美國廢棄物管理公司 (WM) 2016 Q2 法說會逐字稿

Good morning. My name is Janisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the second-quarter 2016 earnings release conference call. (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 your conference.

Thank you, Janisha. Good morning, everyone, and thank you for joining us for our second-quarter 2016 earnings conference call. With me this morning are David Steiner, President and Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer.

Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules 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 footnotes to the earnings press release. Any comparisons, unless otherwise stated, will be with the second quarter of 2015.

The second-quarter 2016 and 2015 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. 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 1:00 p.m. Eastern time today until 5:00 p.m. Eastern time on August 11. You can 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 43986112. Time-sensitive information provided during today's call, which is occurring on July 27, 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. Our second-quarter results, again, exceeded our internal expectations and mirrored the trends we have seen for a number of quarters, improving volumes, strong execution of our pricing programs, and greater traction in our cost programs.

In the second quarter, we are earned $0.74 per share, an increase of more than 10% from our second-quarter 2015 results. The combined revenue growth and cost improvement led to strong growth in operating EBITDA to $955 million, an increase of almost 9%, and an improvement in our operating EBITDA margin of 140 basis points to 27.9%. This is the highest operating EBITDA margin that we have achieved in seven years.

Our pricing programs continued to drive earnings growth in margin expansion. For the second quarter, our collection and disposal core price was 4.9% and yield was 2.6%. Core price improved 80 basis points in the second quarter of 2015, and yield was up 90 basis points. Core price in the industrial line was 9.5%. In the commercial line, it was 7.6%. In our landfill line, it was 2.7%. And in our residential line, it was 2.5%.

Importantly, in the second quarter, our churn was 9.1%, 120 basis points better than last year and 10 basis points better than the first quarter of 2016, which demonstrates our ability to retain pricing and retain customers through improvements in our service efforts. At this point, we would certainly expect to exceed our full-year core price target of 4% and our 2% yield target, although both metrics could moderate somewhat in the back half of the year, due to year-over-year comparisons.

With respect to volumes, we saw positive volume growth in the second quarter, just as we did in the first quarter, but most encouraging is that we saw volume growth in the right volumes: our high-margin commercial, industrial, and landfill lines. In fact, our commercial volumes turned positive for the first time in over a decade. We shed volumes in the lower margin residential and recycling lines of business as we continue to eliminate low or negative margin contracts.

Our traditional solid waste volumes were positive 0.8% in the second quarter of 2016, 140 basis point improvement from the second quarter of 2015. Our commercial volumes were 0.3% in the second quarter, an improvement of 50 basis points from the first quarter and a 250 basis point improvement from Q2 of 2015.

As this is our highest margin collections segment, this is a significant accomplishment and is reflected in the income from operations of the commercial line of business where we achieved the highest results ever. We expect to see continued growth in our commercial line as the year progresses, which is a tribute to the efforts of our sales and marketing teams.

So our strategy of maintaining price discipline, while adding the right volumes, continued to bear fruit. We did see slightly stronger volume growth in the first quarter with weather in the first quarter of 2016 much milder than in the first quarter of 2015. So we were not surprised to see a little less volume growth in the second quarter versus the first, but we expect total company volumes to continue to improve throughout the remainder of the year. And we now expect our traditional solid waste volumes to exceed 1% positive by year-end.

Residential and recycling volumes were down in the quarter, and we would expect them to be down for the remainder of the year. But the loss of those volumes is mostly intentional, given that they are low margin or oftentimes even negative margin volumes.

Our landfill line of business continues to show strong results, which Jim will discuss in more detail. However, as we mentioned on the first-quarter conference call, we have seen a significant increase in the cost of managing the liquids that naturally occur in our landfill. In the second quarter of 2016, the increase in leachate costs was about $22 million or $0.03 per share.

As of July 1, we have implemented a wastewater management charge at all of our landfills for customers that are not under contract. We're still in the early stages, but so far there has not been significant pushback. The next step will be to apply the charge to our disposal contracts as they renew. By passing these cost increases on to our customers, we will ensure that we maintain an adequate return on the huge capital investments that we make in our landfills.

Turning to recycling, we saw a 2.3% increase in average commodity prices for the quarter and a 2.9% decrease in volumes. We continue to focus on managing operating costs as we have seen our recycling operating costs improve more than 9% when compared to the second quarter of 2015. These operational improvements and the increase in commodity prices drove the recycling line of business to its highest income from operations since 2012 when the blended commodity prices were $109 per ton versus $85 in the second quarter of 2016.

Year over year, the recycling line of business contributed $0.01 per share to earnings. We continue to work with our customers to develop a mutually beneficial solution that allows for a sustainable recycling business model.

To summarize, the positive momentum that we saw in the first quarter continued throughout the second quarter. All of our employees worked hard to deliver strong first-half results by focusing on improving price, driving disciplined volume growth, and managing costs. In light of a strong first-half performance, we are increasing our adjusted earnings per diluted share guidance to between $2.83 and $2.86 for the full year, a $0.09 to $0.12 increase from the low end of our previous guidance.

More importantly, we are also raising our free cash flow guidance for 2016 to between $1.6 billion and $1.7 billion, a $100 million to $200 million increase from the low end of our previous guidance, despite our expected capital expenditures being slightly higher than our previous guidance.

