Waste Management, Inc.
Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

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. [Operator Instructions] 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.

[Ed Egl:]

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. 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 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. Additionally, any comparison 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. David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the earnings press release. EPS, effective tax rate, income from operations, income from operations margin, operating EBITDA, operating EBITDA margin, operating cost, operating cost as a percent of revenue, SG&A and SG&A as a percent 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 our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m. Eastern Time today until 5 p.m. Eastern Time on August 6. 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 [phone] and enter reservation code 64809894. Time-sensitive information provided during today's call, which is occurring on July 23, 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. Now, I'll turn the call over to Waste Management's President and CEO, David Steiner.

[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, to 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 generates significant cash, as our cash provided by operating activities increased 47% and our free cash flow grew 30%. We are pleased with these results and we expect the positive momentum to continue to build through 2015 and into 2016. Our pricing programs continued to be a big part of our earnings growth and margin expansion and 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 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. As bottomline dollars that count in core price reflects the bottomline impact from pricing. So while we said that yield would be around 2% of the year, we are not concerned with the slight drop in yield as the absolute dollars to the bottomline from pricing remained 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 improved 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. So pricing efforts are right on track and 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 negative 3% reported in the first quarter of 2015, a sequential improvement of 170 basis points. Although, overall volumes continued 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 negative 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 improved again, as the rate of loss in commercial volumes improved 280 basis points compared to the second quarter of 2014 and 60 basis points sequential, from a negative 2.8% in the first quarter of 2015 to a negative 2.2% in the second quarter 2015, and the momentum improved throughout the quarter, with June showing better volumes than April and May. We also saw service increases exceed decreases in the quarter. Finally, new business in our commercial and industrial lines combined exceeded loss business for the first time in three years. So we are predicting a dramatic and fast turn to positive volumes, but we continue to see the light at the end of the volume tunnel and we would expect volumes to strengthen through the rest of 2015 and into 2016. Turning to recycling, as you heard us saying many times, the current recycling model is broken and we and the entire industry need to fix it. We have seen progress in our recycling operations, but the issues are complex and it’s not an overnight fix. We are also working together with our customers, vendors and industry groups, and we have made progress as we are finding some acceptance for better contract terms and higher fees to offset the higher processing costs that we are 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 continued 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 our operating cost per ton compared to 2014. We expect to continue to see improvements in the second half of the year, but low commodity prices will continue to be a challenge. With respect to the deployment of our free cash flow from operations in our Wheelabrator divestiture we will continue to seek a balanced approach to buying solid waste businesses, repurchasing shares and maintaining the strong yield through our dividend. With respect to acquisitions, we believe that in 2015 we can execute agreements to add an additional $50 million to $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. In the fourth quarter we will determine if we have additional acquisition candidates likely to occur or if we want to deploy cash to repurchase shares. And of course, we will continue to maintain a strong dividend and a strong balance sheet. In conclusion, we're pleased with the strong results to 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 operation, 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. So the year is playing out pretty much as we expected, but our people are doing what they need to do to offset the recycling and currency headwind. Their efforts have been extraordinary and on behalf of the entire senior leadership team we thank them for their excellent. I'll now turn the call over to Jim to discuss our second quarter results in more detail.

[Jim Fish:]

Thank you, David. In the second quarter of 2015 our focus on reducing SG&A costs continues to bear a fruit. Overall, SG&A cost 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 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 2014, we expect to achieve our full-year SG&A goals of reducing SG&A cost 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 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 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 to $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 $54 million increase revenues from acquisitions and $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 in 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 were strong and that much more encouraging when you consider about $30 million 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 internal -- 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% since 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. And outside of energy services, our industrial volumes were positive. Residential volumes 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 internal investment is accretive to shareholders. This core price in 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 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 and operating margin grew 70 basis points. Operating EBITDA grew $16 million and 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 cost. Overall operating cost improved $56 million in 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% and 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 2015, a reduction in deferred taxes and utilization of state net operating loss -- 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. And for that, I want to thank them. For more than halfway through the year, we were very confident that we’ll have a successful year. With that, Janisha, let’s open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Corey Greendale of First Analysis.

[Corey Greendale:]

Hey good morning.

[David Steiner:]

Hey Corey.

[Jim Fish:]

Hey Corey.

[Corey Greendale:]

Just a few questions. So, first of all, I 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?

[David Steiner:]

No, really the prices haven’t come up the bottom. I mean, to the extent they have come up the bottom. It’s been very marginal. So we’re still relatively close to sort of breakeven when it comes to processing cost versus commodity sales. So no, the impact if anything I think the discussions have become more pronounced with the customer. And 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.

