美國廢棄物管理公司 (WM) 2011 Q2 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management second-quarter 2011 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. Ed Egl, Director Investor Relations. Please go ahead, sir.

Thank you, Nicole. Good morning, everyone, and thank you for joining us for our second quarter 2011 earnings conference call. With me this morning are David Steiner, Chief Executive 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. Bob will cover operating costs and the financial statements. We will conclude with questions and answers.

During our statements, any comparisons made by David and Bob unless otherwise stated will be with the second quarter of 2010.

Before we get started, let me remind you that in addition to our earnings press release that was issued this morning, we have filed a Form 8-K that includes the earnings press release as Exhibit 99.1 and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedule to the release include important information that you should refer to.

During the call, David and Bob will discuss earnings per fully diluted share which they may refer to as EPS. Please note that projected adjusted EPS and free cash flow are non-GAAP measures. Please refer to the reconciliations to the most comparable GAAP measures in the earnings press release footnote and the schedules thereto which can be found attached to the Form 8-K and on the Company's website at www.wm.com.

Additionally during the call, you will hear certain forward-looking statements based on current expectations, opinions or beliefs about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are detailed in our earnings press release this morning and in our filings with the Securities and Exchange Commission including our most recent Form 10-K.

Please note that our Form 8-K filed earlier this morning also included a copy of our press release announcing our acquisition of Oakleaf. You should be aware that projected EPS, free cash flow, and all other forward-looking statements except those specifically pertaining to the Oakleaf transaction do not incorporate any benefits or costs associated with the Oakleaf transaction. For information on additional risks and uncertainties pertaining to the Oakleaf transaction, please see the press release filed as Exhibit 99.2 to our Form 8-K.

This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m. Eastern time today until 5 p.m. Eastern time on August 11. To hear a replay of the call over the Internet, access the Waste Management website at www.wmi.com. To hear a telephonic replay of the call, dial 800-642-1687 and enter reservation code 73675301.

Time sensitive information provided during today's call which is occurring on July 28, 2011 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 CPO, David Steiner.

Thanks, Ed, and good morning from Houston. During the second quarter, we earned $0.50 per diluted share. A number of things in the quarter went just as we expected. As previously discussed, we had about $0.06 of combined earnings per share headwinds from our waste-to-energy operations, our growth initiatives and our cost reduction programs. In the back half of the year, we expect these collective headwinds to abate and for our cost reduction efforts to begin to add to earnings.

However in the quarter, a few things did not go as we expected. We had a $0.04 reduction in earnings per share from increased maintenance and repair costs, legal items, and risk management. The legal and risk management items are second-quarter issues, but the maintenance increase is primarily due to higher commodity prices. So we will likely see higher maintenance costs in the back half of the year.

Our revenue growth from yield was slightly below expectations for the quarter and our revenue growth from volume was lower than our expectations. With respect to yield, we are taking immediate and significant pricing actions to increase our yield. With respect to volumes, we continue to move forward with our customer focused growth initiatives and the transaction that we announced today to purchase Oakleaf will certainly accelerate those efforts.

We are pleased that during the second quarter revenue increased by $189 million or 6% from the prior year quarter. This is the sixth consecutive quarter of positive year-over-year revenue comparison. Higher commodity prices, improved recycling volumes, acquisitions, and year-over-year yield increases contributed to the revenue growth.

While internal revenue growth from yield continues to provide positive revenue growth, we are not satisfied with the results for the second quarter. Internal revenue growth from yield on our collection and disposal operations was 1.6% in the quarter and 2.2% year-to-date through June 30.

The combined internal revenue growth from yield in the industrial, commercial, and residential lines of our collection business was 2% in the second quarter. Commercial and industrial yields were 3.2% and 1.3% respectively. Yield in our residential line of business was a 0.9%.

At the beginning of the year, we noted that the residential line of business was becoming more competitive. Local, regional, and national companies have become more aggressive on price. Municipalities are also looking for price concession, so although yield remains positive, we do not expect significant increases in residential yield.

Our price increases to customers were right on plan but mix issues had about 60 to 80 basis points of negative effect on yield in the quarter, which is much higher than we have seen in the recent past. The mix issues were most common in our southern group, where for example in our franchise markets we saw a dramatic shift in mix from higher-priced permanent roll off to lower-priced temporary rolloff. So looking at yield without mix, we would have been over 2% yield.

Our pricing actions in the second half of the year should add about 80 to 100 basis points to yield, of course offset by any continuing mix issues.

Another factor affecting our yield has been rollbacks of our price increases. In our commercial line of business, we implemented significant price increases to our customers in the 6% to 7% range. This level of price increase has been the norm over the last five years of Waste Management. Local haulers often offer new business prices substantially below our prices. But lately we have seen our regional and national competitors aggressively reduce prices to obtain volumes. We had to take action to retain profitable customers. And in the second quarter, we saw the highest level of price rollbacks since prior to 2004.

But the bottom line earnings benefit of increasing our yield continues to exceed the earnings benefit you can get from purchasing volumes at low prices. So we will continue to maintain our pricing discipline even in the face of aggressive discounting by our competitors.

