Waste Management, Inc. Q3 2009 Earnings Call Transcript

Oct.31.09 | About: Waste Management, (WM)

Waste Management, Inc. (NYSE:WM)

Q3 2009 Earnings Call Transcript

October 29, 2009 10:00 am ET

Executives

James Alderson – Director, IR

David Steiner – CEO

Lawrence O’Donnell – President and COO

Bob Simpson – SVP and CFO

Analysts

Richard Skidmore – Goldman Sachs

Vance Edelson – Morgan Stanley

Michael Hoffman – Wunderlich Securities

Hamzah Mazari – Credit Suisse

Scott Levine – JP Morgan

Jonathan Ellis – Bank of America/Merrill Lynch

Bill Fisher – Raymond James

Operator

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 2009 earnings release. (Operator instructions) I would now like to turn the call over to Jim Alderson, Director, Investor Relations. Thank you. Mr. Alderson, you may begin your conference.

James Alderson

Thank you, Nicole. Good morning, everyone and thank you for joining us for our third 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.

During their statements any comparisons made by David, Bob, or Larry unless otherwise stated will be with the third quarter of 2008.

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 on our website at wm.com. The Form 8-K, the press release and the schedule to the release include important information that you should refer to.

We have given detailed information on all of 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 schedules for the earnings press release and the Form 8-K filed today, which can be found on the company’s website at wm.com.

Additionally, during the call you will hear certain forward-looking statements concerning our plans and expectations for the fourth 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 November 12. To hear a replay of the call over the Internet, access the Waste Management website at wm.com. To hear a telephonic replay of the call, dial 800-642-1687 and enter the Reservation Code 3006451. Time-sensitive information given during the course of today’s call which is occurring on October 29, 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 expressed written consent of Waste Management is prohibited.

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

David 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 programs. Our success is proven by the fact that despite an 8.9% decline in volume, our operational earnings were flat year-over-year. In other words, if we start with $0.54 as adjusted and add back $0.09 of non-operational impacts from our recycling and waste-to-energy operations mentioned in our press release, we would have matched as adjusted prior year earnings, again despite volume losses of 8.9%.

This shows the strength of our core operating model, which focuses on pricing and operational excellence. We would expect the fourth quarter of this year to follow a similar pattern. Our pricing and cost programs will make up for volume losses, but we shouldn't see a significant drag from those non-operational items. With year-over-year declines in our waste-to-energy business likely being offset by year-over-year benefits in our recycling operations.

Consequently, we are confident that we can meet the Wall Street consensus of $0.48 per diluted share in the fourth quarter. I'm pleased that we achieved solid third quarter results given this challenging economic environment. We maintained our focus on pricing and achieved internal revenue growth from yield, on our collection and disposal business of 2.9%. We realized the full benefit of our reorganization announced in February, and are on pace to exceed our original target of $120 million in annualized savings.

We increased productivity in our (inaudible) and residential collections lines of business. We have seen some positive signs on the macroeconomic front with recycling commodity prices increasing each month since the lows reached in January. Natural gas prices, which affect the electricity sales in some of our waste-to-energy plants, have rebounded well in the last two months. Collection and disposal volumes have stabilized, which should lead to slightly better year-over-year volumes comparisons beginning in the fourth quarter of this year and continuing into 2010.

Looking at revenue, in the third quarter revenue declined by $502 million, but most of the decline was a result of items that do not relate to our solid waste collection and disposal operations, $189 million of the decline was due to recycling revenues and electricity sale prices, $108 million was related to the decline in fuel surcharge revenues as oil prices declined, and $10 million was related to foreign currency translation. This leads our third quarter 2009 revenue decline related to our solid waste collection and disposal business of about $195 million or approximately 5.5% of revenue.

Pricing continued to be strong and consistent. Internal revenue growth from collection and disposal yield in the third quarter was 2.9%. 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 3.9% in the third quarter. We again produced our strongest results in our commercial collection line of business, where internal revenue growth from yield was 4.4% in the quarter. The yield components of internal revenue growth in our industrial and residential lines of business were 3.8% and 3.5%, respectively.

Internal revenue growth from volumes declined 8.9% in the quarter. The recession-resistant lines of our business, mainly commercial and residential collection, saw volume declines of 5.3% and 3.7%, similar to what we’ve seen in recent quarters. In our more economically sensitive roll-off line of business, volumes were off 18.2%. Despite lower volumes, we maintained our focus on roll-off pricing, which resulted in revenue growth from yield of 3.8% for the quarter. We’ve continued 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 200 basis points.

