美國廢棄物管理公司 (WM) 2015 Q3 法說會逐字稿

Good morning. My name is Junisia and I will be your conference operator today. At this time, I would like to welcome everyone to the third-quarter 2015 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Ed Egl, Director of Investor Relations. Thank you. Mr. Egl, you may begin.

Thank you, Junisia. Good morning, everyone, and thank you for joining us for our third-quarter 2015 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer.

Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedule for the press release, 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, are more specifically references to internal revenue growth, or IRG, from yield or volume. During the call, David and Jim will also discuss our earnings per diluted share, which they may refer to as EPS or earnings-per-share; and David and Jim will address operating EBITDA and operating EBITDA margin as defined in the earnings press release.

Any comparison, unless otherwise stated, will be with the third quarter of 2014. The third quarter of 2014 results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations, and by excluding amounts attributed to businesses and assets divested in 2014.

These adjusted measures in addition to free cash flow are non-GAAP measures. Please refer to the earnings press release footnote and schedules, which can be found on the Company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures.

This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m. Eastern Time today until 5 p.m. Eastern Time on November 10. 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 32546520.

Time-sensitive information provided during today's call, which is occurring on October 27, 2015, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited.

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

Thanks, Ed, and good morning from Houston. Our strong third-quarter results continued what we saw through the first six months of the year, disciplined pricing and cost control programs driving improvement in our business.

In the third quarter, we earned $0.74 per share, an increase of more than 10% from the third quarter of 2014. Each of our net income, operating income and margin, operating EBITDA and margin, and earnings per diluted share improved when compared to the third quarter of 2014. Through the first nine months of the year, our operations have generated almost $2 billion in cash provided from operating activities, which is a 16.5% increase from the prior-year when you exclude divested businesses.

Our strong performance puts us on track to exceed our full-year goals, and we are excited about the positive momentum built into the fourth quarter and heading into 2016. Again, in the third quarter, our pricing programs continued to be a big part of our earnings growth and margin expansion. For the third quarter, our collection and disposal core price was 4%, which is consistent with the third quarter of 2014; and yield was 1.8%.

Core price in the industrial line was 8.4%. In the commercial line, it was 5.7%. In our residential line, it was 2.2%, and in our landfill line, it was 2.3%. Year-to-date through September, core price was 4.2%, which exceeds our 2015 core price target of 3.8%. As we saw in the first half of the year, core price continues to drive margin expansion, as our traditional solid waste business operating EBITDA and operating EBITDA margin increased when compared to the third quarter of 2014.

Turning to volumes, when we look at our business, we track traditional solid waste volumes, which exclude recycling and non-solid waste revenues. Our traditional solid waste volumes were basically flat, declining only 0.1% in the third quarter of 2015 versus a decline of 1.9% in the third quarter of 2014, a 180 basis point year-over-year improvement and a 50 basis point sequential improvement from the 0.6 decline in the second quarter of 2015.

Overall volume, which includes recycling and those non-solid waste volumes, declined 1.4% in the third quarter. In our industrial line of business, the positive momentum that we saw in the second quarter continued into the third quarter. Strong new business pricing outpaced the price of lost business. So, we were able to get both a strong price and positive volumes in the quarter, as industrial volume was a positive 0.4% in the third quarter of 2015, improving 290 basis points from negative 2.5% in the third quarter of 2014.

We also saw the rate of decline in our commercial line of business improve again, as the rate of loss in commercial volumes improved 360 basis points compared to the third quarter of 2014, and 90 basis points sequentially from a negative 4.9% in the third quarter of 2014 to a negative 1.3% in the third quarter of 2015. This is the best commercial volume that we've seen since 2006.

Our service increases continued to exceed decreases, and new business in our commercial and industrial lines combined exceeded lost business for the second consecutive quarters. These are all positive signs that make us optimistic that volume should continue to strengthen into 2016.

Turning to recycling, we continue to work together with our customers, vendors, and industry groups to improve the long-term outlook for recycling through educating the public on what and how to recycle to bring down contamination levels. We have also made progress on renegotiating contractual terms of our customers, including exiting some unprofitable contracts.

Ultimately, we want to provide recycling solutions that both meet our customers' needs and generate an appropriate return for us. Recycling is the right option for the environment, and we are working to make it the right business decision for our shareholders as well.

Moving to current results from our recycling operations in the third quarter, earnings-per-share from the recycling operations were flat compared to the third quarter of 2014, despite a 15% drop in average commodity prices and a 6.4% decline in volumes, which is largely associated with contractual losses as we shed unprofitable business. Our recycling employees performed incredibly in reducing operating costs and improving the business. In the third quarter, we saw a 7% improvement in operating cost per ton compared to 2014.

So, we are moving in the right direction. And our results in 2015 will exceed the expectations we laid out earlier in the year, but there's still a long way to go to get the appropriate returns on our existing assets.

With respect to potential acquisitions, as we mentioned on our second-quarter conference call, we believe that we can execute agreements to add an additional $50 million to $75 million of operating EBITDA in 2016. Recently, we closed on two acquisitions that we expect to generate approximately $18 million in operating EBITDA in 2016.

Our pipelines still look strong, and we are in the advanced stages of some transactions. Consequently, we still believe that we can close transactions that will generate $50 million to $70 million of additional 2016 operating EBITDA. So we expect to see strong operating EBITDA growth from our core business and from acquisitions in 2016's.

But I remind you that the operating EBITDA from acquisitions won't translate to earnings-per-share in 2016 because we'll have corresponding intangible amortization. However, the transactions will generate cash flow, which is the most important metric in our business. And we expect that our cash flow in 2016 will be strong.

In conclusion, we've seen three consecutive quarters of strong results, and we're confident that strength will continue as we conclude the year and look forward to 2016. This performance is a tribute to our employees executing our pricing, disciplined growth, and cost control strategies.