So the momentum in our business continues, and our focus has never been sharper. We look forward to our corporate and field teams building upon this strong performance to drive even better results for the remainder of 2016 and beyond.

I will now turn the call over to Jim to discuss our second-quarter results in more detail.

Thanks, David. In the second quarter, revenues were $3.43 billion, an increase of $110 million or 3.3% when compared to the second quarter of 2015. We saw $150 million increase in our traditional solid waste business due to a $98 million increase from the combined impacts of price and volume and a $52 million increase from revenues from acquisitions net of divestitures. These increases were partially offset by declines of $24 million in lower fuel surcharge revenues, $10 million in foreign currency fluctuations, and a $5 million decline from lower recycling revenues.

Looking at internal revenue growth for the Company in the second quarter, our collection and disposal core price was 4.9%, and yield was 2.6% with total volumes improving 0.4%. Volumes were positive for the second consecutive quarter. The combined positive price and positive volume led to total Company income from operations growing $58 million, operating income margin expanding 120 basis points to 18%, operating EBITDA growing $76 million, and operating EBITDA margin growing 140 basis points to 27.9%.

Our collection lines of business continue to see the benefits to our disciplined pricing programs and improved volumes. Overall, collection core price was 6.3%, and yield was 3.3%. Industrial demand continued the strong performance that we saw in the first quarter. Volume was up 1.5% in the second quarter, 150 basis point improvement from the second quarter of 2015. And, as David mentioned, commercial volumes were positive for the first time since 2005 at 0.3% for the second quarter, a 250 basis point improvement from the second quarter of 2015.

Our residential business continues to be a drag on overall collection volumes, down 3.5% in the second quarter, similar to the declines that we have experienced throughout 2014 and 2015. However, strong core price and positive volume in the high margin commercial and industrial lines of business led to our collections, income from operations growing $44 million and the operating margin growing 120 basis points. EBITDA grew $54 million, and EBITDA margin increased 150 basis points.

In the landfill line of business, we again saw the benefits of both positive volume to positive yield in the second quarter, just as we did last year. Total landfill volumes increased 6.5%. Our landfill volume growth is very consistent with the volume growth over the past two years. MSW volumes grew by 5.2%, C&D volume grew 12.5%, and combined special waste and revenue generating cover volumes grew 4.4%. We achieved core price of 2.7%, an increase of 40 basis points from the second quarter of 2015, and saw same-store average MSW rates increase year over year by 1.9% from Q2 of 2015.

Moving now to operating expenses, as a percent of revenue, those expenses improved 140 basis points to 62.2%. For the second quarter, operating expenses increased $22 million when compared to the second quarter of 2015. Landfill operating costs represented the largest increase, up $28 million. $22 million of the $28 million increase were the increased leachate costs with the remaining $6 million increase related to the decline in the U.S. Treasury rate used for discounting our long-term care obligations.

The remainder of the operating cost dollar increase primarily relates to our increased volumes and cost related to acquired operations, which were partially offset by savings from lower fuel and risk management costs. For the second quarter as a percent of revenue, SG&A costs were 9.9%, up 20 basis points when compared to the second quarter of 2015.

On a dollar basis, SG&A costs were $340 million, an increase of $18 million compared to 2015. Labor costs drove the majority of the increase, primarily related to acquisitions and higher accruals for stock-based incentive compensation.

As you may recall, our stock-based incentive compensation is based upon performance in the areas of free cash flow and total shareholder return, and we have achieved strong performance in both metrics the last two years. In the second quarter, those costs increased $11 million when compared to the second quarter of 2015. We expect that these costs will exceed last year by about the same amount in the back half of the year. We still expect to improve SG&A costs as a percent of revenue for the full year when compared to 2015.

Turning to cash flow in the second quarter, cash provided by operating activities was $748 million, compared to $816 million in the second quarter of 2015. Our operations continue to perform very well as we achieved operating EBITDA increase of $76 million. However, this increase was more than offset by the impact of timing differences and cash tax payments of $75 million and working capital changes. We expect the working capital changes to even out over the remainder of the year.

During the second quarter, we spent $312 million on capital expenditures, an increase of $16 million when compared to the second quarter of 2015. Through the first six months of 2016, CapEx has increased $100 million compared to 2015. A large portion of the increase relates to one-time capital spending for a leachate treatment facility and the timing of truck purchases.

As a result, we now expect that capital expenditures will be between $1.4 billion and $1.45 billion for 2016. We do not believe that this year's increase in capital spending over our original guidance is a permanent increase, due to the one-time nature of the extra spend.

In the second quarter, we had $11 million in proceeds from divested assets, a decrease of $48 million from last year. Combined, we generated $447 million of free cash flow and almost $849 million year to date. Given this strong first-half performance, we are raising our free cash flow guidance to between $1.6 billion and $1.7 billion.

In the second quarter, we returned $431 million to shareholders. We paid $181 million in dividends and repurchased $251 million of shares.

Finally, looking at our other financial metrics, at the end of the second quarter, our debt to EBITDA ratio measured based on our bank covenants was 2.67, and our weighted average cost of debt was 4.22%. The floating rate portion of our total debt portfolio was 10% at the end of the quarter. The effective tax rate was 37.6% in the second quarter. Adjusting for the impairments, the tax rate was 34.7%. We still expect our full-year adjusted tax rate to be approximately 35%.

