美國廢棄物管理公司 (WM) 2013 Q4 法說會逐字稿

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 fourth-quarter and year-end 2013 earnings release conference call. (Operator Instructions)

I would now like to turn the conference 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 fourth-quarter 2013 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer.

Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.WM.com. The Form 8-K, the press release, and the schedules to the press release include important information.

During the call you will hear forward-looking statements which are based on current expectations, projections, or opinions about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K.

David and Jim will discuss our results in the areas of yield and volume which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield and volume. Additionally, any comparisons, unless otherwise stated, will be with the fourth quarter of 2012.

During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS, or earnings per share on an as-adjusted basis. David will also address operating EBITDA margin as defined in footnote B in today's press release. Our EPS, as well as income from operations margin and operating EBITDA margin for our traditional solid waste business, have been adjusted to exclude items that management believes do not reflect our 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 schedules which can be found on the Company's website at www.WM.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures.

This call is being recorded and will be available 24 hours a day beginning approximately 1 PM Eastern Time today until 5 PM Eastern Time on March 4. 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 315-00-809.

Time-sensitive information provided during today's call, which is occurring on February 18, 2014, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Waste Management as prohibited.

Now I will turn the call over to Waste Management's President and CEO, David Steiner.

Thanks, Ed, and good morning from Houston. Looking at 2013, we built strong momentum in the first three quarters of the year, and that momentum continued into the fourth quarter, with our traditional solid waste business growing margin by 150 basis points. However, quarterly EPS results, particular fourth-quarter EPS results, can be impacted by accruals, sometimes positive and sometimes negative.

In the fourth quarter of 2013 we had $0.11 more expense from accruals than in 2012. $0.02 of that $0.11 was offset by tax benefits; so we had a net of $0.09 more from these type of accruals per share than we had in 2012.

This $0.09 consists of $0.06 from incentive compensation and $0.03 from risk management. Without these accruals, our earnings would have continued to show strong year-over-year growth in the fourth quarter.

So our traditional solid waste business is strong, and our earnings momentum continues. Indeed, we have seen that momentum extend into January, as preliminary results show income from operations improving 12% and income from operations margins expanding about 110 basis points when compared to January of 2013.

Looking at the full year, we had a very successful 2013, as we met all the goals that we set out to accomplish. Our plan to increase yield, better manage costs, and have disciplined capital spending paid off in 2013 and should lead us to continued success in 2014.

In 2013 we achieved full-year earnings per share of $2.15 and free cash flow of $1.32 billion, all despite $0.10 of unanticipated headwinds from our recycling business. In 2013 we expected yield to be between 1% and 1.5%, and we exceeded that target. For the full year, our collection and disposal yield was 2.1%, with each quarter sequentially higher than the previous one, culminating with the fourth quarter at the highest level for the year at 2.4%.

Each of our lines of business had positive yield for the full year, with the exception of landfill C&D, which was impacted by Superstorm Sandy last year. Core price increased to 3.8% to 2013, an improvement of 90 basis points. And average landfill rates per unit for MSW ended the year with the highest rates that we have seen, increasing about 3.5% compared to 2012.

This was a tremendous accomplishment by our team, and they have plans in place to continue that success in 2014. We expect that internal revenue growth from yield should be approximately 2% for 2014.

As we have said before, we need to get about 2% yield to offset cost inflation and grow margins. We did that in 2013 and we expect to do so again in 2014.

In the fourth quarter, about a third of our volume decrease resulted from the year-over-year effect of volumes from Superstorm Sandy. We also launched national account business that we were not willing to keep at low rates.

Looking at 2014 total volumes, we expect internal revenue growth from volume in 2014 to be very similar to 2013, about 1% negative. We will see lower national account volumes in 2014 as we drive pricing at our low-margin customers. We need to be more aggressive on those specific national accounts where we are providing platinum service at bronze pricing.

The winter weather is definitely having a negative impact on volumes in the first quarter. We expect our normal seasonal upturn to occur as winter recedes.

So, when we look at volumes, we're more focused on getting the right volumes, not the most volumes. We are looking for the best mix of yield and volumes to drive income from operating margins and dollars; and in our industry that mix always favors yield.

Jim will give you the numbers, but despite negative volumes we increased income from operations dollars and margins in every collection line, which demonstrates the importance of yield.

Turning to landfill volumes, all categories for our landfill volumes were positive for the full year, and we expect that to continue into 2014. This strong demand should allow us to continue to see better pricing at our landfills.

So once again, our traditional solid waste business performed very well in 2013, with strong margin improvement in all three of our collection and landfill lines of business. Our income from operations margins grew 90 basis points, and operating EBITDA margins grew by 80 basis points in the traditional solid waste business.

2014 we expect to grow earnings and margins in our traditional business through pricing, cost controls, and increased deployment of our productivity initiatives.

On the recycling front, we had a $0.12 decline year-over-year in earnings per share compared to the $0.02 decline that we anticipated at the beginning of 2013. As we outlined on our third-quarter conference call, we are taking steps to improve the profitability of our recycling business.

When contracts come up for renewal, we plan to increase processing fees; include tighter contamination limits, with provisions that allow us to audit the inbound material; add language that allows us to recover increased costs due to unforeseen events; and increase consumer education through our Recycle Often, Recycle Right program. These initiatives are starting to work.

We have audited virtually all of our municipal contracts and have found numerous opportunities to charge customers for exceeding contractual contamination limits. And we have seen residue as a percentage of tons sold decrease for three consecutive months.

But even with these improvements we want to be cautious in predicting recycling results in 2014. We are assuming that operational savings will be offset by slight commodity price decline, such that we expect to have no year-over-year EPS impact from our recycling line of business.

Turning to our waste-to-energy business, in 2013 our operations were essentially flat when compared to 2012. With long-term natural gas and electricity prices projected to remain low, the outlook for growth in our waste-to-energy business is limited.

This, as well as lower disposable tip fees and volumes, resulting from contract transitions, are the primary reasons why we had to record a non-cash write-off of a significant portion of the goodwill of our waste-to-energy business. But the charges are the result of projected long-term cash flows, not short-term issues. So for 2014, we expecting income from operations to be flat when compared to 2013 from our waste-to-energy operations.

