Allied Waste Industries, Inc. Q4 2007 Earnings Call Transcript

Allied Waste Industries, Inc. (AW)

Q4 FY07 Earnings Call

February 14, 2008, 05:00 PM ET

Executives

James P. Zeumer - Sr. VP, Public Affairs, Communications and IR

John J. Zillmer - Chairman and CEO

Donald W. Slager - President and COO

Peter S. Hathaway - EVP and CFO

Analysts

Leone Young - Citigroup

Corey Greendale - First Analysis

Jagdeep Ghuman - Credit Suisse

Scott Levine - J.P. Morgan

Jonathan Ellis - Merrill Lynch

Brian Butler - Friedman, Billings, Ramsey & Co.

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Allied Waste Industries Fourth Quarter 2007 Earnings Conference Call. At this time all participants are in listen-only mode. After the prepared remarks by the company we will conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded Thursday, February 14, 2008.

I will now turn the call over to Mr. Jim Zeumer, Senior Vice President, Communications. Please go ahead sir.

James P. Zeumer - Senior Vice President, Public Affairs, Communications and Investor Relations

Thank you, Carol. I'd like to thank everyone for joining us this afternoon to discuss Allied Waste's fourth quarter results for the period ended December 31, 2007. We will follow our prepared remarks today with a Q&A session.

On the call to review our performance are John Zillmer, Chairman and Chief Executive Officer; Don Slager, President and Chief Operating Officer; Pete Hathaway, Executive Vice President and Chief Financial Officer. Also joining us in the room today is Mike Burnett, Senior Vice President and Treasurer.

Before we start, I'd like to remind everyone that certain matters discussed during this conference call are forward-looking statements, intended to qualify for Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements will generally be identified as such because the context of the statements include the words such as the company believes, anticipates, expects, or words of similar import.

The forward-looking statements are subject to certain risks, uncertainties and other factors which could cause actual results to differ materially from those currently anticipated. A description of such risks, uncertainties, and other factors can be found in our earnings press release for the quarter as well as periodic reports filed with the Securities and Exchange Commission. Shareholders, potential investors and other participants are encouraged to consider these factors carefully evaluating the forward-looking statements and cautioned not to place undue reliance on such statements.

Forward-looking statements made during today's conference call are made only as of the date of this call and the company undertakes no obligation to publicly update these statements to reflect subsequent events or circumstances. Our presentation also includes certain financial measures including gross profit, free cash flow and EBITDA, or operating income before depreciation and amortization that are considered non-GAAP financial measures.

You can access information required by the SEC about these non-GAAP financial measures, including a reconciliation to the most directly comparable GAAP financial measure, in our press release for the fourth quarter which is located on our website at alliedwaste.com.

I would now like to turn the call over to John Zillmer, Chairman and CEO of Allied Waste.

John J. Zillmer - Chairman and Chief Executive Officer

Thanks Jim. Let me start out by saying that Allied Waste had an exceptional year with our Q4 results sorting the highlights of tremendous progress our organization has made. Allied 2007 results show the success of ongoing initiatives in support of strategic pricing, operating efficiency and increased cash flow all in alignment with the goal of delivering profitable growth. By driving consistent results our action should translate into an increase in the value of Allied Waste stock.

Following the detail review of our Q4 results to Don and Pete and I'll take just a couple of minutes to talk about a recent meeting with an investor who is been involved with Allied in the past and was considering reinvesting in the company. As we move through a series of questions we've heard many times it became clear to me that he viewed Allied as the company of 4 or 5 years ago not the Allied Waste of today. If we had before and after photos of this company, the dramatic gains and operating financial strength would be striking, which takes on added importance in light of current economic conditions.

The most obvious change is that since 2004 we have shed about $1.6 billion of debt, and in the process we dropped our debt-to-capitalization to 63%, our leverage to just under four times, and our average cost of capital to below 7%. With no debt maturities until late 2010, and $1.2 billion available on our bank lines, we are no longer highly levered, but rather we have an appropriate capital structure for the current stage of our business development.