Turning to yield and volume on the disposal side of the business, third quarter 2009 internal revenue growth from volume decreased by 19.7%. The softness occurred primarily in our more economically sensitive special waste and C&D line. Internal revenue growth from volume for special waste was negative 20.5% and for C&D, it was negative 25.8%. For MSW internal revenue growth from volume was negative 6.3%.

On the pricing front, pricing was strongest in our MSW line with per unit pricing up by 2.9%. Again, we’ll maintain our focus on MSW pricing despite the lower volumes.

The recycling markets have shown significant improvement since January of this year with commodity prices rising on average over 80% between January and September. Even with this improvement, however, average commodity prices were down approximately 40% in the third quarter of 2009. This decline in commodity prices caused a negative year-over-year impact to earnings of $0.05 per diluted share in the third quarter of 2009, consistent with our expectations. For the fourth quarter of 2009, we are anticipating a positive impact to earnings per diluted share of $0.02 to $0.04 in our recycling line of business as we anniversary the steep decline in commodity prices that occurred during the fourth quarter of 2008.

In our waste-to-energy operations, we anticipate a negative impact from electricity sale prices of between $0.02 and $0.04 during the fourth quarter of 2009. While natural gas prices have increased over 150% from the lows reached in September, we expect Q4 2009 prices to be lower on average than Q4 2008 prices by approximately 30%. In addition, the percentage of power sold on a merchant basis increased to 43% during the third quarter.

On a combined basis, we anticipate that our recycling commodity and electricity sales will offset each other for a net breakeven impact in the fourth quarter of 2009. As we look to the fourth quarter, we anticipate that year-over-year volume comparisons should start to improve. However, we will face some headwinds due to the volumes we received during the fourth quarter of 2008 in the aftermath of hurricane Ike, which increased internal volume growth from volumes for disposal by 250 basis points and for collection and disposal by 40 basis points.

So looking at overall volumes for the fourth quarter, we expect the rate of decline to be slightly better than the third quarter of 2009. Given our assumptions, we remain confident that our full-year as adjusted earnings will fall within our previously announced range of $1.95 to $1.99 per diluted share. This is consistent with the current Wall Street consensus of $0.48 per share for the fourth quarter of 2009.

As you all know, our capital allocation program over the past few years has been very clear, return cash to our shareholders through dividends and share repurchases, while opportunistically acquiring assets. We resumed our share repurchase program during the third quarter, and as of today we have repurchased over $100 million of our common stock for the year. In the quarter, we paid $143 million in dividends, and we closed on $82 million of acquisitions, primarily in our collection line of business that will add about $53 million of annualized revenue, and we continue to see good acquisition opportunities.

It is truly an exciting time to be at waste management, and we look forward to entering 2010 with the momentum that we expect to build throughout the year. And with that I will turn the call over to Larry.

Lawrence O’Donnell

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

Operating expenses in the third quarter of 2009 were $1.856 billion or 61.4% of revenues, an improvement of $365 million from the third quarter of 2008 or 160 basis points as a percent of revenue. This is another strong performance given the year-over-year decline in revenue.

The cost reduction is due primarily to three factors. First, flexing down costs and executing our restructuring plan that we put in place at the beginning of the year. Second, lower recycling commodity prices, which resulted in lower rebates we pay to our customers; and third, lower fuel costs from the decline in diesel fuel prices.

I continue to be pleased with the way our team has actively managed down our operating costs during these tough economic conditions. Our new organizational structure that we implemented at the beginning of the year has enabled us to quickly react to the lower volumes by flexing down our costs, while continuing our operational improvements in the areas of safety, fleet maintenance, productivity, and service to our customers. I believe we are in a great position to leverage our cost structure when the economy recovers.

I will now review our performance from the third quarter of 2009 compared with the prior year period in a number of the cost categories. Labor and employee benefits’ cost improved by $59 million in the quarter. $21 million of this improvement relates to costs incurred in the third quarter last year in labor actions in Milwaukee, Wisconsin, with most of that cost related to the withdrawal from Teamsters’ underfunded Central States Pension Fund.

The remainder of this improvement results primarily from reducing routes in reaction to the volume declines, achieving productivity improvements and labor cost savings that resulted from our restructuring that we implemented at the beginning of the year.

