美國廢棄物管理公司 (WM) 2006 Q2 法說會逐字稿

Good morning. My name is Carmen, and I will be your conference operator today. At this time I would like to welcome everyone to the Waste Management second quarter 2006 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Now I would like to turn the call over to Greg Nikkel, Director, Investor Relations. Please go ahead, sir.

Thank you, Carmen. Good morning, everyone. We are starting just a couple of minutes late today because we wanted to give everyone a chance to join the line. With me today are David Steiner, our 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, and provide an update on our 2006 earnings guidance. Larry will discuss operating costs and other related topics, including our safety performance, and the successful conclusion of the New York City strike. Bob will then cover the financial statements, with an update on our Section 45K tax credits and our divestiture program. We will conclude with questions-and-answers. This call is being recorded and will be available 24 hours a day beginning approximately 11:00 a.m. Central time today until 5:00 p.m. on August 11. 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 7247347.

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, which is a non-GAAP financial measure. We will also discuss adjusted earnings growth, adjusted earnings per share growth, and adjusted income from operations as a percent of revenue, all of which are adjusted for certain 1-time items, which are non-GAAP financial measures. We have adjusted these measures for certain 1-time items which occurred in the second quarter of 2006, and the second quarter of 2005. David's and Bob's comments on these non-GAAP financial measures will be on an as-adjusted basis. 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 at www.wm.com.

As I stated earlier, this call will be available for replay for a 2 week period. Time sensitive information given during the course of today's call, which is occurring on July 28, 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 all of you on the call, from Houston. I will begin by summarizing our quarterly results, and will then review our pricing and volume performance in the second quarter. I will close by updating you on our expectations for the remainder of the year. Our main financial goals at Waste Management are to grow earnings, expand our margins and generate strong free cash flow to return to our shareholders. We again accomplished these goals in the second quarter of this year. This accomplishment by our people is even more impressive when we consider that to do so, we had to overcome the headwinds of the 78% phaseout of our Section 45K tax credit, and the cost of the New York City area strike. So we exceeded our internal expectations this quarter, just as we did in the first quarter of this year. But we still have a lot of work to do if we are going to sustain this level of performance. I certainly believe that our people are up to the task.

We earned $0.45 per diluted share in the second quarter. This is an increase of $0.07 per share, or over 18%, when compared with our second quarter 2005 earnings. Income from operations as a percent of revenue increased by 160 basis points to 15.8%. And we produced $398 million in free cash flow in the quarter, bringing our free cash flow for the first half of the year to over $800 million. Revenue growth from yield was the primary driver behind our strong results this quarter. For the third consecutive quarter we generated base business revenue growth from yield of 3.9%. If we include the 1.4% benefit from our fuel surcharge program, our yield increased a total of 5.3%. And we continued to grow yield in both the collection and disposal lines of business. Overall, lower volumes decreased internal revenue growth by 1.1% during the quarter. However, when we adjust to exclude the impact of volume from noncore, nonsolid waste revenues, the loss was really only about 0.6%. For example, you may remember that in 2005 we had volumes associated with a transfer station construction project in Canada, which is now complete. Those 1-time volumes didn't repeat in 2006. So when we look at volumes, we exclude those type of noncore volumes.

We had lower volumes in all collection lines of business. The greatest portion of which came from our residential line of business, which is a relatively low margin segment. We also saw a decline in volumes in our roll-off and commercial lines of business. However, strong pricing in the collection line of business continues to more than offset the loss of volumes. Largely offsetting the collection volume declines were very strong landfill volumes. We do believe that in many markets, particularly in our Midwest and Eastern groups, good first quarter weather led to stronger volumes. As a result, we did not see as much of a seasonal upturn in volumes in the second quarter.

We also believe that our pricing program in the industrial and commercial lines of business has been more aggressive than the rest of the industry. However, despite the loss of collection volumes, we will continue to push prices, fees and surcharges in our roll-off and other collection lines of business. We continue to see a positive trade-off between higher yield and lower volumes, as demonstrated by our expanding earnings and margins. The strong volume growth at our landfills came primarily in special waste and construction and demolition volumes. This the tenth straight quarter we have seen external volumes increase at our landfills, and the volume growth has accelerated over the last 3 quarters. We view this as a sign of a continued positive economic environment. So when we look at our core solid waste business, the overall volume loss was only about six-tenths of 1%. Again our strong performance in yield more than offset the slight loss of volumes and resulted in another quarter of triple-digit margin improvement.

