美國廢棄物管理公司 (WM) 2009 Q2 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 second quarter 2009 earnings release. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Mr. Jim Alderson. Mr. Alderson, you may begin.

Thank you, Nicole. Good morning, everyone. Thank you for joining us for our second quarter 2009 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 volume trends. Larry will discuss operating costs and Bob will cover the financial statements. We will conclude with questions and answers.

Before we get started, let me remind you that in addition to our press release that was issued this morning, we have filed a Form 8-K that includes the press release as an attachment and is available on our web site at www.wm.com. The Form 8-K, the press release, and the schedule for the release include important information that you should refer to. That is because David, Larry, and Bob will discuss our results on an as-adjusted basis. Unless otherwise noted, all of the financial measures referenced in the call including net income, earnings per share, income from operations, operating expenses, and operating margins are adjusted for items we deem unusual or nonoperational in nature.

We will also discuss free cash flow. All of these are nonGAAP financial measures. We have given detailed information on all of the nonGAAP measures that will be discussed on this morning's call and have reconciled them to the most comparable GAAP measures. You can find that information in the schedules to the earnings press release and the Form 8-K filed today which can be found on the company's web site at www.wm.com. Additionally, during the call, you will concerning plans and expectations for third quarter and full year 2009. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are detailed in our press release this morning and in our filings with the securities and exchange commission including the Form 10-K filed for 2008.

This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern time today until 5:00 PM Eastern time on August 13. 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 16261765.

Time-sensitive information given during the course of today's call, which is occurring on July 30, 2009, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now I will turn the call over to Waste Management's CEO, David Steiner.

Thanks, Jim. Good morning from Houston. When we look at the quarter, we see that our core solid waste operation continued to benefit from our pricing and cost program. Our overall results were affected by a number of things that have little to do with our core solid waste business. We had a reduction of $0.07 from our recycling operation. Lower energy prices for the energy sold by certain of our Wheelabrator plants had a negative $0.03 effect in the quarter. Foreign currency translation and waste energy development cost had $0.01 of negative earning impact.

Without these items, we would have matched prior year earnings despite the volume losses. This shows the strength of our core operating model, which focuses on pricing and operational excellence. We would expect the second half of the year to follow a similar pattern. Our pricing and cost programs will largely make up for volume losses.

But we will still face headwinds from lower commodity prices in our recycling operation in the third quarter. And lower energy prices in our Wheelabrator operations will likely continue for remainder of the year. We expect to incur about $10 million of costs associated with the growth of our waste to energy business in the second half of the year. But we certainly believe our investment will pay off. I'll discuss our international waste energy development later in my remarks.

I'm pleased that we achieved solid second quarter results given this challenging economic environment. We maintained our focus on pricing and achieved internal revenue growth from yield on our collection and disposal business of 3%. We realize the full benefit of our reorganization announced in February and saved over $30 million of cost during the quarter. We increased productivity in each of our collection lines of business. We've even seen some positive signs on the macro economic front with recycling commodity prices, which have increased each month since the lows reached in January. Solid waste volumes appear to be stabilizing, which should lead to year-over-year better comparisons beginning in the fourth quarter of this year.

Looking at revenue in the second quarter, revenue declined by $537 million compared to the prior year period. But most of the decline was a result of items that did not relate to our solid waste collection and disposal operations. $207 million of the decline was due to recycling revenues and energy prices. $116 million was related to the decline in fuel surcharge revenue as oil prices declined and $28 million was related to foreign currency translation. This leaves a second quarter 2009 revenue decline related to our solid waste collection and disposal business of $186 million or about $5.3% of revenue.

Pricing continued to be strong and consistent. Internal revenue growth from collection and disposal yields in the second quarter was 3%. Internal revenue growth from yield was strongest in the three collection lines of business. Combined, the revenue growth from yield in the industrial, commercial, and residential lines of our collection business was 4.1% in the second quarter. We again produced our strongest results in our commercial collection line of business, where internal revenue growth from yield was 4.6% in the quarter. The yield components of internal revenue growth in our industrial and residential lines of business were 4% and 3.7% respectively.

In total revenue, growth from volume declined 8.6% in the quarter compared to the prior year quarter. The recession resistant lines of our business, namely commercial and residential collection, saw volume declines of 5.1% and 3.6% respectively, similar to what we've seen in recent quarters.

In our more economically sensitive rolloff line of business, we did see further decline as rolloff volumes were off 19%. Despite lower volumes, we maintained our focus on rolloff pricing, which resulted in revenue growth in yield of 4% for the quarter. We continue to work to obtain price increases in our rolloff line despite lower volumes and certainly we will continue that strategy. Overall, we expanded our income from operation margin in the collection line of business by 140 basis points.

