美國廢棄物管理公司 (WM) 2007 Q1 法說會逐字稿

Good morning. My name Nicole and I'll be your conference operator today. At this time, I would like to welcome everyone to the Waste Management's first quarter 2007 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. Thank you.

I would now like to turn the call over to Mr. Greg Nikkel. Director of Investor Relations. Sir, you may begin your conference.

Thank you, Nicole. Good morning, everyone, and thank you for joining us. With me this morning are David Steiner, Chief Executive Officer, Larry O'Donnell, President an 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 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 noon Central Time today, until 5:00 p.m. on May 11th. To hear a replay of the call over the internet, access the Waste Management web site at www.WM.Com. To hear a telephonic replay of the call dial 1-800-642-1687 and enter reservation code 3382502.

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 27 a of the Securities Act of 1933 and Section 21 E 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 10K for the year-ended December 31, 2006, and in the Company's press release this morning. These risk 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 projected earnings per share after adjusting for certain one-time items, which are non- GAAP financial measures. We have defined and reconciled those items as part of the earnings press release for 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 two week period. Time sensitive information given during the course of today's call, which is occurring on April 27, 2007 may no longer be accurate at the time of a replay. Any redistribution, retransmission of rebroadcast of this call in any form without the express written consent of Waste Management is prohibited.

Now I will turn the call over to Waste Management's CEO, David Steiner.

Thanks, Greg. Good morning to everyone on the call. The first quarter was a very strong one for Waste Management and we once again exceeded our internal expectations. We continue to perform well on our primary financial goals of growing earnings, expanding operating margins and generating strong cash flow to return to our shareholders. The achievement of these financial goals confirms that our strategy of executing a disciplined pricing program in conjunction with operational improvements is the right one. We intend to stick with this strategy, while at the same time, laying the foundation for the future through investments in our systems and our people.

We reported $0.42 per diluted share in this years first quarter which is an increase of $0.08 per share or 24% compared with the first quarter 2006. We increased income from operations as a percent of revenue on a year-over-year basis by 160 basis points, up 15.1% in the first quarter of this year. We generated $335 million in free cash flow during the first quarter.

Our collection pricing strategy continues to produce strong results. These programs have been the primary drivers of our earnings growth and margin expansion. As we expected, our pricing programs again affected our volumes, but the trade off remains positive, as we've shed lower margins and unprofitable business. The most significant contribution to our internal revenue growth from yield was from our collection business. Combined, the revenue growth from yield in the industrial, commercial, and residential lines of our collection business was 4.8% this quarter. Pricing in the commercial collection line of business led the way with internal revenue growth from yield reaching 5.3 % in the first quarter of this year which is the highest level we've achieved dating back to at least 2002. The internal revenue growth from yield of our landfills and transfer stations also improved in the first quarter ,and we expect that to continue as we implement our Disposal Pricing Excellence program throughout the Company.

Revenue was down $41 million in the first quarter of this year as we continued to execute our strategy to divest under performing operations and to price increase or divest accounts in our three collection lines of business. First quarter revenues would have actually increased $24 million compared with the prior year if you exclude the $65 million in divested revenues. As we've always said, not all collection volume is good volume. Particularly if the revenue from that volume doesn't even cover the cost of disposal. When you can shed those volumes and flex cost, then EBIT dollars, EBIT margins, and return on capital all grow. That's exactly what we did with our collection business in the first quarter.

We also continued to focus on collection pricing excellence and group pricing, fees, and surcharges on our entire customer base. We did that while also reducing churn, as a result of our customer service program. Our strategy is to price our services to generate adequate returns on our investments to fully recover our costs and to expand our operating margin. In doing so, we've targeted unprofitable and low margin business. Where we've lost volumes, we've focused on flexing down our operating costs. The net result is higher income from operations and significant margin expansion in our collection lines of business. The income from operations from our collection business grew by nearly 16% in the first quarter compared with the same period 2006 and our income from operations margin in our collection business expanded by over 300 basis points.

At our landfills, our internal revenue growth from volumes was a negative 1.3% during the first quarter of 2007. External volumes coming into our landfill started slowly early in the quarter but improved during the quarter. At the time of our fourth quarter 2006 earnings call in early February, external tons had fallen significantly below 2006 levels and in some weeks were even below 2005 levels. Volumes picked up during the rest of the quarter, but as you all know, the seasonal upturn in our business occurs in the second and third quarter, so, while it's still too early to predict full year 2007 external landfill volumes, we certainly feel better about those volumes today than we did at the time of our earnings call in early February.