We reduced our driver hours by about 915,000 hours by taking trucks off the road as volumes declined, using our routing tool to rebuild more efficient routes and achieving continued productivity improvements.

Transfer and disposal expenses, which include those costs that our collection companies pay to third-party landfills and transfer stations improved by $32 million primarily due to volume declines and our continued focus on managing down our third-party disposal costs.

We lowered our maintenance and repair costs in total by $13 million in the third quarter of 2009 compared to the prior year period as a result of continued reduction in collection truck and heavy equipment fleet maintenance. With the lower volumes, we have parked trucks and we have taken heavy equipment out of service. We have also adjusted our operating hours at our landfills and transfer stations. Our standardized preventive maintenance program has also contributed to the reduction in our fleet maintenance cost.

Subcontractor costs improved by $59 million in the third quarter of 2009 due to using fewer third-party contractors as a result of lower volumes, negotiating down our third-party transportation costs and decreases in the indirect fuel costs passed on to us by our subcontract haulers as a result of lower diesel fuel prices. Cost of goods sold decreased by $103 million, principally due to the reduction of recycling commodity rebates we paid to our recycling customers as a result of lower recycling commodity prices. We also benefited from the implementation of our new recycling pricing and rebate program that is designed to allow us to recover our processing costs and earn a return on our investments before we share the upside on commodity prices with customers.

We lowered our direct fuel costs by approximately $95 million compared to the third quarter of 2008, as a result of lower diesel fuel prices and using less fuel as volumes declined. The average diesel fuel price was $1.72 lower per gallon in the third quarter of 2009 compared to the same period last year. Indirect fuel costs charged to us by our subcontract transfer station haulers declined by approximately $12 million. As I mentioned in the past, our fuel surcharge programs continue to keep pace with changes in our direct and indirect diesel fuel costs over time.

Everything we have accomplished with our restructuring has enabled us to become even more pro-active in managing our costs and efficiently adjusting our operations to match our volumes. This will serve us well as we head into the winter months. I'd like to congratulate our team for the outstanding job they continue to do in a very tough economic environment. We expect the momentum we are created to continue into the fourth quarter and into 2010, and we are well positioned to leverage our cost structure as the economy recovers.

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

Bob Simpson

Thank you, Larry. I’d like to start out by discussing SG&A costs. These costs decreased by $30 million to $339 million during the third quarter of 2009. This decrease is due primarily to labor cost savings that resulted from our restructuring announced in February of this year. Also contributing to the decrease are lower long-term incentive plan expenses, lower bad debt expenses and reductions in advertising and travel expenses resulting from our focus on cost control.

Bad debt expense decreased by almost $4 million for the quarter and our days sales outstanding were essentially flat. We believe that this is a good result, particularly given the economy and we will continue managing all of our receivables very closely.

Depreciation and amortization expense for the third quarter of 2009 declined to $25 million when compared with the third quarter of 2008, principally as a result of lower landfill volumes. As a percentage of revenue, depreciation and amortization expense was 10% compared with 9.2% in the prior year quarter with the increase primarily due to the decline in revenue. Our interest expense declined in the third quarter year-over-year by $10 million primarily due to lower interest rates as well as lower debt levels. Our debt to total capital ratio was 55.8%, well below our target ratio of 60%. The floating rate portion of our total debt portfolio was 28% at the end of the quarter.

Moving to income taxes, in the third quarter of 2009, our effective tax rate was approximately 31.2%. The decrease in our tax rate is primarily the result of the finalization of our 2008 tax return in favorable tax audit settlements. It was also impacted by the recognition of state net operating losses previously unrecognized, as well as updating our effective tax rate. We expect our fourth quarter 2009 effective tax rate to be 36.8%.

Turning to cash flow, third quarter 2009 net cash provided by operating activities was $575 million. Our capital expenditures for the quarter were about $240 million, a decrease of $61 million compared with the prior year period.

Our free cash flow for the quarter was approximately $343 million, and our free cash flow for the first three quarters is $839 million. In order to meet our full year free cash flow target of 1.3 billion, during the fourth quarter of 2009 we will need to produce strong income from operations and closely manage our working capital and capital expenditures. We paid $143 million in dividends in the quarter and purchased as of today over $100 million of our common stock this year. Our dividend yield is currently 3.8%. It takes each and every employee to be engaged in servicing our customers every day to be successful, and again this quarter our employees have met the task. We thank them for their dedication. And with that, Nicole, let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Richard Skidmore with Goldman Sachs.