Turning to yield and volume on the disposal side of business, second quarter 2009 internal revenue growth from volume decreased by 16.9% compared to same period 2008. The second quarter is the time of year we normally see a seasonal increase in volumes. We did see a seasonal increase, with tonnage up 10.3% compared to the first quarter 2009. This increase was only about half the rate that we've seen in prior years. The softness occurred primarily in our more economically sensitive special waste and C&D line. Compared to the second quarter of 2008, internal revenue growth from volume from special waste was negative 23.6%. For C&D, it was negative 15.9%. Internal revenue growth from volume for MSW was negative 5.8% compared to the second quarter of 2008. So sequentially, MSW showed improvement from the first quarter of 2009 when internal revenue growth from volume was negative 8.1%.

On the pricing front for the quarter, our internal revenue growth from yield was strongest in our MSW line, with per unit pricing up by 4.3%. Again, we'll maintain our focus on MSW pricing despite the lower volumes.

Recycling markets have shown significant improvement since January of this year with commodity prices rising on average over 41% between January and June. Commodity prices have continued to improve into July. Even with this improvement, average prices were down approximately 50% in the second quarter 2009 compared to the prior year period. This decline in commodity prices caused a negative year-over-year impact of earnings of $0.07 per diluted share in the second quarter 2009, consistent with our expectation.

We continue to work on revising our pricing and rebate model in our recycling operations to moderate the future effect of commodity price swings on our operations. Our new approach is designed to ensure that we cover our processing costs plus earn a fair return on our capital. We've already changed the number of our contracts and our efforts have been well received. It will take some time to work our way through the customer base. Changing the price structure will help ensure the long-term viability of our recycling operations by making them less exposed to cyclical commodity prices. On the cost side, the company-wide reorganization we announced in February continues to produce the savings we anticipated, and we continue to forecast annualized savings in excess of $120 million.

As we look at the balance of the year, we anticipate that year-over-year volumes in our residential and commercial lines will continue to show their recession resistant qualities and decline at a level of about 3.5% to 5.5%. In our more economically sensitive rolloff and landfill lines while the rate of decline appears to be slowing, we're building our plans assuming that year-over-year declines in volume for the second half of the year will be similar to our second quarter of 2009 volume results. In other words, we expect that volumes will show only about half of the seasonal uptick that we normally see in the third quarter. This would mean that third quarter year-over-year volume comparisons could be slightly more negative than what we saw for the second quarter. Fourth quarter volume comparisons should start to improve. Given our assumptions, we expect that our full year earnings per diluted share will fall within the range of $1.95 to $1.99 a share on an as-diluted basis.

Looking to the future, we're excited by the expansion of our waste to energy business. We recently were selected as the winning bidder to purchase a 40% in Shanghai Environment Group, the leading waste to energy company in China. We're now negotiating the terms of our joint venture and expect to conclude our agreements in the near future. We continue to pursue opportunities in waste to energy in Europe and United States.

In our first quarter conference call, we mentioned we were likely to spend up to $200 million in med waste acquisition. At that time, we had a confidential letter of intent to acquire a med waste company for $175 million and we expected to enter into a definitive agreement within a week after our conference call. As many of you know, a competitor offered more for the business, and we maintained our acquisition discipline by not further increasing our offer. Consequently, our med waste business will continue to grow, but at a slower pace than we anticipated.

We've also decided to re-enter the market to purchase our shares. Our capital allocation over the past five years has been very clear -- return cash to our shareholders through dividends and share repurchases while opportunistically acquiring assets. In the past year, we haven't repurchased any shares. But with our strong balance sheet and cash generating abilities and our confidence in our cash flow performance for the remainder of the year, we've decided to resume repurchasing shares, with authority to spend up to $400 million during the remainder of 2009. With that, I'll turn the call over to Larry.

Thank you, David. Good morning. I will begin by reviewing our operating cost results for the second quarter 2009. Operating expenses in the second quarter 2009 were $1.777 billion or 60.2% of revenue, an improvement of $404 million from the second quarter of 2008 or 230 basis points as a percent of revenue. This is a strong performance given the decline in revenue.

The cost reduction is due primarily to four factors. First, flexing down costs and executing our restructuring plan. Second, lower recycling commodity prices, which result in lower rebates we pay to our customers. Third, lower fuel costs from the decline in diesel fuel prices. And fourth, the decline in the exchange rate of the Canadian dollar.

