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Executives

James G. Alderson – Director, Investor Relations

David E. Steiner – Chief Executive Officer, Director

Lawrence O’Donnell III – President, Chief Operating Officer

Robert G. Simpson – Senior Vice President, Chief Financial Officer

Analysts

Scott Levine - J.P. Morgan

Hamzah Mazari - Credit Suisse

Michael Hoffman - Wunderlich Securities

Jonathan Ellis - Merrill Lynch

Vance Edelson - Morgan Stanley

Corey Greendale - First Analysis

Bill Fisher - Raymond James

Nicole DeBlase - Deutsche Bank

Brad Meeks - Morningstar

Waste Management Inc. (WMI) Q2 2009 Earnings Call July 30, 2009 10:00 AM ET

Operator

Good morning. My name is Nicole and I will be your conference operator for today. At this time, I would like to welcome everyone to the Waste Management second quarter 2009 earnings release. (Operator Instructions) I would now like to turn the call over to Mr. Jim Alderson, Director, Investor Relations. Mr. Alderson, you may begin.

James G. Alderson

Thank you, Nicole. Good morning, everyone and thank you for joining us for our second quarter 2009 earnings conference call. With me this morning are David Steiner, Chief Executive Officer, Larry O’Donnell, President and Chief Operating Officer, and Bob Simpson, Senior Vice President and Chief Financial Officer.

David will start things off with a summary of the financial results for the quarter and a review of the details of our revenue growth including price and volume trends. Larry will discuss operating costs and Bob will cover the financial statement. We will conclude with questions and answers.

Before we get started, let me remind you that in addition to our press release that was issued this morning, we have filed a Form 8-K that includes the press release as an attachment and is available at 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, that is because David, Larry and Bob will discuss our results on an as adjusted basis.

Unless otherwise noted, all of the financial measures mentioned on the call including net income, earnings per share, income from operations, operating expenses, and operating margins are adjusted for items we deem unusual or non-operational in nature. We will also discuss pre-cash flow. All of these are non-GAAP financial measures. We have given detailed information on all the non-GAAP measures that will be discussed on this morning’s call and have reconciled them to the most comparable GAAP measures, and you can find that information in the schedule for the earnings press release in the Form 8-K filed today which can be found on the company’s website at www.wm.com.

Additionally, during the call you will hear certain forward-looking statements concerning our plans and expectations for third quarter and full year 2009. Actual results could differ materially from our plans and expectations. Certain factors related to future expectations are detailed in our press release this morning and in our filings with the Securities & Exchange Commission including the Form 10-K filed for 2008.

This call is being recorded and will be available 24 hours a day beginning approximately 1 pm Eastern time today until 5 pm Eastern time on August 13. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, dial 800-642-1687 and enter Reservation Code 16261765. Time-sensitive information given during the course of today’s call which is occurring on July 30, 2009 may no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited.

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

David E. Steiner

Thanks, Jim and good morning from Houston.

When we look at the quarter, we see that our core solid waste operations continue to benefit from our pricing and cost program. Our overall results were affected by a number of things that have little to do with our core solid waste business. We had a reduction of $0.07 from our recycling operations. Lower energy prices for the energy sold by certain of our Wheelabrator plants had a negative $0.03 effect in the quarter and foreign currency translations and waste energy development costs had $0.01 of negative earnings impact. Without these items, we would have matched prior year earnings despite the volume losses. This shows the strength of our core operating model which focuses on pricing and operational excellence. We would expect the second half of the year to follow a similar pattern. Our pricing and cost programs will largely make up for volume losses but we will still face headwinds from lower commodity prices in our recycling operations in the third quarter and lower energy prices in our Wheelabrator operations will likely continue for the remainder of the year.

We also to expect to incur about $10 million of costs associated with the growth of our waste energy business in the second half of the year but we certainly believe our investment will pay off. I’ll discuss our international waste energy development later in my remarks.

