美國廢棄物管理公司 (WM) 2006 Q1 法說會逐字稿

Good morning. My name is Natwinda and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management first-quarter 2006 earnings 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 INSTRUCTIONS)

Now I would like to introduce the Director, Investor Relations, Mr. Greg Nikkel.

Thank you. 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; and Bob Simpson, Senior Vice President and Chief Financial Officer.

David will start things off with a summary of the financial results for the quarter and he will review the details of our revenue growth, including price and volume trends. Larry will discuss operating costs and other related topics. Bob will then cover the financial statements with an update on our divestiture program and other financial matters. We will conclude with questions and answers.

This call is being recorded and will be available 24 hours a day beginning approximately 11:00 AM Central time today until 05:00 p.m. on May 11. To hear a replay of the call over the Internet, access the Waste Management website atwww.wm.com. To hear a telephonic replay of the call, dial 800-642-1687 and enter reservation code 724-7347.

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 and 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 10-K for the year ended December 31, 2005, 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 and earnings per share growth after adjusting for certain onetime items, and income from operations as a percent of revenue after adjusting for certain onetime items, all of which are non-GAAP financial measures. We have defined and reconciled those items as part of the earnings press release or the release 8-K filed today, which can be found on the Company's website.

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 27, 2006, 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, and good morning to everyone. I will begin by summarizing our quarterly results and then detail our pricing and other achievements of the first quarter.

I am very pleased that for the third straight quarter, we accomplished our primary goals of growing our earnings, expanding our margins, and generating strong free cash flow to return to our shareholders. We are off to an excellent start, and our performance exceeded our expectations for the quarter.

We earned $0.35 per diluted share this quarter, after adjusting for an SG&A charge to increase our reserves for unclaimed property and for a tax benefit from audit settlement. This is an increase of $0.09 per diluted share, or nearly 35% when compared with our first quarter of 2005 earnings per diluted share.

Income from operations increased by nearly 19% on an as-reported basis during the first quarter of 2006 compared with the prior-year quarter. Our income from operations margin expanded by approximately 150 basis points to 13.5% during the first quarter. After adjusting for the SG&A unclaimed property charge, our income from operations margin increased 210 basis points during the first quarter.

In addition to this triple-digit basis point expansion of our income from operations margin, we produced $410 million in free cash flow for the quarter. Strong revenue growth from yield was the primary driver behind the improved quarterly results. We produced base business revenue growth from yield of 3.9%, the second consecutive quarter we have achieved that result. If you include the 1.4% benefit from our fuel surcharge program, our yield actually increased a total 5.3%.

We grew revenue due to higher yield in both the collection and disposal lines of our business. The three most significant contributors to our internal revenue growth from yield were the industrial, commercial, and residential lines of our collection business. Combined, the revenue growth from yield for these lines of business was 4.8% this quarter, which excludes the benefits of our fuel surcharge.

Pricing in the industrial, or rolloff, line of business led the way, with internal revenue growth from yield reaching 5.5% in the first quarter of this year.

We also produced positive internal revenue growth from yield at our landfill, transfer station, and waste-to-energy facilities. These results stem in part from the rollout of the findings of our disposal pricing study across all of our landfills and transfer stations.

Overall, stronger volumes produced 1.9% in internal revenue growth during the first quarter. The primary causes of the increase were significantly stronger year-over-year MSW, C&D, and special waste volumes coming into our landfills. Industrial collection volumes also increased during the quarter. Combined, these stronger landfill and industrial collection volumes contributed over 85% of the companywide internal growth from volumes during the quarter.

In our view, this volume growth is indicative of the usually dry and warm weather we saw in many parts of the country. Plus it is a sign of continued health economy, and it includes an extra workday in this year's quarter. To the extent that strong first-quarter landfill and rolloff collection volumes were the result of good weather, it's possible that volumes were essentially borrowed from the second quarter.

Internal revenue growth due to volume for our commercial and residential lines of business was a combined negative 2.6%. The volume decline was again most significant in our residential line of business, which is consistent with our intent of exiting low-return businesses. As we have discussed in the past, we are bidding on municipal residential contracts with the objective of increasing our margins in this line of business, which have trailed the margins of our commercial and industrial lines. We believe the loss of commercial volumes is in line with our continued push to increase prices.

We continue to see a positive trade-off between the higher collection yield and lower collection volume. In fact, income from operation margins in each of the residential, commercial, and industrial lines of business expanded during the first quarter of 2006.