In summary, through the first six months of 2016, our employees have driven strong operational and financial performance that has exceeded our expectations. And, for that, I want to thank them. The second half of 2016 will have tougher year-over-year comparisons. However, we are confident that we can execute our strategy to have a successful 2016.

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

(Operator Instructions) Joe Box, KeyBanc Capital.

I just want to flesh out the better than expected performance within really just your gross margins here in the quarter. How much of that would you attribute to the volumes really turning the corner here and maybe getting a little more route density within some of your higher-margin businesses like commercial versus, say, the reduction in churn that you saw the quarter and maybe not losing some of those more profitable existing customers?

Yes. I think they are two sides of the same coin. I think our performance on the volume side was driven by both. You can't have continued volume increases when you are leaking customers out the back end. So we have really done a nice job this year of not only adding more new business but losing less of our business.

And so what I would say, Joe, is that we did a great job on that front. But, as we get the tools in place to really understand profitability by customer, we can be a lot more focused on maintaining the right customers rather than just retaining the right number of customers.

And, Joe, I would say, on the operating -- with respect to operating expenses, that was a good story as well. We were up $22 million, if you exclude that pension charge last year, but you are up $22 million on 3.3% top-line growth. So, if you adjust for revenue growth, our salary and wages line improved by about 20 basis points, and we really overcame the merit increase -- annual merit increase of about 2.5% and that increase in landfill operating costs.

Got it. And I guess ultimately what I am trying to get at is you have had the price lever that you have been pulling. Now you're starting to see volume. Obviously, you have been working the cost side. Should we think about the incremental EBITDA margins maybe being north of that typical kind of 30ish-plus-percent that I typically think about going forward? Is that a reasonable bogie?

Yes. Certainly, on the commercial line, that is a reasonable bogie. I mean, you hit on it earlier, which is the route density. The ability for us to add the right customers in the right location at the right price is really the core to our sales and marketing efforts.

And, David, just to be clear, I was talking total company, not just commercial on that incremental EBITDA.

Yes. Well, the commercial line is -- yes, you're absolutely right. Certainly, if the landfill line is higher than that, the industrial line it will be higher than that, but the commercial line is really where you get that benefit of added density.

And then, maybe, just one last quick one and I will turn it over. I think it is interesting that your commercial volumes are starting to turn the corner. Really, at the same time, it looks like the consumer maybe could be getting a bit punkish. Are you thinking that this is going to be the beginning of a sustainable recovery in commercial volumes, or would you caution us that it is going to be somewhat lumpy?

No. When you look at what has happened to our commercial volume over the last, call it, 10 quarters, it has been a really steady progression of about 0.5% to 0.8% every single quarter. And so the beauty of the commercial line of business is, once you sign up those customers, unless they go out of business, they are with you for a long time. And, with the churn rate going down, I would say we are at the beginning of the cycle, nowhere near the end.

Joe, I would also add that most of our new customers are greenfield sites. They are new customers, new startups. It is about at the 60% mark of new customers. So that tells you, there are some economy positives occurring.

Great. I appreciate the color.

Andrew Buscaglia, Credit Suisse.

Thanks for my question. Just looking at your volumes, too, so now we have got our second quarter in a row of positive volumes. How did it track towards what you guys were expecting in the quarter? I know we had a lot of noise last quarter, but were these better than you expected, and then how did things trend through July so far?

Yes. I would say they are a little bit ahead of where we expected. Like I said, the commercial line of business has been a very easy pattern to follow. The march has been very steady at about 0.5 point to 1 point of improvement every quarter. Obviously, the industrial line is a little bit more seasonal, and we probably had some of those volumes move into the first quarter with a stronger construction season in the first quarter. The landfill line, again, has been a pretty steady march. Again, a little bit of extra volume probably in the first quarter.

So I would say we are a little bit ahead of where we are, but we don't expect the trend to change. That is why we think that we are on a very good march toward that positive 1%-plus volumes by the end of the year.

Andrew, the big question that we had, really, at the end of the first quarter, was how much volume did we borrow because of the mild winter that David mentioned, how much did we borrow in Q1 from Q2, and that borrowing would have occurred, really, in two lines of business. It would have occurred in the rolloff line of business, primarily within the temporary rolloff component, and then it would have occurred in the landfill line of business.

And then, looking at it, it looks like, if you adjust out the added work day we had in Q1, we think we probably borrowed somewhere in the neighborhood of 60 to 80 basis points of volume in those lines of business. But, still, when you look at 150 basis point improvements in industrial versus last year and commercial being up 250 basis points, which didn't see any borrowing from Q1 to Q2, we felt pretty good about volume in Q2 and, as David said, probably a little bit ahead of where we expected to be, particularly on the commercial line.

And, with respect to the last part of the question, obviously, it is still early, but July volumes continued to show the steady progression.

Okay. So that is good into July. I mean, you said you could probably do better than that 1%. But what is the hesitation there? I mean, are there some pretty large contracts rolling off in Q3 and Q4, or is it just tough comps or what are we expecting into the second half?

Yes. Obviously, the comps get a little bit tougher with that. And, no, there are no big contracts. In fact, we have a couple of contracts on our national account side that will be coming on in the back half of the year. And so there really aren't any large volume losses like we have had in the past few years, particularly in the residential line of business. But there are a little bit tougher year-over-year comps.

Okay. Got it.

Michael Hoffman, Stifel.

