美國廢棄物管理公司 (WM) 2005 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Waste Management First Quarter 2005 Earnings Release Conference Call. [OPERATOR INSTRUCTIONS.] Thank you. Mr. Nichols, you may begin your conference.

Good morning everyone, and thank you for joining us. With me this morning are David Steiner, Chief Executive Officer; Larry O’Donnell, President and Chief Operating Officer; Bob Simpson, Senior Vice-President and Chief Financial Officer; and Cherie Rice, Vice-President of Finance and Treasurer.

David will start off with an overview of the quarter, and a detailed look at price and volume trends. Larry will delve into our operating costs. And Bob will then cover the financial statements. We will conclude with questions and answers.

This call is being recorded, and will be available 24 hours a day, beginning approximately 10:00 a.m. Eastern time today, until approximately 5:00 p.m. on May 12. 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 (800) 642-1687, and enter reservation code 49788http://www.wm.com.81.

As is our custom, I will remind you that during the course of this presentation, we will be providing estimates, projections, and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities & Exchange Act of 1934.

These forward-looking statements are subject to a number of risks and uncertainties, which are described in detail in Waste Management’s Annual Report on Form 10K for the year ended December 31, 2004, and in the Company’s press release this morning. These risks and uncertainties could cause actual results to differ materially from those described in the forward-looking statements.

Additionally, during the course of the presentation, we will discuss free cash flow, a non-GAAP financial measure. Waste Management defines free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of business, net of cash divested, and other sales of assets.

The Company includes this discussion, because the amount of cash produced by non-financing activities that is available for uses such as acquisition, share repurchase, debt reduction, and the payment of dividends, is important to the Company’s capital allocation process, and its goal of providing returns to its shareholders. For the same reason, the Company believes investors are interested in this measure.

As I stated earlier, this call will be available for replay for a two week period. Time sensitive information given during the course of today’s call, which is occurring on April 28, 2005, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call, in any form, without the express written consent of Waste Management, is prohibited. Now I will turn the call over to Waste Management’s CEO, David Steiner.

Thanks Greg. Good morning to everyone. I will begin by summarizing our quarterly results, and then we’ll detail for you the pricing and other achievements of the first quarter, and our plans for the rest of the year. I am very pleased with our first quarter accomplishments. Our overall results were right in line with our internal expectations for the quarter. And we began to make strides in our pricing initiatives.

We performed well in several operating cost areas. But we need to continue to reduce costs in all facets of our business. Free cash flow was very strong, at $420 million. And we returned $213 million to our shareholders through share repurchases and our quarterly dividends. We look forward to a successful 2005. And, as I stated in this morning’s press release, we’re reaffirming our guidance on full year financial projections that we outlined on February 10 of this year.

Our yield results improved nicely during the quarter, as they produced a 2.1% gain in our internal revenue growth. Let me put that accomplishment in perspective for you. This quarter’s results matched the highest yield since at least 2000. Our revenue growth from yield has accelerated over the last three quarters. In the second quarter of 2004, yield contributed 40 basis points to higher revenues.

Since then, the contribution of yield has improved sequentially, to 80 basis points, 120 basis point, and now to 210 basis points. Our revenue growth from yield was actually 2.9% during the first quarter, when including the impact of our fuel surcharge. In our collection area, we have data on revenue growth, due to yield for the three lines of business for only the last 16 quarters.

This quarter, the growth in revenue due to yield for each of the residential, commercial, and industrial lines of business, stood at a record level. This is also the first quarter in which the yield has improved by over 200 basis points for each of these lines of businesses.

Previously, we have discussed the highly competitive nature of pricing in our Midwestern Group. This quarter, for the first time since the last quarter of 2002, our Midwest Group produced positive revenue growth due to yield in the collection side of its business. Another good trend is that the collection yield in the Midwest Group has been positive for each of the past four months.

These results indicate that our focus on improving pricing is successful, but we have more work to do. As I have described in the past, we now approach pricing as a science, rather than as an art. And we achieve results through the use of data, analysis, process and incentives.

During our Investor Day presentation in February, we spoke of some of the pricing levers on the collection side of our business that we pulled to hit our targets in 2005. Those levers were collection price increases, minimizing price erosion on price increases, new business pricing, and the adoption of an environmental cost recovery fee.

Let me take a quick moment to review some of the results of our approach. During the first quarter of 2005, we were able to raise prices on our commercial customer base by an average of 4%, and on our total collection customer base by an average of 3.2%. These increases are at the highest levels since we began tracking them six quarters ago.

The record yield we reported on the collections side of our business shows that we have minimized price erosions through better efforts at our retention desks. The price increase rollback percentage in the first quarter of 2005 stood at about 8%, down significantly from the 18% price increase rollback figure from the prior year quarter.

We also recognized that discipline on new business pricing has a dramatic effect on overall yield. Rates on new business pricing in our commercial collection business were up over 5%, compared to the prior year quarter. We will continue to focus on new business pricing as a key lever to improving yields.

Another collection pricing lever that has contributed to higher yield has been our adoption of a 1% environmental cost recovery fee, which we have implemented where allowable under our agreement. We have rolled out this fee to most of those customers, and plan to have it fully rolled out by the end of the second quarter. We’re currently recovering about $2.5 million per month from the fee. And we project this will continue as slightly above this rate for the rest of 2005.

Another highlight during the quarter was a higher yield of 100 basis points in our landfill basis. This gain is the highest level in the last 10 quarters, and marks the only time in that period that all three of the principal waste streams, MSW, C&D, and Special Waste, have each produced positive yields. The yield on the MSW stream was positive for the sixth straight quarter. And it reached its second highest level in that time span.

Earlier today, we updated our results on our landfill pricing study. 28 of the 30 sites in the study have raised prices on their customer base. On average, these sites have raised prices on about 40% of the volume they receive from third party customers. The customers excluded are those who have either had a very recent price increase, or who are under contract that does not allow for a price increase.