We are confident that our employees' focus on our core business will allow us to meet the analysts' fourth-quarter consensus of $0.67 of adjusted earnings per diluted share, which would allow us to exceed the upper end of our 2015 adjusted earnings per diluted share guidance of $2.55. We also expect to exceed the upper end of our full-year free cash flow guidance of $1.5 billion, in which case we may decide to prepay some items to help offset tax and other cash flow headwinds in 2016.

I'll now turn the call over to Jim to discuss our third-quarter results in more detail.

Thanks, David. In the third quarter of 2015, SG&A costs continue to be a bright spot in our results, even as we face tougher comparisons to the prior year. Overall, SG&A costs improved $8 million compared to the third quarter of 2014. As a percent of revenue, SG&A costs were 9.8%, an improvement of 10 basis points compared to the third quarter of 2014. With the strong results in the first nine months of 2015, we expect to achieve our full-year goal of reducing SG&A costs by $60 million.

Turning to cash flow for the third quarter. Net cash provided by operating activities was $657 million compared to $627 million in the third quarter of 2014 after adjusting for $45 million from the divested operations. Other impacts on our cash provided by operating activities were $40 million paid to complete our withdrawal from the Central States pension plan and a $60 million reduction in cash taxes paid.

During the third quarter, we continued to improve our working capital position as we reduced days sales outstanding by 1.4 days and increased days payables outstanding by 3.9 days. We are pleased with these results, as our team has done a terrific job of making these improvements, and we expect to see continued improvement in 2016.

Free cash flow was $358 million in the third quarter of 2015, an increase of $20 million when excluding free cash flow from divested operations in 2014. Our capital expenditures for the quarter were $335 million, $28 million more than the third quarter of 2014. As David mentioned, we have generated almost $2 billion of cash provided by operating activities through the first nine months of 2015.

In addition, we've generated over $1.2 billion of free cash flow. Given that, we expect that free cash flow in 2015 will exceed the upper end of our guidance range of $1.5 billion. David mentioned that we would prepay some expenses in the event that we exceed our free cash flow guidance. An example might be prepaying cash taxes.

We currently anticipate that our 2016 cash taxes will increase by $300 million to $400 million. If we have excess free cash flow, we may elect to prepay some of the cash tax increase at year-end to lessen the impact of this increase.

Third-quarter revenues were $3.36 billion. We saw a $53 million increase in revenues from acquisitions and a $48 million increase in our traditional solid waste business. We also saw an overall revenue decline of $186 million from divestitures, a $49 million decline from lower recycling revenues, $47 million in lower fuel surcharge revenues, and $41 million in foreign currency fluctuations.

Looking at internal revenue growth in the third quarter, our collection and disposal core price was 4%, with total volumes declining 1.4%. This led to total company income from operations growing $24 million, operating income margin expanding 110 basis points, operating EBITDA growing $29 million, and operating EBITDA margin growing 140 basis points, in each case compared to third-quarter 2014 results.

Our collection lines of business continue to see the benefit of core price and disciplined growth, as operating EBITDA and operating EBITDA margins grew. In the landfill line of business, we saw the benefits of both positive volume and positive core price in the third quarter. We saw same-store average MSW rates increase year-over-year for the 10th consecutive quarter, up 3.6% from Q3 2014. MSW volumes grew 5.9%, C&D volume grew 4.9%, and special waste volumes were a positive 2.4%.

Total landfill volumes increased 4%. Our special waste pipeline looks strong, and we expect to see landfill volumes remain strong through 2016.

Moving to operating expenses. As a percent of revenue, operating costs improved 140 basis points to 62.4%. Lower diesel costs and lower recycling commodity rebates to our customers contributed $73 million to the improvements. We also had reduced expenses for foreign currency fluctuations.

Subcontractor costs improved $17 million, and labor and related benefits improved $12 million when compared to the third quarter of 2014, as we continue to see improvement from our service delivery optimization program. These savings were partially offset by increased disposal costs related to our improved volumes and slightly higher maintenance costs. Overall, operating costs improved $91 million in the third quarter.

Finally, looking at our other financial metrics. At the end of the third quarter, our debt to total capital ratio was 63.3%, and our weighted average cost of debt was 4.4%. The floating rate portion of our total debt portfolio was 8% at the end of the quarter.

In the third quarter, we repurchased 5.9 million of our outstanding shares for $300 million and paid $172 million in dividends. This $472 million reflects our confidence in the cash generation of our business and our commitment to return cash to our shareholders. Our income tax rate in the third quarter was 32.3%, which compares to 30.6% for the third quarter of 2014.

In tribute to the late and great Hall of Famer Yogi Berra, our third-quarter results were deja vu all over again. We've seen three consecutive quarters of year-over-year improvements, and we expect that to continue into the fourth quarter. All of our employees have worked hard to deliver these solid results, and for that, I want to thank them. We are very confident they will continue to deliver strong earnings and cash flow to complete a successful 2015 and set us up for continued improvement throughout 2016.

And with that, Junisia, let's open the line up for questions.

(Operator Instructions) Scott Levine, Imperial Capital.

So, just looking for maybe a little bit of an update on the pricing environment. Core pricing looked like it was pretty strong in the quarter, but it sounds like a lot of the gross margin expansion you are getting is from lower fuel and commodity costs. But are you still seeing a pretty good pricing environment out there? How are you progressing with regard to your price gauge? Are you still getting good margin expansion associated with your internal pricing activities?

Yes, I'd say sort of as a follow-on to last quarter, I would say that the overall pricing environment is as solid as I've seen it since I've been at Waste Management. You know, we see real good progress across all lines of business, except for our residential line. And, as you all know, the residential line is traditionally the most competitive line.