Turning to free cash flow, our disciplined approach to managing expenses and capital spending in 2013 allowed us to generate $1.32 billion of free cash flow, an increase of almost 60% compared to 2012. Excluding divestitures, free cash flow grew 51% when compared to 2012 to $1.180 billion

In the fourth quarter, we prepaid $51 million of accrued expenses to help offset some cash flow headwinds in 2014. Excluding that payment, our 2013 free cash flow without divestitures would have been $1.24 billion, well within our range of $1.2 billion to $1.3 billion.

In 2014, we expect that free cash flow will be very similar to 2013, at over $1.3 billion. We should achieve this despite anticipated headwinds of approximately $125 million from the expiration of bonus depreciation and the payment of incentive compensation.

We should be able to overcome these headwinds through a combination of increased earnings, improvements in working capital, and capital spending discipline.

The strong free cash flow that we generated in 2013 allowed us to return over $900 million to our shareholders in the form of dividends and share repurchases. This is the highest amount of cash returned since 2011. For 2014, we anticipate continuing to grow the amount that we return to shareholders.

So in summary, when we look back at 2013 we built a strong foundation with our pricing and cost control program. The momentum from these programs gives us the confidence that we can achieve our full-year goals of adjusted EPS of between $2.30 and $2.35 per fully diluted share and free cash flow of greater than $1.3 billion.

I will now turn the call over to Jim to discuss our fourth-quarter results and our 2014 outlook in more detail.

Thank you, David. I'm going to review the results for the fourth quarter and expectations for 2014. I will start by discussing our SG&A costs and cash flow performance; then I will expand on David's comments about the results of operations, yield, and volume in our various lines of business. I will conclude with a discussion of our financial metrics.

Results for SG&A were better than we projected at the beginning of the year. We anticipated costs being flat when compared to 2012 and for SG&A cost as a percent of revenue to improve 10 basis points. I am pleased with the overall results, as SG&A costs for the year improved $4 million to $1.47 billion and improved as a percent of revenue by 30 basis points to 10.5%.

For the fourth quarter, SG&A costs were $376 million, an increase of $20 million. As a percent of revenue, SG&A costs rose to 10.7%. Both increases are a result of the accruals that David mentioned.

This will not be our 2014 run rate, as we expect that SG&A dollars will remain flat in 2014 and that SG&A as a percent of revenue will improve from 2013. We saw that in January, as SG&A improved $8 million as compared to January of 2013.

Turning to cash flow, for the full year we generated $1.32 billion of free cash flow, an increase of almost $500 million when compared to 2012. We accomplished this in part by growing our net cash provided by operating activities $160 million to $2.46 billion, and by maintaining discipline on capital spending. Our capital expenditures for the year were $1.27 billion.

If you exclude divestitures, free cash flow for the year grew nearly $400 million to $1.18 billion. Without the prepayment that David mentioned, free cash flow would have been $1.24 billion.

In the fourth quarter we returned $410 million to our shareholders through a combination of $171 million for our dividend and $239 million in share repurchases. We also invested $26 million in tuck-in acquisitions in the fourth quarter.

For the full year 2013, we returned $922 million to our shareholders, consisting of $683 million in dividends and share repurchases of $239 million. Our Board has indicated its intention to increase the dividend in 2014 by 2.7% to $1.50 per share on an annual basis, which would result in a dividend yield of approximately 3.4%.

This is the 11th consecutive year of increasing the dividend. For 2014 the anticipated annual dividends equate to $700 million to be returned to our shareholders.

We also have authorization from our Board of Directors to repurchase $600 million of our shares.

During 2014 we expect capital expenditures of approximately $1.2 billion to $1.3 billion, which is between 8.3% and 9% of revenue, and free cash flow in 2014 is expected to be in excess of $1.3 billion, assuming $100 million of divestitures and despite the $125 million in headwinds that David mentioned.

For 2014 we expect to spend between $100 million and $250 million on solid waste tuck-in acquisitions.

I will now review internal revenue growth components and operating results. In the waste industry, if we lower price there is no new volume. Putting garbage on sale does not incentivize customers to create more garbage.

If we were in an industry that could create incremental volume by lowering price, like the consumer products industry, we might look at yield and volume mix differently. But in our industry we can't do that.

When we look at the trade-off between yield and volume, we look at them together to determine the best mix in order to maximize income from operations, dollars, and margins. This strategy worked in the fourth quarter and for the full year in every line of business, where we increased income from operations dollars and margins despite negative volumes.

For example, in the fourth quarter commercial yield was 4.9%, which is the highest yield since the second quarter of 2008. Volumes declined 5%. With this yield and volume trade-off, income from operations grew $21 million and margin grew 200 basis points.

For the full year, commercial yield grew 3.3% and volumes declined 3.4%. But despite the volume loss, income from operations grew $42 million and margin expanded 70 basis points.

For industrial, fourth-quarter yield grew 4.3% and volumes declined 3.7%. And still, income from operations grew $15 million and margin expanded 230 basis points.

For the full year, industrial yield grew 4.5% and volumes declined 1.9%. Despite the volume loss, income from operations grew $48 million and margin expanded 140 basis points.

Similarly, the residential line of business also grew despite contractual restrictions on raising prices. In the fourth quarter, yield for the residential line of business grew 1.7% and volumes declined 2.9%, which resulted in income from operations growing $4 million and margin expanding 60 basis points.

For the full year, residential yield grew 1.8% and volumes declined 1.7%, which resulted in income from operations increasing $14 million and margins expanding 40 basis points.

So as you can see, the price and volume trade-off worked in all lines of our collection business. The income from operations trend improved in the fourth quarter, and we expect this trend to continue into 2014.

I will now review the landfill line of business for the fourth quarter, where we saw the benefits of positive volume and positive yield. Volumes were a positive 5.6%, after adjusting for Sandy volumes. MSW yield was 1.7%, with revenue per unit increasing 3.5%.

