美國廢棄物管理公司 (WM) 2011 Q3 法說會逐字稿

Good morning, my name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management third-quarter 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).

At this time, I would like to turn the conference over to Ed Egl, Director, Investor Relations. Sir, you may begin.

Thank you, Brandy. Good morning, everyone, and thank you for joining us on our third-quarter 2011 earnings conference call. With me this morning are David Steiner, Chief Executive Officer, and Steve Preston, Executive Vice President of Finance, Recycling and Energy Services.

David will start things off with a summary of the financial results of the quarter and a review of the details of our revenue growth, including price and volume trends. Steve will cover operating costs and the financial statements. We will conclude with questions and answers.

During our statements, any comparisons made by David and Steve unless otherwise stated will be with the third 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 for the release include important information that you should refer to.

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 those 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.

Additionally, during the call, David and Steve will discuss our results on an as adjusted basis including revenue, net income, earnings per fully diluted share, which they may refer to as EPS, interest expense, operating expenses, SG&A expense, and expenses as a percent of revenue. These financial measures have been adjusted for items management believes do not reflect our fundamental business performance or are not indicative of our results of operations. All these measures in addition to free cash flow are non-GAAP measures.

Please note that our financial results as well as the projected EPS, free cash flow, and all other forward-looking statements except those specifically pertaining to Oakleaf do not incorporate any benefits benefits or costs associated with our recent acquisition of Oakleaf or Oakleaf operations. Please refer to the reconciliation for the most comparable GAAP measures in the Form 8-K and the earnings press release footnote schedule attached thereto, which can be found on the Company's website at www.WM.com.

This call is being recorded and will be available 24 hours a day beginning approximately 1 PM Eastern Time today until 5 PM Eastern Time on November 10. To hear a replay of the call over the Internet, access the Waste Management website at www.WM.com. To hear a telephonic replay of the call dial 800-642-1687 and enter reservation code 96225430. Time-sensitive information provided during today's call, which is occurring on October 27, 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'll turn the call over to Waste Management CEO David Steiner.

Thanks, Ed. Good morning from Houston. I want to welcome Steve Preston on his first earnings call as our Executive Vice President of Finance. As you know, Bob Simpson retired on September 30 but he worked hard up to that day to make the transition a smooth one. We all miss Bob of course, but we are excited to welcome Steve to the team. Welcome, Steve.

We are pleased with the results of our operations for the third quarter as we overcame a number of headwinds from a sluggish economy, $0.01 of negative impact from Hurricane Irene on the East Coast and continued investment in our growth initiative to produce $0.63 of diluted earnings per share in the quarter. We took a lot of cost out in the quarter and we will continue to attack cost.

However, we will also continue to focus on our long-term cost and revenue initiatives because in a slow growth environment, those initiatives will help to drive earnings improvement.

Revenue for the third quarter increased by $181 million or 5.6% from the prior year period. This is the seventh consecutive quarter of positive year-over-year revenue comparison. We achieved this despite the third quarter of 2010, having benefited significantly from the Gulf Coast cleanup effort. Excluding Gulf Coast volumes from the comparison, volumes would have been down only 0.3%, which was the best performance we have seen in years. Higher commodity prices, improved recycling volume, acquisitions, year-over-year internal revenue growth from yield and surcharge increases all contributed to the revenue growth.

Internal revenue from growth from yield on our collection and disposal operations was 1.6% in the quarter and is at 2% year-to-date through September 30. The quarter's results is consistent with our results in the second quarter of 2011, demonstrating our continued pricing discipline. The combined internal revenue growth from yield of the industrial, commercial, and residential lines of our collection business was 2.1% in the third quarter. Commercial and industrial yields were at 3% and 2.2%, respectively.

IRG from yield in our residential line of business was 0.8%. We continue to meet with municipalities that are seeking concessions and we are working with them to change service levels, extend contracts, or offer value propositions that would benefit both municipality and waste management. These are good business decisions but they have negatively impacted our residential and our overall yield.

In the third quarter of 2011, we saw improvement in our price rollbacks as they returned to more normal levels after a spike in the second quarter. We maintained customer churn at about 10.7% in the third quarter, a 10 basis point improvement from the same quarter in the prior year. We need to continue to focus on retaining our customers and we expect our churn rate to improve into 2012.