So I have a question on the price side. You noted that you had a delta of about 80 basis points year over year on the core, but you had a 90 basis points on the yield inside solid waste. So you clearly -- that is the right direction. You are retaining more price within the core. What are you doing proactively to offset the leakage from $450 million-ish of price you're going to the market with versus what you are reporting?

Yes. Michael, as you have heard us talk, that is our Periscope project, and Jim Trevathan is leading that. So maybe he can talk a little bit about what we are doing with Periscope.

Yes, Michael. You have noticed well because that is absolutely true. Part of it can be mix that we don't have control over, but what we do have control over, we are seeing the benefit of that. We are retaining more of that price.

Periscope, it is a self-serve analytical platform. It really marries kind of revenue cost unit data, gives us profitability and trending profitability. We can do it, Michael, by customer, by sales rep. We can do it by customer segment or a sales channel, by route, by geography. It really will help us as we move forward. We are about halfway through, rolling it out to our 17 areas. Not all of them are executing with it. We are in the final steps of putting together a playbook that really will be, because of the analytics are so intuitive and so obvious, it will be really heavy an action. What do we do with the tool to get benefit? Most of that will come as we finish the rollout in Q4 and especially into 2017. But, for those areas that have been -- have had it up and running, we see the benefit.

We also see some real strong effort, just in execution by our teams on retaining those higher margin customers, and I think that plays into that yield positive as well. We have got really good processes that are being executed across the areas to retain customers, and our operating team is providing a lot better service that we measure really consistently with real accountability processes. So I think that trend will continue.

Okay. And, based on the early rollouts where it has been in for a while, what is the pace of that gap narrowing? I mean, is it 10 basis points a quarter, or is it 20 or 30 basis points a quarter?

Michael, we have got -- I don't have the number in front of me, but we piloted in the southeast, and that is one of our highest yields and our most improved from a retention standpoint area. So we see the benefit of that from that area, using it and implementing the tool.

Okay. And then, on volume, if I follow the path of, say, sequential progression and you exit the year at over 1%, but it feels like you start the year at almost 2% based on that -- I mean, the reported number will be over 1%, but you are starting 2017 at 2% on volume. Am I being overly optimistic about your volume outlook for 2017?

Yes. Obviously, we put our budgets together in the October/November timeframe, so we will look at it then and where we are at that point in time. But what I have said, Michael, is that I do think we are progressing toward that -- what I call the 2% price, 2% volume -- the 2 and 2. I have said that is probably 18 months away, but as we put together our budgets for 2017, hopefully we will see it on the horizon a little sooner.

Okay. And then, there is lots of hand wringing in the stock market about the economy and recession here or there, Brexit, all that. Can we break into two sort of pieces of your business so the part that Harry Lamberton runs that approximately $1 billion it is industrial? If I pull out the energy waste business, which I get is down for secular reasons, what is the rest of the trend, and are you seeing any recessionary signs?

No. It is interesting because you hear everybody talking about this industrial recession that is going on in the US. And I would tell you, we are not seeing it. Our C&D volume, which is part of the industrial line of business, and then our special waste volumes, are probably the best gauges of the economy, that part of the economy, and they are pretty strong. Both were solid in Q2. June was the strongest month of the quarter, and July shows continued strength. So we are just not seeing the industrial recession.

Now, maybe it is because we are at the back end of the cycle, but I would tell you, even when we look at our special waste pipeline, it looks pretty strong. So I would tell you we are not seeing what the rest of the country seems to be talking about.

And, you know, Michael, I am not sure -- when the country talks about an industrial recession, I think they are thinking about things like automobiles and refrigerators. I think Houston is sort of indicative of the country, which is the west side of Houston is not doing so great because of low oil prices. But the east side of Houston, when you go to Beaumont, Lake Charles, the spots where we have our industrial landfill based, because of the low energy price inputs, those places are booming. You can't buy a house in Beaumont, not that anyone would want to.

But, that side --

Be careful.

That is a wonderful city. But the chemical corridor is doing spectacularly well. Certainly is not in any kind of industrial recession. So when we look at our overall industrial business, it is actually performing very well.

Okay. And then if I followed that through on the consumer side, so every restaurant company in the country that is casual or fast casual is reporting lousy comps. So, yes, you have shown positive commercial volume. And I think the restaurant comp issue is they thought their were going to be [3] and [4], and they are coming in at [1] and [2], and that is deemed lousy. How do you see the commercial market in the context of end markets like restaurants or the entertainment or services sector?

Yes. The overall commercial business, as Jim Trevathan mentioned, with about 60% to 70% of our new business coming from greenfields, which are our brand-new operating businesses, it seems to us that the whole commercial end market is very strong. We don't look at it necessarily by the various segments, but the end market actually seems to be very strong.

All right. And then, last one for me, on your free cash flow raise, $1.6 billion to $1.7 billion, how many dollars of one-time that are unique to 2016 are in that $1.6 billion to $1.7 billion?

There are probably three numbers that really matter in that, Michael. You have got the one-time CapEx piece and that is about $100 million. And that is offset by kind of a one-time cash flow monetization -- cash taxes monetization. So those two offset one another at about $100 million a piece. And then you have got just the business itself growing at about $100 million coming in through the EBITDA line.

Okay. That is great to know.

Corey Greendale, First Analysis.

This is Ken Wang on for Corey. Just focusing on the decline in recycling volume this quarter, which I believe may be a part of the volume you are shedding, can you speak a bit about the dynamics here, just given that commodity prices have been on an upward trajectory recently?

