美國廢棄物管理公司 (WM) 2007 Q4 法說會逐字稿

I will be your conference Operator today. At this time I would like to welcome everyone to the Waste Management fourth quarter 2007 earnings release. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you.

I would now like to introduce Mr. Greg Nikkel, Director of Investor Relations. Mr. Nikkel, you may begin your conference.

Thank you. Good morning, everyone. And thank you for joining us. With me this morning are David Steiner, Chief Executive Officer; Larry O'Donnell, President and Chief Operating Officer; and Bob Simpson, Senior Vice President and Chief Financial Officer. David will start things off with a summary of the financial results for the quarter and full year 2007. Our review of the details of our revenue growth including price and volume trends and our 2008 earnings guidance. Larry will discuss operating cost and Bob will cover the financial statements. We will conclude with questions and answers.

This call is being reported and will be available 24 hours a day beginning approximately 12:00 noon, Central time today until 5:00 p.m. on February 27. To hear a replay of the call over the internet, access the Waste Management website at www.WM.Com. To hear a telephonic replay dial 800-642-1687 and enter reservation code 30446447.

As is our custom, I'll 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, 2006, 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.

During the course of the presentation, we will discuss free cash flow, which is a non-GAAP financial measure. We will also discuss net income, earnings per share, earnings per share growth, income from operations, all adjusted for certain unusual or non-operational items, which are also non-GAAP financial measures. David's and Bob's comments on these measures will be on an as adjusted basis. We have defined and reconciled those items as part of the earnings press release table or the release 8-K filed today which can be found on the Company's website at WM.Com. As I stated earlier this call will be available for replay for a two week period. Time sensitive information given in the course of today's call which is occurring on February 13, 2008, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed 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 from Houston. We produced solid results during the fourth quarter and completed a very successful 2007. We again met our primary financial objectives during the quarter and closed the year on a strong note, which we expect to carry over into 2008. After adjusting for the items we noted in our press release we earned $0.54 per share in the 2007 fourth quarter compared with $0.47 per share in the fourth quarter of 2006. This is an increase of $0.07 per diluted share, or nearly 15% when compared with our fourth quarter 2006 earnings per diluted share after adjusting for similar items. On our third quarter 2007 conference call, we set the expectation that we would earn between $0.51 and $0.55 per share in the fourth quarter. Without any benefit from Section 45 K tax credits. The increase in crude oil prices actually caused us to lose $0.01 from Section 45 K tax credits during the fourth quarter so we not only met the high end of our expectations, but we were $0.04 above the Street consensus for the fourth quarter.

For the full year of 2007, after adjusting for the items noted in our quarterly press releases, we earned $2.07 per diluted share which is a 14% increase when compared with 2006 adjusted results and is $0.09 above the Wall Street consensus at the beginning of the year. Over the last 12 months, income from operations, margins have increased by 150 basis points and we've had revenue growth on base business from yield of 3.3%. These longer term statistics show the health of the Company and set a strong foundation for 2008. For 2008, we expect our earnings per diluted share to be within a range of $2.19 to $2.23, which is an 8 to 10% improvement over the 2007 level on an as adjusted basis and excluding the benefit of Section 45 K tax credits generated in 2007 which will not the be available in 2008. We also expect to increase our income from operations margins by over 100 basis points and to continue to return cash to our shareholders through dividends and share repurchases.

Given the current economic conditions we believe this level of earnings growth is a noteworthy achievement and reflects the stability of our business and our expectation that we will continue to prosper from our pricing and operational excellence programs. Going back to the fourth quarter, we grew revenues by 2.4 % in the quarter due primarily to the continued success of our pricing programs and higher recycling commodity prices. We expanded our income from operations margin to 16.9%, 150 basis point improvement compared with the fourth quarter of 2006. Strong revenue growth from yield was one of the primary drivers behind our improved quarterly results. Our internal revenue growth from yield on our base business was 3.3% marking the eighth time out of the last nine quarters that our overall yield has exceeded 3%. If you include the benefit of higher recycling commodity prices and the impact of our fuel surcharge program, internal revenue growth from yield increased a total of 7.1% during the fourth quarter of 2007. We will continue to pursue pricing opportunities and believe we can continue to achieve yield on our base business of 50 to 100 basis points above core CPI.

Our internal revenue growth from yield was strongest in our three collection lines of business. Combined, the revenue growth from yield in the industrial, commercial, and residential lines of our collection business was 4.4% this quarter which excludes the effect of our fuel surcharge. We produced our strongest results in our commercial collection line of business, where our internal revenue growth from yield was 5.9% in the quarter, again excluding our fuel surcharge. The yield components of internal revenue growth in our industrial and residential lines of business were 3.2% and 3.8% respectively. These levels of revenue growth from higher yield are significant because they show that we've maintained our pricing discipline in spite of lower volumes.

The internal revenue growth from yield in our landfills and transfer stations also improved in the fourth quarter of 2007 as we're seeing the benefits from our disposal pricing excellence program. In the fourth quarter 2007, internal revenue growth from volume on base business declined 3.8% caused by our pricing program, our culling of lower margin accounts, and by the decline in residential construction volumes that we saw throughout 2007. We expect to largely finish culling unprofitable customers through our business improvement program during 2008. Most of the volume loss was in the collection site of the business which fell by 5.1% during the fourth quarter 2007. We estimate that our pricing programs caused roughly 50 to 60% of the collection volume loss with the remainder due to the economy. At our landfills, our internal revenue growth from volumes was a negative 2.2% during the fourth quarter of 2007. The sharpest percentage decline occurred in C&D ton which is related to decline in construction activity, however, the rate of decline for C&D ton was about 15% in the quarter, whereas year-over-year, C&D volumes had been down over 20% in each of the first three quarters of 2007. So, while C&D volumes are still down, the rate of decline is slowing as we see easier year over year comps. That same pattern applies in our roll-off line of business.

