Q2 2019 Earnings Call
Good morning, everyone. My name is Christine and I'll be your conference operator.
At this time I would like to welcome everyone to waste management 2019 earnings release Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question during that time CMP Press Star then the number one on your telephone keypad.
If you would like to cancel your question press. The Fenqi. Thank you. It's now my pleasure tactical over to Mr. Ed.
Senior Director Investor Relations, Sir you may begin.
Thank you Christine.
Good morning, everyone and thank you for joining us for our second quarter 2019 earnings Conference call.
With me. This morning are Jim Fish, President and Chief Executive Officer, John Morris Executive Vice President and Chief operating Officer, and Divina ranking senior Vice President and Chief Financial Officer.
Well hear prepared comments from each of them today.
Jim a couple of high level financial to provide a strategic update John will cover an operating overview and defeat will cover the details of the financials.
Before we get started please note that we filed a form 8-K. This morning that includes the earnings press release is available on our website at Www Dot W.M. dotcom.
The form 8-K, the press release and the schedules to the press release include important information.
During the call you will hear forward looking statements, which are based on current expectations projections or opinions about future periods.
Such statements are subject to risks and uncertainties that could cause actual results to differ materially.
Some of these risks and uncertainties are discussed in today's press release, and our filings with the FTC, including our most recent Form 10-K and subsequent Form 10-Q .
Jim and John will discuss our results in the areas of yield and volume, which will otherwise stated are more specifically references to internal revenue growth or I or Geo Iraqi for Neal more volume.
During the call Jimmy to being able to accept the earnings per diluted share, which they may refer to it as that's already for sure and it will also address operating EBITDA, which is income from operations before depreciation and amortization and operating EBITDA margin.
You want to be there will also be discussing the planned acquisition to advance the formal services incorporated we semi refrigerated advanced or Ats.
Any comparisons unless otherwise stated will be with the same quarter of 2018.
Operating and FCD expenses operating EBITDA net income and EPS for the second quarter 2019, EBIT adjusted and projected 2019 results are anticipated to be adjusted to hear comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations, including costs related to the pending acquisition of Tds.
These adjusted measures. In addition to free cash flow are non-GAAP measures. Please refer to the earnings press release, and the tables, which can be found on the company's website at www Dot W. M Dot com reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections.
This call is being recorded and will be available 24 hours a day beginning approximately one PM eastern time today until five P.M. eastern time on August eight.
To hear a replay of the call over the Internet access the waste management website at Www Dot Dot dot com.
You hear a telephonic replay of the call dial 85559, 2056 and enter reservation code Fourfive 9818.
Time sensitive information provided during today's call, which is occurring on July 25, 2019 may no longer be accurate at the time of a replay.
Any redistribution retransmission or rebroadcast of this call in any form without the expressed written consent of waste management is prohibited.
Now I'll turn the call over to weak credits, President and CEO Jim fish.
Thanks, Ed and thank you all for joining us.
Once again, our employees delivered strong operating performance in the second quarter.
Continuing to demonstrate our strategic focus on leveraging our asset network.
Serve our customers and drive growth.
Just like in the first quarter, the strength of our collection and disposal business was the main contributor to our success.
In the second quarter, we generated more than 7% organic revenue growth in our collection and disposal business with yield of 2.7% and volume of 4.4%.
And we had strong core price of 5.4%, which translated into total company operating EBITDA of more than $1.13 billion, an increase of almost 7% from the second quarter of 2018.
We also saw operating EBITDA margin expanded 30 basis points for the.
For the total company 60 basis points for the collection and disposal business.
As we've said many times operating EBITDA is the best measure of the health and performance of our business and in the second quarter, all indicators point to excellent health.
Our operating EBITDA growth translated into free cash flow of $440 million.
We're pleased with our year to date results, which we will discuss in a moment, but first I'd like to provide an update on the progress we're making towards the Ats acquisition.
At the end of June the Ats stockholders voted overwhelmingly to approve waste management's acquisition of the company.
Just stockholder approval is an important milestone in the process towards closing the transaction.
In addition.
And as expected we received a second request from the Department of Justice and we continue to work with them satisfy this request.
We remain on track to complete the acquisition during the first quarter of 2020.
We will keep you informed as we continue our progress towards closing this transaction.
We have a dedicated team working to position us to successfully integrate ats upon.
These efforts are important and we're pleased with the progress we're making on that front.
Our team is also focused on a number of additional efforts to accelerate our growth and continuously improve our business.
We continue to invest in our people technology, our customer experience and our asset network.
On the people side.
We opened our second to driver a technician training facility in Glendale, Arizona in June .
And we continue to expand our program with caterpillar to remotely operated equipment at one of our landfills in Denver.
While this is a technology investment its assessment and our people.
As technology like this modernizes the jobs for our workers improves safety.
Enables us to more efficiently work and provides us with an opportunity to expand our workforce in the future.
On both the technology and customer experience fronts.
In June we launched an upgraded w. dot com that allows customers to order and managed service with modernized navigation and increased functionality.
We redesigned the site with input from our customers and so far it's been really well received.
In the first month, we had a 20% increase in customers shopping on the website and an 11% increase in overall online sales revenue.
E Commerce is a small but growing channel for us and we're in the early innings of maximizing its value.
Another benefit we get from e-commerce is improving customer loyalty, because most online customers enrollment convenient billing and payment options.
Finally on the asset network front, we're seeing great results from our increased focus on enhancing our post collection business model.
Our team is securing expansion airspace capacity.
In key markets.
Partnering with communities to ensure that they understand the role that landfills can play in achieving their waste management goals and optimizing our pricing methods to improve profitability and return.
In the second quarter core price in the landfill line of business was 4% and MSW yield was 3.6%, which exceeded 3% for the second consecutive quarter.
This is the highest MSW yield in a decade.
It's important for us to drive disciplined and landfill pricing to ensure that we earn appropriate returns on this capital intensive part of our business.
Our efforts to drive to drive greater discipline in the pricing of our post collection businesses.
Start with the transfer station, which is often referred to as a remote gate.