I'm pleased with the disciplined approach exhibited by our team in managing our controllable operating costs during tough economic conditions. I'm also pleased with the way our team is performing in the new organizational structure we announced at the beginning of the year. The new structure has enabled us to quickly react to the lower volumes by flexing down our costs while at the same time continuing our operational improvements in the areas of safety, productivity, fleet maintenance, and service to our customers. The new structure also puts us in a great position to leverage our cost structure when the economy begins to recover.

I will now review you our performance for the second quarter 2009 compared to the prior year period in a number of the cost categories. Labor and employee benefits costs improved by $45 million in the quarter. This improvement is the result primarily of reducing routes and improving asset efficiency in reaction to the volume declines, achieving productivity improvement in all three of our collection lines of business, as well as labor cost savings that resulted from our restructuring announced in February of this year. We reduced our driver hours by about 991,000 hours. Over 70% of this reduction was due to reducing our capacity by taking trucks off the road as volumes declined. The remainder was primarily due to continued productivity improvements. Our total recordable injury rate improved to 2.8 in the second quarter, a 16.9% improvement compared to the prior year, approaching world class performance. We're very pleased with this achievement, which demonstrates our continued leadership in safety as well as our commitment to protecting the health and safety of our employees and our communities.

Transfer and disposal expenses, which include those costs that our collection companies pay to third party landfills and transfer stations, improved by $36 million, primarily due to volume declines and our continued focus on reducing our third party disposal cost by improving internalization.

We lowered our maintenance and repair costs in total by $18 million in the second quarter 2009 compared with the prior year period. Collection and heavy equipment fleet maintenance accounted for the bulk of the savings, improving by [$16] million. Since the beginning of the year, we have taken over 300 pieces of heavy equipment out of service and adjusted our operating hours given the lower volumes coming into our landfills. Standardizing our fleet and implementing a cost effective preventative maintenance program has enabled to us continue to reduce our fleet maintenance cost.

Subcontractor costs improved by $59 million or almost 80 basis points due to using fewer third party contractors as a result of lower volumes and the decrease in indirect fuel cost passed onto us by our subcontract haulers. Costs of goods sold decreased by $110 million or over 260 basis points as a percent of revenue, principally due to the reduction of recycling commodity rebates.

We've seen recycling commodity prices improve steadily since January of this year. We expect recycling commodity prices to continue to improve moderately for the remainder of the year and we expect to see more modest negative year-over-year impacts from our recycling operations in the second half of 2009. For the second half of 2009, the projected impact to earnings per diluted share from our recycling operations compared to the prior year should be in the range of a negative $0.03 to $0.05 impact in the third quarter and could be slightly positive in the fourth quarter.

We lowered our direct fuel costs by approximately $114 million compared to the second quarter of 2008 as a result of lower diesel fuel prices and using less fuel as volumes decline. Indirect fuel costs charged to us by our subcontract transfer station haulers declined by approximately $23 million. As I mentioned in the past, our fuel surcharge program continues to keep pace with changes in our direct and indirect diesel fuel costs over time.

Landfill operating costs improved by $23 million in the second quarter 2009 compared with the prior period as a result of two factors. First, we benefited from the accounting impact of higher interest rates, which are used to estimate the present value of our environmental remediation obligations. Second, we have flexed out our landfill costs as a result of operational improvements and lower volumes.

I also want to give you an update on the restructuring of our operations that we announced in February which has proceeded very smoothly. We incurred charges during the second quarter of approximately $5 million for this restructuring. We realize total cost savings of over $30 million for the second quarter related to the restructuring, or about $10 million per month. Consequently, we continue to expect annualized savings from the restructuring to exceed $120 million.

I'd like to congratulate our team on the outstanding work they did during the quarter in flexing down our costs with the volume declines. I'm pleased to see how well our restructuring has been implemented, enabling our team to work collaboratively to continue to improve our company and our service to our customers in spite of the challenge from the current economic environment. With that, I'll turn the call over to Bob.

Thank you, Larry. I'd like to start out by discussing SG&A costs. These costs decreased by $35 million to $323 million during the second quarter 2009 versus the same quarter 2008. This decrease is due primarily to labor cost savings that resulted from our restructuring announced in February this year, lower long term incentive plan expenses, and reductions in travel and entertainment partially offset by higher bad debt expense, and higher professional fees related to our business development initiatives in China and Europe.

David and Larry both spoke about the restructuring, and I would like to point out that approximately 70% of the restructuring cost savings were realized in SG&A categories. We believe this new level of SG&A will be able to support our business going forward even when the economy turns around and volumes grow.