Richard Skidmore – Goldman Sachs

Good morning. Thank you. Perhaps you could just elaborate a little bit more on your use of free cash flow between now and the end of the year, and also the free cash flow guidance. It seems like a pretty big step up in the fourth quarter versus what you have been doing over the last couple of quarters. Can you just elaborate on how you expect that you can get to that 460 that you need to get your target?

David Steiner

You know, Richard. (inaudible) on a good conversion ratio of our income from operations and turning it into cash. And we typically in the fourth quarter over the last few years have been between 120% and 130% of converting our income from operations into cash from ops.

And then we just got to be really tight on working capital and on CapEx. We expect it to be a challenge, but we think it is something that is achievable.

Richard Skidmore – Goldman Sachs

And then just on the share repurchase, I thought I understood that the plan was 400 million of share repurchase by year-end ’09, is that still the target, or was I just mistaken?

David Steiner

We are authorized to do 400 million, but you know managing our cash in this kind of an environment is important to us. So we haven't gone in as aggressively as we might. I think we're on pace right now to do 250 million, 300 million shares, probably closer to 250. But if circumstances present a real opportunity, we would certainly increase that. But we do want to continue to look for acquisitions and other opportunities as well.

Richard Skidmore – Goldman Sachs

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Vance Edelson with Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi, thanks a lot. Could you just provide some color around how easy it is to raise prices, how competitive is the environment, are customers very receptive to that and what gives the commercial business particular strength there?

David Steiner

Yes, you know, Vance I wouldn't say that there has been a dramatic change. I mean you would expect there to be a dramatic change, maybe with the -- what the economy has gone through in the last year, but frankly we haven't seen a dramatic change in our ability to continue to raise prices. You know on the commercial side, I think a good portion of it is that we provide certainly the best service in the industry, but also when you are getting a 4.4% price increase on a fairly low base with that average customer being somewhere in the $300 to $500, it doesn't appear as such a large price increase.

So -- and you’ll have heard me say it hundreds of times, it is not just as simple as putting out a 4.4% price increase across the board and hoping that it sticks. There is a science to pricing, and we’ve got a group here that applies that science better than anyone. So we certainly expect to keep that price even if the economy continues to be weak, and we expect it to accelerate if the economy gets better.

Vance Edelson – Morgan Stanley

Okay that is great, and then just on the cost side, since you are exceeding the target of $120 million in annual savings, should we expect more going forward, maybe just remind us where you are in the overall process of becoming more efficient in reducing those costs.

Bob Simpson

Yes, we have been running about $10 million a month. We saw a little bit more than that in this last quarter, but we still think we're going to continue on that same pace. We will slightly exceed our original target, but we continue to look for ways to drive out even additional cost as we go forward.

Lawrence O’Donnell

You know, Vance it's important to think of it as two types of costs. There is both restructuring costs of 120, which we took out and that's out permanently. Then there is the other cost we got from flexing down and while most of the flexing down came through in operating expenses, there was some of that in SG&A as well. And I think it is just a matter of keeping those two buckets separate in your mind.

David Steiner

And I'd add lastly Vance that you know, it's interesting that as you go out and talk to the folks in the field, generally at this time of the year when they see the seasonal downturn coming they're a little bit slow to react because they want to make sure if they can cover volumes. After what we saw last year, where like everybody else our volumes fell off dramatically in October. What we are seeing this year is that our field is starting to flex down cost anticipating the seasonal downturn. So I think Bob and Larry are exactly right. We've hit that cost category in every direction, and we continue that -- we expect that to continue.

Vance Edelson – Morgan Stanley

Okay, that's very helpful. Thanks guys.

David Steiner

Thanks Vance.

Operator

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

David Steiner

Good morning Michael.

Michael Hoffman – Wunderlich Securities

How are you all?

David Steiner

Good.

Michael Hoffman – Wunderlich Securities

Seasonality, you know, we didn't have as much in the third, but you always get some down in the fourth. So we should think about revenues are going to be down sequentially as part of this model, right?

David Steiner

Certainly we do expect that, yes.

Michael Hoffman – Wunderlich Securities

Okay. On the recycling side it was just about this time a year ago that the Chinese just kind of pulled the plug. You know, any -- and it's all about consumer electronics. Any sort of visibility through your brokerage business or anything on the know, how the Chinese are behaving and you know, I realized you'd given us guidance that it's going to offset, but what gives you confidence the Chinese just don't pull the plug again?