The average price increase on the tons that we did increase was about 8%. Although it’s still relatively early in the study, we’ve seen only four sites where we believe we’ve lost tons to competitors due to the price increases. Based on these results, we also announced today that we’re expanding our study to include 23 transfer stations, and to include the landfills, and transfer stations from four entire market areas.

We selected one market area from each of our four U.S. operating groups. They are Virginia/Maryland in the East, Michigan in the Midwest, Houston in the South, and Phoenix in the West. By adding these market areas, we’ll be adding an additional 35 landfills, and another 23 transfer stations to the study.

In doing so, we believe we’ll be able to test and assess the results on an integrated basis for each market area. Further, I have asked our pricing team to put together a plan to cover virtually all of our landfills by the end of the year.

We also continue to study other areas of our business. And we will continue to make changes in the structured approach we take on pricing. For example, to build on the momentum that we’ve already achieved, today we announced a plan to begin seasonal pricing in our temporary roll-off business. We developed this plan, because in studying our markets, we found that we were missing opportunities to respond to higher demand, as seasonal roll-off business increased.

This is no different than what other industries do as their businesses move into peak seasons. But we found that we sometimes waited until we ran out of containers before we changed pricing. Because seasonality in our business is very predictable, we need to raise prices in anticipation of seasonality, not as a reaction to it.

Consequently, we plan to implement these price increases during the second quarter, in about two-thirds of our market areas. Seasonal pricing will be implemented in most of the remaining market areas, according to their seasonal demand. We’ve also identified some other tactical pricing opportunities that we’re implementing in our market areas.

For example, when we study our market areas, we found that set-up and delivery charges were not consistently applied across the board. Obviously, it costs us money to deliver and set up a commercial or a roll-up container. And we need to recoup that cost from our customers. Consequently, our market areas are focused on doing a better job of capturing reasonable delivery and set-up fees to cover the additional costs associated with that work. We’re confident that the momentum of our pricing effort to date will carry forward, through 2005 and beyond.

Our core revenue growth from higher volumes increased by 100 basis points during the first quarter, with the biggest contribution coming from increased brokerage business of recyclable commodities. As we’ve pushed prices across our collection and disposal lines of business, we’ve kept a close watch on whether we’re losing volumes as a result. While we’ve noted some volume declines due to higher pricing in limited markets, we don’t believe we’ve seen any Company-wide impact due to higher pricing.

In looking at our year over year volume trends through the end of the first quarter, our landfill tons were up by about 3%, while our industrial hauls were up by about 1%. Our commercial yards were essentially flat, which we attribute mainly to weather comparisons, but with some impact of the Midwest Group raising its prices.

Our residential home service fell by a little over 1%, due in part to us losing business related to unprofitable contracts. This was intentional, because, as you know, as those residential contracts have expired, we’ve rebid them at higher prices, in order to achieve a more accessible return. And we’ve lost some of those bids.

We also believe that wetter than normal weather in a number of important markets kept volumes from growing more in the first quarter of 2005 versus the same quarter of last year. When we looked at it comparatively, many of these same regions were dryer than normal during the first quarter of 2004.

Although we have a very diverse and broad customer base, we also monitor economic trends, since those can definitely influence our business. We’ve not seen any broad pattern of lost volumes related to general economic conditions. Our overall trends through the first three weeks of April have also been positive. We’ve seen the normal seasonal increases, and some year over year improvement in our industrial hauls and in our landfill tonnage.

We continue to produce strong and consistent free cash flow. We generated $508 million in net cash from operations, and $420 million in free cash flow in the quarter. We paid a $0.20 per share quarterly dividend in March, which is a 6.7% increase from the per share dividend paid during 2004. We repurchased about 3.4 million shares for $99 million in the quarter. In total, we returned $213 million to our shareholders.

In our press release this morning, we noted several one-time events, that had both a positive and a negative impact on our first quarter results. Although these netted to zero, they’re worth mentioning, in order to better understand our results. We earned $0.05 per diluted share on the divestiture of our Ridge Landfill in Canada. This sale, which was mandated by the government regulatory authority, closed in January of 2005.

In February this year, we settled a lawsuit with a group of stockholders who had opted not to participate in the settlement of the class action lawsuit related to 1998 and 1999 activities. This was the last opt-out settlement stemming from that period. It resulted in a $0.03 per share diluted charge to earnings.

Earnings were negatively impacted by another $0.02 per diluted share, due to the costs stemming from the seven week long strike in New Jersey, and the acceleration of expenses under our new long-term incentive plan, for those employees that are eligible for retirement.

In closing, our first quarter results were right in line with our expectations, and were off to a very good start for the year. We have strong momentum from our pricing programs, on which we expect to build. We continue to generate strong free cash flow. And we made progress in a number of operational areas.

I am now going to turn the call over to Larry O’Donnell, who will discuss the details of our operational performance.

Larry O’Donnell: Thank you David, and good morning to all of today’s participants. I am going to cover in detail our operating cost results for the quarter. Operating expenses in the first quarter of 2005 were $2,044,000,000, or $124 million higher than in the 2004 quarter. As a percent of revenue, this is a 100 basis point increase in our operating cost margin, from 66.3% of revenue to 67.3% of revenue.

Increased fuel costs, subcontractor costs, and costs of goods sold from recycling rebates, drove a 170 basis point increase in our operating cost margin. More importantly, the areas where we have developed tools for our field operations, to help them better manage and improve their operating costs, such as labor, maintenance, and workers’ compensation, all showed improvements during the quarter.

Before I begin to detail our operating costs for the quarter, I want to announce some positive changes in how we will disclose our operating expenses in our upcoming Form 10Q. We’ve had an ongoing effort to enhance the way we present our financial reporting and disclosure, to improve our investors’ understanding of our business. As a result, we’ve decided to expand and change our presentation format, beginning with this quarter’s Form 10Q, which we expect to file later today or tomorrow.

