美國廢棄物管理公司 (WM) 2014 Q2 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 second-quarter 2014 earnings release conference call.

(Operator Instructions). I will now turn the call over to Mr. Ed Egl, Director of Investor Relations. You may begin your call.

Thank you, Tanisha. Good morning, everyone, and thank you for joining us for our second-quarter 2014 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 not that we have filed a Form 8-K this morning that includes the earnings press release that is available on our website at www.wm.com. The Form 8-K, the press release and the schedule for the press release include important information.

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

David and Jim will discuss our results in the areas of yield and volume which unless otherwise stated will specifically reference internal revenue growth, or IRG, from yield or volume. Additionally, any comparison unless otherwise stated will be with the second quarter of 2013.

During the call David and Jim will discuss our earnings per diluted share, which they may refer to as EPS, or earnings per share. David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the Form 8-K filed today.

EPS, income from operations margin, operating EBITDA and operating EBITDA margin results discussed during the call have been adjusted to exclude items that management believes do not reflect the fundamental business performance or are not indicative of our results of operation. These measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and schedules in the Form 8-K filed today which can be found on the Company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures.

Please note that our Form 8-K filed earlier this morning also included a copy of our press release announcing that we have entered into an agreement for the sale of Wheelabrator. You should be aware that projected EPS, free cash flow and all other forward-looking statements except those specifically pertaining to the Wheelabrator transaction do not incorporate any benefits or costs associated with the Wheelabrator transaction. For additional information on the proposed transaction and related risks and uncertainties please see the press release filed as Exhibit 99.2 to our Form 8-K.

This call is being recorded and will be in available 24 hours a day beginning at approximately 1 PM Eastern time today until 5 PM Eastern time on August 12. 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 63619185.

Time sensitive information provided during today's call, which is occurring on July 29, 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 is prohibited. Now I will turn the call over to Waste Management's President and CEO, David Steiner.

Thanks, Ed, and good morning from Houston. We had a very good quarter and we will talk in detail about our results. But first I wanted to discuss the news in today's press release announcing that we have signed a definitive agreement to sell our Wheelabrator waste energy business to Energy Capital Partners for $1.94 billion.

As we have said before, our waste-to-energy business has two distinct components, the tip fees that we receive on the front end and the payments for energy on the back. We do not view the energy payments as strategic and we do not have the depth of energy expertise that Energy Capital Partners has.

Consequently, we've entered into a waste supply agreement for the front end where we will use our expertise to fill up the plants for seven years just like we do today. But we will no longer have the volatility of our financial results related to Wheelabrator electricity sales.

We used the proceeds from the sale in the way that is most accretive to earnings and creates the most shareholder value. We will do so by buying back shares or doing acquisitions in our core business if they are more accretive and can create long-term shareholder value. We will do all of this while maintaining our strong balance sheet.

Wheelabrator is a high-performing organization that reflects the quality of the people, our friends and colleagues that operate it. I want to thank Mark Weidman and the entire Wheelabrator team for their hard work and dedication. They made our waste energy business successful and we anticipate that the business will continue to be successful under Mark's leadership and ECP's ownership.

Returning to second-quarter results, the solid performance that we saw in the first quarter continued throughout the second quarter. Once again, our yield and cost control programs drove growth in both our income from operations and operating EBITDA and led to expanded margins in our traditional solid waste business and our overall business.

In the second quarter we earned $0.60 per share, an increase of over 10% when compared to the second quarter of 2013. In addition, we saw a nice improvement in net cash provided by operations and free cash flow. Through the first six months of 2014 our employees are executing on our business plans and we are encouraged by the strong results.

We expect that this performance will continue throughout the remainder of the year. Our yield program continues to be a significant driver of our margin expansion. For the second quarter our collection and disposal yield was 2.3%, which is the fifth consecutive quarter of yield above 2%.

It's down slightly from our Q1 yield primarily due to increased revenue and the anniversary of the implementation of our regulatory cost recovery fee in 2013. Our core pricing remains very strong at 3.9%, a year-over-year improvement of 10 basis points.

Each of our lines of business had positive yield with the exception of landfill C&D. In the landfill MSW line, same-store average rates increased 5.1% and through the second quarter nearly 90% of our contracted third-party landfill customers have received a price increase. The remaining landfill customers either perform event work or have restrictions that limit price increase opportunities.

When compared to the second quarter of 2013, same-store average rates in both the commercial and industrial lines increased 4.4% and we saw a 3.1% increase in our residential line. This has had some effect on volumes particularly with regard to national accounts and residential contracts but we continue to see the trade-off as positive as the operating margin in our traditional solid waste business was up 50 basis points.

