Ed Egl - Director of Investor Relations David Steiner - CEO Jim Fish - President & CFO Jim Trevathan - EVP & COO

Noah Kaye - Oppenheimer Andrew Buscaglia - Credit Suisse Al Kaschalk - Wedbush Securities Hamzah Mazari - Macquarie Capital Michael Feniger - Bank of America Corey Grindal - First Analysis Joe Box - KeyBanc Capital Michael Hoffman - Stifel Tony Bancroft - Gabelli & Company

Good morning. My name is Jinisha, and I’ll be your conference operator today. At this time, I want to welcome everyone to the Third Quarter 2016 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instruction] Thank you. I would now like to turn the conference over to Mr. Ed Egl, Sir, you may begin.

Thank you, Jinisha. Good morning, everyone, and thank you for joining us for our third quarter 2016 earnings conference call. With me this morning are David Steiner, Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedule for the press release include important information. During the call, you will hear forward-looking statements which are based on current expectations, projections or opinions about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today’s press release and our filings with the SEC, including our most recent Form 10-K. David and Jim will discuss our results in the areas of yield and volume, which unless otherwise stated, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, David and Jim will also discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and David and Jim will address operating EBITDA and operating EBITDA margin as defined in the earnings press release. Any comparisons, unless otherwise stated, will be with the third quarter of 2015. The third quarter of 2016 results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and schedules, which can be found on the Company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today until 5:00 PM Eastern Time on November 19. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, dial 855-859-2056 and enter reservation code 90149575. Time-sensitive information provided during today's call, which is occurring on October 26, 2016, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now, I'll turn the call over to Waste Management's President and CEO, David Steiner.

Thanks, Ed, and good morning from Houston. Our third quarter results exceeded our internal expectations. As we have all year, we saw improving volumes strong attitudes in our pricing programs and continue traction in our cost programs. Each of our net income, operating income and margin, operating EBITDA and margin and earnings per diluted share improved when compared to the third quarter of 2015. And during the third quarter, we achieved the significant milestone as our operating EBITDA exceeded $1 billion for the first time. We earned $0.84 per share in the third quarter, an increase of 13.5% from our third quarter 2015 results. Our continued growth and earnings translated into strong generation of cash flow from operations, which grew $96 million in the third quarter and drove year-to-date cash from operations to over $2.2 billion, that’s almost a 12% increase over last year. So, we’re very pleased with the momentum that we built in the first three quarters of the year, which we expect to continue into the fourth quarter and extend it to 2017. Our pricing programs are significant reason for our earnings growth and margin expansion. For the third quarter, our collection and disposal core price was 4.7%, and collection and disposal yield was 2.1% with total company yield at 2.6%. Core price improved 70 basis points from the third quarter of 2015. Core price in the industrial line was 8.6%, in the commercial line it was 7%; and in both our landfill and residential lines, it was 2.6%. Importantly, we demonstrated our continued ability to increase prices while retaining customers through improved customer service. As our churn rate dropped to 8.7%, that’s 170 basis points better than last year and 40 basis points better than the second quarter of 2016, this is the lowest churn that we've seen since before 2015. It attributes to our customer service and operations folks who work together to create a better customer experience. With respect to volumes, we continue to see positive volume growth in the third quarter just as we have all year. In the quarter, we saw volumes in our high margin commercial, industrial and our landfill lines of business continue to grow, and we saw an improvement in the rate of decline of residential volumes. On traditional solid waste volumes were positive 1.6% in the third quarter 2016, a 170 basis point improvement from the third quarter of 2015, and an 80 basis point improvement sequentially from the second quarter of 2016. And our overall volume was also a positive of 1.6%, as our national accounts and recycling segments contributed positively to volume growth in the quarter. Our entire team continues to execute on our strategy of maintaining price, adding high margin business and improving customer service, and the results continue to impress. Our landfill line of business continues to shows strong results too, which Jim will discuss in more detail; however, as we previously mentioned reaching the significant increase in the cost of managing the liquid that occurred in our landfill. In the third quarter of 2016, the increase in leachate cost was about $23 million or a drag of $0.03 per share. We continue to rollout our Waste Water management chart to our landfill customers through our under long-term contracts. However, the charge is fully implemented on our spot customers. So, in the third quarter, we added approximately to 0.2% to landfill yield from implementing the charge, with almost no pushback. However, we still have a long way to go before we can recover the full cost. It’s important that we pass the cost increases onto our customers, so that we can achieve an appropriate return on investment on our landfill assets. But just like when we implemented fuel surcharge, it will take time to fully implement discharge. Turning to recycling, we saw a 13.6% increase in average commodity prices at our recycling facilities for the quarter and a 0.9% increase in the volumes. Year-over-year, the recycling line of business contributed almost $0.03 per share to earnings, which helped to offset the $0.03 of increased leachate cost. The improvement in earnings was driven by about $0.01 from pricing and about $0.02 from operational improvements at our recycling plants and our continued efforts to improve our contracts. On the operational side, our recycling employees have done a nice job on improving operational efficiencies, such as reducing downtime events through preventative maintenance practices, educating customers about contamination and charging for contamination all ridges. This led to gross operating expenses improving 4.5% in the third quarter; and on the contract side, we continue to work with customers on more fair contract terms to allow Waste Management to remain their recycling partner and provide us with a sustainable business model. So, we’re very pleased with our third quarter results as well as our results through the first nine months of 2016. We are proud of hard work all of our employees have done to-date to exceed our expectations for yield, volume, earnings and cash flow generation. Consequently, we are again raising our adjusted diluted earnings per share guidance for 2016. We are confident that we can achieve consensus for the fourth quarter, which would put us at $2.91 of EPS for the full year. Cash flow continues to be strong, and we remain confident that we can achieve our free cash flow guidance for 2016 of between $1.6 billion and $1.7 billion. As we move towards the end of the year, we will do what we have done in the past few years where we estimate full year cash flow and determine, if we want prepay up to a $100 million of our 2017 capital spend or taxes. I want to thank all of our team members for demonstrating once again why they are the best in the business. I will now turn the call over to Jim to discuss our third quarter results in more detail.

