美國廢棄物管理公司 (WM) 2015 Q4 法說會逐字稿

Good morning. My name is Karnethia and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth-quarter 2015 earnings release conference call. (Operator Instructions)

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

Thank you, Tunisia. Good morning, everyone, and thank you for joining us for our fourth-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 to the press release include important information.

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

David and Jim will discuss our results in the areas of yield and volume, which, unless 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 comparisons, unless otherwise stated, will be with the fourth quarter of 2014. The fourth-quarter and full-year 2015 and 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 of our use of non-GAAP measures.

This call is being recorded and will be available 24 hours a day beginning approximately 1 PM Eastern Time today until 5 PM Eastern Time on March 3. 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 21854213.

Time-sensitive information provided during today's call, which is occurring on February 18, 2016, 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. 2015 was a very successful year, as our commitment to core pricing, disciplined growth, and controlling costs generated our highest adjusted earnings per share ever.

We grew our income from operations and operating EBITDA and achieved the highest operating margins we have seen since 2010. We generated earnings per share of $2.61 in spite of the divestitures of our Wheelabrator, Puerto Rico, and Eastern Canada operations, and headwinds from recycling commodity prices and foreign currency translation. In 2015, we saw the execution of pricing, productivity, and growth strategy strengthen our foundation in a way that will lead to continued growth in 2016 and beyond.

During 2015, our strong free cash flow allowed us to return almost $1.3 billion to shareholders in dividends and share repurchases. We have seen solid growth in cash generation in our business over the last few years and we are confident that our free cash flow has reached a new base of at least $1.4 billion per year, up from the $1.2 billion to $1.3 billion level that has characterized the last several years. As a result of confidence in our cash flow, our Board decided to increase the dividend by 6.5% in 2016 and to authorize up to $1 billion of share repurchases.

We acquired Deffenbaugh and several small solid waste companies in 2015. And in early 2016, we closed on the acquisition of Southern Waste Systems, or SWS. The acquisition of SWS and other smaller tuck-ins we expect to close in 2016 should generate between $50 million and $75 million of operating EBITDA in 2016.

As we have previously mentioned, the operating EBITDA from these acquisitions won't translate into earnings per share in 2016 because we'll have corresponding intangible amortization. However, the transactions will generate cash flow in 2016 and incremental earnings starting in the second half of 2017.

Looking at our operations in 2015, our pricing programs continued to drive earnings growth and margin expansion. When we gave initial guidance for 2015, we targeted core price of 3.8% for the full year. And we exceeded that target. For the full year, our collection and disposal core price was 4.2%, with yield of 1.8%. We have now seen eight consecutive quarters with core price of 4% or greater.

For the full year, core price in the commercial line of business was 6.1%, industrial was 8.6%, and the landfill line of business was 2.4%. For 2016, we expect core price to be about 4% and a total revenue growth from yield should again be in the range of 1.5% to 2%.

Our pricing teams continue to perform at high levels and we'll continue our focus on price in 2016. The pricing excellence is not a one-year project at Waste Management. It is a way of life. We must get pricing to keep up with inflation and we have the tools and the people to do that indefinitely.

Our traditional solid waste volumes, which include our collection, transfer, and landfill volumes, were a negative 0.5% for the full year. But importantly, we saw positive trends throughout 2015, with traditional solid waste volumes improving sequentially each quarter, culminating in a slightly positive fourth quarter.

Although commercial and residential were still negative, we continue to see positive momentum in those volumes, particularly in our commercial line of business. In that line, we have seen six consecutive quarters in which the rate of decline has improved. And commercial collection was down only 0.7% in the fourth quarter versus down 1.3% in the third quarter.

Our continued focus on discipline, volume growth, and customer service is paying dividends. Our churn was 10.1% for the full year, the lowest level since 2012. In the fourth quarter, it was 9%, the lowest level since 2002, and we did all of this while reducing rollbacks in 2015. So we are keeping our customers through improved service, not price concessions.

We saw our new business exceed our lost business for the eighth consecutive quarter. These are all positive signs that our volumes are headed in the right direction without resorting to lowing lowering prices.

Total Company volume, which includes lower margin recycling, brokered, and non-solid waste volumes, declined 1.6% for the full year, with the fourth quarter being the best quarter of the year, declining only 0.9%. For 2016, we expect that traditional solid waste volumes will be positive.

However, we do not see a recovery in recycling and non-solid waste volumes, which would lead to overall volumes being about being flat. Of course, some of the recycling volume that we lose is a direct result of our efforts to shed unprofitable volume. So losing certain volumes in the recycling business is not such a bad thing. And we expect that overall volumes will turn positive in the second half of the year.

As you can see, the price and volume trade-off continues to be very positive. For the full year, the Company's income from operations grew 4.6% and our income from operations margin grew 120 basis points. In addition, operating EBITDA increased about 3% and operating EBITDA margin increased 130 basis points to 26.5%.

Our solid EPS growth was achieved despite a $0.09 per share decline from our energy and environmental services business, which has been affected by the sharp decrease in market prices for oil, a negative $0.04 impact from foreign currency translation, and a negative $0.04 impact from recycling operations.

Looking more closely at recycling, we made significant progress improving operating costs and on renegotiating contractual terms with our customers, including exiting some unprofitable contracts. Our recycling employees worked hard and reduced gross operating expenses by 15% and changed contracts where possible to allow us to charge a processing fee where we previously paid rebates.

Without these operational and contractual improvements, we had estimated that the recycling impact could be as much as a negative $0.08 to $0.10 per share, as average commodity recycling prices declined 17.5% in 2015. However, the operational improvements lessened that negative impact to negative $0.04 per share.

On the recycling commodity price front, 2016 has seen a continuation of the downward slide, and current prices are down $20 per ton, or 23% from January of 2015. These are levels that we have not seen in nearly seven years, since the 2009 recession. If we do not see a normal seasonal uptick in commodity prices and prices remain at January levels, this would be a $0.02 to $0.03 headwind in 2016.

