美國廢棄物管理公司 (WM) 2008 Q4 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management fourth quarter and year end 2008 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 like now to introduce Mr. Jim Alderson, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Nicole. Good morning, everyone, and thank you for joining us on our fourth quarter 2008 earnings conference call. 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 volumes. Larry will discuss operating costs and Bob will cover the financial statement. We will conclude with questions and answers.

Before we get started, let me remind you that in addition to our press release issued this morning, we have filed a Form 8-K that included a press release, as an attachment, and is available on our website at www.wm.com. The press release and the schedule for the release include important information that you should refer to. That is because during this discussion of our 2008 results of operation, 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 that are described in detail in our annual report on Form 10-K for the year ended December 31, 2007 and in our 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 also discuss certain financial measures on an as-adjusted basis, just as we had presented them in our press release this morning. These measures include net income, earnings per share, income from operations, operating expenses, and certain operating margins all adjusted for items we deem unusual or nonoperational in nature. We will also discuss free cash flow. All of these are non-GAAP financial measures. When David, Larry, and Bob discuss the results we have presented in our press release, their comments will also be on an as-adjusted basis. Specifically, these adjustments include a $13 million reduction in net income due to charges related to our withdrawal from union sponsored multi employer pension plan in Milwaukee, New Jersey, and Detroit; a $16 million reduction in net income caused primarily by the accounting effect of the decline in long-term interest rates, which are used to calculate the present value of our remediation liabilities at our landfills; and a $6 million benefit resulting primarily from favorable tax audit settlements. We have given detailed information on all of the non-GAAP measures that will be discussed on this morning's call, and have reconciled them for the most comparable GAAP measures, and you can find that information in the schedules of the earnings of the press release or on the Form 8-K filed today, which as I mentioned can be found on the company's website at www.wm.com.

This call will be recorded and will be available 24 hours a day beginning approximately 1 PM Eastern time until 5 PM Eastern time on February 26th. To hear a replay of the call over the internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, dial 800-642-1687 and enter reservation code 80418207. Time sensitive information given during the course of today's call, which is occurring on February 12th, 2009, may no longer be accurate at the time of the replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written content of Waste Management is prohibited.

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

Thank you, Jim, and good morning from Houston. I'm pleased with the high level of performance throughout our organization. We faced significant challenges in the fourth quarter as the commodity prices dropped sharply and volume declines accelerated, but we still posted strong financial results. Our cash generating abilities were proven once again in 2008 and we expect that to continue in 2009.

We earned $0.49 per share in 2008's fourth quarter. In November we announced that we were expecting a negative year-over-year impact of $0.04 to $0.08 per diluted share on our fourth quarter 2008 earnings from our recycling operations, and the results was an $0.08 hit. So if we further adjust the fourth quarter 2008 for the negative impact of commodity price declines, we earned $0.57 in the fourth quarter of 2008. This is an increase of $0.03 per diluted share or over 5.5% when compared with our fourth quarter 2007 results.

For the full year 2008, after adjusting for items other than recycling, we earned $2.22 per diluted share, an increase of greater than 7% when compared with 2007 adjusted results. We ended 2008 at the end of the high end of the guidance that we gave at the beginning of year, which was $2.19 to $2.23 per diluted share. Again, we would have significantly exceeded that guidance if not for the negative impacts in recycling operations in the fourth quarter. These are significant accomplishments for our full year and are a tribute to the hard work and dedication of our employees.

Going back to the fourth quarter, internal revenue growth from volumes declined 5.9% in the quarter. Most of the volume loss is in the collection side of the business, which fell by 6.2% during the fourth quarter of 2008. The recession resistant lines of our businesses, namely commercial and residential collections, saw volumes similar to what we'd seen all year at about negative 4%. The most economically sensitive line of our business, the rolloff line, saw volume losses of 11.7%. This loss of volumes was offset by a continued focus on rolloff pricing, which was up 3% for the quarter. We have continued to see good pricing in our rolloff line and certainly we'll continue with our pricing strategy in 2009. So overall, income continued to increase in the collection line of business. Income from operations increased almost 6% in the fourth quarter of this year compared with the same period of 2007 and our income from operations margins in our collection business expanded by 230 basis points.

Our fourth quarter 2008 internal revenue growth from yield was 2.1%, and was strongest in our three collection lines of business. Combined, the revenue growth from yield in the industrial commercial and the residential lines of our collection business was 3.3% in the fourth quarter, which excludes the effect of our fuel surcharge. We produced our strongest results in our commercial collection line of business, where internal revenue growth from yield was 3.8% in the quarter. The yield components of internal revenue growth in our industrial and residential lines of business were 3% and 2.8% respectively. These levels of revenue growth from yield were consistent because they show that we have maintained our pricing discipline despite the difficult economic environment. We will continue to pursue pricing opportunities and believe we can continue to achieve yield of at least 50 to 100 basis points above core CPI.