The business and the management team have clearly demonstrated the ability to manage leverage. More importantly, with Allied's 2008 EBITDA forecast to grow 5% to 6% and to exceed $1.7 billion, and with free cash flow expected at $400 million, our capital structure provides the freedom to operate effectively and to grow the business profitably through organic opportunities, acquisitions, and strategic investments.

Let me be clear this is not a lead-in to saying we want to add more debt, rather it is just to emphasize our improved capital structure. We clearly have the financial strength and flexibility to operate and grow successfully. Allied's financial strength has been to rebuild over the past several years through continued gains and operating performance.

We have centralized critical activities such as pricing and purchasing. We have built organizational capability and continue to standardize business practices to capture greater efficiency. You can pick any metric and see the progress. From productivity and safety to revenue growth and margin expansion, to cash flow generation and financial returns; we are just better. For all of our progress however, there are still many opportunities to further improve our performance. For example, we continue to implement our strategic pricing programs. As demonstrated by price being up 6% in 2007, and our outlook for 4.5% price growth in 2008.

Our strategy of pricing to achieve acceptable returns will not change. Efficiency gains are allowing us to successfully manage labor and lower those related costs. Our purchasing programs are positioned to deliver $25 million to $35 million of additional savings in 2008. The end result is that we see opportunity to grow top line revenue with a potential to expand operating margins by upward to 100 basis points in the year ahead.

In fact, as Pete will detail, our outlook for 2008 shows additional gains from top and bottom line growth to cash flow generation Allied Waste is delivering improved performance. We fully appreciate that economic conditions are likely to remain challenging but at the same time Allied Waste is at its strongest point in almost a decade. In fact, our financial strength provides us the opportunity to proactively address our outstanding tax issue.

We plan to use some of our 2008 free cash flow to make an early payment of the tax and interest associated with our BFI related tax dispute with the IRS. Making this payment does not resolve the matter however, we have accrued for it. So, opportunistically paying now doesn't impact expected 2008 income. Pete will provide more details later in the call.

One last difference in the outline of today is that although we are focused on controlling costs, we continue to invest appropriately in maintaining the business and adding new operating capabilities and in developing our people. Whether its new trucks, new service offerings or development training for employees that are supporting those programs that are critical to our long term success.

Towards a changed and much stronger organization, we look to the year ahead. As our outlook indicates, we plan to continue our strategic pricing program to generate appropriate returns on our assets. We expect that volume could again be lower in 2008 but it should be less of a drag than we experience in 2007. The Waste industry was one of the first to feel the impact of the housing collapse. So, we'll begin to anniversary to start of a slowdown early in 2008.

Given our expectations for the economy we have already taken actions to reduce overhead and to refocus everyone's attention on the need to control expenses. From large expense items such as staffing levels to smaller ones like travel. We have reduced spending and position the company for success. If economic conditions are better than expected, then we are that much further ahead.

In closing, I want to thank all the employees of Allied for delivering outstanding results in 2007. It is our hardworking commitment to the customer along with the belief in the company's direction that has put Allied Waste in such a strong financial and competitive position.

Now let me turn the call over to Don Slager.

Donald W. Slager - President and Chief Operating Officer

Thanks John. Based on my long personal experience with this company, I can tell you that John is absolutely right when he said that Allied is a very different and much stronger organization. Our Q4 and full year results clearly demonstrate just how much better we are.

In the fourth quarter we saw continuation of business trends, we experienced throughout 2007 with higher prices being partially offset by lower volume. For the year price was up a record 6% as we continue to benefit from our strategic pricing initiative and overall better customer account management.

In the fourth quarter, price was up 5.7%, exclusive of any impact from recycling and higher commodity prices. We also build an additional 50 basis points associated with our fuel recovery fee. Pricing was up across all lines of business, with notable strength and commercial up 8.4% and roll-off which was up 4.8%. Combined landfill and transfer station price gained 7.1% for the quarter, and 5.9% for the year.

Entering 2007, we talked about the need to apply the same strategic pricing discipline on our disposal operations as we add on our collection business. Clearly, we were successful on pricing new landfill business and its contracts came up for renewal. Similar to the prior two quarters of 2007, strong pricing Q4 was partially offset by softer volume which was down 3.8% compared with 2006. Roll-off and landfill volumes remain under pressure with the business down 5.5% and 7.3% respectively.