Lawrence O’Donnell

Well, what we've seen you know, ever since the lows in January, as we have seen continued you know, increases in the commodity prices. You know, we saw OCC pull back just a little bit in October, but it wasn't that much. You know, I guess anything can happen, but we certainly think that we’ll continue to see improvement out of our recycling operations just like we said in our press release and in our remarks.

Michael Hoffman – Wunderlich Securities

Okay, and then --

David Steiner

Michael, I think China is certainly driven by the macroeconomic factors in China, and I certainly haven't seen anything that would indicate that the pace of growth in China is going to slow.

Michael Hoffman – Wunderlich Securities

Okay. That's good to know too. You know, plugging in on the volume issue, do have a dollar amount that I reflected in the fourth quarter because as you think about sort of doing your modeling. I mean if you employ hike out [ph] and then have a normalized, what would the change be?

David Steiner

Michael, as we said it was 250 basis points of volume at the land fills and 40 basis points of volume at the overall collection and disposal line. We didn't translate that into dollars, but you know, basically what we're seeing right now is that the volumes through October are fairly consistent with what they've been in the third quarter where we are going to get the volumes as we said slightly improve the rate of decline in the fourth quarter.

It is because again last year just like commodity prices dropped off the face of the earth in October, volumes dropped off the face of the earth in October. So the comps get much easier going forward. So what we've seen so far frankly has been fairly consistent with what we've seen through the rest of the year, but November and December clearly volumes should you know, if they continue what we've seen through the quarter sort of flat throughout the last 18 to 20 weeks. If they continue with that and have sort a normal seasonal downturn, they should be much better than they were in November-December last year.

Michael Hoffman – Wunderlich Securities

Okay, and then on the waste energy business, I mean the model so far on the merchandise has been to sell on a day rate basis. Is that changing with regards to trying to capture even if it is out six or nine months, a little bit of that forward curve because there is pretty good contango there going on.

David Steiner

Yes, and we have not looked at locking in those yet Michael. We wanted to see the natural gas prices, look they're up 150% of their lows, but they are still down about 40% year-over-year, and so we wanted to wait until -- we think at least short term with winter months coming up that you won't see natural gas prices drop dramatically. So before we lock-in, we want to make sure that we are locking in at the best rates we can.

Michael Hoffman – Wunderlich Securities

Okay and then can we talk a little bit Larry about you know, low inflation, low growth environment. How would you think about capital spending as a percent of revenues in that kind of environment? You know maybe you have run 9%, 10% historically but you've had some inflation in that and more growth, organic growth in the economy. Those are all low or almost zero. What do you think about cap spending as a percent of revenues?

Lawrence O’Donnell

Well, you know, a big part of our -- the two big components on our capital spending, first landfills and that's going to be really driven by what the volumes are. So you know, we've gotten really good at almost building out volumes or sales just-in-time. So that will be reflected with what we see in volumes, and on the trucking container side I mean you know, we parked up and talking about, we parked a lot of trucks this past year as well as containers, and while we filled some of those older assets, you know, we've also made sure we've parked and put off to the side.

So those be ready to go if we see volumes pick up, some of that equipment both trucks and heavy equipment. So you know, I could see it is next year not spending as much on trucks as we did. You know, this current year, but we are going to monitor that. We are going to make sure we're managing you know, our capital in the right way given what the economic conditions are.

Michael Hoffman – Wunderlich Securities

So, 8.5%, 9% is not an unrealistic number given that way you've just described that?

Lawrence O’Donnell

It could be in that range. I mean we're going to just kind of see how the year plays out and you know, just like what we've done this year, we are going to -- we've got our hand on the lever and we're going to adjust to whatever the economic conditions present to it.

Michael Hoffman – Wunderlich Securities

Okay, back to again disposal, you know, realized front-end loader business you got servicing real changes. So in the mix through the first nine months, but everything goes across to scale. Are you seeing on your trucks any increased tonnage out of your front-end loader business that supports some of the commentary that the consumer has shown a little bit of life and it might not be revenues yet, but you're at least getting incremental tonnage.

David Steiner

Yes, Michael what we see is that actually the tons per haul are down slightly in the commercial business, basically flat in the roll-off business, but the amount that they are down has improved each quarter during the course of the year. So, certainly that's a positive trend.