[Jim Fish:]

Corey, when you look at the weighted average commodity prices, it was about $83 in Q1 and $83 in Q2. So really the improvement we’re seeing is through our cost efforts on cost of good sold and operating cost.

[Corey Greendale:]

Okay, yes, it is more -- at least the numbers I have seen, it is more in July that came more meaningfully off the bottom, but I'm looking at OCC and newsprint primarily, so maybe the…

[David Steiner:]

Yeah. OCC seems to have stabilized a little bit but still at low levels.

[Corey Greendale:]

Okay. Then the next question, David, clearly the tenor on the volume environment is getting increasingly positive. I just want to make sure I am hearing you correctly. I think you are saying you would expect volumes to get kind of increasingly less negative each quarter in the back half, but you are not necessarily calling for it to go positive, but just want to clarify that?

[David Steiner:]

Yeah. And you know what we're trying to do in order to give you even a little bit more clarity is to separate it between, what we’re calling sort of our core solid waste volumes than overall volumes. And so when we look at it, we look at those core solid waste volumes which were negative 0.6% in the quarter. And we would expect that to improve in the third quarter and in the fourth quarter so that, look, we are not 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. But 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.

[Corey Greendale:]

Okay, great. And then a question on the free cash flow, I am 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 net benefits this year. Can you clarify is that the right number? Have we already seen that whole benefit? And what should we expect in free cash flow breakout between Q3 and Q4?

[Jim Fish:]

Yeah. So that’s right $210 million was kind of the early payments in Q4 of last year. So we kind of backed out $216 million to get to a number where we think that's 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 if you normalize free cash flow for CapEx, we’re in a position where we've actually overcome the WTI divestiture which is pretty amazing in and of itself. For the remainder of the year, if you tackle on what we think was -- is achievable which was last year -- 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 $1.5 range for free cash flow.

[Corey Greendale:]

And Jim, without asking for kind of operational guidance for 2016, if you just look at movement in cash taxes, would you expect that free cash flow would be up in ‘16 or could it be down because of a movement in cash taxes?

[Jim Fish:]

Yeah. If I take our guidance for this year at $1.5 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 13.5 to 14.0. Not that we’re going to give you a lot of guidance, just yet.

[Operator:]

Your next question comes from the line of Alex Ovshey of Goldman Sachs.

[Usha Guntupalli:]

This is actually Usha Guntupalli on for Alex. How are you?

[David Steiner:]

Good morning. Doing well.

[Usha Guntupalli:]

Great. One more question on recycling, assuming commodity prices stay flat at current levels, you are obviously working on reducing costs in this business, but when you expect the business to turn earnings positive at current commodity prices?

[David Steiner:]

Yeah. We’re earning in positive actually at current prices. Just slightly EBIT positive and certainly positive from an EBITDA point of view. So we didn’t lose money in recycling in the quarter. We just did $0.02 worse than we did last year. So it’s a year-over-year comparison. So 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. So that's why we’ve got to get those earnings up.

[Usha Guntupalli:]

Got it. That's helpful. And on the yield, yield seemed 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?

[David Steiner:]

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 we look at yield, there's a lot of different factors that can play into that. I will let Jim talk about a few of the ways that yield can -- 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. But I will let Jim talk a little bit about difference between yield and core price.

[Jim Fish:]

Yeah. I think probably a good example of that is our Energy Services business. Typically that business has a longer, quite a bit longer length of haul than our ordinary business. So, 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. So as the Energy Services business has slowed due to the falling oil prices, we've seen a decline in yield but not a decline in core price or unit profit.

[Jim Trevathan:]

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 or 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 effects yield and that’s what happened in Q2. But it has no effect on margin or core price.

[David Steiner:]

Yeah. You can imagine, just to sort of put some color around what Jim Trevathan said. You can imagine that right now there is 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. So it's not a profitability issue. It is 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. And so as you’ve seen more growth in places like Texas where it's very profitable, but it is just a lower unit rate versus the Northeast, that's what drives sort of those mix issues. And so when we look at that, we say okay, the yield is down but profitability is up. That’s not such a bad thing. And 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. And so core price is really the true indication of what we're doing. And as you saw with core price of 8.6% industrial and 5.8% in commercial, it's still running at a pretty hefty rate.

[Operator:]

Your next question comes from the line of Joe Box of KeyBanc Capital Markets.

[Joe Box:]

Hey. Good morning, guys.

[David Steiner:]

Good morning, Joe.