So we exceeded the analysts and our own internal expectations in the first quarter. We're off to a great start to the year and have laid the foundation for a successful 2007. After a very strong first quarter, we believe that we'll be able to exceed the top end of the 8-10% earnings growth range we previously gave for the full year. Our focus on increasing our yield, reducing unprofitable and low margin collection volumes and flexing our cost will drive that earnings growth, plus, we expect to receive a slight benefit from recycling commodity prices and we expect to receive 70% of the benefit of our Section 45 K tax credit. As a result, we project that we will earn on an adjusted basis between $2.03 and $2.07 per diluted share for the full year.

In conclusion our strategy is working well and we'll stick to it in 2007. I'm proud of our first quarter results and particularly proud of of the 47,000 Waste Management employees pulling together to once again produce strong operational and financial results. We all know that it's ultimately the employees of Waste Management working together that makes the strategy work so well.

With that, I'll turn the call over to Larry, who will review our excellent operating cost results for you.

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 contributed to the strong results we produced in the first quarter of this year. During the first quarter of 2007, we again reduced our operating expenses when compared with the prior year quarter. Operating expenses in the first quarter of 2007 were 2.34 billion or $66 million lower than in the first quarter of 2006. This is a 3.1% improvement and marks the third consecutive quarter in which we've reduced year-over-year operating costs on an absolute dollar basis.

As we've seen for several quarters, a number of factors contributed to the reduction in cost in the first quarter of this year. These included our ability to flex down our operations and lower our cost as we shed collection volumes due to our pricing strategy and the ongoing divestiture of non- strategic operations. Both of these efforts have been accretive to operating margins. The reduction of nearly one workday in the absence of hurricane related costs during the first quarter of 2007 also led to lower operating costs. As a percent of revenue, operating expenses improved to 63.8 % in the first quarter of 2007 compared with 65% in the first quarter of 2006. This 120 basis point improvement marks the seventh consecutive quarter in which our year-over-year results have improved on a percent of revenue basis. Our employees are utilizing the tools and processes we've developed to achieve these results.

I'll now review our performance in a number of the cost categories using basis point changes as a percent of revenue in my explanation.

As a percent of revenue, we reduced labor and related benefits costs by about 30 basis points. On an absolute dollar basis, we lowered our labor and related benefits cost by nearly $19 million compared with the first quarter of 2006. We achieved the most significant savings in the areas of contract labor and overtime expense, which indicates that we are successfully managing our workforce and flexing down costs as we reduce volumes. Improved efficiencies in our residential and commercial lines of business also contributed to the reduction in cost. We reduced our driver hours by over over 850,000 hours in this year's first quarter compared to the same period last year. Over half of this reduction was due to increased deficiency and lower volumes while the remainder was due to divestitures and the slight decrease in workdays.

We lowered our maintenance cost by about 40 basis points in the quarter. Considering that we estimated annual inflation on our maintenance cost to be 4 to5%, I'm very pleased with this result. As you may recall, in 2006 we completed the deployment of our Compass Maintenance Information System at substantially all of our collection and disposal sites. We're using the information provided by this system, along with our standardization of best practices and tools, to lower our fleet maintenance expenditures as we reduce driver hours. Our field managers are now better equipped to maximize vehicle utilization and to analyze the maintenance cost of each vehicle in the fleet. This enables us to retire excess vehicles and target the highest cost vehicles for replacement or retirement.

We've also been able to flex down technician hours as we've seen volume changes in our business. We saved $13 million in collection vehicle maintenance expense and lowered our cost per driver hour during the first quarter of 2007 compared with the prior year period, while at the same time increasing time between breakdowns in our fleet.

Risk management costs fell by over 40 basis points as a percent of revenue. This was once again driven by a reduction in auto and general liability claim expenses and lower workers' compensation costs. Our improved safety performance as measured by our total recordable injury rate and OSHA safety measure continues to improve. We lowered our TRIR year-over-year for the 25th consecutive quarter. For the first quarter of 2007, we improved our TRIR performance to what we believe is an industry leading rate of 4.4, which is nearly a 10% reduction compared with the first quarter of 2006. As I pointed out last year, the progress we're making in safety is translating to bottom line savings. We reduced our total risk management cost by $15 million in Q1 2007 compared to Q1 2006.