Bad debt expense increased by almost $3 million for the quarter, due primarily to the effects of the weak economy. We continue managing all of our receivables very closely, and even in this environment, our days sales outstanding increased slightly compared to the prior year period.

Depreciation and amortization expense for the second quarter 2009 declined $16 million when compared with the second quarter 2008, principally as the result of lower landfall volumes. As a percentage of revenue, depreciation and amortization expense was 10.2% compared with 9.1% in the prior year quarter, with the increase primarily due to the decline in revenue. Our debt to total capital ratio was 56.4% and the floating rate portion of our total debt portfolio was 28% at the end of the country.

Moving to income taxes, in the second quarter 2009, our effective tax rate was approximately 37.9%. We expect our effective tax rate for the full year to be 37.6%.

Turning to cash flow, second quarter 2009 net cash provided by operating activities was $548 million dollars. Our capital expenditures for the quarter were about $258 million, a decrease of $15 million compared to the prior year period. Free cash flow for the quarter was approximately $297 million. We are targeting our full year free cash flow to be approximately $1.3 billion, with capital expenditures now expected to be between $1 billion and $1.1 billion. We paid $142 million in dividends in the quarter, and our dividend yield is currently 3.9%.

We repaid the $500 million 6.875% senior notes that matured in May 2009 with proceeds from the $800 million of senior notes that we issued in February. The balance of the proceeds were used to repay $300 million of outstanding borrowings under the revolving credit facility.

We announced today that we will be resuming our share buyback program and are authorized the purchase of the $400 million of shares through the end of 2009. We believe that this is the right time to resume our share repurchases for several reasons. First, the financial markets have shown substantial improvement and we demonstrated our ability to access reasonably priced debt in our February note offering. Second, our balance sheet is strong with our debt to total capital ratio at 56.4%. Third, even in the weak economic environment, we've maintained strong free cash flow. And fourth, it appears volumes are stabilizing.

And finally, the success we have had managing in this difficult environment is due to our employees, the best in the business. We thank them for their dedication. With that, Nicole, let's open the line for questions.

Nicole, I'm sorry. This is Jim Alderson to interrupt. Just one second. I understand that the webcast was not working properly at the beginning of our call. I do want to apologize for that and I just want to let you know that we are up and running right now, and we will get the replay up as soon as possible. So again, I apologize. Nicole, let's turn it over to questions.

(Operator Instructions). Your first question come from the line of Scott Levine with JPMorgan.

Good morning, guys.

Good morning, Scott.

With regard to the volume outlook which sounds like in general is stabilizing in the back half expected to be roughly consistent with what you've just seen -- are there any observations you could offer up on a geographic basis? Material differences in certain parts of the country, either better or worse?

You hit the nail on the head, Scott. What we've seen basically through June continuing into July is flat volumes which, as I said, was about half of what we normally see in the seasonal uptick. It's pretty widespread throughout the country. There's not dramatic divisions. Obviously, year-over-year comps in some places like the Midwest are better because they weren't as robust last year as this year. But generally, I would say that the volume weakness is fairly evenly spread throughout the country.

Okay. Turning to Wheelabrator and the waste to energy business, could you remind us the percentage of your contract where pricing is locked in and maybe steps you can take to mitigate the impact of price volatility on the business?

Sure. In the past year, we've gone from having 2% of our contracts float to having 28% of our contracts float. Obviously, we want to have a portfolio that's balanced with some float and some fixed. That's going to hurt you in days like today when you see energy prices going down. It's going to help you when you see energy prices going up. As we look forward, Scott, we will always look for opportunities to lock in energy prices at good rates. Certainly now's not the time to lock out those rates.

Customer receptivity levels will be accommodating. What's your expectation there?

You mean as far as waste to energy and selling the energy?

Yes.

No, we haven't had any issues at all as far as selling energy. Obviously, we're selling it at spot prices, but we haven't had any issues at all as far as the actual sales to energy goes.

One last one on the CapEx budget. So it looks like that's coming down by $100 million or so. Is that right?

A little more than that, about $120 million.

What areas are you likely to trim there?

You know it's pretty much spread amongst machinery and equipment, and real estate. Not too much coming out of landfill or fleet.

Got it. Great. Thank you.

Thanks, Scott.

Our next call comes from the line of Hamzah Mazari with Credit Suisse.

Could you comment a little more on restarting your buybacks? Is that driven by volume stabilization you're seeing? Is that just a lack of large deals you want to pursue in waste of energy and medical? In any case there's nothing big out there -- trying to get a sense of -- you could have restarted this buyback last quarter. Just trying to get a source of what's driving that? Is it volume, acquisitions not being there?

