Waste Management, Inc. (WM) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Tanisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2015 earnings release conference call. [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.

Thank you, Tanisha. Good morning, everyone, and thank you for joining us for our first 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 schedule for the press release included important information. During the call, you will hear our 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, more specifically references to internal revenue growth or IRG from yield or volume. Additionally, any comparisons, unless otherwise stated, will be with the first quarter of 2014. For comparative purposes, our first quarter of 2014 results have been adjusted to exclude certain amounts attributed to divested operations. Please see the tables attached to our press release for additional information. 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 in the Form 8-K filed today. 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 cost as a percent of revenue results discussed during the call have been adjusted and EPS projections are anticipated to be adjusted to exclude items that management believes do not reflect the fundamental business performance or are not indicative of our results of operations. These measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and the schedule for the Form 8-K filed today, 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 1:00 p.m. Eastern Time today until 5:00 p.m. Eastern Time on May 13. 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 16632898. Time-sensitive information provided during today's call, which is occurring on April 29, 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 expressed written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO, David Steiner.

Thanks, Ed, and good morning from Houston. We're very pleased that we earned $0.49 per share in the first quarter, an increase of almost 9% from our 2014 first quarter results, when adjusted to exclude the earnings from divested businesses and assets. Our EPS increased despite $0.03 of year-over-year headwinds from lower recycling commodity prices and the unfavorable impact of foreign currency fluctuation. Our field and corporate teams overcame those headwinds through continued improvement in our pricing and cost control programs. This led to growth in income from operations, operating EBITDA, margin and free cash flow and marked a strong start to 2015. These results were in line with our internal expectations and we expect to see continued improvement as we progress throughout the year. During the first quarter, we reinvested a portion of the proceeds from the sale of our waste-to-energy business. We completed the acquisition of Deffenbaugh Disposal at a pre-synergy operating EBITDA multiple of just under 8. Once fully integrated, the acquisition should add about $52 million of annual operating EBITDA. On the acquisition front, we continue to have discussion with sellers, but will remain disciplined and not overpay for assets. If we cannot identify core businesses to acquire at reasonable prices, we'll buy the business that we know the best, ours, by doing a share buyback. Even if we do identify acquisition targets at reasonable prices, we will still purchase at least enough shares to offset dilution and we'll begin buying those shares in the second quarter. Turning back to our operations. Our pricing programs continue to drive earnings growth and margin expansion. For the first quarter, our collection and disposal core price was 4.4% and yield was 2%. We've now seen 8 consecutive quarters of yield at 2% or better. In the first quarter of 2015, each of our lines of business had positive yield. In the first quarter, we also saw core price improve 20 basis points from the first quarter of 2014 to the highest level that we've achieved. We also saw the highest core price ever in each of the commercial, industrial and landfill lines of business. Core price in the industrial line was 9.4%, 6.6% in the commercial line, 2.3% in our landfill line and 2.1% in our residential line. This is a tremendous accomplishment by our team in light of depressed CPI levels. So we continue to use core price to drive margin expansion. And in the first quarter, our traditional solid waste business income from operations margin increased 110 basis points and our operating EBITDA margin increased 130 basis points. Clearly, the trade-off of emphasizing core price over obtaining lower margin volume remains very positive for us. Turning to volumes. Our traditional solid waste volumes declined 1.2% in the first quarter of 2015 versus a decline of 3.2% in 2014. We saw some very positive trends in our commercial and industrial lines of business. The losses in our commercial volumes improved 200 basis points from the first quarter of 2014 and industrial volume losses improved 520 basis points. Both the commercial and industrial lines of business saw the lowest rate of decline in 7 quarters. So the volume trends are very positive. The revenue trend was not as positive but it reflects the loss of low margin work that we intentionally shed. Total company volumes declined $95 million or 3% in the first quarter. The overall volume decline stems from a $51 million decline in national account contracts and residential business as we shed this low-margin business, consistent with our revenue strategy. We also saw a $43 million decline in our commodity driven businesses, from lower recycling commodity sales driven by the West Coast port slowdown and to a lesser extent, lower landfill gas-to-energy sales. Consequently, although total volumes are down more than we expected, it's due primarily due to volumes in lower margin lines of business. While the volume trends in our most profitable lines of business are encouraging and we expect the positive momentum to improve as we see our normal seasonal upturn. Our recycling operations resulted in a $0.02 decline in earnings per share compared to the first quarter of 2014. This decline is due to the more than 14% drop in average commodity prices for the quarter and an 8% decline in volumes, associated with the slowdown in Western U.S. ports and contractual losses as we renegotiate contracts to include improved processing fee and rebate structures. On a positive note, we've seen our operating cost improve as we tighten our enforcement on contaminated loads and our capacity utilization is at the highest level that we've seen. However, the operational improvements have not been enough to offset the decline in commodity prices. So we will continue to look to improve operations and rationalize our recycling assets until we see the market improve. Given the continued weakness in overall recycling commodity prices and lower volumes, the full year impact from our recycling business is now anticipated to be closer to negative $0.10 per share when compared to 2014 versus our original outlook of between negative $0.03 and negative $0.05 per share. We also expect foreign currency translation to continue to be about a $0.01 per share headwind per quarter for the remainder of the year. So 2015 is off to a strong start and we have the momentum to achieve our full year goals of adjusted EPS of between $2.48 and $2.55 per share despite lower-than-expected recycling results and foreign currency translation headwinds. We also expect to achieve our full year free cash flow guidance of between $1.4 billion and $1.5 billion. As we move through the second quarter and see the seasonal upturn, we expect to see continued improvement in our volumes. Combined with our focus on costs and pricing, this should lead to continued growth in earnings and free cash flow. I'll now turn the call over to Jim to discuss our first quarter results in more detail.