The 3 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 5.1% this quarter, which excludes the benefit of our fuel surcharge. Pricing in the industrial or roll-off line of business led the way, with internal revenue growth from yield reaching 5.7% in the second quarter. There is no doubt that the strong and consistent yield results we're producing across our collection line of business are because of the continuation of our disciplined and analytical approach to pricing. The components include higher new business pricing, minimizing price erosion on existing customers, a 2% environmental cost recovery fee, seasonal price increases, and our pricing excellence program, which is enhancing revenue by assuring that we are paid for the services that we perform for our customers. We did all of this while reducing our churn rate year-over-year from 10.3% to 9.3%. Volumes are down primarily because we continue to be very aggressive on new business pricing, once again, raising new business prices by double-digit percentages. It's our commitment to higher new business pricing that has led to our margin expansion. We simply will not chase new business volumes at lower rates.

Turning to the disposal side of our business, we also produced positive internal revenue growth from yield in our landfills, transfer stations, and waste energy facilities. In total, the internal revenue growth from yield for these segments of our business was nearly 3%. We again made progress this quarter and we will continue to emphasize pricing in these areas in order to capture the costs associated with running these operations, and to improve return. As I stated earlier, we've exceeded our expectations for the first 2 quarters of the year. And we did so despite the earnings headwinds caused by the run-up in oil prices and its impact on our Section 45K tax credit, and about $11 million in strike costs, primarily from our New York City operations.

Our strong first half results, along with our expectations for success in the last 2 quarters of the year, led us to update our earnings outlook for the remainder of the year. Despite the headwinds we've discussed and our continuing divestiture program, we expect our full year 2006 earnings to be toward the upper end of the analyst's current full year range of $1.69 to $1.75 of earnings per diluted share. In so doing, we have confidence that we will be able to return $1.55 billion to our shareholders in 2006 through our dividend and share repurchase program. As a result, today we announced approval for up to an additional $350 million in share repurchases during 2006. We will also review our 2007 dividend program at our December Board meeting. As many of you know, in the past, we reviewed our dividend program at our October meeting. But in order to better align the program with our fiscal year, we decided to conduct the review of our dividend policy at our December meeting. As we have done in the past 2 years, I'd expect that any change would be effective in the first quarter of 2007.

In summary, we had another great quarter, and our people should be proud of their accomplishments. Our team is certainly committed to continuing the progress we have shown in the past year. And with that, I will turn it over to Larry.

Thank you, David. And good morning to everyone on the call. I will begin my remarks this morning with a review of our operating cost results for the quarter. We again produced excellent results in the second quarter of this year, due to our dedicated employees and our continued push to achieve operational excellence. Operating expenses in the second quarter of 2006 were $2,199,000,000, or $26 million higher than in the second quarter of 2005, which is a 1.2% year-over-year increase. Absent higher direct fuel costs, operating expenses would have declined on a year-over-year basis. As I have done on previous calls, I will now review the details of our operational performance in a number of our cost categories, using basis point changes from second quarter 2005 to second quarter 2006.

As a percent of revenue, total operating expenses declined from 66.1% in the second quarter of 2005, to 64.5% in the second quarter of 2006. This 160 basis point improvement marks the fourth consecutive quarter in which we have improved our year-over-year results. And as a percent of revenue, we lowered operating costs in 7of the 10 cost categories that we break out in our financial statements. The 3 exceptions were the categories of fuel cost, subcontractor cost, and landfill operating costs. We are particularly pleased that on an absolute dollar basis we even lowered year-over-year operating costs in 5 of these 10 cost categories.

I'm going to begin my review of the cost categories by discussing our achievements in the area of safety. As we've noted in the past, we've created a culture of safety within the Company over the last several years. And that is evident in both our improved safety performance and in our lower risk management costs. For the twenty-second straight quarter, we have produced significant year-over-year improvements in our total recordable injury rate, which is a safety measure used by OSHA. This OSHA injury rate was in excess of 20 when we started our safety program back in the year 2000. In the second quarter of this year, we improved our OSHA injury rate by 25% compared with the same quarter of 2005, bringing it down below 5 for our second straight quarter. This compares favorably to the OSHA injury rate for our industry of about 7 to 8. While we are very pleased with the progress we have made, we are continuing our drive to become world-class in safety, which is an OSHA injury rate of about 1 to 2. Almost one-half of our business units now have an OSHA injury rate less than 2 for the first half of 2006. So world-class safety performance for our Company is certainly achievable.

I used to tell you about the great progress that we were making in reducing injuries, but that we had many old claims that were still costing us a lot of money, and it would take some time before our progress would translate to the bottom line. I'm pleased to report that with our continued and sustained progress in safety, we are now seeing reductions in our year-over-year risk management costs due to lower workers compensation costs. This helped drive a 20 basis point reduction in our overall risk management costs. While many companies are still seeing a growth in claim cost estimates from older claims, we are now seeing a reduction in our loss projections for our older claims. Safety is now engrained in our culture, and we remain on track in our drive to become a world-class safety organization.

