美國廢棄物管理公司 (WM) 2008 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the Waste Management first quarter 2008 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. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to 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 a review of the details of our revenue growth, including price and volume trends. Larry will discuss operating costs and Bob will cover the financial statements. We will conclude with questions and answers.

This call is being recorded and will be available 24 hours a day beginning approximately noon Central time today until 5:00 p.m. on May 13. To hear a replay of the call over the Internet, access the Waste Management website at WM.com. To hear a telephonic replay of the call, dial 800-642-1687, and enter reservation code 39562966.

As is our custom, I will remind you that during the course of this presentation, we will be providing estimates, projections and other forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities and Exchanges 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, 2007, 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, operating expenses, and operating expenses and income from operations as a percent of revenue all adjusted for certain unusual or nonoperational items, which are also non-GAAP financial measures. We have defined and reconciled those items as part of the earnings press release or the release 8-K filed today which can be found on the Company's website at 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 29, 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 express written content of Waste Management is prohibited. Now, I will turn the call over to Waste Management CEO, David Steiner.

Thanks, Greg, and good morning. The first quarter was a strong one for Waste Management and we once again achieved our primary financial goals of growing earnings, expanding operating margins, and generating strong free cash flow to return to our shareholders. We accomplished these financial goals, despite the head winds of rising diesel fuel prices, a U.S. economic environment that was more challenging than it was at any time during 2007, and severe winter weather in the Midwest. We achieved our financial objectives by consistently following our strategy of disciplined pricing, combined with cost control through operational improvements. It's an approach that's worked in the past and we intend to maintain it. And even in a challenging economic environment, we believe our strategy will help us to meet our full year earnings and free cash flow projections.

After adjusting for the items that we noted in today's press release, we earned $0.47 per diluted share in this year's first quarter, which is an increase of $0.04 per share, or over 9% compared with the first quarter of 2007. Our results from the first quarter 2007 included a $0.02 per diluted share benefit from section 45 K tax credits. Without that benefit, 2007 first quarter earnings would have been $0.41 per diluted share. On that basis, year-over-year earnings would have grown $0.06 per diluted share, or over 14% in the first quarter of 2008.

We increased income from operations as a percent of revenue year-over-year, by 50 basis points to 15.6% in the first quarter of this year. Sharply higher diesel fuel prices impacted operating margins this quarter, causing a negative 50-basis point impact. Excluding the impact of rising diesel prices, income from operations as a percent of revenue would have expanded by 100 basis points this quarter, in line with our expectations for the quarter and for the year. As we go through 2008, we think it's important to look at margins absent any significant effects from the fuel surcharge program.

Revenues grew $78 million, or 2.4% in the first quarter of this year, with the most significant contributions coming from yield on our collection business and higher recycling commodity prices. Our total revenue growth from yield in our base business was 3.2%, marking the ninth time out of the last 10 quarters that our overall revenue growth from yields 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 6.8% during the first quarter of 2008.

Our collection pricing strategy continues to produce strong results. Combined, the revenue growth from yield in the industrial, commercial and residential lines of our collection business was 4.7% this quarter, or 6.6%, if we include the effect of our fuel surcharge. Pricing in the commercial collection line of business led the way, with internal revenue growth from yield reaching 5.8% in the first quarter of this year. The yield components of internal revenue growth in our rolloff and residential lines of business were 3.8% and 4.1% 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.

Another very positive sign of our pricing discipline is the strength of new business pricing in our rolloff business, which was up about 6% on a year-over-year basis, despite a continued softening in our temporary rolloff business. Our collection pricing programs have been the primary drivers of our earnings growth and margin expansion. As we expected, and as we've seen for some time, our pricing programs again affected our volume, but the trade-off remains positive, as we've shed lower margin and unprofitable business. We've consistently followed our strategy to price our services to generate adequate returns on our investments, to fully recover our costs, and to expand our operating margins. In doing so, we've targeted unprofitable and low margin business. Where we've lost volumes, we focused on flexing down our operating costs. The net result is higher income from operations, and significant margin expansion in our collection line of business. The income from operations from our collection business grew by over 11% in the first quarter of this year compared with the same period of 2007. And our income from operations margin in our collection business expanded by over 200 basis points.

Our recycling operations turned in another strong performance in the first quarter of the year, on the strength of higher recycling commodity prices and better rebate structures that we've negotiated with our customers.