Sandy-adjusted MSW volumes grew by 1.6%. C&D volume rose 6.6%. Combined special waste and revenue-generating cover volumes were a positive 3.9%. Income from operations grew $25 million and margin grew 250 basis points.

Our overall internal volume growth was negative 2.2% in the quarter and negative 1.5% if you adjust for the Sandy storm volumes.

I will now discuss operating costs. Operating costs increased by $43 million in the fourth quarter, 64.8% of revenue, which was flat with the fourth-quarter 2012. For the full year, operating costs increased $233 million to 65.2% of revenues, compared to 65.1% in 2012. In both the fourth quarter and the full year, the majority of the increases were for costs associated with recently acquired businesses and labor increases.

Finally, looking at our other financial metrics, at the end of the fourth quarter, our weighted average cost of debt was 4.97%, and our debt to total capital ratio was 63%. The increase in this ratio from 58.9% in the third quarter is primarily the result of the impairment charges.

The floating-rate portion of our total debt portfolio was 15% at the end of the quarter. Our recurring income tax rate was 34.6% for both the fourth quarter and the full year. For 2014 we expect our tax rate to be approximately 35%.

One last item that I would like to address is our asset impairments and unusual items. These noncash charges are primarily related to goodwill associated with our waste-to-energy business and other post-collection assets and related goodwill.

David mentioned the impairment of historical goodwill in our waste-to-energy business. The second category relates to asset impairments from our asset rationalization program. As we have discussed, we have been reviewing our post-collection assets to determine where we have cash flow negative or poor-performing assets that do not fit into our strategic plan.

Impairment of assets in the fourth quarter resulted from our analysis and led to our decision to mothball certain post-collection facilities. This includes deferring active pursuit of expansion permits at four landfills.

In our review, we determined that we're able to move items to other waste management facilities without materially impacting customers or operations. Of course, if volumes available to the mothballed facilities increase in the future we can reactivate expansion permitting efforts or operations at those facilities.

I would be remiss if I did not close by thanking all of our employees. They made 2013 as successful as it was, and we appreciate their hard work.

With that, Tanisha, let's open the line for questions.

(Operator Instructions) Hamzah Mazari, Credit Suisse.

Good morning. Thank you. Just a question on volume. If we adjust for the low-margin national accounts business that you are walking away from and maybe some weather impact, could you maybe comment on what the underlying volume growth is for 2014 that you are guiding to? And also maybe comment on how you balance volume loss with negative operating densities.

Yes. When we look at 2014, Hamzah, probably about 60% to 65% of the volume loss in 2014 is going to be from national accounts. As you know, that's generally very low-margin business.

We just recently lost our largest national account, which was low single-digit margin, because we didn't want to reduce or stay flat on the price. We wanted to get a price increase because our margin was low single digits. So we knew that was coming, and it was the right business decision to make.

The other -- so that is going to account for roughly 50% to two-thirds of the volume loss in 2014. But the remainder we have, the first quarter is going to have a tough Sandy comp still from Superstorm Sandy. And obviously, we've got bad weather, so you've got a little bit of an effect there.

And then we still expect that our pricing program is going to drive out a bit of our commercial volume. So most of what you see in 2014 is culling out that low-margin business and then the year-over-year comps in the first quarter.

As far as the density goes, look: that is a fundamental premise of this business, that if you can create route density, obviously you can service the customer at a much lower cost. But we can't let that benefit that we get upset our pricing program. We have got to be the pricing leader; and if we aren't, then no one else is going to do it.

So we are going to be the pricing leader. We recognize that you get benefits from density. We certainly are looking to grow our commercial volume, but we will not grow our commercial volume at the expense of price.

Very helpful. A question on SG&A. If we assume that bonuses continue into the future, how should we think about SG&A going forward? Is it fair to say that it should run up to 10.5%, 11% on a normalized basis, if we assume that management continues to get bonuses?

Hamzah, on the SG&A, look: I think I was pretty pleased with how we turned out in 2013. We said we would be flat; we were actually down a little bit, about $4 million. And we have guided to flat in dollars in 2014.

So when you think about it on a percentage basis, look: as the top line increases we expect that that percentage will start to get down to the 10% and potentially below 10% range. To really be in the low 9%s, I think you are going to need to see a pretty robust rebound in the overall economy.

For us, that has to be the big driver of top-line growth. The pricing strategy is clearly the right strategy, as you heard from my numbers. But in order to get revenue to really take off, it's got to be from robust economic growth. We can't afford that price/volume tradeoff in the wrong direction.

So when we think about SG&A as a percent of revenue, I would expect that the flat SG&A will produce -- obviously it is going to produce a lower percentage because of some increases in top line. Are we going to get down to 9%? Not going to get down to 9% until we really see the overall economy take off.

But I will tell you, there is still room for dollars on SG&A, both on the labor front and the nonlabor front. We are not giving any guidance for 2015; but I would expect you all hear the same message when we talk next year about being flat year-over-year.

Great. Just last question and I will turn it over. Any update on the divestitures? It seems like you had some this quarter. How should we think about where you are in that process? Thank you.

Yes. When we look at the divestitures, as we said, we are looking at -- we are assuming $100 million of divestitures during the year. We have got a few in the pipeline, particularly in the noncore business.

We looked at our Chinese joint venture, and we may look to monetize that this year. So that $100 million I would tell you I think there is some upside to that. But the bulk of that divestiture would be noncore solid waste.

We do have -- we should have $50 million to $100 million of dispositions in the core solid waste business. But the upside would be all those noncore asset sales.

Okay, great. Thanks a lot.

Derek Sbrogna, Macquarie.

Great. Hey, guys, thanks for taking my question. I was just wondering if you want to -- if you could talk a little bit about -- very encouraging to see the internal revenue growth stay strong in the fourth quarter, 2%; and you're guiding flat for 2014. Can you just talk about some of the things you are seeing and doing which gives you confidence that you will be able to offset some of the CPI headwinds with some of the business that is not linked to CPI?