Turning to yield and volume on the disposal side of business, the positive volume trends we saw in Q2 and Q3 reversed as volumes dropped 1.4% in the fourth quarter. The declines occurred in MSW, which was down 3.6%, and special waste, which was down 2.4%. However, despite the lower MSW volumes, we continued our focus on MSW yield, which increased 2.4% in the quarter. We intend to increase this focus in 2009.

As we anticipated in November, our recycling operations were particularly weak in the fourth quarter due to the significant decline in recycling commodity prices and volumes, causing a $38 million decline in net income,or $0.08 per diluted share compared to the fourth quarter of 2007. For the full year 2008, the commodity price and volume impact to earnings was a negative $16 million or $0.02 per diluted share compared to 2007. We're working on reducing our cost structure and reviving our pricing and rebate model in our recycling operations. We still expect that 2009 will be a difficult year.

Energy markets also experienced declines in the fourth quarter of 2008, which adversely impacts the revenues of our Wheelabrator and landfill gas to energy operation. Combined, we believe the recycling and energy effects will result in an EPS headwind of between $0.17 and $0.23 for the full year 2009. Most of that would occur in the first half of the year as we assume the commodity and energy prices will move towards historic averages later in the year.

Given the weak economy and the effect on our volumes, it's more important than ever for us to maintain our disciplined approach to pricing and cost control. On the pricing front, we're setting minimum yield targets at each of our market areas and groups and at our corporate headquarters. These targets will apply to both our collection and landfill lines of business. If we do not meet the targets, bonus eligible employees will not receive any portion of the annual bonus connected to financial results. For our senior leadership team, that is 100% of the annual bonus, and for others, it's 70%. Certainly, this will maximize the focus on our pricing initiatives at all levels of the company.

On the cost side, as announced in our press release, we've created a new operations and support structure, and the process reduced the number of market areas from 45 to 25, which will reduce our SG&A costs to reflect our lower volumes. This is the next step in our evolution to adjust our organization and operating model so that we can be more efficient and allow us to emerge from the economic downturn as an even stronger company, poised for growth. Larry O'Donnell will give you more information about these changes.

As the economy began to weaken in 2008, we began to plot various scenarios around how we would react to a downturn. When commodity markets collapsed and the economy further weakened in late 2008, we revised our business plan to take the changes in the economy into account. The reorganization of our business reflects our revised view of the economy and our business. We have also looked at our capital spend to make sure that we are managing our spend to match our business. As 2009 unfolds, we will continue to ensure that we can respond as conditions warrant.

2009 will certainly be a challenging year. We saw a significant dropoff in demand from October to November. From November to January, we have seen continued declines, but at a slower rate. It is hard to determine when these declines will stabilize, so trying to predict volumes in 2009 is challenging. But regardless of how our volumes trend in 2009, we can assure you of three things. First, we have taken the actions necessary to reduce our cost structure by over $100 million, and our field operations team has the tools to continue to flex costs if volumes continue to decline. They also have the equipment to handle volumes when they begin to grow again. Second, we will maintain our focus on pricing in our collection and disposal lines. We have demonstrated our resolve by tying annual bonuses to the achievement of specific pricing targets. And third, we're very mindful of our investors' focus on cash generation, and we will ensure that we manage our capital in a manner that produces strong free cash flow. For the year, we expect to generate between $1.3 billion and $1.4 billion of free cash. In 2009, we also expect to acquire more revenue than we divest, as valuations and prices for assets reach lower levels. However, we will not make any acquisitions that would jeopardize our strong balance sheet and our credit rating.

Finally, I also would like to highlight the selection of Wheelabrator Technologies as the preferred vendor to construct and operate regional waste to energy facility for Frederick and Carroll Counties in Maryland. This will be the first new greenfield waste to energy plant constructed in the United States in over a decade. This facility will be paid for and owned by the Northeast Maryland Waste Disposal Authority, and is slated to be operational in 2014. It is one of a number of waste energy projects that Wheelabrator is pursuing in North America and Europe.

We expect that we will continue to win bids for new waste to energy plants, both domestically and internationally. Most of the projects that we are bidding on do not require us to expend significant amounts of capital, because construction costs are financed by the public authority building the plant. For any that we may win that require us to pay some or all of the construction costs, those costs won't be incurred until at least two to four years after the award. So we are excited about the Wheelabrator business in that it provides meaningful future growth, but it is not dependent on current capital outlays. We are pleased to have been selected by the Authority and we are excited about the opportunity to help them and other communities generate clean, renewable energy from the disposal of their waste.

With that, I will turn it over to Larry, who will review our operating cost results for you.

Thank you, David and good morning. I will begin by reviewing our operating cost results for the quarter and for the full year of 2008, after which I will discuss details regarding our restructuring. Adjusting for the items noted in our press release, operating expenses in the fourth quarter of 2008 were $1.918 billion or 61.7% of revenue, a decrease of $207 million from the fourth quarter of 2007 and an improvement of 150 basis points as a percentage of revenue. The cost reduction is due primarily to flexing down costs in response to decreased volumes, lower recycling commodity prices, which results in lower rebates we pay to our customers, lower fuel costs from the decline in diesel fuel prices, and the decline in the exchange rate of the Canadian dollar. We lowered fourth quarter 2008 operating costs in eight of the 10 cost categories that we break out in our financial statements.

