Good morning. My name is Ginnisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2015 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, Ginnisha. Good morning, everyone, and thank you for joining us for our Second Quarter 2015 Earnings Conference Call. With me this morning are David Steiner, President and Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the 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 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. Additionally, any comparison, unless otherwise stated, will be with the second quarter of 2014. During the call, David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share. David and Jim will also address operating EBITDA and operating EBITDA margin as defined in the earnings press release. EPS, effective tax rate, income from operations, income from operations margin, operating EBITDA, operating EBITDA margin, operating cost, operating cost as a percent of revenue, SG&A and SG&A as a percent of revenue results discussed during the call has been adjusted and EPS projections are anticipated to be adjusted to enhance comparability will exclude…

Thanks, Ed. Good morning from Houston. Our strong second quarter results reflect our continued commitment to disciplined core price growth and cost controls, combined with improving volumes, all positive trends that we expect to continue throughout the second half of the year. In the second quarter, we earned $0.67 per share, an increase of almost 16% from the second quarter of 2014 after excluding the earnings from divested businesses and assets. Our net income, operating income and margin, operating EBITDA and margin and earnings per diluted share all improved when compared to the second quarter of 2014, despite year-over-year headwinds of $0.03 per diluted share from lower recycling commodity prices and the unfavorable impact of foreign currency fluctuations. We also saw our business generate significant cash as our cash provided by operating activities increased 47% and our free cash flow grew 30%. We're pleased with these results, and we expect the positive momentum to continue to build through 2015 and into 2016. Our pricing programs continue to be a big part of our earnings growth and margin expansion, and our strategy remains the same: continue our focus on core price while selectively adding the right new volumes. For the second quarter, our collection and disposal core price was 4.1% and yield was 1.7%. Year-to-date through June, core price was 4.3%, which exceeded our 2015 core price target of 3.8% and yield was 1.9%. As we've said in the past, core price is a better indicator of true pricing activities because mix issues can affect our yield results, as we saw in the second quarter. It's bottom line dollars that count, and core price reflects the bottom line impact from pricing. So while we said that yield would be around 2% for the year, we're not concerned with a slight drop…

Thank you, David. In the second quarter of 2015, our focus on reducing SG&A costs continues to bear fruit. Overall, SG&A cost declined $31 million compared to the second quarter of 2014. When you adjust 2014 for the operations that we divested, our year-over-year SG&A cost improvement was $18 million, consistent with our expectations for savings from our reorganization. As a percent of revenue, SG&A costs were 9.7%, an improvement of 40 basis points compared to the second quarter of 2014. With the strong results in the first half of 2015, we expect to achieve our full year SG&A goals of reducing SG&A costs by $60 million. Turning to cash flow for the second quarter. Net cash provided by operating activities was $816 million compared to $555 million in the second quarter of 2014, an improvement of $261 million, with a reduction in cash taxes accounting for $216 million of the increase. Free cash flow was $579 million in the second quarter of 2015, an increase of $245 million when excluding free cash flow from operations divested in 2014. Our capital expenditures for the quarter were $296 million, $88 million more than the second quarter of 2014, as a portion of our expected increased fleet spend occurred in the second quarter. Excluding the cash tax benefit, free cash flow grew almost 9% compared to the second quarter of 2014, despite an increase in capital spending. Given the level of expenditures in the first half of 2015, we expect capital expenditures to be at the high end of our guidance range of $1.2 billion to $1.3 billion. Despite that, free cash flow for 2015 is also expected to be at the high end of our guidance range of between $1.4 billion and $1.5 billion. Second quarter revenues were $3.3 billion. We…

[Operator Instructions] Your first question comes from the line of Corey Greendale of First Analysis.

Just a few questions. So first of all, I appreciate the update on progress on some of your discussions on the structure of your recycling contract. Just wondering, given that commodity prices have come off the bottom somewhat, is that impacting those conversations and your customers' willingness to engage in changes?

No. Really, the prices haven't come off the bottom. I mean, as -- to the extent they've come off the bottom, it's been very marginal. So we're still relatively close to sort of breakeven when it comes to processing costs versus commodity sales. So no. The -- in fact, if anything, I think the discussions have become more pronounced with the customers. And I think more and more -- as you see more folks like you all in the financial community and more folks in the general press understanding the issues facing recycling, I would say those issues are more and more coming to the front rather than going back.

Corey, when you look at the way that average weighted commodity price, it was about $83 in Q1 and $83 in Q2. So really, the improvement we're seeing is through our cost efforts on cost of goods sold and operating cost.

Okay. As far as -- at least, the numbers I've seen so far in July, it came [ph] more meaningfully off the bat [ph]. And -- but I'm looking at OCC and newsprint primarily, so maybe the...

Yes, OCC seems to have stabilized a little bit, but it's still at low levels.

Okay. The next question, David, clearly, the tenor on the volume environment is getting increasingly positive. I just want to make sure I'm hearing you correctly. I think you're saying you would expect volumes to get kind of increasingly less negative each quarter in the back half, but you're not necessarily calling to -- for it to go positive. Or -- but I just want to clarify that.

Yes. What we're trying to do, in order to give you all a little bit even more clarity is to separate it between what we're calling sort of our core solid waste volumes and then overall volumes. And so when we look at it, we look at those core solid waste volumes, which were negative 0.6% in the quarter. And we would expect that to improve in the third quarter and in the fourth quarter so that -- look, we aren't going to try to predict a turn to positive volumes. We said this year that we didn't think volumes were going to get positive. But I would expect us by the end of the year to be at a run rate where we're actually flat to positive on volumes.

