it in unit rates, and it's not. Since 2011, nice increases, and it's every year, nice increases for MSW special waste C&D.
Okay. Yeah, very good color, because that's what I was going to ask. It sounds like, is the landfill pricing a key initiative as you look forward?
Absolutely.
Okay. All right. Thank you.
Thank you.
You bet.
Your next question comes from the line of Michael Hoffman of Stifel.
Hi, David, Jim, and Jim. Thanks for taking my questions. A little bit on the volume, too. If you looked at commercial same-store, kept the customer or had the customer, that volume's up, isn't it, in the container?
Yes, that is correct.
Yeah. Great. When you have a 7.2 from third party, there's some number that's got to be in that direction in your commercial market same-store.
Yes, that's correct.
Right. You're benefiting from what the industry's benefiting is we've had you and I interfacing with the economy outside of work, outside of home, is driving more volume in the container.
Yeah.
Okay.
Again, look, we don't want to declare that the good times are here. You all have heard me say over the last couple of years that we have fits and starts in the various statistics, and we still haven't seen a very clear-cut trend until last quarter. That trend continued into this quarter. When you look at, this really is the first quarter where all of the indicators are positive. Again, that doesn't mean we're going to go from negative 2.2 to positive 5. We don't have to in order to make our numbers in the back half of the year. We just want to see continuous improvement. Weights are up, service increases over decreases are up, the churn rate's down.
On the industrial side, we've had really strong new business pricing. This is really the first quarter where I would say all the indicators are positive. Look, we all know that can change on a dime, but right now I'm more optimistic about volumes than I've been over the last five years.
Okay.
Michael, I want to really re-emphasize something here, that is that because this industry, you've been around a long time, the industry has a history of either being one or the other. You're either price or you're volume, there's nothing in the middle. While we're seeing some nice momentum here on the price side, David went through it in detail a few minutes ago, we are not conceding our strong approach on pricing. That's why we wanted to make sure we gave that explanation of yield versus core price, that Jim and I walked through, because we are as strong as we have ever been on pricing. We're just starting to see it. Maybe it's the economy, we're starting to see that our volumes are looking promising. It's early in the third quarter, July looks promising as well.
Okay. Now you've set me up for a perfect follow-on, Jim. I think of Waste as having sort of put their foot down on the accelerator on price right to the floorboard for the last four or five years, you took a volume consequence for that knowingly. Where are you, or are you even contemplating feathering that, where instead of being 100 miles an hour, you're going 80, now you're not pushing away what could be deemed good business, in particularly commercial, that now that this volume trend's coming too?
Yeah, look, just the simple math, you all have heard us say it 1 million times that you need to get 3% volume in order to make up for 1% price. That's just simple math. You can't get 3% volume by giving away 1% price. The weighting of where you want to focus will always be on price. What we want to do, and by the way, if we, as the largest player in the industry, switch and go after volume, what do you think the industry's going to do? Look, we're the largest player, and we recognize the position that we're in. What we want to do is make sure that we get our fair share of the growth and that we grow the right volumes in the right places.
When you talk to industry participants, I don't think you'll ever hear anyone say, "Well, Waste Management's doing a volume grab in market X or market Y." Do we have individual contracts that we've done where we've gone after volume that I wasn't particularly happy with it on our national account side or somewhere like that? Yeah, we've done that in the past, but that's certainly not a pattern that you will see out of Waste Management. We're always going to favor price over volume. In a growing market, we ought to get our fair share of the volume too, because if we can get our fair share of the volume, that won't have an effect on the overall industry pricing dynamic. It's pretty simple economics. In a better economy, we think we can get both price and volume.
Okay.
Well, I might add to that we've also, because of our price leadership strategy, have begun efforts to improve our service. We realize that there's some improvements that need to be made to make sure we're providing that service that's worthy of our price leadership position, and we're doing a better job of that. You see it in the churn rate. We see it in metrics. We're not done with it, but we have progress in that regard.
Jim, I was just going to say that, Michael, when you talk about going from 100 miles an hour to 80 miles an hour on pricing, look, we've had a lot of discussion recently, to Jim's point, about a differentiated strategy. You can still go 100 miles an hour on pricing if you're differentiated. If your strategy is differentiation with things like the industrial business, where we provide expertise that others don't have, and the size of our balance sheet, things like that, or whether it's bringing technology to bear or, to Jim's point, improving customer service, all of those enable you to keep your foot on the price accelerator.
Okay. To Jim T.'s comment, the churn rate must be coming down if the service relationship's getting better.