We experience lower internalized and third party landfill volumes which reinforces our assessment that changes are more closely related to the overall economy than the shifts in market share. Analyzed in a different lines business we estimate that roughly 70% of the volume decline was related to the slow down in the economy. With the remainder reflecting acceptable losses associated with our price optimization and account rationalization programs as we exit low margin business when appropriate pricing can't be achieved.

Given how market conditions unfolded over the year, I am very pleased with how our operations responded quickly and aggressively to get cost out of the business. Operating expenses as percent of revenue dropped 180 basis points for the quarter and 170 basis points for the year. Even after absorbing significantly higher fuel costs. Labor costs for the quarter dropped as a percent of revenue by 20 basis points although they were up in dollars.

Our quarterly results for 2007 show that our operations were adjusting the labor force in response to softer demand. With changing expectations about the 2008 economy we asked our operations leadership to revisit labor cost and measure themselves against our internal benchmarks. The result was that they found opportunities to further adjust staffing levels. Based on this benchmarking exercise we implemented a more comprehensive adjustment in Q1 of 2008. Our actions, which reduced our workforce by about 2% were implemented partly in response to lower volume, but equally important is that through various standardization initiatives, we are simply gotten more efficient in providing our services.

After assessing the benefits of our improved operating practices and the strength of our field operations, we are also realigning our organizational structure from five regions down to four. This change reflects the development of our management team and the effectiveness of our organization and it will allow us to redirect resources into other areas of the business to derive additional future benefits.

As part of our efforts to reduce labor cost, and capture-related efficiencies, we continue to invest resources in a variety of people focused initiatives from recruiting and on boarding to training and safety. The gains have been significant. As employee retention is up, especially at the critical driver level, safety has improved and overall costs have been lowered.

Beyond labor, our investment in trucks continue to pay dividends, as repair and maintenance costs again declined. I would also highlight that along with lowering R&M costs, our purchase of 900 new trucks in '07 help lower our average fleet age to 7.5 years; putting us among the lowest in the industry.

Our fleet strategy and commitment to making appropriate investments are paying big dividends as maintenance shop costs are down, trucks are on the road consistently as service levels improved. While many of our costs have flexed lower in line with changes in volume, fuel jumped noticeably in the quarter climbing by $20 million or 29%. We estimate that higher fuel costs negatively impacted margins by as much as 120 basis points in the quarter.

Q4 capital expenditures totaled $174 million, which is up 11% from last year. The increase for the quarter reflects primarily the timing of landfill construction as CapEx for the year was up roughly 1%. As a side note, during the quarter we were successful in expanding available landfill capacity by approximately 17 million tons which had a favorable impact on landfill amortization rates. For the year, CapEx was $670 million which was on target with our lower spending guidance. We continue to invest in the business, allocating capital to markets and projects that can support growth while, provide acceptable rates of return. Given our expectations for volumes in 2008, we plan to scale back CapEx slightly to $650 million with an emphasis on spending capital holding on most projects that clearly support the long-term growth of the business.

In closing, we have responded well to the business environment and acquisition of the company for success. Operationally and financially, Allied is in a position to grow and capitalize on these market dynamics. Given the demonstrated success of our strategic pricing initiative, we will continue to refine and implement this important component of our overall strategy. By driving price and ratcheting down our costs, are providing high value service to our customers, we positioned Allied to continue its delivery of improved earnings in returns.

Looking ahead to 2008, we will continue to push a small number of key strategies and initiatives that focus on building durable capabilities within our organization. Reducing predictable cash flows and wisely investing in the business to drive targeted, profitable growth. Success in these areas allowed Allied Wastes to deliver excellent 2007 results and also strengthen the foundation that supports our long term value creation.

Now, let me turn the call over to Peter Hathaway.

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Thank you John. As reported in our earnings release, strong pricing drove full year 2007 revenue to a record 6.1 billion, while EBITDA grew 7.5% to $1.65 billion. The bottom line benefit of these gains was reported earnings from continuing operations of $310 million or $0.71 per share. As detailed in the tables of our release, earnings for the year would have been $0.80 per share when adjusted for asset sales, impairments, refinancing cost and tax benefits.