[Joe Box:]

I just want to review the capital deployment strategy post Wheelabrator. Obviously, you guys have Deffenbaugh under your belt and I know you have got $50 million to $75 million of EBITDA lined up from deals that are going to go next year. Just curious if you have gotten all the deals done that you’ve expected, because externally it looks like or it seems like that you guys are shooting for more deals when you sold Wheelabrator. And then just as a quick follow-up to that, the items that you lined -- the items that you mentioned in the pipeline, are those solid waste companies or are they outside of solid waste?

[David Steiner:]

Yeah. When we are looking at companies, they are all going to be solid waste. We really wouldn't look to stretch outside of, sort of our core business when we are doing acquisitions. The acquisition -- you always think that you are going to have this money to spend. There is plenty of people out there to sell and it should be fairly easy to replace the EBITDA. And then once you get into the market, you realize there's a hundred different issues that affect sellers, right, sometimes their family businesses. And it's hard to get the family over. Sometimes there's higher expectations for pricing. And so when we went into it, we said look, if we can replace the Wheelabrator EBITDA at good accretive multiples, we will 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. So, we were sort of in a win-win situation. And rather than run out sort of in 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. And so what we like to, when we prefer to buy businesses that replaced the EBITDA rather than buying back shares, sure we would because that's a little bit more accretive for our shareholders. But we’ve got to maintain our discipline on pricing and we’ve got to realized 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. And so we certainly think that overtime, we will replace that roughly $200 million of EBITDA from Wheelabrator. It’s just not going to happen overnight.

[Jim Fish:]

And Joe, as I said earlier to Cory'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 property activities and you back out the cash tax benefit, we are $45 million in second quarter of last year and that quarter includes all the divested businesses. So on the net cash from operating activities line and on the free cash flow line as well, you’ve got to normalize the free cash flow for CapEx. But on both those lines, we have essentially replaced Wheelabrator and Puerto Rico and Maritimes and really the only acquisition we've done is Deffenbaugh and we’ve had in the company for a quarter now. So what we will do in terms of capital allocation is continue to opportunistically buyback shares thing here, which we did in Q2 and again in Q3. And look to use those proceeds to buy companies at attractive prices.

[Joe Box:]

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, and maybe talk about if you are participating in the new RFP and how you sit in that market.

[David Steiner:]

Yeah. Joe, I will address the bid that’s out now, the RFP that’s out. We have provided a proposal for that volume. We are on the shortlist along with Progressive. It appears the city has begun discussions with Progressive and we are awaiting what the next steps are. Progressive, as you remember, was incumbent for that volume. And what happens to I guess will occur over the third and fourth quarter. We still have the transfer stations employees receiving volume from the New York City and a couple of those big transfers, Joe and nothing has changed with regard to that volume.

[Operator:]

You next question comes from the line of Scott Levine of Imperial Capital.

[Scott Levine:]

Hey. Good morning, guys.

[David Steiner:]

Good morning.

[Scott Levine:]

So, just looking back at your initial guidance for this year, I think, assumed 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. So, really just trying to get a sense, you are 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?

[David Steiner:]

Yeah. It is 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 are getting from the new volumes is better than we thought it would be. And so the point is that we are getting the right volumes. We've consistently fit or beat our targets on our SG&A numbers and on our operating costs. And so really, it's 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. And then obviously, we've got the interest savings and share count going down from the share buyback and that’s benefiting the year. And so 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. That's like we said, that’s a long-term issue but we're making good progress on it.

[Scott Levine:]

Thanks. And to be clear, is there -- and I don't know if you mentioned this -- is there a tax rate assumption implicit in your guidance for this year now or has that changed at all or no?

[David Steiner:]

For the remainder of the year, I would assume that, that will be at 35% and that's what we’ve baked into the guidance.

[Scott Levine:]

Got it, 35%. Okay. And then as a follow-up, I think, David, you mentioned that the acquisitions you are contemplating here in the back half, into 2016, are all solid waste. Just wanted to confirm that's right, and 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 has changed so dramatically?

[David Steiner:]

Yes. What we are looking in the back half of the year is most certainly solid waste assets. When you look at things like Energy Services, we are going to be a player anytime, one of those transactions becomes available. We think long-term that a good space to be. Clearly, short-term it has some challenges and 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 will play in every one of those bids, but 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 the short downturn. We are not going to make that assumption. When we look at it, we are going to make an assumption on where we think the business is going to go over the next 5 to 10 years and we are going to evaluate accordingly. So, 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. So, I would expect that if you look at what we are going to buy over the next year, it will be focused primarily on solid waste.

[Scott Levine:]

And what are sellers' expectations there in general? Is that market kind of more rational in your view than oil services or not?

