美國廢棄物管理公司 (WM) 2010 Q1 法說會逐字稿

Good morning my name is Tina and I will be your conference operator today. At this time I would like to welcome everyone to the Waste Management first quarter 2010 earnings release conference call.

(Operator Instructions)

I will now turn the conference over to Jim Alderson, Director of Investor Relations. Sir, you may begin.

Thank you, Tina Good morning, everyone, and thank you for joining us for first quarter 2010 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 statement.

We will conclude with questions and answers. During their statements, any comparisons made by David, Bob, or Larry, unless otherwise stated, will be with the first quarter of 2009. 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 it is available on our website at www.wm.com.

The form 8-K, the press release, and the schedules 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 on 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. All of these are non-GAAP financial measures. We have given detailed information on all of our 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 to the earnings press release and the form 8-K filed today, which can be found on the company's website at www.wm.com.

Additionally, during the call, you will hear certain forward looking statements concerning our plans and expectations for second quarter and full year 2010. 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 form 10-K, filed for 2009.

This call is being recorded and will be available 24 hours a day beginning approximately one PM Eastern Time today until five PM Eastern Time on May 13. To hear a replay of the call over the Internet, access the Waste Management at www.wm.com. To hear a telephonic replay of the call, dial (800) 642-1687 and enter reservation code 64713577. Time-sensitive information given during the course of today's call, which is occurring on April 29, 2010 will 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 CEO David Steiner.

Thanks, Jim and good morning from Houston. We earned $0.41 per share in the first quarter, consistent with our full year expectation. We also saw some very positive signs in volumes as the quarter progressed. We performed solidly in the first quarter, despite some headwinds. Winter weather was unusually severe the first two months of this year, which adversely affected operations during the quarter. The year-over-year impact of fuel cost, net of fuel surcharge revenues, was negative $0.02 per diluted share this quarter. And in the quarter we had $0.01 of expense relating to the switch to stock options as part of our long term compensation plan.

So, we had a few headwinds in the quarter, but as the quarter progressed, we saw some very positive trends that point to further volume improvements as the year progresses. And we still expect our volumes to turn positive in the second half of the year. Despite the impact of weather in the first quarter, revenue increased by $125 million, or 4.4% from the prior year period. This is the first positive year-over-year revenue comparison since the third quarter of 2008.

Major drivers of our revenue improvement are the steady upward trend in recycling commodity prices and year-over-year yield increases. Internal revenue growth from yield on our collection and disposal operations was 1.8% in the quarter. The decline in the consumer price index experienced in the second half of 2009 impacted our yield in the first quarter. Annual price adjustments for most of our municipal and franchise contracts are based on CPI and approximately 35% of our collection revenue comes from those contracts.

Excluding the price impact associated with municipal and franchise contracts, which are primarily driven by CPI adjustments, internal revenue growth from yield would have been 2.5% for the quarter. CPI has increased over 2% for the first three months of 2010 and many of our contracts adjust on July 1, so CPI should not be as significant of a drag in the second half of the year. In addition, we raised our environmental fee from 6% to 7.5%. We're also focused on our normal price increase process. Each field management team has a specific pricing plan tailored to their customer base and designed to meet their area's 2010 pricing goals. We remain committed to our pricing discipline and as I've stated previously we designed our annual incentive plan for the second year in the row with minimum pricing targets. Those targets have increased by 50 basis points in 2010. If we do not achieve the pricing target, then no bonuses will be paid under the 2010 annual incentive program. For the first quarter, we did not meet our pricing gates, so, unless we increase our pricing activity, there will be no bonuses paid in 2010. As you can imagine, that has our managers focused on utilizing all of their pricing leverage.

The combined internal revenue growth from yield in the industrial, commercial, and residential lines of are collection business was 2.1% in the first quarter. Commercial and industrial yields were 2% and 2.6% respectively. The yield component of internal revenue growth in our residential line of business was 1.9%. New business pricing for the first quarter was strongest in our commercial line of business, increasing by over 9%. Our customer churn has been improving steadily since the first quarter of 2009 and improved to 9.3% in the first quarter of 2010, the best performance we've seen since the fourth quarter of 2006. We monitor service increases, net of service decreases, because we believe this metric is an indicator of underlying business trends in our industry. It's been improving steadily since the first quarter of last year. And in the first quarter of 2010 it turned positive, which is the first time it's been positive since the third quarter of 2008.

On the volume side of the business, internal revenue growth from volume declined 4.9% in the quarter, 150 basis point improvement from the fourth quarter of 2009. Despite the weather impact in the first quarter of 2010, we're on track to meet our previously announced full year 2010 volume guidance of between negative 1% and negative 3%. Compared with the lows reached during the third quarter of 2009, first quarter 2010 volumes have improved 400 basis points and the rate of volume decline has improved each quarter since the third quarter of 2009 . In our collection business, the recession-resistant lines, mainly commercial and residential collection, saw volume declines of 4.8% and 3% respectively. In our more economically-sensitive industrial line of business, volumes were off 12.4%, a 300 basis point improvement compared to the fourth quarter of 2009. Despite lower volumes, we maintained our focus on industrial pricing, which resulted in revenue growth from yield of 2.6% for the quarter in the industrial line of business.