I would say even in the residential line, though, we are seeing very disciplined pricing based on return on invested capital type of metrics from the large national players. It's always sort of those small local and regional players that seem to sometimes forget that if you offer a lower price, and you invest a lot of capital in those residential contracts, that, over the term of those contracts, you don't make as much money as you think.

But even in the residential line, what we are seeing is sort of those large national companies are bidding based on return on capital, not on chasing low price volume. So I'd say, overall, I'm extremely encouraged by the pricing environment. We expect it to hold into 2016.

Got it. And maybe shifting to tax a little bit here. So I don't know if Jim had given a tax rate assumption for the fourth quarter. Did you give one?

I didn't. Our tax rate in the quarter is going to be similar to the third quarter.

Okay. So just a shade above 32%. And then with 2016, you mentioned $300 million to $400 million pickup in cash tax but for some of this prepayment. Maybe a little bit more elaboration there. And if we do get renewal of bonus depreciation, might you see a significant benefit associated with that, and one that you might be able to take an early shot at quantifying?

Yes, if we do get bonus depreciation -- and thanks to our slow-moving Congress, it seems like that always happens at the very end of the year -- but it's probably going to be in the neighborhood of $70 million, Scott, for bonus depreciation. And then when you think about that $300 million to $400 million, really that's -- of course, that's the prepayment from last year of $214 million. It's the $150 million or so from the early extinguishment of debts transaction earlier in the year.

And then combining all those benefits with earnings growth in 2016, our cash taxes headwind will be somewhere in that $300 million to $400 million, which is why David and I both mentioned the fact that we probably will prepay certainly the -- probably half of that benefit from the early extinguishment of debt will get pushed forward into 2016. And then depending on how we do with respect to free cash flow, it's possible that we will prepay additional taxes at the end of the quarter.

Got it. So said another way, maybe -- expect maybe at least half of that increase in 2016 to be pulled into 4Q, based on what you expect right now?

I think that sounds about right.

Got it. One last one on the M&A side. So, you are essentially, I guess, affirming the EBITDA target that you expected to acquire for next year. Should we assume those are kind of your traditional solid waste acquisitions? Or has your view changed at all with regard to, call it, the nontraditional waste business, whether it's industrial energy or otherwise?

Yes. No, that would be core solid waste. We would consider Hazardous Waste and Energy Services both to be core businesses. And if we found some transactions in those areas, we'd look at them. Obviously, we would look at them based on today's environment, not on tomorrow's environment or yesterday's environment. But when we talk about that $50 million to $70 million of additional on top of the $18 million that we already closed, we would -- yes, we'd look at those more as traditional solid waste businesses -- you'd look at it as traditional solid waste businesses

Got it. Thanks. Nice quarter.

Sure. Thank you.

Corey Greendale, First Analysis.

First, I wanted to follow-up on Scott's question about price. It sounds like the environment is favorable overall. But, I guess, first of all, can you just verify -- I had, from my notes, that about 40% of your revenue base is tied directly to CPI. Do I have that right?

That's about right, yes.

So, can you just address that portion specifically? Given where CPI is at, should we expect lower price in those markets in 2016? And what does that imply for overall price growth in 2016 relative to 2015?

Yes, when we look at our CPI business, we always look at it and say, look, there's nothing we can do about CPI. Because it's a government-posted stat that we cannot control. So, sometimes we're going to get hurt, sometimes we're going to get helped by it. It seems over the last few years, all we've done is get hurt by it.

So in 2016, we don't expect to have a benefit from CPI. In fact, we'd expect to have a little bit of a detriment to pricing from CPI in 2016. But, like we've always said, we can't control that. What we can control is the core price on the rest of our business. And so if we aren't going to -- my guess is that we will have sort of a consistent core price target next year that we've had both in 2014 and 2015. And if we are not going to get it from CPI, we'll make up for it by getting core price on our other lines of business.

Got it. And then just to clarify when you say you can't control CPI, obviously, that's true, but one of your large competitors has talked about trying to shift customers to more of a sewer, water, waste index instead of CPI. Is that something that you've thought about or are doing at all?

Oh, absolutely. We've actually done that. We've tried to use that index. We've also used what we've called sort of our Solid Waste Index. And so, every time that we talk to customers -- look, this goes back 10 to 12 years ago when we first instituted a fuel surcharge, because we saw fuel prices fluctuating.

You know, what has to happen is that everyone in the industry needs to say, look, this just doesn't make sense for us unless we look at these contracts with this type of adjustment in it. And so, going back 10 years ago when we first put in the fuel surcharge on our residential contracts, everyone said that's never going to happen. Because the municipalities won't accept it.

And as the industry said we are just not going to bid unless we have a fuel surcharge, customers started to accept it. It's the same thing with CPI. Look, every single company has been hurt by CPI in the last five years. And I think it's incumbent upon the largest companies to say, look, we are just not going to bid these under the traditional CPI, or even worse, 75% of CPI type of contracts. And if the industry is able to do that, then you'll see municipalities change.

But they are not going to change when only one player is out there doing it. So we've been doing that, particularly in California, for the last number of years. And we'll continue to do that throughout the country.

Yes, understood. And David, can you just talk a little bit about how you are thinking about new business, kind of your selling effort in an improving economic environment, whether -- what is the state of your sales force? Are you growing the sales force? Are you changing how they are incentivized or anything like that to try to win new business?

Yes, you know, I'm not sure I would say that we are growing our sales force. I'd say what we're doing is we're sort of reallocating our sales force. From our perspective, what we've tried to do is put our sales force in those areas where it's growing.

So, when we look at a market area that's not growing, we might reduce the sales force; whereas when we look at a market area that is growing, we might add the sales force. And so, there won't be a drastic addition to our sales force. There will certainly be a reallocation of our efforts in those lines of business that are growing and in those geographies that are growing.

