Good day, ladies and gentlemen, and welcome to the Waste Management First Quarter 2019 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ed Egl, Senior Director of Investor Relations. Sir, you may begin.

Thank you, Lauren. Good morning, everyone, and thank you for joining us for our first quarter 2019 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris; Executive Vice President and Chief Operating Officer; and Devina Rankin, Senior Vice President and Chief Financial Officer. You'll hear prepared comments from each of them today. Jim Fish will cover high-level financials and provide a strategic update. John Morris will cover an operating overview. And Devina will cover the details of the financials. Before we get started, please note that we have filed the 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 schedule 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 the 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. Jim and Devina 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. All first quarter volume results discussed are on a workday-adjusted basis. During the call, Jim and Devina will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and then they’ll also address operating EBITDA, which is income from operations before depreciation and amortization, and operating EBITDA margin. Jim, John and Devina will also be discussing the planned acquisition of Advanced Disposal Services, Incorporated, which they may refer…

Thanks, Ed, and thank you all for joining us this morning. We're excited to share two good news stories this morning. Our excellent first quarter results that demonstrate continued strength in our business as well as the agreement to, the agreement we announced last week to acquire Advanced Disposal Services. The year is off to a great start with organic revenue growth of more than 6% in our collection and disposal business, translating into about a 7% increase in operating EBITDA in that business. But before diving further into the quarterly results, let me spend some time discussing the compelling, strategic and financial benefits we expect from the acquisition of ADS early next year. On April 15, we announced a definitive agreement to acquire all outstanding shares of ADS for $33.15 per share. The acquisition advances our growth strategy and aligns with our financial goals, including growth and earnings per share and margins and free cashflow. It will bring to Waste Management a high quality complementary asset network and customer base in both new and existing areas across the eastern half of the United States. We are joining two teams of dedicated employees who are passionate about helping to manage the environmental needs of customers and communities with outstanding service and a commitment to safety. We expect to achieve more than a $100 million in annual costs and capital expenditure synergies. We anticipate closing by the first quarter of 2020 subject to the satisfaction of customary closing conditions including regulatory approvals. We're enthusiastic about this catalyst for long-term value creation for our shareholders in 2020 and beyond. We believe we can leverage benefits of the investments we're making in technology and people to achieve enhanced efficiency across the ADS network in the coming years. ADS has talented and dedicated employees…

Thanks Jim and good morning everybody. We're pleased with our first quarter results as we continue to execute extremely well on our organic growth strategy. Our disciplined pricing programs have been driving consistently strong core price and yield results the last several years. In addition, we continue to execute on targeted growth of profitable volumes. This strategy has produced both industry leading volumes, demonstrating that we can profitably grow by driving both price and volume. Our volumes grew 4.1% in the collection and disposal business during the first quarter and much of that growth can be attributed to our focus on increasing service to existing customers and reducing churn by improving customer satisfaction. For the quarter Churn was 8.1%, a 150 basis point improvement from the prior year and the lowest churn we've seen in the last three years. Additionally, service increases outpaced service decreases again for the 21st consecutive quarter. Our customer focus has also helped us to selectively grow profitable volumes including our strategic national account business. As you've heard us all say, improving our customer's experience is generating results. In the landfill line of business our well positioned assets continue to attract volumes and enable us to increase yield. Previously, we have discussed the importance of pushing pricing to cover post collection cost increases and maintain returns, and we're pleased with our progress on that front. In fact, in the first quarter we achieved the highest MSW yield in more than a decade at 3.4% and we did this while growing volumes, 5.8% versus 2.2% last year. A large portion of the volume increase relates to new customers in the Northeast as our well-positioned assets continue to attract incremental volumes. We've also talked in previous quarters about our strong special waste pipeline and many of these projects…

Thanks John and good morning, everyone. As both Jim and John has discussed, our first quarter results were strong, and they’ve been driven by organic revenue growth in our traditional solid waste business and our focus on controlling costs through operating efficiencies. In the first quarter of 2019, the conversion of earnings growth into incremental cash from operations was particularly strong. Our cash flow from operations was $890 million in the quarter and that's a 10% increase from the first quarter of 2018, which puts us well on our way to achieving our full-year target. During the first quarter, we spent $471 million on capital expenditures, an increase of $71 million from 2018. The increase in capital spending is related to the strong volume growth that our business continues to generate, particularly in the landfill line of business. And then also some year-over-year differences in the timing of some of our spending. In the quarter, our business generated $431 million of free cash flow versus $423 million in the first quarter of 2018. Timing differences in capital expenditures muted our free cash flow growth for the quarter on a year-over-year basis, but we're confident that with our strong operating cash flow growth and disciplined approach to capital spending, we will deliver on our full-year free cash flow guidance. In the first quarter of 2019, we used our free cash flow to pay $223 million in dividend and repurchased $68 million of our stock. Share repurchases in the first quarter were less than our plan due in part to the nearly $400 million in acquisition spending in the quarter. That was primarily related to our previously announced acquisition of Petro Waste that closed in March. Our 2019 guidance considered $200 million to $400 million in acquisitions for the year, and so…