Subcontractor costs improved by 70 basis points in the quarter, as we utilized fewer third party contractors due to lower volumes, divestitures and the absence of hurricane related work. Lower direct diesel fuel costs caused almost a 15 basis point improvement in operating expense as a percent of revenue. This was caused primarily by the decline in our overall fuel consumption due to the reduction in our collection volumes. The impact of the change in diesel fuel prices was minimal as they were relatively flat between periods.

Transfer and disposal expenses improved by 50 basis points during the first quarter of 2007. Due to the decline in collection volumes, as part of our focus on exiting or divesting low margin collection businesses where we don't internalize the volume. Through our commercial route profitability analysis, we are identifying those customers that have relatively high disposal costs when compared to their pricing. As a result of some of those customers choosing not to accept our price increase and switching to other service providers, our disposal costs have declined.

The cost of goods sold component of our operating cost increased by 90 basis points during the first quarter of 2007. Our cost of goods sold are comprised primarily of the rebates that we paid our recycling customers for materials they supply to us. Examples of these are cardboard, newspaper, and aluminum, which we in turn sell to third parties such as Mills. The rebates we pay to these recycling customers typically float with commodity prices. Because commodity prices for cardboard and newspaper exceeded $100 per ton in the first quarter of 2007, we had a year-over-year increase in our cost of goods sold. Higher commodity prices in our operational improvements in our recycling operations contributed over $0.01 in our higher year-over-year earnings per share this quarter.

During our last earnings conference call, I spoke about the systems, processes and management efforts that we expected would improve our operating expense results during 2007. Those included the utilization of our Compass Maintenance System, the rollout of standard processes and tools, the new training programs for our maintenance technicians, district managers and route managers, the implementation of our efficiency or productivity improvement programs for our collection operations and a continued drive to be world class in safety. The efforts and dedication of our employees and the operational progress we've made are reflected in our first quarter 2007 performance. We remain committed to our strategy and these initiatives, which we expect will drive the operational and financial success that we project for the remainder of 2007.

With that, I'll turn the call over to Bob.

Thank you, Larry. I will start with a review of SG&A costs for the first quarter of 2007. SG&A expenses were 11.1% of revenue during the first quarter of 2007 which was in line with our expectations for the quarter. Our year-over-year costs decreased $15 million in the first quarter of 2007 compared with the first quarter of 2006. During the first quarter of 2006, we booked a $19 million charge to increase our reserves for unclaimed properties, such as uncashed checks to vendors. We increased these reserves as a result of unclaimed property audits for the various periods between 1980 and 2004. During the first quarter of 2007, we recorded an additional unclaimed property charge of $7 million, including $3 million of interest as a result of a settlement. The net $15 million difference in the charge is largely explained by the year-over-year decline in selling, general and administrative expenses.

Depreciation and amortization expense for the first quarter of 2007 was down $18 million when compared with the first quarter of 2006. The year-over-year decline is due to the impacts of lower landfill volumes, divestitures, and reduced depreciation expense as we have fully depreciated an information technology system. As the percent of revenue, depreciation and amortization expense was 9.7% compared with 10.2% in the prior year quarter.

Moving down the income statement, the $9 million in restructuring charges in the first quarter of 2007 was related to the organizational realignment of certain group and corporate responsibilities. Interest income increased $9 million to $18 million for the first quarter of 2007 due primarily to $7 million we received from resolution of a tax matter.

Before I move on, I want to point out that there were three income statement items that impacted operating expenses in the first quarter. One of the non-recurring items is associated with the $7 million in interest income I just noted. These items largely offset each other from an earnings perspective, so in the interest of time, we have decided not to elaborate on them during today's Conference Call. Instead, we have detailed these items in the operating expense section of our first quarter 10-Q which we released earlier today. The line item entitled " Equity in net losses of unconsolidated entities" shows an expense of $24 million in the first quarter of this year. This includes the expenses associated with our two synthetic fuel investments.

Our effective tax rate in the first quarter is 33% which reflects a 30% phase out of our Section 45 K tax credit, based on our estimate of the average oil price for the full year. Our 2007 Section 45 K tax credits contributed over $0.01 in the quarter. In addition, our effective tax rate benefited from a trueup of our 2006 Section 45 K tax credits and a small favorable audit settlement representing almost $0.01. We are currently projecting a 34.4% effective tax rate for the full year 2007, based on the expected 30% phase out of our Section 45 K tax credits. We now expect a benefit from Section 45 K tax credits of about $0.09 per diluted share for the full year 2007. This compares with the benefit of approximately $0.08 per diluted share in 2006. Please remember that Section 45 K tax credits expire after 2007, so we will have no benefit in 2008 from these credits.