On the landfill yield front, the special waste and C&D waste streams have the sixth consecutive quarter of positive internal revenue growth from yield. In recent months, we have increased our environmental fees as our environmental costs continue to rise. We have also continued our general price increase program and those actions will be reflected in our fourth quarter yield results.

However, a change in contract pricing at one of our waste-to-energy operations in South Florida will have between a negative $5 million and a negative $6 million impact on yield in the fourth quarter. Excluding this from our yield calculations, we expect our fourth-quarter results to bring us very close to achieving 2% yield for the full year.

On the volume side of the business, internal revenue growth from volume declined 2% in the quarter. If you exclude the volumes associated with the Gulf Coast clean-up efforts in 2010, IRG from volume declined only 0.3% in the quarter. Our commercial collection line of business saw a year-over-year IRG from volume decline of 4.1%. And the residential line of business saw a 3.4% decline year-over-year.

Both of these collection lines improved sequentially from the second quarter and are the best IRG volume results that we have seen in 2011 for these business lines.

Industrial IRG from volume declined by 2.9% on a year-over-year basis, which is an improvement from the second quarter of 2011. So, collection volumes are improving but not as fast as volumes from recycling which, on an organic basis, grew 8% year-over-year.

If we include recycling volumes we obtained from acquisitions, our recycling volumes have increased 14% year-over-year. As you know, customers are becoming more interested in diversion and we have a great network of [mercs] to support this demand. We will continue to invest in recycling assets to better meet our customers' needs.

In the landfill side of the business, third-quarter 2011 internal revenue growth from volume improved by 1.5%, compared to the third quarter of 2010. IRG from volume for special waste was a positive 3.6% year-over-year. IRG from C&D volume declined 0.4% and MSW volumes declined 4.8% year-over-year. The MSW internal revenue growth from volume improved 270 basis points from the second quarter of 2011.

Income from operations in the collection line of business improved 2% in the third quarter when compared to the same quarter last year. This was our highest third-quarter income from operations and our highest margin in the collection lines of business in more than six years. We increased our income from operations despite lower volumes by flexing costs and maintaining our pricing discipline.

In our waste-to-energy line of business, income from operations declined $10 million primarily related to the expiration of a long-term power capacity agreement in our South Florida market. In the fourth quarter, we expect income from operations in our waste-to-energy business to be flat when compared with the fourth quarter of 2010. Our position as a leader in the North American recycling business continues to be a strength in 2011 with increased commodity prices and volumes contributing about $0.05 of positive year-over-year earnings per diluted share in the third quarter. Commodity prices have increased approximately 29% and recycling volume including acquisition have increased approximately 14% when compared with the same quarter last year.

In the fourth quarter, we expect commodity prices to decline modestly from their current levels. And we expect earnings per diluted share for recycling to be about flat compared to the fourth quarter last year.

As you may recall, recycling prices in the fourth quarter of 2010 remained strong throughout the quarter. But we expect 2011 to be more in line with long-term historic trends with commodity prices showing a seasonal downtick in the fourth quarter. We saw the beginning of that seasonal downtick in late October.

The integration of Oakleaf into our Company is progressing as we expected. Since the acquisition, we have closed on several new business opportunities and expanded some existing contracts. We are continuing to work with the customers and the third-quarter hauler network to ensure a smooth transition.

Our relationship with the third-party haulers is strong and we are working with them to find solutions that will benefit customers, haulers, and waste management. With the holiday season upon us customers want to ensure that any service transition will not interrupt their seasonal business. So the integration will slow somewhat over the holiday season and will speed up beginning in the first quarter of 2012. Consequently we should see the benefits from the Oakleaf acquisition began to ramp up in the second quarter of next year.

In the third quarter of 2011, we saw the best volume performance we have seen in some time, which is encouraging. However, we need to see further strength in our MSW and commercial lines before we can be comfortable that this is a sustainable trend and that we'll see positive year-over-year volume comparisons.

So for the remainder of the year, we expect volumes to follow the same pattern as the rest of the year at about negative 1.5% to negative 2%, which makes it important that we maintain our focus on cost and pricing. By doing so we still expect to achieve full-year adjusted earnings of between $2.14 and $2.18 per share -- per diluted share.

