美國廢棄物管理公司 (WM) 2012 Q3 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 third-quarter 2012 earnings release conference call. If you are with the Waste Management we ask that you please disconnect from the conference and listen via the webcast.

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, Nicole. Good morning, everyone, and thank you for joining us for our third-quarter 2012 earnings conference call.

With me this morning are David Steiner, Chief Executive Officer; Jim Fish, Executive Vice President and Chief Financial Officer; and Jim Trevathan, Executive Vice President and Chief Operating Officer. David will start things off with a summary of the financial results of the quarter. Jim will cover our revenue growth including price and volume trends, operating costs, and the financial statements. We will conclude with questions and answers.

During our statements, any comparisons unless otherwise stated will be with the third quarter of 2011. Before we get started let me remind you that in addition to our earnings press release that was issued this morning, we 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 press release include important information that you should refer to.

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

Additionally, during the call David and Jim will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, on an as-adjusted basis. Our EPS and net income, as well as income from operations margins, operating expenses, SG&A expenses, and expenses as a percent of revenue have been adjusted to exclude items detailed in our earnings press release that management believes do not reflect our fundamental business performance or are not indicative of our results of operation. These measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release footnote and schedules attached thereto, together with Item 2.02 of the Form 8-K filed today, both of which can be found on the Company's website at www.WM.com, for reconciliation to the most comparable GAAP measures and additional information about our use of non-GAAP measures.

David and Jim will also discuss our results in the areas of internal revenue growth from yield and internal revenue growth from volume. Unless stated otherwise please note that any references to yield or volume results are more specifically referring to internal revenue growth from yield or volume.

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 November 14. 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 855-859-2056 and enter reservation code 30012751.

Time-sensitive information provided during today's call, which is occurring on October 31, 2012, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited.

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

Thanks, Ed. Good morning from Houston.

In the third quarter of 2012 we earned $0.61 per share. We are particularly pleased by those results given that the headwinds from commodity prices exceeded our previous expectations.

Our income from operations margin grew 30 basis points compared to the third quarter of 2011. Our income from operations margin, excluding depreciation and amortization, grew 90 basis points.

Collection and disposal yield was 0.8% and grew sequentially for the first time in six quarters, despite the anniversary of our environmental fee in the quarter. And on a workday-adjusted basis, our volumes in the core solid waste business were positive for the third consecutive quarter. So, as has been the case through the year, our core solid waste business continued to perform well and we are seeing some positive trends as we approach 2013.

Adjusting for one less workday in the third quarter, volumes were positive 0.5%. We saw positive volume growth in each of our industrial, MSW, C&D, special waste, and recycling operations. Year to date, volumes through the third quarter are positive and, as such, we still expect to achieve our full-year volume guidance of flat to slightly positive volumes.

Looking at our yield in the third quarter of 2012, each of our collection and landfill lines of business saw positive yield. Our MSW, C&D, special waste, and rolloff segments achieved both positive yield and positive volume.

On the collection side, we continue to focus on our core price increases. Core pricing consists of price increases, plus all fees other than our fuel surcharge, less all price rollbacks. When we look at the core price component of solid waste yield, it increased 2.6% in the quarter, consistent with the last few quarters and indicating our continued commitment to pricing discipline.

We improved our rollbacks in the third quarter when compared to the third quarter of 2011. This is the fourth consecutive quarter of sequential improvement in rollbacks.

More importantly, only once since 2005 has our rollback percentage been lower than it was this quarter. And we expect both core pricing and rollbacks to continue to improve in 2013.

In order to see the effects that commodities will have on our full-year results, we look at both our recycling and waste-to-energy operations. With respect to recycling, when we gave our initial guidance at the beginning of the year, we expected commodity prices to have a negative impact of about $0.04 per share for all of 2012.

Through the first nine months of 2012, we have incurred a negative year-over-year impact of $0.14 per share from recycling commodity prices. In the fourth quarter, we're expecting an additional $0.04 per share of headwinds from recycling commodity prices. So for the full year, recycling commodity prices will create about $0.18 of headwinds versus our expectation of about $0.04, a $0.14 difference.