Yes. It's a great question, because when we look at yield, frankly we don't look at the number, the 2.4% in the quarter, the 2% for 2014. We don't particularly look at that yield number.

When we build our plan, we build our plan to determine the amount of dollars that will drop to the bottom line from all of our pricing actions. Because pricing actions are not just core price increases, but it is also rollbacks, it is also the effect of lost business; there's a lot of different effects that go into what drops to the bottom line from pricing.

So when we look at that, when we look at dollars to the bottom line, we think dollars to the bottom line will be very similar in 2014 to where they were in 2013.

Now, you have hit the nail right on the head. In order to get that, we're going to have to do more robust price increases to offset the CPI. That CPI is what is going to drive the yield down toward the 2%.

So as we look at 2014, we don't think there will be a material difference in the amount of dollars driven to the bottom line. But CPI will mute the numbers a little bit as far as yield goes.

Okay. That's helpful. Just one more. It was good to see the CapEx guidance essentially in line with 2013 levels.

Is there anything we should be thinking about with regards to that number? I actually would've assumed it would have gone a little bit higher, just thinking that you would have seen some cost inflation with regards to capital purchases and some of the initiatives you guys are putting in place with the onboard computers and stuff like that.

Yes, when you look at CapEx, what we are doing in 2014 is making sure that we put the right amount of capital into our core solid waste business. We have talked about it in the past. We have got to make sure that we aren't underinvesting in the core business -- and we aren't.

But so, primarily what you will see in 2014 is that we are going to cut back on those types of investments that haven't been getting us the kind of returns that we want over the last few years, primarily recycling. So we are not going to starve the core business. The CapEx will be a little bit down because of what we call growth capital and capital for those other types of businesses that generally have not been returning -- earning their return on capital for the last two years.

That's very helpful. Thanks very much.

Bill Fisher, Raymond James.

Thank you. Good morning. Just on the EPS growth, I think the midpoint is around 8%; and obviously you mentioned your organic growth is around 1%. Can you touch on some of the drivers there?

Obviously you have a possibly lower share count; acquisitions. I think, David, you mentioned the pricing actions. But it seems like you've got to have some good cost controls, because gross margins would seem to have to rise.

Yes. Well, look: when we look at 2014, just to try to put it in context, I think that there is some potential upside on yield; I think there is some potential upside on free cash flow. But as you well know, Bill, the last two years we predicted our recycling operations to be last year $0.02 negative; they ended up $0.12 negative. The year before we had a similar type of result.

So we wanted to be very cautious on predicting. We have said it before; we can drive 8% to 12% earnings growth through the price/volume combination, but in order to get up into that low mid-teens, we have got to get help from waste-to-energy and from recycling.

We haven't done that in the last few years. So when we put together the plan, we said let's assume that we are going to be very cautious on getting any benefit from it. And, frankly, when you look at the beginning of the year, with slower growth in China, with the weather that has been impacting recycling volumes, I think that that is a good assumption.

So we wanted to be conservative because of those two big tailwinds there -- or headwinds that we've had in the last couple years.

Bill, one of the reasons we talked about January, which we have really never done before, but one of the reasons we talked about January is because we didn't want folks to -- two reasons. One is, we were encouraged by our own results; but most importantly, we didn't want folks to mistake the accruals there at the end of the year for a change in trend.

January clearly showed to us that the trend that we had seen really for the first probably 10 months of the year is continuing into next year. So when we think about 2014 -- for whatever it's worth, right? I mean, January is one month out of 12. But we felt good about what we saw.

I mentioned SG&A cost being better by $8 million, but we felt good about what we saw really overall. Even in light of a really tough weather month, our core business was actually better than prior year.

So I think we have got a pretty good start going here, and we will see what February brings. February has been a tough weather month as well.

Okay, thanks. Wanted to follow up, David, you are keeping the yield north of 2%; and I think last year you had some good success on that regulatory fee. Are there any new incentives or strategies this year? I noticed the commercial price is really strong for you in Q4.

Yes. No; I mean quite frankly, 2014 is going to be the same. It's a repeat of 2013. It is going to be the same things that drive it. Again we talked a little bit about the CPI headwind that we have to overcome. But it is going to be the same types of things.

But, Bill, we will never rule out doing something during the course of the year. We didn't build in any plans to increase that; but we will see how the year plays out.

And, look: the reality is that as we have gone through the various cycles, we have never seen a dramatic amount of pushback to the fee. I think customers get the point that our cost structure is going up every year, and so we have to recover that.

So, could it happen in 2014? Absolutely.

Is hitting our target dependent upon it? No.

Okay, great. Thank you.

Corey Greendale, First Analysis.

Hey, good morning. I think, David, that you said something like half to two-thirds of the volume decline that you are projecting for 2014 is because of national accounts. I am just trying to get a sense; what do you think is underlying market growth, volume growth in the market in 2014?

And then on top of that, how much are you projecting that you are losing because of your being aggressive and being the price leader?

Yes, again I think 2014 from an overall volume perspective is going to be fairly similar to 2013. Look, we have said it now for the last couple years that what we need to see in order to really get robust volumes is we need to see an economy that is driven by housing starts, by new business starts, and by industrial production.

We can't see an economy where growth is driven by noninfrastructure government spend and by the service sector. Right?

So I think that is the big question for 2014: are we going to start to see -- are we going to continue to see the rebound in housing? And are we going to start to see new business generation?

Again, when we plan for 2014 we are planning like we aren't -- like we aren't going to see a dramatic uptick. So from an overall volume point of view I think what you will see in 2014 will be similar to what you see in 2013, with collection volumes -- at least for us, with collection volumes remaining negative and landfill volumes remaining positive.

Okay. I have one, just to help set the expectations; you have given all the things you are seeing in Q1. Do you expect that Q1 will be the worst year-over-year comp in volume and it improves as you get to the end of the year?

Yes, I would be surprised if Q1 is not the worst year-over-year. Now, the large national account that I have talked about, we lost about $90 million of national account business last year. Our largest national account we will lose in midyear this year.