Turning to volumes, in the second quarter volumes were a negative 1.4%, which is an improvement of 40 basis points from the first quarter. More than 50% of our volume decline came from several low-margin but large national account losses.

In the second quarter we saw positive landfill and transfer station volumes more than offset by declines in the collection lines of business. Despite negative volumes overall income from operations grew more than 9% and our income-from-operations margin grew 120 basis points.

In addition, operating EBITDA increased more than 5% and operating EBITDA margins increased 120 basis points to 25.6%. When we issued volume guidance at the beginning of the year we expected volumes to be around a negative 1% for 2014. Through the first six months volumes have declined 1.6% and we now expect that to be about the run rate for the remainder of the year with the change being primarily attributable to the continuing impact of lost national account business.

Our recycling operations also performed better in the quarter adding almost $0.01 in earnings per share compared to the second quarter of 2013 despite a 2.1% decline in average commodity prices. The efforts that we have put in place to improve our enforcement on contaminated loads and modify the methods for calculating rebates to customers are paying off. Operating cost in the recycling line of business improved almost 8% primarily due to lower rebates and reduced labor costs.

Turning to our waste-to-energy business, in the second quarter operating results were essentially flat when compared to 2013. We did not change our full-year EPS or free cash flow guidance as a result of the proposed sale of Wheelabrator but if the deal closes before the end of the year it could have a minor impact on earnings and cash.

On average, our waste-to-energy operations would produce about $0.015 of earnings and $10 million in free cash flow per month. We expect that this transaction will close sometime in the last two months of the year in which case the effect on this year's earnings and free cash flow would be minimal.

Our solid first-half performance on yield and cost controls makes us confident that we can meet or exceed our full-year earnings growth goals. But first and foremost our Company operates to generate cash flow and when we combine our yield and cost focus with our focus on capital discipline and working capital, we expect to see strong cash flow in the second half of 2014.

Consequently, we expect to meet or exceed the $1.5 billion high end of our free cash flow guidance. I'll now turn the call over to Jim to discuss our second-quarter results and the sale of Wheelabrator in more detail.

Thank you, David. Before I discuss the details of our second-quarter results, I want to provide some additional information on the sale of our Wheelabrator business. After normal transaction adjustments to the sales price we anticipate receiving about $1.85 billion in cash once the transaction is finalized late this year.

With our basis in Wheelabrator we will pay no taxes on the transaction and it should generate a capital loss of approximately $300 million that we can utilize over the next five years. Our base Wheelabrator divestiture model assumed a partial use of proceeds to maintain leverage neutrality with the majority of the proceeds going to share repurchases. The diluted EPS accretion in that model is about $0.02 per share for 2015.

Of course we will look for reasonably priced core businesses to replace the $220 million of Wheelabrator EBITDA if they are accretive to the base model. In either case, we would selectively retire debt to the extent necessary to maintain our strong balance sheet and our target leverage ratio of about 3 times EBITDA.

On the share repurchase front, we had anticipated that we would be in the market repurchasing our shares in the first half of 2014. However, we suspended share repurchases while the Wheelabrator transaction was pending.

Now that we have announced the transaction we've entered into an accelerated share repurchase program to spend the full amount of our previously announced $600 million authorization on share repurchases. We will fund the $600 million on August 1 and will receive an initial delivery of approximately 9.6 million shares representing 70% of the shares expected to be retired. The actual number of shares repurchased will depend upon the volume weighted average price of our stock less a discount during the repurchase period, which we expect to be three to six months.

Turning to our second-quarter results, our revenue grew 1% to $3.56 billion. Strong yield and acquisition revenue were the main drivers with volume declines and a negative foreign currency translation muting revenue growth. The foreign exchange impact on revenue was approximately $14 million.

We continue to see improvement in all our cost lines. Operating cost as a percent of revenue improved 90 basis points to 64.6% and improved $10 million in the second quarter.

Reduced cost at our recycling facilities and the sale of an asset improved the cost of operations $41 million and were partially offset by increased cost related to recently acquired businesses. SG&A costs were flat when compared to the second quarter of 2013 at $353 million and improved as a percent of revenue by 10 basis points to 9.9%. We are still on target to achieve our full-year SG&A goals.

Turning to cash flow, for the second quarter we generated $447 million of free cash flow, an increase of $100 million when compared to 2013. We accomplished this by growing our net cash provided by operating activities $10 million to $555 million by improving working capital and by maintaining discipline on capital spending.