Turning to our waste-to-energy business, average electricity pricing declined a little more than 12% in the third quarter when compared to the third quarter of 2011. Our waste-to-energy operations caused a $0.02 drag on earnings per share for the third quarter compared to the third quarter of 2011.

In our original guidance for waste-to-energy, we predicted a negative impact of about $0.05 per share for the full year of 2012. Through the first nine months, we have experienced a headwind of $0.07 year-over-year, or $0.02 more than we expected. In the fourth quarter, we expect our waste-to-energy operations to be flat to slightly down year-over-year.

So, looking at our combined recycling and waste-to-energy operations, the total negative effect is $0.16 of unexpected headwinds for the full year. If we added that $0.16 to our $2.08 to $2.13 guidance, we would be at $2.24 to $2.29, right in line with our guidance at the beginning of the year. So you can see that without these headwinds we would have been soundly on course to achieve our original full-year goals, which demonstrates the stability and continued strong performance of our core solid waste business.

The reorganization that we announced at the end of the second quarter is progressing as we expected. During the third quarter we had approximately $9 million in savings, and we expect to see about $20 million in savings for the fourth quarter. This puts us on track to achieve the full $130 million in annual savings anticipated for 2013.

So through the first nine months of 2012, our core solid waste business has grown and margins have continued to improve. With yield and cost savings accelerating into 2013, we should see continued margin expansion.

If we see a recovery in commodity prices, that would accelerate earnings growth; but we will not count on any commodity price improvement to drive earnings in 2013. We will focus on improving those things that we can control, costs and yield, and we expect to drive both in 2013.

Of course, we will give further guidance and assumptions on our fourth-quarter earnings conference call. In summary, we expect our core business to continue to perform solidly, as it has since the beginning of the year. Commodity prices will again be a hurdle in the fourth quarter; and as of today we expect to see an approximate headwind of $0.04 to $0.05 per share in the fourth quarter.

Even with this, we expect full-year earnings to be between $2.08 and $2.13 per share. If we take into account the $0.07 per share incremental headwind difference in the fourth quarter, we would still be on track to achieve the earnings range of between $2.15 and $2.20 per diluted share that was given after the second quarter.

From a cash flow perspective, we are on track to generate operating free cash flow about $850 million, despite nearly $200 million of commodity headwinds in 2012, an increase in capital expenditures of about $200 million, and about a $100 million of additional cash taxes in 2012. With our focus on yield and cost improvements in 2013, and with cash impacts from commodity prices expected to abate, we expect to see operating cash flow increase in 2013, while continuing to make investments toward a natural gas fleet.

We are building a solid plan for 2013 that I am confident our team can deliver. I will now turn the call over to Jim to discuss our third-quarter results in more detail.

Thank you, David. I will start by describing the changes in revenue, including yield and volume; and then I will discuss costs and cash flow.

Revenue for the third quarter declined by $61 million or 1.7% from the prior-year period due to lower recycling commodity prices. If commodity prices were at third-quarter 2011 levels, third-quarter 2012 revenue would have increased by $115 million or 3.3% from the prior-year period. The revenue decline from recycling commodity prices was partially offset by acquisitions, improved yield, and fuel surcharges.

Yield of our collection and disposal operations grew 0.8% in the third quarter. As David mentioned, this is the first quarter of sequential yield improvement out of the last six quarters.

Adjusting for the change in pricing at our waste-to-energy plants in South Florida, our yield growth for the third quarter of 2012 was 1%. We were able to achieve this with virtually no incremental benefit from our environmental fee, which had a large impact last year.

Compared to the third quarter of 2011, in the third quarter of 2012 we had improved pricing and fewer rollbacks in the collection lines of business. In the collection business, yield grew 1.3% in the third quarter.

More specifically, commercial grew 1.5%, industrial grew 1.8%, and residential grew 0.8%. All of these were improvements from the second quarter of 2012. In the landfill line of business, all of the waste streams achieved positive yield in the third quarter of 2012. In total, landfill yield was a positive 0.6%.

Work-day adjusted internal volume growth was 0.5%, consistent with what we have seen in the first half of 2012. More importantly, this is the first time we have seen three consecutive volume quarters of volume growth since 2005.