Thank you. [Operator Instructions] And our first question comes from Tyler Brown with Raymond James. Your line is open.

Hey, good morning, guys.

Good morning, Tyler.

Good morning, Tyler.

Hey, congrats on the strong start to the year. I appreciate the core business is very solid, but Jim, Devina, I would like to start with the proposed ADS deal. We obviously haven't had a forum really to talk about it. But I was hoping you can talk about some of the mechanics of the deal, including, one, what is the termination fee if you do decide to walk away? And two, how does this $200 million, what I'm going to call divestiture cap work that's built into the agreement because frankly, the agreement isn't exactly the easiest thing to read.

We can appreciate and understand that the agreement's a lot to get through, but we really do think that that's the best source of information for those specific terms and conditions, and we point you back to that. But I would say is all of those terms and conditions were well negotiated and thought through in the process, and we've done a really good job of making sure that we're positioned well to move forward.

But specifically on the divestiture, again, I'm going to call it divestiture cap, if it's required to be over that, what would then happen? What would you be able to do or not do?

Tyler, this is John Morris. I mean, certainly we’re comfortable with the range that’s been published and is in the merger agreement. And I think the details of what the options are for both sides are best learned by reading the merger agreement.

Okay. And then on the $100 million of proposed synergies, is there any breakdown of how that would break down between G&A, OpEx and capital?

Tyler, this is John again. Yes, I mean, it's early innings for sure. But roughly, we estimate about 80% is going to come from the operational SG&A and interest buckets and about 20% will come out of the capital efficiency bucket.

Okay, great. And then maybe some mile markers that we should be looking for as this deal progresses. I would assume shareholder vote is next then you’d go on to DOJ review. And then assuming passage, maybe we'd move off to close. Is that kind of how the process will work?

I think you've got the timing down. There's really three elements, obviously, ADS’ proxy filing, and obviously, the HSR process that's going to have to occur here in the coming months.

Okay. My last one here so I want to switch over to recycling really quickly. You mentioned that it's up $11 million from breakeven despite commodity prices. I'm assuming the processing fee is driving that. Is that correct?

Yes. You broke up just for a second there, but yes, the processing fee is included in that for sure. We talked about, Tyler, the fact that this would be – back in February talked about the fact that this will be a tailwind for us this year. That didn't – we still think it's going to be a slight tailwind for us, but we didn't contemplate this significant drop off in commodity prices. With that said, I think we've done a great job of really passing this through. I mean, we can't bear all of this. As John said in his script, this is a breakeven for us last year. It's now an $11 million better than breakeven, which still there’s not anything to write home about, but we're in the process of passing that through in the form of these fees. And that's what's caused us to mitigate some of this in the first quarter.

We've also done a good job of managing the cost side of the equation, and we'll remain focused on ensuring that we're working through the contamination headwinds that we see on the inbound material to manage those more efficiently in our processes. And as John mentioned earlier, the focus on technology and the MRF line of business will be important to us, and we're continuing to advance those efforts.

Okay, yes.

Go ahead, go ahead.

Yes, go ahead. I’m sorry.

Just back on ADS for just a second, look, what I will say about this is we are very, very excited about this. This is really something that's – we haven't done in a period of 20 years a deal of this size. We can't say a whole lot about some of the details of it for obvious reasons that as John said will end up showing up in the background of the merger and will become public when they filed their proxy. But we just can't see a whole lot about it. We'll give details where we can, but we're – suffice it to say, this is being looked at as being transformational. And the two companies are so complimentary from a cultural standpoint that it really makes a ton of sense for us.

Right. Okay. And then just real quickly, but would you expect going back to recycling? Would you expect recycling to be a positive EBITDA contributor this year under the current circumstances?

Yes, year-over-year, I mean, certainly it’s going to be positive in total. Year-over-year, that's why I said we think it can still be a slight tailwind for us on a year-over-year basis from an EBITDA standpoint but it's also hard to tell because these commodity prices have become pretty difficult to predict. And with that 30% headwind on the commodity prices, we are exclusively reliant on our ability to reduce cost and pass this through in the form of fees.