Despite these pricing pressures, we maintained customer churn at about 10% in the second quarter, a 60 basis point improvement from the same quarter in the prior year. On the landfill yield front, all of the waste streams had positive revenue growth from yield during the second quarter, continuing the trend that we saw in the first quarter.

On the volume side of the business, internal revenue growth from volume declined 1.7% in the quarter, which is flat compared to the first quarter of 2011. If you exclude the volumes associated with the Gulf Coast cleanup efforts in 2010, volume would have declined 1.1% in the quarter.

Although we saw a good seasonal uptick in volumes in the first two weeks of April, volumes hit a soft patch in May and June mirroring the dip in the US economy. Our commercial collection line of business saw year-over-year volume decline of 4.9% and our residential line of business saw a 4.2% decline year-over-year. Both of these collection lines improved sequentially from the first quarter. Industrial volumes declined by 3.6% on a year-over-year basis.

In the landfill side of the business, second-quarter 2011 internal revenue growth from volume improved by 1.1% compared to the second quarter of 2010. Internal revenue growth from volume for special waste was positive 8.1% year-over-year. This is an increase sequentially from the positive 2.9% internal revenue growth from volumes that we saw in the first quarter and we still see strength in the pipeline for special waste volumes.

C&D volumes declined 7.8% year-over-year and MSW internal revenue growth from volume was negative 7.5% year-over-year. Income from operations in the collection line of business improved slightly during the second quarter when compared to the same quarter last year. We increased our income from operations despite the declining volumes and increasing cost inflation in the price of tires, lubricants, and steel parts. These maintenance-related costs have risen between 10% and 40% from the same quarter of 2010, reflecting the worldwide increase in commodity prices.

As we expected, income from operations in our waste-to-energy line of business declined in the second quarter compared to the second quarter of 2010 by $0.02. The expiration of a long-term electric power capacity agreement in South Florida had a negative $6.6 million effect in the quarter. Also affecting the decline were upgrades to our acquired facility in Virginia and increased costs for fuel and chemical usage.

For the rest of 2011, we expect the third and fourth quarters to be flat year-over-year for our waste-to-energy business and for earnings to begin to increase in the first quarter of 2012.

Turning to our recycling business, increased commodity prices and volume contributed about $0.03 of positive year-over-year earnings per diluted share in the second quarter of 2011, which is similar to the first quarter. Commodity prices have increased approximately 25% when compared to the same quarter last year. If prices continue to remain strong, we expect to see about a $0.03 to $0.04 earnings per share benefit for the second half of the year.

With respect to solid waste volumes, we certainly expected to see stronger seasonal improvement during the second quarter. Landfill volumes have remained positive while the collection volumes have continued to show weakness. One positive in our collection business is that service increases have exceeded decreases for the second consecutive quarter. Of course in the third and fourth quarters, we will have to overcome the increase in volume that we saw last year from the Gulf Coast clean up which added about 1.7% to volumes in the third quarter and about 0.8% in the fourth quarter.

Volumes look slightly better in July but given our weak first-half volumes, we now expect to see volumes in the negative 1.5% to negative 2.5% range for the full year.

In response to the current business environment and our outlook for volumes, we have instituted yield improvement and cost containment plans. From a yield point of view, in order to strengthen our pricing in the second half of 2011, we have increased our environmental fee and accelerated our price increase programs. By doing this, we expect to be able to achieve our goal of 2% yield for the full year.

We have also implemented a cost containment program to rein in our increasing costs. This program includes reducing travel and entertainment, eliminating discretionary spending, and eliminating certain positions. We estimate that controlling these costs will add approximately $30 million to $40 million of income from operations when compared with the third and fourth quarters of 2010.

Of course, we also realized that you have to spend some short-term money to get long-term benefits, and we will continue to invest in system upgrades, our innovation and optimization programs, and customer-focused growth. We believe that incurring these costs today will ensure that we are a stronger company in the future, but we also have to be mindful of the present conditions and cut costs wherever we can.

For the remainder of the year, we expect recycling commodity prices to remain strong, and for our waste to energy operations to achieve earnings similar to 2010 second-half earnings.

Our cost programs and growth initiatives will continue to progress, but we expect to see weaker volumes in the second half than we originally planned. Consequently, we now project full-year adjusted earnings of between $2.14 and $2.18 per diluted share.

Finally, today I am excited to announce the acquisition of Oakleaf, the largest waste broker in the United States, with annualized revenues of about $580 million. This acquisition provides us an opportunity to add a significant amount of collection and disposal volumes to our system. In our discussions with Oakleaf, we also recognized that they have some compelling value propositions that they can provide to customers, particularly in the commercial property and food and retail segments. It is similar to what we are doing in those segments through our customer-focused growth efforts.

We expect that their excellent sales, management, and service teams will greatly increase our penetration in those markets by providing value-added environmental solutions to customers. At the same time, we believe we will be able to benefit both their current customers and their extensive vendor hauler network to create a win-win situation.

The Oakleaf transaction provides great value and great opportunities for Waste Management. We look forward to our new partnership, and we welcome the Oakleaf team to Waste Management.