This growth was driven by recycling volumes at our MRFs, which grew 5.1%, and landfill volumes, which grew 4.3%. We have seen strength in recycling volumes all year, and it is encouraging to see the MSW landfill volumes turn more substantially positive recently.

Specifically in the landfill business, special waste volumes grew 4.9%, MSW grew 3.4%, and C&D volumes improved 0.1%.

Landfill volume growth was partially offset by collection volume declines of 1%. More specifically, commercial volumes declined 2.5% and residential declined 1.4%. In the industrial business, volumes grew 1.2%.

As I mentioned, recycling volumes improved 5.1% organically in the quarter, and 10.4% when you include acquisitions. Unfortunately, commodity prices were down in the quarter; but we remain committed to recycling to extract value from the materials that we collect.

The decline in recycling commodity prices also impacted our operating costs as a percent of revenue. As a percent of revenue, operating costs increased to 64.2% of revenues compared with 63.9% in the third quarter of 2011.

We did see savings in cost of goods sold due to lower recycling commodity rebates. Without this savings our operating costs would have increased when compared to the third quarter of 2011.

Third-quarter subcontractor costs added 120 basis points. Repair and maintenance costs added an additional $17 million or 60 basis points of costs. Maintenance costs have been up all year due to our waste-to-energy operations and increases in cost of tires, parts, and lubes. As we add newer trucks to our fleet and improve our maintenance processes, we should see maintenance costs improve.

SG&A costs were $332 million in the third quarter, an improvement of $48 million. As a percent of revenue, SG&A costs improved 120 basis points on an adjusted basis.

The main drivers of the improvement in SG&A costs were a reduction in incentive compensation accruals and savings from our reorganization. SG&A savings from our restructuring should increase from $7 million in the third quarter to approximately $17 million in the fourth quarter.

Overall savings from the restructuring was $9 million in the third quarter and should increase to $20 million in the fourth quarter. The incentive compensation savings will not repeat in the fourth quarter. And in the fourth quarter, seasonal revenue declines typically cause SG&A costs as a percent of revenue to increase.

In the fourth quarter of 2012, we do not expect to be at the third-quarter level of 9.6%. However, we do expect to see an improvement when compared to the fourth quarter of 2011. We expect to end the year on track to achieve the $130 million in annualized savings from our restructuring in 2013, most of which comes out of SG&A.

Our income from operations improved 30 basis points when compared to the third quarter of 2011. This is a good result, particularly given that we had to overcome recycling and waste-to-energy headwinds which reduced margins 140 basis points, and our Oakleaf operations which further reduced margins 30 basis points. Our Oakleaf operations have greatly improved from the second quarter when we saw a negative 70 basis point impact.

At the end of the third quarter our weighted average cost of debt was 5.1%, and our debt to total capital ratio was 60.2%. The floating rate portion of our total debt portfolio was 6% at the end of the quarter.

Our income tax rate as reported for the third quarter of 2012 was 36.1%. In the third quarter of 2011 it was 32.3%. The increase is related to nondeductible losses and a return to accrual adjustment. Our recurring rate is approximately 33.8%, which is what we expect to see in the fourth quarter.

Turning to cash flow, third-quarter 2012 net cash provided by operating activities was $574 million. Cash from operations was impacted by two issues which lowered it by about $150 million.

First, a temporary increase in DSO reduced cash flow by approximately $100 million. Second, we had a settlement for the termination of forward starting swaps related to our recent debt issuance, which decreased cash from operations by approximately $59 million. Without these two factors, we would have seen an increase of about $75 million in net cash from operations, or an increase of more than 11%.

Our capital expenditures for the third quarter were $402 million, resulting in free cash flow for the quarter of $180 million. The previously discussed impact of the cash from operations change and an increase in capital expenditures drove the free cash flow changes.

The increase in capital spending was primarily for fleet capital, of which 90% was for CNG vehicles. We are on track to achieve the cash from operations and capital expenditure components of our free cash flow range, which would generate between $800 million and $850 million of cash for the full year, despite the combined $300 million in headwinds from commodity pricing and cash taxes, and $200 million in additional capital.