Special waste volumes grew by 4.1% during the fourth quarter and we're seeing a solid pipeline of potential jobs as we enter 2008. Our recycling operations also turned in a strong performance in the fourth quarter and the full year of 2007 on the strength of higher recycling commodity prices, better rebate structure that we've negotiated with our customers, and improved operating performance as we continued to open more single stream facilities. We expect this strong level of financial performance from recycling will continue in 2008.

During 2008, we'll focus on maintaining our pricing discipline and improving our sales and marketing performance to generate profitable revenue growth. We expect our internal revenue growth from yield to be within a range of 2.5 to 3%. In 2008, we project revenue growth from volumes to decline between 2.5 and 3%. Clearly, volume comps in 2008 get easier. But we also think that the major portion of the volume loss in our most cyclical businesses, our temporary roll off in C&D disposal line already occurred in 2007, and will not repeat at the same level of decline in 2008. The other part of our business, our residential and commercial lines are not as affected by economic conditions, so an economic slowdown should not dramatically affect these volumes. In other words, the cyclical part of our business has already seen a recession, and the other parts of our business are more recession-resistant to a slowing economy.

We've clearly demonstrated over the last few years that we can manage our costs as volumes decline. We've also demonstrated that our pricing programs are sustainable. Given our past performance, we expect 2008 to be another year of triple digit margin expansion. We also expect to generate about $1.4 billion in free cash flow during 2008 with a continued emphasis on returning net cash to our shareholders. So, 2007 was another strong year for Waste Management as we grew adjusted earnings per diluted share by over 14%.

In the third quarter, there was some concern that our earnings performance indicated a change in the economy, or a change in our business model. At that time, we said that the business remained strong, despite the timing of certain items in the third quarter, and the fourth quarter certainly reflects that strength. The fourth quarter also demonstrates that we need to look at our business over a longer period of time. Looking at the full year of 2007, our results continue the pattern of consistent income growth that we've experienced in our business for the last three years. That growth has been strong and we expect it to continue into 2008. Again, we're proud of our accomplishments in 2007 and we know that it was the people of Waste Management that made it happen. And we're confident they will do so again in 2008. With that, I'd like to turn the call over to Larry who will review our operating results for you.

Thank you, David, and good morning. I'll begin by reviewing our operating cost results for the quarter and the full year of 2007, after which I'll discuss our plans to further improve our performance during 2008. I'm pleased with the progress of our operational excellence initiatives. During the fourth quarter of 2007, we again reduced our operating expenses as a percent of revenue when compared with the fourth quarter of 2006. Operating expenses as a percent of revenue declined to 63.5% in the fourth quarter of 2007, compared with 64.2% in the fourth quarter of 2006. This 70 basis point improvement marks the tenth consecutive quarter in which our year-over-year results have improved due to the successful combination of our pricing, and operational excellence program. Operating expenses in the fourth quarter of 2007 were $2.133 billion, or $26 million higher than in the fourth quarter of 2006. Operating costs were higher in absolute dollars during the fourth quarter of 2007 due primarily to the impact of higher recycling commodity prices which results in higher rebates we paid to our customers, and higher fuel costs due to the sharp rise in diesel fuel prices. Our costs were also impacted by the headwind of an additional workday during the fourth quarter of 2007.

As a percent of revenue, and in actual dollars, we lowered fourth quarter 2007 operating cost in seven of the 10 cost categories that we break out in our financial statements. For the full year of 2007, we lowered operating expenses by $185 million when compared with the full year of 2006. As a percent of revenue, our full year 2007 operating costs were 63.1% which is a 120 basis point improvement compared with the full year 2006. I will now review our performance for the fourth quarter of 2007 in a number of cost categories using basis point changes as a percent of revenue in my explanation.

As a percent of revenue, labor and related benefits cost improved by over 60 basis points due primarily to decreases in total dollars spent on salaries and wages. This shows that we continue to gain efficiencies with our workforce and flex down costs as volumes decline. We reduced driver hours by more than 680,000 hours in the fourth quarter of 2007, compared with the same period in 2006. Approximately 60% of this reduction was due to the ability of our field managers to actively flex down our labor costs as volumes have declined, as well as their ability to continue to improve productivity. The remainder of the reduction in driver hours was due to divestitures. We reduced our maintenance cost by approximately $14 million in the fourth quarter of 2007 compared with the same period in 2006, with $10 million of that improvement coming from the collection fleet maintenance area. As a percent of revenue, maintenance costs were down over 60 basis points in the fourth quarter of 2007. This performance is even more impressive when we consider that the inflation rate we've seen in the areas of labor, parts and supplies, is in the 4% range.

Risk management costs fell 70 basis points as a percent of revenue driven by a reduction in auto and general liability claim expenses and lower workers compensation cost. We reduced our total risk management cost by $22 million in the fourth quarter of 2007 compared to the same period in 2006. Half of these savings resulted from lower 2007 liability and workers compensation costs as a result of fewer claims and injuries, which we expect to continue in 2008 and beyond. The remainder was due to the reduction of actuarial projections of claim losses for pre-2007 claims. We may receive additional benefits in the future for adjustments to actuarial projections of claim losses for prior years but we can't be certain of the amount or when they may occur.