We are committed to recycling and we will continue to work to change the business model to generate revenue that covers our processing costs and drive out operating expenses so that the business is sustainable over the long term.

Turning to free cash flow, our strong operating results, coupled with continued discipline and capital spending, allowed us to generate $1.41 billion of free cash flow in 2015. Included in that free cash flow number was $150 million prepayment of 2016 cash taxes. We had mentioned on the third-quarter conference call that we would make this type of prepayment, given that our cash flow is going to be above the high end of our $1.5 billion range. Consequently, we increased our 2016 guidance to between $1.5 billion and $1.6 billion.

So, when we look at our success in 2015 and our guidance for 2016, we look at three things. First is price. In 2015, we exceeded our goals. And for 2016, it is pretty much locked and loaded and already in process. So we are very confident we will meet our 4% target in 2016.

Second is costs. Again, we did well in 2015 and we believe there is plenty of room to improve in 2016. So again, we are very confident. And finally, volumes. In 2014 and 2015, we built momentum and for the first time in many years, I am very confident that we will see our volumes turn positive toward the end of 2016.

So we go into 2016 with a lot of confidence and look forward to another strong year. We expect that our continued execution of these strategic priorities will drive 2016 adjusted EPS to between $2.74 and $2.79. And we expect operating EBITDA to grow at the fastest rate in 10 years: up 5% to $3.6 billion.

But we can't do it without our people. I would be remiss if I didn't thank them for their hard work and professionalism, and I know they will once again prove their value in 2016.

I will now turn the call over to Jim to discuss our fourth-quarter results and our 2016 outlook in more detail.

Thank you, David. We have produced solid growth in earnings and cash flow in 2015. And it would have been even better when you realize that recycling is down $0.30 per share from its peak. That is why we need to maintain our focus on fixing recycling.

As David said, we are committed to recycling and for the last two years, we have been working to improve our recycling business. We want to see recycling thrive because it is the right thing for our environment and it is the right thing for our customers. We just want to make sure it is the right thing for our shareholders.

We performed well in 2015, navigating through the recycling headwinds, which I will discuss in a moment. But we are in the fourth year of low recycling commodity prices and we are currently seeing these commodity prices at the lowest levels we have seen since the 2009 recession.

Since there is little we can do to affect global market conditions, we are doubling down on those areas we can control. We have tightened our belt on investments. We are driving operational efficiencies. We are working with our community partners to reduce the amount of expensive contamination at our MRFs. We are optimizing our MRF network and we are tackling the slow, difficult, but necessary process of changing the terms of our contracts.

Together, these actions produce real measurable results in 2015 and are expected to make recycling profitable over the long term. Initially, we expected the headwind in the recycling line of business would be between $0.08 and $0.10 of EPS. However, the full-year impact ended up only $0.04 negative. That was not driven by an improvement in commodity prices, but was due to the actions that we took to improve recycling operations.

Recycling was one of several market factors we overcame in 2015. In addition to the $0.04 impact from recycling, we had a $0.09 per-share headwind related to low demands for energy and environmental services, a $0.04 impact from foreign currency changes. Despite these market pressures, our EPS grew more than 13% to $2.61 per share in 2015. We overcame those headwinds through cost controls and strong growth in our traditional solid waste business and those efforts will continue into 2016.

At the beginning of 2015, we expected to see a $60 million improvement in SG&A costs when compared to 2014. I am pleased with our 2015 results, as SG&A cost for the full year improved $68 million to $1.34 billion and improved as a percent of revenue by 20 basis points to 10.4%. For the fourth quarter, SG&A costs were $343 million, an improvement of $27 million compared to 2014. As a percent of revenue, SG&A costs improved 70 basis points to 10.6%.

For 2016, we will continue to focus on managing anticipated wage increases, cost inflation, and incremental SG&A brought on from the acquisitions. But despite these increases, we anticipate that SG&A costs should be flat when compared to 2015.

Turning to cash flow, for the full year, we generated $1.41 billion of free cash flow. As we mentioned on our third-quarter earnings call, we expected we would have a strong year of free cash flow and that we would likely make tax payments, assuming the tax extenders were not going to be enacted. Therefore, in the fourth quarter, we prepaid $150 million of 2016 cash taxes.

For 2016, we now anticipate between $60 million and $70 million of cash tax savings from the impact of bonus depreciation, which was reinstated by Congress at the 11th hour. During 2016, we expect capital expenditures of approximately $1.3 billion to $1.4 billion.

In 2016, the impacts of organic earnings growth, bonus depreciation, acquisitions, and higher capital spending should drive free cash flow to between $1.5 billion and $1.6 billion. In the fourth quarter, we returned $172 million to our shareholders through our dividends. For the full year 2015, we returned about $1.3 billion to our shareholders consisting of $695 million in dividends and share repurchases of $600 million.

Our Board has indicated its intention to increase dividends in 2016 by 6.5% to $1.64 per share on an annual basis. And this is the 13th consecutive year of increased dividends. For 2016, our anticipated annual dividends will result in approximately $730 million being returned to our shareholders.

We expect to spend around $100 million to $200 million on tuck-in acquisitions in 2016, with the remainder of free cash flow allocated to share repurchases. We have authorization from our Board of Directors to repurchase $1 billion of our shares. We have already repurchased $150 million and expect to spend an additional $500 million for the full year.

Fourth-quarter revenues were $3.25 billion. We saw a $59 million increase in revenues from acquisitions and a $50 million increase in our traditional solid waste business due to the combined impacts of pricing and volume. We saw an overall revenue decline of $163 million from divestitures, $43 million in lower fuel surcharge revenues, a $34 million decline from lower recycling revenues, and a $33 million decline in foreign currency.