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

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

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

Internal revenue growth from volumes declined 8.6% in the quarter compared to the prior year quarter. The recession-resistant lines of our business, mainly commercial and residential collection, saw volume declines of 5.1% and 3.6%, respectively, similar to what we’ve seen in recent quarters but in our more economically sensitive roll-off line of business, we did see further declines as roll-off volumes were off 19%. Despite lower volumes, we maintained our focus on roll-off pricing which resulted in revenue growth from yield of 4% for the quarter. We continue to work to obtain price increases in our roll-off line despite lower volumes and certainly we will continue that strategy. Overall, we expanded our income from operations margin in the collection line of business by 140 basis points.

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

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

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

We continue to work on revising our pricing and rebate model in our recycling operations to moderate the future effect of commodity pricing on our operations. Our new approach is designed to ensure we cover our processing costs plus earn a fair return on our capital. We’ve already changed a number of our contracts and our efforts have been well received but it will take some time to work our way through the customer base. Changing the price structure will help to ensure the long-term viability of our recycling operations by making them less exposed to cyclical commodity prices.

On the cost side, the company-wide reorganization we announced in February continues to produce the savings we anticipated and we continue to forecast annualized savings in excess of $120 million.

As we look at the balance of the year, we anticipate that year-over-year volumes in our residential and commercial lines will continue to show their recession-resistant qualities and decline at a level of about 3.5%-5.5%. In our more economically sensitive roll-off and landfill lines, while the rate of decline appears to be slowing, we’re building our plans assuming that year-over-year declines in volume for the second half of the year will be similar to our second quarter 2009 volume results. In other words, we expect that volumes will show only about half of the seasonal uptick that we normally see in the third quarter. This would mean that third quarter year-over-year volume comparisons could be slightly more negative than what we saw for the second quarter but fourth quarter volume comparisons should start to improve.

Given our assumptions, we expect that our full year earnings per diluted share will fall within the range of $1.95-$1.99 a share on an added diluted basis.

Looking to the future, we’re excited by the expansion of our waste-to-energy business.

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

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

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

With that, I’ll turn the call over to Larry.

Lawrence O’Donnell III

Thank you David and good morning. I will begin by reviewing our operating cost results for the second quarter of 2009.

Operating expenses in the second quarter of 2009 were $1.77 billion or 60.2% of revenue, an improvement of $404 million from the second quarter of 2008 or 230 basis points as a percent of revenue. This is a strong performance given the decline in revenue.

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

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

I will now review our performance from the second quarter of 2009 compared to the prior year period in a number of the cost categories. Labor and employee benefits costs improved by $45 million in the quarter. This improvement is the result primarily of reducing routes and improving asset efficiency in reaction to the volume declines, achieving productivity improvements in all three of our collection lines of business as well as labor costs savings that resulted from our restructuring announced in February of this year.

We reduced our driver hours by about 991,000 hours. Over 70% of this reduction was due to reducing our capacity by taking trucks off the road as volumes declined and the remainder was primarily due to continued productivity improvement.

Our total recordable injury rate improved to 2.8 in the second quarter, a 15.9% improvement compared to the prior year approaching world-class performance. We’re very pleased with this achievement which demonstrates our continued leadership and safety as well as our commitment to protecting the health and safety of our employees and our communities.

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

We lowered our maintenance and repair costs in total by $18 million in the second quarter of 2009 compared with the prior year period. Collection and heavy equipment fleet maintenance accounted for the bulk of this savings improving by $15 million. Since the beginning of the year, we have taken over 300 pieces of heavy equipment out of service and adjusted our operating hours given the lower volumes coming into our landfills. Standardizing our fleet and implementing our cost-effective preventative maintenance program has enabled us to continue to reduce our fleet maintenance costs.

Subcontractor costs improved by $59 million or almost 80 basis points due to using fewer third-party contractors as a result of lower volumes and a decrease in indirect fuel costs passed on to us by our subcontract haulers. Cost of goods sold decreased by $110 million or over 260 basis points as a percent of revenue, principally due to the reduction of recycling commodity rebates. We’ve seen recycling commodity prices improve steadily since January of this year. We expect recycling commodity prices to continue to improve moderately for the remainder of the year and we expect to see more modest negative year-over-year impact from our recycling operations in the second half of 2009.