Okay, all right. Thank you. I’m going to turn it over. Thanks.

Yes.

Thank you. Our next question comes from Hamzah Mazari with Macquarie. Your line is open.

Good morning. Thank you. I realize you can't give a lot of details on ADSW, but maybe Jim, you could talk about why you're doing this deal now? I mean as we look back, ADSW IPO'd $18. There was no real buyer when High Star was looking to sell this or exit. Your balance sheet was still very underlevered at that point. So maybe talk about what has changed? Why now versus when the stock was at $18 or pre-IPO?

Well, here's what I’d say, Hamzah. I mean, first of all, the transaction represents a really nice multiple for us to have. It's 11.6x ADS's 2018 EBITDA $427 million. And after you take the $100 million in synergies into account, you're talking about something that's 9.4x their 2018 numbers. So it is compelling for us when we look at – when we started looking at this several months back. It was very compelling for us. The other thing I would say about it is strategically, it's such a nice fit for us. It's really, I'd say, we're looking at this as three million customers that we bring in that we can add our focus on the customer, that we can add our focus on digital technology. All of that fits very nicely into our strategy and it's three million customers who honestly, whether it was organic customers, a lot more difficult to get three million organic customers than it is to fix them up through a great acquisition like this. But it is, in effect, the same end result, which is we bring our processes, we bring our technology, we bring our focus on the customer to a big batch of new customers.

That’s very helpful. And then maybe, I guess, you're having an Analyst Day on the 30th. I think the last time you did one was a decade plus ago. Maybe if you could preview sort of what we should expect there, what investors should expect?

Hamzah, this is Devina. We’re excited about the Investor Day. And certainly, something that was in the works before the announcement of the ADS acquisition. Our focus at Investor Day will be on the great things happening at Waste Management, the leadership team being sure that the investors have an opportunity to meet all of the members of Jim’s senior leadership team, hear about the operating efficiency work that we're doing, our focus on people first from a culture perspective and what that's doing to drive our customer focus and the customer-centric culture that we want this organization to continue to push forward. And then the financial results that are coming out of all of that great work that we've proven in the last several years but we really expect and are excited to see continue in the years to come.

Okay. And then just lastly, just a clarification question. On the volume side, the 3.6% volume, how much of that was sort of wildfires?

The wildfire impacts were actually very small. On a year-over-year basis, if you recall, Hamzah, we had fire and hurricane volumes in Q1 of 2018 as well. So we were virtually flat from a volume perspective as a result of natural disasters on a year-over-year basis.

Okay, got you. Thank you.

Thank you. Our next question comes from Noah Kaye with Oppenheimer. Your line is open.

Good morning. Thanks for taking the questions. First just make sure I understood this right, you're backing full year guidance but you're pausing share repurchases that hits you about $0.06. So should I read that as effectively you're not formally raising guidance, you're effectively raising net income guidance by 1% or 2%...

No. Let me clarify. Thanks for asking the question though. I didn't intend for that to be interpreted that way. What we're saying is we're confirming guidance without the impact of the ADS transaction and we view that $0.06 reduction in EPS specifically as ADS-specific because of the change in our capital allocation plans that we guided for the year. So we are sticking with core solid waste to EBITDA performance driving the EPS expectations aside from that $0.06 impact.

Okay, that’s very helpful. Thanks. And then I guess just a question looking at large mergers in the past history of the waste industry. It seems like a little bit of an elongated timetable for closing compared to some. Can you just talk about what's giving you reason to kind of give that timetable? Is it something the regulatory environment or anything we should be thinking about?

No, I mean, it's recently been reported that DOJ is – DOJ approval process has been taking about 10 to 11 months to complete. With that said, each merger is different and as waste mergers go, they're valued it on a local basis so they present different issues for resolution. But the process seems to be taking 10 to 11 months based on what we've heard, and that's why we said we think it's going to be somewhere in that time frame. And with all of that said, I think what I would finish with is we will be working cooperatively with the DOJ to assist in this review of the transaction, and we'll do our best to expedite the process where we can.

Okay, that’s very helpful. Thank you. And then maybe just one last clarification question. You pointed to the $100 million of synergies, and that really looks like a cash flow number I guess because it's cost some CapEx. So just to understand, is that $100 million net of the interest that you're going to take the extra interest expense to finance this transaction because you’re going to have to take on some debt? Or is that independent?