As a percent of revenue, labor and related benefits costs improved 40 basis points. For the second straight quarter, we have reduced in actual dollars, year-over-year group insurance and health care benefit costs. During this year's second quarter, these costs decreased by $3 million, or a 5% decrease compared with last year. We also showed productivity improvements in all 3 of our collection lines of business during this year's second quarter. Our route managers and district managers are using our labor management tools to improve labor efficiency and to flex down cost as volumes decline.

Transfer and disposal expenses which include those costs that our collection companies paid the third party landfills and transfer stations, improved by 60 basis points as a percent of revenue for the second quarter of 2006. Our focus on exiting low margin collection businesses where we don't internalize the volume, was a contributor to the improvement. Cost of goods sold as a percent of revenue improved by 90 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 customers. The decrease in cost of goods sold as a percent of revenue did not materially impact earnings, because the revenue we received on the sale of the recycled materials also decreases in accordance with the lower recycling commodity prices. We reduced our maintenance cost by 20 basis points as a percent of revenue.

In the area of fleet maintenance, we continue to see overall inflation of about 5% due to increases in costs for lubes and parts, in addition to normal wage increases. We are offsetting most, but not all of that inflation, as we see a number of our maintenance shops continue to gain efficiencies. This leads me to believe that we can, and should, perform better in this area as we finalize the rollout of our Compass Maintenance System into all of our fleet maintenance shops, which we expect to complete by the end of this year. Our continued training for our maintenance technicians on standard preventative maintenance practices will also help produce continued improvement. We also saw lower maintenance expenditures at our waste energy facilities.

Subcontractor costs increased by 30 basis points as a percent of revenue in the second quarter. This increase was caused entirely by the higher indirect fuel costs passed on to us by third party haulers. Absent that, our subcontractor cost in actual dollars were essentially flat from year-to-year. Higher direct diesel fuel costs caused a 70 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 increase in revenue from our fuel surcharge program fully covered the impact of both higher direct fuel costs, as well as the higher indirect fuel costs passed on to us by our subcontractor haulers.

In the other cost category, we lowered operating expenses as a percent of revenue by 10 basis points in the second quarter of this year. This is a good result, particularly when you consider that approximately $8 million of the $11 million of total strike costs we incurred in the second quarter, is reported in this category . The strike costs were for the 2 week strike we had in Washington, D.C., in April, and the strike in New York which began April 2nd, 2006. I'm pleased to report that earlier this week, the Teamsters Union in New York accepted the Company's last offer, and notified us of its unconditional offer to return to work. This effectively ends this 17-week strike. As I've stated to you on previous occasions, it has always been the Company's objective to treat all of our employees, including the 26% of our work force is that union, 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 primary issues during the New York strike was the union's demand for free health care for its members. In the end, the union agreed that the employees would begin paying 17% of the cost of health care, which is the same percentage that our non-union employees pay. We were also able to achieve significant relief on overtime pay, bringing it more into line with typical overtime pay practices across the country. I would like to thank our New York management and our Green Team for the fine job they did continuing our service to our customers during this strike. Although the strike has ended, we expect that the third quarter earnings could be negatively impacted by about $0.01 per share due to the New York strike activities.

As I stated at the beginning of my remarks, the second quarter marks the fourth straight quarter in which the combination of our pricing and operational excellence initiatives have enabled us to reduce year-over-year operating expenses as a percent of revenue. An overall cost increase of only 1.2% on an absolute dollar basis, which is well below the rate of inflation, is our best performance in a number of years. I am pleased that we have continued to make sustainable improvement to our various initiatives, in spite of higher fuel costs and other inflationary pressures. This demonstrates that our team is focused on the right things, and we remain committed to showing continued and sustainable improvement. With that, I will turn the call over to Bob.

Thank you, Larry. I'm going to begin with the review of the impact that several tax related items had on earnings. As we noted in our press release, certain tax related items caused second quarter 2006 earnings to increase by $153 million. There were 2 primary causes. First, there was a $133 million benefit, primarily due to the settlement of the federal income tax audits for the years 2002 and 2003. Second, our income tax expense was reduced by approximately $20 million due to the revaluation of our deferred tax balances, related to federal and provincial tax rate reductions in Canada.