During the third quarter of 2005, we began to implement our pricing excellence program, which is designed to assure that we are paid for all services and incremental work we perform for our customers. As of today, we have introduced this program in 41 of our 55 market areas. After the program has been introduced in a market area, it takes a number of quarters to ramp up to the full revenue run rate from the program.

We are continuing to utilize two other collection pricing levers that we believe will contribute to higher revenue. One is an increase in our environmental cost recovery fee from 1% to 2%. We began to implement the higher fee in the first quarter of this year to offset continuing increases in environmental compliance costs.

The other is the use of seasonal price increases, which we adopted for the first time in 2005. We have begun implementing seasonal price increases in our rolloff business as we have entered this year's period of higher demand.

Along with the success of our pricing excellence program, we will continue to focus on our cost control and operational excellence initiatives. I am pleased with the progress we made in these areas during the quarter, and Larry and Bob will review these in detail in their respective remarks.

Clearly, we exceeded analysts' and our own expectations in the first quarter. We are off to a great start and have laid the foundation for a successful year. Volumes for the first quarter were significantly ahead of our original 2006 plan for the year. While it would be easy to assume that the amount by which we exceeded expectations in the first quarter would be repeated in the next three quarters, we believe it would be premature to do that. It is not clear whether we borrowed some volumes from the second quarter or whether the strong economy just created more volumes. We will share our view on volumes in our second-quarter conference call.

So in summary, we were very pleased with our strong financial performance in the first quarter, and we are very optimistic about the full year. Regardless of any headwinds we might encounter, we still expect to continue to meet our three objectives of increasing earnings per share, expanding margins, and producing strong free cash flow.

We could not have accomplished these strong first-quarter results without the long and hard work of our nearly 50,000 employees, who I think are the best in the industry. This dedicated team of people is the primary reason behind our achievements and will be the catalyst for all of our future successes.

With that, I will turn the call over to Larry.

Thank you, David, and good morning. I'll begin my remarks this morning with a review of our operating cost results for the quarter. Our continued focus on operational excellence initiatives contributed to the excellent results we produced in the first quarter of this year. Operating expenses in the first quarter of 2006 were $2,100,000,000, or $56 million higher than in the first quarter of 2005.

As a percent of revenue, operating expenses declined, from 67.3% in the first quarter of 2005 to 65% in the first quarter of 2006. This 230 basis point improvement marks the third consecutive quarter in which our year-over-year results have improved.

As a percent of revenue, we lowered operating costs in eight of the 10 cost categories that we break out in our financial statements. The two exceptions were the categories of fuel costs and subcontractor costs.

I will now review the details of our operational performance in a number of our cost categories, using basis point changes from first quarter 2005 to first quarter 2006, just as I have done on previous calls.

As a percent of revenue, labor and related benefits cost improved 80 basis points. We saw more than a $7 million, or 10%, decrease in our group insurance and health care benefits cost. We also achieved year-over-year improvements in first-quarter productivity in all three of our collection lines of business.

Our new labor management tool is assisting our operations in planning labor, reducing unproductive time, and flexing down cost when volumes decline. Transfer and disposal expenses, which include those costs that our collection companies pay to third-party landfill to transfer stations, improved by 50 basis points as a percent of revenue for the first quarter of 2006. Our focus on exiting low-margin collection businesses where we do not internalize the volume, was a major contributor to the improvement.

Our internalization rate increased from 65.1% during the first quarter of 2005 to 66.7% in the first quarter of 2006. We also improved our performance in the maintenance area, particularly in fleet maintenance. Overall, we reduced our maintenance costs by 30 basis points as a percent of revenue, in spite of the continued inflation in the cost of parts, supplies, lubes, and oils.

Cost of goods sold as a percent of revenue improved by 80 basis points, due primarily to the impact of lower recycling commodity prices and the associated decrease in the recycling rebates we pass back to our suppliers.

Our overall risk management costs improved by 10 basis points as a percent of revenue during the first quarter. We again produced significant year-over-year improvements in our OSHA injury rate and in our fleet accident rate, both of which improved by over 30%. Since we started our safety program in 2000, we have improved our OSHA injury rate by over 75%. This improvement was the result of a total change in our culture in the way we view safety at all levels in our Company. Achieving world-class safety performance remains one of our top priorities.

Subcontractor costs increased by 60 basis points as a percent of revenue in the quarter. The two largest causes of this increase were higher indirect fuel costs passed on to us by third-party haulers and costs related to work in New Orleans, where we used subcontractors in connection with the Hurricane Katrina relief effort.