As discussed on the second quarter conference call, our full-year free cash flow range assumed the sale of selected assets. We are in the process of evaluating opportunities to sell these assets. If we determine not to sell them at this time or we do not complete the sales before year-end, it will reduce the sales proceeds from divestitures component of our free cash flow, but it will not affect cash flow from core operations.

We return $164 million to our shareholders through a third-quarter dividend, and we invested $24 million in acquisitions. In summary, we are pleased on balance with the results of our operations.

And for that, I thank all of our employees. Their dedication and hard work allows us to generate solid earnings and return cash to shareholders despite the headwinds we have confronted. While we still have work ahead of us, we look forward to a more rewarding 2013. Coupled with the daily efforts of our employees, we anticipate our earnings and free cash flow to grow in 2013 and beyond.

And with that, Nicole, we can open the line for questions.

(Operator Instructions) Hamzah Mazari, Credit Suisse.

The first question is just on SG&A. Is it possible for you to break out how much of the decline was due to lower incentive comp accruals and how much was the restructuring?

Then going forward, Dave, maybe you can comment on your conviction level in executing on, beyond the $130 million which you talked about and maybe talk about some of the risks in not getting to that, -- in not getting there.

Yes, when you look at the number with respect to the bonus accrual, that was about $0.03 for the quarter. When you look going forward, Hamzah, the $130 million I can guarantee you we have locked down to the penny. We know exactly where it came from and we know exactly how to keep it from coming back, and we are monitoring that every day.

We have also put a couple of folks in charge of trying to increase that $130 million. We fully expect that we will see some dollars from that. We haven't built that into our plans yet, but we fully expect that we will see more than that $130 million. But the $130 million is locked and loaded for 2013.

Got it. Then on the asset sales, maybe if you can get a little more color as to your thought process there. Are these assets that you want to get rid of and this is just a timing issue? Or are you still debating whether or not to sell those assets?

And then maybe talk about maybe buybacks. You didn't buy back any shares this year. Is that something that we can expect next year, for you to buy back stock? Or is this just a new cap allocation policy where you are more focused in on just the dividend?

Yes. You know, when you look at the asset sales, as you can imagine, the asset sales -- there's a number of them and they are all in various stages of completion. So we have a couple where we have Letters of Intent and we are pushing to get them closed by the end of the year. We have a couple where we are looking at Letters of Intent.

And then, frankly we have quite a few of the oil and gas properties that we have that -- with oil in the $80.00 range we did not get offers that we found attractive enough. And as you all know, we don't have to sell those properties, and so we probably will not sell those properties. So with having those asset sales at all points across the spectrum, from Letter of Intent to assets that we pulled off the table, we just wanted to make sure that folks realize that we may or may not get to that full run rate by the end of the year.

With respect to the capital allocation policy, that hasn't changed. We would like to add to that mix between dividends and share repurchase. We would like to add to that mix, making sure that we have stability on our balance sheet from a coverage point of view. But as far as our philosophy goes, that hasn't changed.

Just last question on CapEx. Is it fair to say you are running above normal right now on CapEx?

Yes, that's -- so, when we look at it, we are probably running, Jim, $200 million to $300 million above our running five-year average. Obviously we were $200 million higher than we were last year.

So I would say yes, we are running a little bit above average. But the good news is that the reason we are doing that is to invest in that natural gas fleet, which as we have discussed before is not only good for us from a new fleet point of view, from a maintenance point of view, but clearly with the differential between natural gas and diesel, creates some immediate economic benefit.

Great, thank you.

Scott Levine, JPMorgan.

Hi, good morning, guys. So, it sounds like generally speaking the pricing news was pretty positive across the business overall. I was hoping you might be able to provide some color with regard to how much of that was really a function of internal initiatives on your part, as well as your comments and thoughts on the operating landscape in general, and what helped you compensate for the anniversary of the environmental fees in the quarter.

Yes, from the pricing environment point of view, I would say it is a fairly stable environment. When you look at our churn rate, you don't see the churn rate going up. When you look at the rollbacks, the rollbacks have been very positive. And that all points to a very stable pricing environment.

When you look at what drove it in the quarter, as usual it is core price increases. It went up obviously because rollbacks went down, and that is where the focus is on 2013.