And with that, I'll turn the call over to Steve.

Thank you, David. It is great to be here. Sure beats competing against Waste Management. I'm also looking forward to meeting many of you on the phone in the near future as I get out on the road.

So I'm going to give an overview of our cost and our cash flows and then we will open the line up for some questions.

Our operating costs increased by $172 million in the quarter to 63.2% of revenue. The biggest contributor was cost of goods sold, which increased $92 million in the quarter mainly because of rebates to recycling customers due to higher recycling commodity prices in volumes.

Direct fuel costs increased about $39 million. That was primarily because of a 32% increase in price per gallon of diesel fuel. And in the third quarter of the fuel surcharge revenue actually offset the higher cost of fuel completely.

Labor cost increased $21 million in the quarter, primarily related to merit increases. Tuck-in and other acquisitions contributed about $17 million to the increase in foreign currency translation, [part A] in operations accounted for an increase of about $7 million. We also achieved approximately $28 million of benefit in operating expense in the third quarter from the actions that we took to reduce discretionary spending and eliminate positions as well as from the expanded rollout of our procurement initiatives. We expect to see an increase in benefit from those initiatives in the fourth quarter even more so going in 2012.

SG&A costs in the third quarter were flat year-over-year, but improved as a percentage of revenues by 60 basis points at 10.8% despite the fact that we spent about $10 million on those procurement and cost reduction initiatives.

Our third quarter of 2011 was affected by several special items that were identified in our press release. As we normally do, we have adjusted for asset impairments and restructuring costs. We also excluded the accounting impact on our environmental remediation obligations due to changes in the 10-year treasury rate which has declined from 3.5% to 2.0%.

And finally, last year, we excluded the negative impact of creating a $28 million closed landfill remediation reserve. So in the third quarter, we also excluded a $9 million benefit from reducing that reserve when a lower-cost remediation was selected by the EPA.

And as we mentioned in the second-quarter conference call, we also adjusted for Oakleaf integration costs and operations.

Interest expense for the third quarter decreased $9 million compared with the prior year period, primarily due to the improved pricing of our $2 billion revolving credit facility which was amended in May of 2011. And also at the end of the quarter, our average -- weighted average cost of debt was [35.3%], our debt to total capital ratio for the quarter was 60.5% -- that was consistent with our target ratio of 60% -- and floating rate portion of our total debt portfolio was 17% at the end of the quarter. Our income tax rate as reported for the third quarter of 2011 was 32.3%. The reduction in our third-quarter rate is primarily due to audit settlements and adjustments from filing our 2010 income tax return that benefited our EPS by about $0.02 a share. For the full year we expect the recurring effective tax rate to be approximately 35%.

Turning now to cash flow, third-quarter 2011 net cash provided by operating activities was $659 million. In the third quarter of 2010, we received a federal tax refund of $65 million. So if you exclude that item, net cash provided from operations increased $47 million or 7.7%.

Our capital expenditures for the third quarter were $313 million leading us to a free cash flow for the third quarter of $372 million, which was $52 million less than the prior year. That was largely due to an increase in CAPEX of $51 million as well as the $65 million federal tax refund we received in 2010. We still expect our free cash flow for 2011 to be about $1.25 billion.

In the third quarter of 2011, we paid $158 million in dividends. We also repurchased $360 million worth of our common stock, continuing our long-standing emphasis on returning cash to shareholders. In October, we also repurchased an additional $47 million in common stock to complete our Board-authorized share repurchase program for 2011 of $575 million.

And finally, we completed approximately $488 million in business acquisitions, including Oakleaf, during the third quarter.

So in conclusion, we are entering a fourth quarter with a stable price in volume environment, solid momentum in our procurement and cost reduction initiatives as well as good progress on the Oakleaf acquisition.

So with that, Brandy, let's open the line for questions.

(Operator Instructions). Michael Hoffman with Wunderlich.

Good morning and thank you for taking my question. Welcome on board, Steve.

Thank you.

On the recycling price issue, it would appear that 2012 we are not going to fall off of a cliff, but in all likelihood prices will probably average lower than they have in 2011 and can you talk about any kind of a metric that you have, a $10 move equals what or think about what that headwind would look like going into 2012?