Thanks, David. During the first quarter of 2015, we decided to refinance a significant portion of our high-coupon senior notes. As a result of the combination of make-whole redemption and a cash tender offer to purchase certain senior notes, the issuance of $1.8 billion of new senior notes, we reduced the weighted average interest rate of our portfolio by 100 basis points, extended the weighted average duration of these debt obligations by 3 years and reduced senior note debt by $181 million. The after-tax charge for the early extinguishment of debt related to these financing transactions was $344 million. We also had 2 balance sheet items in the quarter. We had a true-up of the sale of our Wheelabrator subsidiary, which reduced our gain on sale and we impaired a short-lived landfill asset. Those 2 items negatively affected our earnings by $0.03 per share but had no effect on free cash flow. In the first quarter of 2015, our focus on reducing SG&A costs continues to bear fruit. Overall, SG&A cost declined $27 million compared to the first quarter of 2014. When you adjust 2014 for the operations that we divested, our year-over-year SG&A cost improvement was $15 million, consistent with our expectations for savings from our reorganization. With the strong results in the first quarter, we expect to achieve a full year SG&A -- our full year SG&A goals of reducing SG&A cost by reducing $60 million. Turning to cash flow for the first quarter. Free cash flow was $285 million in the first quarter of 2015, an improvement of $22 million when compared to the first quarter of 2014, excluding the $221 million of free cash flow related to operations divested in 2014. Our capital expenditures for the quarter were $233 million, $33 million less than the first quarter of 2014. However, we spent about the same amount of capital as a percentage of revenue in both years. Given the strong start to the year, we still expect capital expenditures of approximately $1.2 billion to $1.3 billion. And free cash flow in 2015 is expected to be between $1.4 billion and $1.5 billion. First quarter revenues were $3 billion. In addition to the $220 million impact from the divestitures and a $25 million impact from foreign currency fluctuations, the lower fuel surcharge negatively affected revenues by $36 million. Looking at internal revenue growth for the first quarter, our collection and disposal core price was 4.4%, with volumes declining 1.2%. This led to total company income from operations growing $21 million, operating income margin expanding expanded 130 basis points, operating EBITDA growing $11 million and operating EBITDA margin growing 140 basis points. Our collection lines of business continue to see the benefit of the price-volume trade-off. Our commercial core price was 6.6%, our industrial core price was 9.4% and residential achieved 2.1% core price. In addition to the continued strong momentum on pricing, we saw some positive momentum in volume. Commercial volumes were down 2.8% the first quarter of 2015 versus the decline of 4.8% in 2014, a 200 basis point improvement, and the best result in the past 7 quarters. Industrial volumes improved 520 basis points from a negative 5.7% the first quarter of 2014 to a negative 0.5% in 2015. In April, we see industrial volume turning positive for the first time since the first quarter of 2013. Residential volumes declined 3.1% in the first quarter of 2015 versus a decline of 3.5% in 2014. But those losses were generally intentional as we pushed price over volume in our residential line. Overall, collection core price was 5.7%, with volumes declining 2.3%. The volume change was a 220 basis point improvement from the first quarter of 2014. This core price and volume led to income from operations growing almost $14 million and margin expanding 140 basis points. In the landfill line of business, we saw the benefits of both positive volume and positive core price in the first quarter. We saw same-store average MSW rates increase year-over-year for the eighth consecutive quarter, up 1.2% from Q1 2014. Combine special waste and revenue-generating cover volumes, we're a positive 2.3%, MSW volumes grew by 5.7% and C&D volume grew 10.9%. Total landfill volume increased 1.8%. This led to income from operations growing $2.5 million, which is the eighth consecutive quarter growth, and margins grew 40 basis points. We believe the weather had some impact on landfill volumes. But the special waste pipeline looks strong, so we expect to see positive landfill volumes all year. Looking at our recycling line of business. We had some challenges with low commodity prices and declining volumes. The impact of our recycling business was a negative $0.02 per share in the first quarter when compared to the first quarter of 2014. That decline would have been more than $0.05 per share if we've not been taking steps to improve contract and reduce operating costs. Those steps included: auditing inbound material to ensure compliance; renegotiating contracts to recover the appropriate our processing costs; and improving the quality of materials coming into our plants through consumer education. We were also able to improve the overall operating efficiency of our plants. As David mentioned, we expect our recycling operations are going to be a headwind all year, but we're seeing the results of our efforts to improve the operations. When commodity prices rebound, we're in a great position to see meaningful earnings improvements. In the meantime, we will curtail capital spending in our recycling operations, which will allow us to allocate more of our $1.2 billion to $1.3 billion of capital spend to our core solid waste assets. Moving to operating expenses. We continue to see improvement in all of our cost lines. With respect to total operating costs, operating cost as a percent of revenue improved 130 basis points to 64% and improved $131 million in the first quarter after adjusting for divestitures. $83 million of the improvement related to lower diesel costs and lower recycling commodity rebates to our customers. We're also seeing a continued benefit from our service delivery optimization program in our labor costs as we see improved efficiency in all of our collection lines of business. Labor and related benefits improved $17 million when compared to the first quarter of 2014. The remaining savings were primarily driven by improvements in the subcontractor costs. Finally, looking at our other financial metrics. At the end of the first quarter, our debt-to-total-capital ratio was 62.3%. Our expected 2015 weighted average cost of debt is 4.3% and the floating rate portion of our total debt portfolio was 9% at the end of the quarter. In the first -- in the fourth quarter, we returned -- first quarter, we returned $176 million to our shareholders through our dividend. As David mentioned, we expect to return more cash to our shareholders in the second quarter as we look to repurchase shares to offset dilution. Our income tax rate in the first quarter was 41%. Adjusted for items excluded in our as-adjusted results, the tax rate was 34.2%, which is closely in line with our expected tax rate of approximately 35% for the full year. To summarize our quarter with the exception of recycled commodity prices, virtually all of our financial and operating metrics were tracking ahead of our internal expectations and our previous guidance. We expect that to continue throughout 2015. I want to thank all of our employees for their hard work in the first quarter. I know that they will continue their focus to make 2015 a successful year. And with that, Tanisha, let's open the line for questions.