Compared with the end of the first quarter of 2006, total reported debt decreased by $397 million to $8.223 billion primarily due to the third quarter 2006 repayment of 300 million in senior notes, $300 million in senior notes. The floating rate portion of our total debt portfolio was 37 % at the end of the quarter and our debt to total capital ratio is 58.7%. We generated strong cash flow during the first quarter of 2007. Earnings before interest, taxes, depreciation and amortization increased $28 million, although net cash from operations declined due to year-over-year working capital changes which we expected. As a result, net cash from operations for the first quarter was $538 million down from $623 million in the same quarter in 2006.

Capital Expenditures as reported on a cash basis were $272 million. Adding in the $69 million in net proceeds from divestitures and other asset sales, our free cash flow was $335 million in the first quarter of 2007. As noted in the press release, we still expect to generate between 1.3 and $1.4 billion for the full year 2007. For the first quarter of 2007, our cash tax payments were $15 million and our cash interest payments were $116 million. During the first quarter, we utilized our free cash flow and available cash to repurchase approximately 14 million shares for $487 million. We also paid $126 million in cash dividends during the first quarter of 2007 marking the first payment of our higher quarterly dividend of $0.24 per share.

Our share repurchases have continued and we will have spent about $650 million to repurchase over 19 million shares by the end of this month. This represents over 3.5% of our common shares outstanding as of year-end 2006. We announced in early March that our Board of Directors has authorized management to repurchase up to an additional $600 million in shares during 2007. We have closed three significant divestitures since the beginning of 2007. These divestitures represented approximately $230 million in annual revenue with EBIT margins in the low single digits.

We are off to an excellent start to the year, and as David and Larry have indicated, we will continue to pursue pricing and operational strategies, which we expect will lead to the approved financial performance for the full year of 2007.

And with that, Nicole, let's open the line for questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the q&a roster. Your first question comes from the line of Bill Fisher with Raymond James.

Good morning.

Good morning.

You gave a lot of color on the collection volumes and all the volumes, I guess, but I just want to slice it a little different way. On the 5% decline there, on the collection side, if you had to guess, how much would you say was say construction, the roll off related versus pricing out of the underperforming business?

Yes. When you look at and so we'll look at the industrial line, Bill, when you look at the industrial line, it was actually downly down about 9% in the quarter, and we've talked a lot about volumes, and as I said in my script, we don't think it's appropriate to talk about volumes. We think we should talk about EBIT dollars, so even though we had a 9% drop in roll off hauls in the quarter, actually, EBIT dollars were up in the industrial line of business, so from our point of view, whether it's pricing or economy, is not as important as whether we've increased EBIT dollars or not. Having said that, clearly you had the housing slowdown. Clearly you had some of the economy that effected roll off in the first quarter. But what we've also seen when we've gone out and looked at prices in our market is that we are clearly the pricing leader, and so we like to think that it's a mixture of both. I hate to put a percentage on it but I think for roughly for argument sake you could say it's 50% pricing, 50% housing starts and all of the economy.

Okay, thank you. And then Larry, on the, well, that 800,000, I believe it was hours you were down on the labor side, roughly half of it, 400 was you said volume and more efficiencies. Do you have -- that's a big number. Do you have a sense of what kind of percentage change that was year-over-year?

Well, what I look at, just to make sure we are flexing our cost down even beyond the divested businesses is, I look at the labor costs for instance. And one thing that you can look at is even with the lower or decreased revenue, we actually still improved our labor cost by over 30 basis points, and most of that improvement was actually through overtime and contract labor, so that tells me, indeed we are flexing down our labor as we lose volumes. Some of the other things that we're doing is, as we lose some of these accounts, like some of the commercial accounts, we're actually doing a lot of rerouting and eliminating routes, and I've seen our route count go down even beyond the divested businesses, so there's a number of indicators that I track to make sure that not only are we getting the cost out as we divest business units, but also beyond that as we call accounts, we're further reducing all of our costs.

Okay, great. Thank you.

Thank you, Bill.

Your next question comes from the line of Shannon Mikus with Credit Suisse.

Good morning.

Good morning, Shannon.

Can you talk a bit about the pricing program, particularly on the landfill side? What sort of response have you seen in the quarter and what are the areas you see as opportunities for the rest of the year?