For the full year 2008, we lowered our operating expenses as a percent of revenue by over 30 basis points to 62.6%. Excluding the impact of higher recycling commodity and higher diesel fuel prices, operating costs for the full year 2008 were $262 million lower than in 2007, and improved by 110 basis points to 61.8%. I'm pleased with the disciplined approach exhibited by our team in managing our controllable operating costs during tough economic conditions. We demonstrated the value of our operational excellence initiatives by flexing our costs in reaction to the current economic downturn.

I will now review our performance for the fourth quarter of 2008, compared to the prior year period a number of the cost categories. Labor and employee benefits costs improved by $28 million in the quarter. This improvement is the result primarily of flexing down our costs in reaction to the volume declines. We reduced our driver hours by about 851,000 hours. Approximately 88% of this reduction was due to the same flexing down of our labor costs, with the remainder due to divestitures.

Our total recordable injury rate was reduced to 2.9% in the fourth quarter, a 25.8% improvement compared to the prior year period. We're very pleased with this achievement, which places us even closer to world-class performance and safety.

Cost of goods sold decreased by $67 million, which is an improvement of over 160 basis points as a percent of revenues, principally due to recycling declines. Transfer and disposal expenses, which include those costs that our collection companies pay to third-party landfills and transfer stations, improved by $42 million or over 65 basis points as a percent of revenue. We lowered our maintenance and repair costs by $13 million in the fourth quarter 2008 compared with the fourth quarter 2007. The efforts we have made to standardize our fleet and to institute a cost effective preventative maintenance program have helped us react quickly to volume declines and to offset the higher cost we have seen in labor rates, parts, and supplies. For the full year 2008, we improved our collection fleet maintenance costs by $35 million compared to 2007.

Falling diesel fuel prices lowered our direct fuel costs by approximately $13 million and lowered indirect fuel costs charged to us by our subcontract transfer station haulers by approximately $2 million compared to the fourth quarter of 2007. Fuel surcharge revenues declined in the fourth quarter 2008 compared to the fourth quarter 2007, but at a slower rate than fuel costs decline, giving us approximately $25 million of benefit in the quarter. You will recall that in the first two quarters of 2008, our fuel surcharge fell short of our increase in fuel costs by about the same amount. For the full year, our fuel surcharge program worked as designed and essentially covered our increased fuel costs.

As mentioned by David and in our press release, we have restructured our operations and reduced the number of market areas from 45 to 25. The actions we have taken are expected to provide us over $100 million of cost savings in 2009. We expect to incur a one-time charge of approximately $50 million for this restructuring. As we reviewed our strategy, we saw trends that suggested to us that now was the time to take the next step in our evolution. We want to continue to deliver the financial results our shareholders have come to expect from us. The trends we saw include customer desires for even higher quality service levels, which in turn allows us to maintain our pricing leadership. We also see customers increasingly turning to us to assist them with their sustainability practices to help them reduce their costs. In addition, while we have made progress in improving our operating margins and returns on invested capital, we know we must continue to improve if we are to become a truly great company.

We have also seen the benefits from economies of scale, and standardization of practices that our larger markets have been able to achieve. As we developed our strategy to address these trends, we concluded that we were now ready to roll out this model companywide. When we first went to the market area organizational structure about eight years ago, we had 85 market areas. As our culture has changed and our operating excellence initiatives have become engrained in our daily operating practices, we have been able to further reduce our operational structure that was needed to support our improvement initiatives. This reorganization was just another step in our progression. We believe these changes will help us weather the current economic environment, and enable us to emerge from the economic downturn as an even stronger company poised for growth. Unfortunately, this reorganization has resulted in a lot of really great people having to leave our company. These folks worked hard to put us in the position we are in today to be able to take the next steps in our progression. I want to thank each of them for all of their efforts and dedication while they were on our team.

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

Thank you, Larry. I would like to start out by discussing SG&A costs. These costs increased $11 million to $382 million during the fourth quarter of 2008 versus the same quarter 2007. This increase is due primarily to expenditures on our business initiatives as well as a $3 million increase in bad debt expense. David and Larry both spoke about the restructuring plan, and I would like to point out that our current estimate is that approximately 70% of the anticipated cost savings will be realized in SG&A categories, leading to a sharp decline in SG&A costs. We believe this new level of SG&A will be able to support our business going forward, even when the economy turns around and revenues grow.

Depreciation and amortization expense for the fourth quarter was essentially flat when compared to the fourth quarter of 2007. As a percentage of revenue, depreciation and amortization expense was 9.6%, compared with 8.8% in the prior year quarter, primarily due to the decline in revenue. Interest expense for the fourth quarter of 2008 was $114 million, a $12 million decrease from the prior year period. This decrease is due primarily due to the decline in interest rates, which impacts the interest expense associated with our interest rate swaps, and our variable rate debt. The floating portion of our debt portfolio was 33% at the end of the quarter, and our debt-to-total capital ratio was 58.5%.