With that, I'll turn the call over to Bob.

Thank you, David. I will begin by discussing operating costs. These costs increased by $144 million in the second quarter to 63.9% of revenue. The biggest contributor was cost of goods sold, which increased $95 million in the quarter, mainly because of rebates due to higher recycling commodity prices and volumes. Note that these higher commodity prices and volumes net of rebates resulted in an increase in our earnings per diluted share from our recycling operations of approximately $0.03 in the quarter.

Direct fuel costs increased approximately $39 million, primarily because of a 33% increase in price per gallon of diesel fuel. Subcontractor costs increased $6 million in the quarter, primarily relating to the increased fuel costs at our transfer operations. In the second quarter, fuel surcharge revenue continued to offset the increased costs of direct fuel and fuel increases included in subcontractor costs.

Maintenance costs increased $17 million primarily related to the higher cost for parts and supplies, tires, and lubricants at our collection and landfill operations. As David said, we have seen prices for these items increase between 10% and 40% year-over-year generally in line with higher commodity prices.

Operating expenses increased $24 million due to acquisitions made within the last 12 months. And foreign currency translation for our Canadian operations accounted for an increase in operating costs of approximately $8 million.

SG&A costs increased $37 million year-over-year and as a percentage of revenue, increased 50 basis points to 11.4%. The increased costs in SG&A primarily relate to our strategic growth plans and our cost reduction initiatives and are in line with what we discussed on our previous conference calls this year.

Our growth initiatives, which include Medical Waste and Baxter, had a negative $0.03 per dilutive share impact on the quarter. When we gave guidance for the year, we described the initiatives to reduce costs and improve efficiencies in areas like procurement, routing and logistics, and the centralization of certain functions. We spent approximately $19 million on these initiatives in the second quarter consistent with our expectation. We are now starting to see positive traction in procurement where we have $5 billion in spend that we can go after. Given the positive results that we have seen late in the second quarter, we feel confident that we will see the benefits in the third and fourth quarters that will more than offset the full year cost of these initiatives. We also expect that in the second half of 2011, consulting costs for these initiatives will decline by $22 million.

The remaining SG&A costs associated with these initiatives will support future revenue growth and will reduce operating expenses.

Interest expense for the second quarter increased $3 million compared with the prior year. On June 30, 2011, our weighted average cost of debt was 5.4% and our debt to total capital ratio for the quarter was 57.7% consistent with our target ratio of about 60%. The floating-rate portion of our total debt portfolio was 18% at the end of the quarter. During the second quarter, we amended our $2 billion revolving credit facility, significantly reducing the cost of the facility and extending its term to May 2016. The credit markets had improved significantly since we executed our agreement in June of 2010 and we viewed this as an opportunity to meaningfully reduce our future interest costs. We estimate that we should save approximately $5 million in interest expense during the second half of 2011.

Our income tax rate as reported for the second quarter of 2011 was 34.5%. For 2011, we expect the recurring effective tax rate to be approximately 35%.

Turning to cash flow, second-quarter 2011 net cash provided by operating activities was $478 million. This is flat compared to the second quarter of 2010.

Our capital expenditures for the second quarter were $280 million, $60 million higher than the second quarter of 2010 and consistent with our plan to increase capital expenditures in 2011. We still anticipate spending between $1.35 billion and $1.45 billion on capital expenditures during 2011.

Our free cash flow for the quarter was $206 million, which was $69 million less than the prior year quarter, largely due to an increase in capital expenditures of $60 million. We still expect free cash flow for 2011 of about $1.25 billion.

In the second quarter of 2011, we paid $161 million in dividends and we repurchased $105 million of our common stock, continuing our long-standing emphasis on returning cash to our shareholders. We also completed approximately $58 million in business acquisitions.

Now we believe that the actions we are taking to grow and to optimize our operations including the acquisition of Oakleaf are the right actions and with the help of our employees, the best in the business, we will begin to see the results of those actions in the second half of this year and into 2012.

With that, Nicole, let's open the line for questions.

(Operator Instructions) Hamzah Mazari, Credit Suisse.

Thank you for taking the questions. The first question is just surrounding pricing. Maybe if you could give some color, is the price discounting you are seeing from regionals broad based or are you seeing that more in certain markets?

And then what gives you confidence that the 80 to 100 bps of price actions you are taking are going to materialize? Because it seems like the mix towards temporary rolloff is not changing. It seems like the rollbacks likely are not changing, and it seems like we are not expecting any incremental volume uptick here which maybe help pricing. If you could just add some color there?

Sure, and I think you are exactly right, Hamzah. The mix issues, they were more dramatic at 60 to 80 basis points this quarter than they've been in the past and frankly we don't see those offsetting. And so what we need to do is we'll get that 80 to 100 basis points of benefit from the actions we are taking and hopefully that more than offsets the mix issues.

Now obviously if the mix issues get worse in the back half of the year, you can't predict mix is the problem. If they were to get worse in the back half of the year, obviously that would have more of an effect on that 80 to 100 basis point improvement.