Yes, we've talked a little bit about the use of what we call disposal pricing excellence in the landfill side just like we use collection pricing excellence on the collection side, and we've talked about some of the levers that we're using at the landfill side with fees and surcharges. What we saw in the quarter, because when we look at the landfill we're going to focus mostly on MSW, because that's where disposal pricing excellence is targeted, and what we've seen at the MSW line is a progressive increase in pricing over the last two and a half years. This quarter, through disposal pricing excellence, our same-store sales basis pricing at the landfill actually exceeded our pricing on our collection line. So it's going very well. There's still plenty of opportunity out there and we think we'll be able to get that with disposal pricing excellence through the year.

Great. Thank you.

Sure.

Your next question comes from the line of Jonathan Ellis with Merrill Lynch.

Thanks, good morning, guys.

Good morning, John.

Just wondering, you talk the about pricing in the overall collection business and obviously you gave some detail on the commercial side. Would you be able to provide price growth just in the roll off business and then also the residential business?

Sure. On the roll off line, and again, when we talk about price and volume, I think you always have to look at it as price and volume equals EBIT dollars, and so on the industrial side even though we were down 9.2% in volume, we were up 4.6 % in price which equated to positive EBIT growth. The residential line, obviously we've been doing a lot of work there in the last two years to bid up contracts or get out of those contracts, and so that strategy led to a volume decrease in the quarter of about 3.4% with price going up 4.4%.

Great. And then just on the roll off business, obviously we've seen the continued deterioration of residential construction. What are you seeing out there in terms of equipment utilization, are companies basically stacking up their trucks and containers or are they trying to redeploy them to other serve markets.

I'll speak for what we're doing and not for others but we've always tried to, since Larry has become COO, he's worked with a group folks and the market area folks to move equipment around where we see growth or move equipment around where we see a slowdown, so from our point of view, we're doing just that. What we saw in the roll off volume during the quarter was that it was very weak at the beginning of the year, and then you can't really measure it because we had a lot of seasonality in the first quarter, but what we saw is that it stabilized as we went through the quarter, so that gives us some hope that we've seen the worst of the downturn in the roll off line.

Okay, great. And then just on the reorganization you mentioned the charge you took this quarter. Any further activity anticipated for the second quarter or is that full cost reflected in the first quarter charge?

The full cost would be reflected in the first quarter charge.

Okay, great. And last question, could you just provide an update on where you are with the revenue management system that you're rolling out? I know you had a couple pilot projects going on , just wondering about the

Yes. We started our pilot in New Mexico. We're continuing with our pilot in New Mexico and that's on the revenue management side. We're also piloting on-board computers in Eastern Pennsylvania. Those pilots are proceeding, and we'll stabilize them in those two market areas and then we'll move them into another pilot, a bigger pilot market area with the idea that we'll get the whole system stable in a bigger market area and then we'll roll it out across the Company, so it's a typical in implementation. You run into bumps and bruises along the way, you get through them and you move on, so I don't think there's anything abnormal about what we're going through right now. It pretty much follows that pattern.

So the timing you talked about last quarter, in terms of rolling out the next two years is still intact?

Rolling out over the next two years I think is right.

Okay, thank you.

Your next question comes from the line of Corey Greendale with First Analysis.

Hi, good morning.

Good morning.

Congratulations on a good quarter.

Thank you.

First question I had is, in terms of businesses that you can get out of that are, or contracts that you can get out of that are actually losing money. Can you give us some sense of how big the opportunity is there still kind of just some general expression of how much of the business is left in that kind of category?

Yes, and let's talk a little bit about what we call the business improvement process, or BIP. And there's two pieces to BIP. There's the pricing piece and there's the operational piece. When you put that route auditor in the truck, not only do you get the pricing benefit but you get some great operational benefits like, what Larry was talking about with routing and things like that. We get a lot of benefits operationally not just pricing. But that process is really in the beginning stages, as you know, we started it in the fourth quarter last year. We've started to roll it out throughout the country. It's obviously worked better than we anticipating it working, and so there's still plenty of opportunity out there.

But the other point to make is that when you go out and you find that a customer is not profitable because they are either a heavy weight customer or they might be a long time to service customer, when you find out they're not profitable, you don't just walk in and say goodbye. You walk in and try to get them at a profitable margin by raising the price, and what we found is that with those customers, about 70% of the time, they're accepting the price increase and so that's why the BIP is so successful. Not only are we losing the 30% that we're losing. Our unprofitable volumes, so there's no risk in losing them and the 70% that accept the price increase obviously dropped straight to the bottom line. So the program is certainly working just as we expected it to work and we would expect to continue it throughout the year.