The growth and net cash provided by operating activities was muted by an increase of over $70 million in cash taxes primarily related to the repatriation of accumulated cash from Puerto Rico operations and the expiration of the bonus depreciation allowance. Our capital expenditures for the quarter were $208 million, a decrease of $27 million from the second quarter of 2013. We also divested our Puerto Rico operations and other assets in the quarter for about $100 million.

Year-to-date 2014 we have generated $931 million in total free cash flow and $665 million excluding divestiture proceeds. This is the highest free cash flow we have ever generated through the first six month of the year and puts us on track to meet or exceed the upper end of our full-year free cash flow goal of between $1.4 billion and $1.5 billion despite a planned pickup in capital expense in the second half of 2014.

Looking at internal revenue growth for the total Company in the second quarter our collection and disposal yield was 2.3% with volumes declining 1.4%. This led to income from operations growing $48 million, operating income margin growing 120 basis points, operating EBITDA growing $48 million and operating EBITDA margin growing 120 basis points.

Our collection lines of business continues to see the benefit of the yield volume trade-off. Both our commercial and industrial yields were 4.2% while residential was 1.6%. Overall collection yield was 3.2% with volumes declining 4.1%.

This led to income from operations growing $7 million and margin expanding 10 basis points. The industrial line of business drove the growth in income from operations but that growth was muted by continued declines in the residential line where we lost two profitable franchise contracts.

In the landfill line of business for the second quarter, we saw the benefits of both positive volume and positive yield just as we did in the first quarter. Total landfill volume increased 3.9%. Combined special waste and revenue generating cover volumes were positive 2.1%, MSW volumes grew by 4.4% and C&D volume grew 11.5%.

MSW yield rose 2%. This led to income from operations growing $9 million, which is the fifth consecutive quarter of growth and margins grew 20 basis points.

Finally, looking at our other financial metrics, at the end of the second quarter our weighted average cost of debt was 4.79% and the floating rate portion of our total debt was 12% at the end of the quarter. Our income tax rate in the quarter was 44.7% primarily because foreign cash accumulated in Puerto Rico was repatriated to the United States upon divestiture of the operations. For the next two quarters we expect our tax rate to be approximately 35%.

We are encouraged by the results for the first six month of the year, which put us on track to meet our full-year targets. The strong momentum in our pricing and cost controls sets us up nicely for the second half of 2014 and positions us for continued success into 2015 as we look to redeploy the proceeds from the sale of Wheelabrator.

I would be remiss if I did not thank our employees for their hard work. Because of them 2014 has been successful so far and we are looking forward to continued improvement with their help.

I would particularly like to thank the employees at Wheelabrator. They have been valuable teammates who take pride in running a great and safe business.

I know they will continue that success under the ownership of ECP. And, Tanisha, with that we will open the line up for questions.

(Operator Instructions). Scott Levine, Imperial Capital.

Hi. Good morning, guys. Congratulations on the quarter and the sale of Wheelabrator there. And I guess my first question here is, in the press release announcing the sale you mentioned the fact that there are some targets out there that you are interested in and that there is a good-sized pipeline. We haven't seen a lot larger acquisitions with the exception of RCI out of you guys recently but a little bit more color on what you see out there and additional thoughts with regard to the timing, at which point you might look at deploying capital for buybacks versus M&A, a bit more color on your investment plans as you see them for the proceeds after the deal closes.

Yes, Scott, generally what we are looking at, as you can well imagine, are sort of the smaller tuck-in acquisitions. And obviously in order to spend the kind of money that we are selling this Wheelabrator business for we are going to have to put together quite a lot of those. So it will take time if we are going to replace that EBITDA. As we have said, to the extent we can't do that we would buy back shares. The whole theory of the transaction was that we didn't want to do a deal that wasn't going to be accretive to earnings. And so we used this base case of 100% of proceeds going to debt pay down and share repurchase as our base case. The good news is that is accretive and to the extent that we can businesses to tuck them in, that would replace the EBITDA, that's a net positive for us. So we will be looking at that over the next few months as we move toward a closing. And then I would expect, Scott, that once we do close it at the end of the third quarter, mid fourth quarter, we would have a much better defined plan as to how much of those proceeds we can actually deploy into new businesses.

Great. We will look for that. And then as my follow-up, I think Jim had mentioned that you had lost a couple of profitable franchise contracts during the quarter. Maybe a little bit more color regarding the competitive landscape and your commitment to pricing. I am assuming that continues? Is the environment becoming more or less competitive? A bit more color on the operating environment and pricing there.