Okay, great. And then a question on the free cash flow. I'm just trying to understand the moving pieces, particularly related to cash tax payments. I think last year, you had a $210 million hit from early payment of taxes and that benefits this year. But can you kind of clarify, is that the right number? What -- have you already seen that whole benefit? And what should we expect in the free cash flow breakout between Q3 and Q4?

Yes. So that's right. $210 million was kind of the early payments in the Q4 of last year. So we kind of backed out $216 million to get to a number where we think that's for the year. And particularly, by the way, when you look at cash from operations and free cash flow, both of those, if you normalize those for those taxes and if you normalize free cash flow for CapEx, we're in a position where we've actually overcome the WTI divestiture, which is pretty amazing in and of itself. For the remainder of year, if you tack on what we think was -- is achievable, which was the last year -- or last year's cash flow from operations, and essentially, that's what we did for the first 2 quarters; if you tack that on, and that's what we're forecasting, then you get to a number that's in that $1.5 billion range for free cash flow.

And Jim, without asking for kind of operational guidance for 2016, if you just look at movement in cash taxes, would you expect the free cash flow would be up in '16? Or could it be down because of a movement in cash taxes?

So if I -- yes, if I take our guidance for this year of $1.5 billion and I normalize that for the cash tax benefits and CapEx a little bit -- it's hard to say exactly what CapEx is going to be next year -- I get to a pretty good starting point of about $1.35 billion to $1.4 billion. Not that we're going to give you a lot of guidance for -- just yet, but...

Your next question comes from the line of Alex Ovshey of Goldman Sachs.

This is actually Usha Guntupalli on for Alex. One more question on recycling. Assuming commodity prices stay flat at current levels, you're obviously working on reducing cost in this business. But when do you expect the business to turn earnings positive at current commodity prices?

Yes. Well, we're earnings positive, actually, at current prices, just slightly EBIT positive and certainly positive from an EBITDA point of view. So we didn't lose money in recycling in the quarter. We just did $0.02 worse than we did last year. So it's the year-over-year comparison. So we are slightly EBIT positive, but certainly not EBIT positive enough to earn our return on capital, to earn our weighted average cost of capital. So that's why we've got to get those earnings up.

Got it. That's helpful. And on the yield, yield seemed to have slowed in the second quarter, and you did mention part of it was just mix. Could you give us more color on what was driving that mix?

Yes. When you look at yield versus core price, it's why, quite a while ago, we started talking more about core price. Because really, core price is what drives dollars to the bottom line. When you look at yield, there's a lot of different factors that can play into that. I'll let Jim talk about a few of the ways that yield can -- I guess though, the point is that yield is indicative of pricing, but it's really sort of directional, whereas core price is truly indicative of what's going on in our pricing programs. But I'll let Jim talk a little bit about the difference between yield and core price.

Yes. I think probably a good example of that is our energy services business. Typically, that business has a longer -- quite a bit longer length of haul than our ordinary business. So due to that longer length of haul, that business has a higher unit price and a higher yield, but not a higher core price or profitability per unit. So as the energy services business has slowed due to the fall in oil prices, we've seen a decline in yield but not a decline in core price or unit profit.

Dave and Jim, you also mentioned that we improved in the new business side on a net basis when we add new business in markets that have a lower average unit rate -- not a lower profitability measurement, not a lower margin, but a lower average unit rate, and that's what happened in Q2 -- and/or we lose business in markets with higher or lower average unit rates, that affects yield, and that's what happened in Q2. But it has no impact on margin or core price.

Yes. You can imagine, just to sort of put some color around what Jim Trevathan is saying, you can imagine that, right now, there's a lot of growth in Texas and Texas has lower landfill rates than you have in the Northeast. And hence, you've got a little bit lower pricing, but you also have very high profitability. So it's not a profitability issue. It's just the fact that you -- because you have lower landfill pricing in Texas than you do in the Northeast, you'll have lower unit costs and unit pricing for when you offer new services. And so as you've seen more growth in places like Texas, where it's very profitable but it's just a lower unit rate versus the Northeast, that's what drives sort of those mix issues. And so when we look at that, we say, "Okay, the yield is down, but profitability is up." That's not such a bad thing, and that's why we say, really, what you have to look at is, overall, across our entire business, what are we doing from a price increase point of view? Because price increases takes mix out of the mix, and so core price is really the true indication of what we're doing. And as you saw with core price at 8.6% industrial and 5.8% in commercial, it's still running at a pretty hefty rate.

Your next question comes from the line of Joe Box of KeyBanc Capital Markets.

Just want to review the capital deployment strategy post-Wheelabrator. Obviously, you guys have Deffenbaugh under your belt, and I know you've got $50 million to $75 million of EBITDA lined up from deals that are going to go next year. Just curious if you've gotten all the deals done that you've expected. Because externally, it looks like or it seems like -- I know you guys are shooting for more deals when you sold Wheelabrator. And then just as a quick follow-up to that. The items that you outlined, the items that you mentioned in the pipeline, are those solid waste companies? Or are they outside of solid waste?