I’d like to briefly outline these changes for you, which are set forth in Exhibit 1 to this morning’s press release. If you have that schedule with you, it might be helpful to take a look at it as I walk you through the changes. Following my remarks on these presentation changes, I will discuss our operating results, using these new categories.

The first change is that we will reflect labor and related benefits for fleet and container maintenance as a component of the maintenance and repairs category. These amounts were previously reflected in the labor and other related benefits categories.

We created a new category titled Risk Management, which will include workers’ compensation and insurance and claims, primarily general and auto liability. Workers’ compensation costs were previously included in labor and other related benefits, while insurance and claims costs were previously included in the Other category.

We’ve created another new category, titled Landfill Operating Costs. This will include a number of landfill related costs, such as leachate treatment costs, landfill remediation costs, and methane collection and treatment. These were previously included in the Other category.

Based on input we’ve received from some of you on this call, we believe these changes in the way we present our operating costs will be welcomed by our investors, and hopefully will lead to more standardization of the presentation format for the industry.

As I previously mentioned, our operating cost margin increased 100 basis points during the quarter, compared to the same period last year. Let me begin by discussing some of the positive trends we saw in the quarter.

Our labor and benefits cost improved by 20 basis points from an operating cost margin perspective. Salaries and wages are the largest component of this category. With wage increases of about 2.5% to 3% per year, this will always present a challenge to us. We’ve put in place tools to help drive productivity improvement in our collection operations, and to help our managers flex down labor cost when volumes decrease.

In the first quarter, our productivity improved in both the commercial and industrial segments of our business, by an average of about 1%. Residential productivity was flat year over year. The first quarter is usually our toughest quarter for productivity improvement. And the unusually wet weather during the quarter certainly provided us some challenges. We expect to see stronger productivity improvements going forward this year.

Another component of our total labor cost is employee healthcare costs, which have increased by approximately $6 million in the first quarter, compared to the same period last year. This is less than a 5% cost increase. Although this level of increase is lower than the initial expectations we outlined for you in February, it is too early for us to move away from those full year projections.

Our maintenance and repairs cost increased by only $1 million in the first quarter of this year, compared to the first quarter of last year, which is a 40 basis point improvement in our operating cost margin. I should note that maintenance and repair expenses at our (Wilobraiter) (ph) Waste Energy facilities decreased by $7 million in the first quarter. The maintenance cost at the (Wilobraiter) facilities can fluctuate from quarter to quarter, based on timing of outages for maintenance and repairs.

The good news is that even after adjusting for the (Wilobraiter) reductions, maintenance cost still improved our operating cost margins. This shows that our maintenance improvement efforts have been able to offset nearly all of the higher cost and labor rates, steel parts, and in oil-based supplies, such as lubricants.

As I previously stated, our labor rates are up about 2.5% to 3% year over year. And we’ve seen cost increases for parts and supplies in the 4% to 7% range this year. We expect to see continued progress in our maintenance cost as the year progresses, and as we install our compass maintenance information systems in additional locations throughout the year.

We also produced better results in the areas of workers’ compensation costs, and general and auto liability expenses. Our spend has decreased $4 million thus far in 2005, which resulted in a cost improvement of 30 basis points for the quarter, compared to the same period last year. We believe that the cumulative impact of our safety programs is the driving force behind this improvement.

Our total reportable incident rate, which is a standard OSHA measure, improved 21% from the same quarter last year, and is well ahead of our 2005 plan. This is a significant achievement, particularly when you consider that over the course of the four previous calendar years we’ve reduced our incident rate by about 65%. We’ve seen a 24% reduction in the number of workers’ compensation claims this quarter, when compared to the same quarter in 2004. I am pleased with these results. And it shows that our efforts to manage our controllable costs are having a positive impact.

Now let me discuss fuel, subcontractor costs, and cost of goods sold. Fuel costs were up $24 million, due mainly to higher diesel fuel prices, which were up by almost $0.50 per gallon compared to the first quarter of 2004. This resulted in a 70 basis point increase in our operating cost margin. We recovered about $22 million of this through our fuel surcharge program. This is nearly a 90% recovery of the increased fuel costs, which is a higher recovery than we’ve experienced in previous quarters.

Subcontractor costs were up about $23 million. We identified approximately $8 million where third party haulers have passed through their higher fuel cost to us. The remaining $15 million of increased cost was primarily attributable to higher volumes and longer haul distances. We expect the headwind of higher fuel prices to continue through the remainder of 2005.

We are continuing to take steps to expand our fuel surcharge program to customers that have not been charged the fee. In addition, as municipal contracts come up for renewal, we are attempting to address fuel costs separately from the typical CPI type rate increase included in those contracts.

Cost of goods sold increased by $22 million. In recent quarters, our cost of goods sold increases were driven by higher commodity prices. In the first quarter this year, the increase in cost of goods sold was volume driven. We saw an increase in our recycling commodity brokerage business during the quarter, mainly with our national account customers.

Because of our strong relationships with paper mills, we were able to offer our large customers a higher value on their cardboard than they would receive if they had recycled this on their own. As a result, we broker this commodity for them, and rebate a portion of the price premium. This is good business for us. It’s profitable. There is very low risk, and it produces strong cash flow, with essentially no capital investment. These higher rebates to our customers increased our operating cost margin by approximately 50 basis points during the quarter.

Landfill operating costs increased by $10 million, an impact of 30 basis points on our operating cost margin, due principally to increased site maintenance, leachate collection, and site remediation expenses, driven primarily by this quarter’s wet weather.

I want to take a moment to detail for you the impact that the labor strike in New Jersey had on our earnings in the first quarter. The strike last about 7 weeks, and involved about 170 workers. Our operating cost increased by an estimated $9 million, a negative impact of 30 basis points on our operating cost margin. The majority of the strike related costs were attributable to replacement worker labor, travel, meal and hotel related expenses, increased security, and the higher cost of operations, as we had to redirect some waste due to picket lines.