The primary reason for the continued reduction in our risk management cost has been our tremendous improvement in our safety performance. This was the 28th consecutive quarter in which we've improved our total recordable injury rate. Transfer and disposal expenses, which include those costs that our collection companies pay to third party landfills and transfer stations improved by 80 basis points as a percent of revenue in the fourth quarter of 2007. Our improvements in this area reflect our continued focus on improving or exiting low margin collection businesses where we don't internalize the volume. A significant headwind on operating costs in the fourth quarter of 2007 was in our cost of goods sold category, which increased by over 170 basis points. This was due to the higher rebates we paid to our customers as a result of higher recycling commodity prices. While this negatively impacted our reported operating expenses, our recycling operations received a $0.03 per share overall benefit from higher recycling commodity prices. We expect recycling commodity prices to remain strong throughout 2008.

Higher direct diesel fuel costs, caused an 80 basis point increase in operating expense as a percent of revenue. Fuel costs rose on average by nearly $0.75 per gallon in the fourth quarter 2007 compared with the fourth quarter 2006. The sharp rise in diesel prices not only negatively affected our operating margins but it also lowered earnings by approximately $0.01 per share because the fuel surcharge revenue did not keep up with the steep increase of both higher direct fuel costs and the indirect fuel costs passed on to us by our subcontractor haulers. Landfill operating costs increased almost 20 basis points as a percent of revenue during the fourth quarter of 2007. This increase in cost was caused primarily by several non-cash adjustments to our environmental obligation. The largest adjustments were due to a decrease in our risk free discount rate which is tied to 10 year Treasury and a remediation accrual adjustment at a closed site for a combined total of about $13 million or a $0.02 per share charge in the fourth quarter 2007. Excluding these non-cash adjustments, landfill operating costs fell $5 million in the fourth quarter of 2007 which is about a 7.5% year-over-year improvement.

We entered 2008 with a strong track record of improving financial performance through our committment to operational excellence and our ability to utilize the tools, processes, and systems we've placed in service over the last several years. It is against this backdrop that we expect to continue to improve our operating results. We expect that we will continue to benefit from our mission to zero in safety and the positive impact it has on our workforce and our risk management cost. We will also better utilize our standard maintenance tools and best practices in the fleet data track and our compass maintenance system. We expect our fleet efficiency to improve in all three collection lines of business based on the use of our standard tools and processes and the positive impact of the technical and leadership training we've rolled out to thousands of our operational managers.

An area of focus for us in 2008 will be the deployment of our onboard computing system across several additional market areas. We conducted a successful pilot in our Western Pennsylvania market area in 2007 and we expect that the rest of the Company will benefit from this new technology. I'm very pleased with our accomplishments and the progress we've made and I'm excited about the opportunities we've identified for further improvement. I believe that we have the best operating team of employees in the industry and that the they will be the reason we continue to succeed. 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 quarter. Our SG&A costs increased $23 million to $371 million during the fourth quarter of 2007 versus the same quarter of 2006. As a percent of revenue our SG&A costs were 11%, which is 40 basis points higher than in the fourth quarter of 2006. The full year 2007 SG&A cost as a percent of revenue increased by 40 basis points to 10.8%. These increases were primarily caused by the expenses related to strategic initiatives such as our revenue management system, several process improvement and training programs and our sales and pricing initiatives. In 2008 we will continue to invest in systems and programs to improve our business, including sales and pricing programs to grow profitably. As a result, we expect our full year 2008 SG&A cost as a percent of revenue to be about 10.5%.

I also want to update you on the revenue management system project we have been piloting in our New Mexico market areas. In late 2007, we discontinued the pilot of the software application we had licensed and were using in New Mexico. We did this once it became clear the software application would not support our business. Our onboard computing pilot went well, so we are allocating some of our IT resources to that project in 2008. Depreciation and amortization expense for the fourth quarter of 2007 was down $25 million when compared with the fourth quarter 2006. As a percent of revenue, depreciation and amortization expense was 8.8% compared with 9.8% in the prior year quarter. This decline is due primarily to the impacts of lower landfill volumes and landfill capping, closure, and post- closure adjustments. With respect to these adjustments, in the fourth quarter of each year we review the estimated costs to cap, close, and maintain the filled portions of our landfills. In the fourth quarter of 2007, the net benefit of these adjustments compared with the same quarter of 2006, was $15 million. In his remarks, Larry explained that landfill operating costs were negatively impacted by $13 million in non-cash remediation accrual adjustments in the fourth quarter. So when we think about landfill accounting related items in total, the $15 million benefit derived from the non-cash capping, closure, and post-closure adjustments were essentially offset by the $13 million non-cash charge from the remediation adjustments that Larry discussed.

Moving down the income statement, asset impairments and unusual items reflect a gain of $14 million, primarily on the sale of a collection Company in the Western group. Interest expense was $126 million in the fourth quarter of 2007, a $7 million decrease from the same period in 2006. This decrease is due primarily to the lower average debt levels and a lower interest rate environment in 2007. The floating rate portion of our total debt portfolio was 34% at the end of the quarter, and our debt to total capital ratio was 59%. In 2008, we expect interest expense to be approximately $500 million for the full year. We are considering going to the debt markets in the first half of this year with a senior note offering. In May of this year, we have approximately $250 million of senior notes that the become callable and carry an 8.75% interest rate making a refinancing of this debt look attractive.