I think you analyzed it very well. As we mentioned at the end of last quarter, we had a letter of intent to spend $175 million on a med waste business. That no longer exists. And so I think you've hit the nail on the head.

It's a number of factors, frankly. It's the stabilization of the volumes at the beginning of the year. You had the credit markets that were still not really stabilized. We accessed those in February, so we took care of our current maturities. We don't have another maturity due until August 2010. That's only $600 million. Clearly, we could fund that out of free cash flow.

And looking forward, we have a lot more confidence in the stability of our free cash flow and our ability to manage that free cash flow and our ability to understand what's going on in the economy. So we thought now is the time to start back. So I think you're right. It's not one factor, it's a number of factors. And certainly, the fact that we don't have that med waste acquisition of $200 million weighs into the timing of when we do it.

Just two more questions. How much of your portfolio, how much of your contracts are linked to inflation? Is it 40%, is it less? Could you give us a little more on the seasonal uptick you're talking about? You're saying you're still seeing some, but it's half the historical level. Why are you so sure of that? What's driving that? Thanks.

I'll let Jim Alderson make a comment -- you're talking about residential contracts. Jim's probably got the best insight into that.

I mean, on an overall basis, you've got about plus or minus 25% of our total revenue is tied in with public sector, what we would call the public sector. And basically, the majority of those would have some type of CPI adjustment.

And on the volume question, what we've seen basically since we saw the first signs of the seasonal uptick early in the second quarter, what we've seen are volumes that have been remarkably stable throughout the quarter. There really hasn't been wide variation. And so we've got, gosh, probably 10 to 12 weeks of data that shows us that volumes have been very stable within a very narrow band. That's what gives us the confidence that that's how it's going to proceed going forward. Obviously, none of us can predict the economy, but that's certainly looking at that, looking at the past as a predictor of the future. That's what we've seen.

Okay. Thank you.

Certainly.

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

To follow up on the medical waste comment, am I correct in interpreting it's not a lack of desire to be in it. It's just that you are going do it more organically?

That's exactly right.

To also follow up on the buyback, I mean, I would presume that a buyback is driven more by the strength of the underlying free cash flow. Yes, you didn't deploy some cash in one direction, but you were really looking at the integrity and the overall robustness of the free cash flow that supports the buyback?

No doubt about it. If you had to have, if you had to rank the factors, I would say the first factor is our strong consistent cash flow. The second factor would be the stability of the credit markets, so that we certainly know that we can take care of our debt maturities. The third factor would be that we haven't spent as much money or things like acquisition and capital as we're thought we were going to spend at the beginning of the year.

Can we get some trends in regards to what the pricing pattern and volume patterns were at the landfill side of the business?

They were fairly consistent with where they were in the second quarter. When we look at the landfill, Michael, I like to look at MSW because special waste and C&D -- special waste has so much mix involved in it that you really can't learn a lot by looking at the pricing trend. So when you look at MSW, what you see is the pricing's been very consistent, and the volume is a little better this quarter than it was in the first quarter, at negative 8.1% in the first quarter, negative 5.8% this quarter. So we actually saw a slight improvement. I don't think that's a big enough improvement to expect that to recur the rest of the year.

When you look at this business, Michael, you know as well as I do that the real factor that plays into landfill volumes is special waste. You're generally going to see more stability in MSW than you are in special waste. And that's where we need to see -- once we see that starting to uptick, that's when we can start to say landfill volumes are improving. We haven't seen signs of that throughout the year.

Okay. Just so price was positive in the landfill business?

Price is positive in the landfill business.

Okay. And then, I realize this is real Ouija board aspect to this, but Cash For Clunkers, $1 billion, $4,000 a car, that's 250,000 in cars. What's that mean in fluff, which is special waste, and if all these cars really do get pulled in, in the next five months, four months based on the deadline, when's that enough show up if it really is going to happen?

It's interesting, Michael. As you follow the so-called Cash For Clunkers bill, you know, because you have so many restrictions on it as far as the mileage per gallon, the age of the vehicle and a lot of different things hike that, the numbers I've seen actually aren't expecting it to have a dramatic effect on unit sales for the car manufacturers. So I wouldn't expect to see a heck of a lot of incremental volume because of the Cash For Clunkers bill.

Fair enough. Let's say it worked. They really got the 250,000 cars in. How quickly does that convert into fluff? How fast does the scrap steel market shred these things and the fluff shows up?