Overall, we continued to expand our income from operations margin in the collection line of business, which increased by 40 basis points compared with the prior year period. In the landfill side of the business, first quarter 2010 internal revenue growth from volume decreased by 7.5%. This is a significant improvement from the fourth quarter 2009 decline of 14.3%. Internal revenue growth from volume for special waste was positive 0.3%, which has dramatically improved compared with the 12.1% decrease experienced in the quarter of 2009. This is the first positive year-over-year volume comparison in special waste since the third quarter of 2008. For MSW, internal revenue growth from volume was negative 1.2%, improving from a decline of 5.1% in the fourth quarter of 2009. Volumes were softest in our more economically sensitive C&D line, which was negative by 25.6%. On the pricing front, pricing was strongest in our MSW line, with per unit pricing up by 3.6%. This pricing level is an improvement of 60 basis points compared with the fourth quarter of 2009.

As we built our forecast for volumes for the remainder of the year, we looked at volume trends during the first quarter and into the first few weeks of April. What we've seen is steady sequential improvement in most of our business lines. On the industrial side of the business, workday adjusted internal revenue growth from volume was negative 12.7% in January, but improved to negative 9.7% by March On the MSW side, workday adjusted volume was negative 2.4% in January. And actually turned to positive 0.5% in March. During the first weeks of April we continue to see volume improvement. On the industrial side of the business, recent weekly volumes have surpassed prior year levels in the South and the East and has almost reached prior year levels in the Midwest. On the landfill side of the business, we've seen some weeks where company-wide average tonnage per day has exceeded prior year levels. These signs of improvements certainly bode well for the rest of the year. Increased commodity prices contributed about $0.06 of positive year-over-year earnings per diluted share in the first quarter of 2010, which is consistent with our expectations. We continue to expect a year-over-year positive impact to earnings per diluted share from commodity prices of $0.04 to $0.08 per share. Virtually all of the benefit will occur during the first two quarters of the year. Our forecast equates to 30% higher average commodity pricing for the full year of 2010 compared with 2009.

So, we saw a number of encouraging signs during the first quarter and we're confident that we can meet our full year earnings forecast of $2.09 to $2.13 per diluted share. I would note that our full year earnings per share guidance excludes the benefit of our recent settlement with SAP. So, in summary, we're quite pleased with our first quarter and we realize that our full year results will be driven by improving volumes, a renewed focus on pricing, improved commodity prices, and our continued focus on operational excellence. And with that, I'll turn the call over to

Thank you, David and good morning. I'll now review our operating cost results for the first quarter of 2010. Adjusting for the items noted in our press release, operating expenses in the first quarter of 2010 were $1.853 billion, or 63.1% of revenue, compared with $1.725 billion, or 61.4% of revenue in the prior year period.

While the negative volume trends we've seen over the last 18 months continued into the first quarter, the rate of the volume decline is slowing significantly. Volumes in our more recession-resistant lines of business, especially residential have held up the best. Volumes in our more economically-sensitive lines of business, primarily landfill and roll-off have consistently seen the largest decline. Our residential collection line of business provides a very solid foundation because it's very stable. But it carries the lowest margin of all our collection lines of business. The landfill business carries some of our highest margin but it's very difficult to flex down cost, especially labor as this line of business is less labor intensive than our collection line of business. We continue to see larger percentage volume declines at our landfills than in our residential line of business, which causes a change in our business mix. This change in mix has negatively impacted our margins as we lost more higher margin business than lower margin business. As David mentioned, over the last few weeks, we've seen positive year-over-year landfill and roll-off volumes in some of our groups. As our landfill and roll-off volumes rebound, we expect to see a positive impact to our overall operating margin. We will continue to work hard at aggressively flexing and eliminating costs and for the full year 2010, we expect margins to improve. As many of your are aware, one of the key financial components to our annual incentive plan is expansion of our income from operations margin as a percent of revenue. If we don't expand that margin in 2010 as compared to 2009, we will not receive an incentive payout for that portion of the bonus plan. So you can be assured that everyone is working hard to find ways to control our cost and improve our margin.