You know, the first part of the question is interesting. I think everybody recognizes that we have generally been the price leader in the markets that we serve. And in the past what we have seen is that the regional and national competitors have basically drafted off of our price actions and all the rise -- all the tides lifted the rising boats. But what we -- we have always seen sort of pockets of places where I would say there wasn't as much pricing discipline.

Over the last couple of quarters, what we have seen is that those pockets have expanded to where it looks to us like it's virtually in every one of our markets that we are seeing folks that aren't drafting on our pricing actions anymore. They are taking actions that are designed more to get volume than to draft on our pricing actions. That has become pretty widespread throughout our markets obviously as the economy hasn't improved.

Now the reality is that you get -- you can never get as much benefit from volume as you can from pricing. All the pricing falls to the bottom line, but the volume doesn't. So we continue to recognize that the trade-off is positive, but -- so the trade-off is positive. We have been raising prices on our current customer base, where we've seen the deterioration again as you pointed out is in frankly in the pricing rollbacks in order to maintain our customers that are under attack and in the mix, which obviously we don't have any control over.

So if we see sort of the 20 to 40 basis points of mix in the back half of the year offset by the 80 to 100 basis points of pricing action, that how you get back to our 2% yield.

Okay, then just on the Oakleaf transaction, what kind of synergies are you targeting? I'm assuming that's $80 million number is both synergies and what buckets do you think those will come from? Does this transaction change any kind of your return of cash to shareowners? How should we think about that?

Yes, it shouldn't affect the return of our cash, the return of cash to the shareholders. From a synergy point of view, certainly there are synergies that will be obtained in the combination. But the primary driver of value here is the ability to manage the waste volumes that are collecting from the customers. And so very little of the benefit comes from synergies. The primary, the primary driver of value here will be managing that network.

Okay, perfect. Thank you very much.

Scott Levine, JPMorgan.

Good morning, guys. I was looking for maybe a little bit more color on the pricing subject. It's a pretty big shift it seems like within a relatively short period of time. So just maybe if you can provide a little bit more color on the types -- it seems regionally you are seeing more competition everywhere, but is it certain types of markets? Is it the urban markets or is it the more or less populated regions? Is it more within particular lines of business where you are starting to see competition pick up? Any additional color there would be helpful.

Yes. You know, Scott, like I said before, the interesting thing that has happened over the last couple of quarters is that has become more widespread throughout the business units. It started out at the beginning of the year, we recognized that there was going to be some pretty aggressive action in big residential contracts and we took account of that in our front year guidance. But it has spread to the rolloff in the commercial lines.

We just got through in the last two weeks going through all 25 of our geographic areas to look at their market business strategy for the next four years. And for the first time since I've been meeting with these folks on a quarterly basis, it was virtually every market that said they are seeing very aggressive pricing actions spreading starting out obviously in the residential line of business but now spreading to the commercial and the industrial line, and that's why you see our price rollbacks growing.

So in other words, I think the whole point of the pricing is a few things. First off, we are not going to back off on our price increases because the trade-off is still positive, but we are seeing more reductions from rollbacks, which is obviously competitively driven. And then we've got this mix issue that quite frankly we didn't see coming in the beginning part of the year.

You can't predict mix and it really hit us hard in the second quarter. We expect it to abate a little bit but we still expect to see some of that in the third and fourth quarters.

Got it. Follow-up, I think you mentioned some changes recently into the senior leadership team. I was hoping you might be able to provide some color on that and maybe an update with regard to the CFO search.

Yes, you know, when I look at the senior leadership team and the composition of the senior leadership team, what we were trying to do was to align the senior leadership team around our primary focuses. Right now that is all about our customer-focused growth efforts and our innovation and optimization efforts and I wanted to get the team aligned around that.

Bringing Jim Trevathan in from the field I think was something that we needed in order to make sure that we could drive both of those into the field. Those are the two biggest things we are working on and I needed someone with a depth of experience and with field credibility to be able to drive those big programs throughout the company. So I think Jim will be a tremendous benefit there.

On the CFO search, as you all know, it will be very difficult to replace Bob, but we are well on the way in our search and we fully expect that by the time he marches out the door on September 30, we will have his replacement in the chair.

Got it, thank you.

Bill Fisher, Raymond James.

Good morning. A couple of things. One on the $80 million of operating income improvement you are targeting. Is set in the second half versus the first half or is that kind of a year-over-year thing?

That is the second half versus the first half.

Okay, and on that to kind of roughly to see -- I know it's coming from both operating improvements and SG&A, but is there -- should the SG&A -- I think Bob highlighted some numbers. Should that just drop sequentially and kind of a half-and-half split if you will between on those two things?

I think what you'll see is the SG&A will still be up year-over-year. It won't be up as much as we had planned from the beginning. But the initiative, the customer-focused growth initiatives and the innovation and business optimization initiatives are going to continue and they are incremental to what we were spending last year.

So it's just -- what we have done is we have in sourced a lot of the consulting work and won't be needing that anymore and we have reduced heads in a number of places and in a number of functions. So I think that -- it will -- I expect SG&A for the year to be a little under 12% of revenue.