Thanks, David. The third quarter was indeed another strong quarter for us. Revenues on the quarter were $3.55 billion, an increase of a $188 million or 5.6% when compared to the third quarter of 2015. We saw a $110 million increase in our collection and disposal business from a combined price impacts of pricing and volume. A $60 million increase in revenues from acquisitions net of divestitures, and recycling revenues increased $27 million. These increases were partially offset by an $11 million decline related to lower fuel surcharge revenues. Foreign currency fluctuations had no material impact on revenues, compared to the third quarter of 2015. Looking at internal revenue growth for the Company, in the third quarter, our collection and disposal core price was 4.7% and yield was 2.1% with total volumes improving 1.6%. Volumes were positive for the third consecutive quarter. The combined positive price and positive volume led to total company income from operations growing $65 million, operating income margin expanding 90 basis points to 18.8%, operating EBITDA growing $71 million and operating EBITDA margin growing 50 basis points to 28.2%. Our collection lines of business continue to see the benefits of improving volume. Industrial volume was up 1.9% in the third quarter, a 150 basis point improvement from the third quarter of 2015, and a 40 basis point improvement sequentially. Commercial line of business showed strong momentum with volumes up 1.2% in the third quarter. A 250 basis point improvement from the third quarter of 2015 and a 90 basis point improvement from the second quarter of 2016. While our residential business volumes were down 2.9% in the third quarter, this reflected a 70 basis point improvement from the third quarter of 2015 and a 60 basis point improvement sequentially from the second quarter. Overall our collection income from operations grew $26 million and EBITDA grew $38 million in the third quarter. In the landfill line of business, we again saw the benefits of both positive volume and positive yield in the third quarter, just as we saw in the first and second quarters of this year. Total landfill volumes increased 6.9%. MSW volumes grew 6.1%, C&D volume grew 22%, and combined special waste and revenue generating cover volumes grew 6.7%. More than half of the growth in C&D was due to storm clean up in Louisiana, but underlying trends remain strong. We achieved core price of 2.6%, an increase of 30 basis points from the third quarter of 2015. The combined positive price and volume in the landfill line of business led to income from operations and EBITDA each growing $12 million in the third quarter. Moving now to operating expenses. As a percent of revenue, these expenses increased to 10 basis points to 62.5%. For the third quarter, operating expenses increased to $121 million when compared to the third quarter of 2015. Landfill operating costs represented the largest increase, up $29 million. $23 million of the $29 million increase were the increased leachate cost, which equated to 60 basis points to the percent of revenue. The remainder of the operating cost dollar increase related primarily to our increased volumes and costs from acquired operations, with labor costs increasing $28 million, cost of goods sold increasing $25 million, and subcontractor costs increasing $22 million. These increases were partially offset by savings from lower fuel costs. Over the next 12 to 18 months, we expect to see operating expense margin improvements as we add waste water treatment capacity and as our increased fuel fleet purchases and MSPO initiative began to positively impact maintenance costs. For the third quarter as a percent of revenue, SG&A costs were 9.3%, an improvement of 50 basis points when compared to the third quarter of 2015. On a dollar basis, SG&A costs were $330 million, a slight improvement compared to 2015. We've done a nice job controlling SG&A costs as increases in wages and compensation have been offset by other improvements. Turning to cash flow for the third quarter. Cash provided by operating activities was $753 million, compared to $657 million in the third quarter of 2015. Our operations continue to perform very well as cash flow was driven largely by an operating EBITDA increase of $71 million. During the third quarter, we spent $333 million on capital expenditures, a decrease of $2 million when compared to the third quarter of 2015. Through the first nine months of 2016, we have spent $962 million on capital expenditures, an increase of $98 million when compared to the first nine months of 2015. We still expect the capital expenditures will be between $1.4 billion and $1.45 billion for the full year 2016. In the third quarter, we had $8 million in proceeds from divested assets, a decrease of $28 million from the prior year quarter. Combined, we generated $428 million of free cash flow, a $70 million increase compared to the third quarter of 2015. Year-to-date, we have achieved free cash flow of $1.28 billion. We remain confident in achieving our full year 2016 free cash flow guidance of between $1.6 billion and $1.7 billion. In the third quarter, we paid $182 million in dividends to our shareholders. While we didn't repurchase any shares during the third quarter, we currently plan to start buying back our stock again in the fourth quarter when the window opens. We expect that these late 2016 and early 2017 repurchases will allow us to completely offset the 2017 dilution impacts of our equity compensation plans. Finally, looking at our other financial metrics, at the end of the third quarter, our debt-to-EBITDA ratio measured based on our bank covenants was 2.56 and our weighted average cost of debt was 4.17%. The floating rate portion of our debt portfolio was 13% at the end of the quarter. The effective tax rate was 33.7% in the third quarter. Adjusting for the impairments, the tax rate was 33.5%. We still expect that our full year as adjusted tax rate will be approximately 35%. In summary, year-to-date 2016 has been a very successful year, driven by the exceptional performance from our employees. I want to thank them for their efforts through the first nine months. I know they are working hard to improve our operational and financial performance for the remainder of 2016 and into 2017, and we are confident that they will be successful. And with that Jinisha, let’s open the line for questions.