I now want to turn my attention to the impact that rising crude oil prices had on our Section 45K tax credits earnings this quarter. As a reminder, we earned these tax credits from our landfill gas projects, and from our investments in two coal-based synthetic fuel partnerships. The ability to earn these credits is tied to the level of crude oil prices. At the outset of this year, we estimated that these credits would have contributed about $0.11 to earnings per share in 2006. After the first quarter of this year, we estimated that we would lose 61% of the tax credit for the full year based on the level of oil prices at that time. In our first quarter 2006 conference call, we stated that the effect of this on the first quarter was about a $0.01 reduction in earnings per share for the quarter compared with what we would have achieved if there were no phaseout of the Section 45K credits. During the second quarter of 2006, we saw an increase in average crude oil prices. As a result, we had about a $0.02 reduction in earnings per share compared with what we would have achieved if there had been no phaseout of the credits. As we look ahead to the third and fourth quarters of 2006, we project a 78% phaseout and a 39.3% effective tax rate. The effective tax rate for the full year is also projected to be 39.3%. At the 78% level of phaseout, our earnings per share will be reduced by approximately $0.03 per diluted share in the third quarter of this year, and by about $0.02 per diluted share in the fourth quarter, or a total of $0.05 for the second half of the year. For the full year, rather than $0.11, we project receiving only $0.03 of the benefit in earnings per share. The earnings guidance that we provided overcomes the 78% phaseout projection and the corresponding $0.05 per share negative impact on second half earnings per share.

Before leaving the topic of Section 45K tax credits, I want to provide information and guidance for the remainder of 2006 for the income statement line titled "equity and net losses in unconsolidated entities" which has included the income or loss related to our investments in the 2 synthetic fuel facilities. That line item shows $13 million in income in the second quarter of 2006, which reflects the reduction in losses from the facilities whose operations were suspended by the operator in May due to the higher crude oil prices. It also includes the benefit of an $11 million adjustment we made to our investments in these facilities to reflect our actual obligation over the life of the investment. In the second quarter of 2005, this line item showed $26 million of expense, which reflected the investment we were making in these facilities when they were operational and were earning the full tax credit. Assuming the suspension of operations at the facilities for the rest of the year, and assuming the phaseout remains at 78%, we do not project that line item to include any amounts related to the synthetic fuel investments in the third or fourth quarter of this year.

I will now turn to our SG&A expense performance during the quarter. Our SG&A costs increased $15 million, to $328 million during the second quarter of 2006 versus the same quarter of 2005. This $15 million year-over-year increase was mainly due to increases in sales and marketing activities and in the revenue management system project, costs all of which were discussed in earlier calls. SG&A costs as a percent of revenue was 9.6% or on par -- or about on par with last year's second quarter results. We now expect our full year SG&A costs to be about 10% of revenue, excluding the unclaimed property charge we reported in the first quarter of this year. Depreciation and amortization was 10.1% of revenue in the second quarter of this year compared with 10.5% in the prior year quarter.

Interest expense was $138 million in the second quarter, a $10 million increase from 2005. This increase is primarily the result of the higher interest rate environment in 2006, which we -- where we have seen average LIBOR rates increase by about 200 basis points. Total reported debt decreased by $20 million during the quarter compared with the end of March. Our debt-to-total capital ratio decreased to 58%, in line with our objective to be at or below 60%. The floating rate portion of our total debt portfolio stood at 35% at the end of the quarter, the same level as at the end of the first quarter. We produced strong free cash flow during the quarter. Net cash from operations was $557 million, with capital expenditures of $296 million during the quarter. After adding $137 million in net proceeds from divestitures and sales of assets, our free cash flow was $398 million.

As we have discussed previously, diesel engine changes are mandated in 2007 and we have been monitoring the development of the engines and reviewing our fleet purchase program for 2006. As a result, we have decided to spend an additional $70 million in fleet capital in 2006, introduce our fleet purchases in 2007 by the same amount. We currently project that our capital expenditures will be approximately $1.5 billion for 2006. Cash tax payments were $143 million during the quarter, which is about $60 million higher than previously projected. This was due to higher income levels, as well as the 78% phaseout of the Section 45K tax credits. This largely explains why net cash provided by operating activities did not keep pace with the increase in our income from operations.

We project third quarter cash tax payments to be approximately $145 million. We also expect to receive a $60 million refund due to the recent federal tax audit settlements. Cash interest payments were $165 million in the second quarter, and are expected to be about $120 million during the third quarter. We utilized our free cash flow to repurchase $252 million in shares during the second quarter. For the first half of the year, our share repurchases have totalled $639 million, or nearly 19 million shares. We have continued to repurchase shares in the month of July. As of July 27th, we have repurchased over $710 million in shares for the entire year. Based on our projected generation of cash flow from operations and the continued progress in our divestiture program, we expect to repurchase the additional $350 million in shares authorized by the Board of Directors over the rest of the year.

I will close with an update on our divestiture program. As of the end of the second quarter, we have either sold or have agreements to sell operations about -- totaling about $240 million in revenue. We have also signed letters of intent on operations, which total about $230 million in revenue. The rationalization of our assets by selling nonstrategic and underperforming operations remains a key action in improving our financial performance, and we are on track to accomplish our 2006 objectives in this area.

For the fourth straight quarter we have produced year-over-year increases in adjusted earnings, operating margins and we have produced strong free cash flow. The state of the Company and the state of the industry is very healthy, and due to the hard work of our employees we expect our Company to continue to succeed in the areas of operational and pricing excellence. And with that, Carmen, let's open the line for questions.