Michael Hoffman – Wunderlich Securities

Okay, and then Bob on the cost side what's your visibility or thoughts on the flexion part as the business starts to grow again. You know, how long do you think you can hold on to not, because your two biggest components are labor and your disposals. How long do you hold on not having to add labor as you get growth? How should we think about that, you know, 3% to 4% top line and you can hold the labor tight or is it, where is that number flexion?

Bob Simpson

Michael, I've continued to say that I think we are going to be able to leverage our cost structure. You know, one thing that we did when I got with the group SVPs and we came up with this model to use in the restructuring. One thing we wanted to make sure we did was restructure in a way that would position us well when the economy did come back. And so I think we've got a cost structure that's going to serve us well when the economy you know, starts to -- we start seeing real signs of growth and you know, it's certainly our intention to leverage that cost structure and continue to see benefits from that.

Michael Hoffman – Wunderlich Securities

Okay. And David, I have to ask the medical waste question. So how are we doing progress wise, I saw you announced an acquisition (inaudible), it was little, but you know what sort of the visibility on the progress towards your $300 million in revenues.

David Steiner

Yes, you know, Michael as you point out we did do a small acquisition and it's certainly going to take time. We are not going to get the $300 million in revenue overnight, but what we're seeing as far as we start to build out the network and the customers receiving our offer has been very encouraging. So we look forward to building that business.

Michael Hoffman – Wunderlich Securities

Okay. Well nice job on the numbers.

David Steiner

Thank you Michael.

Bob Simpson

Thank you Michael.

Operator

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

David Steiner

Good morning Hamzah.

Hamzah Mazari – Credit Suisse

Good morning. Thank you. Just -- on your waste-to-energy business, could you comment on your acquisition pipeline there? You know, it looks like there are a number of projects, both domestically and internationally, and you know, how much capital are you putting towards those efforts? How many bids are you looking at right now? And also just remind us what you're contracts are struck on the Wheelabrator business, and is 43% exposure the right number to market in 2010 or is that 50%?

Bob Simpson

Yes, the 43 moves to about 48 to 50 in 2010. So not a dramatic move in 2010, and we'll talk about the growth, sort of by country. You all saw our announcement on our acquisition of 40% interest in Shanghai Environment in China. That will be about $145 million. It's in the normal review process right now in China. It has to be approved by the government like any transaction with a partnership with a foreign partner, and so you know, we expect that to close sometime in the first quarter of 2010.

Again that'll be about $145 million. It won't have exposure to merchant power because the waste contract and the electricity contract are locked in. And in Europe, we continue to bid for projects. We've been short listed on a number, but we haven't won any of those projects yet, and so once that happens we'll report that, and in the United States there are two or three projects that we believe that we are the primary party that's being looked at to build those plants.

You know, obviously we will announce those as we can. We’ve probably seen some press on some of the plants that we are looking on building in Baltimore, and then recently we bid to purchase a plant that we refer to as SIPSA [ph] in the southeast for about $150 million. So, when you look at you know, sort of the current outlay as we look to build plants, whether it is domestically or internationally in Europe or in the United States, obviously the cash outlays for those won't be for a number of years, because as we win the bids, it will be 3 to 4 years before we finalize construction. The two that we will put money out currently, you know, would be China at $145 million, SIPSA at about $150 million.

Hamzah Mazari – Credit Suisse

Okay, great. And then on the volume side are you guys seeing any additional signs of volume stabilization, which are different from last quarter or you're just seeing the same thing?

David Steiner

No, you know, from a volume perspective what we are saying is basically, it has really been interesting that what we've seen over the last, probably 20 weeks has basically been sort of a flat line of volumes now, given that that flat line dropped off dramatically in October of last year, we would be thrilled to death if that continues through the fourth quarter, but what we've seen is basically the volume stabilized and that gives us the confidence to believe that the volumes or the rate of decline is going to be better in the fourth quarter than it was in the third.

But, you know, we also look at some other signs. You know, Michael asked about the tons per haul or other measures of tons per unit, and then we also look at our net service increases versus our net service decreases. And our net service increases -- our net service increases net of our service decreases were basically flat this quarter, down $100,000. That compares with being down anywhere from $1 million to $1.5 million in the prior three quarters. So the signs that we see show again stabilization in the volumes. We are not expecting the volumes to come roaring back like they were in 2007, but we certainly see stability, and given the year-over-year comps stability would be a very good thing.