Okay. And then one more from me on the -- it sounds like you're making good progress on reducing your recycling processing costs. Can you just give us a couple of sentences on what that constitutes, whether it's a labor question or you are putting in different equipment, just what you are doing there? And then, secondly, the reduction that you've seen so far, how far does that take you toward your goal? I think the goal is reducing average cost per ton by $10 or something like that?

Yes, I would say we are probably 70% -- two-thirds -- 70% of the way there on our goals. There's still plenty of room for improvement. And those cost improvements have come from sort of all of the above. You know, first and foremost, you'd have the operational improvements, but secondly, you have shutting down some of our more high-cost operations.

And so, we've basically shut down those operations that we would expect to shut down. There are some contracts that we need to get out of that are high-processing contracts. And then, finally, we need to reduce those contamination levels. You know, that's -- frankly, that's what drove the highest increase in our operating costs.

And so, working with our customers, we need to make sure that when we have a contamination rate goal in each -- in our contracts, which we have in virtually all of our contracts -- we need to make sure that our customers are meeting those goals. And so we'll just go in and do the audits to make sure that we are dropping those contamination rates.

And so, look, our recycling folks have really done a spectacular job of approaching the operating costs from every angle. I think there's still some room for improvement in 2016, but they've done a heck of a job so far.

There's still a day where some of those contracts that will fall off during 2016 that will provide some structural improvement as well for the recycling business.

Corey, I think that this is the first time that we have talked about internally, at least, 2016 not being a big down-year versus the prior-year in recycling. By the way, it's not because of any help we are getting on the commodity line. It's just that the efforts of our team to really permanently change the way the business operates on the cost sides are starting to really bear some fruit.

Okay, great. Thanks very much.

Yes. Absolutely.

Joe Box, KeyBanc Capital Markets.

So, just want to dig into the moderating decline in solid waste volumes. How would you explain the 180 basis point of improvement year-over-year? Is that more a function of waste fundamentals improving? Is it better sales execution? Or is it maybe just a function of your pricing is up, but it's not up quite as much? Just any color on that would be helpful.

Yes, I would say that, primarily, it's related to improving fundamentals in the industry. We really aren't using price to go out and chase volumes. So you've got improving fundamentals across some lines like the industrial line, where, frankly, in the industrial line, we probably could've grown it more in the last couple of quarters, but we are constrained by the number of containers and drivers and trucks that we have on the road.

And so, primarily, it's improving industry fundamentals, but we really have seen a nice improvement in productivity from our sales force. You know, I talked about it earlier. We're not adding a lot of folks to our sales force, but we are top-grading our sales force. And the folks we have right now are much more productive than they've been in the past. And so it's really sales productivity and mostly improving business fundamentals.

Joe, we've talked a lot about also the fact that on the disposal side, how important pricing is there. And when we see same-store average MSW rates up approaching 4% in kind of -- we just talked about CPI being close to zero in almost a zero inflation economy, we are pretty happy with that. And at the same time, we see almost 6% growth in MSW volumes. You know, to us, that's really where we've got to dig in, is on the disposal side of our business

Joe, I was going to add also that you mentioned -- you opened with a price comment. We've maintained that approximate 4% core price number while improving volumes. We also had rollbacks for the quarter at about 18%. And that's a real improvement versus prior-year. So all of those factors have helped improve volume. We've maintained the price focus.

And you know, to Jim's point, on the industrial line, our new business pricing is actually higher than our average rates. And so, we are seeing real strong pricing on the industrial side.

You know, look, industrial volumes are as close to a spot market as we have, as we've talked about many times. And the spot market right now is very strong. And so you should be getting both positive price and positive volume. Obviously, that will moderate as we come into the seasonality and the weather of the fourth quarter and the first quarter, but I would expect to see that improve -- both volume and price improve -- as we come out of the winter and get into the seasonal uptick next year.

That's great color. And let me actually just follow-up on that. You guys have made it clear that you do want to manage to a certain price increase, and I guess the specific metrics that you are looking at is core price. You know, Jim, you mentioned better rollbacks, and I think, David, you said something about the industrial business not necessarily coming in at a lower price. So I understand there are some nuances here. But how are you incentivizing the sales force to really minimize the impact of rollbacks and lower new business coming online with the exception of industrial?

Well, Joe, our sales incentive plan for the account managers that manage our current business is directly linked to how much price they get for their current customers, and whether or not there are rollbacks. So it is a direct impact on that sales rep when they increase rollbacks or they don't get their price. So it's a direct link. And that has --

Okay, so it's not just core price?

No.

It's also looking at rollbacks and where they are bringing on new business?

Absolutely. New business pricing has got to pay out as well.

And Joe, look, when it comes to sales incentive plans, I think everyone that's ever managed a sales force would love to have EBIT as the core metric rather than revenue growth, right? Because you can get revenue growth at low margins, and that doesn't do anyone very much good.

We've got a tool that we are rolling out in 2015. It will be fully rolled out in 2016 that will allow us to measure profitability at the customer level. At that point in time, I would expect us to relook at the compensation plans and say, okay, rather than focusing on revenue and price, let's start now focusing on the actually EBIT that we are generating, and start incentivizing folks to generate higher EBIT.

How do you do that? By selling the right volume; by selling the right volume at the right price. And so we've got compensation plans in place right now that I think drive the right behavior. That's only going to get better through 2016 and into 2017.

In the meantime, Joe, we have absolute control over the pricing, the area level and the corporate for the larger accounts. So we know exactly where our reps are going in from a price standpoint on an overall basis. So we are not waiting for that tool to help us in that regard.

Got it. Thanks for all the detail.

Sure.

Michael Hoffman, Stifel.