[David Steiner:]

Yes. I mean, 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 eight times, 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 eight to nine times EBITDA. Why would I pay someone more than eight times EBITDA when I can buy a business I know really well, our own business at eight times EBITDA. And so, look, we have lost a lot of deals right out of a shoot because sellers are expecting 10 to 12 times EBITDA and that’s just a number that doesn’t work with our model. So could we buy more businesses? Absolutely, but we’d be buying those businesses at very high multiples, which obviously reduces the benefit to our shareholders. And so we will continue to look to those deals that we can buy pre-synergies at eight times or less, and then post-synergies hopefully at sort of as we’ve always said 5.5 to 6 times EBITDA. If we can do that, we are pretty much guaranteed that come hell or high water, it’s going to be accretive to our shareholders.

[Scott Levine:]

Got it.

[Jim Fish:]

I think kind of the opportunity landscape here in terms of what sellers are looking for is pretty broad. I mean, there is some folks that are looking for and in some cases getting 12 to 15 times. We are not in -- we are not talking to those folks, but there are folks that are much more reasonable and obviously Deffenbaugh was one that we felt we got at a very attractive multiple. And so we will continue to talk to companies like them.

[Scott Levine:]

Got it. Great. Thank you.

[Operator:]

Your next question comes from the line of Al Kaschalk of Wedbush Securities.

[David Steiner:]

Good morning, Al.

[Al Kaschalk:]

Good morning. David or Jim, I just wanted to clarify on these deals that you’ve laid out, 50 to 75, are these close? Are we at the goal line, or are these things that still have a few hurdles to get over? I am just questioning what put this type of color there today.

[David Steiner:]

Yes. Well, so I am going to define the goal line for you, Al. There is really two goal lines. There is getting a deal signed. And then the second goal line is getting a deal approved by the government. And getting the deals signed is a pretty simple process. For some reason, the government has been taking a long time. I mean, look, you saw our Kansas City deal and it took them eight months to approve a deal where we weren’t even in the market, right. And so it didn’t seem like it should take that long to approve it. And it took a very long time for the government to approve it. Now they’ve got a lot of big deals in the pipeline at Department of Justice and FDC. And so I assume that’s what’s causing the delays. And so 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. And so 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? And that’s just such a wildcard that that’s why we wanted to let you all know, we pretty much got this deal signed up for $50 million to $75 million of EBITDA, but now we got to get it across the regulatory goal line, the due diligence goal line. There is as you know from signing to closing is complicated not only from a business and due diligence point of view, from a government point of view. So we are pretty much past the first goal line. We are now marching towards that second goal line.

[Jim Fish:]

And that second goal line Al is that’s not an easy one to get over, right. We had a deal recently where we had agreed. We crossed the first goal line. We had agreed on purchase price months ago, but the HSR process was daunting enough for these folks that they just decided for now we are going to back away. So we both agreed to a -- what we both agreed was a reasonable purchase price, but we just felt like that second goal line was not going to be achievable at least in the near term. So we decided to part ways for now.

[Al Kaschalk:]

Okay. So it sounds like this is multiple, several acquisitions as opposed to a single transaction.

[Jim Fish:]

Yes. Well, the $50 million to $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.

[Al Kaschalk:]

Okay. 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 2.6 or 2.8, pardon me for not recalling that. And you had articulated as a company getting towards that 50 basis points down to flat exiting, I believe exiting '15. So can you maybe just put a little better -- refine the sequential trends here? And in particular, is this -- this was an overall volume comment, or was it specific to solid waste about the volume trend?

[David Steiner:]

Yes. It was specific to solid waste, but let me put some sort of color around where we see the volumes going for the back half of the year. So let’s start out with our industrial volumes. Our industrial volumes were flat for the quarter and the only reason they were flat is because energy services obviously is down. So when you look at the rest of the business, industrial is actually positive. So 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. And we don’t see anything on the horizon that would start that momentum. And so even with energy services down, they are flat. So we would 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%. Now that’s a 60 basis point improvement from the first quarter. We would sort of expect that rate of improvement to continue. And so if you see that rate of continuum -- rate of improvement continue by the back half of the year, you are sort of at that negative, call it negative 1% on commercial volumes. Residential volumes were down, let’s call it down 3%, 3.1%, but we don’t really honestly even look at residential volumes, because when we’re losing those volumes, they are generally low profit, very low margin volumes. And so we are not that concerned about losing those volumes. And then the land bill continues to be very strong. So when I look at volumes for the back half of the year, I look at volumes, I am looking at the volumes that would make us money, right. And 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. And so when I look at that, when I look at those three components of the volume, I’d say look the rest is all just noise. As Jim talked about when you are getting, when you are passing through transportation to your customer and you charge your customer $100 for transportation, they pay you $100 and it costs you a $100, you make no margin on it. I don’t care if I have that kind of revenue or not. And so 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.