Turning now to the volume side, internal revenue growth from volumes on base business declined 3.9% in the first quarter of 2008, caused mainly by our pricing programs, economic-related declines, which occurred primarily in our roll-off line of business, and the harsh winter weather in the Midwest. However, the 3.9% rate of decline is the best workday adjusted volume performance we've had since the third quarter of 2006.

Most of the volume loss in the quarter was in the collection side of the business, which fell by 5.7% during the first quarter of 2008. We estimate that our pricing programs caused roughly 55% of the collection volume loss, with the remainder due to the economy and bad weather. This is very close to the same pattern that we saw in the fourth quarter of 2007. During the course of 2008, we still expect the rate of decline in our volumes to improve, partially because of easier year-over-year comps and partially because the most economically sensitive part of our business, temporary roll-off, already saw significant declines in 2007. We don't expect to see those levels of decline in our roll-off business during 2008. And the other segments of our business are fairly recession resistant, so even in a slow economy, we still expect the rate of volume decline to moderate in 2008.

Over the last few weeks, we've seen the volumes improve, although it's not clear whether this is the result of seasonality, the economy, or built up demand from the harsh winter weather in the first quarter. We always say that the first few weeks of the quarter are not necessarily indicative of results for the full quarter. But our volume reports from the first few weeks of April are certainly consistent with our expectation of moderating volume declines for the full year.

In conclusion, our strategy again worked well and we plan to continue to execute it. I'm pleased with the first quarter results, not only because we accomplished our primary financial goals, but also because we overcame the impact of higher diesel fuel prices and harsh winter weather. We will continue to maintain our pricing discipline and control our operating costs, and we expect our operating costs as a percent of revenue to improve as we come out of the winter months. The first quarter has positioned our Company for a successful 2008 and we're confident that we will meet the earnings and free cash flow targets we set out at the beginning of 2008. With that, I'll turn it over to Larry, who will review our operating cost results.

Thank you, David, and good morning to everyone on the call. I'm going to cover our operating cost results for the quarter. Operating expenses in the first quarter of 2008 were $2.092 billion, or $58 million higher than in the 2007 quarter. As a percent of revenue, this is a 30-basis point increase in our operating costs from 63.8% of revenue to 64.1% of revenue. Excluding the impact of higher recycling commodity and higher diesel fuel prices, operating costs would have been $51 million lower during the first quarter of 2008 compared to the same period last year. Excluding these costs and their associated revenue, operating expenses as a percent of revenue would have improved by 80 basis points. I'm pleased to say that we made good progress in managing our controllable operating costs in nearly all other areas during the quarter.

On a percent of revenue basis, we lowered first quarter 2008 operating costs in seven of the ten cost categories that we break out in our financial statement. These improvements once again show the positive impact of our consistent focus on controlling costs and pricing excellence, and also reflect the impact of increased revenues from higher recycling commodity prices and fuel surcharges. Our labor and benefits costs improved by about 45 basis points as a percent of revenue during the first quarter of this year. On an absolute dollar basis, we held these costs flat when compared with the first quarter of 2007. This shows that we continue to flex down costs as volumes decline. We reduced our driver hours by about 728,000 hours in the first quarter of 2008 compared with the same period in 2007. Approximately 64% of this reduction was due to the ability of our field managers to actively flex down our labor costs as volumes have declined. The remainder of the reduction in driver hours was due to divestitures.

The first quarter is usually our toughest quarter for efficiency improvements and the unusually harsh winter weather during the quarter, particularly in the Midwest, certainly provided us some challenges. For example, we experienced 25 days during the quarter, where locations in the Midwest had to shut down operations, and we had 2600 route days, where we suspended or canceled routes due to weather. We estimate that the severe winter weather cost us about $0.01 in earnings during the quarter. We expect to see stronger efficiency improvements going forward this year. Our maintenance and repair cost increased by only $2 million in the first quarter this year compared to the first quarter last year, which is approximately a 15-basis point improvement as a percent of revenue.