Interest income had decreased to $8 million in the fourth quarter of this year due mainly to lower cash levels. We project that our interest income will be about $15 million for the full year 2008 due to reduced cash balances. The Income statement line item titled, Equity in earnings or losses of unconsolidated entities improved $28 million year-over-year reflecting smaller benefit we received from Section 45K tax credits in 2007.

Moving to income taxes, in our press release we noted a $31 million benefit to net income in the fourth quarter 2007. This benefit results primarily from an adjustment to deferred taxes due to future known reductions in the Canadian income tax rate. In the fourth quarter of 2007, our effective tax rate adjusted for this benefit was approximately 39%. This rate reflects the higher than projected phase out of Section 45-K credits due to higher crude oil prices. This is offset by the utilization of state net operating loss carry forwards as a result of our improved operating results. We will receive no Section 45K tax credits in 2008 as the law creating the credits expired at the end of 2007. Consequently, we expect our 2008 effective tax rate to increase to approximately 40%.

Also in 2008, the income statement line item titled, Equity in net losses of unconsolidated entities will not include any ongoing costs for Section 45K related investments, which account for virtually all of the dollars in this line item. As a reminder, these credits resulted in the benefit of $0.04 per share for the full year of 2007 compared with $0.08 per share in 2006.

Turning to cash flow, our capital expenditures for the full year were over $1.2 billion, and our free cash flow for the full year is $1.5 billion, consistent with our recent forecast. We returned a total of over $1.9 billion in cash to our shareholders in 2007 to our share repurchases and cash dividend payments. Based on our market capitalization at the beginning of 2007, this is a pre-tax cash return of 9.7% since the beginning of 2002, we have returned over $7 billion in cash to shareholders through our combined dividend and share repurchase program. We expect our 2008 capital expenditures to be approximately $1.5 billion, as we make additional fleet purchases in anticipation of the impact that 2010 admission standards might have on the reliability of engines manufactured in that year. We found that when the emission standards changed in 2007, some manufacturers had difficulty initially delivering reliable engines. We also expect to increase our spending on landfill gas to energy plants and other revenue growth projects.

We expect to generate $1.4 billion in free cash flow during 2008. In 2008, we currently expect to allocate about $530 million to dividend payments reflecting our Board's decision to raise our quarterly dividend pay out to 27% per share, a current yield of over 3%. We also expect to spend up to $870 million for share repurchases resulting in total cash returned to shareholders of up to $1.4 billion. Of course, what we actually spend on share repurchases will depend on a number of factors including cash allocated to debt retirements, business investments, and acquisitions.

In closing, we generated excellent results in 2007. Thanks to the effort of our 47,000 employees. We believe in the operating strategies that we have been following and we plan to build upon them in 2008. A great example of the impact of our strategies is the improvement we have shown in return on invested capital. At the beginning of 2005, we began to focus on significantly growing our return on invested capital based on the importance our shareholders placed on this measure. For the full year 2007, using the formula outlined in our long term stock incentive plan, our return on invested capital stood at 16.2%, which is a 450 basis point improvement from the year-end 2004 level. We expect the execution of our strategies will continue to improve the quality of our business. We are confident that this will be seen in 2008 and beyond in the form of higher earnings, expanding margins, strong free cash flow generation, and improved returns on invested capital and with that, let's open the line for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jonathan Ellis with Merrill Lynch.

Good morning, guys.

Good morning.

Wondering if you could talk a little bit about the benefit from the extra workday on volumes. I know you mentioned that in the roll-off business volumes were down about 15% in the fourth quarter. Do you have that adjusted for the workday?

Yes, if you adjust it for the workday, actually, when we talked about that, that was C&D, Jonathan, that we talked about, about 15%. If you adjust it for the workday it was about 16.5.

Okay.

If you did an overall adjustment and the overall volumes, it would have been down about 4.5. So fairly consistent with the rest of the year.

Okay, and just given that it seems like C&D obviously the year to year declines improved somewhat from past quarters yet overall volume declines of 4.5% adjusting for the workday were fairly similar to past quarters. So what is--?

Well, they were similar to past quarters on a reported IRG basis, when you put the workday in it actually was slightly lower than the prior quarters.

I'm trying to figure out, I'm sorry, just trying to figure out if there's some incremental volume weakness in another market given that it seemed like C&D improved a little bit, but overall volume declines were fairly comparable to past quarters.

Yes, no, there wasn't a dramatic, C&D only makes a small portion of our overall revenues, so a 1.5% difference in that isn't going to make a huge difference in the other lines of business. So I would say then the fourth quarter we saw volumes that were consistent with the prior quarters but obviously were aided a little bit by year-over-year comps.

Okay, and then hoping you could address a difference in collection and landfill volume declines. It seems like there was more of a divergence this quarter than in past quarters.

A divergence you mean toward--?

Meaning landfill volume declines were more moderate versus collection volume declines in this quarter and past quarters they seem to have been more comparable to each other.

Yes, I think the 4.1% improvement in special waste was a very good thing in the fourth quarter and again we see special waste continuing strong through the first quarter of 2008.

Okay, and then just on the free cash flow forecast for 2008 at 1.4 billion, as of right now, does that factor in any proceeds from divestitures of assets?

About $150 million is in that number.

Okay. So free cash flow would be 1.25 ex those proceeds?

I'm sorry that's all divestitures.

Okay, great. Thanks, guys.

Thank you.