Higher direct diesel fuel costs caused a 50 basis point increase in operating expense as a percent of revenue. Although this negatively affected our operating margins, it did not lower earnings because the revenue from our fuel surcharge program fully covered the impact of both higher direct fuel costs and the indirect fuel costs passed on to us by our subcontractor haulers.

In the area of Other cost, we lowered operating expenses as a percent of revenue by 50 basis points in the first quarter of this year. You may recall that in the first quarter of 2005, a strike in New Jersey increased operating expenses by about $9 million. Approximately one-half of that amount fell into this cost category in 2005. The absence of that cost in 2006 largely explains the year-over-year improvement in 2006.

Many of you have read recent news accounts about our union contract negotiations and strikes, which include a two-week strike that ended two weeks ago in Washington D.C. and a current strike in Brooklyn, New York, which has now lasted approximately four weeks. These strikes had no material impact on first-quarter 2006 results, and we will address their costs in second-quarter results if they are material.

We have a primary objective in our union labor negotiations. That is to ensure that we treat all of our employees, both union and nonunion, in a fair and equitable manner. This includes offering competitive wages and benefits and safe working conditions to each and every employee within Waste Management.

One of the issues we have been addressing in our union contract renegotiations across the country is a consistent approach to health care for all our union and nonunion employees. We believe that all employees should make a reasonable financial contribution into their healthcare program, just as most American workers currently do, including all the nonunion employees of Waste Management. This is a prime example of our objective to treat all employees consistently and equitably in the area of benefits and health care.

We have done an outstanding job of bringing in replacement workers from other market areas to meet the needs of our customers when we have experienced a labor strike or natural disaster. Our replacement workers consist of some of the best drivers, mechanics, and route managers we have in the Company. We call this team the Green Team. We have once again demonstrated our capabilities with the strikes in Washington D.C. and in Brooklyn, and while we would rather not have to bear the cost and inconvenience of a strike, we believe that accomplishing our objective of consistent and equitable treatment for all employees in areas such as the sharing of health care benefits cost, work safety rules, and equitable wages are in the best long-term interest of the Company and our employees.

In closing, I am very pleased that our initiatives focused on pricing excellence, controlling our costs, and improving our safety and productivity have enabled us to continue to improve our operating margins for the third consecutive quarter. It confirms that we are focused on the right things. In spite of higher fuel prices and other inflationary pressures, our operational and pricing excellence initiatives are generating positive results.

While I am pleased with the progress we have made, I remain confident that there is more improvement yet to come. With that, I will turn the call over to Bob.

Thank you, Larry. I will start with a review of SG&A costs. Our goal is for SG&A costs to be under 10% of revenue for the year, and except for one item, we are on track to achieve that objective. Year-over-year, our costs increased largely due to a $19 million charge related to increasing our reserves for unclaimed property, such as uncashed checks to vendors. We increased these reserves as a result of unclaimed property audits for periods dating back as far as 1980. Excluding the impact of this adjustment, SG&A costs as a percent of revenue would have been 10.8% for the first quarter of 2006, in line with the first quarter of 2005.

Depreciation and amortization expense for the first quarter of 2006 was up $7 million when compared with the first quarter of 2005. As a percent of revenue, depreciation and amortization expense was 10.2%, compared with 10.6% in the prior-year quarter.

Moving down the income statement, asset impairments and unusual items in the first quarter of 2005 reflected income of $23 million due primarily to the 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 activity. Asset impairments and unusual items in the first quarter of 2006 reflected income of $2 million.

Interest expense was $136 million in the first quarter, a $20 million increase from 2005. This increase is primarily the result of the higher interest rate environment in 2006, as well as additional debt. We have seen LIBOR rates increase approximately 200 basis points year-over-year, and compared with the end of the first quarter of 2005, total reported debt increased by $234 million to $8.620 billion, primarily due to our fourth quarter 2005 borrowing in Canada related to our previously announced repatriation of funds into the U.S.

The floating-rate portion of our debt portfolio was 35% of the end of the quarter, and our debt to total capital ratio was 58.7%. Interest income increased by $3 million to $9 million during the first quarter of 2006 due to the higher interest rates and an increase in our level of short-term investments.

Our effective tax rate in the first quarter is 35.6%. The increase over our previous estimate of approximately 31% is caused primarily by the high level of crude oil prices. Under the oil price phaseout rules, we have estimated that we will lose 61% of our Section 45K tax credits from landfill gas and synthetic fuel investments. As we noted in our press release, Congress has recently renamed Section 29; it is now Section 45K.