Yes. When we're looking at companies, they're all going to be solid waste. We really wouldn't look to stretch outside of sort of our core business when we're doing acquisition. The acquisition -- you always think that you're going to have to have this money to spend, there's plenty of people out there to sell and it should be fairly easy to replace the EBITDA. And then once you get into the market, you realize that there's 100 different issues that affect sellers, right? Sometimes they're family businesses, and it's hard to get the family over. Sometimes there's a higher expectation for pricing. And so when we went into the -- into it, we said, "Look, if we can replace the Wheelabrator EBITDA at good accretive multiples, we'll do it." The good news for us is, if we can't, we can still buy back stock and it would still be accretive to where we were with Wheelabrator. So we're sort of in a win-win situation. And rather than run out and, sort of in an undisciplined manner, just pay whatever we needed to pay to replace the Wheelabrator EBITDA, we decided to take a little bit more of a disciplined approach, focus on our core solid waste business and see if we can't go out and do deals that are nicely accretive to -- for our shareholders. And so would we like to -- would we prefer to buy businesses that replace the EBITDA rather than buying back shares? Sure we would, because that's a little bit more accretive for our shareholders. But we've got to maintain our discipline on pricing, and we've got to realize that sometimes these acquisitions have to brew for a little while before they're ready and sellers have to come around to the fact that they're ready to sell. And so we certainly think that, over time, we will replace that roughly $200 million of EBITDA from Wheelabrator. It's just not going to happen overnight.

And Joe, as I said earlier to Corey's question, I mean, we've kind of afforded ourselves the luxury of really being disciplined here, because we really have -- if you look at our second quarter, you look at our net cash from operating activities and you back out the cash tax benefit, we're $45 million in second quarter of last year, and that quarter includes all the divested businesses. So in -- on a net cash from operating activities line and on the free cash flow line as well, if you -- you got to normalize the free cash flow for CapEx. But on both those lines, we have essentially replaced Wheelabrator and Puerto Rico and the Maritimes. And really, the only acquisition we've done is Deffenbaugh, and we've had it in the company for a quarter now. So what we'll do in terms of capital allocation is continue to opportunistically buy back shares, which we're doing here -- which we did in Q2 and, again, in Q3 and look to use those proceeds to buy companies at attractive prices.

Got it. Switching gears over to the New York City contract. I know it potentially is coming a little bit closer. Can you guys maybe just talk to what your current contracts are? I know you guys have some transfer stations in the market. And maybe talk about if you are participating in the new RFP and how you kind of sit in that market.

Joe, I'll address the bid that's out now, the RFP that's out. We have provided a proposal for that volume. We are on the short list, along with Progressive. It appears the city has begun discussions with Progressive, and we're awaiting what the next steps are. Progressive, as you remember, was the incumbent for that volume, and what happens to it, I guess, will occur over the third and fourth quarter. We still have the transfer stations in place, receiving volume from the New York -- from New York City, a couple of those big transfers, Joe, and nothing has changed with regard to that volume.

Your next question comes from the line of Scott Levine of Imperial Capital.

So just looking back at your initial guidance for this year. I think I assumed a $0.03 to $0.05 year-over-year hit from recycling. And obviously, your current guidance is assuming much more than that, and I'm guessing a little bit bigger hit from FX. So really, just trying to get a sense. You're guiding to the upper end of the range here. Where's the upside versus your initial expectations coming from to more than offset the greater headwinds in recycling and FX?

Yes. It's really coming sort of across-the-board, right? I mean, on the volume side, although the actual percentage declined and the volumes isn't as good as we thought it would be, frankly, the flow-through that we're getting from the new volumes is better than we thought it would be. And so the point is that we're getting the right volumes. We've consistently hit or beat our targets on our SG&A numbers and on our operating costs. And so really, it's -- what I've said is that everything that we've got going on from an operational point of view seems to be working, other than recycling. And then obviously, we've got the interest savings and the share count going down from the share buyback, and that's benefiting the year. And so when we look at our business, we'd say everything is sort of clicking on all cylinders other than recycling. And so, what is it that we can do to fix recycling? That's -- like we say, that's a long-term issue, but we're making good progress on it.

And to be clear, is there -- and I don't know if you mentioned this, is there a tax rate assumption implicit in your guidance for this year now? Or has it changed at all or no?

For the remainder of the year, I would assume that, that will be a 35%, and that's what we baked into the guide.

Got it, 35%. Okay. And then as a follow-up. I think, David, you mentioned that the acquisitions you're contemplating here in the back half into 2016 are all solid waste. Just wanted to confirm if that's right and just to see if your thoughts had changed in any way regarding the energy waste business, in particular, and/or industrial waste, since you had the breakdown in commodity prices and the landscape's changed so dramatically.

Yes. What we are looking at the back half of the year is most certainly solid waste assets. When you look at things like energy services, we're going to be a player anytime one of those transactions becomes available. We think long term, that's a good space to be. Clearly, short term, it has some challenges. And so you've got to look at it from a long-term valuation point of view, recognizing that short-term valuation is -- might not be what the sellers are trying to sell it on. So we'll play in every one of those bids, but we're not going to -- look, everybody wants to get paid based on when things were blowing and going. They say, "Well, this is just a short downturn." Well, you know, we're not going to make that assumption. When we look at it, we're going to make an assumption on where we think the business is going to go over the next 5 to 10 years, and we're going to value it accordingly. So we haven't bought anything new in the oilfield service space because seller expectations on price haven't come down as much as our view of value. So I would expect that if you look at what we're going to buy over the next year, it will be focused primarily on solid waste.