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

Good morning, guys.

Hi, Scott.

Regarding commodities, I think in your guidance statement, you indicate that you expect the commodity prices to remain roughly consistent with current levels; is that correct?

That's correct.

So on an incremental basis, you're not baking in any earnings tail wind associated with further improvement in that area?

We're expecting it to stay about what we're seeing now.

We'll get some earnings tail winds operationally.

Okay. And just to clarify you said $0.03 in the quarter was from commodities; is that right?

That's right.

Okay. Secondly, with regard to acquisitions, you mentioned acquisitions potentially, are we talking about tuck-ins or is there anything else you're kind of contemplating in that the area?

We don't think that it would be anything beyond a ramping up of good tuck-in acquisitions. No, we don't expect anything dramatic or large in the -- obviously if something comes along we'll look at it but what the we were referring to in the press release were tuck-in acquisitions.

Okay, great. One last one, as we move through the year, and you wrap up the business improvement programs and more of your volumes are reflective I guess of purely economic conditions, what can we think about in terms of your operating leverage to pricing once that occurs? Will it be less, will it be more, will it be the same, because most of the culling has occurred on the collection site of the business. Can you talk a little bit about the flexing down potential in the landfill side as well?

Sure. Look, this business is all about operating leverage. I mean you all know it's very asset intensive and it's very volume dependent, and I think what we've shown in the last three years is that we can continue to grow earnings quite handsomely even though we have declining volumes. Obviously as volumes start to stabilize and hopefully start to improve over the next couple of years, the operating leverage is huge. The operating leverage obviously is more at the landfill, maybe Larry can talk a little bit about the landfill operating costs that you asked about.

Yes, on the landfill operating cost, you don't have, when you look at controllable cost, you primarily look at things like labor and maintenance. Labor being the biggest component of that, and when you have volumes decline at the landfill, it's really hard to get that labor cost out unlike what the we've done on the collection side, as you see volumes decline, well you do reroutes, you pull routes off the street, and you pull the labor out that way, and maintenance goes down because you don't have those trucks operating. At the landfill, as volumes decline, well, you can't just close your -- say okay, from now on, we're just going to open our gate at 10:00 in the morning and close at 2:00. You still have to be open to receive those volumes, and there's not that many employees at a landfill. So it's much more difficult while we're focused on it and we're trying to figure, we actually showed some improvement in Q4 in our operating cost going down, the leverage in terms of when volumes start coming back at our landfills, at the same time we don't have to add a bunch of people. I mean we've got the equipment out there and we have the people and we can then handle those loads as they're coming in. So we certainly look forward to that day coming.

Got it, thank you.

Thank you.

Your next question comes from the line of Jagdeep Ghuman with Credit Suisse.

I was wondering in light of the discontinued system implementation in New Mexico, any plans on trying something different or where do you guys stand there?

Yes, what we would like to do is to work with the vendor to take the application and make it robust enough to serve our business. They have not made it clear to us whether they're willing to make that kind of investment or not. Obviously that would be our preference, but if we aren't able to do that, we've got auto lot of things that we can do to our current system that will make it more robust and we think, obviously we would prefer to have the New Mexico system throughout the country, but we think we can do very well taking our current system and enhancing it.

Okay, what was the total spend on that system?

Capital and SG&A expenses were in the neighborhood of about $100 million, 110, $50 million roughly in expense and about $56 million in capital, maybe $60 million in capital. That's over a several year period.

We have 50 to 60 capitalized and the rest we've already taken as current expense.

Okay, fair enough. On the commercial account audit process, could you just give us a little bit more color as far as where you are in that, have the accounts been audited or are you in the analyzing phase or where are you on that?

Yes, that's a great point. We really have gotten largely through the analysis or the auditing of the customers and we're largely through the analysis of the customers and we talked about it before. What happens is that if you have a customer that crosses over geographic boundaries whether it's from district to district or market to market or group to group with a national account, you've got the to wait until you've gotten all of the locations audited and analyzed before you can approach the customer. And so 2008 will be a year where we're primarily focused on addressing those what the we call the deferred bucket, when you go to a national account in one particular market area, and you audit them and analyze them, you don't then go to the national account. You wait until you do it across the whole country and we put that into what the we call a deferred bucket. So, most of 2008 will be focused on eliminating that deferred bucket, going through and culling out that deferred bucket and hopefully getting the same kind of price increases we got on the remainder of the business.

Okay, so should we still anticipate roughly 30% plus price increases on lower 20% of the accounts that you identify?

Yes, it will be slightly lower. Obviously when you're dealing with national accounts, where you have a long term contract, it's a little more difficult to get pricing but we fully expect to get some benefits from that. Okay, and if I could just ask one more quick one. On the CapEx side, could you just give a little bit more color on the buckets to which that money is being spent, specifically on the truck side, how much are you looking to spend given your comments regarding the 2010 engines?

We expect to spend over $200 million more on fleet in 2008 than we did in 2007. So that's a significant increase there, and then a little less than $50 million more on landfill gas to energy projects and similar growth related items.

Got it. Okay, thank you.

Thank you.

Your next question comes from the line of Bill Fisher with Raymond James.

I just had a couple questions. One on your disposal pricing. I may have missed it, but the gross disposal pricing was up about 6% and did you mention what the third party pricing was up? And then just following on that, on how MSW pricing was doing?