The net effective of this in the first quarter was about a $0.01 reduction in EPS. This tax credit phaseout estimate is based on actual oil prices in the first quarter and oil futures for the remainder of the year as of the end of the first quarter. We have adjusted the equity losses from our two synthetic fuel investments to reflect this estimate. This explains the first-quarter 2006 loss amount of $8 million versus the $26 million in the first quarter of 2005 shown on our income statement line item titled Equity in Net Losses of Unconsolidated Entities. Since the phaseout is based on the average crude oil price for the entire year, we will revise our estimate each quarter as prices change. At 61% phaseout, our normal effective tax would be 37.1%.

I should note that at the 61% level of phaseout of Section 45K credits, our earnings per share will be reduced by approximately $0.02 per diluted share in each of the next three quarters, compared with the EPS levels we would expect to achieve if there was no phaseout of Section 45 credits. If crude oil prices average above $73 per barrel for the full year, all of our credits would be phased out.

Note that the tax reconciliation bill in the Senate includes a provision that would defer the impact of this year's higher crude oil prices to next year. If that legislation passes as currently written, the credits in 2006 would not be phased out at all and we would get the benefit of the credits this year.

Before moving to my discussion of cash flow, I want to point out an additional $6 million before tax benefit included in this year's quarters. In accordance with generally accepted accounting principles, we reduced our environmental remediation liabilities due to an increase in our risk-free discount rate. The risk-free discount rate is based on U.S. Treasury bonds and is used to calculate the present value of future environmental liabilities. So the higher interest rates caused the risk-free discount rate to increase from 4.25% to 4.75%. This resulted in a $6 million reduction in environmental remediation liabilities, which results in a current period reduction in operating expenses.

We generated very strong cash flow during the first quarter of 2006. Net cash from operations for the first quarter was $563 million, up from $508 million in the same quarter last year. Capital expenditures were $171 million. Adding in the $18 million in net proceeds from divestitures and other asset sales, our free cash flow was $410 million. This compares with $420 million in free cash flow for the first quarter of 2005, which included $89 million in proceeds from the divestiture of the Ridge landfill.

For the first quarter of 2006 our cash tax payments were $14 million and our cash interest payments were $110 million. We utilized our free cash flow to repurchase $375 million in shares during the first quarter. This included a $291 million accelerated share repurchase executed at an average price of $32.23 per share. We also paid one $121 million in cash dividends during the first quarter of 2006, marking the first payment of our higher quarterly dividend of $0.22 per share.

In 2006, we currently expect to allocate $475 million to dividend payments and up to $725 million in share repurchases. So we are more than halfway to our share repurchase goal.

I would like now to take a moment to update you on the progress of our previously announced divestiture program. As of today, we have either sold or have agreements to sell operations totaling over $170 million in revenue. We are pleased with the progress we have made and with the process by which we are marketing the operations.

In addition, we have got a good number of prospective buyers conducting due diligence or participating in ongoing private negotiations. Over the coming quarters, we will continue to update you on the progress of these divestitures.

In closing, we are very pleased to have recorded our third consecutive quarter of year-over-year increases in earnings and operating margins, as well as strong free cash flow. This quarter lays a solid foundation for the rest of the year. And with that, let's open the line for questions.

(OPERATOR INSTRUCTIONS) Amanda Tepper, JPMorgan.

Can you talk a little on the landfill and transfer station price increases? You gave a lot of good detail on the collections side. How much is it moving up? Can you also -- what did you get in the quarter, and can you comment also on the costs for constructing landfills? Because we hear those are going up too.

I'll talk a little bit about the pricing and let Larry talk to you a little bit about the cost structure. When we look at the overall disposal line of business, what we see is that the pricing there is pretty much in line with our overall price increases of 3.9%. Now, when we look the MSW line, we look at it on a little bit of a normalized basis, because we have one very large landfill that is closing, Amanda, based on time, not based on volume. In other words, it has to close at the end of the year.

So, as you can imagine, when you're doing that, you want to get as much volume as you can in during that period of time, so pricing at that landfill, I will tell you, has not been going up. It has been remaining flat to down so that we can get as much volume as we can in there.

So when we pull that landfill out, on a normalized basis, again, what we see on the MSW line is that pricing is consistent with the overall yield that we've seen. The pricing at the MSW line is actually about 3.6%.

When you look the Other line, special waste, as you know, is always a moving target because there is a huge mix there. But we see positive pricing in the special waste line. We also see very good pricing in the C&D line. So what that all adds up to is that our pricing at the landfill and at the transfer stations has been pretty consistent with our overall yield. And maybe Larry can talk to us a little bit about cost.