Thank you all for taking my questions. If I could follow back up a little bit around the solid waste and the commentary on volume just to slice it once a little bit differently. If you looked at the same-store volume trends on front-end loader business, residential and your permanent rolloff -- because I get that temporary has been very strong -- on the permanent, what's the trend on the same-store basis for each of those lines in collection?

As far as weights go?

Yes, the volume. Just what's the direction? Is it positive? Flat? Negative?

Yes, I mean, obviously it fluctuates slightly quarter-to-quarter, but I would tell you the trend line is -- both of them were slightly -- actually slightly negative this quarter. But the prior two quarters, they were up. And so I would tell you the trend line is up, so we -- and service increases have exceeded service decreases.

So I would tell you that every trend line that we look at -- and, as you know, Michael, I haven't been saying this for the last three years -- but every trend line we look at is, right now, is positive.

Okay. So just so I make sure I understood that, the overall trend in permanent rolloff, front-end loader and residential, since -- weight, since every day this stuff goes across the scale, is positive, which indicates this improving volume pattern structurally.

Yes, I would say that's true for commercial and industrial. Residential, you know, we -- frankly, we don't look at that. We look at that a little bit differently than we look at the other lines of business. So we're not as focused on weight in the residential side.

And fair enough. Because it's really about the asset utilization of the equipment going down the route. How do you -- how would you frame your churn trend at this juncture as well, with both the direction and then the rate of replacement?

Yes. So the rate of replacement actually has improved fairly dramatically over the last four quarters. And the churn rate -- so this quarter we saw about an 80 basis point improvement in the churn rate, but it's stubbornly stuck. It's sort of that 10% to 10.5% churn. Our focus in 2016 is going to be to try to drive that churn rate down below 10%.

Now, look, again, this is a simple business if you want to use price as your lever. We can drive that churn rate well below 10% if we just exceeded to every single customer asking for a price rollback. But as Jim pointed out, our price rollback trends are actually very positive too.

And so, again, when you look at the combination of trends, you can look at rollbacks and say, boy, rollbacks are going great. But if you are doing it via price -- not so great. And what we've done over the last two years is seen the churn rate come down marginally -- not as much as we'd like to see it come down -- but we've seen the rollback rates also perform very well while not giving away the price. And so, the combination of the three is very positive.

Fair enough. And if you look -- go ahead, sorry.

And then if I might -- I want to add another thing quickly to it, and that's the addition rate, I think you had mentioned -- questioned as well. Dave said it's very positive. I mean, we are about 200 basis points positive on the addition rate. And that's really helped some of the -- especially the commercial volume.

We are positive in dollars in 15 of the 17 areas. The other two are fairly close in making real improvements versus prior years. So, the trends are positive, as Dave stressed.

Okay. And on the churn, given it may be stubbornly where it is, how do you think about it as that which you control versus that which you don't, and that which you control isn't so much about price as it's more service-oriented, things that you could fix and that you could keep doing what you are doing on price?

Yes. I mean -- and you know, roughly half of it is structural, companies going out of businesses or relocating. And so that leaves you 500 to 600 basis points of churn that is voluntary. And you hit the nail right on the head. I mean, every study that we've done since I've been at this Company for 15 years, tells us that price is not the primary reason for churn. Now, price becomes the primary reason for churn when you have a service failure.

And so I always liken it to the cable companies. We all get a flyer every week that offers us a lower price for cable. There's probably a lot of people that accept that and say let's take it every time we can get it. But 90% of the folks say, you know what? That the cost of changing out is too high, so I'll accept the fact that this price might be a little bit higher, but I'll accept it because the pain of switching is too high -- until the cable starts going out, or the satellite dish starts going out. And then, all of a sudden, that price offer looks pretty attractive.

But every study we've ever done says that service failures drive churn, and that's why we reinstituted what we had when I first came to the Company 15 years ago, the service machine program, which, when I came here 15 years ago, did a great job of rallying the Company around the customer. And we've tried to do that in the last 14 months. That's exactly what we've been trying to do -- rally our Company around the customer. And we are seeing some really nice progress in that regard.

And when you think about the efforts and productivity and service optimization, is that what's giving you the comfort to say 10% goes -- we go below 10% in 2016 as you correct that missed pickup, which is usually driven by a truck that broke down and things like that?

Yes, I mean, and you hit another great point, which is it's not just wanting to have great service. It's also being able to provide great service by having a truck that's operating, which goes back to maintenance and fleet and all of those types of issues.

And so what we've done, Michael, is try to take a holistic view of what causes a service failure. And you are absolutely right. A lot of times it's because we don't have a truck that can service it. And so when we look at driving it below 10%, we really need to have all of our operations working in conjunction with our sales folks to execute flawlessly.

And I will tell you, not just at Waste Management but throughout the entire solid waste industry, it is stunning to me that we do our jobs every day as well as we do them. But at Waste Management, what we've said is good is not good enough. We have to be great. And that's what Jim has got the Company focused on.

Michael, one thing that we've changed in that regard, you mentioned missed pickups. You know, if you do a missed pickup measurement and we're pretty good. We compete with almost any in the industry around missed pickups that are reported by the customer. We've taken another view of that.

We're looking now, as Dave mentioned, the maintenance side. We're looking at service failures where perhaps a truck went down late in the day and we missed half a route. And we're going to pick it back up tomorrow. Well, that's a missed pickup from the customers' view. And we're adding that to the metric, and looking at it a little differently than just past when the customer responded to a missed pickup, trying to add and restore that confidence where a truck went down.

And fleet is part of it, but the real issue is also surround our call centers, and how well they are connected to the field. And we can respond to that customer's need in a more timely manner. So, it's a huge focus for us. It's been that way in the past, but we're adding a little more color to it.