It's not where we want it to be, 10.3 is a whole lot better than 12.2 that Q2 of 2014. Absolutely, we see improvement, and we expect more.
Okay.
By the way, Michael, just to expound on that, it shouldn't be lost. If we improve the churn rate by 190 basis points, we didn't materially increase the rollbacks. In the past, what we've seen is that one of the ways we improve the churn rate is our rollback percentage goes from 25%-60%. This quarter, we reduced the churn rate by 190 basis points with a virtually non-existent change in our rollback percentage.
Okay. We've known each other too long because you just anticipated my next question. You're retaining more price too, then. Is that-
We're retaining more.
Okay.
Exactly.
All right. Now I'm changing gears a second. Some housekeeping questions, Jim Fish. Starting share count for 3Q should be about 454.5. Is that the right way to think about it?
I think more like 457, I think is the number.
What's the 451.8 then that's in the press release plus the comp numbers of like 2.8? I can follow up on that, but I just want to make sure I have the starting place. On tax rate, just to follow up on the questions asked earlier, that's 3Q and 4Q should have a 35, not that the full year will be 35?
Correct.
Working capital, you didn't talk about that. Where are we on DSOs and payables for the sort of your plan there?
I'm sorry.
DSOs and DPOs?
Yes.
DSO and DPO. Yeah. We've made some nice progress there over the last two and a half years. We've made nice progress sequentially and year-over-year. Year-over-year and sequentially from Q1, we've improved DPO by about a little bit less than three days, DSO by a little less than one day. When I looked at it over kind of the time period that we've really started working on this, over maybe a two and a half year period, we've really improved the combination of the two by nine days. It's not totally out of the realm of possibility that we couldn't cross over at some point down the road. We're still a ways away from that. Some of our areas have started to cross over where their DPO is higher than their DSO.
Yeah, I'm pleased with the progress, but won't be completely pleased until we cross over like most companies are.
All right. Just to put numbers on that, you're still in the mid-40s on DSOs and high-20s on DPOs, days.
We're in the low-40s on DSO, and we've crossed over to 30 now. We're above 30 on DPO.
Okay. You said this, but I was writing so many numbers I missed it. What was the special waste trend at the landfill in the second quarter?
Yeah, the special waste was 2.4% as I recall. Let me just look. Yeah, the volume was 2.4% for special waste. When we look at it, we sort of look at special waste C&D and revenue generating cover. When you look at special waste, it was 2.4%, revenue generating cover, which is essentially special waste, was above 10%.
Well, I guess where I was going, it was wet in a lot of places in the country, and special waste is predominantly dirt. There's a good chance that we could see a special waste number that's much bigger in 3Q because you just couldn't get heavy equipment in to move the dirt around.
Yeah, we actually had that discussion with our folks out in the markets, you obviously had some wet down here in the Texas area. You had it up in the upper Midwest. I think what our folks would say is the pipeline looks pretty strong. We don't expect special waste to slow down in the back half of the year. I think they're pretty optimistic about it.
Okay. On the deal commentary, just to be clear, I get these are the ones you've got targeted are solid waste, but that doesn't preclude you. You made a comment earlier, David, that I just want to make sure I understand. You would buy a hazardous waste business or an energy waste business under the right circumstances. That's just not what you're targeting at the moment.
Yeah, no, absolutely we would.
Okay.
We consider those sort of core solid waste type businesses. Those are areas where we can apply our expertise very easily. What we aren't going to do is what I led five years ago, which is get into some other types of businesses where we can't take our solid waste expertise and apply them very easily.
Okay. Saving the best for last, Jim Fish, on free cash flow. If I take your one five and I look at it on a what's the recurring operating cash generation? I got to pull out $300 million, right? $100 million for asset sales, round numbers, $200 million for cash tax. I start at one two, you're suggesting you'll be one three five potentially, you're not giving guidance. None of that has any deals in it. That's a pretty healthy $150 million swing. How much of that's working capital versus the optimization programs, cost saves, organic?
Part of it, Michael, is you pull out $100 in acquisitions, I mean, in dispositions, but we do dispositions every year. We sort of always assume that we're going to do, call it, $50 million to $100 million of asset dispositions. I'm not sure that you pull out that full $100.
Help me again, how did you get to the 1.2? I know you pulled out the cash tax piece. What else did you pull out?
You have asset sales, so I can't predict that number, right? Because I can drive a truck between $50 and $100. If I say, all right, what's the business generating in its own cash? $1.5 billion less $100 million for asset sales, $200 million for cash taxes puts it at $1.2 billion. $1.2 billion goes to $1.35 billion. That's $150 million year-over-year improvement, there's no deals in that.