Sure. We have seen cost go up in the area of liner materials. Some areas of the country, costs of cell construction have got up. We have seen some of those prices maybe in the range of maybe 5 to 10%, but it really varies across the country. In some places, we actually have not seen them go up at all.

I think we've done a pretty good job of managing those costs. I think probably our national footprint has helped us as well manage some of those costs. But we also planned for it. So I think the way we planned our budget this year, our capital budget, we did take those costs into account.

And you know some of those costs also show up in our landfill amortization rates. And so we continue to pursue landfill price increases to cover those increased costs, and as Dave mentioned in his comments, that was one of the reasons we recently increased our environmental fee from 1% to 2%, to help cover some of those costs.

So while we have seen some inflation in some of those costs, just like some of our other operating costs, I think we've planned for it and I think we're doing a pretty good job of managing those costs as well.

So even with the volumes up and the cost of some landfill construction up, you spent less on CapEx than we had thought in the quarter. Are you still thinking you might spend as much as $1.5 billion this year? Is that still in line, or could it be higher?

We are not updating anything with respect to our CapEx, Amanda. I think that is about what we are going to spend. Certainly on the landfill side, no changes.

Okay. Then last question just on the asset sales. Could you just give a little bit more color as you're getting out of these? Is it a lot of little deals with lots of different buyers? And what is the landscape? Are you generally getting around the prices you expected? And were there any exited volumes that came out of your revenues in the quarter?

A little bit in terms of exited volumes, but not enough to speak about. With respect to prices, the way the structured auction process worked or is working, we ask for indications of interest. And they were certainly acceptable to us.

After the indications of interests come in, we narrowed -- for each of the assets we had in the virtual data room, we narrowed the list of prospective buyers down to those who we thought were the most qualified and had the highest indications of interest. And now they are going through the due diligence process.

Once they finish the due diligence process, we will ask them sometime later this quarter for actual offers and start negotiating the contract. So that is the process, and certainly we have not seen anything that is discouraging to us yet.

It doesn't sound like there were any swaps there. Are you looking to maybe do some asset swaps before the year is out as part of this?

As we have said in the past and it is still true, we would really prefer to do swaps. There's some swap activity, but not as much as we would like. If we can -- it takes two to do swaps, and if we can't find enough interest among other potential swappers, we will just continue down the road of selling these assets.

Okay, thank you.

Michael Hoffman, Friedman, Billings, Ramsey.

Congratulations. Following up on the tax rate, just so I make sure I understood your comment, Bob, 37.1 is a full year number or 37.1 each quarter for the next three?

I would call that -- I would say it is really both. From this point forward, I would say 37.1 for each of the quarters, assuming a 61% phaseout.

Okay, but you're at sort of 35.6 in the first, so 37, 37, 37 -- and you end up just under 37% for the year.

That is correct, Michael. I would use 37.1 as kind of our operating number going forward. Remember, the other feature or factor that puts effective tax rate down to 35 in this quarter were the state audit settlements that we mentioned in the second bullet of our press release.

Okay. Then next one is the comment in your comments about your goal on SG&A to get below 10%, and we make our adjustments at 60 basis points for the charge. How do you visualize the path -- a steady decline each quarter or we are stepping down? How do you want us to think about this from a modeling standpoint?

First of all, I would tell you to not think about -- to understand that the $19 million SG&A charge for the unclaimed property is not something we were contemplating when we set our goal; we leave that out of the goal.

We talked about in February on the fourth quarter guidance that we would expect to spend more this year on SAP and other IT projects, as well as some other investments that we were going to make. And I expect going forward you'll see us pretty much come very close to what we did last year quarter-by-quarter. And don't forget that the denominator has something to do with that as well.

Okay. So if I'm thinking about that, that's a good, steady trend down sequentially?

Yes, I would expect it to look pretty much like last year.

With the seasonal upturn in revenue.

Okay. I got it, right. Just so we are absolutely certain on your definition of your goal, this is to arrive at less than 10% by the end of the year, not 10% for the full year?

It is the average for the full year, just like last year.

Okay. Six to 7% landfill volume growth is terrific in the first quarter year-over-year. Larry, can you characterize the waste streams? Is that C&D volume? Is that MSW? Is it coming commercial? Can you talk a little about where it's coming from?

Well, certainly I think the weather that we saw in the first quarter had an impact. We saw pretty good volumes all the way around. And the question remains whether the unseasonably dry and warm weather that we experienced in the first quarter brought those volumes forward from the second quarter, or if we will continue to see that trend with the strong economy, what impact fuel prices and interest rates are going to have on the economy. That remains to be seen. But certainly we saw strength at the landfills in the quarter.