Yes, it's sort of following the same patterns we seen in the last few quarters, Bill, where when you look at it on a per ton basis you are seeing price increases in the 3 to 5% range. As you know, that's an overall price increase because there are some contracted customers that you can't price in crease so if you look at it on just those customers that you can price increase on a per ton basis it probably is more in the 6 to 8% range which is consistent with what the we've done throughout the year.

Then totally different for Bob though, I think your floating rate detriment should work out to around $2.8 billion or so and the Q4 interest if I do it is about $500 million and I assume you wouldn't be complaining, but it looks like LIBOR is down about 200 basis points, wouldn't that drive the interest expense down a bit more in '08?

Maybe just a little bit but if we, we were retire the 8.75 that I mentioned, the premium we pay on that will get us to about $500 million.

Okay, so it's just not that big a difference?

It's not that big a difference, no.

All right, thank you.

Thanks, Bill.

Your next question comes from the line of [Nicole Siblas] with Deutsche Bank.

Yes, good morning.

Good morning.

A couple of quick ones for you. You guys went into detail looking at your price and volume trends by business line for the fourth quarter. If you could find of explain how this is baked into your 2008 outlook, that would be great?

Do you mean overall pricing volume?

Yes.

Yes, what we expect 2008 to be is a movement toward, let's look at it from an overall IRG point of view. We talked about the 2.5 to 3% price and the negative 2.5to 3% volume which would imply that we're moving in 2008 more to an overall IRG that's actually flat or slightly negative or slightly positive, but basically overall flat, and so when we look at IRG for 2008, if we can get a flat IRG which means that we're getting as much price as we're losing in volume, obviously the leverage that you get on price, 100% of price dropping to the bottom line, and the leverage that you get on volumes when we can flex down cost, where only let's say 30 to 50% of the volume loss is loss in EBIT and even less if you're dealing with unprofitable customers, the leverage on that flat IRG is still huge, and so flat IRG for us equates to huge leverage on the bottom line. When you look at what we did in the fourth quarter, we started moving toward a flatter IRG and we certainly have seen that continue into January, so we're confident that we've seen the worst of the volume losses because of the losses in our C&D and temporary roll off line of business and that even in a slowing economy in 2008, we're going to move toward flat IRG.

Okay, and then one more for you. If you could discuss the mix between COGS, SG&A, and D&A, when you're talking about the 100 bips of operating margin expansion for the full year 2008?

I'm sorry, the mix of cost of goods sold?

Yes, and SG&A and D&A decreases?

Well, we expect our operating expenses, I think you'll find a lot of the improvement will come from of course the operating expense line. That's where you'll see most of it because our SG&A we're projecting to be as a percent of revenue relatively flat.

30 basis points improvement , so you'll see most of it. We don't anticipate that it will come from D&A. It will come from operating expense

What you have to realize is a lot of the D&A benefit we had this quarter was due to the landfill capping closure, post-closure adjustments which by the way were offset by the other remediation accruals that went through operating expenses, and when we have with lower volumes into the landfill we do have some impact from that, but we don't expect that to be any greater driver in 2008.

Okay, great. Thank you, guys.

Thank you.

Your next question comes from the line of David Feinberg with Goldman Sachs.

Good morning. Two questions for you. One I think I missed a number. Overall, in the fourth quarter, yields were up 3.3%, you mentioned collection was up 4.4%. Did you break out what landfill or disposal pricing was as well?

Yes, we just talked about the landfill pricing on a per ton basis being in the 3 to 5% range.

Okay and then so if I take that forward and you look to '08 and your expectation for 2.5 to 3% pricing, obviously it implies a slowdown from where we were in the fourth quarter. What I'm curious though is what are you seeing or what are you expecting in terms of a mix? Is it really that collection pricing will slow and landfill pricing stays the same or that both slow or how should we think about the mix between year-over-year growth in collection and landfill pricing relative to your '08 guidance?

Yes, I'm not sure. Obviously 2.5 to 3% is a range we did 3.3% for the full year 2007, so if it is a slowing, it is certainly not a dramatic slowing. But when you look at the mix, clearly what we expect is that our landfill pricing will continue to benefit from our disposal pricing excellence program. Frankly, when we've seen collection pricing and when you add-on the fuel surcharges, when you see collection pricing in the 6 to 7% range, I don't think that you can absolutely count on that in a slowing economy. Now, that's a very small change from 3.3% to 3%, so I don't view it as a dramatic shift in our policy. We absolutely are going to continue pushing our pricing. You've got a little bit of a rollover effect from 2007 on some of our fees and surcharges so you're going to see that flatten out over time but we think it's still flattens out at 50 to 100 basis points over CPI which for us means with the leverage we get out of our fixed asset that's going to mean over 100 basis points of margin expansion. So when I look at it, I look at it more from a 50,000 foot the point of view which is are we going to continue to maintain our pricing discipline in 2008 and answer to that is absolutely and resoundingly yes.

Great, and then just one question on the CapEx budget. You talked about spending $200 million incremental on the fleet ahead of the 2010 emissions regulation. Just looking historically, I think in the past, you've done the pre-buy in the year prior to the emissions standards so if you're talking about a 2010 standard you would be talking about a 2009 pre-buy; however, what we're looking at here is the 2008 pre-buy two years beforehand. Any reason you're doing it at an accelerated rate or two years prior to the emission standard?

Well, when the 2007 stand and came into place, we actually started increasing our purchases in 2005.

Okay.

And then we actually did a lot more in 2006, but we started in 2005. This time, we're going to spread it over two years instead of spreading it over, putting most of it in the 2009 year. One other data point is we didn't buy much in terms of truck fleet in 2007, so we have a little bit of catch up in there too.