Okay. Second question I had was for Larry. I was wondering if you can, if there's anyway you can quantify what the impact was of the Katrina not being there this year and the disparity in workdays on margin?

Yes. Let me see if I can get the number. I mean, certainly, I think we had about 27 fewer workdays, so that was going to certainly impact the hours. That would drive the hours down. And not having the hurricane volumes, I think that equated to about, wasn't it about 23 million in revenue that we had last year in hurricane revenues? So as we flex that cost down, obviously we saw that primarily in the South as you would guess. Turned out to be, I think it was about $0.01.

$0.01 of earnings on the --

$0.01 of earnings, yes.

Okay, and then Dave, this is kind of a theoretical question and I'll try it anyway. Obviously there's a lot of different pieces here with -- you're doing a lot of things operationally to improve the business, holding pricing. I'm trying to get some sense, some of this flexing down of costs, how much that's because there are inherent improvements you can make in the business because of the Company's legacy, and how much this really is more of maybe a variable cost business than maybe it would have been looked at in the past.

Yes I think that quite frankly, that it is primarily the legacy issues, if you will, the way we've run the business in the past. That's what the route auditors are finding when they go out on the routes, is that there is a more efficient way to manage the business. And quite frankly, that's exactly why we're making this huge investment in SAP, because if you can take what is currently a manual process of having that route auditor in the truck once a year, if you can take that from a manual once a year process to an automated every day process, now you've given the tools to our route managers an our dispatchers to mind those benefits. When we talk about, when I talk about legacy issues, the fact that we haven't gotten those costs out is not the fault of our folks out in the field. It's the fact that we haven't been able to give them the tools to manage those costs, and so that's exactly why we're making the investment in SAP.

Understood. Thank you.

Yes, there are clearly opportunities on the operating cost side still, whether we're divesting businesses or growing the business, there are lots of opportunities, not only in safety, we can continue to improve there, on the maintenance side there's still opportunities for us to improve our maintenance costs, and when you look at productivity, which we now call efficiency, there's plenty of opportunity for us to improve there as well.

Your next question comes from the line Scott Levine with JPMorgan.

Good morning.

Good morning.

We've seen an acceleration here, I guess, in pricing quarter on quarter. I was hoping you might be able to elaborate a little bit more on which aspects of the business are kind of experiencing or driving that acceleration? Is landfill perhaps picking up a little bit more than you anticipated or is it coming more so from the collection side? I was hoping you could give a little more detail there.

It's really coming from both. When we look at the same-store sales with the landfill, it's pretty much of a sort of a sloping 45 degree angle line. So it shows pretty steady progress on the landfill side, and we expect that to continue with disposal pricing excellence. The collection side has been the basic blocking and tackling we've been talking about for the last two years, and then adding on to that, this business improvement process. And that's what, I think everybody was concerned that we have such high comps year to year on pricing, how are we going to get the pricing? And I've always said we're going to manage pricing as a science, not as an art, and when you put BIP back into it and when you start doing things like raising the environmental surcharge and all the other things that we can do in pricing, that's why you've seen the pricing continuing to be robust. So, it really is across the board and it really is a tribute to our pricing folks and to the folks out in the field, because they've found a way, even in the face of very tough comps, to continue to get that 3%, that price increase above CPI that we've always said we need to get to expand margins.

Did you guys give a churn or retention rate on the call? I don't know if I missed that.

It was down from 9.5% last year down to 9.3% this year, which quite frankly we think is a pretty spectacular feat, given the business improvement process and the programs that we have to call out those low performing customers.

Is there a threshold, Dave, where we should be concerned on the retention rate or how do you kind of think about that? Or the churn rate, sorry.

Yes, I talked about it a little bit before, that the churn rate really isn't as important as the churn EBIT. If you got a 9.3% churn rate and all of those customers are losing you money, you've got a great churn rate, but if you have a 5% churn rate and you're losing all your best EBIT customers, you've got a lousy churn rate. And so, that's what our business improvement process and ultimately our SAP system is designed to make sure that we have a good handle on it, we're churning the right customers.

One last one here. I know it's early in the second quarter but is there anything you can say in terms of an early read on the seasonal uptick Q1 to Q2?