Looking at internal revenue growth, for the total Company in the fourth quarter, our collection and disposal core price was 4.2% and yield was 1.7%, with total volumes declining 0.9%. This led to total Company income from operations growing $42 million, operating income margin expanding 150 basis points to 17.7%, operating EBITDA growing $37 million, and operating EBITDA margin growing 150 basis points to 27%. For the full year, income from operations grew $97 million, operating income margin expanded 120 basis points, and operating EBITDA grew $86 million, and operating EBITDA margin grew 130 basis points to 26.5%.

Our collection lines of business continue to see the benefits of our disciplined pricing programs in fourth quarter. Our commercial core price was 5.8%, with yield of 2.9%. Our industrial core price was 8.7%, with yield of 2.3%, and residential achieved 2.2% core price and 1.5% yield. Overall, collection core price was 5.3% and yield was 2.2%.

Our focus on customer service, which helped reduce our churn, and disciplined growth also benefited our volume trends in the fourth quarter, as volume declined only 0.6%. The volume change was a 90-basis-point improvement sequentially from the third quarter and a 190-basis-point improvement from the fourth quarter of 2014. This core price and volume led to operating EBITDA growing $11.7 million and margin expanding 30 basis points.

In the landfill line of business, we saw the benefits of both positive volume and positive yield in the fourth quarter, just as we have all year. We saw same-store average MSW rates increase year over year by 2.4% from Q4 of 2014. This is the 11th consecutive quarter of year-over-year MSW rate increases.

Total landfill volumes increased 0.5%, MSW volumes grew by 11.1%, and C&D volume grew 15.8%, while special waste and revenue-generating cover volumes declined 7.4%. The special waste decline was predominantly driven by the decline in our energy services business. The positive volume and yield led to income from operations growing $15 million, margins growing 160 basis points, operating EBITDA increasing $14 million, and operating EBITDA margins increasing 120 basis points.

Moving now to operating expenses, these expenses improved by $50 million in the fourth quarter and as a percent of revenue, improved 80 basis points to 62.4%. For the full year, operating expenses improved $328 million and as a percent of revenue, improved 100 basis points to 63.1%. In 2015, our focus on improving operating costs saw significant traction and we expect that to continue into 2016.

For the full year, we saw improvements of $187 million in fuel costs, $102 million in cost of goods sold, and $35 million in labor costs as we continue to see the benefits from our routing and logistics program.

Finally, looking at our other financial metrics, at the end of the fourth quarter, our debt to EBITDA ratio was 2.66 and our weighted average cost of debt was 4.32%. The floating rate portion of our total debt portfolio was 8% at the end of the quarter. The effective tax rate was approximately 32.4% in the fourth quarter and 32.3% for the full year. Taxes were a $0.01 headwind to EPS in the fourth quarter.

In conclusion, 2015 was a very good year for Waste Management, as our employees did a great job of focusing on price, disciplined growth, and cost controls. I want to say thank you to our employees for their hard work in delivering a successful 2015 and positioning us to continue that into 2016. We are excited about continued growth in 2016 and beyond.

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

(Operator Instructions) Scott Levine, Imperial Capital.

It seems like it is steady as she goes in terms of the organic growth trends, that the pricing environment is pretty healthy, that the volume environment is generally improving, and is expected to improve, albeit gradually, with volumes inflecting positive by the end of this year.

But anything surprising, either to the positive or the negative, on the macro or the industry front, either geographically or relative to your expectations? Or are things just kind of continuing to improve at a gradual pace and there is no real change in the operating environment in general?

Scott, I think when I look at the business, you can sort of say -- I think you are right. The growth is fairly muted from the economy, but you can pretty much say the business is firing on all cylinders, save two areas, and that is recycling and energy services. And I think we all know what the macro environments are for that. I mean, it is low commodity prices. Not just oil, but cardboard and plastic.

So I think you hit the nail on the head. It is steady as she goes. We continue to see the other lines of business doing very well and we don't expect that to end in 2016.

The only thing that was surprising was kind of a positive. We were not surprised, obviously, by the headwinds with recycling or energy services, but we were pleasantly surprised when you look at the construction business. I mentioned we were up over 15% in the C&D waste stream and that really, to us, is kind of a foreshadowing of good things there in 2016.

Understood. And then it sounds like you are baking in an expectation here of $50 million to $75 million EBITDA. You have been talking about this for awhile. Could you tell us how much of this have you closed on with the SWS acquisition? How much remains to be closed?

And maybe a little bit more commentary regarding the M&A landscape in general and whether we may see some upside to your $100 million to $200 million spend or valuations in the marketplace. A little bit more color there.

Yes. I would say 80% to 90% of it is locked in with SWS. I mean, that is going to be the big acquisition that we do in 2016. When I look at acquisitions, we have done RCI in Montreal, we did Deffenbaugh in Kansas City, and now we have done SWS in South Florida. And those were spectacular acquisitions for us because they are a fairly large amount of revenue, but they are also straight tuck-ins into our business.

And so we know exactly how to do them. We know exactly how to get the dollars out. Takes a little bit of time, but we know exactly how to do them. So the more of those that we could do, the better. We thought there might be a few more of those in the pipeline, but those -- call them those $400 million to $500 million transactions, we really don't see a lot of those on the near horizon right now. So I think 2016 will be a year where it is mostly driven by tuck-in acquisitions. But again, we would love to do some larger acquisitions like those three that we did in Montreal, Kansas City, and South Florida.

Pricing -- I don't think it has changed dramatically. We have said it many times: we generally pay a little bit lower price for those smaller tuck-ins. And it is because you can pay a little bit higher price when you get that big bigger bulk of business like we did down at SWS. Although, even with SWS, on a post-synergy basis, we will end up paying sort of 6 to 7 times EBITDA.

Got it. And then as a follow-on to that, is there any change in your interest level in energy and industrial or if we get a floor in commodity prices on the energy side, could we see your interest pick up as 2016 plays out? Or are you still focus predominantly on solid waste?

Yes, we are focused predominantly on solid waste and I think we have said it the last two conference calls, which is, look, long term, I think energy services will be a great business. But we are not out there looking for businesses. I think it is going to be a prolonged flattening of oil prices.