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

So first, I apologize. This is a little bit of a mechanical question. But in the press release, the internal growth numbers that you're giving, are those adjusted for -- are you pulling out divestitures in the denominator from the year prior period?

Yes, we are pulling out divestitures, yes.

Yes.

Okay, so in other words, if you pull out divestitures, volume was down 3% just based on the operations that you still have?

That's correct.

That's correct, yes.

Okay. Good, I'm getting a totally different number, I'm not sure why. But anyway, so my question is, it sounds like the core business is kind of moving in the right direction. So could you just talk about, a little bit more detail on the pieces that -- where the volume is declining like national accounts? Is that -- are you seeing more aggression there? Is -- do you think you're hitting the ceiling on what you can do in terms of pricing?

Yes. Basically, Corey, that's the carryover of our largest national account that we lost last year and then 2 residential franchise contracts that we lost in our Southern group last year. And as you can imagine, all of those contracts were single-digit margins and not revenue that we wanted to keep without significant price increases. So that was business that we pretty much intentionally shed.

And the volume decline didn't accelerate in Q4, correct?

Pardon?

The volume was not down as significantly in Q4 as it was in Q1 of '15, is that correct?

Well, Corey, when we looked at it, we look at the specific lines of business. When you look at the commercial and industrial line, they were actually improved from the fourth quarter. On the commercial line, we were down 3.5% in the fourth quarter, we were only down 2.8% in the first. On industrial, we were down 0.9% the fourth quarter. We're only down 0.5% in the first quarter. And that's -- really, that's what you've got going on in our business. What we're trying to say, both in the scripts and in the press release, is that we're seeing improving volumes in our most profitable lines of business. We are seeing declining volumes in our less profitable lines of business like recycling and residential. But even in residential, you can see it getting a little bit better year-over-year by 40 basis points. And it only went backwards 20 basis points from the fourth quarter to the first quarter.

Okay, yes. What I'm trying to get a sense of is just given the -- what seems to be the improving environment overall. And David, I understand things are moving in the right direction on the commercial and industrial. So just the piece like residential for example, is it getting more competitive for some reason than it has been over the past year?

Yes, no. I wouldn't say it's getting more competitive. I think residential has always been a very competitive line of business. What -- those are big contracts, big slugs of revenue and generally, you've got a lot of different bidders. So there's always been aggressive players on the residential side. Frankly, I would say that we're seeing a little bit of more stability on the residential side as folks that have taken those low margin contracts from us over the last few years start to realize they can't make a lot of money on them.

Especially Dave, when you look at the capital that's necessary to fund those new contracts, people are starting to look at it a little more diligently than we think in the past.

Corey, just to give you a sense of -- you asked about the volume in Q4 versus Q1 and you also asked about kind of the difference between 1.2%, which is our traditional solid waste volume loss and 3%. To answer the second one first, the difference between the 1.2% and 3%, 0.8% of that is commodities, 0.2% is renewable energy and then you got another 0.2% which is oil and gas. So and then you got 0.6%, which is national accounts. That 0.6% is $21 million and $18 million of that is Walmart. So to go from the 1.2% to the 3%, it's largely commodities, national accounts and energy services or oil and gas. When you go from Q4 to -- negative 0.8% on volume to that negative 3%, it doesn't look dramatically different. In fact, collection's actually up. As David mentioned, collection was up 0.2%. But then you've got energy services that was down 0.5% of that delta; you have renewable energy that was down 0.4%; you have oil and gas that was down 4%; and recycling down 0.4%. And the other one that is -- the changes from Q4 to Q1 is the landfills were down a bit versus Q4 and the reason for that is, really, special waste was a little softer than we thought, probably largely because the weather in Q1 was quite different than the weather in Q4.

Yes, that's really helpful, Jim. And one other quick one then I'll turn it over. Do you have an estimate of what the year-over-year impact -- I'm assuming it was some benefit -- was from lower fuel cost net of the lower surcharges?