Okay. And then, Jim Fish, I think I'm -- I understand what you're saying about free cash but I just want to say it out loud to make sure I get it. So, I'm picking a number just to frame it. If $1.5 billion is this year's number, and all things being equal, that number would be midpoint of the $3 billion to $3.40 billion is $3.50 billion. So, is -- $1.5 billion is down by $3.50 billion because of more cash tax, and then it grows based on all the other things you would do.

And your intention is to pay some of that $3.50 billion this year so the $1.5 billion would be less. It's -- you are smoothing your cash, is what I'd -- which is perfectly appropriate. I just want to make sure I understand it.

Yes. I think that's -- I'm not sure I would use the word smoothing, but that's about right. One thing I would say, Michael, about free cash is -- that we are pleased with here, is we've been kind of a $1.2 billion to $1.3 billion free cash flow company over the last six years. And I think what you're seeing is, in 2015 and going into 2016, for those two years, is we are starting to become more of a $1.4 billion free cash flow company. And that is really a function of all these things we've talked about, but it's largely organic growth for us.

Right. So if you didn't prepay anything, it's not an unreasonable observation that, sequentially, the cash could be down. That's not a bad sign. It's just the timing of big flows like that. If we didn't have BD in all that, we wouldn't be talking -- having this conversation.

That's right. Without question, Michael. If we didn't prepay anything because of the big headwind that we've got, yes, we'd be down.

Okay.

I think Jim's point shouldn't be lost, which is, we're sort of establishing a new baseline to say we are a $1.4 billion baseline free cash flow-generating company. Now, some years, we might generate $1.5 million, $1.6 million. Other years -- and to the extent that we can prepay those cash taxes to ensure that next year we hit that baseline of $1.4 million and we don't have those headwinds, we ought to do that.

But going forward, I would tell you, Michael, that that $1.4 billion is sort of our stepping off point. Obviously, we'll give more specific guidance when we give it in February. But at this point, I think we've gone from saying we are a $1.2 billion to $1.3 billion baseline free cash flow company to we're a $1.4 billion baseline free cash flow company.

Yes, we agree. So how do you think about the sustainable growth rate of that $1.4 billion, if you took a five-year view?

Yes. I mean, as we've said, we think it's sort of the 3% to 5% a year type of free cash flow growth. You know, when I think about free cash flow, Michael, I will tell you I think about two things. I think about -- and it comes back to our capital allocation program, which is, we can grow free cash flow by doing acquisitions. As Jim Fish likes to point out, we basically replace the Wheelabrator EBITDA not through acquisition but through improvements to our business.

You know we'll continue to add a little bit more acquisitions in 2016 as we talk about that $50 million to $70 million of EBITDA. But then, I also look at cash flow from a per-share basis. And as we buy back shares, cash flow per share is going to go up. And so, as I look at it, when we look at our capital allocation program, we are going to have a nice balance that's going to both increase operating cash flow, but it's also going to increase cash flow per share.

Okay. And then Jim Trevathan, what -- how would you frame your -- the current, on a same-store basis, recycling plant capacity utilization? It's got 1,000 tons per day. Is it 60% or 80% run rate? And what can you do to improve that?

Michael, we are closer to that 80% than 60%. Part of it is volume-driven as well in specific plants. Part of it is shutting down a few plants in cities where we have dual capacity. But that's the goal and there's still room for improvement there. We won't stop at where we are with that 7%, 8% improvement in cost year-to-date. That's still going to go further into 2016.

Okay, thank you very much.

Thank you.

Al Kaschalk, Wedbush Securities.

I don't know if this is a fair question for this morning's call or not, but we'll give it a shot and see how we do. If I take a step back and look at the cost improvement side of the equation, and to your point about nearly replacing all of the EBITDA from Wheelabrator, are you suggesting that you are at the goal line on sort of the cost -- annual cost improvements in the business? Or what's left in the tank?

You know, I wouldn't say that, Al. I would say that's on the cost side, first of all, I'll tackle it from OpEx and then SG&A. On the OpEx side, we put -- over the last few years, we've put onboard computers in all of these trucks. And I would tell you we are only kind of at halftime with respect to using the onboard computer to its fullest capability.

For example, we can route our trucks dynamically, but that doesn't do any good unless the driver follows the route that the computer generates. And then we are only following that route -- if you think about best-in-class, FedEx or UPS probably follows their route 95%, 97% of the time -- we're kind of about 80% of the time. So, while that may seem like pretty good, and it is okay, that last 15 to 20 percentage points is worth a lot of money.

So there's a lot of process work that's going into -- we put the technology in place -- there's a lot of process improvement that still needs to take place on the OpEx side. Maintenance cost is another component of OpEx, and I would tell you we are probably not at halftime on maintenance costs. We're more like in the first quarter on maintenance costs.

We don't use data as well as a lot of companies. A lot of big companies use data to really proactively address maintenance costs as opposed to reactively addressing it, so you are not breaking down on the road. And we don't use it to the extent that we could.

And so, there's, I think, a lot of upside with respect to operating costs going forward. Jim Trevathan talked a bit about the upside on the recycling side of our business with cost. And then SG&A -- you know, look, our goal for the last three years has been to get to a number below 10% of SG&A. I think that's -- because we haven't fully replaced the revenue side of Wheelabrator and the divested businesses, 10% of SG&A is going to be a challenge.

But holding flat on SG&A, while we still give our employees a merit increase, is no easy task. And so we plan, from 2015 to 2016 again, to hold flat on SG&A. And that's on top of the $60 million that we said we would get this year.

Hey, Al, I might add to Jim's mentioning of the onboard unit. We were positive in all three lines of business on the collection side in Q3 in efficiency. And we are really starting a hard look at cost per unit, and starting to move the needle on a CPU basis, which is where the money is -- not just in a unit measurement on homes per hour, for example.