[Operator Instruction] And your first question comes from Noah Kaye.

I would just like to start with maybe your thoughts on the general environment. We’ve seen commentary around maybe a moderating macro longer-term on the other hand that continues to be some optimism around housing growth, but maybe, Dave, if you could sort of tell us how you’re seeing the picture these days and maybe the sustainability some of this very impressive growth that you’re seeing?

Yes, we obviously can’t look out a number of years, but we said very often that the best indicator for our business is new housing starts. And as you know, we’ve been running a deficit on new housing starts in the United States since 2009. So, we still haven’t gotten to the point where we’re meeting annual demand for new housing start. So, everything I’ve seen, says that’s going to continue to be strong through 2020. Now, obviously, you saw there are some labor challenges in the housing markets, but once those get evened out, I think you’re going to start to see those new housing starts move up from that 1.1 to 1.2 to sort of a 1.4 million to 1.5 million. And you can run at that rate for a good three years to four years before you actually catch up with demand. So, and following those new housing start, you’ll see commercial businesses come in. So, we see the commercial business remaining strong. And then I think, our other lines of business like our industrial and our oil field services, I think oil field services has bottomed out. We should see a recovery, I don’t think that will be a huge robust recovery in 2017. But I think, we’ll see a good steady recovery over the next couple of years. So, absent any big political event or big regulatory event, I would expect that we’ll continue to see good volume growth over the next few years.

Now, I might add one thing and that is, well, it's sometimes hard to see what the microeconomic climate holds. Demographics are kind of set in stone, and when you look at housing starts as David talked about, you’ve got a big generation that kind of Millennial Generation, that’s coming into their own in terms of moving out of parent homes and buying their own houses. So, we feel pretty good about that housing start, which is a direct correlate for us going forward for us for next 5 year to 10 years.

Getting the churn rate down to a slowest level, and over a decade, again very impressive, can you go further from here and where do you see it delivers, continue to drive churn rate lower at this point? And also, how do you think about some of the pricing stickiness benefits of the churn rates being at this level now?

Yes, our pricing programs quite frankly have always been premised on providing better customer service. I always use the cable model, right. We all get an offer to get lower cable or lower TV service, once a week. We will get something that will promise us a lower price, but we don’t switch because the pain in switching is high, and the cost differential is not dramatic. So, you got to keep that good customer service because you don’t change TV provider until you start having service issues, and that’s when you take those lower price offers, and you say, I’m going to listen to these and actually get this done. And so, customer service is pivotal to the long-term sustainability of our pricing programs. And I would say, it’s two things that really driving. One is technology. I mean, in use of technology, the use of data, and I would tell you in that we’re probably in sort of the second to third inning. But the more important part of customer service is making sure that our customer service folks, our sales folks and our operations folks are all working hand-in-hand to make sure that we give a great customer experience. And frankly that’s where we've made a lot of progress over the last two year. Jim Trevathan and his team have done a phenomenal job of creating better connections between our sales folks, our customer service folks and our operations folks to make sure that we’re all driving to that same goal. So, yes, it can go lower, a probably about 4% to 5% of that churn is systemic, people going out of business, moving business different thinks like that. But we think we can continue to get it lower and we expect to do so.

With a couple of specific examples of that, Jim Fish and I listed with our national account team last week. And we rolled out in the last year, a very specific tools that helps us provide for our largest customers, some online and a real-time information that helps them manage their business more aggressively. And it's led us as Dave and Jim mentioned in earlier, it's led us grow national account revenue in total this year, where that’s been a negative drag of our volume in previous years. So, we’re trying to differentiate that service offering very specifically. The other thing, without getting into any specific metrics; and it ties to exactly what Dave said, we’ve added some operating metrics that tie directly to service to our customers, rather than just add internal efficiency look. And that's really helped us focusing the right think, we think add that specific value. And I guess, the last thing I have mentioned there is that, that we've gotten much more aggressive in the process that how we handle service challenges with our customers. Occasionally, we fell and when we do, we want to correct it quickly and adequately. But we also want to make sure that we renew contracts, every opportunity we get, so we’ve added several process changes that led us renew those agreements once an issue, either positive or negative happened. And I think, it’s added to that decreasing churn number.

Your next question comes from Andrew Buscaglia with Credit Suisse.

Can you talk a little bit more about, on the volume side, so that definitely was stronger than we expected, I thought moving into the second half of the year, you guys would see more it like flatter up slightly number, but can you talk about why -- where are the things surprised you obviously C&D was pretty strong, but what exactly happened and how surprised were you with these numbers?