Okay, I get that. But was it particularly strong in MSW or is it particularly strong in C&D?

It was extremely strong and C&D and special waste. And it was very strong in MSW. Just as an order of magnitude, at C&D and special waste, we saw better than 15% growth. At the MSW line, we saw about 9% growth.

That leads me to -- if you're getting 9% type volume, that is obviously showing up in your third parties as well. Are you finding yourself encouraged to try and drive pricing leverage to them faster, since they are enjoying very good business fundamentals as well?

Absolutely. But we don't stop. When we talk about pricing -- and certainly Larry has been emphasizing it now for a couple quarters as we go through and talk with our market area general managers every quarter -- when we talk about pricing, we talk about disposal pricing, and we include transfer stations in that as well. So we are certainly making sure that we continue to focus people at all areas of disposal.

Okay. And then just talking about the seasonality, I get your cautionary note of you can't tell whether construction stuff that would've normally started in April happened in the first quarter. There is going to be some construction that's just programmed and it is hard and fast about start dates because of availability of labor and the like, so you should get some incremental increase.

Secondly, there's yard waste activity, that by definition isn't very strong in the first quarter. So we should see some seasonal improvement in the business, even with your cautionary note about maybe some C&D and special waste stuff happened in 1Q that might not happen normally.

Certainly -- please don't misconstrue what we said in our statement, because we are seeing the seasonal upturn. But what we are saying -- remember when we only talked about sometimes there's bad weather in the first quarter and some of that volume moves into the second quarter. This is really the first year since I have been here where we have had unusually good weather in the first quarter, so the question is will the opposite happen? But we certainly expect the seasonal upturn.

But, you know, when we put together our plan for the year, Michael, I've got to tell you, we were not expecting 15% plus increases in C&D and special waste and we were not expecting 9% increases in MSW. So when we put our plan together for the year, we were expecting volumes to be closer to flat. And so the question is will we see that strong volume continue in the second quarter or did we essentially borrow some of that volume into the first quarter and we'll see less growth during the seasonal upturn?

All right. That leads me to another question. If you're getting that strength in the MSW side, are you getting service upgrades now in your commercial business, where two days go to three or an 8-yarder goes to 10 yards?

You know, I think it is difficult to say that. We just got back from all of our reviews, so I would ask Bob and Larry to pitch in too. But certainly what you are seeing is good demand in the first quarter at the rolloff lines. And remember we said that we are down in volume on the commercial line. So I think it would be difficult to characterize it as up service. But again, we did not get down into IRG to that level of detail.

Okay. Lastly, at the convention earlier in the April, lots of the private guys were suggesting that they were adding new business at higher rates for the first time in a long time and, press them, is it just because your inflation is driving rates higher or are you adding more to it, getting some real price. But clearly the message was that new business is being added at higher rates. Are you seeing that?

We have been seeing that very consistently for a long period of time. That was the first thing that we attacked when we went into the pricing program. So we have been seeing that for a number of quarters and it continues to accelerate.

Okay. If you get a second quarter that looks like the first quarter from a performance standpoint, clearly we've got to revisit guidance. Is that an accurate observation?

I think that is an accurate observation. But the caution that we give is that until we see the volumes for the full quarter, we don't think it is appropriate to do it at this point in time.

Got it. Thanks a lot.

Lorraine Maikis, Merrill Lynch.

With the divestiture program, have you actually completed any sales as of the end of the first quarter?

Yes, we have.

Can you give us the revenue dollars of that?

It's too small at this point really to mention. It didn't move the needle. We have got about, as I said, $170 million of revenue both in sold items as well as items that are under contract. And at this point, I think that is where we will stop at that point, Lorraine. We will certainly have more to say as the year goes on.

Okay. And then the tax impact on these fuel credits, can you just discuss the impact on free cash flow?

At the end of the second quarter, we're going to have a much better handle on where the credits are going to go this year. And so at this point I think we're not going to talk about anything as it relates to free cash flow. We will just hold off on that for the time being.

Okay. Because there's a lot of moving parts with the losses in the business, the interest expense.

Absolutely, and that is part of the reason we want to hold off. I think as the bill moves through Congress, as oil prices continue to get farther into the year and we see where it's really going, I think we will be able to be much clearer in the second quarter. So that is when we are going to want to talk about that.

And then can you just comment on how your churn has been trending?

Churn is actually down to 9.5% for the first quarter, down from 9.7% in the first quarter of last year.

Okay, thank you very much.

Jamie Cook, Credit Suisse.