Yes, look, the residential line of business is always very competitive because they are large contracts, sort of just like the national accounts. I would characterize the pricing environment as fairly stable. There's really only two things that we can look at to determine the pricing environment and that is the discussions with our local managers and publicly reported statistics. And I don't think there's any doubt that in the last 12 months to 18 months we have seen some of our larger competitors favor volume over price. That's not something that we traditionally have done and obviously that has cost us volume. But overall I would say that when you look at all the competition out there that it's fairly stable.

Great. Thank you very much.

Derek Sbrogna, Macquarie Capital.

Hey, good morning gentlemen. Congratulations on the quarter and Wheelabrator. So maybe one first on the core, the landfill pricing, MSW landfill pricing, you mentioned a positive 5.1%. Does that include any of those contracts which are linked to CPI? And maybe give us a sense -- I know you guys have talked about on the overall business about 40% of the contracts being linked to CPI, but maybe give us a sense of what that is on the landfill side just to get an understanding of how much of that business is competitive markets versus what is linked to CPI?

Yes, when we look at landfill contracts there's really two things. It's not just CPI, there's also a lot of those contracts will have just a standard price increase in it. So just to use an example, it might be a $30 contract and it goes up to $32 the following year, $34. So it won't have a specific CPI related but it will have a specific price increase. So a large portion of our contracts would have those types of price escalators in them. What we have said is that we are going to look at those contracts as they renew and we are going to get higher price increases. And then to the extent that we have volume that we can raise price on immediately we are going to look for 5% to 7% price increases. We really just started to turn all of our focus to the landfill pricing over the last six months. I would tell you that we are sort of in the second or third inning on that project. There's still a long way to go.

That it. That's helpful. And then maybe one on Wheelabrator. We've talked about it over the last couple of years of a potential sale. Can you maybe talk about the timing? Why now, and have you been in negotiations for a while for the sale of this asset and maybe just a little bit more color around that, please?

Okay, as you know there's been rumors out there for probably two years that we have been looking at the sale of Wheelabrator but it needed to be the right partner for us. We feel like we've found the right partner. It needed to be the right waste supply agreements for us and we feel like we have crafted a good supply agreement with ECP. So it was not so much around when the timing was but when we could get the various features of the agreement together that satisfied both us and the party that we are selling to.

And I would tell you that Jim led the negotiations for the transaction. And from Jim's point of view I can promise you that he thought the negotiations lasted a very long time because he spent a good portion of his time literally over the last six months getting this deal done.

From my wife's point of view, as well.

Got it. Well, well done, gentlemen. Congratulations, thanks.

Amit Mehrotra, Deutsche Bank.

Congrats, guys. Let me add nice quarter and congrats on the announcement, as well. First question is on pricing. Could you just comment on maybe in terms of what inning you are -- you guys are in -- with respect to pricing growth. If we look out this time next year will we be talking about the ninth straight quarter of 2% plus yield? And just as a follow-up to that, what level is the Company willing to see volume comps get more negative to get to the same level of price and and mix growth?

When we look at the price volume trade-off I will tell you that I would expect that next year you will hear us say it's the ninth straight quarter of over 2%. As we talked about, you saw it go from 2.6% to 2.3%, that's really more mathematical things than anything else, it's the anniversary and of some various fees. So it's not an indication that we are going backwards in pricing, it's really more just an indication of mathematics. But you should see that above 2% for the certainly the near future and I would expect well through 2015. When you think about the volume trade-offs, you've got to look at it in various lines of business. When we look at it we say what are those lines of business where we can get volumes without affecting the pricing dynamics in a market and we are going to focus more on those volumes than we would on other volumes. And so we want to be a little bit more circumspect in how we manage our volumes. We think that going into 2015 we should see some easier comps and we should see the volume start to stabilize. And that's what we have always said that this model really starts churning once you can get both yield over 2% and positive volumes. I would hope that in 2015 we can see that reality for the first time in many years.

Okay. That's helpful. And then just a follow-up on the sale announcement. Can you just update us on the cost plan that you guys have in place in terms of the 100 basis points reduction on a run rate basis by the end of 2016? I am assuming that would need to be recalibrated given the divestiture and that impact on the sales level?

I think if you think about the cost piece what we are mostly talking about with Jim Trevathan and his team is on the core side of our business. And that is ongoing and we feel like we are making progress there as you saw in our results. So it won't be affected in terms of absolute dollars. It could be affected in terms of basis points just simply because of the smaller business here. But I think the main point is that when we look at cost control whether it is on operating cost or SG&A, we feel like we are making very very good progress with still additional progress to go.

Okay. Okay, thanks very much.

Hamzah Mazari, Credit Suisse.