Yes. That was about $0.02 in the quarter. But from our perspective, you get lower fuel because you get the recovery from the fuel surcharge. But we also have some oil and gas assets that we maintain. And so when you look at the overall effect, it was about flat.

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

A couple questions for you, guys. First, thinking about the impact of the CPI on pricing. Do you expect the impact from CPI to change on pricing as we move through the balance of 2015?

No. I don't think that we'll see a significant change in CPI. But when we look at our pricing programs, we try to look at them holistically. And if CPI is lower, then we just have to get those dollars from somewhere else. And so if we get a bump from CPI, that would be great. But if we don't get that bump, we're just going to have to pull those dollars from somewhere else and that's what we've been doing the last few years and that's what we'll do this year.

Got it. Thanks, David. And then in the recycling business, I'm not sure if you mentioned this, but is there any EBITDA in that business right now?

Right now, it's...

There's EBITDA because of the depreciation. [indiscernible] There's a lot of EBITDA.

[indiscernible] the impact of EBITs, income from operations was negative $11 million year-over-year, Alex.

Okay, okay. Got it, got it. And then just lastly, is there any visibility on potentially seeing a benefit from coal ash volumes, either towards the end of this year or into '16?

Yes. We've got a nice contract that actually begins in the second half of the year. It's not going to be -- it's not going to move the needle significantly. But it's a nice contract, a few million dollars. But we're having continuing discussions with all of the various utilities. And I'd expect that to be a nice volume stream for the next -- gosh, for the next 5 to 10 years.

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

So I just want to focus on, I think, Jim, you mentioned a 60 basis point volume headwind from national accounts and Walmart. To be clear, is that all associated with contract changes within the past 12 months or were there any additional changes this quarter? And then maybe a little bit more elaboration on your thoughts on that business in general going forward.

So I'll take that and then maybe, Jim, you can add to that. Yes. So for the quarter -- and we expect that -- well, the Walmart, that will anniversary in May, so we won't see that headwind if you want to call it that, it's a headwind on the revenue, not line -- it's not a headwind on the bottom line. But that will anniversary in May. We did lose some other contracts and some of them, we were intentional, some of them were not intentional. We lost some due to aggressive pricing and it's a competitive marketplace for sure.

Jim, what I would just add to that is that we are also winning new contracts. We have won some business, some additional business from current customers as well as some additional businesses that you'll see in future quarters. But that roll forward, in fact, from some of those large losses like Walmart will continue for, at least, first half of the year.

And when we look at that business from a philosophical point of view, look, we completely understand that sort of like the residential business, there's some stiff competition there. But particularly, where we can get that front end small container work that we can tuck right into our operations and create that route density, that's really the kind of work that we want to pick up. The compactor work, like the Walmart business, is generally lower margin and it doesn't really help us from a route density point of view. And so our focus will be on that small container business. But we're obviously going to remain competitive in national accounts and we expect to continue to be the biggest player.

Got it. And just to be clear, and strictly for modeling purposes, was Walmart half of that 60 basis point volume impact or less than that? Or is it -- just to make sure we model the volumes right for the rest of the year.

I think it was a little more than half, Scott.

Little more than half, got it. And then as my follow-up. I think you mentioned in plans to repurchase stock to offset dilution, share dilution in the second quarter. Just kind of are you still holding off on, call it, the larger repurchase activity as you assess M&A prospects and maybe a little bit more elaboration on your thoughts on the acquisition landscape.

Yes. No, that's exactly right. So when we look at 2015, there's really 2 pieces to it. There's what I'd call sort of our normal recurring stock buyback. We generate a lot of free cash flow, a good portion of that goes back to our shareholders through the dividend and traditionally, the remainder goes back to our shareholders through a share repurchase and some of it goes into small tuck-in acquisitions. In 2015, we're getting back to that. And so what we're talking about doing in the second quarter, I would characterize as part of our sort of normal, recurring, returning of cash to our shareholders. On the redeployment of the Wheelabrator proceeds, as we talk to sellers, it's sort of interesting. You've got, really, 2 things happening. You've got expectations of price multiples, which are probably a little higher than we expected. But then you've also got some timing events, right? You've got private sellers that might have family or estate issues and then you got private equity sellers that might have funds that they want hold for a number of years that have sort of a liquidation time frame on them. And so what we're battling is price expectations and timing expectations. My guess is that by midyear, we will know whether we can meet both timing and price expectations. If we can't do that, then we'll buy back stock. Now that doesn't mean that we're not going to ultimately talk with those sellers and buy their business. If they have timing expectations that don't mature for 1 year or 18 months, we'll be talking to them in 1 year or 18 months and we'll buy them as part of our normal acquisition process. And so in the middle of the year, by sort of the end of the second quarter, we would expect to be in a position where we're going to make a call where we say we will either buy those businesses with the proceeds or we'll buy back stock with the proceeds. And if we don't buy those businesses with the proceeds, you'll probably see us continue to look to buy them over the next couple years as their timing gets better.

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

So just a clarification on volume. Are we still thinking about volumes turning the corner later in the year and either flattening out on the total basis or even being up?