When you look at 2013 there's three big components that are going to drive our yield. First that the core price increase, the price increase that we put out on the street. Second, the rollback percentage. And then third, making sure that we have compliance with all of our fees and surcharges. We have seen that slip a little bit in the last few years.

So we have gotten together with the group leadership and with every one of our 17 AVPs. And I can promise you they've got a laser focus on pricing going into 2013.

Thanks. I think there was an expectation there might be some increase in the contribution from fuel surcharges in the quarter. It looks like that wasn't the case. Should we expect that going forward? Or maybe a little color there.

Yes, with fuel prices coming down, obviously there wasn't as much raw dollars. But we actually were positive. Remember, the beginning of the year we were running a little bit behind on the fuel surcharge, where we were losing a couple million dollars. This quarter, I think we made $4 million on the fuel surcharge.

So we said it early in the year, that we will start to see it even out as prices come down. And that is exactly what has happened.

Got it. One last one if I could. The release indicates you expect earnings and cash flow to grow next year. I was wondering if you could provide a little bit more color in terms of what gives you the confidence to make that statement. It looks like commodities have moved up here in the month of October.

Then also with respect to the outlook for cash flow, maybe a little bit more color with regard to the impact from the issues like commodities, like CapEx, like cash tax. There were incremental headwinds that you didn't see foresee in '12, and what your expectations would be for those items for '13.

Yes, exactly. We will give a lot of detail on that when we do our guidance after the fourth quarter. Obviously we will have a lot more visibility into the year as we go through our business plans right now.

But when you look at next year, there's two things that I would say are going to drive the cash flow. Obviously, the first is our cost programs and pricing; and that should drive an incremental -- a minimum of $200 million straight to the bottom line. So you will see cash generation go up nicely.

That is assuming that we get no benefit from commodities. Obviously, this year we had a drag from commodities. And then if we get any types of benefits from bonus depreciation or anything like that, it is gravy on top.

I would not expect us to see a dramatic change in CapEx next year. We are committed to changing over our fleet to CNG, and so we won't pull down that CapEx dramatically next year.

But obviously if environmental conditions change such that the earnings power isn't there, because of changes in the economy, we certainly have the ability to pull that down a good $200 million to $300 million without affecting our business operations at all. So, we should see some pretty strong cash flow generation increases next year.

Got it. Thanks, Dave.

Vance Edelson, Morgan Stanley.

(technical difficulty) answer the earlier fuel surcharge question from the angle of what is the willingness on the part of customers to accept these surcharges most recently. Any change in their behavior versus past fuel cycles?

No. It's -- I think everybody understands the nature of our business from a transportation point of view and the fuel that we use. So frankly what we have seen is a slight uptick in our compliance with the fuel surcharge.

And we have put some processes in place out in the field to make sure that we aren't waiving that fuel surcharge. When we talk about the pricing environment I would say that we got a very stable pricing environment.

What we have seen from some competitors is they have waived fuel and environmental. And frankly some of our folks started to do the same in order to keep up with the competition.

What we have told them is we are not going to do that. We're not going to waive fuel and environmental. That is just putting too much risk into our business plan going forward.

You can get away with waiving fuel and environmental on day one. You can't get away with it for a year, two years, or three years, or seven years -- the time that we like to keep these customers. So you've got to see increases as you see cost go up from both environmental compliance and the fuel.

So we have put processes in place to make sure that we aren't waiving fuel and environmental, and obviously those will continue into 2013. So we see nothing but increased compliance from that point of view, and we haven't seen a pushback from customers really at all.

Okay, got it. Could you just elaborate a bit on the labor dispute? What is the nature of the issue there? Is it mainly behind us now?

Yes, it is. Look, as you know, anytime you have a labor dispute there are a lot of different issues. This was primarily economic. It was a disagreement as to what we thought wage increases should be in this economic environment.

It only lasted less than a week, so we were able to get that out of the way. And we put some reserves in for some liquidated damages for some of the communities up there, to make sure that we take care of our customers. But other than that, it is certainly behind us and we continue to have very good relationships with our unions throughout the country.

Okay, that's helpful. Thank you, David.

Michael Hoffman, Wunderlich Securities.

(technical difficulty) The question on free cash flow, David, your comment about it growing -- so, is it fair, based on the way you have characterized some of the data, we should be north of $1 billion on a comparative basis of that $850 million for this year?