Yes, if you look at recycling prices and obviously it is driven by fiber, but a $10 movement in fiber prices equates to about $0.01 a year.

Okay, equals $0.01. All right. That's great, thanks. And then on the free cash flow side, you know the word about, it makes me think of people in New England using the word yonder and it means around the corner 20 miles away. How do we think about what about is as you think about the free cash? And more importantly to make $1.25 billion either you are going to have one heck of a cash from ops number, which sounds like a big working capital shift, or you spend less money. How do we get there based on where you were year-to-date?

Yes, well, we certainly have some hard work to do to hit that $1.25 billion up target, but we do believe it is achievable. It is certainly, Michael, not in the bag. We have to be very focused I think in the fourth quarter on managing working capital as well as especially focusing on capital expenditure.

So I think it is going to come from a number of places, but we are really going to have to focus on every one of them to bring that number over the line.

But you stay with your budget of $1.35 [billion] in CAPEX? Given that you have got 100% bonus depreciation this year and maybe not next year?

I think we stay with our budget of 1.35 for the time being although we are fourth quarter is a big quarter for CAPEX. We are looking very hard at the entire list of expenditures that we are expecting to make this quarter and making sure that every $0.01 we put out there is well spent.

So there is certainly incentive to do it this year because of bonus depreciation. But I think we are also going to be very circumspect in what we -- in the amount that we spend.

Okay and then there was a slide presentation you did recently at a conference, it is slide 19 and it showed a cost saves and then sort of a second half, the benefit. And basically the conclusion was between the third full quarter and the fourth quarter there ought to be a $0.05 improvement.

Are we going to still see that $0.05 and that means then it's a $0.68 number in the fourth quarter for earnings?

I think there are a number of leading pieces there. I think in terms of the cost improvement we still expect to see strong sequential improvement between the two quarters. And that is going to come really from a number of areas, when you look at that $0.04 to $0.05 to the $0.09 to $0.10 from third to fourth quarter, that includes a number of components. Right? It includes the revenue improvement initiatives that someone -- which David went through. Environmental surcharge price increases is included, the labor reductions that I mentioned, the procurement initiatives. So there are a number of different pieces that go in there. And so I think every one of those components is actually going to see some sequential strength from third to fourth quarter.

Now some of that is going to -- from a year-over-year basis going to be somewhat offset by the commodity pricing that you mention because we had a strong benefit from commodities in the third quarter. Fourth quarter to fourth quarter we are going to see less of that.

So to an extent some of that benefit we are seeing on the cost side is going to be -- is going to serve to offset the commodity price benefit we got in the third quarter.

So that slide should be revised and it shouldn't be $0.05 improvement sequentially then?

Michael, it is probably not a full $0.05. Remember, as Steve said that is both cost and revenue. We are probably $0.01 behind, maybe $0.01, maybe $0.02 behind on that, mainly coming from our growth initiatives. But then as Steve mentioned we got a $0.05 benefit in the third quarter from recycling. We don't expect to get a $0.05 year-over-year benefit in the fourth quarter.

Fair enough, I just wanted to understand how the numbers should play out as far as the model. And then the tax rate if you are going to do 35% for the year, that means fourth quarter has to be much higher. What are you using for your fourth quarter to get to the 35 for the year?

Right, so the 35 for the year was sort of I think I -- were the words I used for the recurring tax rate. What we are trying to do is basically say the base, the base tax rate that we are looking at is $35 million, but periodically as we announced in the quarter, we have adjustments that would affect that number.

So in the fourth quarter right now, if you look at that 35% that would not assume any of those adjustments, but I don't want to call that yet. We may have somewhat of an impact from fourth-quarter tax adjustments. But at this point that is -- think of that as more of the recurring underlying tax rate of the business.

And then if BP was $47 million or not 47, a point -- 1.7% in the third quarter, what is it in the fourth quarter?

It's about 80 basis points in the fourth quarter.

Okay, thank you so much.

Hamzah Mazari with Credit Suisse.

Thank you, good morning. The first question is just on pricing. Were you expecting pricing to accelerate relative to the second quarter, and then maybe if you could just comment on where you are seeing increased competition, in which markets. And is the pricing headwind all due to these Reg E contracts and maybe just touch on how aggressive you are being on the landfill side?