Yes. So let's sort of look at those profitable components that we talked about before. On industrial, we actually saw volumes turn positive in April. They were only negative 0.5% in the quarter. And we actually saw them turn positive in April. So I would expect that we would see positive volumes from the industrial side going forward. The landfill side has always been positive volume. But we would expect to see that get better as we get to the seasonal upturn. We had a little bit of a weather effect in the first quarter. So we'd expect to see those volumes improve. On the commercial side, again, we're 200 basis points better than we were in the first quarter of last year. We're 70 basis points better than we were in the fourth quarter. We would expect that sort of rate of improvement to continue. Such that by the end of the year, I would expect that we'll be closer to flat on the commercial side. So if you look at commercial being closer to flat, industrial and landfill being positive, I think that could lead to positive volumes by the end of the year in those 3 lines of business. Now the headwinds you have are basically national accounts and the residential line of business. Those will be slight drags, but again, those are low-margin drags, so we're willing to live with those. So when we look at the core solid waste business, the negative 1.2% that we had in the first quarter, we completely believe that by the end of the year, those will be flat to positive such that our guidance for the year of negative 0.5% to flat volumes is still valid.

Joe, when you think about how that volume that you talk about translates to top-line revenue, the way we looked at the quarter was -- when we looked at collection, disposal and transfer, the revenue was up fairly decently at about $25 million and keep in mind, that's almost all organic. We really didn't have a lot in the way of acquisitions for the last 12 months. So up $25 million. The second factor, of course, was, as we've talked a lot about this morning, the negative revenue impact of recycle commodity prices and recycle volumes, and that was a negative $70 million. So and then of course, the third factor, David just mentioned, fuel surcharge, FX and we've talked about the lower -- the lost Walmart contract and some of the lost national accounts business. But overall, the volume numbers that we -- the improvement that we're seeing in some of those volume numbers on the core side is translating to top line revenue. We weren't displeased with the $25 million in those 3 core businesses.

Well, actually, Jim, so to that point, maybe you can help me understand the disconnect here. If I just add up the numbers that I have for collection, disposal and transfer, acknowledging that there's some component that's going to go to intercompany, if I'm just adding it up, I'm coming up with a flat number versus last year. So are you stripping out FX to get to that $25 million? Or are you stripping out fuel? What am I missing?

No, you're adding in price. When you look at it from a total revenue point view, you've got to add the price in as well as the volume component.

I'm just looking at total revenues at a flat year-over-year.

FX is not included in that $25 million. So I've broken it into a couple of different buckets, which was our core solid waste, collection, disposal, transfer, those, price and volume, excluding divestitures, was up $25 million in revenue. And then the second factor was a negative $70 million in recycling. And the third factor was $36 million negative in fuel surcharge, $25 million negative in FX, and $21 million negative in national accounts.

Okay, great. Thanks for the clarification. So I'm just looking at the core solid waste business and I'm curious, what are you specifically seeing that gives you the confidence that you can offset that incremental $0.05 to $0.07 headwind in recycling? Or is that just a moot point because you guys prefer to address the guidance in 2Q?

No, I mean, look, we see -- what I would tell you is that we're much more confident now that we're going to get the dollars that we expect to get from our pricing program. We continue to see good improvement on the cost side, both on the SG&A and on the operating cost side. And then I'd say that we're probably a little more optimistic than we were at the beginning of the year from a volume perspective. Again, that's why this is a -- it's an interesting quarter for us. When we first look at the quarter and saw the revenue decline, we said, "Wow, what's going on?" When we look behind it, we say we see some really good trends in our profitable lines of business. We can't help the fact that we lose $70 million of revenue on the recycling side because of commodity prices, but when we look at our very profitable commercial, industrial landfill line, we see some really positive trends there. So and that was -- all those positive trends occurred even though we had got some negative weather in the first quarter. So I would say that we're fairly bullish on the volume side. We're extremely confident on the price side. And we think we'll get a little bit more out of our cost programs than we expected at the beginning of the year.

Got it. One last one for me then. So why does recycling actually get worse as we move through the year sequentially? I mean, it seems like pricing is somewhat bottomed and comps should get easier. So why would the headwind actually get worse?

Yes. Well, the price, actually -- I'm not sure if the price has bottomed or not. It's as low as it's ever been. But we haven't seen any indication of a bottom. And so you've got some fairly tough comps in the second and third quarter, gets a little bit better in the fourth quarter. And then you've got the volume decline right? The 8% volume decline, we don't expect to see that improve throughout the course of the year. And so it's basically -- it's mostly driven by commodity pricing. And I would tell you that we're being a little bit conservative on that because we just don't see any catalyst out there that's going to drive the commodity prices up significantly.

Joe, I think what you're probably thinking is why can't you just straight line the $0.02 and come to $0.08 and the reason is that commodity prices dropped throughout the quarter. So we're looking at kind of straight lining from the commodity price in March, which was the lowest of the 3 months.

Yes, when you [indiscernible] March -- for the quarter, it was down 14% but for the month, it was down 24%. So we're basically extrapolating that low price across the rest of the year.

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

I want to continue on, on recycling. Can you help us maybe appreciate, for lack of a better word, the mix issue that you're dealing with? And then secondly, the contract structure issue that is probably a multi-year resolution to, at end of the day, conclude that this macro theme that you set up for 20 million tons of -- to handle recycled product still makes sense in the shareholder's mind?