And what are sellers' expectations there, in general? Is that market kind of more rational in your view than oil services or not?

Yes. I mean, look, we've always said that, for us, it's pretty simple on the solid waste side. If you assume that our long-term multiple is somewhere around 8x, right? It's been higher than that; it's been lower than that. But let's call our sort of long-term view of our multiple at 8x to 9x EBITDA. Why would I pay someone more than 8x EBITDA when I can buy a business I know real well, our own business, at 8x EBITDA? And so -- look, we have lost a lot of deals right out of the chute because sellers are expecting 10x to 12x EBITDA, and that's just a number that doesn't work with our model. And so could we buy more businesses? Absolutely, but we'd be buying those businesses at very high multiples, which obviously reduces the benefit to our shareholders. And so we'll continue to look for those deals that we can buy pre-synergies at 8x or less and then post-synergies, hopefully, at sort of, as we've always said, 5.5x to 6x EBITDA. If we can do that, we're pretty much guaranteed that, come hell or high water, it's going to be accretive to our shareholders.

Scott, and I think the -- kind of the opportunity landscape here in terms of what sellers are looking for is pretty broad. I mean, there are some folks that are looking for -- and, in some cases, getting -- 12x to 15x. We're not in -- we're not talking to those folks. But there are folks that are much more reasonable, and obviously, Deffenbaugh was one that we felt we got at a very attractive multiple. And so we'll continue to talk to companies like Deffenbaugh.

Your next question comes from the line of Al Kaschalk of Wedbush Securities.

David or Jim, I just wanted to clarify. On these deals that you've laid out, the $50 million, $75 million, are these close? Are we at the goal line? Or are these things that still have a few hurdles to get over? I'm just questioning why put this type of color out there today?

Yes. Well -- so I'm going to define the goal line for you, Al. There's really -- there's 2 goal lines: there's getting a deal signed; and then the second goal line is getting a deal approved by the government. And getting the deal signed is a pretty simple process. For some reason, the government has been taking a long time. I mean, look, you saw our Kansas City deal, and it took them 8 months to approve a deal where we weren't even in the market, right? And so it didn't seem like it should take that long to approve it, and it took a very long time for the government to approve it. Now they've got a lot of big deals in the pipeline at the Department of Justice and FTC, and so I assume that's what's causing the delays. And so what I would tell you is, the first goal line is getting the deals signed up. The second is regulatory approval. We will be past that first goal line very short term. I mean, as far as getting the deals signed up, we're pretty much there. And so now the question is, how long is it going to take us to get those deals approved and what constraints will we have around getting those deals approved? And that's just such a wildcard that, that's why we wanted to let you all know, we pretty much got these deals signed up for $50 million to $75 million of EBITDA, but now we've got to get across the regulatory goal line, the due diligence goal line. There's -- as you know, from signing to closing, it's complicated, not only from a business and a due diligence point of view, but from a government point of view. And so we're pretty much past the first goal line. We're now marching toward that second goal line.

And that second goal line, Al, is -- that's not an easy one to get over. We had a deal recently where we had agreed -- we'd crossed the first goal line -- we had agreed on purchase price months ago, but the HSR process was daunting enough for these folks that they just decided, "For now, we're going to back away." So we both agreed to a -- what we both agreed was a reasonable purchase price. But we just felt like that second goal line was not going to be achievable, at least in the near term. So we decided to part ways for now.

So it sounds like this is multiple trans -- several acquisitions as opposed to a single transaction?

Yes. Well, the $50 million to $75 million that we're talking about is comprised of one larger transaction that would generate the bulk of that and then, obviously, some smaller bolt-on.

Okay. David, I want to push back on the volume comments here. The stock got absolutely crushed after Q1, and the number that you put up, I don't know if it was 2.6% or 2.8%, but pardon me for not recalling that. And you had articulated, as a company, getting towards that 50 basis points down to flat, exiting -- I believe, exiting '15.

Yes, yes.

So can you maybe just a little better refine the sequential trends here? And in particular, is this -- this was an overall volume comment? Or was it specific to solid waste about the volume trend?

Yes, it was specific to solid waste. But let me put some sort of color around where we see the volumes going for the back half of the year. So let's start out with our industrial volumes. Our industrial volumes were flat for the quarter, and the only reason they were flat is because energy services obviously is down. So when you look at the rest of the business, industrial is actually positive. So when you look at what we would look at before we got into the energy services business as sort of our core solid waste business, industrial volumes are actually positive, and we don't see anything on the horizon that would stop that momentum. And so even with energy services down, they're flat. So we'd expect those volumes to turn positive in the third or fourth quarter. Looking at the commercial volumes for the quarter, they were down 2.2%; now that's a 60 basis point improvement from the first quarter. We would sort of expect that rate of improvement to continue. And so if you see that rate of continuing -- rate of improvement continue, by the back half of the year, you're sort of at that negative -- call it, negative 1% on commercial volumes. Residential volumes were down, let's call it down 3%, 3.1%. But we don't really honestly even look at residential volumes, because when we're losing those volumes, they're generally low profit, very low-margin volumes. And so we're not that concerned about losing those volumes. And then the landfill continues to be very strong. So when I look at volumes for the back half of the year, I look at volumes -- I'm looking at the volumes that make us money, right? And when you look at the volumes that make us money, it's industrial, commercial, landfill. Industrial is going to be positive, landfill is going to continue to be positive and commercial is going to get better. And so when I look at that, when I look at those 3 components of the volume, I say, "Look, the rest is all just noise." As Jim talked about, when you're getting -- when you're passing through transportation to your customer and you charge your customer $100 for transportation, they pay you $100 and it costs you $100, you make no margin on it, I don't care if I have that kind of revenue or not. And so when I look at the revenues that actually make us money, we see some really good trends, and we expect those to continue in the back half of the year.