Good morning, thank you. Just a question on the supply agreement. Could you give us a sense of how that supply agreement is structured with Energy Capital Partners? How long does it last for and specifically, what we're looking for is does this impact your ability to be strategic on disposal pricing given that waste-to-energy plants are like landfills in your disposal network? Any color there would be good. Thanks.

So, Hamzah, the intent of the negotiation -- of the waste supply agreement -- was to replicate what Waste Management and [WITI] have in place today and I think we have done that. ECP's primary interest in the waste supply agreement was volume certainty and both sides worked hard to craft an agreement to provide that volume certainty but it also allows us to optimize our operation. For example, our landfills, as you know, are a critical piece of our business and we'll continue to bring tons in those landfills while at the same time fulfilling the volume commitment. And I don't know whether that answers your question specifically but I think we feel good about the fact that we have crafted a waste supply agreement that satisfies both parties' needs.

Okay. I can follow-up offline on that. That's fine. And then on the volume loss, could you give us a sense of how much more low-margin business do you have in your portfolio? It seems like over the last couple of years we have been pruning that. Now we have a pricing gate. Are we near the end of pruning of low-margin business and we should expect the pricing gate to come off once that process is done? Any color on that? Thanks.

Yes, again Hamzah, you've got to look at it by line of business. I would say that on the commercial line our primary focus is going to be on maintaining the customers that we have. We have said it many times that some customers will leave for price and those customers are going to leave. But everybody else you got to make sure that you have a high level of service to maintain them. So our core strategy on the commercial side would be to provide the best service and reduce the churn rate. On the rolloff side, obviously as you see temporary rolloff improve throughout the country with residential and commercial construction going up, we would expect to get our fair share of volumes there. And so I would expect that we will see the volumes on the rolloff side turn positive in 2015. And on the residential line we probably still have some residential contracts that are low-margin contracts. You should see those dark to be culled out or repriced throughout 2015. So it depends upon what line of business you are looking at on how we will approach it. That sort of talked about what we are going to do on each of the three collection lines.

Great. And just last question and I will turn it over, are there any other adjacencies that you would like to get into? It seems like there's maybe a little bit of medical waste still in the portfolio but the rest of the adjacencies are gone. Is energy services a bigger vertical that you want to get bigger in? Thanks.

Yes, clearly we would look to get bigger in energy services. It has been a good growth business for us. We would expect that growth to continue and we would like to get bigger there. On medical waste I think it's been well documented that there's a very strong competitor that does a great job of keeping everybody out of that business. And so we would expect that business, frankly, to not be as much of a growth area as we thought it would be in the past. And so when we look at the growth areas we are really looking at our manufacturing and industrial business and our energy services business.

Great. Thanks.

Hamzah, that energy services business continues to grow at a 25%, 30% clip for us. It still is relatively small compared to the size of the overall business but certainly a nice growth engine.

Right. Great. Thank you.

Alex Ovshey, Goldman Sachs.

Thank you. Good morning, guys. First on the pricing, thinking about the second half of 2014. Will there be any notable impact from the flowthrough of the CPI as it sort of flows through pricing in the back half versus the first half of the year?

Yes, the CPI will likely be a little bit lower in the back half of the year than it was in the front half of the year given the performance of CPI and the fact that a lot of our contracts reprice on July 1. But again, what we've always said if CPI is lower we just have to go out and get those pricing dollars from other places and so we would expect that to continue in the back half of 2014.

Got it, David. And I am not sure if I missed any comments you had on bonus depreciation but another competitor talked about the potential for it to be retroactively extended before the year end. I'm curious if you have any thoughts around whether that potentially could happen and if it does what would be the impact on it Waste Management's cash flows?

It's hard to predict what the government is going to do, I guess, but it certainly could happen and we would be happy if it were extended but the impact for us is substantial. It's probably close to $80 million a year, so it substantial. And when you look at cash flow from operations part of the headwind was the expiration of bonus depreciation for the quarter, it was worth about $20 million.

Got you, Jim. Okay, great. Thank you.

Joe Box, KeyBanc Capital Markets.

Hey. Good morning, guys. Nice job on the recycling front offsetting some commodity weakness. I think clearly a step in the right direction. Can you just give us a feel for if this is the beginning and we should continue to expect lower rebates and lower labor expense, or if this is maybe more of a one-time true-up and we should continue to see things at this level?

This is definitely the beginning. And it's a combination of things. It's continuing to manage our contracts and the rebate structure. It's continuing to look at our cost structure and driving costs out and then it's also rationalizing the plants where we don't have volume. They have done a nice job in the first half of 2014. We would expect that to continue through the back half of 2014. And then as we have always said all along, this thing really starts to cook if we see the commodity prices turn around. We are not forecasting that for the back half of the year. But we would expect to see continued benefit year-over-year from our recycling operations for Q3 and Q4.