To the landfill.
This focus is also showing strong results with our second quarter transfer station yield improving to 3.4% an increase of 70 basis points sequentially and 160 basis points from the prior year period.
We will continue to focus on maximizing our asset utilization to generate strong returns on all of our assets.
We've had a great start to 2019 in the second half of 2019, we expect that our collection and disposal business will continue to generate strong earnings growth.
And more than offset the decline we now expect in our recycling line of business.
John will give a bit more color, but suffice to say, we're confident in our ability to execute our strategy and we are reaffirming our full year 2019 guidance of adjusted earnings per diluted share of between $4.28 and $4.38.
Adjusted operating EBITDA of between 4.4, and $4.45 billion and free cash flow of between 2.0 to five and $2.075 billion.
And with that I will turn the call over to John .
Thanks, Jim and good morning.
Second quarter results were strong, particularly in the collection and disposal lines of business collection and disposal organic growth revenue growth up 7% driven by strong execution on our core price program continued progress of our strategy around customer differentiation and robust post collection volumes at our transfer stations in landfills.
On the landfill volume front in the second quarter growth was driven by the continued strength of MSW volumes and increase in special waste volumes from a pipeline that remains strong and very strong CSD volumes as we were able to position ourselves as a community partner to assist with buyer cleanup activities in California.
The strong volumes that we're seeing in our landfills are also at attractive prices MSW volumes grew 6.1% and yield was 3.6% in the second quarter.
MSW yield of 3.4% and 3.6% in the first two quarters of the year represents a step change improvement from the last several years and we expect this trend to continue.
Our post collection lines of business are seeing increased operating cost pressures as well as higher capital investments as the cost of construction construction rides.
We will continue to focus on disciplined pricing to recover these costs and generate appropriate returns on our investments in these assets.
Turning to our customer focus metrics churn was 8.8% in the second quarter.
Year to date churn is 8.5% 60 basis point improvement over last year.
Additionally service increases continue to outpace service decreases the strong collection and disposal organic growth and great operating performance led to operating EBITDA growth of $112 million and a 60 basis point improvement in the margins in those lines of business.
In the second quarter total company operating EBITDA was the highest that we've ever generated.
In the second quarter total operating costs as a percentage of revenue were 61.5% a 40 basis point improvement over last year as our operations have been able to improve their efficiency and manage their spending as volumes increase.
We still have opportunities for further improvement, particularly around labor maintenance and leachate management costs and our team is focused on identifying and making these improvements.
For example, our am 100 program provides our frontline supervisors of USA segment of their routes throughout the day, which will allow for improved efficiency and additional labor savings.
We saw early benefits from this initiative in the second quarter as efficiency improved in all three collection lines of business driving a 25 basis point reduction in labor costs as a percentage of revenue.
We expect to drive even greater efficiency improvements in our collection lines of business as we continue to the deployment of these tools across the enterprise.
Turning to recycling, there was a $21 per ton or 33% drop year over year in our blended average commodity price down to $43 per ton.
But operating EBITDA improved $6 million.
Looking at the remainder of the year, we anticipate that commodity prices will continue to be well below the $70 per ton commodity price. We expected. When we gave our 2019 outlook and as a result, we no longer anticipate a full year tailwind from recycling.
We now expect that our recycling business will be a one cents to two cents headwind for the full year.
As as Weve mentioned previously the traditional formula that a $10 move in commodity prices changes annual EPS by four cents no longer holds due to our successful efforts to change and improve the business model.
To emphasize this point without our teams' proactive steps to evolve the recycling business model the full year impact from the depressed commodity prices would likely be closer to a negative nine cents rather than the negative one to two cents that we're forecasting.
We remain focused on changing the business model for recycling with improved technology and contract structures that recoup processing costs and protect us from commodity price downside.
To that end, we are on track to open our recycling plan of the future by the end of this year.
With this plan, we expect to achieve labor and operating cost savings, while creating the best quality material for sale.
Impressively, we fully expect the performance of our collection and disposal business to overcome the headwind from lower recycling commodity prices.
As we passed the halfway mark for the year, we anticipate that continued strong organic growth and a focus on operating efficiencies will keep us on target.
Our employees have delivered a strong performance throughout this year.
I want to thank them for the fantastic job they continue to service our customers and producing break through results.
As a leadership team, we're absolutely confident they will continue to perform at high levels to achieve our full 2019 guidance.
Ill now turn the call over to David to discuss our second quarter financial results in more detail.
Thanks, John and good morning, everyone.
As you heard from Jim and John This strong performance of our collection and disposal business continued to overcome the impact of a week with cycling and dynamic.
And our second quarter, we again delivered solid financial results.
Collection and disposal operating EBITDA grew by over 9% when compared with the second quarter 2018, driving hurdle company operating EBITDA growth by almost 7%.
And positioning us well to deliver our full year targeted growth of about 5%.
We view operating EBITDA growth as the single most important measure of our performance.
And were very pleased to see our operations deliver these results.
And the second quarter of 2019 cash flow from operations grew 3.6% to 1 million $10 million.
When you normalize the year over year comparison for the impact of the fuel tax credits that we received in the second quarter of 2018, the increase would have been 6.7%.
We are pleased with this result, MCR efforts to convert more of each revenue dollar to Tas where again.
Cash from operations as a percentage of revenue improving 30 basis points on a year to date basis.
The 24.9%.
This is particularly impressive when you consider that we achieved this result in spite of the $66 million decrease in revenue from within our recycling business due to the 30% decline in market prices of the commodity itself.
During the second quarter.
We spent $578 million.
$578 million on capital expenditures.
This compares to $436 million in the second quarter of 2018.
The increase in the current year is related to timing differences in our spending for landfill construction trucks and containers.
The difference in timing as the result of an intentional steps we have taken to invest in our growth by pulling forward some of our planned capital spending.
We remain disciplined in allocating capital dollars to our highest margin and return businesses and has proactively managed our capital spending in 2019 to address our robust volume bad.
Volume in our landfill in commercial collection businesses exceeded expectations in the first half the year and our operators and their corporate partners have worked hard to accelerate construction and asset deliveries can meet our customers needs.