Yes. So Al, a couple of things. First of all, on the contracts and the mix issue. Each of these contracts has an expectation as to mix of commodities. And when that mix changes, we have to address that with the customer. So for example, we've talked quite a bit about glass over the last couple of quarters. Glass is heavy, so the customers may like it. We don't like it as much. It's only the commodity that we don't get paid for on the back and we actually have to pay to get rid of it. And so as glass goes up, as an example, then we have to address that with the customer, if there are limitations, mix limitations within our contract. Similarly, if there are contamination level restrictions. So for example, if a community has a restriction of 10% contamination levels and when we go through an audit find that there are 20%, then we have to recover some of that. So part of what we're doing through our recycling team is really taking a tough stance on holding customers to contracts on contamination levels and material mix.

Jim, I would add that those 2 issues are absolutely related because some of the mix issues that are caused as cities and counties want to divert more waste add to contamination level in some of those commodities. And many of our older contracts don't allow us to charge. That's what we're changing. We're going in, some of them in mid-contract and having some success, most of them though, we'll wait until the contract ends until we can change the terms and allow us to get paid for their mix issue or their contamination issue.

So it's clearly a multi-year undertaking here?

Yes. Well, look, there's 2 pieces to it. There's fixing the mix and contract issue. And then it's fixing operations, right? I mean, we still have some opportunities to consolidate plants, to drive out from operating costs and we think we can make some more headway there. Like Jim said, if it weren't for the headway that we made in the first quarter, it would have been -- if you look just at the price component, it was a $0.05 problem. We still think we've got some operating cost that we can pull out. We're going to have to consolidate some plants and rationalize some assets. And I think that's what customers need to realize is that we're not the only ones rationalizing assets. The industry is rationalizing assets. And unless we can work out a way where recycling is profitable over the long term, there's not going to be recycling. And customers certainly don't want to live with that. So we just need to make sure that the customers understand that if they want glass recycled, we need to get paid for it. We actually lose -- or we lost in the quarter $6 million by recycling glass. That's -- long term, that cannot be sustainable for Waste Management. So we need to work with the customers to get them to understand the mix issues, to understand the commodity market so that we can make a long-term, viable business out of recycling.

But the progress to date, David, has been slim. Is that because the major customers -- or your larger customers in this area are not ready to discuss until contract comes up?

Yes, exactly. Most of these contracts are long-term contracts. And look, it's a long-term contract. We sign the contract, we will live up to the contract. But what they need to realize is, we'll live up to that contract but we're not going to be there when the contract ends and nobody's going to be there when the contract ends. So if they want us to maintain the facilities that we have in those markets, we're going to have to get some relief from these contracts or we're going to just have to shut the plants. And so I would hope the customers would say, "Let's take a long-term view at it rather than a short-term view." But as you know, as we generate $1.4 billion to $1.5 billion of free cash flow there's not a lot of sympathy for our losses in recycling.

Al, I wouldn't characterize the progress as slim. I think what's happened is, it's been overshadowed by the real dramatic falling commodity prices. Look, commodity prices were basically kind of -- our average bucket of commodity prices was in the $100 range for the last 2 years, last 2.5 years, $98 finished the year in 2014 and all of a sudden, it's gone from $98 to $82 and we processed between 6 million to 7 million tons a year. That's a big price decline to absorb. So we've made some good progress on controlling cost and on kind of holding customers to contract. But man, with such a dramatic commodity price decline, it was hard to overcome it.

So -- but you're not able to maybe take a little more aggressive action yourself and walk away from these contracts?

Well, we're looking at everything. But it's hard to walk away from a contract at times.

Okay, I understand. A follow-up then. Just a little more -- David, your comments about capital deployment or redeployment of the Wheelabrator proceeds. It would seem to me that this is more a function of, maybe some larger transactions that you're looking at than your traditional annual deals you're doing or even something of a Deffenbaugh size. Could you comment on that? And if that's not the case, then why wouldn't you be out in the market aggressively buying back stock, particularly given today's reaction?

Yes, exactly. Well, obviously, that gives us more opportunity to buy back more stock. And so you're exactly right. I mean, what we're looking at, when we look at the Wheelabrator proceeds, are looking at -- we sort of look at it the exact same way. We say we want another 3 Deffenbaughs, right? And those are -- there's not a lot of Deffenbaughs in the country. And once you find that type of business, you've got to overcome 2 hurdles. One, are they ready to sell? And two, what do they want -- what the price that they want to sell? And I would tell you that at the beginning of the year, we were pretty encouraged by what we saw on both of those fronts. As we've got into deeper discussions with sellers, we found out that some of them had bigger timing issues than we thought and some of them have higher pricing expectations than we thought. And so look, that doesn't mean that we ultimately won't buy those businesses. But it might mean that it's going to take us longer to buy those businesses. And if that's the case, then we do need to be out in the market buying back our stock because look, as I've said, that's the business we know the best. We're never going to pay a multiple higher than our own multiple because there's one business we know real well and that's ours. And so I would guess that in the back half of the year, we will be in the market more than just to cover dilution. But if we can get to the point where we can get some of the sellers to -- that we can meet their timing and their pricing expectations, we would obviously much prefer to buy good core solid waste businesses at reasonable prices.

Your next question comes from the line of Charles Redding of BB&T.

On the industrial side, it certainly sounds like your seeing improvement here. I guess as we look ahead, how do we rectify what looks to be slowing industrial production in a tough market for U.S. exports with the expectation for stronger volume growth?