Okay, great. On Oakleaf, is one of the benefits next year as well -- to the extent another hauler in a local market serving a national account, you have hauling obviously there, you can internalize that and bring that collection in house, if you will?

Yes, there's really two approaches that we will take in every market. The obvious one is exactly that. But when you think about it, just to use an example, let's assume that a hauler has $100,000 of Oakleaf business in a particular market and that's 10% of their revenue. If $100,000 is 10% of their revenue, that means they have $1 million of total revenue. Right? And that also means that about 30% to 40% of that $1 million is disposal costs for them. So they've got $300,000 to $400,000 of disposal costs on their $1 million of revenue. That's 3 to 4 times the amount of revenue that Oakleaf has in that market, that $100,000. So when you think about it, you can get 3 to 4 times the revenue if you are able to get all of their disposal volumes in a line of business that has about doubled the margins of the collection line of business.

So if we're able to work with those haulers to get them to bring all of their volumes to our disposal and recycling facilities, we actually do a lot better than if we take over that business on the truck. We can do better on the order of magnitude so you are getting 3 to 4 times the revenue in a line of business that probably has double the margin. So you're getting 6 to 8 times more benefit if you can have that hauler bring their volumes to your landfill network and your recycling network.

So we're going to work with those local haulers to actually keep them in place but look, if we can't provide better disposal solutions for them that become a win for them and a win for us,

Great. And just real quickly that 80 to 100 basis point on price you are trying to get, would you say half of that is from that environmental fee increase or how do you think about that?

That's about right. It's about half, a little bit more than half from the environmental fee and then the rest from accelerating price increases into the year.

Okay, great. Thank you.

Al Kaschalk, Wedbush Securities.

Good morning, Bob. Good morning, David. I want to press a little bit on this mix issue and in particular what changed from sort of the April call to today or to adjusting guidance down, which seems like a significant number in a very short period of time.

Yes, you know, and frankly we were a little bit surprised by it. When you look at the first quarter, we had a slight negative from mix. In the second quarter, that went to $19.5 million and so it was a pretty dramatic shift pretty quickly. And most of that occurred in our southern group, so for example in South Florida, we have franchise business and in the franchise markets, our permanent rolloff is actually higher priced than our temporary rolloff, a little bit different than most of our other markets.

But the permanent rolloff business has started -- in Florida has started to feel the heat from the economy over the last few years, but actually there was a pretty good pickup in temporary business, so you had a mix in the rolloff line that went from higher priced to lower price volumes.

You've also had some residential contracts throughout the country where in order to maintain or extend those contracts, we will go in and offer a recycling service. So if you are doing a solid waste home at $12 a home and you go in and you do recycling at $2 a home, you've made a good business decision, but your yield look like it's going down. And then we've got a lot of special waste, as you know for the last few years and special waste is always interesting. The example I use is if you have a landfill where you're bringing in waste from a long distance, you might charge $18 at the hole but you charge $50 for transportation.

But then if the volumes come in from closer, you might charge $20 at the hole with no transportation. So you are actually making a great business decision. You are making more money but it looks like your price has gone down because of the mix of volumes.

So I think with the increase in special waste, with the change in South Florida, with the change in some of the residential contracts and then with our normal churn, we saw that hit us a lot harder in the second quarter than we have seen in the past.

But David, if I look at the 1.5% to 2.5% decline on that back out, the so-called large special waste item, that being the Gulf, what's the decline in the business now? Because you were basically suggesting flat heading into [the spring] but there's obviously these items you've talked about.

Yes, you know, when we look at volumes really what you are seeing -- I think what we are seeing in volumes mirrors the US economy, which is we just aren't seeing the West and the South come back, work through their housing problems as fast as we expected.

And then -- so what we have seen in the last few quarters is that the Midwest and the East have actually been doing fairly well. The South and the West have not been doing so well. And then this quarter what you saw was that the West and the South continued to have negative volumes but you also saw in May and June, you saw even some softness in the Midwest and the East, which I think is probably driven by the same effects, the same factors that you saw in the national economy.

So what we are seeing is that volumes continue to remain stubbornly low. We have talked about it since the beginning of the downturn, which is what you will see I believe is when you see the commercial volumes start to turn is when you will see the volumes turn for us and we just haven't seen that happen yet.

Okay, and if I may try to bridge or do the waterfall from the prior EPS guidance to the current, which I guess excludes any consideration of the Oakleaf, it looks like at midpoint, there's an $0.11 drop to the guidance. So I was wondering if someone could provide the buckets of which you would associate that $0.11 drop. So 50% is volume, 3% of it is price. What's is the --?

I would tell you that the drop is volume. That drop in volume, Al, is offset by the actions we are taking on the cost side. Remember, the actions we are taking on the yield side ought to just get us back to where our guidance was at the beginning of the year. And the actions we are taking on the cost side plus a little bit of improvement in our outlook for recycling commodity prices and recycling volumes.