With the strength of our volume growth our full year capital expenditures will be at the upper end of our guidance of between 1.65 and $1.75 billion.
And the second quarter of 2019, our business generated $440 million of free cash flow.
The first six months of the year free cash flow was $871 million.
The timing difference that I just discussed for capital expenditures is the primary driver of the decline in the measured from the prior year.
Additionally, our second quarter of 2018 included $28 million of fuel tax credits as well as nearly $80 million in proceeds from the divestiture of non core businesses.
When you normalize for these two items the year over year comparison for both the quarter and year to date period more clearly reflect our strong operating EBITDA Brad.
When you we continue to expect our strong operating performance and disciplined capital spending will yield full year free cash flow in line with our guidance of between 2.0 to five and $2.075 billion.
In the second quarter 2019, we used our free cash flow to pay $217 million and dividends and we repurchased $180 million of our stock.
When combined with our first quarter share repurchase activity. We expect this level of share repurchases to meet our goal of offsetting dilution from stock based compensation.
Given the pending acquisition of Adss, and our efforts to position our balance sheet while for close.
We no longer expect to repurchase additional shares over the remainder of the year.
We continue to estimate that this will have up to a negative six cents impact on for Gary Yes.
During the quarter, we successfully executed a 4 billion dollar debt financing, which positions us to close on the acquisition of advanced disposal.
The offering proceeds have largely been invested in stable money market fund. So we also used a portion of the funds to retire several of our higher priced senior note.
We are happy with the results of both transaction.
And our average pre our pre tax average cost of debt is now below 4%, which is instrumental to executing well on achieving our targeted returns for the pending acquisition.
We estimate that the incremental interest will have a negative three cents impact to 2019 bps.
We plan to adjust for best the impact of lower share repurchases and the incremental interest cost through the HP Hds acquisition closing.
Our debt to EBITDA ratio measured based on our bank covenants with 2.95 times at the end of the second quarter.
This is higher than where we have been in recent years, so well within our targeted level, which is particularly impressive given that the measure does not yet have the benefit of the Ats EBITDA.
Our strong balance sheet continues to afford us the financial flexibility to pursue strategic acquisitions at the right price.
Turning to SDMA for the second quarter, our M&A costs as a percentage of revenue were 9.8%.
In line with the second quarter of 2018, despite the increased investment we are making in technology.
For the full year, we continue to target SDMA expenses as a percentage of revenue of about 10%.
In our business. The second quarter is often an important indicator of how we will perform for the full year as we observed seasonal increases in certain parts of our business.
With the strength of our second quarter results and the positive momentum that we are still early in the third quarter, we are positioned well to the loan to deliver on our 2019 priority.
With that Christine let's open the line for questions.
Understood, ladies and gentlemen, if you have a question at this time.
Please press Star then the number one on your telephone keypad again, Thats star one to ask a question.
We'll pause for just a moment to compile the queue any Boston.
Our first question comes from the line of Tyler Brown from Raymond James Your line is open.
Hey, good morning.
Hi, good morning wanting for <unk>.
Hey, John obviously landfill volumes continue to impress at this point you know you're running maybe north of 120 million tons of landfill volumes, but it feels like there's a couple of discrete projects in there like the wildfire clean up I know you mentioned the pipeline is robust, but how should we think about those landfill volumes moving into next year is there may be a few million tons that won't recur or anything there would be helpful.
No I think that's fair question I mean, we certainly have looked at that and I think theres a lot of puts and takes with that volume I mean, we're we're pointing to the California wildfires.
This year, which is obviously an unfortunate event to say the least.
But if you go back last year and the year before although the geography changes we've seen these events year in and year out.
It's hard to predict obviously, where they're going to show up.
But I think the other thing you should look at is aside from just that as our special waste volumes continue to be strong referenced that in some of the prepared remarks. So we feel good about the landfill volume. We also looked through the transfer stations as Jim mentioned, the remote gate to the landfill, we continue to see both price and volume performance. There. So we feel we feel good about where around the post collection side.
Okay. That's very helpful and then Jim Yeah.
Yeah, well I was just going to add to that too that you know.
It really.
It really is almost like event work for us I mean and to John's point, it's still extremely unfortunate when you have these big.
Natural disasters were there to help help clean up we were actually up the Terra and I were up last week.
In northern California, driving through Paradise, it's devastating but.
But really when you boil it down to how it impacts our volume or how it impacts our EBITDA on our revenue or free cash flow.
As John said, it's a lot of puts and takes its very lumpy hard to predict on a on a area by area basis, but.
But we seem to have whether it's.
A big event.
Or a big construction projects or natural disaster cleanup or whatever it is every year and so we just look at it as part as just simply part of our overall business, albeit a part that's tough to predict yeah. No. That's I appreciate that but just maybe kind of coming back to the economic data I mean, if you look at it across the street it kind of remains disparate.
Obviously your business is doing extremely well right now, but you also tend to be a bit late cycle. So I'm just curious what you're seeing out there and maybe what are the K P eyes that you and the senior management team really watched it might foretell a trend change in that organic growth metric.
Yes, you are right Tyler about the fact that our industry tends to be considered more of a lagging indicator for the macro economy.
I would tell you that waste management, specifically is a pretty good indicator overall, because we service virtually every sector of the economy.
What I would say is there are couple of kind of leading indicators within our numbers.
First and foremost our commercial collection business.
Is somewhat of a proxy for how small business is doing and when you see service increases outpacing service decreases repeatedly and strongly to to us that's a pretty good leading indicator of how small businesses looking at the at the future in terms of the economy and then secondly, John mentioned special waste.
Our special waste pipeline is very strong we've seen double digit numbers, now again, and and and the reason special waste as a leading indicators because a lot of north American companies.
The confidence in the economy shows up in their special waste.
Project work when they see signs of a slowing economy, they tend to to kind of pulled in the reins on on that event work and wait until times look a little rosier. So the fact that our special waste pipeline looks as good as it as it does on the fact that our special waste volumes in the quarters.