[Jim Fish:]

Al, I would add one thing there which is recycle volumes. And I will give you an example. We had a plant that, big plant that that’s essentially cut their volumes in half and by doing that, they improved the quality of the material coming in. They went from call it $0.5 million of month loss to breakeven by doing that. So that’s similar to the resi volume. And that yes, we lost volume on the recycling line of business, but not a bad thing for us on the income statement.

[Al Kaschalk:]

Right. Okay. My final question, I want to ask about this whole capital allocation. And question why, I guess, you lay out -- by the way, is the share repurchase either open market transactions versus an accelerated share repurchase?

[Jim Fish:]

Al, we haven’t made a final call on that, but we didn’t accelerate share repurchase in the first quarter. And I wouldn’t be surprised if we did one in the second.

[Al Kaschalk:]

Okay. I guess to that end, David, why quantify a certain -- one quarter out, a share repurchase program target versus you are 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?

[David Steiner:]

I think that’s a great point. And where we are right now is we are still sort of the in the -- what I would call the final stages of replacing that Wheelabrator EBITDA. I will tell you that as Jim point out, we basically replaced it through operations, that obviously takes a lot of pressure off of our need to do acquisitions. But 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’re in share repurchases. So I would expect that when we give guidance for 2016, we will be able to say okay here is what our expectations for acquisitions and here is what our expectations for long-term share repurchases and approach to the dividend. And so I would say that in 2000 -- at beginning of 2016 after we sort of went through the market and determine 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.

[Al Kaschalk:]

But to be fair, David, I think 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, because I think you said earlier this year that by the end of Q2 you would have an idea what the M&A would look like to execute here.

[David Steiner:]

I am asking for an extension, but I am telling that -- but I am saying that yes, but like I said earlier, you go into this process thinking well this is going to be simple. There is a bunch of sellers out there that want to sell in and we are buyer, and this should line up fairly easily. And 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 be 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 that the risk of HSR was too much for the seller to take on, and so we pushed that aside. And so I am not looking for an extension, I am 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 have liked it to play out. And so 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.

[Al Kaschalk:]

Yes. But I guess you’re playing a little analyst earlier in terms of eight times, nine times on what you’re trading at. And if you are 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. But I certainly understand the need to grow back the EBITDA level. But I think in looking at what the realization is on asset valuations out there, it looks pretty attractive at eight times here.

[David Steiner:]

Yes, 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.

[Al Kaschalk:]

Great. Thank you, David.

[David Steiner:]

Thank you.

[Operator:]

Your next question comes from the line of Tyler Brown of Raymond James.

[Tyler Brown:]

Hey, good morning, guys.

[David Steiner:]

Good morning, Tyler.

[Tyler Brown:]

Jim, so 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. So if you assume that the cash tax normalizes, I think you noted kind of run rate base of 1.35, but does that incorporate this $50 million to $75 million of EBITDA that you have kind of lined up?

[David Steiner:]

It does not. So that is just growth on top of it.

[Tyler Brown:]

Okay.

[David Steiner:]

So what I’m coming up with at 1.35 is really normalizing. And by the way, what we'll do is I didn’t want to give 2016 guidance, so I kind of gave you a starting point there 1.35 to 1.40.

[Tyler Brown:]

Exactly. Okay. So then, you would add on kind of acquisitions, maybe some rollover of Deffenbaugh, and kind of whatever your growth is in the core business, plus or minus the other stuff?

[David Steiner:]

That we can provide.

[Tyler Brown:]

Okay. Perfect. That’s very helpful.

[David Steiner:]

In models.

[Tyler Brown:]

Okay. Very helpful. Thank you. And then, can you just -- can you guys kind of work through or kind of remind us just what percent of the book is linked to CPI? I am just curious how the 0% all-in prints today are going to impact the '16 pricing? I mean, is that more of a back-half issue? And I mean, should we expect the core pricing will take a step down in ', just mathematically from CPI?

[Jim Fish:]

Well, to answer first question, Tyler, it’s about 40% of our businesses 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 midyear and then end of the year adjustment, so it's pretty evenly spread for us. And what we've always said about CPI is to the extent that it hurts us will make it up elsewhere with open market.