I should note that maintenance and repair expenses at our Wheelabrator waste energy facility increased by $6 million in the first quarter. The maintenance cost at the Wheelabrator facilities can fluctuate from quarter to quarter, based on our scheduling of outages to perform maintenance and repairs. The level of expenditures at Wheelabrator during the first quarter of this year was consistent with our operating plan for the year. After adjusting for the Wheelabrator increases, maintenance costs improved on a year-over-year basis. This shows that our fleet maintenance improvement efforts have helped offset the higher costs in labor rates, steel parts, and in oil-based supplies, such as lubricants. Considering that we estimate an annual inflation on our maintenance costs to be at least 4%, I'm pleased with this result. We expect to see continued progress in our maintenance costs during the year.

Risk management costs improved nearly 20 basis points as a percent of revenue, driven by lower workers' compensation costs. The primary reason for the continued reduction in our risk management cost has been our tremendous improvement in our safety performance. This was the 29th consecutive quarter in which we improved our total reportable injury rate, which is an OSHA safety measure. We improved our TRIR by about 10% in the first quarter of this year compared to the same period in 2007 to a TRIR of less than 4.

Transfer and disposal expenses, which include those costs that our collection Companies pay to third party landfills and transfer stations, improved by over 90 basis points as a percent of revenue in the first quarter of 2008. Our improvements in this area reflect our continued focus on fixing or exiting low margin collection business, where we don't internalize the volume. Subcontractor costs improved by about 5 basis points in the quarter, as we used fewer third party contractors due to the lower volumes and divestitures. This was partially offset by higher fuel costs passed on to us by third party contractors. Higher direct diesel fuel costs caused a 110-basis point increase in operating expense as a percent of revenue. Average fuel costs in the first quarter of 2008 were about $1 per gallon higher than in the first quarter of 2007. These record high diesel prices, not only negatively affected our operating margin, but also lowered earnings by approximately $0.01 per share, because the fuel surcharge revenue lagged the steep increase of both higher direct fuel costs and the indirect fuel costs passed on to us by subcontractor haulers.

Due to the higher recycling commodity prices in the first quarter of 2008, our cost of goods sold category increased by nearly 140 basis points. While this negatively impacted our reported operating expenses, and squeezed our operating margins, the overall impact on our recycling earnings in recurrence is positive. We expect recycling commodity prices to remain strong throughout 2008. I'm pleased with our performance in controlling our operating costs. Our progress in these areas was due to the efforts of our employees who continue to utilize the tools, systems and standard practices that we've deployed over the last several years. We remain committed to our cost control and pricing strategies, which we expect will drive the operational and financial success that we project for the remainder of 2008. 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 for the first quarter of 2008. SG&A expenses were 11.3% of revenue during the first quarter of 2008, which was in line with our expectations. Our year-over-year costs increased $15 million in the first quarter of 2008 compared with the first quarter of 2007. This year-over-year increase was primarily due to increased sales and marketing spending and an increase in our provision for bad debt. Depreciation and amortization expense for the first quarter of 2008 was down $13 million when compared with the first quarter of 2007. The year-over-year decline is primarily due to the impacts of lower landfill volumes and divestitures. As a percent of revenue, depreciation and amortization expense was 9.1% compared with 9.7% in the prior year quarter. Interest expense was $122 million in the first quarter of this year, a $13 million decrease from 2007. This decrease is due primarily to the lower interest rate environment we have seen in 2008.

Interest income decreased $13 million year-over-year, due in part to the decrease in our cash and investment balances, and the lower interest rate environment. In addition, in the first quarter of 2007, we received $7 million in nonrecurring interest income from the favorable resolution of a tax matter.

Moving to income taxes, in our press release, we noted a $6 million benefit to net income in the first quarter of 2008 compared with the benefit of $16 million in the first quarter of 2007. These benefits result primarily from income tax audit settlements. In the first quarter of 2008, our effective tax rate excluding the $6 million benefit was approximately 39%. We expect our effective tax rate for the remainder of the year to be approximately 40%. Total reported debt increased by $382 million at the end of the quarter compared with the end of 2007. Our debt to total capital ratio increased to 60.8% in line with our objective to be around 60%.

In March of this year, we issued $600 million in senior notes, priced at about 6%. We used a portion of these funds to pay down borrowings on our credit revolver and on May 1, we will repay $244 million of senior notes that would have matured in 2018, but are callable. The interest rate on those notes is 8.75%, which makes calling the notes attractive. We produced strong free cash flow during the first quarter. Net cash from operations was $561 million, with capital expenditures of $213 million during the quarter. Including $14 million in net proceeds from divestitures and sales of assets, our free cash flow was $362 million for the quarter.