Well, look, I think the trend has been there now for about five quarters. So, I would tell you the move up in the volume number was not surprising at all. What I would tell you is, where we've made the most progress, I would say is on the commercial line. We finally flipped last quarter the commercial line to positive volume, and those are the customers that stay with you on average somewhere between 7 and 9 years. And so, they are long-term customers, we can create that route density. And so adding that 1.2% volume on the commercial line, I think is tremendous. I wouldn't say, surprised, but I would say that, that we're happy to see the landfill continue to be so robust. And it really doesn't look like that's going to slow down dramatically. Now, we may not continue to see that 22% on the C&D line, but we fully expect to continue to see sort of that 4% to 7% increase in the landfill. We don't see that's slowing down, and so we've created some good volume momentum, and we'd expect that to continue in the '17.

And I don't think you can overstate also the importance of that chart number that, Jim, just talked about. I mean, when our churn is at 8.7% and it wasn't too long ago that we were in the 11s, that is a big contributor, and it comes as Jim said largely from our focus on customer service which doesn't cause you to lose yield. You keep a good solid customer through improved customer service.

Yes, Jim, the addition rate itself we talked more about the defection side, but on the addition side, we were up 50 basis points there, providing another quarter that was net positive in number of customers, not just dollars.

And your C&D seemed to have benefited, you mentioned, the Louisiana some work down there, how about in Q4 with storm cleanup from Hurricane Matthew, do you expect volumes to just kind of continue at this level here?

Yes, like any big storm event, the initial issue is that we've increased operating costs. We were actually as a company hit particularly hard by the flooding from the hurricane, we lost probably 20 brand new CNG trucks that were flooded out. And so, we have to move other trucks in, to cover for those trucks, and so the initial will actually be a cost for us. But obviously, you'll see some additional volumes, but it really was not a hurricane that hit in very populated areas and that caused lot of damage in populated areas. And so, if I had to guess, I would say it would be about a wash for the fourth quarter.

Your next question is from Al Kaschalk of Wedbush Securities.

So, performance, David, I want to just drill down on two topics. First, on the volume side, you called out the special waste piece, and if I'm not mistaken that's really more fly ash directed. So, could you talk about maybe the duration of that and what it means more for your broader outlook as it moves to volume? I know you’ve said a few things earlier, but is this more a comment that there is reacceleration in the economy from your perspective, and therefore, this landfill and transfer volumes revenue should be continue to remain strong for couple of quarters.

Yes, the ash is actually a very small part right around 10%.

Less than that.

It's a special waste, so it’s really a pretty small part. But, we continue to see good growth in that area, and we expect to continue to see good growth in that area. As far as special waste goes, my view of it, Al, is that we never really saw the industrial slowdown. And I think, people talk about an industrial slowdown and they focus on a particular sector like, my focus on the automobile sector, they might focus on the housing sector and they might focus on a particular sector and say, well gee, that shows that there’s an industrial slowdown. We cover all the sectors and we service all of the sectors, and we really just haven’t seen when you look at it on that basis with all of the industrial business, we really haven’t seen the slowdown. So, we’ll see a slowdown maybe in the oil field sector, but we’ll see a picked up in the chemical corridor. And so, overall, we really haven’t seen the industrial slowdown, and we don’t see it on the near horizon.

And I'd say, but there is no --

I was going to say, Al, part of that answer is because we're well distributed with our asset based across so many geographic areas, but also as Dave said, specific industries, we are so well positioned along the Gulf Coast with all of the capital being spent to improve petrochemical industry that we picked up quite a bit of volume, those hazardous sites along the Gulf Coast while other places show maybe a little bit weakness and that’s the strength of our company.

I would have thought with the government spending, the election, housing sort of shaking around a little bit, mix data here, that the volume would not have been as strong. Although, look, I’m not taking anything away, I’m just trying to tease out the duration of the tenure of what you see it looks like to be 2% volume growth for the next several quarters. So, that’s sort of that one the setting out.

Yes, we just don’t see -- at this point in time, we certainly don’t see that momentum stopping.

Well, actually, Al, a piece that's been a week for us has been energy services, and we’re starting to see -- starting to hear a little bit from drillers that they may be looking to add capital expenditures in drilling, in 2017. So, we’re not banking on that, but that would be a benefit to us in the landfill.

Okay. My second follow-up, if I may. I wanted to talk a little bit, I know, it was 23 million in terms of cost for the quarter. But just on a bigger pictures standpoint, the leachate cost seems to maybe something that’s maybe going to stick with you for a while. But maybe you can add some color as to how broad base that is, is it just a few sides? Is it regional? Is there weather issues that are going on? What’s the future expense that we should be thinking about?

Yes. I would say that it’s obviously two factors, the volume of leachate and then the cost of disposal of the leachate, right. And there is not a lot we can do about the volume of the leachate. When it rains, we get more leachate. But there is something that we can do, on the disposal side, and that is the bigger part of that $23 million of expense, is disposal side. So we’re building waste water treatment plants, we’re going to look at doing some deep well injection at various sides and so. If we can reduce that disposal cost, we think we can bring that cost down pretty dramatically. Now, that takes a little bit of a time, so we would expect these increase leachate cost to be with us at least through mid-year of next year and probably throughout 2017. But in 2018, we ought to be able to attack it pretty well.