So you will get a little bit of that effect in the back half. But because of the weather effect and because of the Sandy effect and because of national accounts, yes, I would expect the first quarter to be the toughest comp quarter and for it to improve going forward.

Is that competition on national accounts, is that coming from your large national competitor? Or are you seeing new businesses like Oakleaf forming?

I think it is a combination of both. Look, from a -- it doesn't matter where it is coming from; because even if it's a broker it's coming from our large national competitors. We don't do business with brokers, right? From our point of view, we don't see why we would strengthen a competitor by acting as a subcontractor for these new brokers in various markets.

We don't understand why you would help a competitor. So we don't do business with the national brokers. So even if the bid isn't won by our large national competitors, they are doing business with those brokers, so they are getting some of that business.

So I think the answer would be: yes, predominantly we are losing it to the large national players, either directly or indirectly, because they are working for the brokers.

Okay. One quick one for Jim. In the press release you talk about the $0.09 impact; some of that is the bonus accruals, but some of it is also risk management. Can you just elaborate a little on that? Is that a one-time adjustment? And what is your expectations for risk management expense going forward?

The risk management was a benefit actually prior year. We typically expect -- with our safety improvements we have been seeing $0.01 to $0.02 per year.

This year we actually went the other way; we had a couple of incidents so we ended up with a $0.01 charge. Last year it was a $0.02 benefit on risk management adjustments.

So, is it a one-timer? Certainly the trend would say that we wouldn't see a repeat of that. But it is hard to say it's a one-timer.

Yes, when you look at our safety numbers, our safety numbers are actually improving, which would lead you to believe that we would've gotten a positive accrual. The problem as we had a couple or a few large incidents that we accrued for in the fourth quarter.

So again, like Jim said, you would expect it to be positive, but you just never know when these large incidents are going to happen.

Got it. Thank you.

Adam Thalhimer, BB&T Capital Markets.

Hi, good morning, guys. Thanks for the detail you provided in terms of the yield and volume in your various businesses.

I am curious; from your perspective, is the yield-volume trade-off working better on the industrial line than the commercial line? Because on the commercial line it looks like you are getting 5% price, but then giving up 5% volumes. Whereas on the industrial side, you're getting a lot of price but not giving up as much volumes.

Yes, when you look at it from a pure dollars point of view, maybe you would say that commercial is doing better. But I think you're right.

Look -- and it goes back to the earlier question about route density. You don't have the same issues with route density on the rolloff side that you do with the commercial side.

But, look. In this business there is a few large chunks of business that you can go after very quickly. You can get large residential contracts; you can get large national accounts; and you can get temporary rolloff business. You can sort of flip a switch and get any of those three.

The problem is you're going to get those three at very low margins. And we know that if we go out -- look, if the large player goes out and grabs a bunch of volume at low margin, what is the rest of the industry going to do?

So from our perspective we have got the right trade-off. What we are expecting to see is our volumes recover with the economy, not for our volumes to recover because we keep our price flat. We are going to continue to push our price and make sure that we get above that 2% so that we can expand margin.

Adam, it is also worth mentioning that some piece of our volume loss is not a function of price. We don't know exactly how much that is; but some piece of it is related to customer service.

And we are really focused at this point on customer service and improving the experience to the customer. And that doesn't -- getting that volume back has no negative impact on the price side as we would if we were simply lowering price to get more volume. But we are keenly focused on that.

Got it. Okay. That's very helpful. Then just as a follow-up, in terms of the -- you guys are obviously being aggressive on pricing, which is probably a good thing for the whole industry. What exactly are you seeing in terms of how your competitors are responding to that?

Look, I would say that we would love to see all of our competitors, large and small, lead rather than follow; but we recognize that generally they aren't going to lead. So mostly what we have seen is what I would call rational behavior.

Like there always is, there are pockets where you see some unusual actions. Generally, those are in markets where you have seen a lot of stress put on volume.

So we just recently saw a competitor lower their own price by $4 million in the Northeast on a disposal contract, sort of bidding against themselves. We saw a competitor drop price at the landfill by 20% to 25% in South Florida, because both of those markets are fairly challenged.

But that is the kind of behavior that for us is going to cost us a lot of volumes. And again, we can't go out and do that type of behavior. Because look, I have always said we can lead the industry in one of two ways. We can't control what they do; we have absolutely no control over what anyone else in the industry does other than us.

But, as the largest in the industry, we can take one of two stances. We can say we're going to go after volume and give away price; or we can say we are going to go after price and give away volume.

And both of those can lead to what we call the spiral effect, either downward or upward. We long ago -- look, Jim said it. You can't lower price and create demand.

Cherie Rice, who used to be with our Company, used to say with shoes, if you lower the price of shoes, people buy more shoes. When you lower the price of garbage, people don't create more garbage.

So when you're working with a fixed buy you are always going to be benefited by driving yield up because you can't steal enough volume to make up for that yield. And if we go and start stealing volume, then it creates that domino effect of everybody stealing everybody's volume, and that is not a path that we are willing to go down.

Got it. Okay. Thanks for the color.

Al Kaschalk, Wedbush Securities.

Good morning, David. Could you just clarify on the Sandy headwind what that is for 2014 in terms of a comp headwind on a volume basis?

Yes. Again, that is primarily in Q1. If you look at it in Q4, you saw that it was 0.6%. I would expect it to be a little bit more muted in the first quarter, but probably somewhere between that 0.3% to 0.6%.

Okay. Then should we assume the balance is national accounts?

Yes. Look, so you've got national accounts and you've got the commercial business going down; but all of that is offset by landfall volumes going up. And again, look, that goes back to the tradeoff, right?

If you tell me that my low-margin national account business is going to go down and my landfill business is going to go up, I will take that tradeoff six ways to Sunday.

Al, if you haven't heard it from the other guys, which you probably have, the weather is throwing volumes out of whack. Now, we were pleased with the results, as we said in January.

But boy, when you -- we have had several operations, especially in February, where we have been shut down in a big part of the South. You expect to be shut down in the North and the Midwest, but when Atlanta shut down for two days that generally is not expected going into the winter.

So I think there is going to be an impact from the weather that is yet to be determined.