Yes. So when we look at pricing from a competitive point of view, I think we see a fairly stable pricing environment. In a slow economy you know I would rather see that stable price environment where it was three years ago and a great economy at 3% to 3.5% but in a slow economy you would expect there to be a little more competitive reaction. And we have seen that, but it hasn't been anything dramatic.

So when we look at the third quarter, most of the pricing actions that we took -- the raise in the environmental fee and moving up price increases -- most of them occurred throughout the quarter so we didn't get the full benefit in the third quarter. We certainly will see that uptick in the fourth quarter.

So in the third quarter, it was offset a little bit by residential pricing, both CPI and price rollbacks that we have had to put in to maintain contracts. But again, those are good decisions. We are going to take the right pricing actions to maintain the right business. And so we continue to have rollbacks, albeit at a much lower level than in the second quarter. We continue to see residential pricing a little bit weak. So that was that headwind in the third quarter.

In the fourth quarter, again we have got that one big contractual headwind in South Florida from our waste-to-energy plant. If you exclude that we would expect to see improvement in the fourth quarter on the pricing side.

And just on the landfill site, what are you pushing through on price right now and how much additional running room do you think you have there?

Yes, I think we have a lot of additional running room. Basically if you look at the overall landfill pricing it's up about 1.3% but we still have plenty of room to go there.

And just on Oakleaf, how much -- how should we think about that business in terms of what it is generating right now on EBITDA? You've said you have you can bring that up to $80 million of EBITDA. How long does that process take? What is the business generated right now and what do you have baked into your guidance for Oakleaf?

So, Oakleaf right now, I think, was about a cost of $0.01 a share in the quarter and that is really the mixture of fully unintegrated Oakleaf plus any integration costs associated with that as well as higher interest expense. And think of the next two to three quarters as being heavy integration periods.

So I think in the next couple of quarters we would expect it to look roughly like we do now. I think some of those integration costs are going to hit sequentially over the next few quarters.

Getting into the middle of next year, we would really begin to see, we would expect to see a pretty significant ramp in the benefit from Oakleaf and that comes from really two, three primary areas. It comes from working with third-party haulers to expand our relationship with them so that if Oakleaf is giving a hauler business, we have the opportunity not only to get the disposal work on that particular haul, but to expand our relationship. So it's an important incentive to drive disposal volume to our facility.

Secondly, in a number of the markets Waste Management will be taking some of that volume and internalizing it. And then thirdly, there is a significant opportunity to consolidate the operational side of the two companies. We have -- many aspects of what both companies do are overlapping, and as we put those on one platform, we would expect to see the benefit. So as you ramp that up the next two or three quarters we would be sequentially taking some costs to drive that integration, some of that is going to be for streamlining, some of that is going to be for equipment that we put out in the field and repair. And then really sort of in the second quarter going through the third, fourth quarters of next year, we would expect to see that ramping.

Full year next year, I don't think it's going to be a significant impact, but the run rate coming out of 2012 sort of fourth quarter going into the following year is when we would expect to really be achieving that full benefit.

Got you, that's helpful. And just the last question, on SG&A on your long-term SG&A target, does that need to change now given the macro economic environment we are in as well as the sort of structural cost take-out that you plan to do? It seems like that is a little behind. Does that need to change or do you feel pretty comfortable with that?

No, I actually feel very comfortable with that but it is going to be driven primarily by technological upgrades. Right? I mean, when you look at our SG&A costs we have a lot of costs that are out in non-consolidated function. So you have got to drive those consolidations with technology. So, I fully expect to see that happen over the next two, two and a half years.

Right, great, thank you.

Scott Levine with JP Morgan.

Good morning. And welcome aboard, Steve.

First question, additional color on pricing. I think last quarter you had indicated that the Southeast in particular was challenging, and it was residential municipal that were the areas where you were experiencing the most pressure and I think you have affirmed that the latter is still true.

I was wondering if you could provide any additional regional color with regard to pricing additions across your entire footprint? Whether there are any changes versus three, six months ago perhaps?