Now, I would say that it is, someone regional, but we’ve seen an increase in transportation, not just in kind of East Coast, Mid Atlantic and doing one, we’ve seen it in Michigan area, we seen it in Texas, not obviously so much on the West Coast. And I don’t think you guys have rained there for couple of years. So, we haven’t seen much in the West or the Rocky Mountains, but defiantly the rest of the country has seen an increase, not only in volume but in transportation cost.

I appreciate all the colors. Are there any one or two sides that, I don't say are problem child, but could be or are working that way there?

The biggest issue we had was in Virginia, when we got, basically, we were transporting the leachate to a water treatment facility, municipal water treatment facility of the PLTW. And they shut off the leachate, not just from our landfill but from all landfills. And so, it’s not an issue that is unique to us. We just happen to have too large landfills fairly close to that PLTW. And so -- and by the way that’s happening a little bit more throughout the country, I wouldn’t say, it’s a trend, but that’s the biggest part of what’s driven our transportation cost. Now, instead of transporting it to a local PLTW, we got to put it on trucks and barges, and ship it 100 of miles. And so, if we can build the waste water treatment facility on site, obviously, you eliminate that transportation cost, and that’s exactly what we’re doing.

Your next question is from Hamzah Mazari with Macquarie Capital.

The first question is just on free cash flow, is 1.6 billion to 1.7 billion the new normal for Waste Management, 5 to 10 years and ago was 1.1 billion. Just trying to get a sense of, is the free cash flow profile sustainable, given that data, features don’t seem like a big part of the number at least this quarter?

Yes, Hamzah, as you recall back a couple of quarters ago, we kind of set the new normal was 1.4 and it feels like that number is going out and it feels like more or like a 1.5. If you look at, kind how to get to our range of 1.6 to 1.7 for this year, I kind walk you through little bit of it. But most of it comes from the single biggest component, which is EBITDA, which is in my mind kind of the best proxy for how the business is doing overall. So, if we think about finishing 2016 with about 365 in the EBITDA, and then you back out CapEx kind of the middle of that range, so that I give it on earlier. So back out CapEx of 1.425 billion last kind of the some of the interest taxes and working capital of about 650 million. And then you added proceeds, and you’re right proceeds are kind a small number this year compared to prior years. But adding proceeds of about 50 million, and that puts you at about 1625 finishing point for 2016. And then in order to get to kind of a new normal, you probably have to kind of normalize cash taxes a bit. We haven't decided exactly what we're going to do. But for the last two years we've actually prepaid some cash taxes, two years ago, we prepaid 200 million. And last year, we prepaid a 150 million. And as we said when we did it, it was really an effort to try and kind of smooth out cash flows a bit, so we don't have these big lumps. But, we'll look at that as we get to the end of year and to the extent that we're kind of over the top of that low end of the range, maybe look to prepay some cash taxes in December.

So, Hamzah, I would completely agree with Jim that I think, I think the business is about a $1.5 billion free cash flow business, I think that's sort of baseline. And then you look at what happens with working capital, right. If working capital goes positive, this year it goes positive because of the prepayments that's how you get to about 1.6 to 1.7. And so, I would say that I'd agree with Jim, the baseline is sort of 1.5 and then you have a couple of other moving items within working capital that could drive it above that.

And then second question on commercial volume, we saw a nice recovery there. But aside from the last two, three quarters, it's been negative since 2008. And I realize that you've been getting rid of low margin business, but maybe just frame for us where we in that commercial volume cycle -- is it the second inning, the third inning? And can commercial see the same cycle industrial volumes have, just curious on any thoughts there?

Yes, I would tell you, Hamzah that I think we're in the early inning, still. I talked earlier about housing starts and how housings starts are, the demand is there. The problem right now is that it's hard for the housing companies to get labor. And I would say that's sort of where we are in this cycle, right, that the demand is there. But getting drivers, mechanics, getting the labor, getting the trucks in place, is something that we've got to work to be able to meet the demand. And so, I'm encouraged that I think we're in the early innings because the demand is there. Now, it's a matter of us getting the labor and the equipment there to meet the demand. But, I'll let Jim.

Completely, agree Dave, it's been a little more of a challenge, you saw that, little bit of the compression in the operating margin. Although, with move forward, it was smaller than previous quarters, and we think that's primarily related to some new route trucks that were not routed before, we've spent a few dollars in maintenance costs to get them up and running and servicing customers correctly. And it's a good problem to have that we see continuing but we're getting our arms around how to do that quicker and faster and better as that volume is forward. And I think, I mean the economy, that's kind of late cycle economy that I've read, you all have talked about. It's definitely is helping volumes. And then I think our process in some of the additions that we've made on how we go out and find that volume. We're targeting volume especially on the commercial side, but also industrial, much more specifically to MSAs that have growth and where do we put the right resources in place, both human and physical resources in place, how do we target it correctly, price it correctly. And those tools have been out there, we're just using them much more consistently across all areas, sharing best practices and you're starting to see the benefit of that.

Your next question is from Michael Feniger with Bank of America.

If we’re in a 1.5% to 2% volume growth next year, what can we reasonably expect for margin expansion? Is it just still work to do, I know, we have leachate cost, but still other areas that we could look at for the cost item that we can make sure that we can get margin expansion?