Well, it was mentioned earlier. You've got the coal ash coming. But you've also got a huge amount of construction being done along the chemical corridors, right? From Houston to Beaumont and up to Baton Rouge and up through Pennsylvania where you've got very low natural gas prices, you've got some huge projects being built. We expect to get good volumes out of that. And then when you look at the residential and commercial construction, those numbers look fairly strong. So we think that the economy's going to be finally a little bit of a help to us on that side. Now remember, we also have a lot of those hauls in our energy services. We really haven't seen a dramatic drop on the energy services side. And so we've got well-positioned in still some good shale plays there. So we see pretty positive trends throughout the various sectors that drive industrial hauls for us.

Okay, and then I guess just a little follow-up on Canada. I realize it's relatively fractional for you. But can you speak to, perhaps, what you're seeing there? And then I guess, has the macro pullback had a material impact on the recent volume growth in the region?

I think it's kind of the tale of kind of 2 parts of the country. Western Canada is, particularly Alberta, suffering a bit from the energy price decline. Eastern Canada seems to be reasonably strong, similar to kind of Northeast U.S. cities.

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

Just, Jim, can you help us out on the cadence of cash flow and just why Q1 was such a large working capital drag? I don't know if that was the cash taxes paid on Wheelabrator? Or if your cash conversion cycle creeped? And then maybe how do we think about the full year impact of working capital in your cash from ops guidance?

So couple things running through working capital worth mentioning here. First of all, our -- you may recall that in -- for our bonus payouts, our annual incentive comp payout that would've paid out in March of 2014, we accelerated a piece of that into December of '13. So it was a 2013 year annual incentive comp. But a portion of it was paid out in 2013. We did not do that this year. So we knew we were going to have a working capital negative headwind in March of this year. And that amounted to about $65 million. Most of that was that acceleration, a piece of it was just a higher payout from year '14 versus year '13. That was -- totaled about $65 million as a headwind. We also had about $21 million in nonrecurring -- mostly nonrecurring cash payout for the 2014 restructuring. We've got about $12 million left. And that will spread out over the next 3 quarters. But we had $21 million in Q1 that is, for the most part, nonrecurring and that's a payout of our 2014 restructuring. And then in addition to that, we had -- in 2014, we had a benefit, a $36 million benefit from the settlement of a forward-starting swap that didn't repeat of course this year. So you think about year-over-year, the negatives were those, the positive was EBITDA was up. And then the other positives were that we continue to make headway on managing working capital on DSO and DPO, particularly DPO, was up 2.1 days, DSO up 0.6 days. So we're starting to narrow the gap pretty significantly there from a couple years ago.

Okay. So is working capital a drag in cash from ops guidance or is it neutral?

Well, I think working capital is certainly a drag in Q1. There will be some positives coming up as we look at the remainder of the year. So for example, the San Jacinto settlement of last year. That won't repeat. And so that will be a tailwind for us on working capital. And as I mentioned, we shouldn't have those -- that cash impact from the restructuring starts to taper off pretty dramatically in Q2. So as those -- and of course, the bonus headwinds from the incentive comp payouts, acceleration of that, that doesn't occur either.

Okay, that's helpful. And then, follow-up here, just -- I just want to understand CapEx just a little bit better. So if I look a trailing 12 CapEx, and I even -- if I even adjusted divestitures, you guys are about 8.5% of sales. I think there's a common convention or belief out there that you need to be north of, call it, 9% of sales on a pure maintenance basis. So am I missing something there? Or how do you bridge the gap, the differential in the CapEx?

We've said that -- we kind of gave a number of 8.3% to 9%. I think we gave that last year. First quarter's historically slow. We were -- the number I had was 7.7% of revenue in the first quarter. And -- but if I look at Q1 of '14, it was 7.8%. If I look at Q1 of '13, it was 7.9%. So not way out of the range with those 2 years' first quarters. We expected 2015, actually, is going to be in that $1.2 billion to $1.3 billion range, which is a bit of a headwind for us in terms of free cash flow because last year, we only spent $1.150 billion. So we're going to spend somewhere $50 million and $150 million more in CapEx and clearly, on a percent of revenue, without the Wheelabrator assets, that will be a higher percentage of revenue. So I think 2015, not only is it going to be higher in absolute dollars, it's going to be higher as a percent of revenue.

Okay, that's helpful. And then just maybe if I can squeeze in one last in here. Thinking about capital structure. But you guys a have kind of swept some of the Wheelabrator proceeds, the net proceeds, I should say, maybe to Deffenbaugh, you had your note repayment, maybe you've delevered a little bit. But I've got you at about, call it, 2.7 on the leverage. You've got $300 million in cash. So when we think about future capital deployment, is the idea that you would relever to do so? And if so, what is the kind of the level of leverage you're willing to go to or what's your kind of optimal capital structure?

Yes. So if I think of us as being in kind of that 2.78 leverage ratio range, yes, I would expect that to increase slightly as we acquire some businesses to replace Wheelabrator going forward.

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

Jim, can we do a little bit of a waterfall to try and reconcile 2014 EPS and the guidance for '15? If I understand everything you've given us and thanks for the data, which, I should take $0.18 out of last year's number for all the divestments and then you take $0.10 out for recycling and $0.04 for currency and that kind of gives me a starting place, add in buybacks and then I get growth. That's kind of how -- is that the right way to think about it?