Yes, we will obviously, we will give a lot more guidance when we get our 2013 guidance. But yes, if you take the $800 million to $850 million that we are talking about this year and you add that incremental $200 million that I'm talking about from cost and yield, it absolutely should be over $1 billion.

Okay. Then Jim, the DSO hit this quarter, when does that reverse? What quarter?

So, Michael, there were two components there of that. The first was really a handful of our municipal customers who effectively made third-quarter payments in the fourth quarter because their payments came in on the first and second of October. So that will reverse itself in the fourth quarter.

The second component was really a number of our large customers, national account customers and energy services customers, who basically did a better job of managing their DPO than we did of managing our DSOs. So I expect that that will be an area of focus for us.

To answer your question, though, about the number, we expect it to come back down by about 2 days. It was up by about 3 days in the third quarter. We expect at least 2 days to come back down at the end of the fourth quarter.

At the end of the fourth quarter? Okay. Then your comment about the reorg had $9 million -- I just wanted to make sure I understood this correctly. $9 million in the G&A favorably this quarter; $20 million in the fourth quarter. And that doesn't include, David, your comment about the $0.03 for bonus accruals?

That's right. It was actually $9 million total; $7 million in SG&A for the quarter. And $20 million total in the fourth quarter, and $17 million that will come out of SG&A.

Okay, and the fourth quarter bonus accrual adjustment should be the same as the third quarter. So we should take that out, too?

No, no. We won't have any significant bonus accrual reversal in the fourth quarter.

Okay. Then to be clear, the Board's view on dividends is that they are paying a dividend and it is their intention if they can to grow it. That is clearly their intention still?

That is absolutely correct.

Okay. There is no -- all right. Then lastly, can you help us understand the capital you've been investing in the alternative technologies, as you drive the future growth of the Company? When should we start to think about those being breakeven on a free cash basis, let alone turning positive?

On a free cash basis, they are currently breakeven. But when we look at it, we look at it from sort of a portfolio point of view as to when will these investments pay off.

In other words, they are already cash neutral. The question is when do they -- when are we able to monetize those?

You might have seen one of our investments had a public offering out this year. They ultimately pulled it. But we would expect to see quite a few of those investments start to go public in the next two years.

Okay. Thank you very much.

Corey Greendale, First Analysis.

Hey, good morning. First, I just wanted to follow up on the question Michael was asking about free cash flow. The $200 million drag from commodity prices, that is 2012 versus 2011, correct?

Correct.

So to get back that entire $200 million, you would need commodity prices to get back to 2011 levels on average; is that the right way to think about it?

That's right. And, look, when we put out our plan I don't expect us to assume any benefits from commodity prices. Look, we think they're at a trough. We certainly think there is more upside than downside at this point in time.

But we are not going to build in a dramatic rebound into 2013. We will build in more flat-type prices for 2013 and then hope we get some benefit.

Okay, I understand. Thank you. Wanted (technical difficulty) questions about the disposal side of the business. So if you just look at the national data, construction activity has been recovering pretty nicely for almost a year now. I think in the script, Jim said that C&D volume was up 0.1%.

Do you think -- is there still a lag effect here where you would expect to see that pick up, given what we have seen as somewhat of a recovery in construction? Or do you think this is -- for whatever reason, you're not going to get as robust volume growth as construction activity has been?

Yes, you know, Corey, we hear a lot about the construction activity; and frankly, we are not seeing it dramatically in the volumes yet. But we are certainly starting to hear from our folks out in the field that they see it coming.

When I look at the quarter, frankly the most encouraging thing that I saw in the quarter was that we are starting to see the volumes bounce back in the South and the West. They were the most dramatically affected by the downturn, and you're starting to see them turn positive from negative in a lot of the lines of business.

To me -- now, look; obviously that is because they went down pretty dramatically in the downturn. But seeing those volumes start to pick up in the South and the West I think is probably a good sign that we will see some construction pop in 2013..

Okay. David, I think I know how you feel about disposal pricing. But could you just talk a little bit about how much room you think there is for upside in the near term? Maybe 2013, how much -- where you think that might be able to get to.