Yes and I think when you look at our yield being pretty steady last two quarters, at 1.6%, the word -- again the word to use is stability. And so, we don't see any sort of unusual pricing action in any particular area of the Company. Where we have seen the most pricing pressure has been on the rollback side and then in the residential line. And then you have got -- like the South has certainly had struggles. Part of it is down in South Florida with our waste-to-energy plants, a lot of those contracts -- a lot of those disposable contracts were long-term disposal contracts. And they happened to be rolling off -- much like some of our electricity contracts, they happened to be rolling off at a time when the market isn't as strong as it was four years ago. If this contract had rolled off four years ago we would be in a heck of a lot better shape than we would be today. It just so happened that contract is rolling off in South Florida and that is going to hit us.

But again if you eliminate that contract from the fourth quarter, we fully expect to see price begin its march back up. And then next year when you see CPI getting better, we'd expect that to continue.

Now again, next year, every year is harder than the prior year because you've got a lot of different things like fees and surcharges anniversarying. And so we have got to find a way to overcome those.

Got it, but again to reiterate your point on CPI and the impact of CPI on your pricing, your expectations that will have a positive impact on core price in 2012?

Should have a positive impact, yes.

And then turning to free cash flow deployment, you have been aggressive with the buyback it seems in the third quarter. You guys typically make an announcement, I believe, on the dividend in December. Any changes in terms of the thought process [moving to] next year in terms of free cash flow [priming your appetite] for acquisitions?

No, I wouldn't expect any dramatic shift.

Okay. One last question. I think in the operating revenues by lines of business it looks like your revenues from other had roughly doubled sequentially from $105 million to $210 million. I was wondering if you could remind us of what is in that category?

Would that be the Oakleaf revenue? I'm asking our folks here.

Oakleaf would be about $106 million.

Okay so that is almost all of it there.

Yes.

Great, thanks a lot. Appreciate it.

Corey Greendale with First Analysis.

Good morning. First of all, I wanted to verify on the guidance, the full-year EPS guidance, does that use the $0.63 in Q3?

Correct.

And then I was hoping, David, you might be able to talk a little bit about what has shifted in terms of your expectations from the last conference call. I don't know if $0.63 was exactly what you were expecting or not but if you would kind of quickly touch on price volume, the cost, just -- and commodity prices -- what the moving pieces are in terms of what has shifted since last quarter?

Yes. When you look at this quarter compared to last quarter, obviously our -- you have got sort of a double whammy, right? We have spent a lot less on our short-term and long-term cost and revenue initiatives so we spent less and we saved more. And you should see that continuing into the fourth quarter. We are going to spend less and save more.

So when we looked at third and fourth quarter we knew we had to do $1.25 just to get to the bottom end of the range and we knew that historically our fourth quarter is slightly down from our third quarter. So we knew we had to have cost savings ramping up, going into the fourth quarter in order to make the year. And I'm pleased to see that that is exactly what happened in the third quarter. So we are pretty comfortable with that range -- $2.14 and $2.18.

And just on the $.63, can -- so the -- within the bullet point kind of description in the press release, and you mentioned in the commentary Steve, there is the benefit of the tax item. And you didn't pull that out of the $0.63. So could you just talk about why we should view that as more of a recurring item and shouldn't pull that out of the $0.63?

Look, there's absolutely no doubt that we would rather have that $0.02 be driven by cash generating items than tax rate, but taxes are what taxes are right they are going to fluctuate year-to-year. So earlier in the year we paid a higher tax rate because of -- before we had these audit settlements. So we sort of paid that price in the early part of year. This is basically just a catch up from the higher tax rate we had earlier in the year.

Corey Greendale One more. I think in your commentary, David, you mentioned that you think churn will improve going into 2012. Just could you give us all but more on that and why you think churn improved?

Yes, the churn rate is driven as you can imagine a lot by our rollback rate and we need to make good balanced pricing decisions. And so when a customer calls up there's are certainly more competitive action out there going after customers and again you would expect that in a lower volume environment. We need to make the right decisions to maintain those customers. And if that means that we have to roll back the price, you know we are going to look at that piece of business and determine is it worth rolling back the price or do we let that customer go.

And so we are going to put an added focus on that. But the reality is that most customers don't leave over price. They leave over service issues. And so as we use technology to improve our service issues, we fully expect that and as we become an easier company to do business with, we fully expect that to drive down the churn rate.

Great, thank you.

Al Kaschalk with Wedbush.