We were committed to several objectives during this strike. One was that we would continue to provide timely and efficient service to our customers. Our replacement workers performed wonderfully. In fact, there were several editorials in the newspapers, recognizing the outstanding performance by our replacement workers. We were also committed to protecting our employees and assets from strike related violence. The strike concluded with the workers accepting a fair and equitable proposal, which was favorable to the Company.

The key demands of the union workers that led to the strike were increased wages, in excess of what we felt were reasonable, and the union workers’ desire to pay less for healthcare than our non-union employees. The union workers ultimately ratified our proposal, which requires them to pay the same employee premiums for healthcare as our non-union workers. The short-term costs of the strike are outweighed by the beneficial long-term outcome, which was important to Waste Management.

David mentioned the optimism he sees for the Company for the remainder of the year and beyond. We recently returned from in depth discussions and reviews of every one of our 56 market areas. Overall, we saw a large degree of optimism about the state of our Company. Our market area managers are seeing accelerated increases in volume and roll-off hauls the last few weeks. They are also seeing the positive impacts of our pricing initiatives to cover the increased operating costs.

Certainly, the changes we made in our incentive plan, which are tied to improving margins and increasing cash flow and returns on capital, are driving the right behaviors. Our managers are closely examining their under-performing lines of businesses and contracts, and implementing plans to fix, sell, exchange or exit those businesses or contracts. They are also utilizing the tools we’ve developed to help them continue their improvement in the areas of safety, productivity, labor management, and maintenance costs.

In closing, I feel strongly that our Company leaders are aligned on a common set of objectives and standard operating practices that will benefit our shareholders. I will now turn the presentation over to Bob Simpson, for his detailed financial review.

Thank you Larry. I am going to begin with a review of the SG&A costs for the quarter. As a percent of revenue, our SG&A costs were 10.9%, which is flat when compared with the first quarter of last year. SG&A costs as a percent of revenue are typically higher in the first quarter of the year, due to the seasonally low revenue. We still expect to achieve our full year target of lower SG&A costs to under 10% of revenue.

SG&A costs increased $14 million this quarter, mainly due to the following. First, salaries and wages increased $10 million. This includes accelerated expenses under our new long-term incentive plan, for those employees eligible for retirement. It also includes salary and wage increases in our normal incentive plan accrual. Group insurance costs increased $2 million, due to the increase in healthcare costs. Professional and related fees rose $2 million, mainly due to higher litigation costs.

An area of interest to many of you is our expectation on spending for Sarbanes-Oxley Section 404 work during the year. You may recall that we spent about $11 million in outside professional fees during 2004. We project that we will reduce our spend to approximately $3 million this year, internalizing a good portion of the required work. Depreciation and amortization was 10.6% of revenue in the first quarter of 2005, compared with 11.2% in the prior year quarter. This is due, in most part, to the increase in revenue this year.

In the asset impairments and unusual items line of the Income Statement, we had income of $23 million this quarter, due primarily to a gain from the divestiture of the Ridge Landfill, partially offset by a charge due to the settlement of a stockholder lawsuit related to 1998 and 1999 activities. Combined, these resulted in a favorable earnings per share impact of $0.02 per share.

As we discussed earlier in the call, the combination of the one-time impact of the New Jersey strike, and the accelerated expenses under our long-term incentive plan for those employees eligible for retirement, caused a decrease in earnings of $0.02 per share. Interest expense was $116 million in the first quarter, a $3 million increase from 2004.

This increase is a result of the higher interest rate environment in 2005, partially offset by several 2004 refinancings, through which we effectively reduced interest rates on over $600 million of debt. Interest income was $6 million during the first quarter of 2005, an increase of $3 million, due in part to higher interest rates.

The next line of the Income Statement reflects the $26 million of equity in losses of unconsolidated entities for the first quarter of 2005. The principal driver of this line is the investment we made in two synthetic fuel plants in the first and second quarters of 2004. Operating losses due to these investments stood at $28 million during the first quarter of 2005. This is an increase of $9 million, when compared with the first quarter of last year, which reflected only the first investment.

The $28 million in losses are offset by $29 million of income tax reductions and credits. After accounting for the $2 million of interest expense related to these investments, the result is a net after tax loss of about $ 1million in the quarter, about the same as we experienced in the first quarter of 2004.

For the full year, we expect these investments to result in a net income benefit of about $0.04 per share, as the income tax credits will be realized on higher consolidated profits. The effective tax rate for the first quarter of this year was 31.95%. Our full year projection remains at 30.5%. The first quarter rate was higher, due to the fact that we did not recognize a tax benefit on the payment of the previously discussed shareholder settlement. Not recognizing the tax benefit on this settlement increased our income tax expense about $6 million.

That completes my review of the Income Statement. And I will now move to the Balance Sheet, and the Cash Flow Statement. Our accounts receivable balance is down about $119 million from the December 31 balance, due in large part to the seasonality effect of declining sequential revenues. We’ve collected additional receivables related to the 2004 hurricanes.

The hurricane related receivables fell from $42 million to $24 million during the first quarter. And we expect an additional $15 million payment to be received in May. Total debt fell by $180 million during the quarter. And our debt to total capital ratio decreased to 58.5%, in line with our expectations.

The primary drivers of the decrease in total debt were a $35 million payment of convertible notes, and the $67 million payment of a short-term loan related to our Canadian operations. As a reminder, we intend to repay $103 million of senior notes maturing in May of this year with cash on hand. The floating rate portion of our total debt portfolio was about 38% at the end of the quarter, which is also in line with our previously stated objectives.

As David mentioned, we produced strong cash flow during the first quarter of this year, with free cash flow reaching $420 million. Capital spending is seasonally low during the first quarter. And we benefitted from the Ridge Landfill divestiture. Also, cash interest and cash tax payments are expected to be about $50 million, and $65 million higher sequentially during the second quarter.