Al, we say it every year, that you can't make a call on full-year volumes based on the first quarter because of the seasonality. Right? We have said that every year since I have been here, to Jim's point.

More so this year than ever before because it has been a ridiculously brutal winter, not just in those places where we always have a brutal winter, but in places where you don't have brutal winters. We had two days of school shutdowns in Houston, Texas, from the winter weather. You saw what happened in Atlanta.

So what I would say, Al, is we have no idea what Q1 volumes are going to be. We would expect them to not be robust.

But again, I don't think that is an indicator of what you are going to see for the full year. We will really know what full-year volumes are going to do once we see the seasonal upturn in March, April, May.

Here is a broader question, David, and I appreciate the color from both you and Jim. You are guiding us to 1% volume decline and better than 2% pricing. If I look at the others in the industry, all the other metrics -- those metrics are flipped.

I certainly appreciate you going out and focusing on price. But can you explain why that is such a diverse message coming from you? Or why they -- I prefer you talk about your business, but why you are seeing metrics that are different than the rest of the crew?

Yes, look, I think we are seeing a lot of metrics that are different than competitors. Again, you have got to take out the fourth-quarter accruals; but let's take a look at the full year.

Again, when we talk about metrics, what we are talking about is income dollars and margins. So take a look at those metrics.

In every line of business we increased dollars; we increased margins. I can only speak for us, but we did in every line of business.

There is only one thing I can tell you. We have seen what happened when we had 1% yield and 1.5% volume. We saw it. We saw it in 2012.

I guarantee you what is going to happen. Margins go down and income from operations dollars go down, particularly when the volume that you are picking up is low-margin business.

You just can't get enough yield in order to make up for -- you can't get enough volume in order to make up for lower yield. I think everybody in this industry would acknowledge that you need to get 1.8% to 2% yield in order to expand margins.

So that is the question. Do you want to expand income from operations and margins, or do you want to see them go backwards? You have to get the yield in order to do that.

Again, we have seen many times what happens in our business when we give away price to get volume, and it is not a healthy tradeoff when it comes to income from operations dollars and margin.

So it's fair to say that -- not that you want to quantify guidance for 2014, although it would be helpful -- how much basis points do you expect EBITDA margins -- EBITDA margin, excuse me, there is only one margin -- to improve in 2014, relative to 2013 on an apples-to-apples basis?

Yes, and again, remember as we look at 2013 we had to look at the core solid waste business because of the negative effects from recycling and waste-to-energy. That was 150 basis points.

Next year, we shouldn't get detriments from those two businesses. And we think that if that plays out like that, we should get 50 to 100 basis points of margin expansion.

Finally, on this waste-to-energy business, you take the impairment charge. Why be in that business? Why aren't we thinking about -- or maybe you are -- but what strategic nature does that provide to your portfolio?

Yes. The waste-to-energy business is really two different businesses, right? The waste-to-energy business is electricity, which is what they sell out of the back-end of the plant; and it's basically a landfill at the front end of the plant. They take in waste and they charge a tip fee.

So when we look at it, we say that the electricity certainly is not core to us, and it is not something that we have deep expertise in. Obviously, our folks at Wheelabrator have expertise, but we are not a power company; so we don't have as deep an expertise as folks whose primary business is power.

So you are absolutely right. On the power side it is not strategic.

On the tip fee side, it is absolutely strategic. We always call the Wheelabrator plants the bottomless landfills because they can keep taking in waste and they never fill up. So when we look at it from that point of view, it is absolutely strategic.

Thank you.

Michael Hoffman, Wunderlich.

Good morning, gentlemen.

Normally we don't have a question from the line of Michael Hoffman. We will have many questions from the line of Michael Hoffman (laughter).

How you doing, David? Well, I'm going to have to live up to that now. I only really had one written down, but I guess I could make a bunch more up.

Don't feel like you have to live up.

Okay. If I can follow on the last question, the way that was answered would say a creative thought about maintaining that strategic exposure to the tip fee side but finding somebody else who could actually leverage the electricity side is not off the table.

Yes. Look, when we look at the electricity side we are always looking at what we can do to improve it. In the past we have hedged it; but yes, we are always looking for ways that we can take that -- where we can take the volatility out of the earnings stream.

Okay. On the volume side, where should -- you give us some great tables. One of them is called operating revenues by lines of business. And when we think about where things are gone because of like a lost national account or Sandy, can you point out -- like, is the lost national account coming out of the industrial line or is that coming out of commercial? Because there is a pretty steep decline in both.

Yes, a little bit of both. It depends on what type of national account customer you have. But it is going to come out of both, I would say roughly 50-50, maybe a little bit more leaning toward the permanent rolloff side.

Okay. One of the things that hasn't been discussed -- and I have to believe you are seeing this -- is that if you are on a same-store basis in your commercial business, which is that small container business, which is -- if you are going to get what you pointed to earlier -- housing starts leads to new household formation which leads to new business formation -- this volume shows up there.

How would you characterize the volume in the container that is still there year in and year out?

Yes. Well, let's talk a little bit about the commercial business. Because I will tell you, Michael, when we look at the lines of business, what I would tell you is, look, if we're going to lose low-margin temporary rolloff business I am not going to lose a heck of a lot of sleep over that. If we are going to lose low single-digit national account business, I am not going to lose a lot of sleep over that.

Now don't get me wrong. I would love to have that volume.

The problem is: what does that do to the pricing dynamic? But when I am losing those low-margin lines of business, I am not particularly upset by it.

I would tell you that the commercial line of business is the one -- if you could tell me which one line of business do we want to get focused on to stem the losses, I would tell you it is the commercial line. And it is because again, going back to that earlier question, the route density is -- the benefit that you get from route density is incredible. And that is like, as Jim said, that is why we are putting some more effort into customer retention without using price.

But when you look at that small container business, what you have seen over the last couple years is sort of the amount of waste going into the container varies mildly from negative 2% to positive 2%. So we just haven't seen that real kickstart that is going to dramatically change those commercial volumes.