And so with that in mind, if we go out, I know it's, we're talking about a long period here but if I look at 2009, would there be an incremental buy in terms of the fleet or just the 200 million incremental that we'll see in '08 will probably spend that the same 200 million in '09?

I think it will depend really on how comfortable we get with the 2010 technology. We're expecting to get some engines to start testing probably in the second quarter of this year from one of the manufacturers, maybe the end of the second quarter. So I think how comfortable we are with what we've learned in those tests will dictate what we end up then buying in 2009, whether it will be a sort of a normal year or do we need to ramp up a little bit more, because we're not comfortable with either what we're seeing in the reliability of the engine, or even will they be able to deliver it to us. In 2007 we had some real problems in even getting trucks delivered because some of the manufacturers were still having trouble. We had one manufacturer, it was still late towards the end of 2007 that we still hadn't even been able to complete our testing because we were having problems with the engine. So I think right now, it's too early to tell but we'll know more as we progress through 2008.

All right, thank you very much.

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

Dave, a question for you. I know you just in answering other questions spoke to the margin benefit that you get from keeping price 50 to 100 basis points above CPI, and I don't want to make you repeat what you just set but can you just reiterate that that is the case and that the margin improvement that you're looking for in '08 that you aren't assuming a lot of benefit just from internal improvement initiative, that it's mostly being driven by price?

Well, when you look at our performance over the last few years I think what you've seen is the price has been the bulk of the benefit, obviously with 100% of it dropping to the bottom line but I don't think you can discount, you can't discount the operational improvements are harder to get but you can't discount the fact that over the last two years as we've seen volume drop, we've done a really good job of flexing down cost, and so look, the reality is is that when you look at 2008, we give you all initial guidance. There's only one thing I can promise you all. It will turn out differently than what our initial guidance is as far as what the pieces are, but I can promise you that we're going to make sure that the we get to that 2.19 to 2.23, so as we go through the year, we're going to make sure that we focus both on price and operational excellence to get to our targets. If we perform better on both, then we'll exceed expectations. If we perform a little bit weaker on one, we're going to make it up in the other area, and so I don't think you can discount the fact that our operational excellence programs are an integral part of our margin expansion and they will continue to be in 2008 and beyond.

Okay. And then you also had talked about this year being more of the deferred bucket catch up on the commercial customer audits. Can you just kind of take a stab at what the magnitude of that bucket is compared to the bucket of customers that you did the increases on in '07?

Yes. When we look at it, it's probably, the deferred bucket is probably and I'm working from memory here, it's probably in the 30% range, 25 to 30% range of the overall customer base.

The overall commercial customer base?

Correct.

Okay, and so in terms of just looking at what percent of your commercial customers are going to get that compared to last year was it a similar percentage last year?

Similar percentage in the deferred bucket?

In the percent of the commercial customers, who saw those kinds of increases, that you were applying the increases to, was it the other 70% essentially?

Exactly exactly.

Okay, and in terms of the timing of that deferred bucket is that going to be done mostly in the first half of the year or is that going to be more ratable as the year progresses?

It will be more ratable. Obviously you've got to finish up all of the -- all of the audits and the analysis, so it will be ratable, but it will occur throughout the course of the year.

Okay, and just you also said that it seems like the weakness is mostly contained within a C&D, but are you seeing pockets of spillover to the commercial business from economic weakness at all?

Well, look, the volumes have been down and we said that we think that about 40% of it is related to the economy but the point is that those lines of business are more recession-resistant than the temporary roll off line. The temporary roll off line certainly is not recession-resistant. So the volume losses will not be nearly as dramatic in those lines of business as you saw in our temporary roll off in our C&D tons, so what we're saying is, is that we don't think even in a slowing economy, we don't think that the volume loss that we'll experience as the result of a slowing economy will stop us from achieving our 2.19 to 2.23.

Understood, thanks very much.

Certainly.

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

If I could take a look at Corey's question in a slightly different way, if you look at the your volume expectation for '08, would you -- could you make a stab at what is economy and what's still the left over culling, because obviously that has a big impact on your margin leverage as well.

Yes. Well, let's take a little bit of a look at 2007 and extrapolate into 2008 because I think if you look at the fourth quarter here, we haven't seen final GDP numbers but we've seen are some folks that are estimating final GDP, and you see in final GDP being estimated somewhere in the neighborhood of 0 to positive 0.6% so certainly not a robust economy. And when you look at the fourth quarter, we're saying about 40 to 50% of the volume loss was from the economy, about 50 to 60% was from the pricing. Now when you look at pricing again, you have to divide that into three different buckets. When we look at the pricing we've got about a third of that that we lost from the intentional culling through our business improvement process, about a third of that is a loss of national accounts where we just lost the national account because we weren't willing to take it at the price that someone else was willing to take it at so again very low margin business and about a third of it was from us pushing prices on our customers. So two-thirds of the pricing was low margin or losing margin customers. So obviously, we're going to continue that into 2008. I think using that sort of baseline as the 2008 forecast is probably not a bad way to go. I don't think we see 2008 being dramatically different than the fourth quarter 2007.

Okay, that's terrific and also just looking at the pricing outlook as well, so if I could recap and just make sure I'm reading this accurately, the 2.5 to 3% versus what you did in '07 is just sort of I guess pragmatically recognizing a slower economy and tougher comps and not any shift in any other underlying trends?