Moving to income taxes, in our press release, we noted a $6 million benefit to net income in the fourth quarter of 2008. This benefit results primarily from favorable tax audit settlements. In the fourth quarter of 2008, our effective tax rate adjusted for this benefit was approximately 38.4%. This rate reflects the utilization of state net operating loss and credit carryforwards. We highlighted in our press release a $16 million noncash charge to net income that arises solely due to interest rates used in our accounting calculation of the present value of our environmental remediation obligations. The discount rate used is the 10-year Treasury rate, which dropped during the quarter from 4% to 2.25%.

Turning to cash flow, fourth quarter 2008 net cash provided by operating activities increased to $673 million, a 13.5% improvement over the prior year period. We benefited from favorable working capital results in the fourth quarter, some of which will reverse in the first quarter of 2009. Our capital expenditures for the quarter were about $430 million and our free cash flow for the quarter was $259 million.

We have paid $132 million in dividends in the quarter. We have not purchased any shares since early July. Before the year, we ever turned over $940 million in cash to our shareholders through our share repurchases and cash dividend payments. Since the beginning of 2004, we have returned to our shareholders almost $6.5 billion. Reflecting their confidence in our company's strength and consistent cash generating ability, our board of directors has approved a capital allocation program for 2009, authorizing the expenditure of up to $1.3 billion in combined cash dividends, common stock purchases, debt reduction, and acquisitions. We currently expect approximately $575 million will be dedicated to dividend payments in 2009, reflecting the board's stated intention to raise our quarterly dividend payout by 7.4% to $1.16 per share per year, resulting in a current yield of over 4%.

To give you some additional guidance on our plans for 2009, we expect capital expenditures to be approximately $1.2 billion and we intend to spend most of the capital in the second half of the year. Our capital spending is flexible and can be adjusted as circumstances warrant. After capital expenditures, we have targeted our full year free cash flow to be in the range of $1.3 billion to $1.4 billion.

We currently forecast total interest expense for 2009 of about $450 million. This estimate includes a number of assumptions. We assume an overall borrowing rate of 5.9%. We also assume that 90 day LIBOR rises during the course of the year, ultimately to 2.5% by year end. We plan to issue new senior debt to replace maturities in 2009, and we also note that the 2008 full year interest expense benefited approximately $24 million from the favorable impact of terminated interest rate swaps that will not recur. We expect an effective tax rate in 2009 of 40%, excluding the effects of any tax audit settlements.

We wanted to give you as much detail as we could around our expectations for 2009. However, we are not giving specific guidance around revenue and earnings per share. Given the dramatic changes in the economy, we think it is prudent to hold off until we see how the year is going. Certainly we expect the first quarter to be weak, and we expect improvement in the economy by the end of the year, but the recent volatility makes it difficult to estimate the timing of the improvement. Again, regardless of the economy, we will manage the business to continue our strong cash, and when the economy gets better we will be poised to leverage our reduced cost structure to grow earnings and expand margins.

Finally, as a company, we are focused on improving return on invested capital for our shareholders. And our strategies are designed to accomplish this. For the full year 2008, using the formula outlined in our long-term stock incentive plan, our return on invested capital stood at 16.3%, which is a 460 basis point improvement from the year-end 2004 level. This was accomplished despite a challenging economic environment through the fine efforts of our employees, and we thank them for their dedication. And with that, Nicole, let's open the line for questions.

(Operator Instructions). We will pause for just a moment to compile a Q&A roster. Your first question comes from the line of Scott Levine with JPMorgan.

Good morning, guys.

Good morning, Scott.

It sounded in the introductory commentary that the weakness that you are seeing on the business that picked up in the fourth quarter is relegated to the industrial segment, but you weren't seeing much slippage on the commercial side yet. What are your expectations there? It's generally lagged the economy and/or what are your expectations anecdotally with regards to the volumes and/or the price trends in the commercial business specifically as we move through 2009?

Yes, I think Scott, what you see here really is the tale of two companies. We are very encouraged by what we see in the commercial line, both from a volume and a price point of view. It shows the recession-resistant nature of our commercial business. Now we certainly don't expect to see improvement in commercial volumes, but we don't expect to see significant deterioration either. That gives you an opportunity to make sure that you are getting good price. As you all know, the success that we have had over the last few years has been driven primarily by the pricing programs and we intend to continue that focus in 2009.

In thinking about maybe what were the incremental, if there's incremental volume weakness -- is it really a broadening out in the industrial segment beyond, call it the housing driven lines of business, where you expect to see the incremental weakness, and not on the commercial side of the business? Is that an accurate -- ?

I think that's safe to say. I think all across the temporary rolloff lines of business we're seeing weakness.

And the permanent rolloffs, that's holding up relatively well?

The permanent rolloff should hold up -- should act a little bit more like the commercial line of business. It should be fairly recession resistant. It will have a little bit more, because of the lower manufacturing statistics you see. It is not going to act like temporary rolloff. It's not going to act like commercial. It's going to be somewhere in between.