We utilized our free cash flow to repurchase $102 million in shares during the first quarter, $3 million of which was settled in April of this year. During last year’s first quarter, we did not repurchase any shares, although in January of 2004 we did settle $24 million of repurchases made in December of 2003.

At the end of the first quarter, our diluted share count is 10 million shares lower than the end of the first quarter in 2004. 2005 is off to a good start. And we are enthusiastic about the pricing results we have produced. As we look forward to the remainder of the year, we expect the momentum of our improved yield to continue.

We are also very aware of the cost challenges. And we will continue our programs, which we expect will improve our operations and lower our costs. We will also continue to focus on reviewing our under-performing operations. Once identified, we will implement plans to fix, sell, exchange, or exit those operations, which we expect will contribute to margin improvements. And with that, Angelique, let’s open the line for questions.

[OPERATOR INSTRUCTIONS.] Amanda Tepper of J.P. Morgan.

Good morning. On the gross margin line, I think it’s better than it looks at first glance. So I was trying to calculate. The numbers you were running through, it sounds like zero margin pass-through dollars basically, for your fuel surcharge, was about 70 to 75 basis points of the year over year hit.

And I am just looking at the other pieces up and down. Could you generally characterize, is there anything else big? And where would we see gross margin going this year? Because I think what investors are looking for is to see gross margin up on a year over year basis, to really feel confident that pricing is working on a net basis, to more than offset cost increases.

Yeah Amanda. I did cover all the big items in my remarks. Obviously we continue to look for improvements. We expect productivity to certainly move forward from where we were in the first quarter. And don’t forget that the strike costs were in there. And we also saw some weather during the quarter that was unusual, particularly out in the West. So we do expect -- certainly our goals are to continue to improve our operating margins.

Okay. And then on price, where you’re all in was 2.1%, excluding the surcharge. But you said commercial was up 4%, all in collection was 3.2%. So where is it running negative?

No. What we said, actually Amanda, remember, the way we report yield is net of the price roll-backs and all the various things, like mix, that affect yields. And so in the last six quarters, what we’ve done, is we’ve given sort of a same store comparison. So if you look at just the customer base that we have, that’s where the 3.2 and the 4.0 percent price increase was across those lines of business.

So it’s apples and oranges you’re saying?

It’s just two different ways to think about IRG. About six quarters ago, we wanted to give you the same store, because we thought it was helpful for the investors. We wanted to give you the price increases in our current customer base, and give you our net yield. And so it’s not that you’re seeing net negative pricing. It’s just that what we’re seeing is the gross price increase that we have across our collection line of business, and then the net yield, taking into effect things like price roll-backs and mix.

Okay. And then finally, on the four market areas, it sounds like you’re taking a different approach, instead of just picking individual assets, scattered across the country. You’re looking at these four more cohesive markets. Is the intent, if you can get all the disposal pricing up, to follow in those markets with a more, above average collection price increase to come?

Well, the purpose of the study all along is for us to learn about pricing, learn about elasticity. And so it’s hard to say what we will do, until we see the results of the study. But suffice it to say that the parts of the study that we’ve seen so far, in the 30 landfills, 28 of which where we have raised the prices, the results are optimistic enough that I have asked our pricing group to prepare plans to roll it out throughout the Company by the end of the year. So you would expect to see pricing continue to increase across our landfills.

Okay. Thank you.

Lorraine Maikis of Merrill Lynch.

Thank you. Just to ask the gross margin question a little bit differently, can you just share with us, in your plan or your budget for the year, during which quarter do we start to see a year over year increase in your EBITDA margin?

Yeah. Obviously Larry talked about some of the things we saw in the first quarter. It’s always difficult to judge a year by the first quarter, because of the seasonality of this business. And so you have a lot of things that come into play in the first quarter.

So our plan, absolutely, shows us improving those margins in the second quarter. That’s when you will really get a good look at what’s going on in the economy, the overall effect that the economy is going to have on our business for the full year. So we fully expect to see those in the second quarter.

Okay. And then it sounds like you expect volume growth to accelerate in the second quarter, not only based on seasonal factors, but based on some of the penned up demand from first quarter weather. Should we look to see that statistic rise dramatically? Or do you think that some of your price increases will offset those gains?

No. I think what we’re saying is that we’re seeing the volumes increase as we expect in the second quarter. It’s obviously very early in the game to say what volumes are going to do in the second quarter. But I think what we’re saying is that we are seeing the normal seasonal up-turn. And we’re also seeing very good year over year comparisons.

So are we expecting volumes to have a dramatic increase in the second quarter? I think that would be a little bit too optimistic. Do we think that we’re going to have a material effect from our pricing program? So far we haven’t seen it. And you would expect that, if you were going to see volumes decrease because of price increases, that you’d see it during the seasonal low first quarter, rather than in the seasonal high second quarter.

That’s why what you saw this morning, with our price increase across our roll-off line of business, that we’re going to catch the seasonality wave, if you will. We’re going to catch it before it crests, rather than after it crests.

Thank you.

Michael Hoffman of Friedman, Billings, Ramsey.

Can we get some data on cash taxes, cash interest, working capital changes, post close or closed, those cash numbers?

Yeah Michael. The cash taxes for the quarter -- are you looking for the quarter Michael, or looking forward?

The quarter.

Right. It’s $20 million of cash taxes; $100 million of cash interest. With respect to closure and post-closure costs, about $5.4 million of closure and post-closure costs, a million of capping, and about $6.1 million of remedial environmental spending.

Okay. And then do you have a working capital number?

We’ll do that out real quick, and we’ll have that later on.

And then you’ve made this interesting comment about a 10 million share difference for year over year. But what’s the actual end of the quarter share number?

It’s in the press release.

Yeah. Let’s see. It was 568.3 million shares.

I just hadn’t gotten that one.