Both second and first haven't have look good as is a good leading indicator for US and then the last one of course is.
It's just CSD volume and of course part of our Sandy numbers driven by by fire volume, but but even without the fire volume RCD number has been very strong for at least five quarters.
Every city I go to seems to have a sea of cranes on the.
Add on the horizon. So it looks like CMB is still quite strong and that is also a pretty good leading indicator of the overall economy.
Okay. Yes, that's helpful. And then maybe digging a real quick what was the divestiture made in the quarter. So one you noted it was ancillary maybe what was it too is it in that other revenue line and then three just how should we think about divested revenue.
In the second half versus the 82 million in the first half just for modeling.
So the 82 million was actually in the first half of 2018 and divestiture activity in the second quarter and 2019 very immaterial at about $8 million and that's just normal course asset divestitures.
Okay, sorry, I got my numbers, all mixed up but is there a lot going to be a lot of back half divestitures are now.
Yes, there is not currently an expectation of any meaningful back half divestitures and we certainly look at all the time for underperforming assets and assets that we can.
Said in order to be sure that we're optimists optimizing business model, we're really looking at the reverse side of that and thinking about acquisitions, then you'll see that in the second quarter. We acquired on this $50 million as additional traditional solid waste businesses and when we think about that in terms of acquired revenue.
You're looking at about $120 million of acquired revenue thus far in 2019, what you're seeing is somewhat of an offset associated with.
Divestitures from the prior year and said there were divestitures both in the front half of 2018 and the back half of 2018 that are somewhat offsetting that strong acquisition growth and but you will see some of that normalize in the back half of the year. Okay. That's helpful. All right. Thanks, guys.
Thank you.
Our next question comes from the line of Michael Feniger from Bank of America. Your line is open.
Hey, guys. Thanks for taking my questions just on the MSW yield 3.6% second straight quarter.
Can you just help us understand what is out there in the market right now that should give us confidence that there's there's momentum there that we could kind of look at that number.
Going forward rather than stepping back into the.
The the older years, and the old cycles, where pricing was a little bit more competitive is it something with the cost pressure see the landfill that the market now can start passing that through disruption on the recycling front.
Is it some consolidation that's played out help us understand some of the factors that is really putting together two straight consecutive quarters of good yield that at.
At the disposal.
Yeah, Michael I think you've touched on a couple of pieces there it's.
Part of it is is an increased focus through the use of data and analytics.
We brought that to to the collection side of the business.
Probably seven or eight years ago, and we really transition that over.
To the landfill line of business and now there is not only a use of data and analytics, but theres a real focus on it.
From our senior Vps as they work with their teams in the field. So that certainly is having an impact I think.
There may be some of it that is kinda necessarily as a result of.
A few other cost categories going up specifically transportation related costs and lead management certainly are climbing at a rate higher than CVI, but but I think some of it is just sort of recognition on our part that.
That these are really critical assets that we have to earn a better return on them. They are very capital intensive and so I would say that that 4% core price in landfills and 3.6% MSW yield on the heels of 3.4 is is good but I still think theres opportunity to increase that's at our landfills and transfer stations.
Not just to keep up with inflation in certain cost categories, but but to help us expand margins.
And to me, that's kind of a breath of fresh air after it feels like a decade of 1%.
Yielded at the landfill.
That's that's helpful. And then just lastly, I mean, you know this this year had it had a nice little benefit from the inflation pickup last year.
This year, though inflation has has kind of disappointed at least on the headline numbers.
Can you just talk about what that might mean for us thinking about that going to 2020 and.
Are some of your business lines, clearly seeing cost inflation.
C P and the market's going to still have to try to raise pricing to offset that thank you.
Yes, sure Michael I'll.
Really on inflation Cpis, specifically you know, it's it's really been flat for the most flattish it was down I think 10 basis points.
For the quarter, but we didnt see really much in the way of you know tailwind from CP VI. It was as it was creeping up over the last few quarters and now as it started to reverse course little bit we're not anticipating much in the way of a headwind as you said, we do have some cost categories that are that are outpacing inflation and so as a result, we've we've tried to transition some of our pricing of contracts over to to that water sewer trash index that.
That is more representative of our overall cost structure.
But they're awesome. There are also a few cost categories that are that are.
Not increasing at the same rate such as fuel so.
Overall, I think we're kind of a bit above that that CPI, but it but we don't expect to see.
Much of a headwind as we move out towards the latter half of 19 and into 20, unless something really changes dramatically I don't I don't anticipate much of a headwind on the price side from C. Guy softening.
Thank you.
Our next question comes from the line of Sean Eastman from Keybanc capital markets.
Okay. Thanks for taking my questions first one for me is just.
On Mds in the HSR review I can fully appreciate that there's only so much you guys would want to disclose in the middle of this process, but it wouldn't be helpful. If you could let us know how this review has been tracking relative to initial expectations.
And then maybe lay out kind of a rough timeline on what to expect in terms of next steps coming out of this second request from the D.R. J.
Yes fair enough. This is John I think in terms of what we've experienced to date I think it's tracking about as we expected from a timing standpoint, the process standpoint.
Clearly, we're not far enough along where we can really start to add any more color.
Or detail as we as we said in the prepared remarks, we still think the first quarter of 2020 is on track I will tell you. The process. So far has not yielded any surprises.
We're continuing to do everything we can from a regulatory standpoint to to make the process with the D.R.J. goes as expeditiously as it can.
So.
In terms of next steps again, we're not far off along in the process far enough along in the process for us to really add any additional color, but I would expect probably in the next 60 to 90 days were going to be further along to the point, where we'll be able to add a little bit more color. John I think we all can empathize with you on that year and patient care, because but unfortunately when it comes to things like like synergies, we gave that original $100 million number, but we don't know anymore. At this point, because there's still operating as a separate company and we and we have not.
It's not as if we have a team and they're kind of diving in right now that team won't go in a dive in until till we close the transaction and then in a in very short order will know whether that 100 million is is conservative or not but.
What we're trying to you know, we're we're kind of equally impatient. We're we're waiting for this to run through its cycles.