And I would tell you that I think that's exactly right. The primary change is the volumes. The secondary change has been the price rollbacks. We did not go into the year expecting to see the level of price rollbacks we have. Obviously it's a more competitive market out there than we had anticipated and I think that make sense given where the volumes are. We expected there to be a little bit of a turn in the volume which obviously takes a little bit of the pressure off of both local, regional, and national players to lower price. I think as they have seen the volumes continue to remain weak, they have gotten more aggressive on price.

As I keep saying and saying and saying and I will continue to say, we are not going to take those actions, but we're going to have to respond to those actions by maintaining customers through price rollbacks.

So structurally don't expect any change in the price strategy. You continue to be firm on that, but as a result of that we should expect some net churn and higher churn in volume?

Not as a result of that. I would say it is just where the volumes were, the economy is right now.

What it comes down to, the churn rate in the quarter was actually slightly improved, but the problem is that we have to roll back prices to maintain those customers. So I don't think -- look, we have a choice. Whenever a customer calls in and says they got a lower price from someone in the competition, we have two choices. Let them go or maintain them by reducing their price as little as we can by offering them other services and things like that.

But we need to maintain those customers. So at the same time, we've got a pricing strategy that says we're going to continue exactly as we have been in the past getting those 6% to 7% type price increases and maintaining our new business pricing discipline. But we're going to have to be more aggressive to maintain customers.

Thank you.

Michael Hoffman, Wunderlich Securities.

Thank you very much, David and Bob. Not to be too maudlin here, but Bob, it has been a great run. I have really respected working with you and I wish you luck.

Thank you, Michael, I appreciate that.

Price -- 1Q '10, you had a price scenario that I'm going to try and possibly equate to what we are seeing in 2Q in the sense of it doesn't live up to your expectations. And you fairly quickly turned around to the system and said fix it and they did. We saw a rapid change in 2Q. Can you compare those two to us in the context of what you are dealing with and the probability of that ability to have that quick turn?

I think actually that's a great question, Michael, and that is what we have been spending a lot of time -- I would tell you we have been spending most of our time over the last probably three weeks working on, and I think you are exactly right. The parallel is very clear. The only difference is -- and so the organization will get it done. I don't have any doubt about that. We have already got the environmental fee rolling out. We've got the acceleration of our price increases in the pipeline. So the organization will respond. I don't have any doubt about that.

The difference that we've got between this year and that year because what you saw was we dropped below 1% and then we immediately snapped back well above 2%. The only difference you have between now and then is this mix issue. We didn't have the 60 to 80 basis points of mix headwind. And again, mix doesn't necessarily reduce your bottom-line earnings. In my examples, you are actually making more money but it looks like your yield is going down.

And so you would see exactly the same snap back if it weren't for these mix issues and the way we are looking at the mix issues right now, we are expecting them to continue in the back half of the year. So I think the corollary is identical. As soon as we see deterioration, we take action to do something about it and we intend to maintain that discipline.

Okay, and so another side of that question is you are being more proactive about defending long-standing business as opposed to allowing --

Right.

Okay. All right. Which that in itself isn't necessarily a bad thing either because the alternative is to replace it without being too long about this. If you had a customer churn at 10%, then you are talking about having customers for 10 years. So if you've held onto somebody for 10 years and you put them in at $3 a yard 10 years ago but raised prices 6% a year every year, you are somewhere in the $5 or $6 a yard now and the competitor is somewhere between $3 and $5 to try and pick it off.

You're exactly right, and when we look at it, we look at new business pricing, lost business pricing, and the business that we look at from a lost business pricing point of view, the business that we have is spectacular business. It's way above what our competition is charging for new business. And so the smart thing to do is to maintain those customers because you don't have -- obviously you don't have the acquisition costs for those customers, but you also have those customers already at great rates.

So you've hit the nail right on the head. The problem is that we have to spend our efforts defending the price and we are going to do that. I would hope that as folks recognize that we are not going to let go of customers as readily as we have in the past that they will realize that it's for their own company they are going to start a death spiral that probably doesn't end where they want it to end.

All right, then you have highlighted Florida very specifically and unfortunately there's three relatively sizable -- between Advanced Choice and Waste Pro, they are noted for being the price draggers in Florida. But the other thing you said -- so I can see where maybe that's is one of your problems.

But let me understand this mix other thing. So what I am basically hearing is that bankruptcies are increasing or basically people are going out of business that used to be permanent but the temporary would suggest that there's some economic recovery recurring as well.

Well, I think in South Florida I'm not sure if I would call it an economic recovery. It's a dead cat bounce, right? The rolloff volumes went down so dramatically that it's pretty easy for them to grow, and so you have actually seen a little bit of growth in the temporary business, but you have seen shrinkage in the permanent business.

All right, and then on the free cash flow side, it hit the goal for the rest of the year. You've done just under $500 million if I've got my math correctly for the first half. That means you've got to do $750 million-ish in the second half. And you are noting this $80 million that you are going to capture in savings between the yield and the cost cuts. So that would suggest to me the run rate was [670] going in. That seems stronger than the normal -- its a [55] second-half/[45] first-half mix of your free cash.