That happens pretty fast. There's not a significant delay at all.

Next steps in China now that you've had this great success with Shanghai Environmental?

We're negotiating the joint venture agreement. We expect to announce the conclusion of that hope any in the near future. Then we proceed to put together the business plan. We expect at this point in time to be building somewhere between two and four plants or winning bids to build two to four plants per year. They've already got some plants over there. We're jumping into it head first and we look forward to the opportunity. They are certainly the leading player in waste energy in giant.

Did you end up paying the $140 million that was estimated?

Yes. That's exactly right. As I recall, the final number was about $143 million.

Waste energy, can you share with us the total megawatts that are exposed to floating rates? And how much are coming off contract that would increase that rate of floating rate?

So when you look at it's interesting, Michael, when we talk about the China opportunity -- we've talked a lot about our European and China opportunities. Those will have -- we're bidding those with fixed energy price contracts. So you won't have that fluctuation with China and Europe. I don't know the top of my head the megawatts -- from a contractual point of view, it went from 2% to 28%. In 2010, it will ramp up to about 45%. I'm not sure if our Wheelabrator folks are measuring by megawatts or measuring by dollars, but that's the percentage we got from them.

Thank you very much.

Thank you.

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

Thanks, and good morning, guys.

Good morning.

Just on landfills, and I hear what you're saying about MSW versus special waste in the mix issue there. Can you just quantify for us what were the overall landfill pricing year over year?

Overall landfill pricing from an IRG point of view, as I recall, was 0.7%. That's obviously with the positive in MSW and basically flat at special waste and what we call revenue-generating cover, C&D.

If I'm not mistaken, special waste can account for -- correct me if I'm wrong, as much as one-third to 40% of your volumes at the landfill at any given quarter?

When you look at the landfill, we've got special waste and then we've got what we call revenue generating cover, right, basically dirt jobs that we pick up and use as cover. When you look at that, and you look at the shortfall that we had at our landfills in the second quarter, which totaled about $60 million -- $74 million if you look at the overall. That accounted for about 60% of the shortfall. That's why I say when you look at our landfills and you look at when this business will start to turn, you can't look at MSW. When you look at pricing, you've got to look at MSW. When you look at when will the landfill start to turn, you have to look at those more economically sensitive lines, like revenue generating cover and special waste. Once you see that turn is when you see that huge leverage pop back down to our bottom line.

Great. If we can just turn our attention to fees. That's been a lot of discussion in the past about the environmental fee and the administrative fee. Since -- you can quantify what portion of your IRG from yield this quarter came from the environmental fee and if you've fully implemented the administrative fee at this point?

When you look at the fees from a dollar point of view, between our late fee and our environmental fee, it was about $57.5 million. The bulk of that, about $54.5 million, comes from the environmental fee.

Okay. And should we assume that I know you recently as of the beginning of the year, you implemented an increase of about 6%. Should we assume that has been fully rolled out -- the environmental fee of 6% has been rolled out to the customer base at this point?

You can pretty much assume that.

Great. Then just quickly on the free cash flow guidance. Based on my calculations, seems that you're assuming about a 40%/60% split in free cash flow this year between the first and second half. Based on my analysis, it's usually evenly split. Any particular reason why you're expecting more of a free cash ramp in the second half of this year?

CapEx spending was more weighted toward the first half of the year this year, particularly with the fleet purchases, trying to get those in before the 2010 engines kick in.

We also at the beginning of the year had a carryover of roughly $200 million of capital that we had spent but hadn't paid. So we had that carryover in the first quarter.

That's great. Then just finally, I'm not sure if you can or want to answer the question. But given that you've given some sense in terms of how volumes should trend for the remainder of the year, vis-a-vis the second quarter, can you give us some sense of expectations for your IRG from yield in reported core pricing for the remainder of the year for 3Q and 4Q? Can you help us directionally?

Yes, I can and want to answer that, so I'll affirmatively answer on both. We expect our -- remember we've also got our incentive plan set up to ensure that this happens. We've got a gate dealing with our yield. If we don't hit our yield dates, no one gets their annual bonus. So not only our expectations, but our compensation is tied to the fact that we have to hit our IRG target. I'd certainly expect that IRG would remain consistent through the year if anything is going to improve. When I look at the three-month trend through the second quarter, we hit our highest yield number in the third month of the quarter. So I certainly expect that we'll be right around that 3% range the entire year.

Great. Thanks, guys.

Thanks.

Your next question comes from the line of Vance Edelson with Morgan Stanley.