We repurchased approximately 9 million shares for $281 million during the first quarter. We also paid $133 million in cash dividends, marketing the first payment of our higher quarterly dividend of $0.27 per share, which is a 12.5% increase over last year. At yesterday's closing stock price, our dividend payment equates to a yield of over 3%. As we previously noted, we expect the amount we will spend on acquisitions during 2008 will exceed proceeds from divestitures and asset sales during 2008. In the first quarter of this year, we spent approximately $70 million for acquisitions, while receiving approximately $14 million in proceeds from divestitures and asset sales.

In closing, we are off to a solid start for the year. And as David and Larry indicated, we will continue to execute our pricing and operational excellence strategies. We are confident this will lead to our achieving the full year 2008 earnings and cash flow guidance, which we reaffirm today. 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.

Hello, Jonathan.

Wondering if you can talk a little bit more about pricing at the landfills, and specifically, gate rates versus contract pricing at the landfills.

Yes, Jonathan, overall when you look at it on a per ton basis, we're seeing pricing in the 3 to 5% range. Clearly we are seeing gate rates that are above that, and we're seeing contract renewal rates that, when we see the contract renewal rates up here, we're seeing them in the range of 7 to 10%. So obviously we're not able to hit all of that contracted volume in any one particular year. But overall, we think the pricing program at the landfills is working very well and we expect that to continue.

Great, and could you talk about where you are either in percentage terms, or maybe qualitatively, how far you are along in revising landfill contracts?

How do you mean, revising landfill contracts?

As they come up for renewal and seeking to get more favorable terms, what percentage of the contracts have come up for renewal at this point that you've successfully renegotiated for higher rates?

Yes, well, when you look at it and there's two things. There's higher rates and then there's, as you say, there's better terms, i.e. things like the fuel surcharge, the environmental surcharge. A number of those contracts were allowed to pass those through under the contract already. About two years ago, we started, actually probably more like three or four years ago, we started putting into all of our contracts, whether they were collection, large municipal collection contracts or landfill contracts, we started putting in provisions that allowed us to pass through things like change in law provisions because you have fees and taxes that raise the stakes. So most of our contracts have gone through that. As far as the pricing goes, my guess is, and it would only be a guess because of the amount of time that we've been in landfill pricing excellent is that we've gotten through roughly half of our contracts that have gone through price increases in the last two years.

Okay, great. And just on the volume side, could you talk a little bit more again at the landfills about volume trends for MSW, C&D and special waste?

Yes, they are following sort of the same trends that we saw late last year. We do think that we've seen a trough in those volumes as of late last year, but they are following the same trends. When I say the same trends, C&D is down more than special waste and MSW, obviously, because of the housing market. But what we see -- it's always a little bit difficult to talk about volumes in the fourth quarter and in the first quarter because of how seasonality effects us, but we do believe we've seen a trough in the volumes and that we're going to see the volumes, the rate of decline improve throughout 2008.

Okay, great. And would you be able to -- I don't know if you have this information available, but break out internal revenue growth from yield for the permanent versus temporary rolloff businesses?

No, we do not have that broken out, Jonathan. I'm sorry. We don't break it out that way ourselves. I would love to give it to you, but we don't break it out ourselves that way.

Okay.

But as we said, the overall increase was 3.8%, and new business pricing, I think even more importantly, when you're in a down economy, to have new business pricing up 6% in the industrial line, I think is a pretty strong accomplishment.

Yes. Great. Then just very quickly on IRG yield, do you have the, what the impact from environmental fees were this quarter on that number? The total number for the Company?

Yes, Greg has that number.

Yest, that number, year-over-year increase was about $20 million due to the increased environmental fee.

Great. Then just my final question, are you seeing any increased pushback from customers either for higher environmental fees or higher fuel surcharges, given the macroeconomic backdrop?

We really aren't. I think we -- you always expect to see that, and quite frankly, over the last three years, we've always thought that there might be a little bit more pushback. But I think the consumers, they see the news just like we see the news. They know that costs are going up. They particularly know that fuel costs are going up and so certainly you have some folks that ask about it. We do a very good job on our website and in our communications with our customers of telling them why they are coming through. But we really haven't seen any losses in volumes because of the surcharges.

Okay, great. Thanks, guys.

Sure.

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

Hi, guys.

Good morning.