I'll now review our performance for the first quarter of 2010 compared to the prior year period in a number of the cost categories. Labor and employee benefits costs improved by $4 million or 100 basis points as a percent of revenue in the quarter after adjusting for a $28 million charge for the partial withdrawal of an underfunded Teamster pension plan. This improvement results primarily from reducing routes in reaction to the volume decline. This helped offset the wage increase for hourly employees that we implemented at the end of June 2009. We reduced our driver hours by about 394,000 hours in the first quarter by taking trucks off the road as volumes declined and using our routing tools to build more efficient routes. Cost of good sold increased by $77 million in the first quarter as a result of higher recycling commodity prices that increased our rebates to our customers. This negatively impacted our operating cost as a percent of revenue by 250 basis points. Our direct fuel costs increased approximately $28 million, or about 80 basis points as a percent of revenue as a result of higher diesel fuel prices. The average price of diesel fuel increased by approximately $0.65 a gallon in the first quarter of this year compared to the same period last year. In direct fuel cost, charge to us by our subcontract transfer station haulers also increased by approximately $4 million. Compared to the first quarter of 2009, fuel costs increased more than fuel surcharge revenues, causing a 60 basis point decrease in our income from operations margin in a negative year-over-year impact to earnings of $0.02 per diluted share. Landfill operating costs increased approximately $22 million in the first quarter. This increase is due to higher remedial liability costs and higher weather-related operating costs in the first quarter of this year. In addition, the first quarter of last year had a $10 million favorable adjustment due to the higher -- due to the effect of higher interest rates on the estimated present value of our environmental remediation obligations. Overall, this increasing cost caused a 70 basis point decrease in our income from operations margin.

The discipline we've used to manage our cost as volumes have declined has put us in a position to leverage our cost structure as volumes turn positive. Coupled with the disciplined approach our team has shown in executing our pricing strategies, we remain confident that we will again make progress on expanding margins as well as our primary goals of generating strong free cash flow and growing earnings. And with that, I'll turn the call over to Bob.

Thank you, Larry. I will start by discussing our SG&A costs. These costs increased by $14 million year-over-year to $351 million during the first quarter of 2010. This increase resulted primarily from additional costs related to our growth initiatives and information technology expenses to upgrade outdated equipment and applications, both of which we discussed at our investor day in March. Our day sales outstanding improved by 1.6 days year-over-year and our bad debt expense decreased by $9 million. Managing our receivables very closely remains a high priority. Depreciation and amortization expense for the first quarter of 2010 increased $2 million when compared with the first quarter of 2009. This is primarily due to an increase in intangible amortization expense from acquisitions closed during the prior year. As a percent of revenue, depreciation and amortization expense was 9.9% compared with 10.3% in the prior year quarter. As anticipated, our interest expense net of interest income for the first quarter increased by $11 million compared with the prior year period, primarily due to interest on $600 million of senior notes we issued in November of 2009. Our debt to total capital ratio for the quarter is 57.4%, below our target ratio of about 60%. The floating rate portion of our total debt portfolio is 21% at the end of the quarter. From the $600 million of proceeds from the notes we issued in November, we paid $142 million to purchase a 40% equity interest in the Shanghai Environment Group, a company focused on developing waste-to-energy plants in China. This transaction closed on March 23 of this year. We expect to close today on the purchase of a waste-to-energy plant in Virginia, which will cost $150 million. In addition to the waste-to-energy investments, we have targeted $250 million to $350 million for other business acquisitions and investments of which we spent $80 million in the first quarter of 2010.

I'd like to discuss our new electricity hedging program. Since 2008, our exposure to merchant electricity sales in our waste-to-energy business has increased as some of our long term electricity sales contracts have expired. Those long term electricity sales contracts had favorable pricing compared with the merchant pricing terms we obtained in today's markets. At the beginning of 2009 approximately, one-third of our electricity sales were on a merchant basis. Today, we sell approximately 46% of our waste-to-energy power on a merchant basis and we expect this to increase to approximately 53% by the end of 2010. For our merchant energy stream, we have implemented a more actively managed hedging program to decrease the volatility of our electricity sales prices. We expect to have hedges in place on about 20% of our total annual energy stream for durations ranging from 60 days up to nine months. So, our plan is to continue putting in place additional short-term rolling hedges, and, when we see an opportunity, to lock in portions of our portfolio longer term.

Turning to cash-flow, first quarter 2010 net cash provided by operating activities was $496 million. Our capital expenditures for the quarter were about $255 million, a decrease of $70 million compared with the prior year period. Our free cash-flow for the quarter was $253 million. This is consistent with our previously discussed full year 2010 guidance of approximately $1.2 billion for capital expenditures and a range of $1.2 billion to $1.3 billion for free cash-flow. In the first quarter, we paid $153 million in dividends and we repurchased $120 million of our common stock. Our dividend yield is currently 3.5%. The good results that Waste Management has demonstrated in the first quarter can be accomplished only through the hard work of our employees and we thank them for their effort and dedication. And with that, Tina, let's open the line for questions.

(Operator Instructions)

Our first question will come from the line of Hamzah Mazari with Credit Suisse.

Thank you. Good morning. Just a couple questions, on the volume side, you guys are looking for positive volumes in the second half, could you comment on how much is comps getting easier versus actual demand pick up? Is it too early to say that you're seeing a strong seasonality right now because usually you see that sort of at the end of May and what are you seeing in customer churn in some of your markets as well?