Hamzah Mazari – Credit Suisse

I will let some other people ask questions. I'll get back in the queue. Thank you.

David Steiner

Thank you.

Operator

Your next question comes from the line of Scott Levine with JP Morgan.

David Steiner

Good morning Scott.

Scott Levine – JP Morgan

Good morning guys. How are you doing?

David Steiner

Good.

Scott Levine – JP Morgan

A couple quick ones for you. Geographically were there any unusual trends or notables more accurate trends either positive or negative in any of your regions that will be noteworthy either on the volume or the price side?

Bob Simpson

No, nothing of note at all. There is a slight difference right now, and, you know, as you'd imagine the economies were hurt more in the South and the West than they were in the Midwest and the East, because there were falling from a higher perch if you will, and so you see a slight difference in the South and the West but nothing that I would call dramatic or that I would say as a trend. So really no big regional differences.

Scott Levine – JP Morgan

Okay, and then following up on the uses of cash question earlier, you guys last couple of years I think have made an announcement on your dividend in the month of December or late in the year, any thoughts on how that fits into your cash flow usage decision-making?

David Steiner

Yes, certainly Scott. You're exactly right. This is the time of year, we have a board meeting in November and another board meeting in December. The December meeting is generally when we present our capital plan for 2010 and so any announcement that we make with respect to the capital plan would occur after that meeting.

Scott Levine – JP Morgan

With regard to the guidance or the implied guidance in the fourth quarter as well, could you tell us, I don't know if you mentioned earlier Bob the tax rate you're assuming?

Bob Simpson

Yes, I did mention. It is 36.8.

Scott Levine – JP Morgan

And is that a good one to think about for 2010 preliminarily?

Bob Simpson

I think for 2010 you're probably going to see something more at 37ish, but we'll give some guidance on that Scott after we finish our budgets in due for the year, but it will be a little bit north of what we talked about today.

Scott Levine – JP Morgan

Very good, and then without asking for guidance on 2010 obviously, what preliminary thoughts could you offer in terms of the business outlook or is really the expectation, a reasonable expectation at this point to kind of think about stability on both, stability on the volume side. Were the volumes really more a function of math than anything else and then pricing just kind of remaining disciplined, but other folks have really talked to falling CPIs weighing on the reported growth rate. Any commentary you could give would be appreciated.

David Steiner

Just, you know, Scott it's like I said earlier, from a pricing perspective we don't see us going backward on price. The only way we see us going is forward. If the economy is more robust in 2010 than we expect, we'll do better on pricing. So we don't see us going backward on pricing. From a volume point of view, I think you've hit the nail right on the head. Stability is the word, and if we can see stable volumes you know, we would fully expect the year-over-year comps in the sort of the first half of the year to be less negative than they were this year, and then we think there could be some actual volume growth in the second half of the year. So we're just looking forward to starting 2010.

Scott Levine – JP Morgan

That is it. Thanks guys.

David Steiner

Thanks Scott.

Bob Simpson

Thank you.

Operator

Your next question comes from the line of Jonathan Ellis with Bank of America/Merrill Lynch.

David Steiner

Good morning Jon.

Jonathan Ellis – Bank of America/Merrill Lynch

Good morning guys. First of all, just you've given the pricing for MSW to landfills. Could you also, normally you provide overall landfill pricing and then pricing for C&D or special waste.

David Steiner

Yes, the overall pricing of the landfill on an IRG reported basis, not on per unit basis is about 1%, and on special waste it was basically flat. Both C&D and special waste were basically flat, slightly positive but you know, 0.2%, 0.3%, but basically flat.

Jonathan Ellis – Bank of America/Merrill Lynch

Okay, great. And then just on the environmental fee, can you provide us the -- if you have it handy, the dollar contribution this quarter. Also any thoughts on you know, whether you may look to raise the environment fee again next year?

Bob Simpson

Yes, the contribution -- the year-over-year increase is about $9.8 million. The total contribution is about $56 million. You know, we are now at 6% on the environmental fee. You know, I certainly don't see. We have not again looked at our 2010 plan. We'll do that in December. But I certainly don't think that that you'll see a dramatic increase in that.

Jonathan Ellis – Bank of America/Merrill Lynch

Okay, great. The -- just there was a reference to CPI from an earlier question, but I guess if you can help us kind of ring-fence what the potential risk is. Do you have a number in terms of percentage of revenues tied to municipal contracts, where there is some kind of inflation escalator, and you know, to what extent you think you can kind of negotiate if in fact, you know, CPI for the full year is negative?