Yes, look; you all have heard me say it before that disposal pricing is absolutely pivotal to us to sustain all of our pricing programs. So we need to be more aggressive in 2013.

As I have said to many of you, it is hard to be aggressive when you are seeing income from operations going down at your landfills, and that is we saw between 2009 and early 2012. We've now had three straight quarters where we seen improvements at the landfill side of the business.

You saw that our volumes were pretty strong this quarter. So, I would expect that in 2013 that will allow us to be more aggressive at the landfill.

Great.

I might add to that, Corey, just one thing -- that when you look at our landfill volumes, pretty strong landfill volumes for the quarter. Landfill price at 0.6%. And we also had an anniversary of our environmental fee on the landfill side of the business. We have talked a lot about it on the collection side of the business, but we have an anniversary of our environmental fee on the landfill side of the business too, which we have overcome.

But as David said, really as pricing at the landfill goes, so goes pricing on the collection side of the business.

Got it. Thank you.

Joe Box, KeyBanc Capital Markets.

Jim, I think you mentioned earlier that residential collection yields were up about 80 basis points this quarter, which is a pretty nice acceleration from last quarter. Can you maybe just talk to what some of the biggest drivers were behind that improvement?

Sure, yes. The biggest drivers, of course, are going to be twofold. One is the absolute price increase; the other is the reduction in rollbacks.

And then of course CPI, when you think about residential a big chunk of that is CPI driven. Our expectation for CPI is about -- 1.5% is about right.

So we think that residential is still going through a bit of a competitive battle here. But we also see some encouraging signs on the residential side that possibly some of these contracts we have lost in the past due to price, those folks are not having such a good experience there and we may see them bounce back.

Okay, great. To that point on rollbacks, can you maybe just give us a sense of how much overall rollbacks went down in the quarter, and maybe what you are targeting for improvement in 2013?

Yes, rollbacks were down about 30% in the quarter, which obviously is a nice improvement. Look, if we could keep rollbacks at their current level, as I said it is the lowest level we have seen since 2005 with the exception of one quarter.

So we are going to look for improvement next year. I am not sure we will be able to get that 30% improvement, but we are going to target a good 20% to 30% improvement for next year.

Got it. I haven't heard much of a mention or any mention at all about the potential hurricane impact.

Right.

I know it is obviously very early, but I am just curious if you have any either business disruption or potential cleanup work that is baked into your current guidance.

Yes, we will let Jim Trevathan, our COO, talk about the storm effects.

Yes, Joe, I guess the first thing I would mention is that we have done extensive work the last couple of days. We have battered down many of our East Coast operations just in preparation of the storm.

Another piece of -- a good piece of news, our people, our team members are all accounted for and safe. We start there.

We are starting to see those operations start back today and will over the next couple of days. Right now, the assessment is underway as to how much damage has been sustained.

Generally, Joe, we don't see -- we see a little bit of impact the first couple of days around volume, negatively. And obviously, with facilities down any rebound in those volumes will occur over the coming weeks and months.

Too early to really tell, but we have huge effort underway given our experience in the South and along the East Coast around hurricane support. We have got teams ready to go with equipment, with personnel, technicians ready to go support those areas in their cleanup efforts. I do think it is a little early for us to tell about any volume change, though, other than the first couple of days that will be negative.

Got it. I appreciate the color. Thank you.

Not a problem.

Alex Ovshey, Goldman Sachs.

Thanks, good morning. Question for you on thinking about the leverage to the construction recovery. How do you see that playing out over the next couple of years?

If you look at what C&D volume is today relative to the entire [part] of the business versus what it was when construction was a lot better, as we think about construction activity normalizing, how much incremental volume upside is there in the business for you? And how do we think about the potential incremental margins on that volume?

Yes, you know, the incremental margin on our industrial side of our temporary rolloff business is pretty high, probably in the 35% to 45% range. When you look at the potential bounce-back, the good news is -- I think what we have seen over the last 18 months is that the bounce-back depends on two things, right? Supply and demand.

What we have seen in the last 18 months I believe is that we have basically seen the pickup pick up all of the supplies. So in other words, in the downturn you obviously had a lot of the local competitors that were stacking cans in the yard because they had nowhere to put them. What you have seen in the last 18 months is that all of those local competitors have generally used up their cans. They've got their cans and their trucks out on the street. And as you all know, it is pretty difficult right now for a small business to get a big loan from a bank, and so it's hard for them.