Nice quarter. My -- first quarter, you talked a lot about volume versus your expectations, but you haven't commented on how pricing is trending versus your expectations.

Pricing is certainly trending at or above where our plan was at the beginning of 2006, and we certainly don't expect to back off during the course of the year.

Could you just talk a little bit more -- can you comment on the market's willingness to accept more prices -- given the pricing initiatives that you have had to date and in 2005, I guess, how much more is left?

Sure. When we look at it and you look at what the market reaction is to the pricing, what we are pretty much seeing is what we have seen in the past, which is it appears that there is no centralized direction in the market. You'll have sporadic behavior throughout the country. So we continue to see good pricing in some places, and then you go somewhere like Dallas or Michigan or Minnesota and you see what we would view as irrational behavior.

So it is sporadic. I would say that it is improving. It is not as widespread as it has been in the past. But we still see a market that I believe that is not acting in a centralized manner.

So when we look at pricing, we continue to say that we are not going to let the market affect what we are going to do. We are only going to do what we can do. And we think that there is still some room for growth, as we said. We've brought out the new price and excellence program to 41 of our 55 markets, so there is clearly still work to be done. And even after we finish that rollout, there is the process of making sure that you maintain that momentum.

So there is still a lot of work to be done. We're going to do everything we can to do with pricing, and we're not going to let how the market reacts affect what are going to do in the future.

David, you talked about volumes in the second quarter that perhaps we could have -- I mean, in the first quarter we could have had some pull-forward, I guess. But do you have any data on volumes in April and how that's trending (multiple speakers)?

Looking at three weeks of the quarter and then trying to extrapolate, we think is a little bit of a premature judgment. Just like taking three months of the year, we think is premature to judge the full year. So we want to see what the volume trend looks like throughout the quarter before we make a call on how the volumes are looking.

Okay. Then my last question, Bob, in the cost line, was there any in the first quarter related to the revenue management system?

Yes, there was.

I think we said $30 million for the year. What was the first quarter?

It was around $5 million. There are also other IT projects in there. You may recall we talked about COMPASS and FastLane, and that would be in there as well. SG&A also, we had our branding campaign was not something we were pursuing last year in this year. That would be a year-over-year difference as well.

Okay, great. Thanks a lot, guys.

Bill Fisher, Raymond James.

Larry, you mentioned your subcontractor costs continue to rise a fair bit, and you're using a surcharge to address it on the fuel side. But just coming at that differently, your landfill sites are generally, I think, real well-positioned and closer to the markets. And basically how far along do you feel like your local operations are?

And kind of having that information, what the -- the customers' cost of hauling is going up, and then trying to exploit that on that third-party disposal pricing. Is that still opportunity or have you really done that?

I guess I will answer it in a couple of ways, if I understand your question right. One, you'll recall one thing that we wanted to address with increased fuel surcharges that we were seeing from the subcontractors we were using, that is why we changed our fuel surcharge program to then pick up that additional fuel surcharge that we were receiving from our subcontractors. So we addressed those costs that way.

Then another thing that we have been doing is actually as we look at some of the residential municipal contracts where we did not even internalize the waste, and in some of those cases we were hauling out to some pretty distant landfills, which just didn't make sense to us, we did that work in order to increase the margins on it and in some cases we have lost it. And through that then you've seen as we've lost it, we've actually increased our internalization rate.

But certainly as in some locations where we have had to begin to haul to more distant landfills, that is why we are looking at things like, as David mentioned, the pricing not only at our landfills but at our transfer stations. That's something I have been talking to each of our market areas about as I have made by way across the country. I think that is really important, that we not only focus on the landfill but also the transfer stations. I don't know if that answers your question.

Partially. I guess I'm just specifically thinking of your third-party disposal customers and whether you hit them at the transfer station or -- if your landfill's closer into a market, it seems like that subcontractor hauling differentials rising even more, the long haul cost is rising. So you could kind of exploit the price increase to them more.

We absolutely take a look at where our landfills are and where third parties would have to haul to if they did not come to us, and take into account that transportation component of it and make sure we're pricing -- if they're -- pricing our close-in landfills accordingly. We absolutely take that into account.

Thank you.

Corey Greendale, First Analysis.

Congratulations on the quarter. First question, David, you made a comment about the margin differential between the residential hauling line of business and the commercial and industrial line. I was just wondering if you could put a little more color on that, like what the differential was maybe a year ago and how much it's narrowed since then.

Corey, we don't have that data specifically here at our fingertips. We can certainly get that. But suffice it to say that as we have been saying for a long time, the residential line of business is an underperforming line for us. And if we are in a market area where we are not getting that return on invested capital that we think that we deserve, because it is also a very capital intensive line of business, we're going to exit the business.