Specific to the fourth quarter, income from continuing operations was $117.6 million or $0.27 per share. Reporting fourth quarter earnings include a tax benefit of $0.03 per share I'll come back to our taxes in a minute. In 2006, fourth quarter earnings from continuing operations were $8.2 million or $0.00 per share. Prior year results include $0.17 per share in charge as primarily associated with tax related benefits.

Reported gross profit for the quarter increased $47 million or 8.7% to $587 million, a gross margin... as gross margin expanded 180 basis points to 38.6%. Higher gross margins for the period reflect the impact of account rationalization efforts as well as strong price depreciation and initiatives to improve operation effectiveness and efficiency.

On a dollar basis, operating cost for the period increased $7.8 million less than 1% reflecting a large increase in fuel expenses. Risk management cost benefited from our efforts to lower accidence and claims within our operations. Through ongoing investments and safety training and creating a safety first culture we realized a direct reduction in our property and casualty liabilities following the standard annual review.

Financial performance is important but even more important is that our major safety initiatives are making a difference in creating a safer work environment for our employee. Other operating expenses for the period decreased $6 million as we benefited from gains on normal property sales which were completed in the quarter.

SG&A expenses increased $5 million in the quarter while decreasing 10 basis points as a percentage of revenue to 9.9% although up year-over-year SG&A cost were down about $5 million from the third quarter 2007. We expect that actions taken to lower SG&A cost in Q4 will also benefit the year ahead. We expect SG&A in 2008 to decrease approximately 40 basis points from the 10.4% reported in 2007.

Depreciation and amortization cost in the quarter increased $6 million driven primarily by a higher depreciation expense associated with recent capital expenditures. Interest for the period dropped by $15 million as we continued to benefit from actions taken in 2007 to lower our cost of borrowing. As noted in our earnings release our efforts continued subsequent to a quarter end as we used accumulated cash to retire $161 million of debt which came due in January 15, 2008.

Allied's tax rate for the quarter was approximately 35% compared with 93% last year. Fourth quarter 2007 taxes were benefited approximately $15 million related to favorable developments on previously recorded federal and state income tax matters that lowered our exposure and resulted in a reduction and accrual. Last year's Q4 tax rate reflects the impact of approximately $58 million of expenses associated with interest charges related to matters under review by the IRS and adjustments to state income taxes. In 2008, an effective tax rate of between 42% and 43% is expected at this time.

For the quarter Allied's cash flow from operations was $324 million compared to $290 million last year. Free cash flow generation for the quarter increased 14% to $164 million. The increase in free cash flow for the quarter was driven by a higher operating income and timing related to working capital changes. For the full year, free cash flow generation was $479 million, almost double last year's free cash flow of $250 million driven by improvements in operating cash flow. Free cash flow in 2007 was directed towards further strengthening our capital structure after considering the increase in cash, we reduced our net debt by over $400 million ending the year with a total debt balance of $6.6 billion. At quarter-end we had, more than $1.2 billion of available capacity on our revolver.

Looking ahead, our outlook for 2008 shows we are targeting revenue growth between 1.5% and 3% although we expect economic conditions to remain challenging primarily driven by continued weakness in the housing sector. We expect the annual volumes in 2008 could be lower by 1.5 to potentially 3%. The same time, our plan show continued success in our pricing strategy programs which we estimate could improve price by approximately 4.5%.

Operating income for the year is expected to range from $1.145 billion to $1.185 billion which in addition to revenue growth assumptions reflects continued savings in our operating cost and SG&A estimated at 10% of revenue. Built into this estimate our expected savings of approximately $20 million from recent work force adjustments and realignment, net of approximately $10 million in the severance and costs which will be recorded in the first quarter of 2008.

2008 depreciation and amortization is expected to be $575 million or about 9.5% of revenue with capital expenditures for the year targeted to be $650 million or about 10.5% of revenue. Given our outlook for the operations in investment we expect free cash flow generation of approximately $400 million excluding the payment related to taxes and into John referred to earlier.