I'm trying to also kind of normalize CapEx. I don't know what my CapEx is going to be next year, but 2014 CapEx was $1,150 million, 2015 CapEx is going to be $1.3 billion. On a smaller business at this point, we don't have Wheelabrator, we don't have Puerto Rico, we don't have Maritimes. I'm adding back a bit there in CapEx, too, but it's hard to say. We know we're going to have some CapEx next year for Oakland. We had some this year for Oakland. It's not going to be $1,150 million again, but it may not be $1.3 billion either.
Michael, you and Jim are talking the same number. The only difference is the divestiture piece, basically.
I think that's the whole point, Michael, is that it's the divestitures and the CapEx that can move around a little bit. When you look at the sort of the long-term history of what we've done, both on CapEx and on divestitures, you sort of get to that 1.35 number.
Okay. Yeah. What I was really trying to understand was what made up the $150 million. Some of it's CapEx. How much then is organic versus the optimization programs you've initiated over the last couple of years? How would you?
We'll get into that. I don't want to try to parse it to the penny because frankly, we haven't done that. We'll certainly do that next year when we give 2016 guidance. That's probably a better time to try to parse it down to the penny.
Okay.
We assumed you'd ask the starting point, though, so we did have that answer.
Right. We're both agreeing on one, too. That's good enough. All right. Thanks.
Certainly.
Michael, your question about share count, the difference between your 451 or 452 and my 457 is just the effect of using weighted average common shares outstanding, and that has to do with the mid-year share purchase.
Got it. Okay. All right. Perfect. Thanks.
Thanks, Michael.
Yep.
Your next question comes from the line of Barbara Noverini of Morningstar.
Hi, good morning, everybody.
Good morning.
You talked a little bit about differentiation earlier in order to push price. I thought we'd focus on the residential business just a little bit. My sense is that Waste Management used to differentiate itself with recycling services in a bundled contract. Now that you are heavily scrutinizing recycling, how else do you differentiate in residential outside of recycling? Is winning or renewing municipal contracts in this competitive environment increasingly dependent on the bundled services you're able to provide municipalities?
Yeah. I don't think the bundling of recycling with residential slows down. In fact, frankly, it's more of an opportunity to bundle it because, given the asset mix that we have, we're one of the few companies that can actually make money on recycling. It probably gives us a little bit of a competitive advantage as far as bundling recycling with residential services. When we look at the residential line of business, we start out with, let's keep the contracts that we have at current rates or higher rates. Keeping the contract that you have is all about service, right? Most municipalities, if they've had your service for a long time and they're happy with it, the citizens aren't looking for a change just to save a little bit of money.
The first part of our residential strategy is keep the contracts that we have at the same or higher rates, and we've got a very high success rate of doing that. Then, the second piece is find out where we can be competitively advantaged. If it's in a market where we have recycling capability and no one else does, can we bundle it with recycling capability? If it's in a market where we have different types of disposal assets and different green initiatives that we can bring to the table, and that's what the customer wants, that's how we'll differentiate ourselves. For us, it's a two-part strategy. It's make sure you keep your current contracts, and that's by providing spectacular service.
Then it's find out where we can win bids that aren't based solely on price, because if they're based solely on price, we aren't going to win. Let's find those markets where service, recycling, green initiatives make a difference, and let's go in and win those bids.
All right, thanks for that.
Several things.
Go ahead.
We almost look at it by line of business because what differentiates you in the industrial line of business is different than what differentiates you in the residential line of business. In fact, we're in the process of going through a strategy preparation to present to the board here in August, and we're focusing specifically on differentiation in one case, and it is by line of business. Maybe we bring different technology to the table. Certainly operating efficiency, because so much of the residential business is driven by price. You got to be as efficient from an operating standpoint as you can in residential.
Right. Got it. Yeah, thanks for that.
Absolutely.
I will now turn the call over to Mr. David Steiner for closing remarks.
Thank you. Thank you all for joining us. We've had a strong start to the year. We expect to finish the year strong, and we'll see you next quarter. Thanks again.
Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1:30 P.M. Eastern Standard Time today through 11:59 P.M. Eastern Standard Time on August 6th, 2015. The conference ID number for the replay is 64809894. Again, the conference ID number for the replay is 64809894. The number to dial in for the replay is 855-859-2056. This concludes today's Waste Management conference call. You may now disconnect.