Bob Simpson

Yes, I mean. I don't know about you all, but I haven't seen CPI for the full-year going negative on this yet. You know, we have about $3 billion of municipal business. You know, most of that $3 billion is going to be tied to CPI or PPI. You know, I'm not sure that we are going to see negative CPI, and mind you that not all of those contracts allow for the price to go backwards. A lot of those contracts only contemplate positive CPI. So again you know, if we see CPI going backwards to where it becomes negative, then that's something we are going to have to address with our municipalities but look these are long-term contracts that we signed up too and we're just going to have to make that up somewhere else.

Jonathan Ellis – Bank of America/Merrill Lynch

Okay, that's helpful. And then just, quickly turning your attention to profitability and you know, normally looking at things on a sequential basis is dangerous in this industry given the lack of seasonality this year, I figure it would be somewhat appropriate to compare 2Q and 3Q, and I did notice that there was some up-tick in the selling expense between 2Q and 3Q this year. Any particular reason for that, where there changes in accruals or deferred compensation anything on those lines?

Bob Simpson

Actually, but [ph] for a reversal of our long-term incentive plan accrual in the second quarter, the amount of the reductions are just about the same. I think we didn't have that long-term incentive plan accrual benefit in the second quarter and plus a few smaller items, we would have been at the same rate than as we are in this quarter. So it's really been no change.

Jonathan Ellis – Bank of America/Merrill Lynch

Okay, great. Thanks a lot guys.

David Steiner

Thank you.

Bob Simpson

Thank you.

Operator

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

Bill Fisher – Raymond James

Good morning.

David Steiner

Good morning Bill.

Bob Simpson

Good morning Bill.

Bill Fisher – Raymond James

Yes, I just -- first you guys have done a great job on the labor productivity, obviously through the downtown and obviously have some leverage when the economy improves. Do you see -- are there any other initiatives you are looking at or you can talk about on that front that might help you, you know, if volumes are more sluggish or stable or whatnot?

Bob Simpson

Well, couple of things. One, you know, we put in place a whole new labor management tool that I think has really helped our field adjust their labor cost and in the number of heads they need on a much more current basis than we had before. The other thing we have is a routing tool that we've updated that the field is using and, you know, they are constantly as you might imagine with that much volume change and are changing constantly, all of our operations are in a constant state of rerouting.

You know, they just never, they never stop. I think with those two tools, it helps us not only as we see the downturn but I think it's going to help us when we start seeing increases in activity to better manage our costs than we were able to do before. On the maintenance side you know, there is still opportunity there. We continue to standardize our fleets, standardize our maintenance practices, and that's one of the reasons that we been able to continue to see those costs going down, even when we were in an inflationary environment.

So I think there is still continued opportunity for us there as well. Productivity, you know, with the focus that we've had on improving our efficiency, and that doesn't mean driving faster. We've really analyzed our routes and found ways to drive out inefficiencies. We'll continue to do that. So, you know, we've got a lot of levers at our disposal on the operations side that you know, I think there is continued opportunity for us to improve our cost structure, even if activity stayed at the same level that we are seeing now.

Bill Fisher – Raymond James

Okay, great. And just totally different thing on that, you mentioned a lot of detail on the natural gas prices and impact on waste energy. Do you feel those have negatively impacted the landfill gas business or is that just too immaterial or kind of hard to isolate?

David Steiner

Clearly they would have affected it, but not anything again. You're right. It's not material for the results.

Bill Fisher – Raymond James

Okay, great. Thank you.

David Steiner

Thank you Bill.

Bob Simpson

Thank you Bill.

David Steiner

You know, when we look at the quarter, virtually all of the trends that we follow are positive, and the cost actions that we took this year are going to continue into the fourth quarter and into 2010. So we look forward to a strong fourth quarter and a return to growth and profitability in 2010. And with that Nicole, we’ll say goodbye to all and see you on the road.

Operator

Thank you for participating in today's Waste Management third quarter 2009 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 Thursday, November 12, 2009. The conference ID number for the replay is 30064951. Again the conference ID for the replay is 30064951. The number to dial for the replay is 1800-642-1687 or 706-645-9291. Thank you for participating in today’s conference call. You may now disconnect.

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