And so in energy services, if we buy something in energy services, it would be opportunistic. We are not actively out searching for businesses in that line of business.

Corey Greendale, First Analysis.

A few questions. First, Jim, I was hoping -- Jim Fish, I was hoping you could help bridge the cash flow from ops guidance from 2015 to 2016. I calculate your guidance to a $300 million to $400 million increase. EBITDA, you're guiding to $160 million. So what is accounting for the rest of the increase?

When we look the cash flow from ops or if I look at free cash flow, because when I include in there CapEx, if I talk about free cash flow -- and if that doesn't answer your question, let me know. But if I talk about free cash flow for 2016, I have a starting point of, let's call it, $1.41 billion from this year and then I am adding in EBITDA growth.

You mentioned $160 million. We are kind of calling it $170 million in EBITDA growth year over year, which includes -- that includes organic growth. That includes some of the benefit of acquisitions. I add in the impact of bonus depreciation, which I mentioned was, let's call it, $70 million.

And then our CapEx is going to be a bit higher this year. I mentioned the $1.3 billion to $1.4 billion range. So back out $100 million in added CapEx, and I arrive in the middle of that range of $1.5 billion to $1.6 billion. And keep in mind there, Corey, that the prepayments that we made in cash taxes is really offset by the benefit we got from the Q1 2015 debt transaction. So those two kind of offset each other. So that walk forward works without a cash tax -- the cash tax difference.

That did answer my question. Thank you. And one clarification. I think you said this, but the EBITDA that you are expecting to get from acquisitions -- the number that you gave, is that only from Southern and new acquisitions? So in other words, you are not including rollover-affected acquisitions in 2015?

Yes, there is a small rollover effect from a 2015, but the bulk of it would be the SWS and the tuck-ins we do in 2016.

Okay. Then next question. You addressed the environment in general when you were answering Scott's questions, but given that we have a lower -- a low CPI environment, you are committed to continuing -- like you said, pricing is not a temporary thing; it is the culture. I guess the question is how confident are you that you won't be pushing away more volumes as the year goes on, given that CPI will be quite low?

Yes. Well, look, we have done it the last three years consecutively. We have seen our churn rate come down while we have maintained that core price at 4%-plus. So look, it really comes down to making sure that you service your customer. If your customer is happy, they completely understand that our costs go up every year and you have got to get those price increases.

And we have always said that it is a fairly small portion of our customers' overall cost structure, so getting that price increase to maintain inflation-plus really hasn't been difficult as long as you can maintain the service levels to the customers.

And so that is really where we are focused this year. We know how to get the 4% core price. We have got those plans, like I said, locked, loaded, and we are already executing them. So we know we can do that. The key is having that great customer service, which allows you to keep that low churn rate, also keep price rollbacks down, and get back that positive core price. And so like I say, we have got it sort of clicking on all cylinders, but we can always do better.

Great. And then on the competitive and acquisition front, David, I just wanted to get your thoughts on whether the proposed connection, this acquisition of Progressive has any impact on those markets, whether you -- and also whether you might be interested in some of the potential swaps that may be coming out from that.

Yes. Look, I think Ron did a spectacular job in picking up that business. And everywhere that we compete with Waste Connections, they are a tough competitor, but they are a fair competitor. And so we certainly welcome them into the markets. I don't know how to say welcome in Canadian, but we welcome them into the markets.

But the other thing is I would love -- I am glad you brought it up. I owe Ron a phone call to let him know that to the extent that they have to get rid of any business, that we would certainly be interested in buying any pieces of those business that we can buy. I'll make sure to give him a call today and let him know that.

Great. Let me know if you need his phone number; I can send that to you. And then just one last quick one, if you don't mind [what's going] back to Jim Fisher (sic). Given the EBITDA guidance, I am coming out at a slightly different place on EPS. I was hoping you might be able to give us some sense of what you are assuming on interest expense and share repurchases.

Interest expense will be up slightly. We finished the year at 384 in cash interest. It will be up slightly, not a lot; maybe call it $5 billion million. And then share repurchase -- look, we said that we'd probably repurchase -- we have already done $150 million. We said we will probably do another $500 million on top of that for a total of $650 million, which kind of approximates what we bought last year. We bought $600 million last year. We have authorization for $1 billion. Probably won't spend the full $1 billion in 2016.

Got it. Okay, that actually moves me in the wrong direction -- is there anything going on in the equity income or loss line or anything else below the line that is changing (inaudible) in 2015?

No, not that I can think of. Maybe we can reconcile it for you. If I look at EPS -- I mean, that is what you are concerned about, right? Is EPS?

Yes.

If I look at EPS, from $2.47 to $2.61, we had divestitures that were worth $0.18, so I am backing those out. And then we had -- and I am reconciling 2014 to 2015 for you here, but then we had shares and interest. We had traditional solid waste growth of $0.08. We had some unusual items, specifically our energy services business was $0.09.

And then when I look at moving from $2.61 up to our range of $2.75 to $2.79, I am really adding in kind of our traditional waste -- solid waste growth that we expect and we've talked about on the EBITDA line. So hopefully that helps.

Tyler Brown, Raymond James.

David, just want to dig in a little bit more on the relationship between core price and yield. So if we go back and look over the last few quarters, including Q4, it looks like the spread between core price and average yield has actually widened out. And at least from an outside perspective, it just looks like you are keeping less and less of that core price increase.

Can you guys talk a little bit about that relationship and why that spread is widening out? It sounds like churn is actually trending well and the gap between new and lost business isn't widening. So is it mix or what is going on there?

Yes, I think you hit the nail on the head with mix. So the reason we have moved to core price is because core price is really an indicator of the price increases that we put across our current customer base. To go from core price to yield, you then put in -- because we do it on a per-unit basis, you then come in to a lot of things like mix.