It's more like -- it will be more like last year, where we had stronger free cash flow in the second half of the year than we have had previously. And that is what we are expecting to see. The second half --

But the degree of that strength would suggest that it's not great news to be able to tell everybody you're lowering your guidance. I get all that, but reading through it, the degree of that strength would say there is -- that if I roll into '12, I'm going to be up in free cash in '12 -- 2012.

We haven't given guidance on that yet but, Michael, I don't know why that wouldn't be true.

Right, just following the logic of all of this, that 2012 has got to be higher than 1.25 based on the way you are describing how this plays out in the second half.

Well, I think that's right. We are taking a lot of steps. We are paying the price in SG&A now to grow our business, to reduce our costs, and we should see the benefits of those, some of it in the second half of this year but accelerating into 2012 and later years.

Okay, so not to press a fine point, but so where is the Board's tolerance or patience with regards to the show me this is really happening?

You know, Michael, it's interesting because obviously you have to spend money to make money and we had a lot of opportunities to get long-term benefits. We identified at the beginning of the year we knew we had to spend money in order to get those benefits. That's just the nature of the beast. But we also expected volumes to bounce back.

Look, the reality is that these dollars that we are spending to benefit our future wouldn't even be recognized if we were showing volume growth and continuing to get 2% plus yield. It wouldn't be affecting our numbers whatsoever. We happen to be spending money for the future in the [teeth] of volumes of price that aren't as strong as we thought they would be.

And so you have two choices, right? You either say okay, we are going to cut the spending because we are not seeing the volumes and the price come in. Or you say we are going to continue to do what we think is the best thing for the long-term of this company and you spend despite the fact that you are seeing -- because you know you're going to get the future benefit and you keep spending despite the fact that it's in a tough year.

I said it in my script, it's a tough balance to do for the long-term and the short-term, but we are going to spend to benefit the long-term, but on the other hand, we are also going to go to our organization and say, look, we've got to find everywhere we can to cut out costs other than the investment in the future.

So when you talk about a board, our Board is obviously a long-term thinking Board. We are a long-term thinking management team and so I think they have -- as long as they are seeing the progress, I think they have got the right amount of patience.

I think they recognize the journey is not a straight line.

Okay. And clearly they target an $80 million number. You can't tell the market that and not actually deliver on it. So you must have an awful lot of visibility on that number.

Well, you know, as we said, a good part of that is from pricing actions and we have already done that. Now if we had to roll that back dramatically -- but we built into the plan what we think is a reasonable amount of rollback of that. And so that could affect it. And then on the cost side, we have already taken a lot of the action to pull those costs down. So yes, we are pretty confident there.

Then lastly, this is in public record, so the Woodland Texas municipal bid, you guys lowered the price pretty significantly to keep it. It was $12.50 a home and now you are in $9, so that seems pretty -- is it taking that kind of change to be able to keep business?

Yes, it is a different -- we also had a different level of service in there. So that's -- I think that's a great point. That's a place where it looks like we're reducing price but basically what we did was we went in with different service levels and we actually do just as well on that contract than we did at the higher price. So it's one of those actions that is a good business decision but that also makes it look like you're dropping price.

Okay, thanks again and, Bob, good luck.

Corey Greendale, First Analysis.

Good morning. I apologize in advance for -- this is going to be some serious dead horse beating maybe, but if you just bear with me. First question is, Bob, I think you commented that you think that increasing the yield level won't hit volumes. Could you just square that with the idea that right now you are having to rollback price more? And if it's not going to hit volumes, why not aim for 2.5 points of price instead of 2 points?

I think what I was saying, Corey, first of all, I think we've shown over time that raising prices hasn't really impacted our churn rate. Our churn has between 9 and 11 ever since I got here 12 years ago. It stayed in that range and it's still in that range now. So the impact of raising prices hasn't been a significant impact in how our volumes have performed.

Now we have increased rollbacks in the second quarter and that may indicate a higher level of competition, but we're still going to get 2% yield even with a little bit higher level of rollbacks. We think the real driver of the volumes isn't the price increases. It's the economy and where businesses are right now.

Okay. And David, I think you said that the rolloff --relative temporary rolloff strength was a dead cat bounce and if that is right and assuming the cat doesn't keep bouncing indefinitely, wouldn't that suggest that back half of the year what you are going to see probably is more out and out weakness versus a mix issue?

Yes, from a volume perspective -- you know, Corey, we just haven't seen -- it's actually very interesting to watch our volume reports because what you will see is a couple weeks where you start to think that you are turning the corner and we have actually had a couple of weeks where our volumes were not only above 2010 volumes at least in the rolloff and the disposal side -- where they are not only above 2010 volumes but they have been above 2009 volumes. And then all of a sudden they flatten out.

And then on the commercial side, we just haven't seen -- unfortunately I think that cat has been dead for a while and we just haven't seen any bounce on the commercial side. That to me is indicative of the fact that there is not a lot of strength on the consumer side of the United States economy. There's strength on the manufacturing side. There's strength on the service side, but right now there's not a lot of strength on the consumer side.