Somewhere in the middle. Got it. And then turning to pricing. Core pricing decelerates 60 basis points quarter on quarter, but I guess the interpretation as well as the cost inflation is easing. If we think about pricing and the expectations there, you said you expect 50 to 100 basis points above the rate of cost inflation. Would an accurate conclusion be that you are not expecting any deceleration of [fuel] in that spread? 1,500 basis points versus what we have seen in 2008, maybe 2007?

I think we are talking about -- when we talk about core CPI, fuel is not in that component.

Right. So you are still thinking core pricing can remain 50 to 100 bips above cost inflation. Is that roughly equivalent to what you saw in 2008 ex-fuel?

Well, actually we saw a little bit better performance than that in 2008. And frankly, we're going to -- when we looked at it, you hit the nail right on the head. You see a 60 point basis decrease. A lot of that is driven by lower weights and things that drive our yield calculation. But we said we need to make sure that we keep this 50 to 100 basis point above core CPI number. And that's why we put a stake in the ground by saying if we don't do it, no one is going to make their -- get their annual bonus.

So looking at it from a spread perspective, you are not expecting any real slippage on price?

Absolutely not.

One last one, if I could -- and you are not giving EPS guidance, but you did give some operating cash flow guidance in the press release. Are there any unusual developments '09 versus '08 on some of the noncash items that go into operating cash flow that we should be thinking about or is everything consistent roughly speaking with 2008?

I would expect -- well, I would expect to continue to see some improvement in our management of working capital, even in a tough environment, but I don't expect that to be a significant driver. So I would say it would be pretty consistent.

Although the timing of the working capital. We had such a working capital benefit at the end of the fourth quarter that you could see that reverse a little bit in the first quarter, but overall, I think you will see consistent performance.

That's right.

Great. Thanks. Nice quarter.

Thank you.

Thank you.

Your next question comes from the line of Michael Hoffman with Wunderlich Securities.

Hi, guys.

Hi, Michael.

I apologize if you said some of this in your prep. I was scribbling away. I may have missed some of this. The timing of $50 million in costs for the reorg. Are we going to see that all in the first quarter? Is it spread? Can you give us a second of how you will model that? Second, will you show that extraordinary, even if it is a non-GAAP extraordinary adjustment, so we can pull it out?

I would suspect that the vast majority of it will be in the first quarter. There may be some that will go beyond as we make some other adjustments in the facilities and leasing obligations and the like, but the vast majority will be in the first quarter. The vast majority is already incurred. We will get some more and clearer numbers on that when we get to the first quarter earnings call in April. And I would expect we'll treat the restructuring charge, as we call it, I expect we'll treat it as something we would exclude from our ongoing earnings, our as adjusted earnings. There is a line in our income statement referred to as restructuring expenses and that's where you find it.

Okay. Your $1.3 billion to $1.4 billion assumes that as a cash impact as well?

$1.3 billion to $1.4 billion -- yes, I would expect that would include the $50 million in it.

Okay. And then the $100 million savings conversely, how quickly do we get to model in the adjustment on a year-over-year basis?

The $100 million savings is the savings we expect to feel in the current year, and 70% of that would go to SG&A.

And, I mean, if you have taken the impact on the cost side in the first quarter, does that mean by the second quarter I'm seeing 100% impact, about 70% in SG&A?

Very nearly, yes.

Very nearly. Okay. So that's the speed of it is what I'm trying to get at. Do you have an exposure to the Smurfit bankruptcy in your receivables?

Very, very little exposure. It's less than $1 million.

Then with regards to the receivables, I heard you say something about bad debt allowance being up $3 million, so I assume the DSOs start to lengthen a little bit. That's a challenging to working capital improvements. I would like to hear what you are doing in those regards -- how you can pay that.

The DSOs even through the fourth quarter continued to improve and I would expect to see pressure on that. We haven't seen pressure on that yet. And through our revenue management center, which was located in Phoenix and working with -- our centralized center working with the market areas, we have been pretty good at identifying problem customers and getting with them quickly to get paid. So -- and we have got a special watch on some of our customers would have troubled financials and work with them very closely to make sure we continue to get paid. Will it have an impact? I would expect so, but I'm thinking we will be able to manage that fairly well.

Okay. And then I don't want to get carried away with this, but the yellow sheet's showing a little recovery in OCC. Nothing in O&P. Are you getting any of the benefit of that into -- the extraordinary drop in November or starting to recover, seeing it in first quarter on the recycling side?

Yes, it's definitely better now than it was when the bottom fell out. Certainly the export rates on the coast are higher than what we are seeing in the Midwest and in the southeast. But we have seen some improvement.

But, remember, Michael, you will have three months of a down cycle for the first quarter when we only had two months in the fourth quarter. So we would expect sort of a similar effect that we saw in the fourth quarter in the first quarter, even though the pricing is coming back. You have lower pricing for the full quarter. So we expect about the same impact that we saw in the fourth quarter.