And so the biggest thing that we think drove the disparity between the core price and yield was the fact that our energy services business was down fairly dramatically. And those are very high priced hauls. Compared to -- if you look at an energy service haul compared to an industrial container at a shopping mall, the price-per-haul difference is dramatic. And so the fact that energy services dropped off, as we said, $0.09 for the year, when you saw that dramatic drop-off in energy services, you lost a lot of those a very high-priced pulls and that is where the biggest chunk of the disparity between core price and yield comes in.

Yes. Okay. That is very helpful. And then Jim Fish, can you help us out a little bit on cash taxes? You got lots of moving pieces here. So first off, just simply, what was cash taxes paid in 2015? And then what is exactly contemplated in the guidance, just the total dollar number just ballpark?

2015 was $434 million. So if you assume that we have got the offsets for 2016, 2016 is going to look like kind of that $433 million. We will get a benefit of about $70 million from bonus depreciation and then a piece of incremental taxes on earnings gets us to a cash tax figure of around $400 million is our expectation for 2016.

Okay. Good. That actually answered my next question, so I will move on here. But just David, real quick, can you guys talk about where you are on the coal ash front? And is this -- well, first off, how much did you move in 2015, if any? And then is this a key driver in your confidence in back-half volume growth?

We are seeing -- it was a piece of our growth in 2015. Not a huge piece. We have got one customer that has started with us. We have got three different plants that we are working with them on -- really one of them was started in June. The other one started kind of November, December, and then the third will start in 2016. So not a huge impact for us.

And we are kind of seeing the public utilities move at varying paces here in terms of remediation on that side of their business. Recall there is this -- there is another side of their business, which is the perpetuity. And so we can use either on-site management for their continuing needs, we can manage it off-site through our landfills, or we can offer them beneficial reuse. So we are equipped to handle all three. We think that will ramp up in 2016, but not a huge impact in 2015.

Okay. Good. And then just Jim, lastly, how much did you pay for SWS? Just what will we see on the cash flow statement in Q1?

We paid 500 -- $516 million for SWS.

Jeff Volshteyn, JPMorgan.

I wanted to ask around the industrial side of the business. Industrial waste is doing well. What I wanted to find out is just kind of an update on how much of your business is directly linked to the industrial economy? And when you look at the portions of the industrial volume -- PERM business, DERM business -- what do you see in 2016?

Well, it's interesting when you look at our industrial. Our industrial line of business, as we look at it, includes a couple of different business types. It includes large retailers. It includes manufacturing and industrial. It includes construction and it includes energy services. And those really were -- there was a wide spectrum there. Construction, as I mentioned earlier, really finished the year on a high note. So we are very happy with that and it looks like it is going to do well going forward.

The large retailers were pretty solid, as was manufacturing and industrial. It looks like industrial production figures came out today and it looks like they are decent. And that is kind of what we saw as well: pretty solid in manufacturing and industrial.

The one real soft spot -- and you will hear it several times today -- was energy services and it got worse throughout the year. So we were down 32% in our energy services business, albeit on kind of a small base there. But down 32% and down 45% in fourth quarter.

And looking through that kind of small lens, we don't see energy services getting much better in 2016. But overall, if you want to think about how we talk about industrial, it was more -- it more than compensated for the downturn in energy services.

You know, I think everybody gets concerned that there is going to be some kind of industrial recession. I mean, look, in our business, what you had happen last year was obviously you had the inventory build and then working off the inventory. And that is what I think drove everybody to say, oh, gosh, what is going on in the manufacturing sector. As Jim pointed out, you saw some good numbers from it today.

But when they build up the inventory and then they work down the inventory, they don't shut down their plants. They still operate their plants. And so that really just doesn't have that big of an effect on us. It doesn't have an effect on us until they shut down the plants. And I don't think anyone is seeing a shutdown of plants. I think they are seeing a little bit of a slowdown at the plants.

And so when we look at our industrial waste, it really isn't going to be affected by the manufacturing and industrial space. And then the final piece is that a lot of the low energy prices are a big boon to a lot of the manufacturing and industrial customers that we have in the chemical corridor -- all the way from Beaumont, Texas, up through the Midwest.

And so we see the manufacturing and industrial volumes actually being very strong. As Jim said, we have got a wide spectrum: from extremely strong construction two weak on the energy services side. And manufacturing and industrial, I would say, would come in on sort of the slightly positive side of that spectrum. So we don't see that particularly slowing in 2016 and we expect industrial volumes to continue to be positive in 2016.

That is very helpful. Just following up on the commentary, I think, from last quarter. You talked about some situations with shortage of drivers on the industrial side of the business. Is that a material headwind heading into 2016?

I will jump in, Jeff. It is a headwind. But it is a weakened headwind. We are doing much better in that regard. The oilfield services decline in 2015 has helped us in that regard is in those markets where that kind of business exists as drivers have become more available. It is still -- in some of the larger, the higher growth markets, it is an issue for us, but we are working through it much better in late 2015. And then we expect to in 2016 better than in the 2013, 2014 period when the oil field service business was booming. We will manage right through it and we will continue to grow our business on that industrial side with new drivers.

But look, it is a good problem to have, right? I mean, that tells you there is strong demand out there and we will take that problem six days to Sunday rather than the alternative.

One more question from me, if I may. On the CapEx side of the business, looking into 2016, are there any sizable differences in sort of in the buckets of investments compared to 2015?

No, not anything sizable. We will spend a little more on fleet capital; probably $20 million more on fleet capital. We have got about $15 million that is related to the Deffenbaugh and SWS acquisition that we will spend.

And then part of the reason we were a little lower than our guidance back at the end of Q3 in CapEx for 2015 was that we had some CapEx that was accrued and the cash didn't actually go out the door until Q1. So we will have a little bit of carryover and that is really what gets us from that $1.23 billion CapEx number for 2015 up to kind of the range of $1.3 billion to $1.4 billion.