[OPERATOR INSTRUCTIONS] Michael Hoffman, Friedman, Billings, Ramsey.

Hi, congratulations. It's a little housekeeping. All these numbers we got, just to make sure I got everything right. End of year tax rate is 39.3. If you take the first and second quarter to do that, you kind of have to be at 40% for the third and fourth quarter to get to 39.3.

We will be at 39.3, Michael, for the third and the fourth quarter. The first quarter was around 37.1. The stand-alone rate for the first, second quarter was 39.3. But when you correct -- .

I don't see --

-- when you correct that 37.1 in the second quarter you reported -- adjusted rate, I should say, in the 10-Q, would 40.5 in the second quarter.

And then -- so we are starting with the right share count, what was it on June 30th?

We will have that for you in just a second.

I'm sorry, I must be having a slow end of the week. I didn't follow you on the below the operating line thing you were trying to tell us. Can you get a little more specific what it is you want us to know about -- ?

Well, here is the way to think about it. It all relates to our Section 45K credits. We've said all along, it's about $0.11 per share per year. And about half of that comes from our own landfill operations, but the other half comes from our investment in the 2 synthetic coal partnerships. That 11 -- that $0.055 from those partnerships has 2 components. There's the actual credits we generate, which are below the line and run through the tax rate. But there's also losses that we pick up in the other income loss line. When the facilities are closed, and we're not generating the credits, which happens when we're at this particular rate, we won't have any losses in that line. And so when we talk about an $0.11 benefit from the Section 45K credits, it's really the combination of our own landfill gas, plus the credits from the facilities, as well as the -- offset by the losses from the facilities and other income or loss. I guess what you would want to take from this, is that we expect for the rest of the year, as long as the facilities are closed, and 78% is the phaseout, that the number going through other income loss would be very small, like $1 million, $2 million. Probably be -- it would be a small benefit. And Michael, share count was 541,947,000 shares.

541, 9 what?

947.

Okay. In this quarter, equity and net earnings of unconsolidated entities is actually shown as a gain.

Yes. Again, as I mentioned, there was a 13 -- or, $11 million correction or adjustment to put our investment in those facilities at the right level given than they were closed.

Got it. Okay. So going forward, we should show about a minus 1 million, 1.5 million?

I would say a positive 1 million, 1.5 million.

Okay. That's what I was trying to get clear. And minority interest should track at about the levels it's been tracking?

Yes, I wouldn't think that would change.

Okay. And then what about interest income?

Interest income, be about the same.

$20 million?

It would be about the same as it was this quarter. Maybe down a little bit. It would be down a little bit as we use the cash to repurchase more shares.

Okay. And then help me understand all this data. When you look at your landfill data you give us, sequentially you're up 11.7% in volume. Year-over-year you are up 3.4%. And yet, when you do your IRG, you are talking about a negative volume growth. There must be dollars of revenue in 2Q '05, fairly significant number that does not repeat at all in 2Q '06. And in reality you are showing volume growth. It just -- it belies logic that you can have that strong a sequential improvement in -- year-over-year improvement in your landfills.

I don't think so Michael. What we have said is that in the collection line we saw volumes down. Certainly, we saw volumes up. We think that what that is an indication is that as we are continuing to push price in the collection line, we are losing collection volumes. The good news is those volumes aren't leaving our system. They are still coming to our landfills. So whoever is getting that volume increase, a good portion of that continues to come to our landfill. We also think that the strong construction market is driving good C&D volumes. Quite honestly, we're not surprised by it, a bit.

But how does that volume, if it is coming to you in landfill, not be volume in revenue?

Is it revenue.

Okay. It just seems to belie logic that you could have that strong of year-over-year comparisons and sequential comparisons, and have a negative volume in your IRG.

Well, don't forget Michael, there are 2 components to the negative -- so the negative volume was primarily in collection, not in landfill. And the -- and about half of the decline related to those noncore items, like the construction of the transfer station in Canada, which we really don't count as part of our core business.

That's all I've got for now. Thanks.

Bill Fisher, Raymond James.

On -- your gross margins, obviously, were very impressive. If you are looking forward, I guess, in maybe another piece of that, you are going to have, roughly just on the plate, $500 million of divested revenue from these things you've announced. Now that you have your arms around it, if you had to pin down a number, would you say that had a mid single-digit EBIT or can you give some color on that kind of mix?

What we're selling -- what we've said all along, Bill, is that which we are selling is low margin to begin with. It was I think our first tranche of 400 had an average margin of 5% -- EBIT margin of 5%. The second tranche, which was little more than that, over $500 million, had an average EBIT margin of 3%. What we've sold so far is -- comes out of both tranches. So it's going to be low no matter what.