With the department of Justice and once it does we expect that things will move along pretty quickly.
Oh, Yeah, I get that and I wasn't really trying to provide an update the synergy number necessarily I just wanted to understand kind of true.
Even just procedurally what.
The next step is in terms of.
What will be released by the Doe, Jay or or filed by you guys and kind of when that next sort of filing or update would be.
Well as you've seen this the second request is in process right now that's probably the only update since the last call. We're obviously working our way to satisfy that request from the from the regulators.
Okay got it thanks and then the next one for me is just on the 60 basis points of.
Margin expansion in the collection and disposal business.
From a year over year perspective, there is quite a few moving parts.
Terms of some of the bonus payments made last year some seasonality nuances.
And then this year some technology investments being made.
You know if there is any kind of additional.
Parsing out you could do you could you provide us in terms of.
How much of that was.
New and newly games operating efficiency versus you know.
Some of these other nuances I just highlighted.
Any color around that 60 basis points would be helpful.
I think what's most important in thinking about that 60 basis point is one that is ahead of our expectations for the year, we look for about 50 basis points and traditional holiday Dcor collection and disposal margin expansion annually and so to be at 60 basis points in the second quarter. As ahead of plan. What is also important about this is that it generated in acquired businesses. So the special bonus that you mentioned you did provide about 40 basis points, but that separate and apart from that 60 basis points that we're really focused on in measuring as an indicator of how our efficiency focus as well as our pricing execution is delivering on the margin expansion goals at the organization.
On the reverse side and the incremental as CNH spending that we've talked about for a technology investment is on the S. DNA line.
And we talked about SDN, I actually being flat on a year over year basis from a margin perspective, we do expect that you'll see some acceleration of our SDMA spending for digital in the back half of the year end as a result, you will see some of that margin pressure on that digital and SDN <unk> cost that we talked about in anticipated come through and normalize out some of the EBITDA margin expansion that we've experienced in the first half of the year, but overall when you think about the fact that in 2018, we have a fuel tax credit and that gave us about 30 basis points of a headwind to 2019 on margin we've ever come that nicely and generated strong EBITDA margin expansion and and we expect that to continue strongly into the back half of the year and then into 2020.
That's helpful and nice job this quarter guys. Thanks very much.
Thank you.
Our next question comes from the line of Noah Kaye from Oppenheimer.
Hey, good morning, everyone. Thanks for taking the questions.
So just wanted to go back to your comments about the commercial service increases outpacing the decreases coupled with the strong industrial yield and a very nice commercial yield I think you also mentioned that the churn rate.
Was 8.8% in the quarter is that right. So that actually ticked up into Q. So is that just sort of seasonality what drove the slightly higher churn rate how should we think about it.
You know that maybe trending going forward as you look at the business.
Yes. This is John you touched on one there was a slight uptick in Q2, but when you look on a year to date basis, we're still better through the first two quarters. So we're not concerned about that in terms of what's driving some of the commercial volume I think Jim mentioned it.
In his remarks, you know, we've we've implemented smart truck technology on our vehicles, and we think that being able to gather data that we otherwise weren't able to certainly driving some of some of that volume.
Secondly, I think when you look at the at the churn rate.
Part of it's being driven by our customer service and customer experience improvements and it's coming from the lost business that is moderated a bit.
As opposed to how we've done well on the new business side as well, but part of it's coming out of our ability to retain some of these.
So some of these customers and then lastly, I would say Jim mentioned early early innings.
But I think the experience that customers are starting to have with some of the online tools, we put in place as shown in showing nice progress, albeit.
Early innings.
That's really helpful color. Thanks, and then just just a general macro I mean, your organic growth you know was outstanding this quarter.
I think you broke out at your Investor day, the revenue mix across different sectors and that was very helpful and it's pretty diversified.
Just listen to some of the other companies.
Particularly in the industrial space this quarter.
There have been some some frankly warning indicators around some of the heavy industry and even in the transport space and I guess just looking at your industrial business. Specifically you know how should we think about kind of expectations for growth and price strength through the rest of the year. What what are you hearing from customers that kind of gives you confidence and sustainability of these metrics you've been you've been delivering.
Yes, no I mean, obviously I can't speak to what the other companies are seeing but what I would say about our volume is and I've mentioned a little bit earlier.
The real kind of indicators.
That reflect the health.
All of the industrial segment.
Our special waste, primarily and then.
Also there is a component of it.
Within CSD.
And maybe even NSW, but but largely special waste and and that special waste pipeline looks looks still very strong you know I mean, I think theres and there's reason for optimism there even on on things like.
Coal combustion residuals down the road so.
It's a little bit.
That speaks to the Lumpiness that we see in our overall business that we talked about early on.
Those things are hard to predict but they come as big as big chunks of business and they tend to come.
Every year, we just.
I have a hard time, telling where they're going to be and when they're going to come but.
But I would tell you that that.
This this economy has been has been.
You know a real Enigma because it's there isn't a real clear sign as the as to the direction of its and so we kind of have to look at our own numbers and say what do we think as opposed to what are the pundant thing because upon a tech though the fed can't even tell you what they think about it so.
Right now our numbers look to be.
Still pretty strong.
When we look at July you know into into the month that we're in now our volume numbers that we look at a you know each week still look strong and they look strong in.
The commercial line of business. They look strong in the landfill line of business.
And they look fine.
In the roll off line of business as well the the one that's been historically weak for US has been rosy and that's been weak for.
For quite some time and some of that's just been almost by design, but.
But not to sound like the blind optimist here.
In a room full of.
You know kind of naysayers, but but our volumes look reasonably good.
No I would add one thing on the industrial line of business, specifically I think if you think about how waste management has positioned itself to be more customer centric and really ensure that as we've grown in the industrial line of business with the since the last recession its been about shifting some temporary business to permanent business and doing that by focusing on our customer and so I think you're seeing the results of that not just on the volume side of that part of our business, but also on the price side. So we're happy that you know the overall focus on the customer is really showing us results and our ability to retain those volumes I think we're better positioned for that today than we were last time around.