Jim, maybe just a little more color around the fleet side of our business. Our supply chain folks and our field people worked really well together. In 2015, for example, we purchased 12% more trucks than we did in 2014, but for the same total dollars as we expended in 2014. In 2015, we bought 1,124 trucks, about 11% average reduced price per truck than 2014. So we are doing some standardization around the fleet that has helped us in that regard. And some commitments to our suppliers that helped us with that reduction.

In 2016, we will buy 1,234 trucks, according to the current plan, and it is about 10% more than 2015, but we'll only spend about 4% more in dollars than we did in 2015. So we are making real progress there. And we are investing in the fleet, but we are just doing it more efficiently.

That is very helpful. Last one for me, I promise. What is the impact of the [one hour the] leap day in the first quarter?

The impact on what?

Leap day.

Leap day -- one extra day.

Yes, we had actually have one extra day total in the quarter. We had one fewer in January. We have one extra in both February and March. And theoretically, that extra work day probably costs us a little bit of money because our cost structure is a little bit higher than the additional revenue that we would get. But it shouldn't have a material effect on the quarter.

Michael Hoffman, Stifel.

Thank you very much for taking my questions. Jim Fish, on the free cash, if you were to pull out cash taxes entirely and looked back over a trend, how would you characterize the growth rate of your free cash, X the variability any given year of cash taxes? What is happening operationally before the tax impact?

I guess I would focus on EBITDA for that question, Michael, because really that is where -- that is the biggest components and that is where we spend most of our time is on EBITDA. And we saw EBITDA grow nicely last year, kind of in that 3% range. And we see it replicating that again organically. And then we will have some EBITDA growth from these acquisitions in 2016.

Okay. With that said then, if I looked at your expectation for the $3.6 billion in 2016, what is the underlying margin assumption in the EBIT and the EBITDA?

So EBITDA -- look, if you -- there is always the question of what happens to the top line. If we don't have these kind of top-line impacts that are kind of out of our control, such as foreign currency and fuel surcharge, if you assume the top line doesn't have those, then we would expect to see EBITDA margins improve somewhere between 50 and 100 basis points.

Okay. And EBIT -- what about the EBIT margin?

I don't have a number for you there, Michael. I'll have to get back to you on that.

Okay. Behind that question is does D&A stay flat on a percent of revenues or is it up or down, with the mix shifts that are going on.

Yes, it should stay pretty flat on a percent of revenue basis.

Okay. And then when I think about the question that has been asked a couple different ways, what is your share count and your assumption for $2.75 to $2.79?

Share count at the end of last year was 455 million and in our plan we have got 445 million.

Okay. And then if you did spend the $1 billion, it would imply that you would borrow money to do that. That is the right interpretation, correct?

I guess you could say we --.

It depends how the cash plays out during the year and then when you buy the shares. And so what we have said is that we are going to basically spend -- we are not necessarily going to spend the whole $1 billion. We will spend the difference between dividends and what we do in acquisitions from -- subtract that from the total cash flow and the remainder will go to the stock buyback.

And so we are sort of planning on that $600 million type of dollars on the share buyback. If we go above that, we would either have to generate more cash or have less capital in the year. Or we would have to borrow it.

But right now, when we draw down on our revolver, we are drawn down at 1%. Our balance sheet at 2.66 times is in great condition. So we don't have any intention to borrow to buy shares, but certainly we would have the ability to do it.

Well, I guess where I was coming from on that, I don't necessarily think it's a bad thing because you are delevering naturally. And there seems to be logic in leverage in a 2.5 to 3, just from a cash tax planning standpoint. And at the rate of improvement, you are delevering pretty quickly.

Absolutely.

Yes. I mean, Michael, if you look at free cash flow and you just take the middle of the range of 155 and back out dividends of 730, let's back out to -- you know, we have kind of said $100 million to $200 million in tuck-ins. So let's back out $150 million for that. That gives you $670 million. That is kind of right where we have discussed today would be share repurchase.

Okay. All right. And then the one in-the-weeds question around the industrial side is you do operate five hazardous waste landfills. What has the trend been volume-wise there?

It has been as we ended the year, and as you saw, some of the petrochemical plants gearing up some with a low -- their low feedstock costs, it has been okay. We have done fine at both AEREON in Alabama, Lake Charles in Louisiana. Kettleman has got the new permit in online and adding some volume.

So overall, that business is doing well for us. It is not, as you know, a huge part of our total revenue, but it is an important part because it differentiates us from those large -- four of those large customers with capability to handle everything from their trash and recycling to their hazardous waste. And they like our balance sheet, as we just talked about. And our capabilities are full for them. So it is a good part of our Company and we expect to grow it.

You know, it has been very nice for us, Michael. And frankly, if I look at the various pieces of the business and think can they get better or worse? This is one that I think can get better, both organically just because of the growth in the volumes, but we can also extend the reach of these landfills.

Right now, we have got fairly limited reach without transfer capabilities. And over time, if we can improve those transfer capabilities, we can extend the reach of our hazardous landfills and both grow volumes because we see growth in overall volumes, but also because we can extend our reach and take volumes out of further-away geography.

Yes. And Michael, an example of that -- of our commitment to that business is in the fourth quarter, we did a small tuck-in kind of transaction and acquisition in California that helps us with internalize some volume at that new Kettleman permitted space. So we are committed to that business, to growing it and looking for opportunities in that regard.

Okay. And then Jim Trevathan, while I have got you, if we are 50 to 100 point basis margin improvement, you are getting 20 basis points out of G&A, per Jim Fish, the rest has got to come from ops. Some of it is fuel because that clearly (inaudible) a favorable trend. But where would I look in the line items to see that incremental improvement coming from?

Well, one area, Michael, is labor. If you look at all three collection lines of business, in 2015, we were positive in efficiency and all three, with obviously a couple of them, still negative in volume. That is one excellent indication. If you look at those three lines of business, collection lines, on a cost-per-unit basis, all three of them are in that 1% range. And with inflation, just driver labor cost in the 2%, 2.5% range, that is a pretty good number. And you see that in our labor cost improvement.