Great. And actually, Bob, second part is maybe related to that. You had about a billion one in cash and investments, and with some of the money you get on these divestitures, seems like even with the buyback plan, you wouldn't draw that down a tremendous amount. Are you going to be using a lot of IRB cash on the landfills in the second half? Are you going to pay down some debt? Or what is kind of an optimal cash level, looking out a year.

Out a year. well, it's hard to forecast at this point, Bill. We expect to do the share repurchases. We'd like to make it to invest that cash in acquisitions and other investments that make sense to us. And we also have some debt that we are going to repay as the year goes on. I think we will give some better guidance on that as we get into year end activities.

Great. Thank you.

Lorraine Maikis, Merrill Lynch.

Can you talk a little bit about the seasonal surcharge that you put on the roll-off business and what the competitive reaction to that was?

Yes, we started this last year, as we went in and recognized that it made absolutely no sense that generally, prices on the roll-off line of business increased after everybody was out of cans. Well along the curb, if you will, on the time line of when the seasonality kicks in. So last year we put in a 10% seasonal price increase in May. This year we did another seasonal price increase in May, and I think it's very clear to us that we lost volume as a result. As we said, we think we are being more aggressive on new business pricing. Once again, on new business pricing, we saw new business pricing for the quarter up double-digits, and we certainly didn't see that help volumes across the country. So again, we continue to see a negative trend in roll-off volumes, but the pricing at 5.7% for the quarter, more than offset the loss in volumes. We think it's a tradeoff that's worth making. Obviously, we would rather that the industry follows along in pricing and we didn't lose volume. But we are going to stick with it, because as you can see, it has led to 160 basis point market expansion for the quarter.

Thanks. And then I know you've raised your gate rate at all of your landfill sites. Could you just talk a little bit about the longer term contracted volumes there? As those contracts rollover, what types of increases are you able to get on that landfill volume?

And I think that you've hit the nail right on the head. Because that's where landfill pricing is really going to take hold for the long term in this industry. I think we are seeing some movement at the gate rate across the industry, but quite honestly, we're not seeing as much movement on the long-term contracts. When you look at some of the bids that have come out in the last few years, quite obviously you've got Boston, Philadelphia, Toronto, Cleveland, New York, some of the bigger bids that have come out, we haven't seen the kind of movement that we have seen at the gate. From our point of view, what we have done is taken those contracts and every time one of those comes up, we are going to look at it centrally, and make sure that we get the pricing increases that we want to get. We've lost, again, some volume as a result of that. We lost volume in Philadelphia. We lost volume in Boston. We didn't get the Cleveland bid. We didn't get the Toronto bid. But again, we are going to continue to make sure that we get the returns that we need to get out of our landfills. And if we lose that volume, you can see the tradeoff has still been positive. So I think it's a wait and see for us on that game. We haven't seen a lot of movement as those contracts rollover from the industry. You will certainly see the movement from us.

Thank you very much.

Corey Greendale, First Analysis.

Just a couple questions. First of all, I just wanted to make sure, Bob, on the CapEx for the additional trucks, you already have that slotted, so there is no chance of it getting delayed until '07?

That's correct. We have got that slotted already.

Okay. And do you have any -- is it fair to think between that and the extra CapEx spending you are doing this year on systems, that CapEx could come down in '07?

Oh, yes, I would expect it would. At a minimum, it will come down by the $70 million we are spending this year, that we just talked about.

But we would certainly expect it to come down by much more than that.

We've always said that our normalized rate is about 10% of revenue. And we would expect it to be more normal next year.

Great. Next question is on the maintenance. The fact that, Larry, I think you said that it could. You think there is more upside -- or downside to the margin there. How close do you think are we already to the optimum on the margin impact for maintenance? How much upside to margin do you think is still to come there?

At the end of last year, we had our Compass Information System installed in about 82% as I recall, a little more than 80% of our maintenance facilities, collection maintenance facilities. And we will have it installed in all of our facilities by the end of this year. As people begin to -- what that system is giving us, is not only the ability to finally have some decent data to work with, but it's also helping us process warranty claims. Many of those claims were just getting away from us before. We couldn't even track them. Where now, when we pull a part off of a truck, we know exactly when it was installed, how much warranty is left on it, and in some cases can even process the warranty in an automated fashion. So people are just sort of getting used to operating with that new system. Some places don't even have it yet, because we are just halfway through the year. But I think that is an area that I continue to view as ripe with opportunity for us.

Another thing that we've started to focus on, you heard me talk about it in the past, is what we call customer service interruptions. And what that is geared at, is eliminating or certainly reducing break downs out on the road, and door traffic in the morning. Door traffic is when the drivers can't get out on the routes, because something is wrong with their trucks. And as we have focussed, not only our drivers through their inspection process when they come in at the end of the day, but also our mechanics on trying to eliminate those instances, we have seen tremendous progress already in reducing those customer service interruptions. And I think that's going to start hopefully showing up in the bottom line, as well.