Yes. And there's some interest expense savings in there too.

Interest expense would be a part of that. Okay. So getting back to the growth then aspect of this and in the solid waste side. And I -- and you may have given this data and I pardon, it was just so much of it. I'm not sure I got it all written down. But weight per yard trends in your front end loader business had exited '14 on a positive trend line. How -- what's that trend line coming through the first half of the year at this point? And where does it sort of set in your mind about that cycle of service interval upgrades that creates such operating leverage?

Michael, when we look at the commercial line of business, I'll give you a few reasons why we're optimistic. First is you're right, the weights continued through the first quarter. We saw improvement there. We saw service increases exceed service decreases. So there's some good news there. But frankly, the best news that I've seen on the commercial line of business, we just went through reviews with our 17 market areas. And 12 of our 17 market areas had net positive new business in the first quarter. The other good part of that news is that over 2/3 of that new business was greenfield projects, new businesses that are created, not stealing share from somebody else. And so I think what you're seeing is a better secular trend. And what you're seeing is that we're taking advantage of that better secular trend.

Okay. So following through with that then, on your C&D side of the business. On the pulls, what's the trend in absolute number of pulls and in revenue per pull? How's that trend look like?

Yes. The revenue per pull is nicely improving. On the number of pulls, frankly, I don't have the actual number of pulls. I know what the percentage increase was. But you saw a 10.9% volume in the landfill. And so I would assume that equates to a pretty healthy increase in the number of pulls.

I think it was down slightly in terms of revenue pulls which pretty much is -- correlates to the volume number that we talked about. But it was down slightly and part of that, as David mentioned earlier in the call, Michael was in energy services. I mean, there's -- you're down 50% in rigs. Fortunately, we were able to replace some of that revenue. So we're not down as much as the rig count, of course. But it did affect the hauling side of the business.

Well, okay. So what I was really trying to get at too is, and you alluded to this to one other question, if I remember correctly, pretty much the whole industry assumed going into this year that residential construction would hold about 1 million starts. Some of us were looking for it to be better. But so far, the data set would suggest that maybe that trend is better, one. And two, the nonresidential construction x oil and gas and energy, broadly, if you will, power and oil and gas, which had been positives in the '14, all of the other components, commercial, lodging, office and what have you, actually, just struck a bottom in '14 and it started to turn a corner. Are you seeing that corner turn? In both...

Yes, look, I think that's exactly right, Michael. I mean, look, we're not going to call a dramatic turn. But I do think that we -- for the first time in 2 years, we're willing to say that there is a good secular trend going on that we see continuing.

Okay, all right. And then on the recycling side. What -- if $98 was the number for blended commodities in end of December and $82 is 1Q, what's the blended commodity dollar number given the current cost structure of your recycling business to be breakeven on an EBIT basis? What do you need that to be?

Breakeven is probably in the $78 to $80 range.

Okay, and then on free cash flow. When do I see working through the cash flow from ops that -- there's $200 million in nonrecurring tax situation, when do I see that walk its way through? Is that spread out through the whole year? Or is it -- there's a tax filing in I think 2Q and 4Q -- is it a 2Q and 4Q issue?

Yes, it's -- well, we're paying all 3 quarters. We kind of make a double payment in 2 and 4. So you'll start to see it in Q2 and it will carry through the rest of the year.

Okay, so I should see a little bit of a above average cash flow from ops as a percent of revenues in 2Q?

Yes. I mean, none of that $210 million, Michael, showed up because we didn't make any federal tax payments in Q1.

Right. So stripping that away and looking at the sort of recurring number, $1.2 billion to $1.3 billion, what do you think, based on what you're looking at the business today, the embedded recurring growth rate of that $1.2 billion to $1.3 billion would be as I look forward? Is that mid-single digits? High single?

I think you're looking at, basically, sort of that 5% to 7% compounded growth rate.

Okay, that's very helpful. And then, 2 housekeeping questions just because I'm a little confused. On Page 6 of your 8-K, you have a nice table...

Yes, Michael, that's a little bit obtuse for us.

What's that? Page 6?

Going to a specific page of the 10-K [indiscernible].

Right, sorry. But you have these great tables you've given and you talk about landfill volume up. But the tons number you have in the document, actually, has it down versus 1 year ago. You were 21.3 a year ago and you're 20.9. So I'm trying to reconcile the script and the data that's in the document.

Michael, that's all intercompany volume based. The intercompany volume's down, third-party volumes are up. That's the difference.

Perfect. That's great. And then as I think about the fuel -- I mean I had a -- more cost saves than I did revs in 1Q but I would assume that, that gap narrows through the rest of the year and it's less of -- it's more just a net offset each other as I work through the year. That's a timing distance difference of -- the surcharge comes back slower than the savings hit.

Yes, that's correct.

Okay. And I should try and just smooth that out to the remainder of the year and it kind of nets itself out by the end of the year?

Correct.

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

Thank you. Well, obviously, we at Waste Management had a very good quarter. But when we look beyond Waste Management and look at the overall industry, as we said with Michael, we see improving industry fundamentals with the pricing environment stable and the volume environment improving. So we look forward to capitalizing on those improving industry fundamentals and continuing to gain momentum throughout 2015 and into 2016. And with that, we'll see you next quarter. Thank you.

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