[David Steiner:]

And when we talk about CPI, CPI is not -- there is not one CPI, there is a lot of different CPIs in 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 given people 3% pay raises, CPI just doesn’t cover your costs. And so, what we've been trying to do in our contracts is look at different types of indexes that more reflect the true cost in our business and try to get those true costs. And so 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. And so 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.

[Jim Fish:]

David, we've had some success in doing that in the first half of this year in some renewals where we moved to more of a refuse index rather than just CPI, so there is some positive trends occurring.

[Tyler Brown:]

So, I mean, is it a big portion of that 40%, or is it just kind of a small slice?

[David Steiner:]

Yes. It is probably in the 10%, 15% of that 40% and that maybe it's 20%. I don’t have the numbers in front of me Tyler, in that range.

[Jim Fish:]

And typically Tyler, where we’ve seen more success in this is in the franchise markets in California. And we’ve had a couple of big franchise agreements that we moved to refuse rate indexes.

[Tyler Brown:]

Okay. Great.

[David Steiner:]

Tyler, I was talking about at lower end what we’ve done in the first half. Oakland contract is an example of when we did last year that’s going into effect this year that’s on that same basis.

[Tyler Brown:]

Okay. Great. And 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 am curious, is that a third-party number?

[David Steiner:]

Yes.

[Tyler Brown:]

Okay. Any color on why landfill MSW has been so strong?

[David Steiner:]

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 door and landfill. And that was very successful and that's when we saw the rates go up. And then look, over the last couple of years, I think we've also seen as an industry we’ve seen MSW growth. So, 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.

[Jim Fish:]

The encouraging part about not only the volume piece there but really the price piece, if you look at unit rates and our landfills, I was looking at last five years, I mean we’ve really increased unit rates at our landfills by way stream, whether it’s MSW or C&D or special waste. So I was kind of thinking along the same line as you. Does this volume mean that we’re seeing a deterioration in price as I think about it by in unit rates? And it’s not. I mean, since 2011, nice increases and it’s every year nice increases for MSW, special waste, C&D.

[Tyler Brown:]

Okay. Yes. 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?

[David Steiner:]

Absolutely, absolutely.

[Tyler Brown:]

Okay. All right. Thank you.

[David Steiner:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Hoffman of Stifel.

[Michael Hoffman:]

Hi, David, Jim and Jim. Thanks for taking my questions. A little bit on the volume. If you look at commercial same-store, kept the customer, have the customer, that volume is up, isn't it, in the container?

[David Steiner:]

Yeah. That is correct.

[Michael Hoffman:]

Yeah. Right. So…

[David Steiner:]

So…

[Michael Hoffman:]

… when you have a 72 from third-party, there is some number that’s got to be in that direction in your commercial market same-store?

[David Steiner:]

Yeah. That’s correct.

[Michael Hoffman:]

Right. Right. So you are benefiting from what the industry is 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?

[David Steiner:]

Yeah.

[Michael Hoffman:]

Okay.

[David Steiner:]

And again look, we don’t want to declare that good times are here. But you all have heard me say over the last couple of years that that we have fits and starts in the various statistics. And we still haven't seen a very clear-cut trend until last quarter and that trend continued into this quarter. So, when you look at -- this really is the first quarter where all of the indicators are positive. And again, that doesn’t mean, we’re going to go from negative 2 to positive 5, but we don't have to, right, in order to drive to make our numbers in the back half of the year. We just want to see continuous improvement. So wage are up, service increases over decreases are up, the churn rates down. On the industrial side, we’ve had really strong new business pricing. So this is really the first quarter where I would say, all the indicators are positive. Now 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.

[Michael Hoffman:]

Okay.

[Jim Fish:]

Michael, I want to really reemphasize something here that and 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 priced or your volume and there's nothing in the middle. And so while we’re seeing some nice momentum here on the price side and David went through in the detail a few minutes ago. We are not conceding our strong approach on pricing. I mean and that's why we wanted to make sure we gave that explanation of yield versus core price that Jim and I walk through, because we are as strong as we have ever been on pricing. We’re just starting to see, maybe see economy, but I was starting to see that that are volumes are looking promising. It’s early in the third quarter but July looks promising as well.

[Michael Hoffman:]

Okay. So, you have set, let me -- set me up for a perfect follow-on, Jim. I think of waste is having sort of put their foot down on the accelerator on price right to the floorboard for the last four or five years? And 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 are going 80, but now you're not pushing away what could be deemed good business in particularly commercial that -- now that this volume trends coming too?