Yes. With landfill volumes particularly, obviously seasonality plays a big part in it. I talked about it in the scripted remarks that, basically what we saw in early January threw us for a little bit of a curve, because the volumes were down so dramatically it had concerns for landfill volumes and they bounced back in February and March. And so, it is really difficult, we've learned this lesson many times over many years, it is really difficult to make a call on the quarter based on the first couple weeks of the quarter. This quarter, in early April you had snowfall pretty much throughout the Midwest and the Northeast, which was extremely unusual for the beginning of April. And so, until we really see the weather stabilize and the normal seasonal upturn, at the end of the second, beginning of the third quarter, it's really just difficult to predict landfill volumes.

Thank you.

Sure.

Your next question comes from the line of Brian Butler with Friedman Billings Ramsey.

Good morning.

Good morning.

Question on the volume decline. I guess, and you may not know this, but where do you think this volume is going? Is it being picked up, these customers that are unprofitable by really the independents or are you seeing some of the other public companies picking this up?

Yes. And so I assume Brian you're talking about the commercial line, because obviously the industrial line some of those all just disappear.

Sure, right.

So, on the commercial line it's really interesting. I think what you're going to see over the next two years on the commercial line, is that as we pushed out these customers, and this is just anecdotal evidence, I won't tell you that we put a lot of analyst -- analysis into this, but what we've heard anecdotally from our folks out in the field is, that as we pushed out the customers, and basically why we're pushing out most of these customers is because they are high weight customers, right, they've got to lot of volume in their containers so they are high disposal costs, and that makes them unprofitable. So as we started to push out these customers, the competitors have started to ask about, let's see your weight ticket. We wanted, if Waste Management gave you a weight ticket as part of their audit, we want to see that weight ticket. And so, ultimately a lot of these people have started to come back to us. When we talked about 70% of them accepting the price increase, that's because they've understood that they were getting a deal. They've gone out and they found out that there's not a better price out there so they are coming back to us. I certainly believe that that 30% that we've called out of the business is going to go out there, and as the competition [folks] recognizes they've taken on an unprofitable customer at a bad price, they are going to churn them. And so those customers that are high cost, low price customers are going to ultimately find out that no one will service them and they will start coming back into us.

And that's why we think that, on the commercial line, remember, during the year, during the quarter , the decline in the volume of the commercial line was only about 2.4%, and that's what tells me that what we're starting to see is some traction as competitors refuse to take on these customers because they are high priced customers, and the competition has started to realize they are going to lose money if they take them on at a discounted price. So that's why, when we talk about the pricing environment, I think the pricing environment is very favorable going forward, because I think the other companies are starting to understand that if a former Waste Management customer comes to you, they're coming to you because they are a high cost customer and the prices are going to go up

So, I guess taking that and thinking about volume just on an overall basis, or the decline, the decline that you saw in the first quarter, when does that, I guess, peak or does it just run at kind of this 5% or does it continue to accelerate? Because you've now had four quarters where it's kind of increased from a decline of 1% or so to 5.5. I guess where does that stop?

It never stops as long as we're growing EBIT dollars by 16%. I mean, I think what you saw in the first quarter was an acceleration of our BIP process where we went from essentially 10% EBIT dollars growth in the fourth quarter to 16% EBIT dollars growth in the first quarter. And so, when we talk about volume, the point that I like to make is that we are never going to talk about volumes for volume sake. We're never going to talk about what or why are we down 2.4% volume on the commercial side when we grow EBIT dollars by 16%. On the commercial side we're down 2.4% in volume but we were up 5.3% in price. That is a tremendous trade off from an EBIT dollar point of view, particularly if that 2.4% were customers that were high cost customers. And so, as long as we continue to get the growth in EBIT dollars, we're going to continue that program, and quite frankly, we're sort of at the beginning to middle of our BIP process. I don't see that process ending any time in the near future.

Okay, and then just last question, kind of thinking about that process, has it been more or less difficult as we get into the fourth, I guess kind of a, the fourth quarter of where you've been pushing price like this at replacing the lost unprofitable customers with the higher profitability customers. Are you seeing that becoming more difficult or is it about the same?

It's about the same. But what we are seeing, and again, this is anecdotal, but what we are seeing is that some of those customers that we pushed out are actually coming back to us.

All right. Thank you very much.

Thank you.

Your next question comes from the line of Leone Young with Citigroup.

Yes, good morning, and congratulations.

Thank you.

Is there anything, this is kind of a broad question, but as you look at that great progress on the gross margin side, as well as the acceleration in pricing, in a broad sense, is there anything you think is sort of unsustainable in there we should be aware of?