Yes, we've certainly seen a bigger pickup this year than we did last year, which gives us some optimism that, remember, last year, we pretty much didn't see much seasonality at all. So, we're encouraged by the signs -- you're absolutely right, its hard to make a full call on it until you've seen April and May volumes, but we're encouraged by what we see so far in April. As far as customer churn goes, we've, again, we saw the saw the lowest customer churn that we've seen in a couple of years and it's not particularly surprising to us, but as we've gone and put out our annual price increases, as we raised the environmental fee to 6% to 7 .5% we haven't seen it significantly affect churn.

Just on waste-to-energy, what are your longer term thoughts on, market exposure there? How much exposure do you want for the market longer term because you're spending more money there as that business becomes bigger as part of your portfolio mix, it'll probably make your business more cyclical. I'm curious to see what your thoughts are there, do you want more exposure to the market longer term? Is the 46% market exposure what you're looking for or do you want it lower? Just curious to see how you think about that.

Yes, the SPSA plant that we're closing on today is basically 50% merchant and 50% fixed, but the investment we made in China is 100% fixed, because you'll sign a 25-year electricity contract. The bids we're making in Europe are mostly fixed-price contracts for 10 to 20-year terms. So, what that will do, is it will drive our portfolio to more fixed price than floating price.

Okay. And then just last question on your operating expenses, it seems like you've got some growth expenditure back in there. Could you quantify that at all and then your commodity rebates is there some opportunity there to make those more favorable longer term? Should we take your current operating expense run rate and SG&A, is that going to be sequentially higher or flat going forward? Just some color there would be appreciated? Thank you.

Yes, on some of those investments, we're making, it was probably about a $0.02 impact. We think those are going to be the investments that are going to pay off for us in the future to be able to deliver the type of things that our customers are going to be requiring in terms of services. And we just announced, as you saw at investor day, our Baxter products, so, some of those we hope to start seeing some payback very soon.

And Hamzah, on SG&A expenses, we talked about it at investor day. What we said at investor day is what we think will happen for this year, which is basically a percent of revenue flat to last year. But over the longer term our goal is to get the SG&A down to 9% of revenue and not just by growing revenue, but to actually get costs down. We need some help on the technology side to do that and we expect to get it. So, that's our we're shooting for.

Okay. Fair enough. Thank you.

Thank you.

Thanks, Hamzah.

Our next question will come from the line of Jonathan Ellis with Bank of America.

Thanks, good morning guys.

Hello John.

First off on landfill pricing, you gave the MSW figure, can you tell us what overall landfill pricing was? And was there any implications for mix this quarter in terms of that pricing figure?

Yes, there's always implication of mix. We talked about special waste being positive in volume for the first time in a long time, that was also -- the special waste was negative in pricing by 1.7%. So, overall landfill pricing was basically flat for the quarter.

Okay. Great. And then, just in terms of the environmental fee, was there any impact in the first quarter or should we assume that the impact is really going to be in the second through fourth quarters? And also, sort of a related question is, what portion of the revenue base is the environmental applied to now.

There was no impact from the increase in the environmental fee in the first quarter That went out with April billing. And so, we'll see the impact of that as we go through the year.

Okay. Great. And then, if we can talk a little bit about the CPI adjustments. Can you help us understand, you mentioned where CPI is now, but for the adjustments on contracts in the first quarter, and presuming that will impact the second quarter as well, what is the average CPI that's being applied to those contracts?

Yes, the average CPI, as we talked about it, some of them are negative, some of them are positive. We haven't gone back to check on the average. My guess is the average is well below 1%.

Okay. Should we assume, though, that on a full year basis, that you're still committed to the previous guidance 1% to 2% price growth and index-based contracts?

Absolutely.

Okay. Great. Couple other quick questions if I may. The, just on the waste-to-energy business this quarter, I notice that the downside in terms of electricity pricing was offset by the increase in disposal pricing and it seemed to be a pretty material increase, I think about 7.5% price growth for waste-to-energy disposal. Anything that you're doing on the disposal side in the waste-to-energy business to help to cushion some of the electricity volatility?

Well, as couple of contracts came up, we were able to renegotiate the disposal side of the equation to mostly offset the impact of that contract. That's why we didn't really mention it as a headwind this year, pretty much an offset in this quarter. Our guidance is $0.01 to $0.03 negative in electricity in the first half of this year offset by $0.01 to $0.03 positive in the second half net, net flat for the year. And this is perfectly consistent with that.

Okay. Great. And then, my final question is the SPSA plant, the Virginia waste energy plant that you're closing on, is that included in your full year EPS guide, and if not, what do you expect the incremental contribution to be?

No, it is there. We expected that to close right about the time we're closing, so, it's in there.

And the benefit is really nothing this year because we've got some expenses that we come out of the gate with to improve the plant. So this year there's basically no benefit for the plant.

Great. Thanks guys.

Thanks, John.

Thank you.

Our next question will come from the line of Scott Levine with J.P. Morgan.

Good morning guys.