And so we have been seeing those margins expand quarter-to-quarter on a very consistent basis over the last year. From a percentage point of view, obviously, I am certainly they've expanded more than commercial and industrial only, because they are starting at a lower base. But we don't have the specific margin basis point improvement handy right now.

Okay. The $170 million in divestitures -- actually, just speaking to what you were saying -- is there any noteworthy amount of revenue that you have exited for that reason because it's low margin?

Pretty much -- I would say all of the assets we put up for sale would fall into the category of low margin. And so I would say that applies to all the $170 million.

Is there some sort of a margin number, just a ballpark, that you could put on the $170 million?

We haven't tried to do that. We had two tranches. The $400 million had an average EBIT margin of 5%, and the 500 plus million that we added in January and announced on the February call had an average EBIT margin of 3%. So I bet if you went right into the middle there, you would be okay.

Okay. The $170 million, is it your expectation that most of that closes during Q2?

Yes. Well, some of it has already closed. We would expect the rest of it to close in Q2. Closing sometimes takes a little bit longer -- we would hope we would have more closed now -- but for a lot of these businesses we are selling, you have to get consents from local municipalities and the like, and it just takes time to get through that.

The good news about that underperforming business is that, like the rest of our business, even though it is underperforming, it is improving. So for all you buyers out there, make sure that you take that into account when you look at your prices.

They are not exempt from our initiatives and programs.

Great. Then just one quick clarifier, Bob, on that change in the discount rate for the obligations, the closure obligations. Is that you said a $6 million benefit to cost that runs through -- does that run through the disposal item?

In our 10-Q, which we will file later today, maybe even later this morning, it will be in the landfill operating cost line.

And it is $6 million in the quarter?

Correct.

Thanks very much.

Leone Young, Citigroup.

Let me add my congratulations. Going back to your comments, and I think very prudently about wondering if the first quarter was robbing Peter to pay Paul a little bit, how should we think about the gross margin pattern as well? You obviously had stellar gross margin in the first quarter. But related to the fact that maybe there was some pull-in on volume, should we think about gross margin being up seasonally, but perhaps maybe not as strong as in prior years?

You know, Leone, I think is too early to tell on that too. Clearly, this is a business that is to a great degree dependent upon leverage. It is all dependent upon how much volume you run through the system. So I certainly think that it is too early to call that for the second quarter.

But look, we're going to stick with our usual goals. We're going to stick with the fact that everything we work toward is going to improving our margins, improving our earnings, and improving our cash flow. So it is hard to judge what the second quarter will look like, again, until we see the volumes from a margin point of view.

But based on your comments, as you said, because it tends to be volume driven, the leverage, that is not unreasonable to assume perhaps a little more muted gross margin increase.

Yes, I think, depending on how the volumes react, I would agree with that.

Also, you characterized the landfill pricing as being about in line with the average. Where would you have put it last year?

Last year -- certainly it is up this year than it was from last year. And last year it ran probably slightly below the run rate on yield. And that was primarily driven by lower pricing in special waste, and we did not get the great pricing last year that we got in C&D this year. But again, that is all a function of volume.

Terrific. Lastly, just a quick housekeeping. Do you have an average cost of debt these days, and is there any plans to change your debt balance by year-end?

Our cost to debt is about 5.8, 5.9.

It is actually up to about 6.3 in this quarter.

Thank you. That's Cherie, by the way.

And then you asked -- what was it about the debt?

Are you planning to change your debt levels before the end of the year or just stay about the same?

Probably stay relatively the same. We've got $300 million of senior notes that come due in November. That is really the biggest -- or maybe it's October. Anyway, we expect to pay those off with cash; however, we are probably going to issue a similar amount of tax-exempt debt through the course of the year. So all in all, not much change.

But then right at the beginning of next year, we have the Canadian borrowing that comes due, so --

Well, it is not necessarily due yet then, but --.

We have the opportunity to --

We might look at paying that down early next year, right.

Thank you very much.

There are no further questions at this time. Mr. Steiner, are there any closing remarks?

Yes, thank you all for joining our call today. Clearly, with triple-digit expansion in our margins, we are thrilled with how the first quarter shaped up. And it is obvious to us that our operational and our pricing programs are working. That gives us great optimism for the quarter and for the year. And we certainly look forward to seeing all of all out on the road over the next coming months. Thank you.

This concludes today's Waste Management first-quarter 2006 earnings call. You may now disconnect.