That’s all right.

Swaps. One of the competitors last week suggested that they were starting to do them again, but hadn’t seen you all very active. In February, you had made a point of stating that you had moved the decision making process of that from the region, back up to corporate. So you got out of their behavior, the influence of EBITDA changes, and were really making good business decisions. Can you talk a little bit about what you expect to happen on swaps going forward?

Sure. You know Michael, when we talked about, as you know, in February, what we talked about is, the reason we brought it up was because too often what we saw was when we sat down and had discussions, we would put our poor performing assets on the table. Some of the other companies would put their poor performing assets on the table. And no one wanted to trade junk for junk.

So I think it’s safe to say that, right now, the discussions are much better, much more frequent than they have been in the past, about making trades, where we’re trading good assets for good assets, but where both companies can achieve the cost savings from the location of the assets, and where they can get the incremental margin improvement by the location of the assets.

And so when you’re talking about trading good assets for good assets, it is going to take a little bit longer, because you’ve always got to do a little bit more analysis, to make sure that when you get rid of a good asset, you’re getting a better asset in return. So I think it’s safe to say that the discussions are at a higher level. The discussions are with respect to better transactions, I think, for all the companies involved. And I would expect that you will see them play out during the course of the year.

Okay. And then just two quick ones. You did about $300 million in acquisitions last year. Do you think you will stay on that trend? You are a little bit behind it on a percent change in the first quarter. But do you think you will get at that sort of level?

Well, we gave guidance at the beginning of the year of $250 million. And right now we see ourselves pretty much on track for that.

All right. And then interesting point about pricing new business at higher rates. We’d heard that through our survey, well, from the private side. But are you seeing service upgrades as well? With any new pricing, I would think service, your small container business, past utilization, you’re starting to get service upgrades.

Yeah. I mean, you know, you obviously see that in various market areas. But where we’ve focused, Michael, is -- we talked about it a little bit last year, that when we went into the market areas that we studied, and last year we studied 11, what we found was that our competitors offered a price that was, on average, 27% lower than our average price in the market area.

But, on the other hand, we also found that we were helping to lead that parade in some market areas, by offering some substantially reduced prices. So when we went through our plan this last year, when we went through the budget process, Larry and I got around to each of the market areas. And we very specifically tasked them with raising their new business pricing, because we happen to believe that might be the most important lever to making sure that we maintain our levels of price increases.

So we’ve put our focus on that. We’ve seen a 5% increase. But, frankly, we’re planning on doing better during the course of the year.

Okay. Thanks a lot. Nice quarter.

Corey Greendale, First Analysis.

Just a couple of quick questions. First of all, on the expansion of the Landfill Pricing Study, I understand we’re kind of just going through the process of understanding exactly what that’s going to be. But could you just say a little bit more about how those market areas were selected, whether this next phase is going to look kind of like the last one, in terms of the percent of the volumes it’s going to apply to, and the magnitude of the price increases?

Sure. The transfer stations that we’re bringing into the mix, the additional 23 standalone transfer stations, are generally -- the criteria that we generally went through were the same criteria we went when we went through the first Landfill Price Study.

So when you add those to the study, it’s pretty much the same criteria. When you look at the other piece to the new portion of the study, it’s the expansion of the study into four specific market areas, and covering all of the disposal assets in those four market areas. And we did that because we certainly understood that in any particular market area, we might have more than one disposal asset. And there might be other disposal assets that are relatively either more advantaged location wise, or less advantaged location wise.

So, until you cover the entire market area, you really don’t understand the full market area dynamics. And so that’s why we included the new four market areas. So there’s a little bit of a different approach on that portion of the test.

We’ll continue to report the information. As we expand the number of landfills, we may take that information and just report on those areas where we are losing volume, so that you don’t get such a voluminous amount of detail. And, particularly, that could be the case as we go through the year. And, as I said, I have told our pricing department that we want to cover virtually all of our landfills by the end of the year.

And if the kind of 8% price that you guys got in the study so far, is that a good benchmark for where this ends up for the rests of these as well?

I think in those, well, you know, in the full market areas, it’s a little bit of a different type test. But, generally, we’re looking at putting the same types of price increases on those disposal assets.

Okay. Great. And then just one follow-up. I’d imagine not a lot has changed since the investor day. But, since this is the first call since then, I just wanted to ask for an update on the (Med) (ph) Waste initiative, and kind of the pace and how that’s rolling out.

Yeah. I mean I think it’s safe to say that it’s rolling out at a pace that we’re very comfortable with. But, as we said in February, we are taking a measured approach to this. We’re not planning on going out and doing a huge acquisition to ramp up from zero to $500 million overnight. So we’re certainly ramping up at a measured pace. But again, it won’t have a material effect on any of our operating numbers for the year.

Great. Thanks very much.

Tom Ford of Lehman Brothers.

Good morning. Hey Dave, sticking on the comment to the pricing group about planned by year-end, does that mean implementation? Or is that just that you want to have something in hand, if you will, on paper?

No. That means implementation.

It means implementation?

It does.

Okay. Great. The other thing I was curious about was, I understand the cost movements and everything. But I too, I was just sitting here thinking about it. I mean your price was up sequentially by 90 basis points, and fairly notable. I guess I would have thought you would have seen a little bit more of a margin, if you will. I was just wondering. Do you know how much was mix, as opposed to price? You know, when we look at that (IRV) (ph) number?

Well, you know Tom, as you know, we don’t separate it out by mix. But when you look across our lines of business, what you see is every single line of business positive in yield. And that includes special waste. Generally where you’re going to get the most mix by type of volume is in special waste. But also, you do have the mix issue geographically.

I won’t tell you that we have gone through and done the analysis, because there’s two different types of those mix. We have not gone through to do that type of analysis. It’s safe to say that when you see the price increases like that, throughout the lines of business, and when you talked about the things we talked about, which is the reduction from 18% to 8% in the retention line of business, the increase of 5% on new business, we certainly believe that actual price increases are more responsible for the increase in yield than mix.