Morning. I was hoping, David, you could provide a little bit more detail on your outlook and expectations as it relates to commodity prices given it's a little bit greater impact now on your business. And what appears to be a little bit more than seasonal volatility in the October prices of OCC and OMP.

So I hear you say that there's not maybe a headwind or easier comps over the next four quarters. But could you talk about maybe what the drags would be?

Sure. And with commodities you're absolutely right, we are more and more moving toward that in our business and commodities have become certainly a worldwide market. So you've got the export market, primarily China, driving a lot of pricing including driving some of the domestic pricing. So traditionally what you see in the fourth quarter is you see the pricing tick down as the Chinese mills start -- they've already shipped a lot of their Christmas goods and so they are starting to slow down in the back half of the year. So you see the China mills start to slow down and then you'll see the domestic mills start to slow down.

And that is frankly exactly what we're seeing today. We are seeing the Chinese mills starting to slow down so you've seen pricing come back in China, 15% to 20%. That really hasn't hit the domestic market yet. We fully expect that the domestic market will soften beginning in sort of throughout the November time frame. And then we'll go back into a stable pricing environment as we come out of the new year. That has been the historical trend.

Last year, frankly, it was the anomaly. Last year fourth-quarter prices stayed strong throughout the fourth quarter. So what we're seeing here is nothing that we didn't expect. You know, we are looking at flat year-over-year earnings. If we continue to see deterioration in the export market, could we have maybe $0.01 impact, negative $0.01 impact in the fourth quarter? We could. But it's early not what we are projecting right now.

Just to clear up here the fourth-quarter and full-year $2.14, the $2.18, are you assuming current prices or what you had at the beginning of the year in terms of average price for commodities or how should we think? Because I think you said earlier a $10 drop would equate to about a $0.01. I assume that is for the full year, but --

Correct.

We have seen more than $10 just in each of the past couple of weeks in those markets. So --.

You absolutely have, but what we are looking at -- it is better than if you look at it sequentially than if you look at year-over-year. When you look at it year-over-year, you've got two things. You had strong prices throughout the quarter in the fourth-quarter last year and then we got more volume. Remember we grew volume by 14% year-over-year. So that helps make up for the earnings on a year-over-year comparison.

But you're absolutely right, it goes back to what Steve was talking about earlier. On a sequential basis, you will see weakening in prices so you can't just say, we are going to save money in cost and that gets sequentially added to the third quarter, because you will have a sequential downturn in earnings from recycling. And so, those are going to obviously offset each other to make that -- help us drive that fourth-quarter earnings.

And then my follow-up or second question sort of a two-parter if I would may. Could you comment or provide quantified EPS impact on the amortization from Oakleaf transaction? And then secondly you had talked about and I know this is an in-progress, but [100 plus] million contribution for the quarter but what are you hearing from the customers about the ability to sustain the relationship with WM going forward?

Yes, actually the customer relationship part has been very encouraging. We put together a plan, Steve and his group, when we started to look at doing the deal. The very first thing we did together was a plan to get out and meet with the customers and let the customers know that this combination for them is actually going to be very good. What you have got is a combination of the biggest and the best company in the industry from a brokerage part of view that knows where to go to get services and you've also got the biggest and the best company from an asset point of view on the range of recycling and other asset that can meet those customers' needs.

So as we like to say, the combination made us both stronger. So we are able to better meet the wide range of customer needs. So, so far, the customer relationships have been very good. We have actually expanded business with a number of those customers and added a number of new customers that were in the Oakleaf pipeline. So, so far, that has been spectacular. We are looking forward to bringing that combined service offering to a lot more customers in 2012.

I think that's right and just to answer your first question, on a quarterly basis, we are looking at about $7.5 million worth of amortization.

There appear to be no further questions at this time. I'll now turn the conference back over to Mr. David Steiner for closing remarks.

Thank you, Brandy. Thank you all for joining us. We'll be seeing you on the road, looking forward to introducing you to Steve and we won't talk again until 2012. So given that, have a happy holiday season and we'll see you next year.

59 PM Eastern time on Thursday, November 10, 2011. The conference ID number for the replay is 96225430. Again the conference ID number for the replay is 96225430. The number to dial for the replay is 1-855-859-2056 or 404-537-3406.