For the second half of 2009, the projected impact to earnings per diluted share from our recycling operations compared to the prior year should be in the range of -$0.03-$0.05 impact in the third quarter and could be slightly positive in the fourth quarter.

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

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

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

I’d like to congratulate our entire team on the outstanding work they did during the quarter in flexing down our costs with the volume decline. I’m pleased to see how well our restructuring has been implemented enabling our team to work collaboratively to continue to improve our company and our service to our customers in spite of the challenge from the current economic environment.

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

Robert G. Simpson

Thank you, Larry.

I’d like to start out by discussing FG&A costs. These costs decreased by $35 million to $323 million during the second quarter of 2009 versus the same quarter of 2008. This decrease is due primarily to labor cost savings that resulted in our restructuring announced in February of this year, lower long-term incentive plan expenses and reductions in travel and entertainment partially offset by higher bad debt expense and higher professional fees related to our business development initiatives in China and Europe. David and Larry both spoke about the restructuring and I would like to point out that approximately 70% of the restructuring cost savings in the second quarter were realized in the SG&A category. We believe this new level of SG&A will be able to support our business going forward even when the economy turns around and volumes go up.

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

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

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

Turning to cash flow, second quarter 2009 net cash provided by operating activities was $584 million. Our capital expenditures for the quarter were about $258 million, a decrease of $15 million compared to the prior year period.

Our free cash flow for the quarter was approximately $297 million. We are targeting our full year free cash flow to be approximately $1.3 billion with capital expenditures now expected to be between $1 billion-$1.1 billion. We paid $142 million in dividends in the quarter and our dividend yield is currently 3.9%.

We repaid the $500 million of 6 7/8 senior notes matured in May 2009 with proceeds of the $800 million of senior notes that we issued in February. The balance of the proceeds were used to repay $300 million of outstanding borrowing under the revolving credit facility.

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

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

James G. Alderson

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Scott Levine with J.P. Morgan.

Scott Levine - J.P. Morgan

With regard to the volume outlook which sounds like in general, it’s stabilizing and the back half expected to be roughly consistent with what you’ve just seen, are there any observations you can offer up on a geographic basis? Were there material differences in certain parts of the country, either better or worse?

David E. Steiner

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

Scott Levine - J.P. Morgan

Turning to the trending on the waste-to-energy business, can you remind us of the percentage of your contracts where pricing is locked in and maybe steps that you can take to mitigate the impact of price volatility on the business there?

David E. Steiner

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

Scott Levine - J.P. Morgan

And customer recidivity levels you expect will be accommodating, what’s your expectation there?

David E. Steiner

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

Scott Levine - J.P. Morgan

Yes.

David E. Steiner

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

Scott Levine - J.P. Morgan

One last one on the CapEx budgets, it looks like that’s coming down by $100 million or so, is that right?

Robert G. Simpson

A little bit more than that, about $120 million.

Scott Levine - J.P. Morgan

And what areas are you likely to trim there?

David E. Steiner

It’s pretty much spread amongst machinery and equipment and real estate, not too much coming out of landfill or fleet.

Operator

Your next question comes from the line of Hamzah Mazari with Credit Suisse.

Hamzah Mazari - Credit Suisse

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

David E. Steiner

Yeah, again, I think you’ve analyzed it very well. As we mentioned, at the end of last quarter, we had a letter of intent to send $175 million of med waste business. That no longer exists and I think you hit the nail on the head. It’s a number of factors, frankly. It’s the stabilization in the volumes in the beginning of the year. You had the credit markets that were still not really stabilized. We accessed those in February so we took care of our current maturities. We don’t have another maturity due until August of 2010 and that’s only $600 million. So clearly we can fund that out of free cash flow. Looking forward, we have a lot more confidence in the stability of our free cash flow and our ability to manage that free cash flow and our ability to understand what’s going on in the economy. We thought now was the time to start back. I think you’re right, it is, it’s not one factor. It’s a number of factors and certainly the fact that we don’t have that med waste acquisition of $200 million weighs into the timing of when we do it.