Al, I'll add one thing to that, which is recycle volumes. I'll give you an example. We have a plant that's -- a big plant that essentially cut their volumes in half. And by doing that, they improved the quality of the material coming in. They went from, call it, $0.5 million a month loss to breakeven by doing that. So that's similar to the resi volumes. And that's yes, we lost volume on the recycling line of business, but not a bad thing for us on the income statement.

Right, right. Okay. My final question, I want to ask about this whole capital allocation and question why I guess, we lay out -- by the way, is the share repurchase in your [ph] open market transactions versus an accelerated share repurchase?

We haven't made a final call on that. But we did an accelerated share repurchase in the first quarter, and I wouldn't be surprised if we did one in the second.

Okay. The second -- I guess the...

On the 14th [ph].

To that end, David, why quantify a certain one quarter out of share repurchase program target versus -- you're in it for the long haul here, but -- and then as well as shareholders are, to just not maybe specifically allocate capital to those markets so that you can give yourselves some flexibility to execute on M&A? Maybe the stock gets hit, maybe it doesn't.

I think that's a great point. And where we are right now is, we're still sort of in the -- what I'd call the final stages of replacing that Wheelabrator EBITDA. I will tell you that, as Jim pointed out, we've basically replaced it through operations. That obviously takes a lot of pressure off of our need to do acquisitions. But we want to see what we can get put together in the back half of the year from an acquisition point of view so that then we can make that long-term call on where we are in share repurchases. So Al, I would expect that when we give guidance for 2016, we'll be able to say, "Okay, here's what our expectations are for acquisitions, and here's what our expectations are for long-term share repurchases and an approach to the dividend." And so I would say that in 2000 -- at the beginning of 2016, after we've sort of went through the market and determined what we can buy and what we can't buy, that we would be able to give you a more long-term view of share repurchases.

But to be fair, David, I think what you said earlier this year that by the end of Q2, you would kind of know -- I guess you're asking for an extension, from the outsiders looking in. Because I think you said earlier this year that by the end of Q2, you'd have an idea what the M&A would look like to execute here.

I'm not sure that I'm asking for an extension. But I am saying that -- yes, like I said earlier, you go into this process thinking, "Well, this is going to be simple. There's a bunch of sellers that want to sell, and we're a buyer and this should line up fairly easily." And at the beginning of the year, it absolutely lined up easily. Jim talked about a transaction, and if we had done the transaction Jim was talking about, we pretty much be -- have replaced the Wheelabrator EBITDA and we'd be moving on and telling you what our long-term share repurchases are. It's only been in the last month where that -- the risk of HSR was too much for the seller to take on, and so we pushed that aside. And so I'm not looking for an extension. I'm just saying that it's a fluid process. It's not a onetime event. And it didn't play out as fast as we would've liked it to play out. And so the back half of the year is going to continue to be a little bit more fluid, and then we can get more certainty going in 2016.

Yes. But I guess you were playing a little analyst earlier in terms of 8x, 9x on what you're trading at. And if you're down now with the stock price where it's at, at the level, it sure would seem to make a lot more sense to buy back stock than to chase M&A. But I certainly understand the need to grow back the EBITDA level, but I think I'm looking at what the realization is on asset valuations out there. It looks pretty attractive at 8x here.

Yes, absolutely. Well, look, you're talking at a person that put $2 million of his own dollars into the stock. So I certainly thought it was attractive.

Your next question comes from the line of Tyler Brown of Raymond James.

Jim, so if we could just go back quickly to free cash flow, and you gave some really good color, but I do need a little clarification. So if you assume that the cash tax normalizes, I think you noted kind of a run rate base of $1.35 billion. But does that incorporate this $50 million to $75 million of EBITDA that you have kind of lined up?

It does not. So there's -- that is just growth on top of it. So that -- what I'm talking about with $1.35 billion is really normalizing. And by the way, what we'll do is -- I didn't want to give 2016 guidance, so I kind of gave you a nice starting point there, about $1.35 billion to $1.4 billion.

Exactly, okay. So then you would add on kind of acquisitions, maybe some rollover of Deffenbaugh and then kind of whatever your growth is in the core business and plus or minus the other stuff?

That's exactly right.

Okay, okay, perfect. That's very helpful.

Need models?

No, very helpful. And then can you just -- can you guys kind of work through or kind of remind us just what percent of the book is linked to CPI? I'm just curious how the 0% all-in prints [ph] today are going to impact the '16 pricing. I mean, is that more of a back-half issue? And I mean, should we expect the core pricing will take a step down in '16, just mathematically, from CPI?

Well, to answer your first question, Tyler, it's about 40% of our businesses is driven by CPI. I wouldn't say it's a back-half issue, because I think it's pretty evenly spread. It's kind of a midyear and then an end-of-the-year adjustment. So it's pretty evenly spread for us. And what we've always said about CPI is, to the extent that it hurts us, we'll make it up elsewhere with open market.