No, not – that is independent. You're right, Noah. And as I mentioned earlier, we're still working through those financing plans. We're thinking about that $100 million more as an indication of our run rate synergies over the long-term and not providing information about capital structures specifically because those costs of the incremental debt is too early for us to specifically to quantify.

Okay. Perfect. Thank you.

Thank you. Our next question comes from Brian Maguire with Goldman Sachs. Your line is open.

Hey good morning. This is Derrick Laton sitting in for Brian.

Hi Derrick.

While we're on the topic of the synergy capture there for the deal, just wanted to see if you guys could highlight if you have any sort of timeline that you might expect for that synergy capture, assuming that the deal closes as you expected?

Hey, this is John Morris. I think it's safe to assume that there is going to be some early dollars we’ll get but we are also early in the process here. I think it's going to take some time. We've got kind of a lot of woods to chop here between now and closing in order to kind of refine the timing of when the synergies are going to occur.

Okay, thanks for that. And then just to kind of circle back in recycling for a second. I think you said you're still expecting overall a tailwind for you year-over-year. I wonder if you can just maybe clarify what you have assumed in the reaffirm guidance there for recycling prices and your expectations there?

I think we said in February, I think, I said $30 million to $50 million or so we thought…

$20 million to $30 million.

$20 million to $30 million, okay, sorry. So $20 million to $30 million is what I thought the tailwind would be in February. And as I mentioned earlier, we've didn't – that did not contemplate this heavy downturn. So it's hard to say exactly what that will be for the remainder of the year. We do know that the fees are somewhat front loaded because of the fact that last year, we started the implementation process for those fees. It's kind of mid second quarter April-ish right around now. And so the comps, at least from a fee standpoint, become more difficult in third quarter and then particularly in fourth quarter. What happens with respect to comps in terms of the commodity prices is TBD. So it's a bit hard to pin down the number, but I think we're willing to say we think that there's certainly still a possibility of a tailwind. It's not going to be in that $20 million to $30 million range.

I would add to that, Jim. I mean, I think the comments of both you and Devina made is that we continue to make progress on the operating expense side, and we've referenced on the last call that we're looking at these contamination and other fees through kind of three phases. And we've done a nice job in Phase 1 and Phase 2, Phase 3 is still developing, which is really where about 60% of our volume comes from. That's a single stream volume that we're still continuing to address through Phase 3 through the municipal recycling contract.

And I have two kind of other comments on recycling. First of all, we said it for a number of quarters, and that is that it demonstrates how strongly our core operations are exclusive of recycling that we can continue quarter-after-quarter to have these really good results. In the face of – I mean, look, we're talking about 10-year lows from a commodity standpoint. So our – the rest of our business is really operating well. A lot of you have reported on that and that is absolutely the case. The second thing I'll say is we're not just sitting back – here's what's going on in recycling. There's real extreme supply and demand imbalance, and we talked about China a lot so I won't go into details on that. But there is a really extreme supply and demand imbalance. So for us, we feel strategically it doesn't make sense for us to sit back and rely on the rest of the world literally to try and figure this out. So that's why we talked about it last quarter, maybe the quarter before, that we're building what we call a recycle plant of the future to address some of this downturn in the market on our own. So that recycle plant of the future that's going up in Chicago and will be starting to take materials sometime in Q3 or Q4. We believe we’ll significantly reduce operating cost at that plant because the technology that we're putting in, a lot of optical technology in that plant. So we think it will be a very different plant in terms of operating cost. And that's part of our answer to try – trying to address this downturn in the business that really we don't have much control over and don’t have much view of when it will resolve itself. So we're going to try and fix something that we control on our own.

Great, that’s helpful. Thank you. And just one more really quick one for me, you have strong volume number in the quarter, I think you guys said the impact of natural disasters was effectively a net neutral with first quarter of 2018. But [Audio Dip] wetter weather and weather impacts being a headwind in the quarter, just wonder if you could quantify, what headwinds you might've had there to your volume number in 1Q.

Yes. No, we looked at that. I think when we looked at weather kind of year-over-year, it was negligible between what it happened last year in different regions versus this year, so we didn’t see a big impact on a year-over-year basis from weather. What I would tell you on the volume side though, and we commented that on the prepared remarks, is we continue to see obviously MSW volumes in our landfill be really strong. We had a really, really strong special waste quarter. And when we dug into that, we're seeing that across not one or two areas, but really seven or eight of our regions, which suggests a couple of things to us. One is the general overall economy is that's usually a bellwether for that. And then the pipelines we’ve talked about in the back half of last year and last quarter continued to produce this year. And I think overall, I think when we will look at our volume for Q1 and trends; I think we're on pretty solid footing.