Yes. The bulk of those volume declines were large contracts where we were losing money, and we re-bid them to make money and someone else took the contract. And so those were -- losing those volumes is the best thing we can do for recycling because they were literally negative margin volumes.

Okay. Thanks. That's helpful. And then, kind of on the same topic, I know you put into place recycling contracts that limit price exposure. And, again, with prices up for commodities, how will this affect the bottom line? Is there kind of a formula that you can give us or some kind of rule of thumb?

Yes. You know, and, look, prices are up, not dramatically. Just in that 2% to 3% range for the quarter. So not a dramatic increase in price. And, as we look forward, remember, every year you seem to have that seasonal uptick, and then starting in July, it starts to tick down. So we are not certain that we're going to see that benefit in the back half of the year.

But, generally, what we say is that every $10 in commodity prices equates to about $30 million of EBIT for us, and so what we have tried to do in this business is to make sure that if commodity prices go down, our earnings don't take a negative hit. But if commodity prices go up, they take a positive hit. So we try to de-risk the business so that there is no downside, only upside. If the commodity prices go down in the back half of the year, we think we can offset that with operational improvements. So we don't expect any negative benefit in the back half of the year. If we see anything in the back half of the year, it will be a positive benefit for recycling.

Ken, if you look at the whole first half of the year on recycling, while we were up in commodity prices for Q2 by about 2.3%, we are actually down, still, year to date over 4% in commodity prices. And to David's point, we think that will probably even out. We are cautiously optimistic because of the dynamic that he mentioned with kind of high prices in Q2 and then they tail off in Q3 and Q4. But we are cautiously optimistic that we might be able to get to flat pricing. All the benefit that you are seeing from recycling, a big chunk that you are seeing from recycling for us has been on the OpEx side where we have taken quite a bit of OpEx out for the first six months and we will continue to do so in the back half.

Thank you.

Al Kaschalk, Wedbush Securities.

From LA, I should say, as opposed to Houston. On the recycling piece, maybe we can talk a little further on that, please, for clarification. A couple of years ago, you called out -- I think it was actually dollar valued sort of the improvement that you were looking for operationally. A lot of it was through negotiating and renegotiating contracts. Some of the commodity price headwinds, et cetera. But where are we in terms of that tailwind on the improvement? You earned $0.01, I think, this quarter or you commented that I think you had $0.01, which is the first time you turned profitable in a while. And so let's just leave it at that and let you take it from there to see if you can share an update on where you're at.

Yes, sure. We are about 75% to 80% of the way through what I would call those negative margin contracts. We still have a couple more that we will roll off over the next six to nine months. And so that is why I say, in the back half of the year, being 75% to 80% through those contracts, obviously, we still have 20% to 25% that have some exposure to downward commodity prices. But, if that 20% to 25% sees downward commodity prices, we do think we can offset that with operational improvements. So that is why I say in the back half of the year, there really is only upside from recycling. There really isn't much downside.

Now, as we look back into the back half of the year, we are not counting on a dramatic commodity price increase, but any commodity price increase that we have obviously falls straight to the bottom line.

Are you hearing from customers in terms of new service adds in this area? Are people -- municipalities, I guess, in particular, are they still -- do they get it yet in terms of understanding the costs? I know your messaging has been very direct there, but what is the feedback that you're getting as folks are looking at this service?

You know, look, I think they get it. It has been a very prolonged downturn. This has been a different downturn than we have ever seen in the recycling markets. And so I think they get it.

Now, early on in the cycle, you had some people that came in and bid some of these contracts under the old methodology, and they are not very happy with those contracts right now. And so in my mind, it sort of follows the same cycle that we saw with the fuel surcharge back in the early 2000s where initially, people go, well, we will count on the markets bouncing back, so we will continue to bid under the old model. They are now stuck with three- to five-year contracts where they are going to lose money for three to five years. The next time those contracts come up, they will be bid more rationally.

So not only do the municipalities get it, but I think that the recycling business community gets it, too. And so I think what you will see is a much more rational bidding behavior over the next five years.

Switching gears on the industrial side, you guys were on record in talking about this being a very strong growth area for you, but it suggests to me it was more M&A implied but also organically. Could you talk about the environment there? There certainly have been a few companies that have struggled in this area. We have had a fair amount of tailwind from the energy concept, which largely now I think has dissipated out of numbers. So-called easy comps. But -- and then, I think Jim made some comments earlier about C&D and special waste. But just talk about -- you put up 9.5% price, which I think was pretty -- I get that number right, correct. Where do we go from here?

Yes. There is a couple of components of that industrial line of business. It is a big category. Of course, energy services -- I mean, we have had some questions when we have been out talking to investors about, are you seeing your energy services business coming back because you are seeing price of oil bouncing back up. And what we have said is, look, energy services is really not so much driven by the price of oil as it is driven by drilling activity, and we have not seen drilling activity rebound in the form of rig counts. So the energy service piece was still pretty soft year over year. It is a pretty big negative for us that we have fought back against.

Coal ash is another component. Coal ash, as you know, we have a big Duke contract that is proceeding well for us, and we are seeing some -- certainly seeing landfill impact from that contract. The utilities -- the public utilities are out there developing their coal combustion residual plans for each plant, and we expect that those plans will result in a combination of on-site work and some off-site disposal for us in the next few years.