Good morning.

Hello, Scott.

Following up on the question on SPSA, so, is your expectation there that that will be accretive in 2011, or is there anything that you can talk about to give us a sense of how that might impact results coming forth?

We do expect it to be accretive in 2011. We haven't given guidance yet on what that exactly will be. But, it'll be more than a penny, beyond that we'll wait till later to talk about it.

Okay. Great. And following up on the pricing question, are you guys effectively affirming the total yield guidance for 2010, which I think was 2.5% to 3% positive?

Yes, what we've always said is that we want to get 50 to 100 basis points above CPI and that regardless of what CPI is, we're going to get 2% yield. Obviously, the 1.8% that we got in the first quarter didn't meet that hurdle. That's why we've made sure that we went back and reinvigorated the pricing programs with our field. And again, as I mentioned in the script, if we don't meet the yield gate for the year, nobody gets a bonus in this company. So, you can bet that folks are focused on getting there. Now, obviously the CPI is going to create a headwind to our overall guidance to 2.5% to 3%. But, if we see CPI pick up like we expect it, we certainly hope to get to that number.

Understood. Thanks. One last one on the weather. Did you guys indicate or can you quantify how much of an EPS impact weather was? And did that show up more in the volumes or in the cost?

You know, it was in both. We haven't given a number on that. You know, 2003 we gave a number. And it's a real difficult item to quantify with any precision. It was at least what we did in 2003. And the thing is, when revenue comes back in March, is that -- because revenue goes up in March, is it because of the weather or is it because of just economic improvement, it's just hard to know. So, we chose to not give a specific number on that.

Okay. I understand. Thanks, guys.

Our next question will come from the line from Vance Edelson with Morgan Stanley.

Good morning. Thanks a lot for taking the questions. On that last point with the pricing gates not being met of late, were there any factors beyond CPI that you can point to and did it have anything to do with the bar being just set a bit high in order to drive the team to perform?

No, I think you're exactly right. It has to do with setting the bar. Look, every year when we come into our pricing year, we recognize that we've got things that we've got to improve on to lap. In other words, the environmental fee went up from 4.8% to 6% last year. And we knew that's a headwind to yield. So, that means we've got to go out and be more vigorous on our commercial price increases. And that's where the bulk of the dollars come from.

So this year -- when we saw -- remember we talked about it at investor day, that we saw the end of 2008 start to go down in pricing. We made sure that when we went back and looked our commercial increase price program that we put in higher price increases earlier in the year. So, you need to do that in order to lap the headwinds that you had. You need to do things like higher commercial price increases. You need to do things like raising your landfill pricing. You need to do things like having higher new business pricing. So, as we talked about many times and I think you all saw at investor day, there's a lot of pricing leverage that you can pull and you just got to go pull every one of them if you're going to make up for the headwinds from what you did last year, right.

Okay, that makes sense. And there was a comment on the Iron Mountain call this morning about their relationship with Waste Management to sell their recycled paper. Would you characterize that as one of the many arrangements that you have to drive your recycling volumes higher and are there more wholesale opportunities like that with hopefully nation wide partners?

We're working with all the big players out there and looking to grow that business so we can utilize the capacity that we have. So, that's something we continued to be focused on.

Okay. Got it. And maybe just one more question. Could you comment on the nature of the Tuck-In acquisitions? Is this mainly contiguous geographies and would you expect the rate of Tuck-In acquisitions to continue at a similar rate the rest of the year?

Our expectation is to spend as much as $350 million. And typically, a typical Tuck-In is continuous geographies, or within a geography where we already have some routes. Some of the acquisitions we did were also, though, on the recycling line of business. Where we used to -- were able to get into new markets more quickly, like for example, the Houston, San Antonio, and Dallas markets from an acquisition we did earlier this year that allow us to get single stream capability throughout Texas, the first to be able to do that. So, those will be the kind of acquisitions we're talking about.

But certainly the bulk of the acquisitions are going to be exactly as you described, Tuck-In, stable-on acquisitions.

Okay. Got it. On Shanghai, I may have missed it, but any update as to when that might begin to bear fruit or is that generally going to be a slow process.

We'll see some benefit later this year, the benefit we expect to see is already in our guidance. Then as that business continues to grow, we'll see more and more benefit from it as time goes on. So, it's definitely we'll see some fruit, some profit from when it comes through, now remember this will go through other income, so you won't see it from income to operations line, it'll go through other income.

Okay. Got it. Thanks a lot guys.

Thanks.

Our next question will come from the line of Al Kaschalk with Wedbush Securities.

Good morning Al.

Good morning guys.

Good morning.

Just to hammer the price question again, it was my understanding that on the contracts that there was not -- you were protected somewhat on the floor from a negative pricing impact. Obviously, that's misunderstanding on my part. But could you comment on that? Is that something to consider going forward, is that not something that's even remotely feasible?