Hi. Thanks a lot. As you work through the contract changes for recycling, how cognizant would you say your customers are of the 40% increase in recycled commodity prices year to date? Does that throw a monkey wrench at all into what you hope to accomplish in the renegotiations? Thanks.

Actually, as we started talking to our customers about our new approach, it's been very well received. We're working our way through the customer base now, but what I would say is our customers want to see recycling continue to be viable. And many municipalities saw what happened with some of the recyclers -- when things got really bad, they weren't able to -- people they had contracted with, they began to have some problems. We got calls from folks because they didn't know what to do with their recycling commodities. So I would say overall people want to see recycling be a viable business, and they realize that in order to do that, processors like us have to at least make sure that our cost of processing is covered plus a fair return on our capital. And then we'll share the upside from there with the customer. So the concept has been very well received.

Okay. That sounds very fair. And then just regarding the return of the share buyback, could you just remind us what the rules are around blackout periods -- when you can buy, when you can't and how you plan to be opportunistic about it? Thanks.

Generally, we've got our General Counsel here, but as I recall it's three days after we release earnings when we can get back in the market. We then close the window on the fifth day of the third month of the quarter.

So what we generally do is we put in 10b51 programs to cover the blackout period, where we'll buy a consistent amount through that period and adjust it at various prices during that period.

Okay. Great. Then just one final question. Could you provide some color around the current competitive landscape for collection? Do you feel pressures are escalating as other players look to expand? Is that a recent development or would you say that the environment is more or less stable there?

I would say the environment's stable. I mean, obviously, you see pockets where you see some unusual behaviors, but overall that doesn't affect it. So I'll call it very stable.

Thanks.

Thank you.

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

Good morning.

Good morning, Corey.

Dave, you started to answer this question just now, but could you comment on changes in customer churn rates? Are those stable?

Sequentially, they're stable. We're at about 10.6% in the first quarter. We're at 10.7% in the second quarter. That is about a 100 basis point change year-over-year. We were at 9% second quarter of 2008. But it is stable with Q1.

So far as it is up year-over-year, the little competitors being a little more aggressive?

No, no. 100 basis points isn't a dramatic change across our customer base. I think it's probably more a result of -- because our churn rate is both controllable and uncontrollable. So I think it's more of a function of the economy than it is of competition.

Okay. You alluded to the yield gate on the incentive compensation. Do you expect to basically all of the folks who have that in place are going make the target some.

At this point in time, everybody is making the target.

Okay. Then could you just talk a little bit broadly about -- there was this time years ago when people looked at the recycling business as something you've got to be in, and the goal was to minimize your losses. And more recently last year it was talked about as a real opportunity that you want to be investing in. Where in that spectrum are you thinking about that business now?

I think you have to look at recycling different than you did 18 months ago. Our results this year reflect it. It's going to be here long term. The communities want it. We need to look at it and say not so much should we be in it or not be in it. We will be in it. We will stay in recycling. We need to look at it and say how do we control the volatility and commodity prices? That's why we're going back to our customers.

Look, the reality is our customers understand that if they allow this volatility to occur, they're going to have peaks and valleys where they lose recycling assets. I don't think anybody wants that to happen. That's why I think we're getting such good cooperation changing our pricing structure. They realize if we don't change the pricing structure -- a company like Waste Management can absorb those kinds of losses. There are plenty of companies that can't absorb those losses, and they're going to go out of business and there's going to be less recycling. So we'll be in this long term. We just need to make sure we can manage the volatility. Not only manage the volatility, but when I say manage the volatility, I mean manage the fact that when prices go down, we don't get hurt. But that when prices go up, we are able to take advantage of when prices go up.

Right. I hear you. Just one last one, insofar as you took the high end of the free cash flow guidance range off the table -- is that -- at the same time, lowering the CapEx budget, would you say purely that's because the economy's weaker than you expected at first and it's all volume? Is this anything else you would point to?

That's probably right. We gave a range at the beginning of the year that showed cash from ops varying about $200 million. We've cut that back the top end of that range back about $150 million, maybe a little bit more to get to the number we're getting to. Part of it, though, we don't expect our working capital benefits to be as strong as the beginning of the year, just with the managing DSOs and DPOs get a little bit harder in this environment. We're thinking that that's probably not going to be as positive as we thought at the beginning of the year.

When you look at where we thought the world would be at the beginning of the year, certainly the volumes are lower are than we thought they'd be at the beginning of the year. But our pricing and cost program have kept up with that. We've been able to basically keep relatively flat year-over-year. We also knew there was going to be -- by the time we came out in February we certainly knew there was going to be a reduction in the recycling business. The one frankly we didn't see at the beginning of the year was the waste to energy piece. With $22 million just in this quarter -- we're talking about $0.04 more in the back half of the year plus energy prices in the first quarter, that's probably $50 million right there that comes out. So you've got $50 million there. You've got the things Bob talked about. I think that sort of accounts for the difference.