And when we talk about CPI, CPI is not -- there is not one CPI. There's a lot of different CPIs and different contracts. What we've been trying to move toward is more of a industry-specific CPI, what we call the Refuse Rate Index. So that as our costs go up -- when CPI is 1% and you're giving people 3% pay raises, CPI just doesn't cover your costs. And so what we've been trying to do in our contracts is look at different types of indexes that more reflect the true costs in our business and try to get those true costs. And so I think as an industry, we could probably do a better job of making sure that we don't get linked to some arbitrary type of CPI, that we get linked to something specific to our industry. And so, when we talk about 40% of our business, a lot of that business -- or some of that business is tied to what we call this Refuse Rate Index, and we hope to move that percentage up.

And David, we've had some success in doing that in the first half of this year in some renewals, where we moved to more of a Refuse Index rather than just CPI. So there's some positive trends occurring.

So is it -- I mean, is it a big portion of that 40%? Or is just kind of a small slice?

Yes. It's probably in the 10%, 15% of that 40%, and that's -- maybe it's 20%; I don't have the numbers in front of me. Within that range.

And typically, Tyler, where we've seen more success in this is in the franchise markets in California. And we've had a couple of big franchise agreements that we've moved to Refuse Rate Indexes.

Tyler, I was trying to break out, at the lower end, we've done in the first half, we -- the Oakland contract is an example of what we did last year that's going into effect this year that's on that same basis.

Okay, great. And then just lastly, real quick. You guys mentioned that, I think, overall landfill was up 3.2% and MSW landfill was up 7.2%. I think I heard that correct. I'm curious, is that a third-party number?

Yes.

Okay. Any color on why landfill MSW has been so strong?

It's been strong now for 2.5 years. And it's probably mostly tied to when we bought the Oakleaf business, and we retained that broker model. And we went out to the folks that brokered the collection business for us and said, "Look, we want you to keep that collection business. You're making good money on it. We want to keep it. But in return, we want you to bring those volumes to our landfill." And that was very successful, and that's when we saw the rates go up. And then -- look, over the last couple of years, I think we've also seen -- as an industry, we've seen MSW grow. So I think the specific actions that we took with respect to our brokers and then the general economy have both been good drivers of MSW.

I tell you, Tyler, the encouraging part about it's not only the volume piece there but really the price piece, if you look at unit rates at our landfills, I was looking at it last night, over the last 5 years, I mean, we've really increased unit rates at our landfills by waste stream, whether it's MSW or C&D or special waste. So we've -- I was kind of thinking along the same lines as you. Does this volume mean that we're seeing a deterioration in price as I think about it by -- in unit rates? And it's not. I mean, it's, since 2011, nice increases and it's every year, nice increases for MSW, special waste, C&D.

Okay. Yes, very good color because that's what I was going to ask. And I mean, it sounds like -- is the landfill pricing a key initiative as you look forward?

Absolutely, absolutely.

Your next question comes from the line of Michael Hoffman of Stifel.

So I -- a little bit on the volume issue. If you look at commercial same store, kept the customer, had the customer, that volume's up, isn't it, in the container?

Yes, that is correct.

Yes, right. So when you have a 7.2% from third party, there's some number that's got to be in that direction in your commercial market same store?

Yes, that's correct.

Right, right. So you're benefiting from what the industry is benefiting, because we've had -- you and I interfacing with the economy outside of work, outside of home is driving more volume in the container.

Yes. And again, look, we don't want to declare that the good times are here. But you all have heard me say over the last couple of years that we have fits and starts in the various statistics, and we still haven't seen a very clear-cut trend until last quarter. And that trend continued into this quarter. So when you look at -- this really is the first quarter where all of the indicators are positive. And again, that doesn't mean we're going to go from a negative 2.2% to a positive 5%, but we don't have to, right, in order to try to make our numbers in the back half of the year. We just want to see continuous improvement. And so weights are up, service increases over decreases are up, the churn rate's down. On the industrial side, we've had really strong new business pricing. So this is really the first quarter where I would say all the indicators are positive. Now look, we all know that can change on a dime. But right now, I'm more optimistic about volumes than I've been over the last 5 years.

And Michael, I want to really reemphasize something here that -- and that is that because this industry -- you've been around a long time. The industry has a history of either being one or the other. You're either price or you're volume, and there's nothing in the middle. And so while we're seeing some nice momentum here on the price side, David went through it in detail a few minutes ago, we are not conceding our strong approach on pricing. I mean -- and that's why we want to make sure we gave that explanation of yield versus core price that Jim and I walked through, because we are as strong as we have ever been on pricing. We're just starting to see it. Maybe it's the economy. But we're starting to see that our volumes are looking promising. It's early in the third quarter, but July looks promising as well.

Okay. So -- you've set me up for a perfect follow-on, Jim. I think of waste as having sort of put their foot down on the accelerator on price right to the floorboard for the last 4 or 5 years, and you took the volume consequence for that knowingly. Where are you -- or are you even contemplating feathering that where instead of being 100 miles an hour, you're going 80, but now, you're not pushing away what could be deemed good business, in particularly, commercial, that now that this volume trend's coming too?