Sure. As you can imagine, we have a lot of those contracts and they range all over the board. So, some of them do have protection, many of them don't. That's one of the things that, it's interesting, in this economic downturn, I think this whole industry's learned quite a bit. So, for example, when we saw the recycling commodity prices fall off the face of the earth, we restructured the contracts to say if that ever happens again, we need to make sure that we're protected on the down side.

I think when you're doing municipal contracts in a 3% to 5% CPI environment, you're probably not thinking of negative CPI. But, again, that's another lesson learned. Now as we do municipal contract, we need to make sure that we provide in there that we do set a floor so that we don't go backwards if there's negative CPI. So, I think that's the lessons we've got to take out of this downturn. Obviously they hurt us a little bit today. But in the future we need to make sure it doesn't happen again.

Would it be difficult to contribute what your exposure still may be or have you looked at that or is that something you're willing to share in terms of expectations? Again, I appreciate that there's a huge number of contracts here and they renew over various periods. But, where do you think you're at in terms of the exposure and what's left potentially if we hang out here at flat CPI number.

Obviously, we won't see -- most of the contracts that we have are going to renew pricing on July 1 and we certainly won't see flat CPI for that with CPI running at 2% right now. So, frankly, we have not gone back because we see CPI coming up fairly consistently over the last few months. We've not gone back and found out what the effect would be if it turned back to negative. Because, we certainly don't expect it to turn back from negative between July 1st.

If I may switch to the collection business and I know there was a fair amount of commentary that everybody provided. But the collection business seemed to be pretty strong at least relative to my expectations. So is that a function of the assessment of your customer base getting additional volumes now on customers where you can see incremental revenue from, or is it just a function of the easy comp?

Yes, when we look at the indicators, for example, pounds per yard, when we look at service increases and service decreases, that gives us the indicators that show whether it's economic or not. We certainly think that it is -- it is driven by more business. Now look, it's also comps. It's more business than what they had last year which is still less business than what they had two years ago. So, it's certainly driven by both. The indicators that we see, that we look at for economic activity have been virtually all positive for the last couple months.

And finally if I may, I know Larry provided a lot of the one time charges or explanations on some of these expenses, but it seems like the margins were a little bit soft, certainly from our expectations, and I was wondering if you can comment relative to your own internal expectations if that was the case?

Well, we did see our income from operations margin improve in our collection business overall. We did see a negative impact at the landfill just as we've been talking about. It's really hard to flex down the cost at a landfill. You just don't have as many levers available to you. You don't have many people out there and in terms of trying to reduce hours, you're not going to have landfill just open for a half a day because the volumes come in throughout the day. It really is a challenge at the landfill. We certainly expect as we see volumes rebound, that we're going to see the reverse that will enable us to see some increasing margins and those are our highest margin businesses as I described. The mix should help us as volumes turn around and go the other way.

And sorry, Larry, what was the change in mix of the drop off in the higher margin business would have been which components?

Well, the landfill is going to be the biggest component. That's going to be the biggest driver of the decrease in margin. We also had the impact from our energy prices.

When you look at the high RG impact, just to give you the numbers, if you look at the total collection line of business it was only down 4.9%. When you look at the total landfill business, it's down total 7.5%, so, you've got 260 basis points of difference right there.

Excellent. Thanks a lot, guys.

Alright, Al. Thanks.

Our next question will come from the line Bill fisher with Raymond James.

Good morning, Bill.

Thank you. Just on the diesel prices, with those moving up in the first quarter, do you see that being a catalyst at all for raising MSW landfill prices particularly on your sites that are closer in to the markets?

Well, we continue to look at the landfill as a place that we ought to be impacting our pricing. And that's something, -- it's not just driven by increased diesel fuel prices. It's something that we need to do and that's something I can assure you the whole team's focused on.

I guess I was just talking about the haulers who would rail cost going --

Right. Transportation cost.

Okay.

I mean, when we look at pricing, it's a function -- you've got the nail right on the head. It's a function of the tip fee plus the transportation cost. So, as the transportation costs go up, the closer in-network is benefited and we think we have the best close in-network in the business.

Okay. And thanks. Then on the special waste, obviously, you said it was up slightly this quarter. Is the bed activity thick enough there as you look into Q2, Q3 versus where you're seeing it recently?

Yes, we're pretty much hearing that they don't think it's just one time in special waste, that there's a pretty healthy pipeline out there. As projects pick up, as the economic stimulus starts to take effect. What we're hearing. We've always said that our business lags the general economy by six months. I think that's the indicator that's the case and so as the economic activity continues, we should see the benefit from that.

Okay. Thanks. And this last small one. Just on the China joint venture, you mentioned SPSA wouldn't be accretive this year. But would China be slightly accretive coming out of the box?

Both of them actually are slightly accretive. SPSA will be accretive this year. It's just a pretty small number and China will be accretive, probably twice of what SPSA will be.

Okay. Great. Thank you.

Thank you.

Thanks.

Thanks, Bill.

Our next question will come from the line of Alex Ovshey with Goldman Sachs.