We rolled out our SDO initiative across all 17 areas -- service delivery optimization. We are focused on two things in that regard: let's sustain it where we have it working well and let's improve it. Let's find best practices as areas have implemented and now been a couple of years. And we are looking for new ways to utilize some of the logistics and the technology that our corporate operating team is providing us to get more labor costs out of that and continue to improve on the efficiency.

Joe Box, KeyBanc Capital Markets.

It is Sean Egan on for Joe Box. I wanted to dig in a little bit into your pricing guidance for 2016, looking at that 4% versus the 4.2% posted in 2015. Is that sequentially lower simply due to lapping more difficult comparisons? Is it conservatism on your part? Any color there would be appreciated.

Yes. Look, 4% has sort of been our target for the last three to four years and so we want to maintain that target. We obviously overshot that target in 2015. I expect that -- I am virtually certain we will get that 4% in 2016. If we were going to not hit that target, the question is would it be lower or higher than that target? I am also very confident that if we miss the target, we are going to miss on the high side, not on the low side.

But I don't think there is anything to read into the difference between 4.2% and 4.0%.

Great. Thank you. And then kind of piggybacking on that with respect to yield. Outside of CPI, can you maybe help us understand what some of the largest drags would be to beating that 2% top of the range? I mean, would it be the mix that you talked about earlier with the energy business? Anything there is helpful.

Yes, the two biggest components of that would be mix and then new business pricing versus lost business pricing. Those are the two big components that go -- that don't affect the price increase that you are putting on your current line of business, but that does affect yield. And so it would be mix and the difference between new business pricing and lost business pricing.

And so how would --

And David, and if I added a third, that would be rollbacks and we have managed those really well over the last couple of years. We are positive in 2015 versus 2014 and we expect that trend to continue.

Got you. So what you just alluded to earlier, the new business pricing, how is that holding in, say, compared to a year ago?

Yes, you know, our goal is to drive that new business pricing to 10% or under. And I would say right now, we are sort of at the high end of that. As the economy improves and as we have seen a good pricing environment, I would expect us to over time to be under that. But right now, we are sort of at the high end of that 10% discount.

And Joe, if I add a little more color, the industrial line of business, the rolloff line, we are within that target. The commercial side, just outside it, and working hard to improve it.

Okay, great. And then wanted to talk a bit about recycling volumes. Just curious where, if you know, the recycling volumes might be going that you have shedded in favor of price? Are customers choosing not to recycle? Are they choosing independent operators? If you have any sense of where it is going, that would be helpful.

Yes, most of the volume that we have lost have been large residential contracts and that volume is turning into net losses for our competition.

Okay. Understood.

I can promise you, we know what those prices were bid at. And at these commodity prices, there is nobody making money on those contracts that we gave up.

Especially, Dave, with the capital required --

Exactly.

-- on the new contract, where typically that customer wants new trucks. We would make that decision around return on invested capital as well as margin.

And you know, frankly, those contracts, just to be very clear, those contracts generally have not been lost to our solid waste competition. They have been lost to people that are solely in the recycling business. And if you are solely in the recycling business and you take on another underwater contract, you can see that story is not going to end very well for those folks.

Al Kaschalk, Wedbush.

David, I have one simple question.

No, you don't. (laughter)

Why can't Waste Management post positive volumes like their peer group?

Yes. Look, this is an easy question to answer because you can't look at just a volume number. You have got to look at what is that volume made up of, right? If that volume is made up of brokered volumes, you are not making any money on it. If that volume is made up of recycling volumes, you are not making any money on it.

And so when I look at the volumes, I don't say look at the overall volume number. I say look where the volumes are coming from. So for us, we have got positive volumes in the industrial line, which is a very high margin line for us. We have got positive volumes in the landfill line, which is the highest margin business that we have. And we are about to turn the corner to get positive volumes on the commercial line. We are at negative 0.7% in the quarter. I would expect to see that turn positive during 2016.

So we are adding volume in the high margin areas. We are losing volume in recycling, we are losing volume in brokered business, and we are losing volume in non-core -- all very low-margin businesses. And so if you get positive volume and margins go backwards, I don't see that as a good volume report. If you get negative volumes and margins go up by 150 basis points, I view that as fairly positive.

So I think it is a very easy question to answer: we look for volumes where we can make money on those volumes. We don't look for volumes for the sake of volumes. But having said all that, in those moneymaking volumes, we are going to see the overall volume number turn positive in 2016 and that is what I look forward to.

Look, this is a high fixed cost business and layering in that volume on the high fixed cost allows you to drop a big flow-through to the bottom line. So I think we have done the right thing. We will continue to do the right thing. We will continue to add volumes where we can make money.

Right. Hence the progression on EBITDA margin. I guess (multiple speakers).

Exactly.

Right. As a follow-up -- thank you for that. I guess I have a second question, then.

I told you.

The commentary around the industrial environment economy and yourselves being opportunistic when you can, why would you not or are you suggesting to keep our eyes open on being more aggressive on that hazardous piece of your business, which I guess would be -- I don't know if I would say is this profitable, but maybe you could articulate that for us. But why wouldn't you get more aggressive on acquisitions on that front?

Well, I will jump in. I mentioned earlier that we did, as we added airspace at Kettleman in California. We went out and found the right tuck-in for us to add volume. So we invested in that business in the second half of 2015 and we will continue to look for those opportunities that can improve both our margin, but our returns especially.

But you know, look, what we need to do in our hazardous waste line of business is we need to develop a national transfer network so that we can leverage our landfills. We would love nothing more than to be able to buy that and go very quickly to do that. But there is just not a lot of businesses out there that meet those needs and that are for sale.

So in the meantime, we are going to do it organically. And so we are going to -- we are going to grow that network one way or another, but right now, given the state of the acquisition market right now, we're going to do that organically.

Good luck, guys.