The one place that I do think that we saw some weather impact is actually on the operating cost line, where we saw whether it be efficiency impacts or in the leachate cost for the Northern part of our business as we had a wetter winter season this year. And so we do expect some moderation in some of those costs as we move throughout the year.

Great, that’s really helpful. Thank you.

You bet.

Our next question comes from Sean Eastman with KeyBanc Capital Markets. Your line is open.

Hi, team. Thanks for taking my questions. I just wanted to start on ADS. I know it's early days, but you guys are highlighting a very complementary asset base there. But I was hoping you can maybe comment on the – compare and contrast the operating structure. It's my impression that Advanced operates considerably more decentralized relative to Waste Management. I'm just wondering kind of what challenges or opportunities that means from an integration perspective.

Well, I think – I'm not going to comment on their structure, but I would tell you that when we look at their portfolio of business and the work we've done thus far, I think what we find is a business and a set of assets that are very complimentary to ours. As I mentioned in my prepared remarks, I mean, this is certainly a business in an industry that’s been very acquisitive. And we feel very confident in our ability to tuck-in kind of this core business that is kind of down the middle of the fairways as Jim referred to it before.

One thing I will say just to check on John there is that we can't say about their structure, not so much their operating structure but that is the makeup of their lines of business is a little different than ours. They are kind of 80% collection, 20% landfill. And we're more like 65% collection, 35%. It's another factor that gives us confidence that we will certainly make it through this process and complete this by kind of the 10- to 12-month period.

Okay, that’s helpful. And then just as it relates to the guidance being intact, I just want to understand some of the moving pieces. So obviously the commodity – recycled commodity price is kind of an incremental headwind relative to that $20 million to $30 million guidance earlier. So I'm just wondering exactly where the positive offset is. Is it kind of that strength in the special waste volume? Or is it a mixture of a lot of things? Some color there would be great.

Yes. And I would say it’s entirely the performance of our solid waste business being led by the strong landfill volume, whether it’d be the 5.8% MSW volume that we spoke about or in the special waste pipeline, both the strength that we saw in Q1 and then our expectations for that strength to continue over the remainder of the year. The outperformance of solid waste in the quarter far exceeded the impacts of the negative commodity price drag in the recycling line of business. And so we’re optimistic that pattern will continue over the remainder of the year.

I would add, Devina. I mean, we called out a few headwinds we had on the post-collection side and M&R within the collection side. But outside of those, we're making progress. And I commented about what our OpEx was as a percentage of revenue in my prepared comments and some of the headwinds we overcame. So we're clearly making progress on the operating expense control side as well.

Okay, super helpful. And then just last quick one for me. So, obviously, you’ve really outsized volumes in the first quarter, and I believe you guys guided to a 2% volume growth outlook for the full year. So I'm wondering from this base here, like, what the big swing factors are to watch, is it really just that wildfire opportunity? Or is there some other volume growth elements we should be thinking about as we move through the year relative to that 2%?

Yes, I mean, I think that you've seen a couple of things. John has talked and touched on a few of them. John and Devina both with respect to special waste and landfill volumes being strong. We didn't touch on it, but by the way, we're, when you look at 3.4%, yield at the MSW line, that also is impressive in and of itself. But on volume, in addition to those items that they mentioned, I mean, look, I think what you're seeing is that that technology, our focus on technology and our major emphasis on the customer, all of that is coming to roost in the form of strong volumes. The key is here are things like, are the data reporting tool that we've put into national accounts that's driving strong growth in our national accounts business at good margins. The focus on the customer has as driven the lowest churn number that we've seen in years at 8.1%. And again, John mentioned the strong special waste pipeline that's the highest number we've seen in quite some time. And all of that has been discussed in the past as being part of a good pipeline. But now it's actually showing up. By the way, I think that's, that's actually a good sign. And I think he mentioned this, but I, that is somewhat of a barometer for the economy. These big companies look at those, that event type work as being somewhat discretionary and in a strong economy, they're more willing to spend those discretionary dollars in a very slow and weak economy. You oftentimes just see them trim back on those projects. So, I think that to the extent that that says anything about the economy in 2019, for the rest of the year and possibly into early 2020, I think it's a good sign. Okay, thanks. And best of luck to the integration team.

Thank you.

Thank you.

Thank you. Our next question is from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. I'm sorry to go back to the recycling issue, but I guess the industry has been dealing with this for about a year and a half. Are you finding it easier to go back to your customers and asking them to focus or shift more to this fee-for-services model? Has it gotten easier over that timeframe?