Okay. That helps. Thank you very much.

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

Wanted to slice pricing a little different on that. You've had a lot of success on the commercial side of the business raising price. I'm wondering on the small competitor side if you're seeing them being more capital constrained in terms of buying trucks. On the flip side, maybe on the [RFPs] environmental fees, if you're getting any pushback on that side?

Bill, it's a great point because everybody thought that going into the downturn you'd see this industry change its pricing approach, and you haven't seen it. And from my perspective, I've always said we can't let the small local competitors drive our pricing program. We have to drive our pricing program. We've been able to do that and we haven't gotten a lot of pushback from customers. I think that we need to realize that the reason why we're able to basically hold the line in this environment is our pricing and cost program. And so folks understand that. We've been at it a long enough period of time, that folks aren't going to change the policy during the course of of this year. Now, again, we ensured that it wasn't going to happen by making it part of our annual incentive plans.

On Wheelabrator, you feel like you're spending maybe more effort on RFPs or maybe looking at acquisitions? I think I saw you were a finalist on a facility in Virginia, and the RFPs are probably not a capital event towards [2011], where obviously the acquisitions would be quicker.

That would be right. Of course, I think we'll have enough free cash flow, plus with the accessing the capital markets it's necessary to do whatever we need to do this year.

It's important to note with our Chinese joint venture, it will self fund. And so $143 million is our acquisition price. From that point forward, it self funds without any debt guaranteed by Waste Management. There won't be any debt incurred by us. There won't be any additional capital put into the entity by us. So you're absolutely right. It shouldn't have a dramatic effect.

Great. Thank you.

Your next question comes from Nicole DeBlase with Deutsche Bank.

My questions have been answered but I'd like to go into restructuring a little bit. I believe initial guidance was $53 million for the full year 2009. Looks like you guys have done about $43 million. How do we think about the second half from a restructuring standpoint?

Nicole, I think we're thinking at this point that the additional expense that we'll incur will be somewhere between $5 million and $10 million. So we'll give that $53 million number as the high end of where we think we'll end up.

Is that going to be split fairly evenly between the two quarters, or would it be more heavily weighted towards the third quarter?

I think it's going to be more heavily weighted toward the third quarter.

You guys said you're currently seeing $30 million benefit per quarter.

Right.

Should we expect an incremental step up in 2010 or do you expect to run at that $120 million run rate going forward?

I think the 120 is the number we're focused on.

Okay. And how does that break down between structural versus temporary, i.e., how much of that restructuring benefit comes back when volume starts to improve?

None of that should come back. The goal was to do the restructuring that gave us a permanent benefit. Other cost savings that we've seen are performance -- may be more volume related. These are not.

Okay. Great. That's all I have. Thank you.

Thank you.

Thank you.

Your final question comes from Brad Mook with Morningstar.

Hi, guys. Good morning. Overarching question. What give US confidence that -- this is an overarching theme, but that pricing will remain strong and you're not going to lose share to smaller competitors or larger competitors over time?

I think two things. I go back to our compensation plan. I think any time you want to drive behavior, if you build into your compensation plan, you'll be sure to drive behavior. But the second is frankly the history of this industry.

This is an industry that has now been very solid and very stable on pricing for three to four years. And look, there is no doubt that this industry started to see the economic downturn earlier than other industries in that our rolloff volume started running at almost double digit declines beginning in the first quarter 2007, fourth quarter 2006.

So we've had an economically sensitive roll off line of business that now has been under pressure for roughly 2.5years. We continued to get above 4% price increases. So what gives me the confidence frankly is the history of this industry over the last three to four years.

Great. And one last question. On the med waste contract, would it make sense to assume that maybe it's not as high a priority as it was in the first quarter to break into the med waste space since you're doing it more organically instead of acquisition related?

I think that's a fair comment.

That's all I have, thanks.

Thank you.

There nor further questions at this time. Are there any closing remarks?

No. Thank you all for joining us. We look forward to seeing you on the road and having you join us on the third quarter conference call. Again, we apologize for the glitch in the webcast. We'll have up the replay as quick as we can.

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 midnight Thursday, August 13, 2009. The conference ID number for the replay is 16261765. Again, the conference ID number for the replay is 16261765. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you for participating. You may now disconnect.