It sounds like the volume came in for the quarter maybe in line a little better than you guys had expected, given what happened with weather in the Midwest. Could you take a stab at quantifying the impact that the harsh weather had on your volumes, and give us a little bit of a sense as to what expectations you have baked into your expectations for the year for volumes, including both the temporary rolloff segment and other cyclical business lines you have?

Yes, remember at the beginning of the year we said volumes negative 2.5 to 3%. So clearly the first quarter was a little bit weaker than that. Now, also remember that during the course of the year, comps get easier, too, so we're going to get some benefit from that. But again, it's difficult to see what happens in the first quarter and in the fourth quarter, because of weather. We think that the harsh weather probably costs us about 20 basis points in our volumes, but the good news that we've seen is that in virtually all of the lines we've seen the rate of decline slow, even in our temporary rolloff line, where we were down about 9.4%, and in our C&D line, where we're down 15%, which are big numbers, but are way off of where the, where the high numbers were last year. So we do expect during the course of the year, even in a weaker economy, that we're going to see volumes improve.

One of the other statistics that we look at, that I think gives us optimism for the year is new business. And we added about 23% more new business in the first quarter than we did in the first quarter 2007. So, again, it's a little bit difficult to make a call just based on the first quarter because of the severe effects of weather, and again, like I said, it's a little bit difficult to use the first few weeks of April to indicate what's going to happen in the second quarter, but certainly when we look at it over a longer period of time, over a three or four-quarter period of time, we think we've seen the trough in volumes and we think we'll see the rate of decline moderate during 2008.

Understood. Turning to recycling, could you hazard a guess on what the EPS -- it sounds like that was a benefit in the quarter -- hazard a guess on what the impact was there, and when you say further strengthen recycling is expected throughout '08, do you mean further increases in recycle commodity prices or are you kind of expecting prices to remain at current levels?

The pricing, the commodity pricing we expect to really stay about what we've seen at current levels. Much like what we saw throughout last year. When you look at, in terms of what impact it had on EPS, that was about $0.02.

Okay. And lastly, turning to SAPs, hoping you guys might be able to give us an update. We've seen some news items on the tape in recent months?

Yes, quite frankly, SAP turned into a, as you can imagine, a big disappointment for us. Basically it's a simple case of, and we don't use the word lightly, it's a simple case of fraud, where SAP promised us a product and then, and knew they didn't have it and then tried to cover up the fact that they didn't have it. What they promised us, what they guaranteed us in the contract was an out of the box solution without modifications. In fact, when they demonstrated it to us, what they did was they faked the mock-ups so that it looked like it was an out of the box solution. And then when they went in and piloted it in New Mexico, they basically knew that the product didn't work, but they tried to get us to pay for fixing it when they were responsible for fixing it under the contract. When we found out what was going on, we said, we've got a contract with you folks. We want you to fix the software like you promised us, and you've got to pay for it on your nickel, not on our nickel. At that point, they refused to fix the software and we sued them. So, and they refused to fix the software once again. So, again, it's a simple case of fraud and we fully expect to receive all of our damages when we go to trial.

And too early to think about a charge here at this stage of the game?

Well, Scott, I think that's right. Under the accounting rules, you have to make that decision once you've really come to a point where you are, have another plan in place. We are studying other alternatives now. We've successfully migrated New Mexico back to the old system MAS, we're going to make some enhancements to MAS that will help us achieve some of the benefits we were hoping to get and we'll continue -- we're looking at other alternatives. Now, when we make a final decision on what those other alternatives are and perhaps make a commitment to go down that road, we'll revisit when the, when the write-off will take place. At this point, the write-off is between, somewhere between 46 million and $51 million. It's just a matter of the timing.

Got it. Thanks, guys. Nice quarter.

Thank you.

Thank you.

Thanks.

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

I just had two minor questions on the recycling side, it looks like you're at a 1.2 billion, 1.3 billion run rate right now. I was just wondering what the rough size of the brokerage operation is right now?

Our brokerage out of the total is probably somewhere around 30 to 40%. Now, that -- we actually saw increased brokerage in Q1. That continues to be good business for us, as we've described in the past, a good return that we get from that business.

Okay, and just for Bob, in terms -- I know you did some things with debt in the quarter. What would be the rough mix of the fixed debt now at the end of March?

36% of our current debt is floating.

Is floating, okay. Thank you very much.

Thank you.