[David Steiner:]

Yeah. Look, just the simple math, you all have heard us say it a million times that you need to get 3% volume in order make up the 1% price, I mean that just simple math. And you can't get 3% volume by giving away 1% price. So the waiting 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 you think the industry is going to do. I mean, look, we’re the largest player and we recognize the position that we’re in. So, 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. And so, I don't think when you talk to industry participants, I don’t think you'll ever hear anyone say, well, Waste Management is doing a volume graph in market X or market Y. Do we have individual contracts that we've done where we've gone after volume, but 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 it is that certainly not a pattern that you will see out of Waste Management. And so, we're always going to favor price over volume, but in a growing market, we are to get our fair share of the volume too, because we can get our fair share of the volume and that won't have an effect on the overall industry pricing dynamic. And so, look, it's pretty simple economics in a better economy. We think we can get both price and volume.

[Michael Hoffman:]

Okay.

[Jim Fish:]

Michael, I add to that that we’ve also because of our price leadership strategy have begun efforts to improve our service. We realize that there are some improvements that’s need to be made to make sure we're providing that service that’s worthy of our priced leadership position. 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 progressed in that regard.

[Jim Trevathan:]

Jim, I was just kind of 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 at to Jim's point about differentiated strategy. I mean, you can still go 100 miles an hour on pricing if you're differentiated. I mean, if your strategy is differentiation with things like the industrial business where we provide expertise and that others don't have and 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 pricing accelerator.

[Michael Hoffman:]

Okay. So but to Jim T's comment, then the churn rate must be coming down if the service relationship is getting better?

[Jim Trevathan:]

It was -- it’s not where we wanted to be but 10.3 is a whole lot better than 12.2 than it was -- that Q2 of ‘14. So absolutely, we see improvement and we expect more.

[Michael Hoffman:]

Okay. And then ….

[David Steiner:]

And Michael just to expand on that so should be loss if we improve the churn rate at 190 basis point but we didn't materially increase the rollbacks, right, I mean, in the past what we’ve seen is that we have the one of the ways we improve the churn rate is our rollback percentage grows from 25% to 60%. This quarter we reduce the churn rate by 190 basis points with virtually nonexistent change in our rollback percentage.

[Michael Hoffman:]

Okay. So we have known each other too long because you just anticipated my next question. So that was you’re retaining more price too then, is that…

[David Steiner:]

You got that.

[Michael Hoffman:]

Okay. All right. So, now I am changing gears a second. Some housekeeping questions, Jim Fish. Starting share count for 3Q should be about $454 million or $454 million, is that the right way to think about it?

[Jim Fish:]

I think more like $457 million, I think is the number.

[Michael Hoffman:]

Okay. What's the $451.8 million then that it’s in the press release, plus the comp numbers like $2.8 million? I can follow-up on that, but I just want to make sure I have the starting place. And then on tax rate, just following up on the question that was asked earlier, that's 3Q and 4Q should have a 35%, not that the full year will be 35%?

[David Steiner:]

Correct.

[Michael Hoffman:]

Okay. And working capital, you didn't talk about that. Where are we on DSOs and payables for your plan there?

[David Steiner:]

I’m sorry, as of DPOs?

[Michael Hoffman:]

Yes.

[David Steiner:]

DSO, DPO. Yeah. We’ve made some nice progress there over the last two and a half years. We made nice progress sequentially. Year-over-year and sequentially from Q1, we've improved DPO by about a little bit less than three days, DSO by over 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 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 hospitality that we couldn’t crossover at some point down the road. We are still away from that. Some of our areas have started to crossover where the DPO is higher than their DSO. But, yeah, I'm pleased with the progress but won’t be completely pleased until we crossover like most companies are.

[Michael Hoffman:]

All right. So just to put numbers on that, you are still in the mid-40s on DSOs and high 20s on DPOs, days?

[David Steiner:]

We are in the low 40s on DSO and we’ve crossed over to 30 now. We are about 30 on the DPO.

[Michael Hoffman:]

Okay. Okay. And then I didn't -- 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?

[David Steiner:]

Yeah, the special waste was 2.4% as I recall. Let me just look, yeah, the volume was 2.4% for special waste. And 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% of revenue-generating cover, which is essentially, special waste was about 10%.

[Michael Hoffman:]

Well. And I guess where I was going, it was wet in a lot of places in the country and special waste is predominantly dirt, so there is 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?

[David Steiner:]

Yeah. We actually have that discussion with our folks out in the markets. And we obviously have some left 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 slowdown in the back half of the year. So, I think they are pretty optimistic about it.

[Michael Hoffman:]

Okay. And then on the deal commentary, just to be clear, I get the ones you have 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 are targeting at the moment.

[David Steiner:]

Yes, no. Absolutely, we would. And we consider those, sort of core solid waste types 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 that where we can take our solid waste expertise and apply them very easily.