Okay that is incredibly helpful color. Thank you both.
Thanks.
Our next question comes from the line of Jeff Silber from BMO capital markets.
Thanks, so much I actually wanted to shift back to the recycling discussion.
Despite the pressure on commodity prices, you're still able to increase operating EBITDA, which is phenomenal can you tell us roughly how many or percentage wise of your contracts have been restructured to kind of shift the risk Soviet or customers.
Yes. This is this is John Jeff.
We look at it we're probably about 40% of the way through and I will tell you we think about it in phases.
You know the cook, but the customers we have on our own backs. If you will obviously, we can get to them generally quicker than than than the residential customers or commercial customers. If you will the volume thats coming into our merce directly is another phase. We've obviously begin to tackle early on.
And then the last phase is really a lot of the franchise and municipal customers, which take longer just because the structure of those contracts is generally.
Three to five years and a lot of times, it's related to other lines of business its integrated to a franchise.
Post collection contracts et cetera, so but to answer your question, specifically, we're probably between 35 and 40% of the way through probably.
A middle innings on the commercial piece in the Merck volume and probably.
We use a baseball analogy, maybe the third inning on the residential side.
So we've got we've got room to go for sure and when you look to your point for us to see another quarter of continued revenue drop and our recycling team in the field team has been able to improve EBITDA were pretty impressive. We're pleased with the progress in a pretty pleased with where we're at we have it we have a bunch of work left to do and plenty of opportunity.
Okay. So Jeff.
Yes, one more point here and that is that.
To to what John said about having still 60% left albeit the tougher.
The tougher group, which are these big contracts. The good news is if there is a little bit of good news in a in a really low kind of 25 year low number and that is that our argument. There is a lot stronger when we come into a municipality during a renegotiation and say look we're at a we're at 25 year lows on LCC pricing, we're getting zero Premixed paper.
And this business is has as you know has really fallen off.
The down cycle right now, but we think it will come back I wish I was as optimistic as that unfortunately, theres. Some some kind of things that are changing within the recycling business things like.
Amazon's.
Reduce packaging program and us retail stores I think last time I saw was us retail big box stores of.
They've been 12000 closure so far in 2019 compared to 6000 for the entire year last year. So theres some permanent changes going on in the business.
So if there is a silver lining to dark cloud. It's that's when we go in free negotiation on these big contracts, we we do have a pretty compelling story.
All right Thats helpful. If I could just ask a follow up on the merger. Besides the DLJ review, what other milestones should we be tracking before closure.
Well I think.
I mentioned earlier, one of the previous questions the second request.
Has been we're executing against that right now and that to me is the next milestone is getting through that.
And then like I said I think in the next probably 60 to 90 days.
Little bit of speculation I think between 60 90 days, we're going to have some more detail that we can share with you folks and while it's difficult for you guys to track. This act generally internally, we're certainly tracking our integration planning efforts for you can imagine a number of back office processes that are not on the customer side and certainly sensitive to how were thinking about operating two separate businesses through close, but where we've got the right team in place that is focused on integration planning at this point and that's an important thing for all of us to be tracking within the organization, but not one that you'll be able to be at the efforts of the externally.
Okay I understand thank you so much.
Thanks, Jeff.
Our next question comes from the line of Michael Hoffman from Stifel.
Thank you all for taking the questions.
If I could just close the loop on and yes, Tim when we were last together.
A few weeks ago, you suggested that the 12 to 15 months that you thought this would take to get it done now might be more like 12 is that that could be a point of an update just to give everybody something to play it on.
Yeah, I'm not looking at maybe that's just my own kind of optimism coming out I just feel like the you know the.
Hi, Chuck that Theres always want to be sideways whenever I say that.
But.
Right, Hi, I think Thats, you know based on what we're experiencing so far with the second request based on the fact that.
But there seems to be a smooth process, taking place within the between the DJ and and and.
And our own inside and outside counsel.
Gives me optimism that this is more kind of the front end of the range that we've given as opposed to the vacuum.
Great.
And then depending on the free cash flow to help us a little bit with cadence. So if I use the midpoint. The 2.05 that leaves you with 1.179, you got to do is generate in the second half how would how should we think about the cadence of that between the two quarters.
So I think in particular, if you look at the first six months of the year, we talked about the capital side. So at about a billion 50 of capital through six months, we're at about 60% of the full year target at this point. So that's one of the items. It is weighing more of the free cash flow toward the back half of the year. The other piece is actually increased interest and taxes, which we talked about in setting our targets for the year, we talked about $75 million of incremental cash taxes associated with.
Cash tax planning benefit that we realized in 2018 that would not repeat in the current year three to six months, our interests and taxes are up $90 million. So what you can see is that weve effectively paid did that most of us.
That incremental $75 million that we expected to incur and those two items really do explain that what you're seeing in terms of distribution of cash flow relative to the overall target that we're still very confident that with the EBITDA growth being the leader of that cash flow generation, coupled with our focus on working capital optimization, we're gonna deliver right at that targeted free cash flow that we talked about a 2.0 to $5 billion to $2.075 billion for the year. Michael That's you know just to reiterate that one point that that is the.
Call it the long pole in the tent, but that that EBITDA growth, which we've always said is that's the best measure of the health of business I said in my in my prepared remarks.
But you know that I, just don't want that to be missed here I mean, 6.9% growth in EBITDA.
It's pretty darn impressive and that's that's the number we're proud of stuff as we as we report today.
Okay. So just to close the loop on my question and if I follow your line of thinking there Jim Your next best quarter in EBITDA Threeq you seasonally so I <unk> is there anything timing wise of attacks normal tax payment or interest payment that would eat into cash in threeq and so awful portion that 179 or more in the Threeq you lesson for Q.
And I would certainly say that as that long pole in the tent being EBITDA on Q3 being our strongest EBITDA quarter. We are confident that Q3 will be a very strong EBITDA quarter for us.
Our free cash flow for the board and there's not some timing issue around cash outflows like taxes or.
Interest expense that.