And that will have a real impact. Volume has helped, but that's not the driver. We are still negative, for example, in residential volume, as Dave mentioned, and yet we were positive on the efficiency side, and moving that way on the CPU with real upside left, as we fully implement SDIO and some of the process work that will continue to work across all districts.

Are you able to -- or, as David put it, any thresholds there in terms of the dollars of cost of operation to come out either on an annual basis or margin improvement on basis points? I mean, all of these -- I appreciate the macro commentary, and I know there was one on truck efficiencies done, that 15 or 20 basis points, but is there any way to help on the operations side to talk about, well, maybe some goals and where that's at on a quantified basis?

Al, we don't -- I don't think at this time we are going to give you guidance for 2016, but we absolutely have targets both in dollars and in metrics -- at the area level, the district level, and all of these, we expect improvement, and hold people -- ourselves accountable as well as our areas. They hold their districts accountable. But this isn't just a shot in the dark. We have absolute dollar and metric goals for each of these metrics.

And as that -- in that regard, I would say we are 33% to 40% there on the cost target. You know, like anything, when you start out with a cost program, it is the hardest thing to do in a company. And so we are about 33% to 40% of the way there, but we are pretty confident that we are going to hit that target. It's a multiyear target. We are pretty confident that we'll hit it in the next two years.

Great. We'll certainly be watching, right? (laughter)

With bated breath, we will, as well. (laughter)

On the acquisition side, did I hear all areas were targets, including Energy Service and Energy Waste? Is that fair about what you have in your line of sight is not -- is more on the solid waste side?

Yes, you know, what I would say is, we are primarily focused on our traditional solid waste business. But -- well, let's -- I'll retract that. We are only focused on our core solid waste business. We're not looking to do acquisitions outside of our core solid waste business.

Right now, what we are looking at mostly is what I would call our traditional solid waste business, but we do believe that Industrial Waste and Energy Services are part of our core solid waste business. But when it comes to Industrial Waste, we would certainly look at assets in that arena, because that dovetails perfectly with our industrial footprint.

On the Energy Services side, I'd tell you that if we were to do a deal in Energy Services, we'd do an opportunistic deal. We are not actively looking to go out and expand our footprint dramatically in the Energy Services businesses, like we have been in the past. But if we can find some deals that are opportunistic and at the right price, we certainly think that, long-term, Energy Services is going to be a good line of business.

It's not going to be a good line of business for the next year or two. So, we've got to see something on the long-term horizon at an opportunistic price if we are going to invest in Energy Services.

I don't hear much in the way of discussion on Hazardous Waste. Is that something you are less focused on? Or just it's not imperative from a operational distribution point and collection route down to the type of market?

No, it's -- I think that's exactly right. It is a great line of business that completely overlays our footprint. You know, the reality is that there are a lot more traditional solid waste providers out there that we can buy than there are Industrial Waste providers. And so, I wouldn't say that we would -- we certainly would not preclude any transaction in Industrial Waste, but right now we are a little more focused on traditional solid waste.

Okay, I think that's enough for now. Thank you.

All right. Thank you.

Tyler Brown, Raymond James.

Hey, I don't want to get too caught up in the vernaculars here, but can you give us what average yield was in industrial and commercial? I just assumed that, including the impact of churn, it's a bit more meaningful as volumes are improving?

Yes, the average yield on the commercial side was 2.6%. And on the industrial side was 3%.

Perfect, thank you. And Jim Fish, just a quick clarification. But when you talk about exceeding the $1.5 billion of free cash, are you including or excluding divestitures?

Yes, we are including it. There's not a lot there. It's -- we excluded the big ones last year. So, we've always included them, but they are cats and dogs, and add up to not a huge number. But obviously, last year, we had to exclude them because they were all so big.

Okay, but you are including them in the $1.5 billion this year?

Correct.

Yes, okay. So, I'm just curious -- so, what is exactly exceeding -- what's driving the exceeding of the range? I mean, are you coming in better on cash from ops? Or is it that CapEx is tracking towards the lower end? Or is it a little bit of both?

No, it's definitely not -- it's not the latter for sure. CapEx is just kind of at the high end of the range. The range we gave for CapEx was $1.2 billion to $1.3 billion. We are at the high end of that range. We may even go a little bit over the top of that range. So it's certainly not because we are tightening down on CapEx.

I think it is more -- when I look at EBITDA, that's really, in my mind, kind of the best barometer for how a business is performing. And our EBITDA seems to be performing quite well. Some of it is from yields. And the big puts there are really yields, operating expense, and then the takes are kind of poor Energy Services business.

Our Energy Services business could be down as much as 30% for the year. So that's been a big take that we haven't really talked about, but -- and it just nets out against the progress we're making on the others on the EBITDA line.

Tyler, the improving volumes have obviously helped as well on the free cash side.

Sure, sure. Okay, good. So if I think about, though -- and I appreciate that you're not giving 2016 guidance, but I'm just looking at the buckets. So if we start from cash from ops of call it $2.7 billion, $2.8 billion, wherever you guys end up this year, you are going to get back the $40 million of Central States payment that you won't make next year. You're going to get some core EBITDA growth just in the base business.

You've got -- you know we've talked about the M&A that may be in the pipeline that comes on. And then you are going to lose the $300 million to $400 million of higher cash taxes, and then kind of whatever we think you'll do with that prepay. Is there anything else big-bucket-wise, though, that I'm missing?

Yes, I think working capital. We're making some progress on working capital. There's a lot that runs through that line, but -- and you mentioned one big thing that ran through it this quarter, the Central States pension fund exit.

But we're making a lot of progress. It kind of got masked a bit this quarter because of that Central States. But with DPO up 3.9 days and DSO down 1.4, it was pretty impressive improvements, considering it wasn't too long ago, a couple of years ago, where we were kind of a 20 to 25 day difference in the wrong direction, with 45, 47 on DSO and 22 on DPO. We're now up over 30 approaching 31 on DPO and down at 42 on DSO. So that -- we shouldn't lose sight of that. That has a big impact on cash.