Understood. And then on the residential side I think, David, you mentioned potentially calling some contracts or repricing those contracts. I'm just curious what is your sense in the competitive environment for the residential business? And maybe the appetite for some of your smaller peers to be bigger in this business? Has that changed at all over the last couple of quarters?

I'm not sure that it has changed dramatically. We are always going to be the higher priced provider in the residential line of business. I can give you a perfect example of the service price dynamic. We had a contract that we lost in Pennsylvania. We lost it purely on price and the contract went away and what the municipality found out is that they had dramatic service issues with the new provider. They came back to us and they said we need you to look at taking this contract back. We said we will take it back but it's going to have to be at our price and they said that's perfect. And we said, that's great, don't worry, we will handle it from here. So it just goes to show that when you look at residential business, service matters. And when we look at the residential line of business we are not looking to win every bid. What we are looking to do is to renew our current contracts at that current or higher rate because of the service that we provide and the partnership that we have with our communities for many many years.

Got it. Thanks.

Corey Greendale, First Analysis.

Hi. Good morning. Just a couple of clarifying questions from some of your responses earlier. Someone asked earlier about the 5.1% growth in MSW pricing. Is that including all of your MSW volumes, so that includes the long-term contractual stuff, would suggest that you are pricing on the gate rate is significantly higher than 5.1%?

That's right. That's exactly right.

So can you just help us with that a little bit? Like what percent of the overall volume are you able to rise price at, any given year, and what is the increase at the gate rate?

Yes, given that those contracts are generally three to five years you're seeing sort of anywhere from 20% to 30% of the volume that we can affect. And remember that 5.1%, I don't want you all to think that that's across the board 5.1%, there is some mix in there. Because all that is doing is taking a look at same-store sales. But there's absolutely no doubt the folks sitting around this table are looking at landfill pricing every month and every quarter and making sure that we are touching the customers that we can touch as we mentioned. We hit 90% of our landfill customers in the first half of the year. The other 10% it's not that we let them slide on pricing it's that they are either event work or they have contracts that prevent us from doing it. So we are going to take the same approach on landfill pricing that we took on the residential pricing, which is we are going to move that price up. And it may end up costing us some volume but when you look at the overall competitive effect on our overall business both collection and landfill driving that landfill price up is positive for the entire business.

When you've talked about the various impacts on volume you haven't called that one out. Does that suggest that you are not seeing a substantial volume impact from the higher landfill pricing?

So far it has been -- actually I would say the landfill pricing environment has been probably as good or better than the environment on the collection side. Because as we have seen our pricing increases we have not seen a dramatic loss of volume. We are hoping that will continue. Obviously we can't do anything other than what we can do but the pricing environment has been fairly stable there.

Part of our answer, honestly, to our volume decline on the collection side is to raise prices on the landfill side. We have talked about that a lot but that is a critical component. I wouldn't say we are happy with the volume decline on the collection side. We are pleased with what we're seeing on the landfill side but pricing is critically important at those landfills to help us with our volume decline collection wise as is customer service. But when you look at collection pricing and I know your question was around landfill pricing but they are interrelated, we are just simply not going to turn the coin over. That price volume coin that is on the price side right now, we will be smart about it but we are not going to turn that coin over because it is detrimental to our results.

Got it. And then I had a follow-up question on the Wheelabrator proceeds. So by my calculation you are still around 3 times levered even without paying down anymore debt after you lose the $220 million in EBITDA. So how should we think about how much you are going to deploy into paying down debt immediately versus how much cash you will sit on for potential acquisition?

I think you are probably looking at where we were at the end of the quarter. And we were a bit low there, kind of artificially low with respect to leverage at the end of the quarter. The reason for that is that because we hadn't had any share repurchase year-to-date we ended up using that to pay down our revolver, so a more normalized leverage ratio for us is 3%. Then as a consequence when you do divest that $220 million worth of EBITDA, our calculation is we will probably need about $400 million in debt paydown in order to maintain that leverage neutrality.

Thanks for that clarification.

Michael Hoffman, Stifel.

Good morning, and thank you very much for taking my questions. If we could get a little clarity, do you have a sense of when you think the timing is for Wheelabrator?

It's a little bit hard to predict. Because it is a function of FERC approval. And that really is the biggest uncontrollable hurdle at this point. But in talking through this with ECP we believe it's somewhere within three to five months, probably closer to three to four.