Great. And then a question for Dave on the price. First of all, the environmental fee, is that fully rolled out to the portion of the customer base that can accept those fees?

We've essentially rolled it out, but we have not rolled it out across the full customer base. So there is still some opportunity there.

Okay And so just ballpark, like halfway done -- ?

No, I would say we are more than halfway done. Part of the issue is that you have to go in and analyze the customers that you are not certain of. It would be an estimate, but I think we are halfway to three-quarters of the way done, somewhere in that neighborhood.

Okay. And my last question for you, this is total crystal ball question. But I figure you have as good a shot as anybody at answering it. You are obviously doing a great job on the price, and pushing on the right levers. You have got a good environment for moving on price between the good economy and the inflationary cost environment. If the economy starts to go south, and if inflationary costs, fuel, et cetera, moderates, what kind of sustainable level of price growth do you think is attainable?

Well, you know, Corey, we've talked about what we are going to do, and what the competitive reaction to that is going to be is anyone's guess. What I can tell you is that from our point of view, whether we are in a good economy, which we do think we we're in right now, or we we're in a bad economy, we absolutely have to continue to get price for the services we render, and to offset our cost increases. Quite honestly, I don't see us changing our pricing program. Now could the order of magnitude change? Sure. But our goal is always going to be to make sure that we are getting price to stay ahead of our cost pressures. And as long as this management is team is here, that's what we are going to do.

Great to hear. Thanks very much.

Leone Young, Citigroup.

Congratulations on a good quarter, and we thank you for the new guidance. First of all, just on the landfill pricing, you mentioned all in, it was up 3% with waste energy and transfer. Would the landfill portion of it be significantly different than that 3%?

No, it wouldn't be significantly differently. Now, it obviously breaks down significantly differently. In other words, C&D and special waste and MSW, the pricing differs dramatically. As you probably heard from the industry, special waste pricing is still the biggest challenge.

And would it be fair, or is my memory correct, that that 3% would compare to about 2% last year?

I don't remember the exact number last year, but certainly it's higher each quarter as we have moved along, certainly it's increased.

Great. And perhaps for Bob. You mentioned in particular, the guidance overcomes also the impact of divestitures. Obviously, the divestitures are helping the returns in the margins, but they may be having a short-term dilutive impact. Have you tried to quantify that at all?

It hasn't been much at all at this point, Leone. And it may be something more significant in the third and the fourth quarter. And if it is, we will talk about it on those calls. At this point though, it hasn't been significant.

Terrific. Thank you.

Chase Becker, Credit Suisse.

Good morning, this is Chase Becker. I'm calling on behalf of Jamie Cook. My main question pertains to the pricing program that you touched upon last quarter. Can you give us an update in terms of the overall markets? Are you seeing any geographic regions that are performing better than others? I believe at the end of last quarter, you said it was -- you were in 41 out of 55 markets. So is there any way you could provide an update on that? Or is there any way to quantify that?

Sure. And when we talk about pricing excellence, you really do have to divide it into 2 different categories. You have got pricing excellence in the open markets, and pricing excellence in the franchise markets. Some would say, well, you are in a franchise market, there's not a lot you can do. What we have found is that there is quite a bit you can do in the franchise market. We are actually bringing pricing excellence to our franchise markets as we speak. With regard to the open markets, we are virtually finished with the first phase of pricing excellence, and is that going in and looking at the pricing levers. Now, at any particular market, it's going to take 12 to 18 months to get the benefit from all of those levers. So we are still in the process of going through that. But as far as the initial rollout to look at the pricing levers, understand what the opportunity is, and trying to get the tools in place to take advantage of those pricing levers, we virtually finished that. We've also taken pricing excellence, as I said, to the franchise markets. We're looking at national accounts. Again, we think there is a lot of room for improvement in national accounts, and we're even taking pricing excellence over to our recycling operation. So with respect to solid waste, we are virtually finished rolling it out to the nonfranchise markets. Those other areas we think there is a lot of improvement, and we are rolling it out there in national accounts, recycling, and the franchise markets in the second half of the year.

Great. And then I guess a follow-up on that. One of your competitors mentioned some favorable pricing in some of the more competitive urban markets. Is there anyway you could touch on that? Would you echo that as well?

Well, when we look at pricing, we are going to look at it more by line of business and by geography. Every quarter we get out to the field to talk to all 55 of our market area general managers to get an understanding for what is going on in every market that we serve. And I think it's safe to say that the pricing environment in the industry is certainly better than we have seen it since I have been here at Waste Management, nearly 6 years. Having said that, it is obviously stronger in areas where the economy is stronger. So you all know where those high growth areas are. South Florida and Arizona and some places like that where we have seen great economies, we have seen a better opportunity for pricing. But we continue to get increased pricing throughout the country. So when we look at pricing, I think it's safe to say that it's a good environment, but we are still disappointed that we are losing collection volumes. It is very clear to us that when it comes to new business pricing, we continue to see our competitors not keep pace. And from our point of view, the only way to get real margin growth is to get new business pricing up, and that's what we have done.