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

Can you hear me?

Yes. I can now.

Okay, sorry. Most of my questions have been answered, but going back, you guys said that you expect acquisitions to offset divestitures fully this year and come in ahead. I was hoping you might be able to talk about the deal pipeline and if you see deal activity picking up?

Yes, actually what we said is that we think we will spend more in, and the last couple years we've been more in divestiture mode. This year we think it will switch around. We'll be more in acquisition mode than we are in divestiture mode. With $70 million in the first quarter as opposed to $14 million in divestitures, we pointed out that that is sort of the turning point for us.

So when we look at the deal pipeline, we see some good deals out there. We see some deals out there that are not only good, solid tuck-in acquisitions for us, but actually some that will help us provide some services to our customers that we currently don't provide to our customers. And so when we look at business throughout the country, we've got customers that are looking for more C&D recycling. We've got customers that are looking for more electronics recycling. We've got customers that are looking for a lot of additional services in addition to their solid waste. We not only see a good solid pipeline in the solid waste business, but we see a good pipeline in the other businesses that are very closely related to our core and that our customers want.

Okay, great. That's helpful. Thank you.

Sure.

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

Good morning.

Good morning.

Good morning.

Good morning.

Seems to be a bit of a lag. Probably afraid I'll start swearing or something.

We hope we didn't have a quarter that caused you to swear.

It would only be in a good way. The first question, David, I think in answering another question, you said that new business was up 23% from last year. Did I get that right, and what's the pricing look like on that new business?

Yes, when we price our new business, clearly we're pricing it at levels that are much higher. When you look at it, and again, we'll talk about the commercial line of business. From the commercial line of business, you're seeing the new pricing again similar to the rolloff line of business up in the 6 to 8% range, and then that's year-over-year. And, the new business pricing, it's not a huge amount of dollars. It's about $1.5 million, but it's, it's good to see that we're now adding more business than we're shedding, and we expect that, again, to continue throughout 2008.

And I know you've been adding more on the sales and marketing side. Do you think that new business -- I would assume given what the economy is doing, that that's more taking share than it is new business developments, or new municipality, that kind of thing. So is your sense that you're taking share from smaller players, or where's that business coming from? Oh, I think that you do see a little bit of organic growth, but Corey, we've never really looked at -- when we look at where we're losing the business to, clearly we are predominantly losing the business to the local regional players, just from math, I would assume that we're gaining share from those local regional players. Okay. Then I wanted to ask about your customer audits. I think you had said last call that you were moving more toward the national accounts now and just wondering how that effort is going, and how much longer you have to go on that whole project?

Yes, the national accounts part of it, you're absolutely right. The national accounts is the slower part because you have to audit the customers throughout the footprint of the national account before you're ready to do anything. We expect that that will end, third, fourth quarter of this year. How is it going? Obviously with national accounts, you're not going to have as much success as you have with individual accounts, but, again, our customers recognize just like everybody, that fuel prices are going up, that, they are getting cost pinching, too, so we're actually having some pretty good success passing through those costs.

And, Dave, when you say not as much success, are you saying more customers are choosing to walk away to competitors, or do you mean you're just getting lesser price increases?

Yes, no, we're just getting lesser price increases. Most of these national accounts, we have a contract with, and so it's a little bit harder to get a price increase from someone that you have a firm contract with than someone that you have a contract that allows the price increase.

And I had a question for Larry. In going through the cost items, you talked about the relative impacts on labor costs flexing down costs for lower volumes, and then divestitures. Can you talk about how much opportunity remains to take routes out or improve routing efficiency, independent of volume declines?

Well, I think there's still opportunity to do that. As we went through the BIP process and, actually lost some of those customers, what we're now doing is going back through and looking at our route structure and doing a lot of rerouting to make sure that we're then rebuilding those routes where they are -- they are much more efficient than they were before. Particularly with the economy, as slow as it is, that gives us an opportunity to really look at how we're running our routes and get some efficiencies out of that. So in terms of where we are in the process, I really couldn't estimate how far along we are, but it is our plan to get through all those reroutes. That's something we always do, but in terms of the ones related to BIP, that's part of what our focus and our plan is for this year, is to get through the rerouting that had to do with BIP changes in our route structure.

Okay, thanks very much.

Your next question comes from the line of Chris Hussey with Goldman Sachs.

Good morning, fellows.