Okay. And then, if I got your numbers right, it sounds like the environment fee is like 20 to 30 basis points. Is that about right? And is that the full roll-out of it pretty much?

On the roll-out, we pretty much rolled it out through about 70% of the customer base right now. We’ll have it completely rolled out by the end of the second quarter. Like we said, that’s about $2.5 million a month. And think that’s the number that – that or slightly higher than that – is the number that we’ve been looking at for the full year.

Okay. One other thing I was curious about was your comment on the seasonality and volumes and pricing comment. And I guess the key question would be are you concerned about not getting the incremental share of the up-tick, the way one normally would, because of the pricing actions?

Well, you know, you always have to be concerned about if your pricing actions are going to drive off volume. That’s always a concern. Frankly, it’s a concern that we’re willing to live with. We haven’t see it. You expect it if you’re going to see it. You’d see it more during the first quarter, when folks have empty boxes sitting on their lot, and they’re able to respond with lower pricing.

As the seasonal up-tick picks up, frankly, Tom, the best position we could be in is to have all of our competitors out of boxes, and we being the only one with boxes. So I don’t think that what we’ll see is a dramatic change in volumes, because there’s a limited supply of boxes out there. And as the seasonal demand picks up, and we’re seeing it pick up pretty nicely, you would expect that there is going to be plenty out there for everybody to chase.

And I guess, from your comments, it doesn’t sound like in these initially innings of sort of the seasonal up-turn, you’re not seeing that, where like your relative share of that incremental up-tick. It sounds like it’s consistent with prior years.

It’s actually -- when you look at it on an overall basis. Obviously, when you look at it down to the business unit, it can change. But when you look at it on an overall basis, that’s correct.

Okay. And then just lastly, or two questions, going back to one thing you mentioned on the last call. You talked about bids in New York City and Boston. I wasn’t sure if you guys had any details that you could share there.

Well, the Boston bid, and it’s all public information. So you can go back and look at it. But Boston has an interesting way of doing their bidding. They bid the disposal first. And then they let each of the collection companies that want to bid, bid using those disposal rates. So when the disposal bids came out, what we saw was that we raised our price fairly dramatically. And, frankly, the other competitors in that market area didn’t raise their price on the disposal side as dramatically.

When the collection bids came in, what we saw was that there was some pretty good rational pricing in the market. What that means is that we raised our bid. And many of the other competitors raised their bid. And Boston actually was won by a small, local, independent hauler. New York City and Philadelphia, both of those bids are still in process. I will tell you that we have raised our prices for the bid in both of those cities. And we’ll see how they turn out.

Okay. And then just lastly, Larry, you had talked about the subcontractor costs being up $23 million year over year. Could you talk about why? I am a little confused as to why we have a number up like that. Was there hurricane element still in the first quarter? Or just curious there.

Larry O’Donnell: There was still a little bit of hurricane. It wasn’t a lot. It was about, as I recall, about $1.5 million. It was $4 million? Okay. And then there was some impact from the closure of Live Oak. That was the $1.5 million, where we’re now using our transfer station network in Atlanta, as opposed to having Live Oak Landfill. So that was a little of it.

As well, we’re just seeing some increases as we haul to further distance landfills, through our hauling network. And then there’s always the fuel component. I talked about the fuel portion of the increases that we’ve been able to identify. But, as we also see higher costs in that line, I’ve got to believe there’s some fuel in those rates as well.

Okay. All right. Thanks.

Before we go on, let me respond to Michael’s question about the working capital. Our working capital at March 31 was a credit balance of $336 million. That’s $50 million improved from our year-end working capital, which was a credit balance of $386 million. And then, with that Angelique, let’s move on.

Kevin Monroe of Thomas Weisel Partners.

Good morning. Just trying to get a better sense for the margin performance in the quarter. Help me understand it. So the one-time gain from the sale of the Ridge Landfill and the lawsuit settlement, that’s in the asset impairment and unusual item line?

Right.

And the strike is in your COGS line?

It’s in the operating expense line.

Operating expenses.

Those are different lines in that category.

Right. And so the strike, I guess, on a pre-tax basis is about $36 million, roughly?

No. It’s $9 million.

Oh, it’s $9 million on pre-tax. Okay. So it’s less. Okay, that helps. The next question would be are you guys – ? What are you seeing in terms of landfill pricing trends at the third party landfills that you use, where you’re bringing your waste to someone else’s landfill? Are those fees going up? And are you willing to accept increases in that part of your business?

Well, again, that’s a market area by market area analysis. But our first and foremost desire is to internalize every ton of waste that we generate. And so we’re not using a lot of third party landfills, where we can help it. But obviously as those costs go up, we’re going to have to pay those additional higher costs. The key for us is making sure that as those costs go up, we pass them through to our customers, through price increases.

Okay. I am just trying to get a sense of landfill pricing in general. The industry is going up. You guys should be seeing that also. And so are you? Or has that changed recently, from kind of past experience?

Nothing that has been noteworthy enough for us to focus on it.

Okay. Thank you.

Leone Young of Smith Barney.

Not to beat the margin issue to death, but we’ll do it anyway. Looking at the first quarter numbers, sort of giving you credit or adding back the New Jersey strike, we’re looking, I think, at largely flat margins. So to achieve the full year guidance, you have to have a pretty sharp acceleration in your margins above and beyond seasonality. So I guess I am looking for, specifically, Larry talked about the cost. But I am not sure exactly what’s going to reverse there, or in terms of the price, are we looking for price acceleration beyond 2% then, to really start moving those margins? Or do you think there could be some delay factor here that you got price, and for some reason it’s lagging a little bit coming down to your bottom line?

Well Leone, I think it’s a number of factors. And I’ll let Larry talk about the cost. I’ll talk a little bit about the price. But it really goes back, again, to the fact that you can’t judge the full year by the first quarter, because of the seasonality that we saw.