So coal ash will be good. I would tell you that, for the most part, these companies prefer to handle it on site, prefer beneficial reuse. We can handle all three, but we will certainly see some benefit in addition to the new contract. C&D, we talked about. C&D has been strong, and I would tell you that, in talking to one of our area vice presidents who has a strong C&D market right now, he believes that that is part of what is affecting his commercial volume, is that -- David has said it many times. When you start seeing these big tracts of land being taken out and we get that C&D business, maybe the more beneficial side of that is getting the commercial volume -- the permanent business on the back end of that, and this VP seems to think that is exactly what is going on. And then there are a couple of components within the industrial line of business as well. But, overall, I think industrial looks to be reasonably strong for us and appears to be continuing down that path.

Great. Jim, on your coal ash opportunity, there are a couple of companies, one in particular, that has a fair amount of relationships with the utilities on the -- sort of selling that ash out for beneficial reuse. Is M&A an opportunity for you guys here, understanding that disposal or the off-site work you certainly are set up for. But wondering about the on-site work and the marketing of ash.

Yes. So M&A is an opportunity for us there, although we bought a company called Fly Ash Direct a couple of years ago, and they have really grown tremendously since the acquisition of -- since we acquired them a couple of years ago. So while we are always looking for proprietary technologies and that is what Fly Ash Direct brought to us, right now we feel good with that acquisition. But not to say we wouldn't look at another acquisition there or in any other space, in energy services, for example. It has got to be properly priced, and we don't want to kind of buy at the bottom. But -- and we can talk more about M&A later, but we would certainly be interested in acquisitions. We just met need to make sure it is the right technology and provides the right returns.

Great. Finally, David, if I can come back to your comment on your prepared remarks, I think you said that core price 4% yield was 2%, and then you followed that with it could moderate in the second half of 2016. Help me appreciate what you were -- I won't say (multiple speakers).

What I meant, Al, is that our original targets were 4% core price, 2% yield. We are going to exceed those. There is no doubt about it. This quarter, it was 4.9%, so well above our target, and 2.6%, well above our 2% target. And so in the back half of the year, we have got some CPI headwinds. We have got some year-over-year comp issues. We have got the timing of price increases. So it might moderate a little bit, but nothing dramatic, nothing that will dramatically affect profitability. We still expect to have a great back half of the year. And, for the full year, we will clearly exceed that 4% core price target and that 2% yield target.

Okay. So you were saying moderate from the 4.9% and 2.6%.

Exactly.

All right. We will look forward to seeing the results. Thanks a lot.

Noah Kaye, Oppenheimer.

Just wondering if we can touch on the residential portion of the business. You did shed some of the unprofitable volumes. Can you give us an update on how you are tracking with migrating to the Waste CPI sub index, something that I know certainly a competitor has talked about quite a bit? Can you give us a way to sort of measure where you are in the progress of that initiative?

Jim Trevathan here. We absolutely are focused on that, not just with the residential line of business, but with our national account business. With CPI, obviously, below [1] and not looking for any real strength in that number, we have migrated in that regard.

On new contracts, that is the goal on every new contract to have a metric that is closer to our cost increases rather than CPI. And we are, on the resi side, probably a third of the way through. On the national accounts side, we are getting a different metric on every renewal of a contract. It may not be the full wastewater treatment metric that is generally 200, 300 basis points higher than CPI, but we see that as the way forward to minimize the margin deterioration as our costs go up, but yet CPI stays below 1%. So that is absolutely a focus, and we are a little less than halfway through, but, again, those are long-term contracts. So as they change, that is the goal.

Even with the positive progress that Jim just talked about on shifting within these contracts, it is no secret that resi is a tough line of business for us. And I think, to me, it highlights the need for good, solid disposal pricing, and we believe that we have made some progress on disposal pricing. Not as much as we would like. Part of -- you will see an improvement as our charge kind of -- I don't know, we put in last quarter, actually started on July 1 -- starts to kind of come to fruition. But, look, that line of business has, in all honesty, has been a disappointment for us. We are doing a lot to try and fix it, and part of that is addressing it on the disposal side of our business.

And an example of that focus on the residential line, we were over 2% in yield for the quarter where we have not been over 2% for a couple of years on the resi line of business, but we are making real progress. It is measurable.

Okay. That is incredibly helpful. Thank you. That additional $100 million to $200 million of free cash flow, a nice provision there. Wondering how you are thinking about allocation generally these days, how you are looking at the M&A landscape? Certainly, rising tide tends to flip all boats and potentially valuations, but we are seeing more industry discipline on a number of fronts. So I am wondering how you are thinking about the M&A opportunities and also what kind of opportunities you are seeing for any kind of asset swaps and market consolidation.

Yes. When we look at the acquisition market, basically the last three years we have done a moderate-sized deal each year that added sort of that $50 million to $75 million of EBITDA. So we did Deffenbaugh at RCI in Montreal, Deffenbaugh in Kansas City, and then FWS in South Florida. And we really don't see another one of those on the horizon. We have looked at a number of deals in the southeast and some other places where what you have said is exactly right. Sellers have gotten a little bit undisciplined on what they want. We are generally willing to pay sort of 6 to 8 times EBITDA, given the synergies we can pull out for a bigger deal. We might pay 7 to 9 times EBITDA up, again, because we can get good synergies. And post synergies, we can get it at sort of 6 to 7.5 times EBITDA.