Good morning, Chris.

Good morning.

Quick questions, maybe just follow-up a bit on the comments you made about the volume improvements you're seeing in April. Just want a little more color on that. Are you seeing out of any particular end market, any particular region that's doing better than others?

We're really seeing sort of what we've seen over the last year, which is, and, what we talked about back when the economy was booming, which is if you want to be a company that's focused primarily in the Sunbelt, you're going to do great when the economy's booming, but you're not going to do so great when the economy isn't booming. And we always said that our geographic footprint for us is something that we think over the long-term is going to benefit us. So what we've seen is not so much that the Midwest and the East are booming. But they never did boom, so they are not slowing down quite as fast. And so the Midwest and the East are very strong for us in the sense that they are maintaining a slower decline of volumes, even though we've continued to see volumes decrease in the West and in the South. And so, again, we think it's an indication that our geographic footprint in an economic downturn is going to benefit us, just like sometimes it hurts us when the Sunbelt states boom.

But so -- but the recent observations then, is it fair to say not seeing necessarily things coming out of the South and the West, but actually seeing things maybe improving more out of the Midwest and the East?

Relatively speaking, they are improving better in the Midwest and the East.

Okay, that's fair. And then I can't help myself, but talking about the acquisition strategy, you mentioned ancillary services. Might this include buying some more storage services?

Not in the foreseeable future. I mean certainly we're in that business. We're not in that business in a big way. When I talk about closely related to our core, that is a logistics business, but it's not as closely related to the core as the things that our current customers are asking for, things like C&D recycling, electronics recycling, a lot of the different programs, single stream recycling from municipalities, so certainly I wouldn't preclude us from being more into the storage business, but I don't see us doing a material acquisition in that arena in the near future.

So more about recycling acquisitions than--?

Recycling and solid waste. Core tuck-in solid waste acquisitions.

Right, usual stuff, and how about waste energy, any thoughts there?

Waste energy, as we talked about, there are more RFPs on the Street in waste energy today than there have been in the last 20 years and we fully expect to play in that arena.

So you guys will -- when should we expect you guys to start sort of saying, hey, listen, we're going to start building more waste energy plants?

Well, it's not really up to us. It's up to the bidding process. And so when you look at the RFPs, it's really up to the municipalities to determine the timing on that.

What's your best guess?

Well, those things take a long period of time. If you look, for example, Baltimore just announced that they are going to look to build a new 1500-ton plant and we expected that RFP to come out probably nine months ago. So, those things take some time. The municipalities have to work through the issues that they have got with the public and they have got to work through siting issues. And so it's really difficult for us to even guess. But I would expect that you'll see a couple of those bids awarded in 2008.

Great. Last question. On the landfill pricing, you said you're about 50% through, 50% of contracts you really haven't touched pricing on. What could we expect from the contracts, though, that you have touched pricing on? As we go forward, what do you think the sustainable pricing growth of your landfill is?

Yes, when you look at the landfill, and, we've talked about it quite a bit, which is that you can be a little bit more aggressive in pricing at the landfill, because it's not like an airline seat. With an airline seat, if you don't sell it today, you will never sell it again. With a ton of landfill air space, if you don't sell it today, there's only one thing you can be guaranteed of, you will sell it for more in the future. So long-term, I think that the landfill pricing should exceed the collection pricing. It's a little bit difficult for us to go through and analyze it because obviously you've got three different streams in there that are priced completely different. You've got a huge mix issue in other words between special waste, C&D and MSW. When we look at it, we look at it primarily from an MSW point of view. And from an MSW point of view, we certainly think that landfill pricing should meet our long-term pricing goal, which is 50 to 100 basis points above CPI, if not better.

Thanks, guys. Appreciate it.

Thanks, Chris.

Thank you.

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

Yes, good morning.

Good morning, Leone.

First of all, as you mentioned, Dave, obviously the rest of your business except rolloff is pretty defensive. In fact, are you seeing any impact from the economy, in your sort of bread and butter commercial line of business, changes in surface intervals, that type of thing?

Yes, we're seeing a light change in service intervals. Probably that was about -- Greg will remind me if I'm wrong, about $500,000 of, less of an increase. In other words, we're still getting net service increases, but it was about $500,000 less of an increase than it was last year. So we're still seeing net service increases, just at a little bit of a slower rate. So -- again, it's hard to tell with that small of a number, $500,000, it's really hard to tell if that's from the economy or if that's just the natural order of things. So, we don't see anything in the commercial line of business that leads us to be overly worried that we're going to face a dramatic dropoff in the next three quarters.