But you have seasonality every year though.

Yeah. Seasonality every year. But we absolutely believe that the wet weather, primarily in the West, but also some of the winter storms in the East and Midwest. We believe that the wet weather in the West absolutely dampened our volumes. So you’ve got a few things going on with price and volume. And I’ll let Larry talk about costs.

We expect the volumes to continue the up-turn that we’ve seen in the beginning of April, which you see up-turns during the first quarter. But then just as quickly, when a big weather event occurs, you see a very quick down-turn. And so we do expect volume to act better year over year on a consistent basis week to week.

So that helps the volumes in the second, third and fourth quarters. And then with pricing, obviously you get the roll-over effect of the price increases. It is a snowball effect, as you continue to accelerate pricing through the year. So when we look at it, that’s what gives us confidence that we’ll get there on the price and volume side. And then Larry can talk a little bit about the cost side.

Larry O’Donnell: Sure. As I mentioned, we certainly expect to see improvements in productivity as we progress through the year. On the maintenance side, I fully expect to see improved maintenance cost, as we continue through the year. We’ve got our programs out there, our Compass Systems, which are maintenance information systems that not only help us plan and schedule our maintenance work, but also process our warranty claims.

We had about 65% of our maintenance spend covered by our Compass Systems at the end of last year. And I think as we continue to install those systems throughout the Company, we should be somewhere around the 80% coverage by the end of the year. So that’s going to help us better manage our maintenance.

And on the workers’ comp side, we have made just incredible progress in reducing our incidence and reducing our workers’ comp claims. And, as I have described before, there is a lag. When you see those improvements, you still have the old claims that are in the pipeline that you’re still paying for, because we’re better able to actually reduce the number of claims that we’re seeing. We ought to see the benefits from that in our workers’ comp line.

So we’ll continue to focus on those items. But, at the same time, as Dave mentioned, we’ve got to get price as well to cover our increased costs. And we think we’ve got people poised in the field to make sure that happens.

And you know Leone, it’s certainly not a bit item. But Bob touched on it a little bit in his script. And that is that our synthetic fuels transaction for the full year is a $0.04 benefit. We actually had a negative benefit, slight negative benefit, in the first quarter. So we didn’t get that $0.01 benefit that you would get if you take the $0.04, and divide it evenly through the year. You would get a penny per quarter. We actually had a small, slight negative in the first quarter. So it’s not a big deal. But it’s worth noting that in the first quarter that $0.01 didn’t appear.

Yeah. That helps. And the 10% price on the temporary roll-off, remind me, what percentage of the revenue?

What percentage of the revenue? What was that? You cut out.

Excuse me. The 10% seasonal charge, or excuse me, price, that you want to put on the temporary roll-off, I was wondering if you could remind me about what percentage of the revenue base is that.

Well, roll-off is about -- I am trying to look for the exact number. It generally runs around pretty close to 30% over the full year of our collection revenue. And about nearly half of our roll-off is temporary business.

Thanks.

Your last question comes from Jamie Cook of Credit Suisse First Boston.

My first question relates to the competition. Do you segment the public competitors that we follow versus some of the private companies? Because I think there is a concern in the market. Your public competitors seem focused on pricing. They talk about it. But are you getting a push-back from some of the smaller, private companies in the market?

Yeah, you know, Larry talked about how we went out and visited with each of our 56 market areas in our first quarter review, something that we haven’t done before when we go through the quarterly results. And generally what you heard from those 56 market areas is that they are not seeing a lot of push-back, at least on the commercial and the industrial side. They’re not seeing a dramatic amount of push-back.

Now, are there some market areas where they see more push-back than others -- places like Michigan and Illinois, on the collection side; Maryland and Virginia on the landfill side? Are there some places like that, where you see more push-back? Absolutely. But I think, Jamie, frankly, what you’re seeing here is that this industry, and that includes mom and pops, all the way up to us, as the leader of the industry, that this industry really hasn’t done a very good job at keeping up with what you all know have been some very dramatic price increases over the last few years -- I am sorry, cost increases.

And so I think that’s affected the mom and pops, just like it’s affected us. And so my guess is as they’ve seen their fuel and steel prices go up, that they’ve had to raise their pricing too. So we haven’t seen a dramatic amount of push back is the short answer.

Okay. And then my next question relates to the expansion of the study to the -- I mean you’re pushing it out to 58 landfills. And then you said you’d expect to hit the remaining I guess that would be about 240 landfills or so [audio difficulties] the ramping of that process. I mean it seems like you’d have to hit, given we are in April, you’d have to hit a lot of – you know what I mean? You’d have to really ramp, escalate, I guess, the pricing.

Sure. And remember, when we first started this study, and everybody said how fast are you going to roll it out across your customer base, our response at that time was we really can’t say, because we don’t know what’s going to happen in these market areas.

What we’ve seen is that there’s been a fairly muted reaction in these market areas. As we said this morning, we only lost volume, we believe, due to the price increases at four of the landfills. Because of that Jamie, it certainly gives us more confidence that we’re going to be able to roll out very quickly. Now we’re going through the second phase of the study right now. All I can say that I’ve told our pricing department is that I want it implemented across, assuming that we see the same types of results in the second phase of the study that we saw in the first, because it was very positive, I believe that it would be time to take it across all of our landfills by the end of the year.

Now to say when that’s going to happen sequentially, I won’t tell you that they have put the actual plan together. That plan will be developed as we see the results of the second phase of the study. So as much detail as I have given our pricing department, is that we need to make sure that if we see the same type of reaction in this phase as we saw in the last, that we’re ready and able to implement it across the whole Company.

Okay great. Thank you very much. Nice quarter.

And with that, we will wrap up the call for the day. Thank you all for joining us. And we look forward to seeing you, as we’ll be out on the road in the future.