Yes, when you look at the margin expansion, I think that we still have that 50 to 100 basis point. So, when we look at 2017, we will probably expect to not get a big benefit from recycling even though we think commodity prices are up. We’ve been bitten by that before, so when we put together our plan we probably won’t expect to get a large benefit from recycling. So, that won’t contribute the margin. Obviously, we’ve got this leachate expense which will restrain the margin. But what we need to do is get efficiency gains by adding route density, we need to get more dollars of price as we see the construction season beginning next year and we need to do I think a better job of planning for the construction season and meeting the increase demand that we would expect to see. And to meet that what’s going to drive the margin, obviously, the Jims and our other operations folks keep a great eye on SG&A. And as you see revenue go up, obviously, we pick up basis point there because we’ll hold SG&A relatively flat. And so I think that 50 to 100 basis points of margin expansion next year, so to come probably 40% from SG&A and about 60% from the operating side.

That’s perfect guys. And my follow up, if we do see volumes come out a little bit late next year. Is there any way to move in towards or maybe stepping up the acquisition side or situations you guys talk about the pipeline there and what are you’re seeing on the M&A front?

Yes, the last three years, we've sort of done that $50 million to $70 million EBITDA acquisition starting with RCI in Canada and then Deffenbaugh in Kansas City and then SWS in South Florida. And we really don’t see, one of those types of acquisitions in the pipeline for 2017. So, we’re going to have to go back have to doing it one acquisition at a time doing those $5 million to $25 million type of acquisitions and get our business developers to really go out and start getting some folks to build up those types of acquisitions, so that we can reach. We like to add somewhere between $25 million and $40 million of EBITDA next year, but we’ve got some work to do in order to get that done.

Your next question is from Corey Grindal with First Analysis.

So, just looking at yield being a little bit softer in Q3 relative to Q2, just wondering what do you attribute this to and what do you see as the sustainable rate going into 2017?

Yes. As you know we’ve always said, we think that yield should be somewhere around 2%. The overall company was 2.6%, we actually got some positive from recycling and some other areas where we've sort of been negative lately. So, it’s pretty much right where we expected to be now, we moved that in the back half of the year. And I think we said on the first two quarter conference call that, that it would probably abate in the second half for the year, between CPI and mix that we would see it come down closely to about 2. But you know when I look at -- when I look at pricing increasingly, we’re looking at core price, not yield, because yield has those mix issue in it. Yield has some of the CPI issues in it. But core price is the actually dollar that we’re putting on the street and holding onto in pricing. And as you saw, that was up 70 basis points this quarter. What we said as that we think core price should be sort of at that 4% number year-in and year-out. We would expect that to continue. And so, we continue to get that 4% plus core price, yield should continue at around 2%. But we’re going to get too worked up over a few basis points of moment here or there based on CPI or on mix.

And just looking at commodity prices, which have been on an upward trajectory, what kind of impact are you expecting for your recycling revenue over the next few quarters? And does this have any impact on your efforts to change contracts?

No, I mean, look, we got to get -- you can’t fall into the trap of saying, no, prices are going up, so let's go back to the old style of doing business in recycling. We absolutely will never do that as long as I’m breathing. And so, it won’t affect our contracts, it will affect -- we will continue to readout those contracts that are under the old form. And basically, we’re about 80% through with that. When you look at the pricing, it’s up, but it’s not dramatically up. And it’s been fairly volatile over the last few years, so we’re not declaring victory, we’re going to continue to go after all the operating cost that we can on the recycling side. And like I said, we won’t expect to get a benefit from it, in 2017. But if we get a benefit that will help to offset some of those increased leachate cost.

Now, we’re finished when you think about were we -- to put its historical prospective, we finished the quarter about $98 in our average commodity price for us. And the 10-year historical average is kind of 103ish. So, still slightly below that, and as David has said, we've fallen into the trap before of some saying we think this trend continues and we'll build it into the guidance for 2017. At this point we, while we haven’t put the guidance, we’re not probably not going to set high expectations for commodity prices for 2017.

Thank you.

And by the way to the volume issue, because I think you did ask about the volume too. Most of the increase that we saw and we did see a positive volume in the quarter, but most of that volume was brokerage volume, which obviously is very low margin volume. When you look at the core processing business, as you know we've shed a lot of unprofitable contracts over the last three years. And so the core business is still seeing some negative volume on the recycling side, but we had really strong brokerage volume.

[Operator Instructions] Your next question is from Joe Box with KeyBanc Capital.

David, if I heard you right, I think you said, you're looking for about 50 to 100 basis points of margin expansion next year. And I think you called out 40% of that being SG&A and 60% being operating, maybe if you can drill into the SG&A, which it was basically at the lowest level that I could find in my model going back to at least 2003. When you look at that going forward, are there any big items that you expect to cut out SG&A? Or is this more a function of just watching your costs and getting good leverage on that revenue growth?

I do think it is, it is watching the costs. And the Jims and the operating folks have done a spectacular job of keeping SG&A flat despite the fact we gave a 2.5% to 3% merit increase, every year. So, they've done a nice job of keeping the dollars flat. And then, if the revenue goes up, that's where you get the expansion. And look, we've always said, if we can start putting volume onto this sort of high fixed cost structure that we have, that's how we generate margin expansion. And we feel like we've got the right level of SG&A in order to meet the needs of the business whether it's in today's environment or in next year's environment where we see the volumes go -- continuing to go up. And so, we don't think that we're going to have to add a lot of dollars of SG&A. We've done a nice job on SG&A over the last five years of taking out costs, I would tell you there's not any big dramatic decrease in SG&A. It's just a matter of making sure that you're not adding people that you don't have to add. That you're not adding expenses that you don't have to add. And Jim and the operating guys do a spectacular job of looking at every dollar of SG&A we spend and making sure that it's justified.