And the lower course EPI. We always talk about where we, look, if our pricing goes up 2.5 to we also expect our cost base to go up at a slower rate because CPI has come down a little bit, and so we look at it more in terms of where are we above CPI, because if CPI goes up to 3%, you can bet we're going to raise our prices to get to recover our cost, and so we talk in terms of 50 to 100 basis points above CPI, that's again what creates that leverage to the bottom line.

Terrific, thank you.

Your final question comes from the line of Brian Butler with FBR.

Under the bell there. Just a couple quick ones, most of them have been answered. On the surcharge, the fuel surcharge part of this where you didn't quite recoup all of the cost in the fourth quarter, does that translate then into a little bit of a tail wind in the first quarter '08?

Yes, I mean, it could be slightly, but we certainly didn't see a huge recovery of that in January. It was $0.01 in the quarter, we expect it to not be a negative in 2008, so it's basically inconsequential.

It really depends on when the prices start coming down, and how fast they come down. That's really, if there were a pick up at all that's when it would happen. What happened to us in the fourth quarter is the fuel prices ramped up so quick and as we would send bills out each month, then during the middle of the month and prices were still going up, so our fuel surcharge that we were billing, in that the month, we were still getting higher fuel cost, because the ramp up just happened so quick. So the tail wind would happen if fuel prices came down dramatically, very quickly and while we -- our fuel surcharge lagged that decline in fuel prices.

Okay, yes, that makes sense.

That make sense?

Yes. And then on the deployment of the onboard computing kind of initiative, can you talk a little bit about that in little more detail just in the fact that you've had some success, can you kind of give some metrics on how successful that's been and then once again, get everyone familiar with the size of the rollout and kind of the 2008 period?

Yes, what we -- the onboard computer project, what it's all about is really bringing technology to our operations. I'll just give you one quick example, if you look at the our roll off line of business, it still runs probably the way it was run when rolloff, the rolloff business was first invented. It's all paper based, a customer calls in, a ticket is generated when the drivers come in in the morning we hand them a bunch of tickets, they kind of sort through them, they go through, pick up in whatever order they deem to be the most efficient, based on the tickets that were handed to them, and then at the end of the day, the tickets are brought back in, the volumes or weights are recorded on the tickets, they bring in the tickets that they picked up when they went through the landfill. Those are then matched up, manually, and a bill is then generated out of those pieces of paper. Very inefficient and what we're looking at, what this system allows us to do is automate all of that, so you eliminate the paper and you're in a position to bill the customer immediately right after the haul is completed and closed out by the driver. So you don't have all of the paper shuffling and the risk of losing pieces of paper that you then have to locate.

And I'll give you another great example. In the pilot market that I was describing in Western Pennsylvania, while we were doing the pilot, the electricity went out during a storm at our dispatch office. Normally that would have shut us down because there was no way to then communicate with drivers as to where their next stops are. Usually in the morning they get a handful of tickets, and then we communicate with them during the day as new orders come in. What we were able to do is because then our route managers also have this onboard computer system in their trucks, the route managers were able to then take over routing the trucks as the new tickets came in. The drivers never even knew what happened. Certainly our customers never saw any disruption in service, and we were able to continue to service our customers even though we had lost power at our dispatch office.

There's lots of efficiencies that come through this system. I could go on and on. I'm pretty excited about what it's going to mean to the rest of the Company. What we're doing now we think we've got the system configured in a way that will support our business throughout the Company, before we roll that out, completely to the Company , we want to test it in a couple of more market areas just to make sure we have had it configured where it will support everywhere so our plan in 2008 is to roll it out into two more market areas. That's the scope of what we will do

Okay. That's very helpful, and then just last question, on pricing, how is new business pricing holding up across the different business lines? Is that also increasing or is that flattened out?

Yes, new business pricing actually is holding up very well, and when you look at it, again, when you look at the most economically sensitive part of our business, which would be our rolloff line of business, you would expect or I think some people would theorize that as those volumes have decreased fairly dramatically in the 8 to 10% range in 2007 that you'd see pricing go backwards, we actually saw pricing up quite nicely in the industrial line both in the fourth quarter and throughout 2007, which shows that even in the face of lower volumes, we're going to maintain our pricing discipline and it also shows that the loss of a little bit of volume -- you can make up for the loss of a lot of volume with a little bit of price, so that shows the leverage we're getting to the bottom line.

Okay, great. Thank you very much.

David, let me expand on a question Jonathan asked about the divestiture proceeds. We're figuring about $150 million in our free cash flow from divestiture proceeds and asset sales and it's about two-thirds divestiture, one-third just normal asset sales over the ordinary course of business.

In summary, we think that 2008 is going to be another great year for Waste Management. We think it's going to be a great place to be as a stockholder even if the economy slows. We believe that if the economy slows, we have largely seen the loss that we're going to see in volumes and 2008 is going to be a time when we start seeing our overall IRG moving back to flat. And then, if the overall economy improves because of the economic stimulus plan, it's going to be a very good place to be at Waste Management because we have huge operating leverage. So we look forward to 2008. We look forward to seeing all of you on the road and have a great year.

Thank you for participating in today's Waste Management fourth quarter 2007 earnings release conference call. This call will be available for replay beginning at 12:00 p.m. Eastern standard time today through 11:59 p.m. Eastern standard time on Wednesday, February 27, 2008. The conference ID number for the replay is 30446447. Again the conference ID number for the replay is 30446447. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you for participating in today's conference call. You may now disconnect.