And also, on the SG&A, Bob, you mentioned that it was largely in line with what you expect in the first quarter, but turning perhaps a bit higher than previous goals you had had, would you take a shot at a longer-term, or '08 target for SG&A?

Well, we, I think we said we're -- at the beginning of the year, the forecast was about, a little over 10.5%. We're not changing that at all. Over the longer term, our goal is to get it down into 9 or below. And a lot of the investments we're making right now we think will help us get there.

That's great. And then just lastly, still looking for about 1.5 billion in CapEx?

Yes, that's right. At this point, we're very focused on it. And while the fleet purchases that we intend to make this year, we intend to make because of the 2010 engines and the fact that we underbought in 2007, but we're very focused on landfill construction if the volumes slow down to the point where we don't need to expand to sell this year, we'll put that off. If the volumes are such the container purchases aren't necessary, we'll deal with that, too. We've got our eye on it and we will continue -- we'll flex down as we need to. In the meantime, we'll just -- we aren't going to change our estimate right now.

Terrific. Thanks a lot.

All right.

Thank you.

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

Good morning.

Good morning.

One quick question on the depreciation and amortization. A little bit low, on the lower side as the volumes slowed up. Is that kind of on a percent of revenue basis, kind of the right number to be looking at, kind of that 9, 9.1%?

I think it's somewhere between 9.1 and 9.5 is somewhere you ought to be thinking. As volumes come back, or as volumes pick up during the year that, could very well go up some more. So it's just a matter of where the volumes actually come out. Truly 75% of the difference is related to the lower volumes into the landfill.

Okay, and then one quick question on the, on your marketing campaign, you guys have been out there pushing the marketing side. From a strategic point of view, are you -- how's that paying off? Are you seeing any tangible benefits, either in the bidding process or anywhere else? And what do you think of that program on a go-forward basis?

Yes, Brian, I think from our point of view, we see both tangible and the intangible benefits. We've talked about it quite a bit in the past few years that, from a tangible point of view, it's always hard to measure the bang for the buck from an advertising point of view. And so we measure it by looking at actually how consumer attitudes change as a result of the advertising campaign. In other words, what are the attitudes before the adds and what are the attitudes after the adds. When we started the campaign, we were getting changes in consumer attitudes in the range of 40 to 50%. We're still getting changes in consumer attitudes in the range of 20 to 30%. And so certainly from a measurement point of view, we are still seeing the benefits.

Now, from an anecdotal point of view, I think the point you make is exactly right. We hear from a lot of customers. In fact, I can tell you every time I've met with a customer, one of the things they say is we've seen your ad campaign and we love your ad campaign. And that goes all the way from the small commercial customer to the large industrial customers, so the municipalities. Also anecdotally, when we've talked about landfill expansions, when we talk about permits that we've needed, we've had folks say to us, it helps us to review your processes, that you've got this ad campaign that makes the public feel a little bit better about you. Any time you go in front of the public for a public hearing and the public feels a little bit better about your Company, you're going to have an advantage. So I think we've seen both tangible and intangible benefits.

And then finally, from our current employees and from perspective employees we get the same thing. From perspective employees we hear, wow, we didn't realize you all did all of these amazing things. This sounds like a great place to work. And from our current employees, obviously you get that feeling of pride that they get every time they see that commercial on TV. So we've certainly got a number of measurable benefits and we continue to receive intangible benefits.

Great. Thanks a lot, guys.

Thank you.

Thanks a lot.

There are no further questions at this time. I will now turn the call back over to Mr. David Steiner for any closing remarks.

Thank you. Well, clearly we're very happy with our first quarter and we're very optimistic for 2008. We look forward to sharing our results with you during the course of the year and we look forward to seeing all of you all on the road, as we get out during the course of the year. Thank you for joining us again.

Thank you for participating in today's Waste Management first quarter 2008 earnings conference call. This call will be available for replay beginning at 12:00 a.m. Central time today through 11:59 p.m. Eastern standard time on Tuesday, May 13, 2008. The conference ID number for the replay is 39562966. Again, the conference ID number for the replay is 39562966. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. This concludes today's conference call. You may now disconnect.