And maybe just switching gears to the coal ash side, can you maybe talk about what the coal ash contribution was in the quarter, either from a revenue or volume standpoint, where are you putting that? Is that primarily in the special waste bucket? And I'd be curious to know, how the margin is coming in for coal ash, if it's accretive to the overall margin or if it's dilutive?

Yes, Joe, overall as we said earlier on the call, coal ash, the disposal portion, flows into the special waste revenue generating cover category, and that was up almost 7%. The coal ash part is less than 10% of that total, so it's still a small part of our overall revenue but a growing component of our revenue. We also have some onsite activities. We've done work on those customer sides where we're moving materials from one location to another, helping them operationally manage both their generated waste materials, but also their historic materials that are stockpiled and need remediation. So, there's an onsite component. That onsite component is without a doubt a lower margin. It is accretive to our company. But it also -- it has a very low capital costs associated with it. The disposal side, much higher margin and when we go off site, higher margin. But it's typical to our landfill margins. So, it is a good part of our business but it's not a substantial part yet, Joe. But we expect it to be over the coming years to continue to grow as those regulations take effect. And companies decide what they're going to do on their site to meet those new regulations.

Your next question is from Michael Hoffman with Stifel.

So, Jim first on, SG&A you started the year targeting a flat year-over-year in dollars. To do that, you would actually be down again in 4Q, is that still the right trend in dollars?

I think for Q4, it'll probably look a little bit look like a first half for the year, but the goal is always as it is, when we talked about 2017 planning right now to try and hold flat in dollars and then get the benefit as revenue increases. I think, Q4 will probably a little bit more like the first half of the year than the Q3 itself.

In percentages or dollars?

Percentages.

Percentages, okay. So, the midpoint of that sort of 10 points --

Yes, let say this, not in the absolute percentages, but in percent of revenue versus prior year. So, we were -- for first half of the year, we were basically flat on a percent of revenue basis. We were up a little bit in dollars. And a lot of that came from the increase in our stock based compensation, the accruals for our stock based compensation programs, which driven obviously by total shareholder return and then also free cash flow. And those two metrics have done well, so as a result, we've had increased the accruals there. So, I think you may see that again in Q4, which would mean that as a percent of revenue in Q4 versus prior year will probably be about flat, dollars maybe up again.

Right, okay. Well, definitely up a bit, so that puts up for the year. Okay, that helps there. So then, to get to your revised guidance on earnings, which suggests that the gross margin in the fourth quarter has to improve. So while you had gross margins weak a little bit sequentially, this is a sequential issue, and you noted a leachate issue, I’m hearing there is some maybe gross margin improvement that’s to come in the fourth quarter in order to be able to hit that 291 or better number?

You've also got the volume improvement continuing in the fourth quarter.

Yes, I mean, that’s the operating leverage into the gross margin is what I’m assuming, is that volume improvement, is going to help drive gross margin improvement in the third quarter and fourth quarter?

It's absolutely correct.

Okay. So, it would be realistic to assume gross margins to be better in the fourth quarter than they were in the third quarter?

Yes, absolute.

Okay. And then with regards to the volume, but let me ask some questions on churn first and then the operating leverage. Given if you were to run all next year at the same rate of churn, I would think that you are reported price that yield number trends up by definition because you’re not replacing as much business as lower rates, so that four point something core price you’re keeping more of it. That’s part of the answer of why you’re able to do two percentages is because you're structurally going to have a whole year of lower churn?

Now, that's exactly right. And when youlookatthe effect of new business pricing, lost business pricing, you’re exactly right. If we can have less lost business, that drops straight to the yield number.

Got it. Okay. All right. So that’s the support for that pricing. And then, Jim Fish, on working capital. Do we get some help on working capital on the fourth quarter to the free cash? Should that be a pass -- you’ll get -- you collect more your bills?

We do get a little bit of help from working capital in Q4.

Okay. And then, David, you started talking about industrial activity, I think Jim Trevathan use it too, and then you didn't quite close a loop on it. I mean, clearly, the industrial economy is slow, that’s not disputable. But you’re not seeing incremental deterioration, it’s slow to a now sustained rate of a lower rate of growth, and you’re not seeing any future duration?

No, I'd agree with that. And last time I saw the numbers, they are still above 50. So, we’re still seeing a little bit of industrial growth.

Yes, it’s just that of smaller rate of growth and everybody had been, and folks we’re looking for 3% and 4% industrial traction growth. Starting near, we’re really sort in a 1 to 2. So, it’s a long-term low growth rate?

No, I'd agree with that.

Okay. And then on free cash flow, all things have been equal, we would be -- it would be down year-over-year because of the cash tax issue and then grow that numbers. I mean that’s the common of the base line of 1.45 billion to 1.5 billion and grow that number summary. Is it right way to think because the noise of cash taxes?