Again, I think in the natural economic cycle you will see it as new houses get built. No one builds a new gas station in the middle of nowhere. No one builds a new grocery store in the middle of nowhere. But as new subdivisions start getting built, then they've got to build a gas station; they have got to build a dry cleaner.

So I think new business starts naturally trend behind housing starts. So if we continue to see housing starts positive into 2014, I would hope that we would start to see more new small business creation. And if we can get that 2% to 3% GDP, hopefully that at a very minimum will at least stabilize those volumes.

If I take what I am hearing, what you are saying is that there is a slightly positive trend line that is starting to replicate or match this improving housing start number; but not enough yet to change the economic model. But the direction is moving -- it is moving in the right direction.

I think that is absolutely right.

Okay. Changing gears, capital spending, would you break -- the $1.2 billion to $1.3 billion, or take the midpoint, $1.25 billion, how does that break out in your definition of growth versus maintenance?

Michael, we said last year that we had redefined that. There was some growth -- what had otherwise been considered growth capital previously, that we retitled to maintenance capital. If we had a contract that came up for rebid, previously that would have been considered growth capital as we went through the process of evaluating it.

That now is considered maintenance capital, even if the contract requires new vehicles. So at this point, the growth capital number has shrunk pretty considerably; and what we are left with is a maintenance capital number that is probably in the $900 million to $1 billion range; growth capital is the $200 million to $300 million.

Jim and I have taken a very discriminating view, as David said. When we look at -- when we make capital expense decisions, we discriminate. We discriminate against those that provide low returns.

Michael, when you look at what I would traditionally call growth capital, I will divide it into three categories. You got landfill gas-to-energy; you have got alternative technologies; and you've got recycling. Those are the three big buckets that we have spent what we will call, quote-unquote, growth capital on in the last five years.

In 2014 you are not going to see a lot of spending in recycling or in alternative technologies. You are going to see more -- you will see some spending in landfill gas-to-energy, but you are not going to see it in those two areas.

The obvious question is: why? Well, because we aren't seeing the returns in those areas.

So again, as Jim said, we certainly aren't starving the business. We think we're at a good level of CapEx, and we don't expect to see that dramatically go up over the next few years.

Okay. Speaking of recycling, when you think about your efforts on going back to the customer like you did post the Great Recession and establishing pricing floors, what it has the reception been on -- we really need to talk about the quality you are sending us, and if you don't send better quality, we have got to charge you more?

Yes. I think the reception has been, I would say, has been fine. We haven't -- those are not hard conversations to have.

I think the more important thing, Michael, is: what is going to happen going forward? I liken this to what we did in the early 2000s with the fuel surcharge. When we first started the fuel surcharge, municipalities said: well, we don't have a fuel surcharge in our contract, so we are not going to allow you to bid if you take an exception for the fuel surcharge. And we said: fine, we are not going to bid.

After a while that became an industry standard. Other industry players said: well, gosh, we are getting killed by fuel too, so we're not going to bid if there is not a fuel surcharge. And now virtually all contracts are bid with a fuel surcharge.

So going forward the question is -- we are not going to bid these contracts if they don't have the types of provisions that we need in order to make money. The question is: is the industry going to do like they did with the fuel surcharge and say: gosh, we aren't making any money either, so we are going to -- we're not going to bid these contracts.

That is going to be the big question going forward. Is someone going to be optimistic enough that they are going to bid contracts without the protections that they need in order to make sure they make a return on the investment?

Or are they going to do like we do and say: look, we want to be the largest recycler in North America; we don't have any intention of not being. But we also are not in this to lose money, and we have got to systemically change the way our contracts work going forward so that we can make sure we make an adequate return.

The contamination levels only get to a certain amount of dollars. The rebate is a big part of it, too.

So you have to -- and then again, educating the consumer. So you have to go at it from all of these angles.

So I would tell you the reception has been fine; but just getting a good reception from municipalities and changing those contracts doesn't get us anywhere near where we want to be from a return point of view. The only way we get there is if we fix these contracts going forward.

Okay. Then Jim, on cash flow from operations, what is it going to -- is it just margin that gets you from 17.6% of revenues to a 20% target? Or is there working capital as well?

Yes, there is probably four things, and we saw them in January and I think we will see them for the rest of the year, that drive cash flow from operations and ultimately free cash flow. Those four things -- well, and I guess I am speaking about free cash flow here, because I am including capital in there: but cash flow from operations; yield, of course; and cost control, both SG&A cost control and operating cost control; and then when you take that to free cash flow, CapEx.

Then of course as you mentioned, working capital -- and it is an item we haven't talked about on this call -- but it has been an area of focus for us particularly in the last two quarters of the year. To give you a couple of numbers, we improved our DSO by 2 days. Not happy with that.

Happy with it's in the right direction, but not happy with the number. We have got to improve DSO more than that and I actually think you will see that in 2014.

Our days to pay, we really didn't start working on that in honest until August. And from August through December we improved our days to pay by -- we increased that metric by 3 days.

And really there is quite a bit more to come there in 2014 as those pay cycles cycle through. We didn't change payment terms until November/December time frame. So I think you will start to see a benefit in working capital from continued improvement in DSO and then a full year of improvement in days to pay.

Okay, that's great. Then just a couple housekeeping items. In your guidance, what share count are you using to do the $2.30 to $2.35?

What we would expect, Michael, is that we offset dilution, that we buy back at least enough shares to offset dilution.

Yes. I think we were at 470 million at the end of the year, so we would buy back shares, as David said in 2014 to offset dilution. And then make a decision based on (multiple speakers)

Your dilution much about 2% to 3% of share count?

Correct.

That's about right.

Okay. Then the tax rate in 2013 was relatively lumpy in the quarter. How do we think about that in 2014?

Because it tends to have a pretty -- since you have given an EPS number, it tends to have a pretty dramatic impact on EPS by quarters.

Yes, we can get you the quarterly number. The annual number is basically flat at about 35%.

Right. Okay, great. I hope I didn't disappoint you. I could come up with some more if you want, but I am good.

That was excellent.

Thanks, guys.