Okay. And I'm assuming some of the rebates that you have had to do, all of that is rolling itself backwards as well. Are you able to put a surcharge in for commodities where you had contractual relationships about sharing the load here?

Yes, we are actually now going back and looking at our whole pricing model. What we want to make sure we are doing is getting paid for our processing costs and put ourselves in a position to get an adequate return on our capital investments. So we're taking a whole new look at the rebate structure in total.

Okay. Share -- you may have said this and I missed it. Is there an intent for share repurchase in the context of your free cash and your dividend guidance?

Michael, we put the press release out in December on this point. We wanted to emphasize a point we have been making a long time, which is the portion of the free cash flow that we put into our capital allocation program that's not going to dividends can be used a number of different ways. Now in the past we focused on share repurchases. But in this environment we will also focus on liquidity levels and liquidity issues, as well as focus on acquisition opportunities. So as we get through into the year, we see how the liquidity is holding up and whether our debt refinancings we have coming up happened in accordance with what we like to see. Then we will make a decision about share repurchases. In the meantime, we are interested in acquisitions. We will not risk our balance sheet for acquisitions, but we would certainly like to be in a position to make some acquisitions as well.

I'm assuming some of the fear of a raising capital gains tax -- you're seeing a lot of companies that might not have been sellers thinking about selling now?

I think, Michael, that you will see that happen throughout the year. Not only the capital gains tax but I think people are starting to realize that they are not going to get the multiples that they were expecting a couple of years ago. So when we look at 2009 from an acquisition point of view, we will be opportunistic. We will take advantage of opportunities where we see them. But we will also be disciplined. We are not going to change, just like we did in 2008. We are going to make sure that whatever we do, we don't risk our balance sheet, and so -- and clearly they will gravitate more towards tuck in acquisitions than any large acquisitions.

Okay. And two more, just quickly. Wheelabrator. How do we book? And when is the timing of some of the benefit of some of Frederick County and how do we book that in an impact to the income statement? Or is there no income statement impact until it goes live in 2014.

There's virtually no income statement or balance sheet impact until close to when it goes live in 2014. That's the point with the -- that's the great thing about these Wheelabrator projects. If we had to put up a lot of capital here, this would not be a good time to be going into waste energy projects. Most of those projects, we don't put up any of the capital because they are financed by the public authority. But in the event that we do have to put up capital, you are looking at at least two to three to four years out before you have to worry about that. Certainly we all expect that within three or four years the capital markets will be a little different position than they are today.

And then the last one, deflation. In a deflationary environment where we are coupled with slow growth, how do you handle pricing as a best practice and a behavior in 2010?

We always talk about 50 to 100 basis point above core CPI. If, in fact, we get into a deflationary environment, there's only one thing I'm certain of -- we will do better than 50 to 100 basis points above core CPI. We have no intention of seeing our pricing program go back to where it's running in the 1% to 2% range. And so what we have seen in our business is that we can get those price increases at 50 to 100 basis points above core CPI, but we are never going to let them drop below that 1% to 2% range like they did in the early 2000.

All right. Thank you so much.

Thank you.

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

Good morning.

Good morning.

Hello, David.

Hey. A few follow-ups to the first round of questions. In terms of the M&A opportunities, you addressed the individual or smaller carters or mom and pops -- sorry, private companies that might be coming for sale. Any comments on pending sales from Republic Services and what you may or may not be bidding on? We heard about one block of businesses that went out the door earlier this week.

Certainly we'll take a look at all the assets that become available, and we'll respond accordingly.

Okay. You then talked -- well, out of what's left, I'm assuming then have you looked and is there anything you are interested in?

We really haven't taken a good hard look at it. Obviously we are interested in any asset that we can get at a fair price. But for whatever reason they have chosen, Republic has decided to exclude us from a portion of that process.

Understood. David, you talked about November trends being worse than October, and December being worse than November, albeit at an improving rate. Any early indication of how January shaped up?

January shaped up pretty similar to December. We saw -- and, again, you really have to look at this -- as I think this quarter in particular showed us the dramatic difference between our recession resistant lines and our economically sensitive lines. In the recession resistant lines, we have seen a fairly stable situation with volumes. In a couple of those months we actually saw volumes going up. And so you don't see the volumes reacting dramatically in those lines of business. But in the economically sensitive lines, like our C&D, special waste at the landfill, primarily rolloff in the collection lines of the business, we saw that dramatic dropoff in October to November, and then fairly similar dropoffs in December and January. I think that's frankly why we have chosen not to try to tag a revenue number for 2009. I think the question on everybody's mind, no matter what company you are in, is when are these volumes going to trough? And in past years, we've always had a pretty good idea on that. I'm not sure with the state of the economy right now, that anyone has that kind of idea. So rather than put a number out there that reflects the current trends, we certainly expect those trends to get better during the course of the year. As Bob said, it's just difficult to determine when they will get better.