Thanks. Good morning.

Good morning.

The question on the guidance, in the second half of 2010, when volumes are expected to begin to show year over year improvement, can you share with us what you're assuming for incremental volume -- I'm sorry, incremental margins on the volumes growth?

We went through that at the investor day, Alex, and I think that model still works -- will work well for you, it certainly works for us.

Okay.

We've got a little model in there that I think will help you with that.

Okay, that's helpful. As we think about incremental margins once the volumes recover begin to take hold, how do you see them changing, if at all, relative to margins when volumes begin to recover?

I didn't follow, Alex, could you give me that again?

As the volumes recovery takes hold, do you anticipate incremental margins changing at all?

At some point they do. This is a question we got at our investor day as well. At some point they do, the incremental margin benefit you get will be impacted by the need to add more cost, for example. And then it's a stair stepping arrangement, really. We didn't give a number on that. I don't think that's something that.

That we're looking forward to the opportunity to see it happen.

Yes.

Fair enough. And I wanted to just ask one question on the pricing side. As volumes come back, as you said, you look forward to seeing, do you think there will be a greater opportunity to raise prices on the nonindex contract?

I don't think there's any doubt that as you see the volumes go up and as capacity in the industry starts getting taken out because volumes are going up, that's going to give you that opportunity, absolutely. You know, that's -- we've talked about when we first started our pricing programs many years ago, we talked about the fact that, for example, in the roll-off line of business, what people used to do is wait until they ran out of cans and then raise prices, right? Well, every year, you have seasonality, so, you've got to anticipate the seasonality and start raising prices before you run out of cans. And that's how I feel about the economic upturn right now. We're not going to wait for the economic upturn to start raising prices as capacity gets taken out, we've got to get ahead of that game and make sure that we're taking advantage of it even before the volumes pick up. So, again, you can be assured that everybody in this business, in this company, is laser focused on pricing right now.

Great. Thank you very much for taking my questions.

Thanks, Alex.

Our next question will come from the line of Michael Hoffman with WSI.

Good morning Michael.

Good morning all. Can you -- I hate to come back to price and beat this horse to death. Can we walk through the components -- front end loaders up, if you could tell us percentage that would be great, but front end loaders up, residential's flat to slightly down, industrial is --

Are you talking pricing, Michael?

Yes. I'm trying to add -- I'm trying to think of the pieces that you put together and I get to 1.7% What's up, what's down across the mix?

Yes, basically every line in the collection business is up. Commercial up 2%, industrial 2.6%. Residential 1.9%. What you see is the overall collection business was 2.1%. That gets dragged down a little bit, as I said, landfill pricing was basically flat, but it was negative 0.2%. So you know you start to see where you saw the drag a little bit was at the landfill.

Okay. So, that takes me to the next piece. The landfill volumes that you report, $22 million in December, go to $20 million in January -- or in March. That's a bigger than normal dip, seasonally. So how much of the weather impacted that?

Yes, you know, it's really not a dramatically different dip than what we've seen over the last few years, but certainly weather played a part in that this year.

But it's definitely bigger than normal. I get there's a seasonal dip there. It's -- so I'm trying to understand how much of that's just the weather versus something else that's going on.

When you look back at last year, the sequential dip was about 13%. And obviously, that was more economy last year. The year before that it was about 8.5%. And so, it's not dramatically different, but certainly weather did play an effect there.

So when you look at March, and then April year over year on what happened on a volume basis, because you get that every single day, how does that start to trend relative to the pattern?

Frankly what we're seeing this year is different than what we saw last year. Last year we just didn't see the seasonal uptick. We think, if you just look at our volume reports, we're seeing the beginnings of a seasonal uptick. As I said earlier, you can't really make the call on that until you're into the May, early June timeframe. But we're optimistic that what we're seeing is more of a normal seasonal uptick than what we saw last year.

Okay. What -- when you think about your landfill business, when do you think the landfills go to zero volume on a comparative basis as you look at the trend in the business at this point?

You know, Michael, you have to take it apart and look at it component by component. Right? So, as we said, special waste is already flat. MSW, in March, was already positive. So, the big drags that we have are in C&D and revenue generating cover. Those are the big drags. So once we get that C&D volume, not negative 25%, but we can absorb a negative 5% to 10% as we see special waste and MSW go positive. That's really what we need to see. We need to see that C&D and look, for us, at the landfill that's the biggest economic indicator, C&D volumes. And so, we'll see MSW and special waste go positive and I think stay positive for the remainder of the year. The question is, when are we going to see some improvement in that C&D volume.

Okay. Bob, on the working capital generally, there's generally a pattern of slight negative in the first quarter, or at least as I look back over multiple years, and this year it's neutral to positive. So, is that DSO improvement a permanent improvement or is that something it was -- how do I think about it?

Well, it's incremental and we don't expect to give it back. What we get today, we'll keep today, and try to get more tomorrow. Our DSOs are still at the 42-day level, so we still have room for improvement there.