Okay. So would you share with us then the year-to-date EBITDA so if we are inclined to pull it out of a model and model the business without it, what am I looking at it year-to-date EBITDA?

Well, on an annual basis the EBITDA is about $220 million and really there's not a heck of a lot of seasonality. There was a little bit more this year because of the real cold winter but typically the volume is pretty static. The price fluctuates a bit with your stronger electricity pricing quarters being Q1 and Q4, but I would straight-line it for your analysis.

Okay. So can you help me with the $220 million? Because if I take the 10-K data, add back the charge, I get to $171 million. So what's the difference between $171 million and $220 million?

I don't know. I would have to look at that, Michael. I don't have that number.

Okay. Was this shopped, or was this a privately-negotiated transaction?

What was the question again?

Was it shopped; was this a fully marketed --?

Well, we didn't do per se a process on it, but we had interest from at least one other company where they actually set a nonbinding letter of intent to us. And we went through quite a bit of work with them and came up with a number that was a fair amount lower than the $1.94 billion. And then, of course, last year we -- probably no secret to anyone, but we had had conversations with [Covant] at that point, as well. So I would say that while it wasn't formally a process, pretty close.

Okay. And then if we could talk about the pricing environment. When you think about either the 5% number you have used around the landfill side or the 3% plus on the collection, how would you frame the percent rollback trend at this point? Is it worsening, stable, getting better? I'm asking in the context of volumes have been on a reasonably good positive trend -- the market volumes. And how is that inflow, anything sort of rollbacks?

We had a big jump up in rollbacks in 2012. Since that time we have basically held our rollbacks below 20% and you saw the same thing this quarter. So I would say from a rollback perspective what you are seeing is very much stability. When you are turning something around and you see a very low number, we turned it around literally on a dime and when you see someone turn something around that fast you wonder is it sustainable. And what we found on the rollback side is that it is sustainable and so I would expect that to continue at below 20% into the future.

And your churn rate's still running at about 11.5%?

Yes, the churn rate, obviously it is affected by the national account loss. But if you take out the national account loss you are looking at 10% to 11% type churn.

Okay. And then are you at this juncture -- it would appear you are not replacing 100% of your churn. You are replacing much of it but not all of it, is that an accurate observation?

That's correct.

Okay. If you were to replace 100% of the turn it probably would drive the rollbacks -- widen that, effectively?

Yes, I think that's right.

I just wanted to make sure I understood correctly on the landfill, the pricing issue, this is revisiting of a strategy on collection be aggressive of our price now, let's bring a strategy to landfill, let's be aggressive on price and that's a newer initiative beginning about now? Did I understand that correctly?

Yes. We have always known that the landfill pricing is one of the keys to a long-term pricing program on the collection line of business. As I have said before when you're going through the worst economic recession that you have had at least in our lifetimes and you're losing volumes fairly fast at the landfill it's a little hard to go in and drive a pricing program. As we have seen the economy recover, as we've seen the volumes come back it's a little easier to be more aggressive at the landfill. And we have done just that and we would expect that to continue.

So this is a great way to force discipline into the market to the independents. Have you seen any evidence that that is also helping your churn and your rollbacks that you are forcing them to absorb the single biggest costs they have?

I would say we certainly haven't seen any ripple effects from pricing throughout the market. Those small local competitors and the regional, even the national competitors that might not be integrated in the market, there's always going to be a healthy amount of competition in every market we serve. So I'm not sure that it can have that dramatic of an effect but to the extent that it will have an effect over time, it will be over time. We are certainly not seeing any effect currently.

Okay. Thank you very much.

Charles Redding, BB&T Capital.

Just a quick follow-up on the front-end load side. Is it overly optimistic to expect some margin lift here from increased contribution? Are we simply just at a point in the recovery where we can't do that?

Are you talking about related to the transaction, or --?

No, on the commercial side in terms of collection volumes.

We have to get better with our system. It's what I talked about earlier that the big leverage that we've got in our business is really on that commercial side. Because the route density makes such a difference in there that you do have to look at it from a contribution margin point of view. So as we look at our business what we're going to try to do is look at those lines of business where we can pick up volume without affecting the marketplace. And then we are also going to look to start adding some density into our commercial routes. Again, we are not going to do it in such a manner to upset the competitive dynamics in any particular market. So it's going to take a period of time. Certainly as we see the economy improve and as we see the commercial business get better across the country, it will give us more of an opportunity to go and take our fair share of the growth. We are not looking to grab market share here. What we are looking to do is to get our fair share of the growth. So as you start to see those plans grow you should see our volumes in the commercial line get better.

That's helpful. And then in terms of the overall recovery, is it possible to see better commercial volume without housing? Are the two simply tied together such that you couldn't get better volume there?