Sure, okay. So working capital might help a little next year as well. Okay. And then on the M&A, I'm just curious -- is that $50 million to $70 million of EBITDA with justice at this point? For review? Or does it have to go to review?

Yes. That level of purchase price, it has to go to justice. And we do have one transaction that's going through justice and some others in the pipeline.

Okay, perfect. And then maybe just my last question for Jim Trevathan. But it sounds like your core solid waste business is pretty solid. But I'm curious, have you guys seen anything, if even small, a deterioration in the Hazardous Waste side of the house? Or maybe anything on your Industrial Services lines?

No, Tyler, we haven't. I mean, it's been very strong for us this year. The base business more so than the event business, we -- our sites are -- from a geography standpoint, sitting right where most of the construction in the petrochemical industry is occurring. Given the low energy cost and therefore the low feedstock for that petrochemical industry, our Alabama and our Louisiana site, it's a really good spot for base business as that industry grows.

Event business in the -- on the West Coast on the haz sides have been very good, especially the Pacific Northwest; in places in the Southeast, maybe not so much. So that's kind of a mixed bag. But we are very happy with that business and expect it to continue to improve

Tyler, we -- just anecdotally, Jim and I met with some of our big customers a couple of weeks ago over in Louisiana, and those guys are all, as Jim said, kind of the beneficiaries of lower energy pricing. You've got the producers that are -- and the service providers that are kind of taking it on the chin, but you have the consumers that are benefiting.

And we met with some big customers of ours who are consumers, and they are very positive about their industrial business with us in 2016. In fact our haz business, even though it's still small relative to our solid waste business, our haz business is up year-over-year.

Okay, yes. I assume AMEAL is very well-positioned to capture that petrochemical story over the next few years. It is --

Really, Tyler, Lake Charles sits right in the middle of it.

Lake Charles. Okay, okay. And then --

Lake Charles is better.

Yes, perfect. Okay. And then just lastly, have you guys seen anything on the coal ash side? Is there anything to think about as we look to 2016?

Yes. I mean, look. We are in the early stages here of this opportunity. What we are seeing is that it's -- we think it's a good long-term opportunity for us, but it's also pretty capital-intensive. And I guess that could be a good thing because it serves to differentiate us from some of the small guys that can't put the capital into it. But it still is very early. We are starting to see some of these companies make some decisions about coal ash and we feel like we are well-positioned.

Okay, perfect. Thanks, guys.

Thank you.

Tony Bancroft, Gabelli.

Back to the Energy Waste business with the slower sustained crude prices, customers probably pretty cash-strapped by now, are you seeing any issues with your contracts with them, renegotiations, concessions?

Yes, I mean, they've come back to us over the last probably 12 months and asked for price concessions. In some cases, we've made some price concessions. In some cases we haven't. It's as much as anything a function of where our assets are relative to the drilling that's taking place. But certainly there's been some real pressure in that business and that's why our revenue will be down probably 30% in the year.

Roger. And then I know you've discussed the M&A on your Energy Services side, but what would you -- so if a deal were to be done on a one-off basis, like you mentioned, what would you -- what would be a -- how would -- what's the going rate right now? Could you give me sort of a ballpark what you think you would be paying?

Going rate in terms of a multiple? Is that what you're asking?

Yes. Yes.

I don't know -- I'm not sure the multiple changes but your forecast changes. Right? In other words, it's a multiple of EBITDA, and we aren't paying trailing 12 on EBITDA. What we are going to do is say, okay, let's look at a forecast of what we think is going to happen over the next three, five, 10-year horizon, and let's discount it forward and figure out a reasonable multiple to pay.

But you know, but I would tell you, again, when I look at our pipeline of acquisitions, I would say that the pipeline that is the least full would be Energy Services. I mean, you know, we are not actively looking at any transactions in Energy Services of any magnitude. And so, like I say, we'll be opportunistic but we're not going to be as actively searching for deals in Energy Waste as we are going to be actively searching for deals in Solid Waste.

Roger that. Thank you so much.

Your final question comes from the line of Adam Baumgarten of Macquarie.

Thanks for taking the question. Just a quick one on dividend. I mean, you talked about this sort of 3% to 5% free cash flow growth going forward. I mean, is that what we should expect for the dividend? Or could we see some upside there in the years ahead?

Yes, you know we've always said we want to have a balanced dividend, where we want to have a payout ratio somewhere around 50%. We want to be in the top quartile of S&P 500 dividend paying companies. We are in that sweet spot right now. You know, we've had pretty consistent growth in our dividend over the last few years, and I'd expect that to continue.

Great. Thanks.

Thank you.

You have a question from the line of Barbara Noverini -- I'm sorry. I will now turn the call back over to Mr. Egl for closing remarks.

Thank you. I'll fill in for Ed. (laughter) I wanted to thank the entire Waste Management team for some spectacular business results. But every once in a while, an event happens that makes you realize that the reason that we all are here is not for business, it's for family. And we actually had one of those events yesterday, when Jim and Renee Trevathan welcomed Georgia Marie, their grandchild, and --

Number eight, Dave.

Number eight.

It makes me feel old.

(laughter) So Jim is going to start some routing programs with his grandchildren, because he now has eight of them running around. It makes you realize what's important. And I certainly hope that Georgia Marie has as good a 2016 as we expect to have at Waste Management. Thank you.

Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1 p.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on November the 10th, 2015. This conference ID number for the replay is 32546520. Again, the conference ID number for the replay is 32546520. The number to dial for the replay is 855-859-2056.

This concludes today's Waste Management conference call. You may now disconnect.