Hamzah Mazari - Credit Suisse

Just two quick questions. How much of your portfolio, how much of your contracts overall are linked to inflation? Is it 40%? Is it less? And then, can you give us a little more color on the seasonal uptick? You’re talking about, you’re saying you’re still seeing some but it’s half the historical levels. Why are you so sure of that and what’s driving that?

David E. Steiner

I’ll let Jim Alderson make a comment on the, we’re talking about residential contracts and Jim’s probably got the best insight into that.

James G. Alderson

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

David E. Steiner

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

Operator

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

Michael Hoffman - Wunderlich Securities

To follow up on the medical waste comment, am I correct in interpreting, it’s not a lack of desire to be in it, it’s just that you’re going to do it more organically so that’s the slower pace?

David E. Steiner

That’s exactly right.

Michael Hoffman - Wunderlich Securities

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

David E. Steiner

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

Michael Hoffman - Wunderlich Securities

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

David E. Steiner

Yeah, they were fairly consistent with where they were in the second quarter. When we look at the landfill, Michael, I like to look at MSW because special waste C & D, because special waste has so much mix involved in it and we really can’t learn a lot by looking at the pricing trends. So when you look at MSW, what you see is that the pricing’s been very consistent and the volume actually was a little better this quarter than it was in the first quarter, -8.1% in the first quarter, -5.8% in this quarter. So we actually saw a slight improvement. Now I don’t think that’s a big enough improvement for us to expect that to occur through the rest of the year. When you look at this business, Michael, you know as well as I do that the real factor that plays into the landfill lines is special waste. You’re generally going to see more stability in MSW than you are in special waste. That’s where we need to see, once we start seeing that start to uptick, that’s when we can start to say landfill volumes are improving. We just haven’t seen signs of that throughout the year.

Michael Hoffman - Wunderlich Securities

So is pricing positive in the landfill business?

David E. Steiner

Price is positive in the landfill business.

Michael Hoffman - Wunderlich Securities

I realize this is a real Ouija board aspect to this but there’s cash for clunkers, $1 billion, $4,000 a car, that’s 250,000 cars. Where’s that flush in special waste and if all these cars really do get pulled in the next five months, four months based on the deadline, where does that flush show up if it’s really going to happen?

David E. Steiner

Yeah, I know, it’s interesting, Michael, as you follow the cash for clunkers, the so called cash for clunkers bill, because you have so many restrictions on it as far as the mileage per gallon, the age of the vehicle and a lot of different things like that, the numbers I’ve seen actually aren’t expecting it to have a dramatic effect on units sales for the car manufacturers. So I wouldn’t expect to see a heck of a lot of incremental volume because of the cash for clunkers bill.

Michael Hoffman - Wunderlich Securities

Okay, fair enough on that perspective but let’s say it works and they really got the 250,000 cars in. How quickly does that convert into flush, how fast does the scrap steel market shred these things and the flush shows up?

David E. Steiner

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

Michael Hoffman - Wunderlich Securities

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

David E. Steiner

We’re negotiating the joint venture agreement. We expect to announce the conclusion of that hopefully in the near future. Then we proceed to put together the business plan. We expect at this point in time to be building somewhere between 2-4 plants, when we bid to build 2-4 plants per year. They’ve already got some plants over there so we’re jumping into it head first and we look forward to the opportunity. They are certainly the leading player in waste energy in China.

Michael Hoffman - Wunderlich Securities

Did you end up paying for the $140 million which was sort of estimated?

David E. Steiner

Yeah, that’s exactly right. As I recall, the final number was about $143 million.

Michael Hoffman - Wunderlich Securities

Then waste energy, can you share with us the total megawatts that are exposed to floating rates and how much are coming off contracted would it increase that rate of floating rates?