That’s right, Michal, I mean there is two things really that are potential headwinds for us, and then we overcome those with growth of the business. Those two things as you mentioned, one is cash tax and the other is CapEx. And right now looks like, CapEx for 2017 could be higher. We've had a couple of projects that we originally had in 2016, that’s why our range is come down a little bit. We were originally 1.4 to 1.5. We’re now 1.4 to 1.45. So, we brought the top end at the right side by $50 million that’s just simply because the government projects that we had originally thought would show off in 2016. Look like, they will show up in 2017. So, none of it is, do we feel like we can’t overcome, but those are two things that work again in little bit 2017.

Okay. And I was going to sort of tease on that, given the strength of volume, do we see the mix of CapEx or may be move a little bit to help this tax issue to which is pull forwards and trucks and containers, get them in service before the end of the year and capture the bonus depreciation?

So, Jim and I have kind of managed the capital committee, pretty along those lines. And we look at bonus depreciation and we look at, how do, kind of smooth CapEx a little bit. And so, as we think about CapEx, so really may be to answer your question this way, we set along that we thought CapEx should fall in the 9% to 10% of revenue range. In 2014, it was below that, it was in the 8%. 2015, it was just about 9 like 9.1. And 2016.it's going to closer to 10, but we still think in 2017 and on a go forward basis, that range of 9% to 10% is the healthy range, it’s a good range for us. Keep in mind; if you look at things like leach repurchases in 2012, 2013, I think in 2012 we bought around 900 to 950 vehicles. We’re going to buy 1300 vehicles this year. So when we think about OpEx and we talked about it earlier, eventually that has to start affecting our maintenance cost, as we increase the numbers, trucks that we buy by almost 40%. Hopefully that answers your question.

Yes, Michael, I just add one other thing, although we have the last few years moved few dollars to capital into the current year. The one thing that Jim and I are certainly focused on and that's making sure, we support the business and the growth. We’re not doing that other than to support growth where can we have value by moving trucks forward or backward or any other capital projects. It's got to align with where the opportunity is and how we want to grow our business.

Okay.

Produce in order -- we've talked about as look, talking to individual area of managers and Vice President's and say look, here's what your capital request has done over the last three years. And here's what your earnings have done. So, when we think about return on invested capital maybe you're doing well, maybe you're not. But we're having those individual conversations.

And then last question on volume. So lots of hand-wringing in the last month about data regarding the consumer and economy, if you look into your database and start looking at very consumer-centric businesses is strong especially retail. My sense is based on the MSW trends and then landfill volume trends in MSW, that consumer is still plodding along there and you haven't seen any pullback in activity. They're participating in the economy and then restaurants maybe complaining about having many cut price and do all that, that's a fundamental issue for them, it's not that consumer starts shopping?

I completely agree with that. We've seen to you point in the restaurant sector we've seen waste come down slightly. But we haven't seen service levels change, so we continue to service increases outpace service decreases. And for us, that's really sort of on the commercial side that's the leading indicator that we look at and we still see that very strong.

Your next question is from Tony Bancroft with Gabelli & Company.

Real quick, just give us update on the Waste CPI transition and progress there?

Yes, as we look at it I think the number that we've always said is about 25% to 35% of our customers are on some type of modified index, whether it's a particularized index for us or a government index like the waste water and sewage. That’s one where like a lot of things we do. You have to have sort of an industry backing, right. I mean, look too many times we see -- I'll go back to the recycling business, too many times we saw a lot of people bid rational contracts like we do and then one party comes in and says we'll do it under the old type of contract and before you know it they're winning business and losing money. And I would tell you, we haven't seen as much sort of industry acceptance of a different CPI based residential or franchise type model. We've not seen widespread enough acceptance to move the needle, I mean when competitors go and say we're going to bid on a modified CPI and then the fourth bidder comes in and says we'll take whatever you have on the table. It's hard to see things change. And so we've had better success in our large franchise areas like California but I think that's going to be a long slow slug that we just have -- we have to as -- there's only thing we can do at Waste Management, and that's stiffing our backbone and say, we're not going to bid these contracts when it's not good for our business. We've proven that on the recycling side. We need to continue to have that different type of firm backbone on the residential and franchise side.

And Tony, you’ve seen that our residential volume is stay negative is that we have loss of volume, but we look at it as Dave said, on the long-term basis or return on invested capital. There is just real focus and we just not going to take business long-term, it doesn’t give us the ability to manage our cost structure and also get some margin improvement.

And I know you mentioned in the call bottoming up you’re and if you potentially I was wondering if you could maybe elaborate obviously a little rates have been up. And recently, anything you’re seeing as far as in your line of business right now?

Yes. The last report I saw which was last week I think showed rig counts across the U.S and the shale plays up 11, which is very small on a percentage basis. And the majority of those were in the Permian Basin where we don’t have a presence. But, we are starting to see a little bit of indication that maybe some of those shale place where we do have a presence or thinking about drilling next year which is a change from the past two years for sure.

Right.

But, Tony, in real business, we’re still down versus the prior year or getting closer to that reduction but it still not in close to the previous level and without significant movement forward. But we see some signs of it.

At this time, there are no questions.

Well, thank you for joining us as we move into the holiday season. We wish all the best as we move towards the end of the year. And hopefully everyone on the phone will have to spend time with the families and live what the holidays are about. So, we’ll see you when we release next quarter. Thank you.

This concludes today’s conference. You may now disconnect.