Part of the problem is, we have got a lot of the solid waste sellers that want 12 times EBITDA, and that is just not a number that really works for us. And so we really don't see one of those decent-sized solid waste acquisitions on the near horizon. We are not looking dramatically outside of our core solid waste. As Jim said, if we saw some opportunistic buying on the industrial side or energy services, we would look at that. But we are not currently actively looking at anything in that arena. And so we are sort of back to what I would say are our smaller tuck-in acquisitions, sort of the $10 million to $20 million type acquisitions, and we have asked our business developers to pick up the pace on those to make up for the fact that we don't have any of those larger transactions on the horizon. And so you know the deal. These things go in cycles. There are not a lots of buyers out there. You really haven't seen a dramatic amount of activity in the M&A side. And so -- and I think that is probably because a lot of the sellers have heightened expectations as the industry dynamics have improved.

I would said that the industry is showing just as much discipline on the M&A side as they are on the operational and pricing side. No one is out there paying crazy numbers.

So those businesses are going to be sold. It is just a matter of when they get to a reasonable multiple.

Yes. Well, thank you very much, and congrats on the quarter.

Scott Levine, Imperial Capital.

Just want to push a little bit more on the guidance revision and what is behind it. It looks like the recycling business did a little better than you were budgeting for in the first half of the year. 1Q exceptionally strong volumes seasonally. Maybe a little bit more detail on explicitly what is behind the guidance raise. And also, I know you don't give guidance first half versus second half, per se, but is this mostly just outperformance in the first half, or is it factors that should continue to lend themselves to upside in the back half of the year and beyond?

Yes. You know, when I look at the first half of the year and the outperformance in recycling, the outperformance in recycling is sort of offset by the underperformance on our leachate costs, which, as we have said, we are up $22 million this quarter. And so, actually, that is a slight negative overall.

And so, from a business point of view, when I look at the year, it is the plain and simple stuff. It is the blocking and tackling. Price, volume, and cost control. And we have seen steady progress on all three of those. We don't expect that to slow down. And so the back half of the year, it, obviously, ramps up a little bit more than the first half of the year, but we are pretty optimistic that we are going to continue to see the strong performance continue. Again, it is blocking and tackling; price, volume, cost.

Got it. Fair enough. And as my follow-up, not to beat a dead horse on residential, but I don't recall -- I think you said, Jim, down 3.5% on volume. I don't recall offhand if that is better than it has been, or maybe just a little bit more elaboration on what is driving the weakness in -- and it sounds like you are doing some things on the pricing side that are working well. But how flexible is this, or is this kind of an industry phenomenon, and how confident are you that this business just in general that the metrics improve going forward?

Yes. Look, it is about the same. I mean, last quarter was negative [3-4]. We have had some [2-6s], and last year we had a couple of negative [3-6s] on volume. So it is not been a great volume business for us. But, by the way, a lot of that is by design. But I think the changes that Jim talked about in those contracts are, kind of back to David's point, about de-risking the business, are helping to derisk the line of business. And then, I think it is very important that we have had some very stiff competition within the resi line of business. And so it is important for us to continue to push disposal price increases in addition to collection price increases. We are pushing collection price increases through this residential line of business on our customers, but I think it is important that we push disposal price increases on our third-party customers as well. I mean, they should have to pay their fair share.

And is it a certain class of competitor where you are seeing the issues as large residential contracts versus intense competition for them in landfill prices to lever to drive improvement, or is there more to it than that?

Yes, Scott. Jim Trevathan. I Think part of the issue on some of that volume loss -- not all of it, but enough that it is measurable -- are from our local competitors. When you look at interest rates where they are, they can lease trucks really at a really low cost and come in and take some of the neighborhoods, for example, that are around the Houston area. Now they probably don't have the capital -- the capability from a capital standpoint to handle one of the larger locations or franchises, but they put pricing pressure on some of those local neighborhoods where they can get a couple of trucks really, really inexpensively. And that is part of the effect.

What we do is look at it from an integrated standpoint, as Jim Fish said. We are integrated, and we are taking -- handling the disposal internally, and it is not flow controlled to another disposal site, then we are going to retain that business. Where it is not, we will turn that volume loose where it is a low collection margin and put that capital to work at a place that we get a better return.

And the beauty of that is, when you see that local competitor take on a moderate sized residential contract, generally what happens is, they lose their focus on the commercial and industrial side. So they are adding trucks on the residential side. We don't have any problem with that as long as they are not adding trucks on the commercial industrial side.

So for us, it is really a matter of balance. Where do you want to invest your capital? And, for us, we would much rather invest our capital on the commercial industrial side than on the residential side.

Understood. Appreciate the color.

Michael Feniger, Bank of America Merrill Lynch.

With maybe not a large transaction on the horizon and with free cash flow coming stronger than expected, could we maybe see more put to share buybacks or dividend growth, perhaps? How are you guys thinking about that?