[Michael Hoffman:]

Okay. Saving the best for last, Jim Fish, on free cash flow. If I take your $1.5 billion and I look at it on 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, so I start at $1.2 billion, and then you are suggesting you will be $1.35 billion potentially. You're not giving guidance. But none of that has any deals in it, so that's a pretty healthy $150 million swing. How much of that is working capital versus the optimization programs, cost saves, organic?

[Jim Fish:]

Part of it, Michael is, you pull out $100 million in acquisitions, I mean in dispositions. But we do dispositions every year. We sort of always assume that we’re going to call it $50 million to $100 million of asset dispositions. And so that’s -- I'm not sure that you can pull out that $400 million.

[David Steiner:]

And help me again. How did you get to the $1.2 billion, I know you pulled out the cash tax. What else did you pull?

[Michael Hoffman:]

Well. You have asset sales, so I can't predict that number, right, because I can drive a truck between $50 million and $100 million. So if I say, all right, what is 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 and there is no deals in that. I'm just trying to understand.

[Jim Fish:]

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 11.50. 2015 CapEx is going to be 1.3. So by the way on a smaller business at this point, I mean. We don't have Wheelabrator. We don’t have Puerto Rico. We don’t have Maritimes. So I'm adding back a bit there in CapEx too. But it’s hard to say when our -- we know we are going to have some CapEx next year for Oakland. We had some this year for Oakland. So it’s not going to $11.50 again but it may not be $13 either.

[David Steiner:]

Hey Michael, you and Jim were talking the same number, the only differences is the divestiture piece, basically.

[Jim Fish:]

And I think that’s the whole point Michael is that the divestitures and the CapEx that can move around a little bit. So when you look at the sort of a long-term history of what we’ve done both on CapEx and on divestitures, you sort of get to that 1.35 number.

[Michael Hoffman:]

Okay, yes. What I was really trying to understand was what made up the $150 million, and so some of it is CapEx. How much, then, is organic versus the optimization programs you have initiated over the last couple years? How would you…

[Jim Fish:]

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. So that’s that's probably a better time to try to parse it down to the penny.

[Michael Hoffman:]

Okay.

[David Steiner:]

We still did get asked the starting point though so we did have variance.

[Michael Hoffman:]

Right, so we are both agreeing on one, two, so that -- good enough. All right, thanks.

[David Steiner:]

Certainly.

[Jim Fish:]

And Michael, your question about share counts, I mean 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 midyear share repurchase.

[Michael Hoffman:]

Got it. Okay. All right, perfect. Thanks.

[David Steiner:]

Thanks, Michael.

[Operator:]

Your next question comes from the line of Barbara Noverini of Morningstar.

[Barbara Noverini:]

Hi. Good morning, everybody.

[David Steiner:]

Good morning.

[Barbara Noverini:]

You talked a little bit about differentiation earlier in order to push price. And I thought we would 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. But 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 are able to provide municipalities?

[David Steiner:]

Yeah. So 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 actually make money on recycling. So probably give us a little bit of a competitive advantage as far as bundling recycling with that -- with residential services. But 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 rate. And keeping the contract that you have is all about service, right. Most municipalities, if they had your service for a long time and they’re happy with it but citizens aren’t looking for a change just to save a little bit of money. And so the first part of our residential strategies keep the contracts that we have at the same or higher rates. And we’ve got a very high success rate of doing that. And then the second piece is finds out where we can be competitive -- competitively advantaged. So if it is in a market where we have recycling capability, no one else does, can we bundle it with recycling capability? If it’s in our market where we have the 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 differentiate ourselves. And so for us it is a two part strategy. It’s make sure you keep your current contract and that’s by providing spectacular service. And then let’s find out where we can win bids that aren’t based solely on price because if they are based solely on price, we aren’t going to win. And so let's find those markets where service recycling, green initiatives make a difference and let’s go in and win those bid.

[Barbara Noverini:]

Thanks for that.

[Jim Fish:]

I mean, 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. So as we've -- in fact we’re aware of the process of going through a strategy preparation to present to the board here in August and we’re focusing specifically on differentiation in any one case. And it is by line of business. So maybe we bring different technology to the table, maybe -- certainly operating efficiency because so much of the residential business is driven by price. And then you got to be as efficient from operating standpoint as you can in residential.

[Barbara Noverini:]

Great. Got it. Thanks for that.

[David Steiner:]

Absolutely.

[Operator:]

I will now turn the call over to Mr. David Steiner for closing remarks.

[David Steiner:]

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.

[Operator:]

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