Long term I have always said that what you've got going on in the economic recovery is you've got housing starts for the first 18 months were sort of what I call tuck-in housing. There wasn't a lot of new developments going up, it was teardowns and rebuilding houses. What you have seen in the last 18 months is you've started to see some big takedowns of large property swaps and you have seen new developments particularly in places like Texas, Florida, California. You are starting to see new housing developments. What comes along with the housing developments is commercial business, the new gas station, the new restaurant, the new grocery store. And so you absolutely need to see a sustained housing recovery to see the robust commercial volume recovery. I think we are on the -- you all see it just like I do, the housing starts number are sort of going in fits and starts over the last year. But I would say that as we go around and talk to our market the trajectory is clearly up. You are starting to see more and more housing development. You are starting to see more and more businesses that might have gone out of business during the downturn reopened. And so I would expect that throughout 2014 and particularly into 2015 you should see those commercial volumes grow. Now again, it's not going to be everywhere. This is a geographic game for us. You not going to see commercial volumes grow as robust in some places as others. But in those places where it is growing we want to make sure that we get our fair share of growth.

Great. Thanks, David.

Barbara Noverini, Morningstar.

Hi, good morning, everybody. You mentioned that national account losses are partially responsible for the acceleration of volume declines past your original volumes. So are you working through your national account contracts in a similar manner as the rest of your business from a pricing perspective? And secondly, are these contract losses also affecting your recycling volumes?

Yes, they are not so much affecting our recycling volumes but they are more so affecting just our traditional collection volumes. But it's exactly right. As we look through the national accounts, the largest one that we lost was a low single-digit margin contract. And so as we -- we are treating our national accounts business sort of just like we treated our residential business 6 to 10 years ago, which is we are not going to -- we always say we are not doing this for practice. And we don't need a lot of practice doing this. So we are going to make sure that we get a fair price on those national account businesses and we are not going to keep a national account just to maintain volume. The largest account, the largest one that we lost again was a low single-digit margin business. For the full year we expect that we will lose about $100 million of annualized revenue. Of that annualized revenue about two-thirds of it will be very low single-digit margin and about two-thirds of it has hit to June 30. So the pace of that volume loss will accelerate a little bit in the back half of the year. But again you won't see a dramatic earnings hit because it was very low-margin business.

Got it. And I know we've been asking you this about every line of business today, but what inning are we in in the reviews of your national account businesses?

We know exactly what we want to do in our national account business. So I would tell you that from a planning point of view we are in the eighth inning. From an execution point of view I would tell you we are in the third inning. So there's still a lot of room to manage those contracts. We plan to do that over the next few years but we know exactly where we are going with it.

Got it. Thanks a lot.

Tony Bancroft, Gabelli.

Good morning. Thanks for taking my call. You mentioned growth in the energy services as sort of the next step. How much would you say looking five years out will be organic versus acquisitive growth and if there is acquisitive and if there are -- are there any large service Energy Service acquisitions that you have been looking at, or are out there?

We haven't been looking at any at this point and most of our growth has really come organically. We've done a few very small acquisitions in our interest services business but we do consider it part of our core. And if there was an acquisition out there that looked like it was priced properly we would look at it.

Thanks.

I will now turn the the call over to David Steiner, President and CEO of Waste Management for closing remarks.

Thank you. Clearly we had a great performance from our Waste Management employees in the quarter. As Jim said I think we would be remiss without recognizing our colleagues at Wheelabrator who have done a phenomenal job over the years. And we don't view this as an end of the relationship but as the beginning of another long-term relationship. We are still going to be the primary provider of volume to the Wheelabrator plant. So this will be a change in the relationship but it has been a great relationship and we expect that great relationship to continue. As we look at the rest of the year, as Jim mentioned, we've got FERC approval, which could take anywhere from three to five months. The good news with that is that it gives us three to five months to really develop a plan on what we are going to do with the proceeds from the divestiture. So I would expect that at the end of the third quarter we will have a fairly well-defined plan that we can talk to you all about about how we are going to split those proceeds between purchasing tuck-in type of businesses and doing share repurchases. All of which we think is going to be a very positive driver for us at the end of 2014 and driving into 2015. So once again we look forward to the future and we will talk to you all at the end of the third quarter.

Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1 PM Eastern standard Time today through 11:59 PM Eastern standard Time on August 12. The conference ID number for the reply is 63619185. Again the conference ID number for the replay is 63619185. The number to dial for the replay is 855-859-2056 or 1-404-537-3406. This concludes today's Waste Management conference call. You may now disconnect.