Yes. It is really a great question and, look, as we have said many times, our first priority would be to reinvest it in the business through acquisitions. The fact that we don't have one on the horizon doesn't mean these things happen fairly quickly. And so we want to make sure that we keep enough powder dry that, if something comes along, we are able to act and act fast without leveraging up the balance sheet too dramatically. And so we are always going to save a little bit of dry powder to make sure that we can do any of those acquisitions that come along. And then, when we look at it, obviously, our dividend yield has gone down with the stock price going up. And so at the end of the year, when we look at our dividend, I would expect that we will see another good increase in the dividend coming into the back half of the year. And then, on the share repurchase side, the bulk of the remainder of our cash goes to our share repurchase. We don't really time share repurchases, and so we are going to ultimately do sort of $500 million to $800 million of share repurchases every year. And I would expect to see that continue.

Great. And on the churn rate, how low can that go? What is the ceiling or I guess the better term is the floor? How should we think about that progression?

Michael, we ask ourselves that same question regularly. In the vicinity of 5% is structural churn. It is businesses -- small businesses that open and come and go. So we probably at this point have about 400 basis points to play with. I fully expect that to stay in single digits. And whether -- our next goal is to get it below that 9% number into the 8%, I think that is an achievable goal over the next few quarters, next year or two. And that is what we are after. We won't -- that is affected both by service, by how we handle customer issues as they come up. I think the Periscope tool will help us in that regard and help us focus price increases on customer segments that tend to accept them better and, therefore, reduce that churn umber. Some of the process issues I mentioned earlier will help us in that regard, but a lot of it boils down to much better just frontline service provision that our field guys are 100% focused on.

Tyler Brown, Raymond James.

Congrats on swinging the pendulum over to the positive side on commercial volume. But, Jim Trevathan, can you talk a little bit about the frontload fleet? How much excess capacity do you think you have in that fleet, and how much volume growth do you think you could absorb before you would have to see a bump in CapEx?

Yes. Tyler, we have plenty of capacity. There are a handful of markets where we have added some frontload capacity on the route side, but our system has plenty of capacity when you look across the whole network to handle more volume. There are places, as I said earlier, that we have added routes, but with the tools that we now have through service delivery optimization and SDO with the onboard computers, when we add that, we are adding it at that low-cost basis rather than just a truck handling a handful of customers. We reroute regularly with that tool and make sure that the efficiency numbers stay up and they have, as we have added volume in high growth markets. So I don't think you are going to see a huge impact, whether it is through efficiency, you will see most of those dollars on the commercial customer additions going to the bottom line.

By the way, Tyler, we are buying more trucks this year. We are probably going to buy 10% more trucks this year than last year. So we are buying some additional trucks, and you can imagine we are not buying a lot of resi trucks. So most of them (multiple speakers) on the industrial line of business, but also the commercial.

Right.

Right. We will buy about 1300, 1315 trucks this year versus 1120 last year. So we see that upside and yet our efficiency, Tyler, is still positive, about 1% year to date. That is a good number for us compared to historic numbers.

Yes. That was actually my second question. So is that 1300, is that a heightened replacement, or is that more of a normal replacement cycle? I assume it is heightened.

Yes. It is heightened somewhat, especially, as Jim said, on the industrial side because we are seeing more growth there and have consistently over the last couple of years. But you're going to see it stay in that vicinity. We expect that volume, as Dave said earlier, to go past [1], and we will continue in that 1300 or so trucks on just a replacement basis.

Okay. And then Jim Fish, maybe I am reading into it a little bit, but did your comments kind of indicate that CapEx would decline in 2017, given the leachate investments, or did those stick around into 2017? Just any way to think about that?

Well, specific to the leachate investment, yes, I think you're going to see a decline. Because as we talked about that kind of $100 million -- and not all of it is the leachate plan, but the wastewater treatment plan, but, yes, specific to that, they will decline.

Now, there are some other things that could affect its -- if we were to win a big contract, for example, next year, that might offset some of that. But not knowing that at this point, I would say that we would see at least a partial decline off of this kind of $1.4 billion or $1.45 billion.

Okay. Very helpful. And then, this is a housekeeping question. I apologize. I got on the call late. I may have missed it. But what was the $40 million expense in the other line that was below EBIT, and can you give us any help on how to think about that line going forward?

Yes. That is the impairment of some conversion technology investments that we had.

Okay. All right. Perfect.

I will now turn the call over to Mr. David Steiner for an announcement and closing remarks.

Thank you. In a year where there doesn't seem to be a lot of good presidential news, we actually have some very good presidential news here at Waste Management. Today we will be issuing a press release and we are going to file an 8-K announcing that we are promoting Jim Fish to the role of President. I wish I could promote him to the role of President of the United States, but, unfortunately, all I can do is promote him to President of Waste Management.

As part of our ongoing succession planning process, the board and I felt that the next logical step in that process was for us to name Jim President. We are conducting a search for a new Chief Financial Officer who will report to Jim, and while that search is underway, Jim will retain his CFO responsibilities.

Obviously, you all on the phone know Jim very well. Many of you have worked with him for a while now. So you know why the board and I have such confidence in him. He has really been pivotal to the success of our Company, and he is also a talented leader with tremendous knowledge of all aspects of our business. The promotion is a well-deserved recognition of his past accomplishments and another step in his development as a leader. I am sure you will all join me, our board, our senior leadership team and the rest of our Waste Management family in congratulating Jim on this great achievement.

And, with that, operator, we will see you next quarter. Thank you.

Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning today at 1:30 p.m. Eastern standard time through 11:59 PM Eastern standard time on August 11, 2016. The conference ID number for the replay is 43986112. Again, the conference ID number for the replay is 43986112. The number to dial for the replay is 855-859-2056.

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