David E. Steiner

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

Operator

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

Jonathan Ellis - Merrill Lynch

Just on landfills and I hear what you’re saying about MSW versus special waste and the mix issue there, can you just quantify though first what was the whole landfill pricing year-over-year this quarter?

David E. Steiner

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

Jonathan Ellis - Merrill Lynch

If I’m not mistaken, special waste can account for, correct me if I’m wrong, but as much as a third to 40% of your volume in the landfill at any given quarter?

David E. Steiner

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

Jonathan Ellis - Merrill Lynch

If we can just turn our attention to fees. There has been a lot of discussion in the past about environmental fees and administrative fees. Do you have, if you could quantify maybe directionally, what portion of your IRG from yield this quarter came from the environmental fee and if you implemented the administrative fee at this point?

David E. Steiner

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

Jonathan Ellis - Merrill Lynch

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

David E. Steiner

Yeah, you can pretty much assume that.

Jonathan Ellis - Merrill Lynch

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

Robert G. Simpson

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

David E. Steiner

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

Jonathan Ellis - Merrill Lynch

Just finally, and I’m not sure if you can or want to answer the question, but given that you’ve given some sense in terms of how volumes should trend for the remainder of the year, vis-à-vis the second quarter, can you given us some sense and expectations for your IRG from yield, the reported core pricing for the remainder of the year for 3Q and 4Q at least directionally?

David E. Steiner

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

Operator

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

Vance Edelson - Morgan Stanley

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

David E. Steiner

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

Vance Edelson - Morgan Stanley

Okay, that sounds very fair. Just regarding the return of the share buyback, could you just remind us what the rules are on blackout periods, what you can buy, when you can’t, and how you plan to be opportunistic about it?

David E. Steiner

Yeah, generally we’ve got our general counsel here, as I recall it’s three days after we release earnings when we can get back into the market. We then close the window basically on the fifth day of the third month of the quarter. So what we generally do is we put in 10b5-1 programs to cover the blackout period where we’ll buy a consistent amount through that period and then we can adjust it at various prices during that period.

Vance Edelson - Morgan Stanley

Just one final question, can you provide some color around the competitive landscape for collection? Do you feel that competitive pressures are escalating on all as other players look to expand? Is that a recent development or would you say that the environment is more or less stable there?

David E. Steiner

I would say the environment’s stable. Obviously, you see pockets where you see some unusual behaviors but overall that doesn’t affect us. So I call it very stable.

Operator

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

Corey Greendale - First Analysis

Dave, you sort of answered this question just now but can you comment on changes in customer churn rates or are they stable?

David E. Steiner

Yeah, sequentially they’re stable. We’re at about 10.6% in the first quarter, we’re at 10.7% in the second quarter. That is about 100 basis points change year-over-year. We were at 9.7% second quarter of ’08. But it is stable with Q1.

Corey Greendale - First Analysis

When it’s a positive and it’s up year-over-year, do you think that’s because of the little competitors being a little bit more aggressive?

David E. Steiner

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

Corey Greendale - First Analysis

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

David E. Steiner

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

Corey Greendale - First Analysis

Can you just talk a little bit broadly about the, there was a time years ago when people looked at the recycling business as well you got to be in and the goal is just to minimize your losses, then more recently, last year it was talked about as a real opportunity you want to be investing in, where in that spectrum are you thinking about that business now?

David E. Steiner

I think that you have to look at recycling a little bit differently than you did 18 months ago. Obviously our results this year reflect it. But look, it’s going to be here long-term. The communities want it. We need to look at it and say, not so much should we be in it or not be in it because we will be in it. We will stay in recycling. We need to look at it and say how do we control the volatility and commodity prices? That’s why we’re going back to our customers. Look, the reality is our customers understand that if they allow this volatility to occur, they’re going to have peaks and valleys where they lose recycling assets. I don’t think anybody wants that to happen. So that’s why I think we’re getting such good cooperation change on our pricing structure because they realize if we don’t change the pricing structure, look a company like Waste Management can absorb those kind of losses. There are plenty of companies that can’t absorb those kinds of losses and they’re going to go out of business and there’s going to be less recycling. We’ll be in it long-term, we just need to make sure we can manage the volatility. Not only manage the volatility but when I say manage the volatility I mean manage the fact that when prices go down, we don’t get hurt, but then when prices go up, we are able to take advantage when prices go up.