Moves that timing around the distribution of the free cash.
That's right I'm not in 2019, I think the only timing Michael by the demand has talked a lot about it so that is capex and.
We have said FX, yeah, yeah, I mean, exactly I mean, we're I think devino.
As we discussed yesterday were well probably.
60% isn't through our Capex spending through two quarters now that doesn't mean anything you necessarily kind of straight line it from there but.
But it does give us.
Optimism that Thats. This this timing of Capex in the first two quarters of the year.
Is what's causing this this.
Pretty high capital expenditure number I think the other thing worth mentioning there Michael.
Is that is when we think about Capex a lot of it is about the growth the future growth of the business. We're spending you and I talked about this we travel together, we're not talking about an immaterial number we talk about.
Building a brand new for example, a brand new single stream plants. I mean, you know whether it's the recycle plan the future a single stream plan when you build it from the ground up.
And this and secure the land and put the building on there and then put all the equipment in there.
That's that's not cheap and and that's all for the brand New you know recycle plan of the future in Chicago, that's all happening this year.
We think that is if it if it proves out the way we think it will.
Well the the impact of one plant on the income statement in 2020 is not going to be material. If it proves out the way we think it will from a process and from an equipment standpoint.
This bed would starts this this kind of cascading effect, where we replace every one of our single frames potentially with a plant that looks like that so so that is all that capital is showing up this year.
And none of the EBITDA showing up this year. So it's a piece of this capex.
Is related to just an investment in our future.
Fair enough and thanks for that clarity.
In the past you've shared with US what your price volume trends were specifically in sandy and special waste and by the way. Thank you for including that new table that shows price or yield and volume by lines of business could could we get some clarity on specifically what happened in sandy and special waste.
In the quarter.
Like you did 0.1 volume in one Q.
Yes, I mean, I think I've talked a bit about special waste today and John you can give some color here too, but special waste as I said, there's there's a whole bunch of project work in there I mean.
You know Mike Watchers team are very focused on it we said that that at some point next year, you know CCR as they start to impact that number which would be good for us right now, they're not and right now. It's just it's just a lot of project work, which in.
Kind of referenced to the macro economy is a good thing as somebody North American companies are are using that.
As I think it's a sign that there still is a level of confidence in the overall economy, but it's hard to point to one thing in the in the special waste.
A waste stream, it's all a whole bunch of things and I would say pretty much. The same thing about CND with the exception of the fire volume which was in there.
And so when you look at our CSD volume over the last few quarters, it's been double digits.
It has not been as high as it is.
As it was in the second quarter, but thats that was really more driven by the fire volume.
Yes, I would say is when you look at it.
Great John Sorry, No no go ahead John .
Well I was going to add was when you look at it quarter by quarter, you can see some of the lumpiness with some of the projects have gone in and out of the CD bucket, but as you look at it over the last handful of quarters last two years really it's been generally up into the right as Jim mentioned, we continue to see strength in that overall from quarter to quarter. It is it does bounce around a little bit.
Yes fair enough.
Right.
Sorry, Michael one point I do think that's particularly important on the volume side right on the price side, we're talking about consistent execution on the volume side thinking about the landfill line of business and our outlook for the rest of the year. When when you look at the first six months and 4.3%.
Year to date as volume grows overall and in the company moderation from things like the California wildfire impact in the fourth quarter of last year, They anniversary and the New York Department of sanitation contract. They came.
How does that change late in 2018, we do expect some level of moderation in volumes in the second half of the year from what you've seen in the first half.
Fair enough and so you did 10, one in volume in the first quarter and 17, two and special waste year over year growth, what's that number in twoq for both.
That's a waste was 13.3% and what was the other one that you were looking for you at CMD was 10, one in the first quarter I was just curious what it was in the second quarter.
Year over year growth.
Volume.
That's where the army.
That's where the fire volume showed up for that measure really isn't one of those that stands alone and tells you what the business did that if we normalize for the fire volumes and looked at landfill overall, our volume growth for landfill with 5.3% in the second quarter.
Perfect all right that helps a lot and then last thing.
I mean I've correction the wave show the data you had positive contribution year over year from recycling of for your own efforts, but because where prices are it will be negative in the second half and therefore negative for the year is that the right way for me to model it.
That's exactly right. So the benefit in first half of the year from the recycling line of business totaled $17 million or about three cents of it yes.
And we're now selling that we expect the back half or the total impact for the year to be a negative one to two cents, which tells you a negative four to five cents of EPS is what we expect in the back half of the year and that has to do with our execution on the consumer and agencies in our contract renegotiation efforts that really started to show themselves in the back half of 2018 and Anniversaring those impacts.
Thank you very much for taking the questions.
Thanks, Michael.
Our next question comes from the line of Derek Spronck from RBC.
Okay. Thank you for taking my questions are you seeing any pickup in landfill disposal volumes.
Actually coming from recycled material that otherwise would have been recycled because of the poor economics now.
Instead of being recycled shifting into the into the landfill and maybe you could if you could maybe just touch on the coal ash opportunity as well. Thank you.
Yeah, I would say this is John I would tell you on that for the first question. The short answer is no.
We haven't seen any appreciable impact from recycling movements are moving to our landfills for sure I think one of things we mentioned in the previous call is we've had we had the good fortune to have a really talented team in our brokerage side of the business. So we've been able to continue to move material even through that even through the most the you know the most the harshest downturn in commodity prices in 20 or 25 years.
Yes, and I'll take the coal ash.
Question I I mean.
Weve one of the reasons, we feel good about the the opportunity is because weve. Since 2010, we've managed over 30 33 million tons of Cc ours.
For electric utility customers.
But there's an awful lot left.
Weve developed what we think a really good reputation for for the safe professional.
Handling of the of that but there are 700 active and inactive.
Ash ponds in the United States that are covered by the state and federal CCR regulations.
And so over the next probably decade.
Those electric utilities are going to are going to have to address somewhere in the neighborhood of 700 million tons. It's a it's a big big number.
And we we certainly believe we'll get some portion of that.
Based on past history and based on the fact that we we've built a really solid reputation as a good partner in this area.