Well, I think a couple of things. The fact that this been a sustained situation, I think customers are understanding that there are real pressures that, the service providers are facing in order to continue to provide them not only recycling but sustainability services that they're looking for. I don't think it's ever easy to go back to a customer. And this was a good example to tell them that they're going to have to share more of the risk and pay more for the services. But I think as evidenced by what we referred to as these three phases and we've been working through for the better part of a year, we're finding that with good messaging and communication with our customers, in giving them real feedback, real time feedback. Jim mentioned some of the technologies we're using some of that technology advancements that we have to give our customers real feedback and give them an opportunity to address some of the behaviors of their employees or their constituent base to try and improve recycling.

Okay, appreciate that. And then if I could switch back to the ADS potential merger, you mentioned the potential synergies on the cost side and the capital structure, the capital expense side, excuse me and the complimentary nature of the deal. I'm just wondering, are there any natural areas of overlap either geographically or end market focus?

Well, okay, here's what I would say about that. I mean, when you look at the two companies east of the Mississippi, there's a lot of dots on the map, but I think it's important to recognize that many of those dots are in these large markets where there is no shortage of competition whatsoever. So, certainly there will be you know, there is some overlap there just looking at a map. But there's, there are a lot of we're in a lot of large markets, they are in a lot of large markets and there's a lot of competition in those markets.

Okay, great. Appreciate the color. Thanks so much.

Our next question comes from Michael Hoffman with Stifel. Your line is open.

Hi, thanks for taking the questions. So I actually want to talk about trash, so in solid waste when you give us the price compare on collection and disposal, what's actually that base of revenue on a net basis in 2018 coming into 2019

The collection and disposal revenue in the first quarter of 2018 was a total of $3.07 billion and that grew $200 million on a year-over-year basis to $3.27 billion in Q1 of 2019.

Perfect. And then could you give us what the Petro Waste annual revenues are so we can figure out how to layer that into our model.

So not necessarily Petro Waste specifically. I'll point you to total acquisition spend in the first quarter and total acquisition spend in Q1, which to your point Michael is largely Petro Waste driven. On an annualized basis that revenue is a little over a $100 million. And when you think about what that revenue number is based on, it's the landfill line of business and therefore relatively high margin when you compare it to a traditional solid waste tuck-in that can usually be more collection business and therefore a little narrower on the margin side.

Okay. And then hey John, so on recycling. If I take the 11 million as the profit and you did 291 that's kind of 3.8% margins, what should a good margin be? And it kind of gets to a bigger question about cashflow. I'll come – circle back to that, but what, what should we think about that margin? Because when you get it, it should all be cash, right?

Well Yeah, certainly Michael where we're at, I mean we're very happy with what our recycling team has done. And really keep in mind, what we're talking about recycling in a vacuum. It does penetrate other elements of the business. So not only our recycling team, but our entire operating team has done a really nice job of taking what is a headwind and increasingly a headwind as evidenced by the recent price decline and turn that into a positive. But you're right, I mean going from break-even to $11 million, while we consider that a victory is clearly not where we're satisfied. And a good margin on that based on the capital as deployed mid-teens. I mean, if I thought just, just like what part of this is understanding that this $1.2 billion business, if I pick up 10 percentage points incrementally, that's another $100 million of cash.

Yes. Mid-teens would certainly be better than where we are now. Michael. I'd like mid to high teens. I think the other thing that we obviously take into consideration is looking at returns on those assets as they also require capital.

Okay. That helps a lot. Go ahead. Sorry.

I was going to say at normalized commodity prices, we were accustomed to being able to say that the recycling line of business was our second highest return on invested capital business. And so everything we are working on today is about returning this business to that model, because it can be a very successful business and sustainable over the long-term from an economic perspective. It's about making sure that we're achieving that in spite of this volatility in commodity prices that we're seeing.

I would follow that. Just Jim made a comment before. I mean we're not – our – are trying to change this recycling model and in that we're certainly not relying on benefit from commodity prices a lot of things that have gone the wrong way there. I think what we're doing to try and lower operating costs through some of the investments we're making in technology trying to reduce the labor component, which by the way is a very hard, hard positions to staff anyway. I think that's really where our focus is in balancing the capital deployed to do that versus the returns we're going to get back.