No, certainly nothing that we can see in the near future. I mean I think what we have proven over the last 18 months is that, I think everyone thought when we started this pricing program that at some point in time, because we so successful at it, that at some point in time it was going to hit a wall and stop. And again, I've got to tell you, it is a tribute to our pricing folks and to our folks out in the field that they just keep coming up with new and better ways to do it, and we went from collection pricing excellence to disposal pricing excellence to the business improvement process, and quite frankly, as we lay in the SAP system, that will be the next catalyst that allows us to get the data to allow us to be even more scientific about pricing, so I certainly don't see that ending. It's going to fluctuate, obviously, quarter to quarter, but always within an acceptable range that we believe will be above CPI, and so we're going to constantly, if you will, reinvent ourselves in the pricing arena, so that we can make sure it's sustainable.

Great. And also on the operating cost side too, I assume you feel the same way?

That's what I was talking about earlier. I mean, when I look out, I think we still have lots of opportunity in each one of those areas that I mentioned, maintenance, risk management, and efficiency. When you look at maintenance, for instance, we've just last year at the end of last year, you remember I talked about, we finally got our new Compass Information System, Maintenance Information System deployed across our landfill and collection operations. And so, you've got people now understanding how to work with that system and just beginning to realize how to flex costs down and look for more opportunities, because they have more data at their disposal, so I think we'll continue to see, certainly the opportunity is there. It's all about us just executing, continuing to execute on our programs.

Great. And one last technical thing. Within the guidance, are you assuming the full share repurchase program including the expanded amount?

No. At this point in time, we hadn't built in the extra 600 million.

Thank you.

Your final question comes from the line of Krishna [Simani] with Deutsche Bank.

Good morning.

Krishna, your line is open. Please go ahead.

Good morning. I'm sorry. I cover risk management from the credit side, and I just wanted to ask a question about financial policy, and can you give us some direction as to, now that your business is looking much more stable and your free cash flows are improving, if you have, if you have any intent of increasing leverage or anything along those lines that you might be considering?

Krishna, this is Bob Simpson. I think at this point in time we're very happy with our investment grade credit rating. And unless there's a good reason not to have it, I can't think of what that would be, we like having it and that's our policy and we'll continue to go in that direction. Could it change? Sure. But I don't see that in the near future.

Thank you very much.

Thank you.

I will now turn the call back over to Mr. Nikkel for closing remarks.

I'm going to turn it back to Dave Steiner.

Thank you. Obviously, we're very proud of the first quarter. And I think what we've learned over the last two years is that you can't focus on revenue and volumes in this business, because if you focus on revenue and volumes, all volumes are different. We don't sell our services at the same price to everybody, so it's not about volume for volume sake. It's about managing your volumes. And that's exactly what we've done over the last two years. We've managed our volumes. And so when I think about it, I think, how do you manage the volumes in our two lines of business, in the collection line and the landfill line? Why is it that we can manage volumes such that we lose volumes to gain EBIT? Well, in the collection line, it's very simple, because if you get substantial price, even though you lose volume, you get the leverage. And so we saw it again this quarter where we raised prices, we lost some volume, and we grew EBIT dollars by 16%. So the trade off continues to be very positive. So it's very simple to be able to manage volumes, and it's very acceptable to lose volumes in the collection line of business.

On the landfill line of business, obviously we didn't lose the same amount of volumes that we lost in the fourth quarter. We only had negative 1.3% volume. But we're going to continue to raise prices on the landfill side, and it makes it easier to raise prices on the landfill side because, if we don't sell that volume today, there's only one thing I can tell you. We'll sell it for more tomorrow. So that allows us to manage pricing on the landfill side.

So when we look at what we're doing in 2007 and what's going to drive us to make our estimates of $2.03 to $2.07, it's all about managing volumes and managing volumes is about pricing and managing costs. We think we've demonstrated that we can do that in the first quarter and we expect that we'll continue to do that throughout 2007. With that, thank you all and we'll see you on our next conference call.

Thank you for participating in today's Waste Management's first quarter 2007 earnings release conference call. This call will be available for replay beginning at 12 p.m. Eastern standard time today through 11:59 p.m. Eastern standard time on Friday, May 11th, 2007. The conference ID for the replay is 3382502. Again, the conference ID number for the replay is 3382502. The number to dial for the replay is 1-800-642-1687, or 706 -645-9291. Please remember to state your first and last name, company name, and telephone number when you dial into the replay. Thank you. You may now disconnect.