Or the landfilling economics on coal ash relatively similar to the MSW landfill.
Yeah, I think so I mean, you know in some cases there's.
We had a big customer a couple of years ago and so the the.
The margins going into the into the landfill were comparable there was a pretty big capital.
Commitment there.
But hopefully some of that capital.
As we use a lot of it was in the form of trucks some of it in the form of of.
Mana Phil.
Construction. So we think that that is going forward and we'll be able to leverage some of that capital that we that we stepped out for with this big customer several years ago.
And so the so the returns there would be it would be actually better than that.
Original customer.
Okay, that's great and maybe just one more for myself.
If the DLJ determines that you need to divest of more than $200 million of asset does that derail. The the NDS acquisition at all or whatever what are the recourse or mechanisms if that were to occur.
Yes, the $200 million isn't negotiated point between the two parties in sort of an insurance policy. If you want to look at it that way, it's not a line in the sand is going to dictate whether the transaction goes or does it go it's simply a way to get full size comfortable with the threshold of potential divestitures, but as Jim said and I said earlier, we feel good about where we are in the process.
All the feedback we've got to date has been consistent with what we expected and that's why we remain confident that sometime in the first quarter 2020, we will be able to get the transaction close.
Okay. That's great. That's all for me. Thank you.
Our next question comes from the line of Brian Maguire from Goldman Sachs.
Hey, good morning, everyone. This is Derek on for Brian .
Good morning Derik.
Thanks for squeezing me in here just one question around input costs in the quarter did you guys see anything meaningful in terms of higher landfill operating costs slightly generation anything like that and if so could you quantify that.
Yes.
We do we certainly reach it continues to be one of the buckets of cost pressure for us as is as is transportation, but I think the important thing to note is when you look at the overall margins.
And Weve talked at length about core price and yield results for post collection and specifically the MSW, we're finding ways to obviously combat that and still show margin accretion. So as doing I think mentioned earlier there are certainly a couple of buckets to I mentioned that are outstripping, what we would expect from normal cost increases, but overall I think we're probably tracking in that 3% range from the Cpis standpoint, so Derek from a quantification perspective on the current quarter impact about 20 basis points of incremental cost was from retail costs and acceleration specifically, but that's incorporated in that 60 basis points of overall margin expansion that we talked about for collection and disposal. So it shows you that leachate is certainly one of those cost categories like John mentioned that.
Outpacing CVI growth, but at the end of the day, it's still a component of that 60 basis points of strong EBITDA margin expansion operating margin expansion that we own the business.
Got it that's helpful. Thank you and then just one last one for me you mentioned sort of a step change in pricing around the transfer station.
What's sort of driving this this focus and maybe whats the opportunity for you guys. As you look ahead for pricing in this in this particular segment.
Well I think weve talked at length about the fact that we've got really well positioned assets and the not just the landfills as Jim mentioned remote gate to the landfills and a lot of cases of these transfer stations, which we think Weve, obviously teams done a nice job of making sure we're positioned in the right places in the right markets.
I think that coupled with some of the strain that's been spoken about it in terms of transportation network.
We've been able to leverage that and I think thats part of the reason why we're seeing the success through the transfer stations and I think that certainly there's two components to pricing one is overcoming obviously the cost headwinds that we've we've we've spoken to and secondly, as leveraging leveraging the position of not only our assets for the network that exists between those post collection assets and I think Thats. What you are seeing the results over the last four quarters.
That's helpful. Thanks, guys.
Our last question comes from the line of Mark Neville from Scotiabank.
Hi, Thanks for taking my question.
I think you just answered it but.
Just to yield a step change in the yield in MSW and transfer.
In around 3.5%.
Hi, guys I guess can you just clarify this point you are capturing incremental margin.
More than offsetting the cost pressures, we're seeing in that business and that's part of the 60 basis points correct.
That is correct.
And.
I think Jim earlier, you mentioned.
Further gains potentially on the yield I'm just I'm curious is that is it more incremental margin or is it.
Again, just more offsetting additional cost pressure.
Well I I don't know that we expect these operating cost we talked about today to continue to climb from where they are.
But they are at this point.
Running in excess of inflation. So so I would guess that that's.
Continuing to to focus on pricing and drive higher price.
Is is probably as much margin accretion, but but I would say after after many years of 1% 0.9% 1.4%.
I don't feel like I'm doing something that.
Sure Upsets me folks.
Okay, and obviously with the volume growth, it's not impacting volume you're seeing in Atlanta business.
Okay, No I mean, I think it goes to what John said, just a second ago and that is that we really have well positioned disposal assets.
Around North America, and so that.
That that makes it makes a big difference for us as we think about our customers viewing it as the next they do it what's considered to be the next best alternative analysis and in many many cases, where the best alternative when it comes to disposal.
Right.
Yes. Thank you.
You bet.
We have no further question at this time I will now turn the call over back to Mr. Jim fish.
All right. Thank you and lastly.
We've talked a lot about our people today and I just want to reiterate how important.
This team of 44000 people is and to producing user results.
Without every single person.
We could not do what we what we do our reporting today wouldn't be what it was.
We continue to make sure they know that by investing them.
And then last week I was in Chico, California.
Meeting with some of our teammates we're about to open a brand new hauling facility next week I'll be in Denver were were visiting our recently opened energy services building I mentioned in my script that we're opening a state of the our driver technician facility in Arizona.
And.
On giving the go ahead this week for the fifth year in a row to fully absorbed health care increases so that our our hard working 44000 employees don't have to pay extra for that very very important benefits.
It's if you were at our Investor at our Investor Day, You heard me talk about something called people first and it's part of that culture. It's.
One of the questions that I think was asked was.
What's the the key ingredient here.
To waste management's consistency.
And this and this.
Kind of volatile economic climate and I would tell you that that the answer is our people.
And so thank you to all of our 44000 teammates today for all that you do and thank you to all of you.
For joining us today, we'll talk to you next quarter.
Ladies and gentlemen, thank you for joining US. This concludes today's conference call you may now disconnect.