Michael it’s Jim here. I mean, you know this, but when, when the single biggest customer for recycling – for recycled commodity materials comes out basically. I mean, China was two years ago, was 27% of all of our recyclables. We're going to China, they're now 3% in a period of 18 months. When that customer comes out, you're going to have a real, oversupply condition. And we've tried to move that around. So, a lot of it has gone to the United States. Actually, we were 63% of all of our commodities stayed domestic two years ago. It's now 77%. Some of it's been replaced in Southeast Asia, which has gone from, like 1% to 7%. So, we've done a good job of finding other homes, but there is going to be this big supply and then demand imbalance too. I mean, part of the issue is demand related and that means that the companies will have to use a higher percentage of recycled material in their products. And today that has not been the case. So there, there is a, and in finding other uses for low value, recyclables is also more on the demand side. We think over time this does, we're optimistic that over time this really balances out. But as I said earlier, we're, we're not willing to just sit back and let it balance itself out. And see this as a kind of a low margin, low return business over a period of years. So that's why we're investing at things like this recycled plant of the future that takes a considerable amount of cost out, operates at as much as 30% or 40% lower unit costs than our current single streams.

Okay. That's great. And to that speed question, does this incremental pressure allow you to accelerate the pace of the phase three or we just stuck in contract cycles?

Michael, I wish I could, if we could have accelerated it, we would have done it already. I think as you know, a lot of the life on these contracts is generally three to five years. So, we're being as aggressive as we can to work through them as quickly as we can, but I don't know that the additional headwind it might help the conversation with some of our customers, but, I wouldn't say aside from that, that it's going to accelerate just based on the further commodity price decline.

Okay. So now I have to switch gears to ADS for just a second. If I can read all the legalese and I'm in the document, you've got this, you've talked about breaked up fees in two places. You talk about the 200 million of asset sale potential. Just to be clear, do I understand the writing correctly that even if you decided to walk away because it was more than 200 million, you'd still have to pay $150 million breakup fee?

That's right.

Okay. I just, the lawyers ought to get paid extra for how confusing they wrote all that. Okay. That helps. And then, I think an important comment would be one way to think of this as, so right, so you're around 15 billion. They are a billion six, let's say it's 200 million. So it a billion four, so that's kind of a 9% growth rate. But more importantly, you're telling me add three million customers. If I remember correctly, you have 22 million, so that's a 14% increase in the customer growth all in one fell swoop.

Well, that's why I talked about the fact that, this isn't really a, you could try and go do this organically. It just would take you forever to do it. So, it gives us the ability to pick up a company that is very similar to us culturally ADS. I mentioned earlier though, a multiple that's very attractive, particularly when we packed her in the synergies. And it gives us the ability to bring those efficient processes and new technologies, data and analytics, differentiated customer focus, all that stuff to these three million customers very quickly.

But I'm right, it's about a 14% here. You’re about 22 million, right?

Yup. 20. Probably 20.

Okay. All right. Well, so now it's 15%. So that's a huge customer growth fast, which is really the essence of this.

Actually that goes back to Jim’s comment earlier on the difference in the mix of business, because customer account is higher in the collection line of business than on the landfill side of the business. And so but your point is exactly right. And that's one of the reasons that this deal is so exciting for us because it's about extending our customer focus and our use of technology to a broader customer base.

Well and because of the collection layer of them higher, the density play of, I mean it's just now hundreds of little tuck-ins in a sense at the local level for you and the, and it's the classic route rationalization and customer overlay. That's what we get to look for eventually.

We're, certainly optimistic about all of the opportunities that we have in front of us with this transaction. I think, we’ve discussed it well and those synergies that we talked about include how we're thinking about the operating efficiency opportunities that are in-front of us.

Yes. I mean so the extent that it doesn't affect every single market then yeah, I mean the, the it is somewhat similar, I mean much bigger but somewhat similar to tuck-in. I mean they're really done. I think there's nine markets that have even touches out of 17

And it’s got a piece of the footprint in nine markets. I mean there's overlap in all

I think the main point I made earlier, which is that it's the, there are a lot of dots on the map east of the Mississippi between the two companies, but the preponderance of them are in these heavily competitive markets. So there's no shortage of competition where these two companies operate.

Yeah, you'll pay the $500 an hour lawyers to figure out how to talk to the Justice Department into what the size of the market is and how it'll all work itself out. At the end of the day, it's a 14%, 15% increase in the customer growth all in one fell swoop. That's huge.

I think they're more than 500 bucks.

Okay. Last question from me is whatever the leverage has increased, or the [debt] is going to be for this basically, I can look at the interest expense approximately being offset by the $100 million in savings. So, that kind of washes itself out. I start with your 2.05 billion midpoint of 2019 cashflow, add a 140 is what Advanced is, pick-up 100 on recycling potentially not all at once, but I get it eventually. So, we're really talking about a company that should be sitting here looking at about a $2.3 billion free cashflow number and then some sustainable organic growth.