(Operator Instructions) Charles Redding, BB&T Capital Markets.

Thanks for taking my question. Perhaps just a follow-up on transportation. How should we think about the impact on northeast landfilling volume from the lower transportation costs? And then with reduced diesel, is it fair to expect collectors to bypass closer-in-generation units really in favor of the longer haul sites, just based on price alone?

Yes. When you see the transportation costs go down, which is what happens with the fuel, you basically open up landfills that are further away, right? And so we have actually seen pretty nice growth in our northeastern landfills. I am not sure that I would attribute it 100% to the lower transportation costs, but we have seen nice volumes both in our northeastern network and then in our southern network.

We would expect that to continue into 2016. I always say, to a certain extent, low fuel prices are both good for the economy, but they are also good for our business.

Great. And just a follow-up, with apologies, on energy services. Can you just be a little more specific in terms of those types of hauls that are seeing the most pressure from lower spending? And maybe too early to think about any nascent stabilization here year to date?

The types of hauls that are seeing lower spending -- look, we haul -- most of what we haul is drill cuttings. And then we haul some waters. We haul a little bit of NGL. So clearly, the big piece that has declined is drill cuttings.

But what has happened is you are seeing these -- the rig count has dropped off by 60%, so they are not drilling. They may be leasing property, but they are not drilling nearly as much as they were a year ago. And so as a consequence, the drill cuttings coming out of those holes are not moving to our landfills. So I think that answers your question. Because it is the majority of our energy services business, that is what is causing the biggest drop off.

Tony Bancroft, Gabelli & Company.

Could you please add just a little more color, maybe, on the renegotiations for your recycling? Some of the unprofitable recycling contracts and CPI-linked contracts? I realize that you said it was a small portion of the customers' cost structure and you guys in general are more prone to not -- you have always previously said that if you can't do anything about CPI, you'll go get it somewhere else.

But maybe just where are we in a sense, maybe on a percentage -- maybe some kind of gauge on a percentage basis of what needs to be renegotiated and how far along you are? Is there some kind of maybe general big picture inning-type thing of where you are along in that?

Yes. On the recycling front, I would say we are about 75% to 80% through renegotiating the contracts. And the contracts that we haven't renegotiated, we can't do anything more about because they are basically sort of long-term contracts. And we just have to eat the losses on those contracts until the contracts come up for bid. And hopefully (inaudible) at a higher rate or they will go to someone else who is welcome to lose money on them.

And so on the recycling front, we are probably about 75% to 80% through. On the CPI front, about 20% of our business is our CPI-related business. It is either on a floating index that more approximates the waste services index or they're on a fixed price increase track with over 2.5% fixed price increases.

In other words, 2.5% is sort of our inflation rate. About 20% of our contracts are either on a CPI-based measure or that is not CPI, but would be, for example, the waste and water index or what we call a solid waste index. So that runs at a higher rate, generally, than our 2.5% inflation. And then we've got other contracts where they run higher than our 2.5% inflation because they have fixed price increases at over 2.5%.

So about 20% of our business is under those types of contracts. So there is still a lot of room to go on the residential and on the national account side to get those CPI contracts moved up, but we are about 20% through it.

Barbara Noverini, Morningstar.

Somewhat related to the last question, but if we are looking at a lower-for-longer commodity price scenario for recycling, how much further can you take the operational improvements that you have been speaking about? Would you have to consider more aggressive restructuring actions? Or is there still a lot of runway for this sort of operational cost-saving customer education, et cetera, that you have been describing?

Yes. When we look at recycling, we have made some great improvements. I think there is still plenty of room for improvement. But at this point in time, basically what we are down to is we have a series of plants and those series of plants generally revolve around a large contract -- a large municipal contract or other contract. So if we lose that large municipal contract, absolutely -- we would probably have to shut down that plant because we don't have enough volume going through that plant.

We don't have any that we have on the early time horizon where we think that will happen. But that is basically how we will have to respond to a low-for-long commodity price. We still have operational improvements we can make. We think we can pull out sort of that 5% to 10% operating cost for a few years.

But any bigger restructuring, we don't have any planned right now. If we did any of that, it would be based upon large contract losses that we would have, if we have those.

And just as a reminder, we have consolidated over the last two years roughly 20% of the total number of facilities. Most of them smaller, but where we have either lost unprofitable volume and can move the remaining good volume into a larger facility in the same MSA. So we have already done some of the physical rationalization. We are working towards the operational side of it -- of efficiency now.

But let's not lose sight of the fact that if the industry changes, what we have said is we won't bid contracts unless we can be guaranteed that we recover our processing costs and then we will split -- and a margin of profit. And then we will split any excess with the customers. But if there is no excess, then the customer's going to have to pay for the processing and profitability.

If we can get contracts on those terms, we are not going to be shutting down plants. We will be adding plants. And so what we are trying to get to is how we can make this business sustainable for the long run. I think we have done a spectacular job with our recycling folks of doing that. I am a firm believer that the industry is going to follow just because the economics don't allow them to do anything different than what we are doing.

And so I think over the long haul, even in a lower-longer commodity price environment, I think we can grow recycling. So we are looking forward to doing that over the next few years rather than shrinking our footprint.

Yes. That makes sense.

At this time, there are no questions.

Thanks. Well, just in closing, as we said, we are real confident that we can hit our targets in 2016. For the most part, everything seems to be clicking on all cylinders. But you can't do it just because you have a good economic environment or you can't do it just because you have the best assets in the business. You absolutely have to have the right team to execute.

And so I would say all the way from our senior team here in Houston and out in the field, all the way down to our leadership out in the field, all the way down to our frontlines, we have got the right team. And that is why we are so confident that we are going to grow this business in 2016 and well into the future. Thank you.

Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1:00 PM Eastern Time today through 11.59 PM Eastern Time on March 3, 2016. The conference ID number for the replay is 21854213. Again, the conference ID number for the replay is 21854213. The number to dial for the replay is 855-859-2056.

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