Okay, could you just give your thoughts on kind of the coordination between you all and Houston and the field in terms of some of the price rollbacks that you are seeing? Is that completely consistent with what you would've expected in Houston and with what you would have advocated for? Or would you say that the field has maybe been a little bit more aggressive in rolling back price to keep volumes than you would've liked and you are looking to change that?

No, I think actually they are doing a good job. Again, it comes down to the question of how fast could you add customers to replace the customers that you let leave you? And at what rate are they leaving you? When they are leaving us at the highest rate that we've seen from a rate per yard, rate per pole on the industrial side, when they are leaving us at the highest rates we've seen in a number of years, those are the types of customers -- not the highest rates in a volume point of view but the highest rates from a price per yard and a price per pole point of view -- those are customers that you don't want to lose.

And then you've got to out and acquire new customers to replace them if you want to maintain your volume and that costs you some money and in this environment, that's not an easy thing to do either without lowering your price.

So it's the right strategy for us. Can we do better? Yes, we can do better. We can save them at higher prices and we've got our folks focused on doing that, but it's the right business decision to make and it's one that we've got to continue to make.

Okay, and then I had a couple of questions on Oakleaf. I presume it's a relatively capital-light model but can you just give some sense of what their CapEx is?

Yes, their CapEx is fairly low. Obviously for us, we have got, as I said before, we've got sort of the two business models. We've got the one business model where we will have to go in and become the hauler, but our preferred method would be to work with the vendor network to allow them to offer other services that we have whether it's recycling, lamp tracker, other types of services and then be able to offer disposal and recycling services to them across their business line. That's our preferred method.

If we go in a market where we go about that method, obviously there's no additional capital because the containers will stay in place. If we aren't able to work out those types of arrangements with the vendor network, then we're going to have to go in and replace them and spend some capital.

But we don't see that as I recall, Bob, that was sort of in the $10 million to $15 million on a high end that we would have to spend in capital in the back half of the year. And again, if we can work with the vendor network in a win-win manner, we won't even have to spend that.

Okay, and could you, David, just to revisit I think in answer to Bill Fisher's question, you were talking about being able to influence the people in the network to use your disposal. Can you just elaborate on that? What is it about owning Oakleaf that makes that a more -- an easier process than it would have been discussing that with those people when you didn't own Oakleaf?

Yes, well, it makes it easier because we now control a big portion of their collection business. Right. In the example I used, if 10% of their business is Oakleaf business, we would prefer to leave that in place and work out an arrangement with the vendor hauler where they bring us recycling volumes and disposal volumes at a level that's cost-neutral and maybe even cost-beneficial to them. So that is a huge win for them. It's a huge win for us.

The reason why we are able to do that that we aren't able to do now is that we don't have 10% of their business in that market isn't controlled by Waste Management. As of today, it is. And so if you want to maintain that business, then we've got to look at the other parts of our business relationship to make it a win-win. It's not a win for Waste Management if one of our vendor haulers just simply maintains that $100,000 of business in the market and we do nothing. That is not a win for Waste Management.

There's only two ways we can win. One, putting it on the back of our trucks and bringing it to our landfill, but then we only get back 10% of the business. If we can get 100% of their volumes into our disposal network, that's a huge win for us and if we can do it at a cost neutral or even a cost beneficial number to the vendor hauler, it's a win for them.

And so it's a bigger win for us and a good win for them and we see that as positive for everyone.

Okay, I understand. And do you have a best guess on when that transaction is going to close?

It closed today.

Oh, it closed today. Good. Thanks very much.

That is all the time we have for questions today. Are there any closing remarks?

Yes, what I would like to say is a couple of things. Obviously we are not happy with what happened in our second quarter and hopefully what you have heard today is that we are going to take actions to get this thing right. But we are not going to do that by sacrificing the future.

And then I think a couple of other things. On the Oakleaf transaction, I think we would be remiss if we didn't mention the amazing work that our team did putting this together. We've been in discussions with them for quite a long time, but we got into some very serious discussions over the last month or so and I would be remiss if I didn't mention John [Sein] and our legal team, and Joe Cassin, and Buddy West and Sean Hill in our finance group and Scott Stadelman in the sales department and tons of other people that have been working night and day to get this deal done.

It was a phenomenal job by them. This is going to be a great opportunity for Waste Management. It's also going to be a great opportunity for the folks at Oakleaf. So we are really looking forward to getting to know our new partner and I can promise you we will be meeting with them regularly to let them know what's going on, as we will with the vendor/hauler network.

And then finally, I wanted to say this is actually Bob's last quarterly conference call and from my point of view, we have been together now for about seven years. Bob has been a great business partner, but he is a better friend than a business partner and we will certainly all miss his sage advice as he wanders off to retire to his beloved Kingwood.

So Bob, congratulations on the retirement and I am sure I will be visiting your house often.

Please come out.

Thank you all.

Thank you for participating in today's Waste Management second-quarter 2011 earnings release conference call. This call will be available for replay beginning at 1.00 p.m. Eastern standard time today through 11.59 p.m. eastern time on Thursday, August 11, 2011. The conference ID number for the replay is 73675301. Again, the conference ID number for the replay is 73675301. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. You may now disconnect.