Yes. Look, just the simple math. You've all have heard us say it a million times that you need to get 3% volume in order to make up for 1% price. I mean, that's just simple math. And you can't get 3% volume by giving away 1% price. So the weighting of where you want to focus will always be on price. What we want to do -- and by the way, if we, as the largest player in the industry, switch and go after volume, what do you think the industry's going to do? I mean, look, we're the largest player, and we recognize the position that we're in. So what we want to do is make sure that we get our fair share of the growth and that we grow the right volumes in the right places. And so I don't think -- when you talk to industry participants, I don't think you'll ever hear anyone say, "Well, Waste Management's doing a volume grab in market X or market Y." Do we have individual contracts that we've done where we've gone after volume that I wasn't particularly happy with it on a national account side or somewhere like that? Yes, we've done that in the past. But it is -- that's certainly not a pattern that you will see out of Waste Management. And so we're always going to favor price over volume. But in a growing market, we ought to get our fair share of the volume too, because we can get our fair share of the volume and that won't have an effect on the overall industry pricing dynamic. And so -- look, it's pretty simple economics. In a better economy, we think we can get both price and volume.

And I might add to that, that we've also, because of our price leadership strategy, have begun efforts to improve our service. We realize that there are some improvements that need to be made to make sure we're providing that service that's worthy of our price leadership position, and we're doing a better job of that. You see it in the churn rate. We see it in metrics. We're not done with it, but we have progress in that regard.

Jim, I was just going to say that. Michael, when you talk about going from about 100 miles to 80 miles an hour on pricing, look, we've had a lot of discussion recently, to Jim's point, about a differentiated strategy. I mean, you can still go 100 miles an hour on pricing if you're differentiated. I mean, if your strategy is differentiation with things like the industrial business, where we provide expertise and -- that others don't have and the size of our balance sheet, things like that, or whether it's bringing technology to bear or, to Jim's point, improving customer service, all of those enable you to keep your foot on the price accelerator.

Okay. So but to Jim T's. comment, then the churn rate must be coming down, if the service relationship is getting better.

It was -- it's not where we want it to be. But 10.3% is a whole lot better than 12.2% that was -- that it -- that Q2 of '14. So absolutely, we see improvement and we expect more.

And by the way, Michael, just to expound on that, so -- it shouldn't be lost that we improved the churn rate 190 basis points, but we didn't materially increase the rollbacks, right? I mean, in the past, what we've seen is that we've been -- one of the ways we improve the churn rate is we -- our rollback percentage goes from 25% to 60%. This quarter, we reduced the churn rate by 190 basis points with a virtually nonexistent change in our rollback percentage.

Okay. So we've known each other too long because you just anticipated my next question. So that was -- you're retaining more price, too, then. Is that...

We're hanging on to that.

All right. So now I'm changing gears for a second. Some housekeeping questions, Jim Fish. Starting share count for 3Q should be about 454.5 million. Is that the right way to think about it?

I think more like 457 million, I think, is the number.

What's the 451.8 million, then, that's in the press release plus the comp numbers of -- like 2.8? I can follow-up on that. But I just want to make sure I have the starting place. And then on tax rate, just a follow-up on a question asked earlier. That's 3Q and 4Q should have a 35%, not that the full year will be 35%?

Correct.

Okay. And the working capital, you didn't talk about that. Where are we in DSOs and payables for -- the sort of your plan there?

I'm sorry.

DSOs and DPOs?

Yes.

DSO and DPO, yes, we've made some nice progress there over the last 2.5 years. We've made a nice progress sequentially and year-over-year. We -- year-over-year and sequentially, from Q1, we've improved DPO by about a little bit less than 3 days, DSO by a little less than one day. When I look at it over kind of the time period that we've really started working on this and I -- over maybe a 2.5-year period, we've really improved the combination of the 2 by 9 days. It's not totally out of the realm of possibility that we couldn't crossover at some point down the road. We're still a ways away from that. Some of our areas have started to cross over where their DPO is higher than their DSO. But yes, I mean, I'm pleased with the progress, but won't be completely pleased until we cross over like most companies are.

All right. So just to put numbers on that. You're still in the mid-40s on DSOs and high 20s on DPOs, days?

We're in the low 40s on DSO, and we're -- we've crossed over to 30 now. We're above 30 on DPO.

Okay, okay. And then I didn't -- maybe you said this, but I was writing some of your numbers and I missed it. But what was the special waste trend at the landfill in the second quarter?

Yes. The special waste was 2.4%, as I recall. Let me -- just looking at the volume, it was 2.4% for special waste. And then -- but when we look at it, we sort of look at special waste, C&D and revenue-generating cover. When you look at special waste, it was 2.4%. But revenue-generating cover, which is essentially special waste, was above 10%.

Well -- and I guess where I was going, it was wet in a lot of places in the country, and special waste is predominantly dirt. So there's a good chance that we could see a special waste number that's much bigger in 3Q because you just couldn't get heavy equipment in to move the dirt around.

Yes. We actually had that discussion with our folks out in the markets. And you obviously had some wet down here in the Texas area. You had it up in the upper Midwest. I think what our folks would say is the pipeline looks pretty strong. We don't expect special waste to slow down in the back half of the year. So I think they're pretty optimistic about it.

Okay. And then on the deal commentary. Just to be clear. I get these are -- the ones you've got targeted are solid waste, but that doesn't preclude you -- you made a comment earlier, David, that I want to do is make sure I understand. You would buy hazardous waste business or an energy waste business under the right circumstances. That's just not what you're targeting at the moment.

Yes -- no. Absolutely, we would. And we consider those sort of core solid waste-type businesses. Those are areas where we can apply our expertise very easily. What we aren't going to do is what I led 5 years ago, which is, get into some other types of businesses that -- where we can't take our solid waste expertise and apply them very easily.