And as a follow-up there, and I think Scott had touched on it in his questions, it is a little counterintuitive to me how your commercial business is recession resistant. We hear about small businesses suffering, and from our real estate team how real estate vacancy rates are increasing. I would think that commercial volumes would start to fall off, albeit maybe on a lagging basis. It seems from your comments that that has not happened. Is that your expectation that as this slow economic period plays out that the commercial is the next leg to fall off? Is that how we should think about it? Or do you expect it to hold up throughout?

Well, remember when we say they haven't fallen off, they are running at negative 4%. So it is not like they are positive, right. But certainly you would expect to see a little bit of weakening there as the businesses close down. But in both the residential and the commercial side, you also have the benefit of less waste -- if you have a fixed price for the customer and they put less waste in their bin, you are actually benefited by that, right. So what we have seen is certainly a dropoff, but not a dramatic dropoff, like we have seen in the economically sensitive line. Could that get incrementally worse? I'm sure it could, but what I'm saying is that what we saw in November to December to January, which was fairly dramatic in the economic sensitive lines, was not dramatic at all in the commercial line. Now, could it get incrementally worse during the course of the year? I think you are absolutely right. It could. But we don't see it getting worse in the same manner that we see the economically sensitive portions getting worse.

Right. And one follow-up question now for Bob in terms of the cash flow outlook. Again, a follow-up to Scott's question. I think you had said that the working capital would provide a little bit of a benefit here in '09. I guess my question is on D&A and the other line that you lumped together. Other historically has jumped around. Any expectation for what the cash flow from operations would be from the other items? And D&A has been trending down over time, but here in the fourth quarter was flat on a dollar basis year over year. Your thoughts on those two items in '09?

I expect the D&A to continue comparable to the levels we have seen over the last year. With the exception if landfill volumes continue to stay low, you might see a little bit of decline in the D&A, because there's significant portion of it that relates to the amortization expense per ton that we take in with the landfills. With the other, I don't think that was a big item in 2008, and I don't expect it to be any different in 2009.

Okay. Maybe I was confused. I know we'll get more detail on this in your 10-K filing, but I think it was over $390 million of cash flow from those other lines.

That's probably just -- I think the working capital adjustments would fall through there.

I'm sorry. I'm flipping through the press release. I had seen changes in operating assets and liabilities net of effects, negative $89 million. The other $339 million is going to include working capital then?

Yes, that's right.

Okay. So I misread it. Thanks for the clarity.

Thanks.

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

Thanks and good morning, guys.

Good morning, Jonathan.

I wanted to -- you touched on potential acquisitions and the use of cash flow. Can you talk a little bit about -- are those acquisitions primarily in your solid waste business? Are they ancillary businesses? Talk about your acquisition pipelines this year if you could.

In fact, we are getting our business developers together in the next week to talk just about that, because obviously there are going to be opportunities in solid waste and we want to make sure that we take advantage of those. But we do think that there will be a lot of opportunities in ancillary businesses. For example, I noticed that you wrote a report about medical waste yesterday. Certainly that would be an area where we would be looking to make opportunistic acquisitions. And so we aren't going to limit ourselves to solid waste. We are going to be looking at ancillary businesses. We are going to be looking at waste to energy opportunities. We are going to make sure if the right opportunity presents itself that we are in a position financially to take advantage of it.

Great. And Bob, just on the debt maturity that's coming in May, based on what you know and seeing the credit markets right now, is your expectation that you will be able to refinance it? And as of right now, you are not planning to pay that bond down?

I think that's our expectation, yes.

Okay. Great. Just turning your attention to the quarter very briefly, I think if I caught this correctly, you talked about MSW pricing at the landfill. But in here you provide an overall pricing figure for disposal this quarter?

Yes. The overall price for disposal was positive 0.2%. When we look at the disposal pricing, frankly, where we focus is on MSW. Special waste is job specific. It can -- there's a huge mix element in there and then C&D, there's obviously a geographically element in there. So it's hard to make a determination on overall pricing strategy based on -- with those two lines. MSW is a line that is fairly homogenous throughout the country. So you don't have those type of mix issues. So when we focus on pricing at the landfill, we focus on MSW. The targets that I talked about will focus on MSW. The target for our annual bonus will focus on MSW.

Just since you brought that up, you are you willing to disclose what those minimum thresholds are for bonus this year in terms of yield?

Yes, we are in the process of the putting them together as we speak. We will put them together market area by market area. As you can imagine, there's differences in market areas where some should do better than others. We are in the process of putting those together market area by market area. I can promise you, they will be aggressive but achievable targets, but we haven't set those target areas for the market yet. Once we set those, we will know how they roll out for the groups and the corporation.

Just from a pricing standpoint, can you walk through very briefly on the collection and the landfill side, what portion of your contract rate base at this point has not been repriced over the last few years?

I think we have been through most of it. Very little of it it hasn't been repriced at this point.

Okay. So even amongst -- because I know particularly on the landfill contracts and that was an area that --

I'm sorry. I thought we were talking about collections. Yes, landfill, we still have some long-term contracts that will be coming due sometime during the year that we haven't touched yet. On the collection side, I think that we have certainly been through the business improvement process, and there are still some national accounts we are working with. But I think that's not very much anymore. I think we've been through that. We are continuing on with that. It's not like that that was a one-time project.