Alex Ovshey, Goldman Sachs.

Thank you. Good morning. Just one question and a follow-on to it. Can you talk about how you expect your yield to perform at the landfills relative to the collection business in 2014?

And just from a volume perspective, should we expect that volumes at the landfill at some point are going to begin to mirror with what you are seeing on the collection side? Or is there a reason to think you can continue to outperform on the landfill side volume-wise (technical difficulty) collection?

Yes, we certainly expect volumes at the landfill to be positive in 2014. And like we have said, particularly in the landfill line of business where you're seeing positive volumes, that should lead to better yield.

Okay, thank you.

Barbara Noverini, Morningstar.

Good morning, everybody. Jim, you referred to asset rationalization in your post-collection facilities and specifically mentioned a few cash flow-negative landfills. We have talked about this in the past.

But how much of this that was just reported is related to recycling assets? And further, is it fair to say that asset rationalization is continuing in your recycling portfolio as you work through these contracts? Or would you say you've got a pretty good handle on projected future cash flows of your portfolio at present?

A bigger portion of it, of that asset impairment, the biggest portion of it was, of course, the landfills. A piece of it was recycling facilities.

We are not aware of any additional impairments at this point. But we always review our assets and where appropriate we would close facilities.

We felt like this year we had gone through a pretty extensive analysis, and by the time we got to the fourth quarter we were prepared to make a call on those.

Okay, great. Just quickly, on the lost national accounts businesses that you were talking about earlier, how much of that is related to disappointment on your end from what they are demanding on the solid waste front versus the recycling front? Have you seen that demand from those customers in recycling is above what you're prepared to give at this point?

When you look at the national accounts, most of the national accounts do want recycling. And, frankly, that is one of the positives that we have, right? That we have the largest network of recycling facilities. So the more recycling they want, the better chance we have at winning the bid.

Look, basically what it has come down to is that our primary competition, as we talked about, is other large national players and then the brokers. I think the brokers are probably -- well, they are both very competitive.

But the brokers' model -- which by the way we have a brokerage model too. The brokers' model is to go out and try to get very low-margin work done by subcontractors; and as long as there's folks willing to do that, they are going to be able to continue to reduce price.

From our point of view, we always say we don't need to practice our business. We have got plenty of ways to practice. We don't need to go out and do it for the margins.

So if other folks want to fill up their capacity with that low-margin business, that is quite all right. When the economy comes back and we start seeing a better volume, we will have that excess capacity that we can stretch in to get new volumes at higher margins. And obviously those competitors won't.

Okay. Good. That's it for me. Thanks very much.

Jeff Osborne, Stifel.

Great, good morning. Just a couple quick questions from my end. I was wondering, David, on the national accounts side, you mentioned there was a $90 million headwind in 2013. And the largest customer, I think you articulated, would come off-line in mid this year.

Would you expect that number to be higher than $90 million in terms of lost revenue in 2014?

You mean as far as new lost revenue? Or the rollover effect of the $90 million? You mean new?

It was the new lost revenue is what I was looking for.

Yes, no. That national account is roughly $50 million to $60 million -- I'm sorry, $60 million to $70 million of annual revenue. But again, it is at low single-digit margins.

Got you.

And (multiple speakers) when we look at other national accounts -- look, the way we define national accounts is not just the $60 million and $70 million customers. The way we define national accounts is that basically if they cross over geographic market areas they become a national account. So a lot of those national accounts are regional.

And the bulk of our national account business is great business, because we can create that route density. So I wouldn't expect that we are going to lose another $90 million of national accounts in 2014; and we will continue to add the smaller regional national accounts. So overall, the net effect will be that we will lose some revenue in national accounts, but we expect that our national accounts EBIT dollars will actually be flat to up.

I understand. In that same vein, can you just touch on the commercial side of the business in terms of service frequency increases, excluding the national account lost sales in 2013? What the trajectory or the rhythm was through the year.

And maybe touch on January. Are you seeing greater frequency increases, excluding the lost customers?

Yes, we haven't seen the January numbers. But again, what we saw in 2013 was a fairly narrow band of positive/negative, down 2%, up 2%. We had a couple numbers that were up 2% or 3%, or down 2% or 3%.

But basically what I would say is that the overall trend in 2013 was slightly positive; and we would expect that trend to continue -- in fact, probably get a little bit better in 2014.

Excellent. My last question is just can you touch on the couple hundred million in growth CapEx that you mentioned before? I think it was to Michael's question.

In particular I was looking for where you are in terms of your natural gas fleet. Did you accelerate that last year with the accelerated depreciation? And then would you look to decelerate the amount of new nat-gas vehicles in 2014 added? Or just an update as to where that is exiting the year and what the plans are for this year would be helpful.

Yes, Jeff, Jim Trevathan here. We still plan to buy about 90% of our new trucks, will be natural gas trucks. We are installing about 15 new locations across the country where we put the infrastructure in.

And we will continue that. The payback was excellent in 2013 and we expect the very same in 2014.

I don't see any change in that strategy at all around implementing natural gas fleet. Our customers like it; it's obviously cleaner air. Both residential and commercial customers appreciate it, and we will continue that focus.

Just to put it in perspective, Jim, in terms of the percentage of the fleet today, are you in the mid-teens or whereabout are we?

14%, 13% -- 16% now; I'm sorry.

16%? Okay. Thank you very much.

16% of the total fleet. We have put about 900 trucks on the road that were natural gas in 2013; we moved that percentage up a couple of points.

Thank you.

I would now like to turn the call back over to Mr. David Steiner for closing remarks.

Thank you. As we said, from a business point of view 2014 is off to a great start.

But from a personal point of view, 2014 is not such a great start. We recently lost two of our corporate family to cancer. I wanted to say that our sympathies go out to the families of Jim Perry and Scott Stadelman. I can promise you that they may be gone but they are not forgotten.

Thank you, operator.

Thank you for participating in today's fourth-quarter and year-end 2013 earnings release conference call. Replay dial-in number, 800-859-2056; international local dial-in number 404-537-3406; conference code 315-00-809. You may now disconnect.