Okay. Saving the best for last, Jim Fish, on free cash flow. If I take your $1.5 billion and I look at it on what's the recurring operating cash generation, I got to pull out $300 million, right, $100 million for asset sales, round number's $200 million for cash tax. So I start at $1.2 billion and then you're suggesting you'll be $1.35 billion potentially, not giving guidance. But none of that has any deals in it. So that's a pretty healthy $150 million swing. How much of that's working capital versus the optimization programs, cost saves, organic?

Part of it, Michael, is you pull out $100 million in acquisitions. But -- I mean, in dispositions. But we do dispositions every year. And so we sort of always assume that we're going to do, call it, $50 million to $100 million of asset dispositions. And so that -- I'm not sure that you pull out that full $100 million.

And how did you get to the $1.2 billion? I know you pulled out the cash tax piece. What else did you pull?

Well, you have asset sales, so I can't predict that number, right? Because I can't write a chart between 1 -- $50 million and $100 million. So if I say it right, with the business generating in its own cash $1.5 billion less $100 million for assets, $200 million for cash taxes puts it at $1.2 billion. $1.2 billion goes to $1.35 billion, that's a $150 million year-over-year improvement and there's no deals in that. I'm just trying to understand...

I'm trying to also kind of normalize CapEx. I don't know what my CapEx is going to be next year, but 2014 CapEx was $1.150 billion. 2015 CapEx is going to be $1.3 billion. So on -- by the way, on a smaller business, at this point, I mean, we don't have Wheelabrator, we don't have Puerto Rico, we don't have maritime. So I'm kind of -- I'm adding back a bit there in CapEx, too. But it's hard to say what are -- we know we're going to have some CapEx next year for Oakland. We had some this year for Oakland. So it's not going to be $1.150 billion again, but it may not be $1.3 billion either.

And Michael, you and Jim are talking the same number. The only difference is the divestiture piece basically. And I think that's the whole point, Michael, is that it's the divestitures and the CapEx that can move around a little bit. So when you look at the sort of the long-term history of what we've done, both on CapEx and on divestitures, you sort of get to that $1.35 billion number.

Okay, yes. What I was really trying to understand is what made up the $150 million. And so some of it is CapEx. How much then is organic versus the optimization programs you've initiated over the last couple of years? That's -- how would you...

We'll get into that. I mean, I don't want to try to parse it to the penny, because frankly, we haven't done that. We'll certainly do that next year when we give 2016 guidance. So that's probably a better time to try to parse it down to the penny.

We'd still get asked the starting point though, so we did have that answer.

Right. So we're agreeing -- both agreeing on $1.2 billion. So that's good enough. All right.

Certainly.

And Michael, the -- your question about share count. I mean, the difference between your 451 million or 452 million and my 457 million is just the effect of using weighted average common shares outstanding, and that's -- that has to do with the midyear share repurchase.

Your next question comes from the line of Barbara Noverini of Morningstar.

You talked a little bit about differentiation earlier in order to push price, and I thought we'd focus on the residential business just a little bit. My sense is that Waste Management used to differentiate themselves with recycling services in a bundles contract. But now that you're heavily scrutinizing recycling, how else do you differentiate in residential outside of recycling? Is winning or renewing municipal contracts in this competitive environment increasingly dependent on the bundled services you're able to provide municipalities?

Yes. So I don't think the bundling of recycling with residential slows down. In fact, frankly, it's more of an opportunity to bundle it, because given the asset mix that we have, we're one of the few companies that can actually make money on recycling. So it probably gives us a little bit of a competitive advantage as far as bunding recycling with that -- with the -- with residential services. But when we look at the residential line of business, we start out with, let's keep the contracts that we have at current rates or higher rates. And keeping the contract that you have is all about service, right? Most municipalities, if they've had your service for a long time and they're happy with it, the citizens aren't looking for a change just to save a little bit of money. And so the first part of our residential strategy is keep the contracts that we have at the same or higher rates, and we've got a very high success rate of doing that. And then the second piece is, find out where we can be competitive advanced -- competitively advantaged. So if it's in a market where we have recycling capability and no one else does, can we bundle it with recycling capability? If it's in a market where we have different types of disposal assets and different green initiatives that we can bring to the table and that's what the customer wants, that's how we'll differentiate ourselves. And so for us, it's a 2-part strategy. It's, make sure you keep your current contracts, and that's by providing spectacular service. And then it's, find out where we can win bids that aren't based solely on price. Because if they're based solely on price, we aren't going to win. And so let's find those markets where service, recycling, green initiatives, make a difference, and let's go in and win those bids.

I think there are are several things. I mean, we almost look at it by line of business. Because what differentiates you in the industrial line of business is different than what differentiates you in the residential line of business. So as we -- and in fact, we're in the process of going through a strategy preparation to present to the board here in August, and we're focusing specifically on differentiation in one case and it is by line of business. So maybe we bring different technology to the table, maybe -- certainly, operating efficiency because so much of the residential business is driven by price, that you've got to be as efficient, from an operating standpoint, as you can in residential.

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

Thank you. Thank you all for joining us. We've had a strong start to the year. We expect to finish the year strong, and we'll see you next quarter. Thanks again.

Thank you for participating in today's Waste Management's conference call. This call will be available for replay beginning at 1:30 p.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on August 6, 2015. The conference ID number for the replay is 64809894. The number to dial in for the replay is (855) 859-2056. This concludes today's Waste Management's conference call. You may now disconnect.