And given the state of the economy a lot of them aren't making big investments in new trucks and cans. So I think what you have seen in the last 18 months is that we have started to eat up that excess supply that was on the market as demand picked up. So now as demand picks up I think what you will see is that the large national companies that have more available assets will start to get more than their fair share.

On the downturn, we certainly lost more than our fair share, because we wouldn't drop our price to maintain our volume. Those local competitors would do that.

So you should see -- if construction bounces back, to me that would be the most positive thing that could happen to our business. Because there is the ability to both get volume and price because of the slack in supply that is out there. So obviously that is something that we all hope for in 2013; but again, we are not going to build that into our plan.

Alex, one quick addition to that in some ways we have replaced some of that lost construction business in some areas of the country with energy services business. So when you look at our volumes you see that special waste is up pretty significantly while C&D is basically flat. And it's the same equipment for the most part that we are using.

So we are just taking equipment that would have otherwise been dedicated to construction business and redeploying it. It shows up when you look at landfill volumes in special waste; it shows up when you look at collection volumes, with industrial still being fairly strong.

Okay. That's helpful. Could you just remind us what the environmental fee was last year in the third quarter that you had to overcome this year in the third quarter?

7.5% was the environmental fee a year ago, and we bumped it to 10%.

We bumped it to 10% a year ago.

Yes, bumped it to 10%. Right.

Okay, understood. Thank you.

Adam Thalhimer, BB&T Capital.

Dave, what percent of your total business today would you characterize as urban markets? I am just curious; with GDP growth getting a little bit better in Q3 versus Q2, are you seeing any improvement in the dynamics in urban areas?

Yes. The urban areas have always been more competitive than the rural areas. But as you mentioned, they also have a lot more room for growth.

When I talk about seeing the volumes in the South and the West bouncing back, obviously that is where a large part of the population is, in California and Florida. So I think you are absolutely right.

I think you will see -- I think in the downturn you saw probably a relative outperformance in the rural markets. In an upturn I think you see an outperformance in the urban markets. As far as the split between urban and rural, I will let Ed research that and get that number for us.

Okay. Then one more percentage. Have you ever broken out the percentage of your business that is C&D today versus perhaps the housing peak back in 2005/2006?

Yes, we have looked at it. I will tell you we don't have those numbers at our fingertips, but we have looked at that to see what we think would happen at peak versus trough. We don't have those numbers at our fingertips.

Okay. I will follow up. Thanks very much.

Michael Hoffman, Wunderlich Securities.

Question I forgot to ask. The $130 million in reorg savings,, what is your expectation about the timing of when that is fully in the model?

That, when you look at the ramp-up from $9 million in the third quarter to $20 million in the fourth quarter, you can see it starts to ramp up almost to where it's at that $10 million a month run rate in the fourth quarter. We will hit the ground -- in 2013, we will hit the ground on day one at that $130 million run rate.

Okay, so we can count that as -- if we are modeling it, we can say 100% of that is a benefit in '13.

That is absolutely locked and loaded.

Okey-doke. Great. Thanks.

Thank you, Michael. And thank you all for joining us this morning. I know that many of you on the phone are in the region that was affected by Hurricane Sandy. As Jim mentioned we have a lot of facilities and a lot of employees up in that region also. I just wanted to let you all know that our thoughts and prayers are with you.

And as Jim mentioned, we've got a lot of experience dealing with these types of events. And there is one thing I can guarantee you; when it comes to Waste Management, for those folks that are in the affected areas, you have got the absolute best in the business that are going to help you as you go about cleaning up after the storm.

With that, operator, we will sign off for this quarter.

Thank you for participating in today's conference call. This call will be available for replay beginning at 1 o'clock p.m. Eastern Standard Time today through 11.59 p.m. Eastern Standard Time on Wednesday, November 14, 2012. The conference ID number for the replay is 30012751. (Operator Instructions) The number to dial for the replay is 1-800-585-8367 or 1-404-537-3406 or 855-859-2056. You may now disconnect.