Great. Thank you very much.

Scott Levine, JPMorgan.

I was hoping you might be able to talk a little bit about the [inaudible] volumes. Sounds like the volume growth declines were acceptable share loss. But if we could parse out versus what your expectations were. How much of that is -- what the macro conditions were like. A decent looking economy here, you've got share loss in there, and then you've also got the [inaudible]. Hoping you could help us understand how volumes came in relative to your expectations?

That's a great question because, obviously, we talked in the first quarter, we had huge volume growth for us in the first quarter, about 1.9%, which quite honestly, surprised us in the first quarter. So the way we have to look at volume, is look at it normalized over the whole first half of the year, not just looking at first quarter and second quarter. So when we looked at the first quarter and second quarter, what we saw was about 0.3% volume growth over that 6 month period, which we think is very consistent with the growth rate that we saw in 2005. So we then looked at what happened with volume in those lines of business, i.e. roll-off, and in those geographic areas, primarily the Midwest and the Northeast, where you would expect weather to have had an impact. And what we saw was that there was a huge surge in volume in that line of business and in those geographic areas in the first quarter, and it tailed off pretty dramatically in the second quarter. So we do believe that there was some push into the first quarter from the second quarter particularly, again, in those geographies where you would expect weather to have an effect, the Northeast and the Midwest. Having said that, the 0.3% volume growth that we are seeing for the full first half of the year is right about in line where we expected to be this year. We knew that at a time when we were going to be the leaders in pricing, that as the biggest in the industry, it was likely that we would lose volume. So for the full first half of the year, we are right where we want to be on volumes.

Okay. And nothing you've seen so far [inaudible] expectations [inaudible]?

No, I think when we go around and talk with our 55 markets, we see a lot of optimism for the second half of the year. Now, again, there are markets that are going to be affected more than others, where the economy isn't as hot as others. I think you saw some of that in the Beige Book numbers that came out just this week. So, there are going to be some pockets of slower economic growth. But overall, we see positive economic growth in the second half.

And then one for Bob. Regarding the cash flow impact of the phaseout synthetic [inaudible]. I was hoping you might be able to talk a little bit about what the impact is there.

The phaseout of the credits are going to have an odd result. We are going to have our cash taxes are going to go up. They are going to go up about $130 million this year over what we expected. Now we will pay less for the credits. Those portions of the credits that are part of the synthetic fuel facilities, those partnerships. But the payments weren't -- only about a third of the payments were going through cash flow from ops. The other two-thirds were really going through other lines in the cash flow. So, net-net, we should see our cash taxes go up $130 million, offset by the $60 million refund that I talked about, and we will see operating other income -- the loss in other income come down, but that mostly wasn't going through cash flow through ops.

And one last one, if I may. On landfill pricing, it sounds like the bulk of the pricing initiatives on the collection side so far, [inaudible] talk about what you see as the potential in the landfill pricing side, and whether that could drive another round of collection pricing due [inaudible]?

When we say driving another round of collection pricing, I don't know that I view it like that. I would view landfill pricing as being the support for continued collection pricing. We're not going to look at collection pricing in rounds. We're going to look at it as a continuous way that we do business. And in order for you to be able to continue to get those price increases on the collection line, you absolutely have to have MSW prices at the landfill that continue to go up. And again, this not something new for us. We have been doing this for a long time. At the gate, we have been seeing the price increases approaching 10% at the gate over the last year. So it's really nothing new for us at the landfill. It's absolutely new for us to see some of our competitors actually coming up closer to where our prices are.

Okay, sir?

Okay, and David, let me mention one other thing Michael asked about interest income and we had $20 million this quarter. $5 million of that is from the IRS refunds that we received or will expect to receive. So there was a starting number, really is about $15 million. And that's spelled out in our 10-Q which we filed a just few minutes ago.

And in closing, certainly we are proud of what our folks accomplished in the first half of the year. And we are very optimistic about what we can accomplish in the second half of the year. And on a personal note, I did want to say to my sister, Adele, who I know is listening today, happy birthday. Thank you all for joining us.

Thank you for participating in today's Waste Management second quarter 2006 earnings release conference call. This call will be available for replay beginning at 1:00 p.m. Eastern time today, July the 28th, through 11:59 p.m. Eastern time on Friday August 11th, 2006. The conference ID number for the replay is 2095328. Again, the conference ID Number for the replay is 2095328. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. Thank you.