Corey Greendale - First Analysis

Just one last one, can I so far as, you took the high end of the free cash flow guidance range off the table and at the same time lowering the CapEx budget, is that purely because the economy’s weaker than you expected it or it’s all volume or what else? Is there anything else at this point to be affected by?

Robert G. Simpson

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

David E. Steiner

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

Operator

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

Bill Fisher - Raymond James

I just wanted to slice the pricing a little different on that, you had a lot of success on the commercial side of the business, raising price, I’m actually just wondering on the small competitor side if you’re seeing them maybe be more capital constrained in terms of buying trucks, maybe on the one hand and then on the flipside maybe on the administrative or environmental fees, if you’re getting some pushback on that side?

David E. Steiner

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

Bill Fisher - Raymond James

Just a follow-up on the Wheelabrator, do you feel like you spent maybe more effort on RFPs or maybe looking at acquisitions, I think I saw you were maybe a finalist on a facility in Virginia. I just ask the question because the RFPs if you want them are probably not a capital event for them where obviously the acquisitions would be quicker.

Robert G. Simpson

Yeah, that would be right and of course, I think we have enough free cash flow plus accessing the capital markers if necessary to do whatever we need to do this here.

David E. Steiner

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

Operator

Your next question comes from Nicole DeBlase with Deutsche Bank.

Nicole DeBlase - Deutsche Bank

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

Robert G. Simpson

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

Nicole DeBlase - Deutsche Bank

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

Robert G. Simpson

I think it’s going to be more heavily weighted towards the third quarter.

Nicole DeBlase - Deutsche Bank

You guys said you’re currently seeing $30 million benefit per quarter. Should we expect an incremental step-up in 2010 or do you expect to run at that $120 million run rate going forward?

Robert G. Simpson

I think the $120 million number is what we’re focused on.

Nicole DeBlase - Deutsche Bank

How does that break down between structural versus temporary, i.e. how much of that restructuring benefit comes back when volumes start to improve?

Robert G. Simpson

Actually none of that should come back. The goal was to do the restructuring that gave us a permanent benefit. Other cost savings may come, that you’ll see our performance may be more value-related, these are not.

Operator

Your final question comes from Brad Meeks with Morningstar.

Brad Meeks – Morningstar

Quick question for you, kind of an overreaching question, what gives you confidence that, this is kind of an overreaching theme, but that pricing will remain strong and you’re not going to lose share to your smaller competitors or larger competitors over time?

David E. Steiner

I think two things again, I go back to our compensation plan. I think anytime that you want to drive behavior, if you build into your compensation plan, you’ll be assured on driving behavior. But the second is frankly, the history of this industry. This is an industry that has now been very solid and very stable on pricing for three to four years. Look, there is no doubt that this industry started to see the economic downturn earlier than other industries in that our rollout volumes started running almost at double digit declines beginning in the first quarter of 2007-fourth quarter 2006. Our economically-sensitive roll-off line of business that now has been under pressure for roughly two and a half years, we continue to get up above 4% of price increases. What gives me the confidence frankly is the history of this industry over the last three to four years.

Brad Meeks – Morningstar

One last question. On the med waste contract, is there any chance, I assume it is not as high a priority as it was the first quarter to break into the med waste base, is this more organic than acquisition related?

David E. Steiner

I think that’s a fair comment.

Operator

There are no further questions at this time. Are there any closing remarks?

David E. Steiner

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

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Source: Waste Management Inc. Q2 2009 Earnings Call Transcript
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