Okay. So, as you factor that plus the SAP settlement into the free cash-flow analysis, just taking the SAP award, that puts me at the upper end of your free cash-flow, plus this improvement in DSO.

The DSO improvement's in the math. We expect to push that. With respect to the litigation settlement item that we talked about today, or actually, that we highlighted in the footnotes, and I think what you can say there is relatively recent. We'll work through the math on that and update our guidance on this free cash-flow at the end of the second quarter call.

Okay. And then capital spending in the quarter, how much of that was impacted by the weather just delaying activity because it's just a little bit lower than I thought it was going to be?

Michael, it really wasn't. Or it was, but we made up for it. What was going to happen in February probably didn't happen till March. The spending we had was actually pretty much what we typically spend in the first quarter, typically.

What's different this year is the carry over from last year. You may recall that at the end of the fourth quarter, within fourth quarter, we ended up not accruing as much at the of the fourth quarter as we did the year before. And so, we had less carry over to pay for in the first quarter, so that really is the difference.

Okay. That helps. And then on the churn, when you look at the 9.3%, which is a terrific number, how is that splitting up now between that which you can control and that which you can't? And the thing you can't control is somebody closes the business and moves.

Yes, you know, it's running now still about what it's run over the past few years, which is 50/50 split between controllable -- what we call controllable and uncontrollable churn.

Okay. But the good part of that is that closing your business, whether it's a bankruptcy or move into a bigger place, that's coming down, too.

You're absolutely right.

So, that's a huge indicator, as well.

You're absolutely right.

And then on the recycling, help me understand the rebate trend as I look forward. So, I get the pressure in this quarter, but is what you're doing going to improve that so I get a little less pressure on margins, or am I looking at that pressure as a permanent part of the model if the prices stay where they are?

Well, our rebate structure, if you compare year over year, it was certainly the rebates we paid out last year were low because of the commodity prices were so low. So, you have seen our rebate, the amount that we paid, go up because the commodity prices have come up. And you'll continue to see that as long as commodity prices were higher than they were last year, you're going to see that impact in our cost of goods sold.

Well, I apologize. I didn't ask that question very clearly. If I understood what I thought was the mix of, when you get to a certain level, how much you've got to give back, it just seemed like I was -- the rebate seemed a little higher than I would have expected as the rates were rising. I get that rates and absolute dollars are going to be up, but I'm just trying to figure out on seven million tons what your exposure on rebates are. Did something change year over year on the exposure rebates as a percentage of the rising price?

Well, a couple of things have changed. One is, on the down side, we're going to make sure that we're going to be covered on our -- we sort of ensure we get our processing costs covered. An then we typically have a sharing of the commodity prices after that, anywhere from 80/20, 70/30, something like that, in that range. When you look at the brokerage side, those averages tend to be, we keep about, maybe 3% to 4% there. So as we have more brokerage, it's going to make it -- it's going to make that overall mix move to where it looks like we're paying out higher rebates. Does that make sense?

I think so. But maybe I'll follow up.

Yeah, in other words, Michael, you can't look at the increase in recycling revenue and figure that it all comes from processing rebates. A good portion of that comes from brokerage rebates, which are much lower than the processing rebates.

Okay. So, it's harder to predict, basically, is what I'm hearing, because the mix between brokerage and processing --

It depends on where the volume comes in.

Right. Lastly, the fuel surcharge, just for clarity on my part, the $28 million that you've identified is exposure to not having had enough surcharge to offset that and that if you continue to pressure surcharges through the course of the year, basically make that up in some later quarter.

Yeah the 28 million is the direct fuel cost increase.

Now we did get 13 of that through fuel surcharge. But you're correct. The way it works is that, as you know, it lags as the fuel prices go up and down relatively quickly. But it is designed to get it all back. So, you would expect us to get that back in the coming quarters.

Right. And so, you couldn't have predicted the rate at which the price is going to go up when you're giving your guidance. So, I think I've got a couple of pennies for play here, then, as a result of the success of your surcharge for the remainder of the year.

Well, you know, Michael there's always -- there's always ins and outs of every quarter.

Okay. I just wanted to make sure I understood it correctly. Alright. Terrific free cash-flow, folks, I hope you keep it.

And I would like to turn the call back to Mr. David Steiner for closing remarks.

Thank you. Well, as you all can tell from what we've been saying, we're very pleased with the first quarter but we're also very pleased with the volume trends and the other business events that occurred in April. And so, we look forward to talking to everyone on our second quarter conference call. Thank you.

Thank you for participating in today's Waste Management first quarter 2010 earnings release conference call this call will be available for beginning at twelve PM Central Time today April 29 through eleven fifty-nine PM Central Time on Thursday May 13 2010. The conference ID number for the replay is 64713577. Again the conference ID number for the replay 64713577. The number to dial for the replay is (800) 642-1687 or 1(706) 645-9291. Thank you and have a good day.