Sure. Will you be able to give us, just based on what you have been able to accomplish thus far, what type of price increase you may expect on those landfill contracts, as they come up? Based on what you've been able to accomplish historically?

I mean, what we have seen in the last few years is that pricing has run somewhere between 5% and 10% on our -- the reprice in the landfill business, probably in excess of that, when we reprice residential bids. And we don't expect to back down from that.

Okay. Great. Thanks a lot, guys.

Thank you.

David, let me just quickly mention, David Feinberg asked about the our item into the cash flow statement, and I was -- I was not following. I did not get a chance to look and, David, the biggest single item in that is deferred taxes. We don't expect that to change drastically in the coming year. Nicole, we can move on.

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

Good morning.

Good morning.

David, a follow-up on this minimum yield targets. It sounds like it's a major focus. Can you give us some color on how you factor in if you see some more volume losses as a result of those, and how do you balance those two in that incentive comp?

Yes, we have very consistently said that you can lose 3% to 5% of your volume if you get 1% price. And that is the mantra that we are going to follow at Waste Management. When you look at -- again, I think it's interesting to look at the volumes in the fourth quarter and to see that even in a quarter where I certainly haven't seen in my lifetime a quarter that was worse than the fourth quarter, although we might be living in one right now. Hopefully that will end soon. Even at that point in time, in a bad economy, you saw the volumes on the commercial side hold up very well. So I don't know why we would be less aggressive pricing there. And so, when we look at those targets again, what we are going to do -- we don't want to put out targets -- this is going to be 100% of the annual bonus for the senior leadership team and 70% of the annual bonus for all of our folks out in the field. And so you want to make that target achievable, but aggressive.

Okay. Great. Thanks. And actually just for Bob, just want to clarify -- the $100 million savings for '09, that's going to be roughly 100% realized in the year?

Yes.

Okay. And kind of minutia, but you mentioned you have the interest rates going up a fair bit in your forecast and you mentioned three-month LIBOR. Can you use one-month LIBOR? It's obviously a lot lower than three month right now.

I guess we would look into that. But right now our swaps are in place already, and they are based off of 90 day LIBOR.

The swaps are based on 90. We can borrow under our revolver using 30, and we did do that at the end of 2008. But right now we are in a 90 day LIBOR tranche, even under our revolver.

Okay. Thanks very much.

We have one final question. Your final question comes from Nicole DeBlase from Deutsche Bank.

Good morning.

Good morning, Nicole.

First of all, on pricing, you sounded pretty confident that you won't see pricing dip around the 1% pricing that you saw during the last downturn. So if we're in a deflationary to flat CPI environment this year, what gives you confidence that you can see more than a 50 to 100 bit spread?

I mean it basically comes down to, again, it's the beauty of this business, the recession resistant nature of this business. There is not -- [Shari Rice] liked to say that if you put shoes on sale, people are going to buy more shoes. But if you put waste services on sale, people are not necessarily going to buy waste services. There's a finite level of demand and there is a -- the amount of demand is not going to reduce dramatically if you raise prices. And so it's a simple matter of looking at the elasticity of demand. And you can -- in this line -- when you have a necessary product, like our product is, in a commercial line of business and in our recession resistant businesses, when you have a necessary product, you are always going to be better raising price and taking the volume loss, because the elasticity of demand is always going to work in your favor. So that's basically what our pricing programs are built around. They are built around the fundamental premise that the elasticity of demand is always going to pay you better if you raise prices and take the volume loss. And we will continue that in 2009. The good news is that from a return on capital point of view, I think this entire industry has understood that when you look at return on capital, you have to look at it from a pricing point of view. And I think we have also seen the pricing hold up very well throughout the country. So we're going to continue with the program of letting elasticity of demand work in our favor and that's not going to change, whether it's a deflationary environment or an inflationary environment.

I understand that, but you are saying if it is deflationary that you can get more than 100 bit spread, correct?

Correct. In other words, if we have deflations, of course CPI is negative, we will not go to negative pricing.

Okay. Okay. Got it. And then what are you guys seeing in the competitive pricing environment?

I mean, it's what we said before. We have seen it holding up fairly well across the country. I think there's a lot of factors that come into play there. Obviously with fuel coming down, I think that's been a benefit. And so we have seen pricing -- it's basically the same that we have seen over the last few years. You see a fairly solid pricing environment with pockets of unusual behavior.

Okay. Thanks.

Sir, there are no further questions at this time.

Well, thank you all for joining us. We certainly know that 2009 is going to be a challenging year. We certainly expect to meet those challenges and we look forward to a great year, filled with opportunities and another great, strong year of generating free cash that we can return to our shareholders. Thank you all for joining us.

Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1:00 PM Eastern standard time today through 11:59 PM Thursday, February 26th, 2009. The conference ID number for the replay is 80418207. Again, the conference ID number for the replay is 80418207. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. Thank you. You may now disconnect.