It's too early for as they get a new baseline free cashflow number. But we appreciate the effort that you've taken to help us bridge from where we are today. But I would tell you that our cost of capital I think is better than what you just outlined. We're optimistic that we're going to be able to pull in a nice return on the ADS business immediately and now our cost of capital is actually one of the things that makes this feel so attractive.

Yeah. But you are going to add more debt, so it's just going to end up increasing your interest expense about the amount of the, of 100 million.

Certainly going to add more debt, but that incremental debt class is nothing compared to the incremental cashflow and synergy value that we're looking at bringing on.

Okay. All right. Thanks very much. See you guys in a couple of weeks.

Thank you.

Thank you.

Thank you.

Our next question comes from Scott Levine with Bloomberg Intelligence. Your line is open.

Hey, good morning guys, So I actually wanted to ask about Petro Waste a little bit and was hoping you might be able to elaborate a little bit. And remind us about the size of your energy waste footprint right now and what attracted you to that opportunity at this point in time and maybe elaborate a little bit more on your strategy and any plans to grow that business maybe outside of Texas, which I think is the primary focus for the acquisition you just made there.

Yeah, so at its peak and that, and I'm talking kind of 2014, 2015 that energy services business, which was largely just grown organically was in the $200 million to $250 million in revenue range. And of course, that trailed off considerably with the drop in oil prices. It has returned, maybe not to that peak, just and of course oil prices haven't gotten back to where they were there either. But the business has grown nicely over the last two years. So, 2017 to 2018 and then again 2018 and so far in 2019, the Petro Waste acquisition, really for us is very strategic, particularly as it relates to geography. I mean, if you're going to be in this, if you're going to make a commitment to be in this energy services space, you have to be in the big eye, which is the Permian Basin. And we had a very small presence in the Permian Basin. This gives us a much more important presence in Permian. It's largely landfills as we talked about, I think last quarter. It is largely a landfill acquisition. So, we look at it as being core. It's core to what we do every day. And so we're very good at it. And so we're feeling confident that that this business will immediately be accretive for us. But when we bought it, we recognized that because it's an area that we really didn't have landfills at all, that it would have to survive based on the, or it has to be purchased based on the fact that it was a reasonable multiple, not one that is supplemented by synergies. There really weren't any synergies with it. So it's, we're very confident that we got it at a good price, that it's right down the middle of the fairway for us in terms of landfill. And it's in the best location if you're going to be in this space in the United States.

I think Jim, I would add too, I mean, we've been in the energy space for a handful, for a number of years now and I think even outside, we've got the resources within the organization already to really go after and address a lot of the customer needs out there because we have services – a lot of those same type of customers in other geographies.

Got It. And just to make sure I understand correctly, I think you said, for the balance of this year, the focus on acquisitions was strictly tuck-ins in solid waste outside of the Advanced Disposal regions. Did I hear that correctly or would that, would you still be interested in other opportunities, call it outside of solid waste, whether it be energy waste or otherwise, as you await approval and completion of the ADSW merger?

So, I actually think, you've summarized it well from the perspective of tuck-in acquisitions outside of the market that ADS covers. But we are, we're certainly continuing to be interested in deals similar to the Petro Waste acquisition that we did in the energy and environmental services space. We view that as core business for us. So we're not limiting our pursuit of acquisitions to just traditional solid waste. We are looking holistically, on the traditional solid waste side though we are specifically looking at markets outside of the ADS market.

Got It. Thanks. Appreciate the time guys.

All right. Thank you very much.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Great. Thank you very much. In closing, I just want to say that we're really pleased with the efforts of this entire Waste Management team, for quarter after quarter they do a fantastic job of focusing heavily on the customer, standing behind our commitment to our digital technology now and then executing on the overall strategy of continuous improvement of differentiation. This is truly a team effort and I think it really shows and with that, I think we're very excited to add the Advanced folks to our team in the near future. Thank you all for joining us today and we'll talk soon.

Ladies and gentlemen, again, this conference will be available for replay today, April 25, 2019 at 01:00 P.M. Eastern Standard Time through May 9, 2019 11:59 P.M. Eastern Standard Time. You may access the replay system at any time by dialing (855) 859-2056 and entering the access code 4295916. International participants, dial (404) 537-3406, those numbers again are (855) 859-2056 and (404) 537-3406 access code 4295916. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.