Allied capital structure has been strengthened over the past several years as we have dramatically lowered our debt, our leverage and our interest expense. This strength along with no maturities until late 2010, gives us the flexibility to consider alternative uses of our cash along with continued debt repayment. For example, in 2008, we plan to make tax and interest payments of approximately $315 million primarily related to our tax dispute with the IRS. The payment represents taxes and interest associated with this matter which relates back to the acquisition of BFI and is well detailed in our 10-K. The net payment is comprised from tax and interest less and expected benefit from interest deduction of approximately $75 million.

We made this choice because interest is accruing at rates up to 9%, compared with the borrowing rate on our revolver of less than 5% today. There are clear economic benefits to taking this opportunity to make the payment although it does not resolve this matter with the IRS, Allied has accrued the taxes and interest, so there is no P&L impact, only the cash flow. Even with this payment, we anticipate our debt-to-EBITDA to be below 3.75 times by the end of 2008. Paying as liability does not in any way change our legal position nor is it meant to imply we have changed our opinion as to the merits of our position rather it just makes good economic sense.

In using this outlook to think about 2008, I'd like to remind you that that there are normal seasonal patterns to our business, which results in Q1 being our weakest quarter of the year. I know its Valentines Day and that people in the East coast want to get home, so let me end here by saying that we are very pleased with Allied Waste fourth quarter and the full year results, and that by remaining focused on our goals in generating visible gains in pricing, productivity, and capital efficiency we can continue to deliver strong results.

Thank you for you time and we are now prepared to open the call for questions.

Question And Answer

Operator

[Operator Instructions]. Our first question today comes from Leone Young from Citi. Your line is open.

Leone Young - Citigroup

Yes thank you and first of all congratulations.

John J. Zillmer - Chairman and Chief Executive Officer

Thanks Leone.

Leone Young - Citigroup

On the IRS payment, surely doesn't resolve things but it obviously makes economic sense and I understand that but obviously the overall potential liabilities in the Q's and K's is been a lot more. So in essence have you sort of closed the books on that or by making this payment now or is there potential future payment?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Leone its Pete. That's a great question. Our objective here is to put a box around this particular liability to get a focus on what this potential outflow could be. The interest in the taxes that we are paying today are the interest in taxes related to the matter in dispute. And so look at it this way if we were to loose that matter we would pay this $315 million net of benefit for the interest deduction, so puts a box around that. If were to win we get that back. So it just stops the interest meter from kicking at that rate and just basically converts it to a more economic rate.

Leone Young - Citigroup

Great and can you talk about the timing of when you intent to do that?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Well we... I think it was yesterday, we made roughly $200 million of the payment and I think the rest might come in mid year.

Leone Young - Citigroup

Great and perhaps Don if you could talk a little about... on the business side it seems to appear that your landfill volume loss is stabilizing, am I looking at that correctly?

Donald W. Slager - President and Chief Operating Officer

Yes that's right I said in my comments we think some of that sort of anniversaring now and you will see how it goes throughout the year but we feel we are right about [ph] where the volumes are today.

Operator

Our next question comes from Corey Greendale of First Analysis. Your line is open.

Corey Greendale - First Analysis

Hi. Good afternoon.

John J. Zillmer - Chairman and Chief Executive Officer

Hey Corey.

Corey Greendale - First Analysis

I guess first question is the free cash flow guidance $400 million is that been on a just below [ph] the 478 or say you guys this year so what are the factors that make free cash flow lower next year?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Sure, great. Again Pete. Free cash flow at $400 million estimated for 2008 reconciles roughly this way, we expect obviously to improve EBITDA performance to see better cash flow from operating performance. You will see an improvement in year-over-year cash flow generation from a reduction in interest charges as we paid down debt balances this year, done some refinancings to lower our average cost of borrowing and obviously on our variable rate debt we'll probably see some additional reductions in interest... interest rates and interest cost this year.

That will be offset by an increase in cash taxes which will probably amount to around $220 million next year most certainly you are and many of the listeners are aware that we have been benefiting from an NOL for many years and we've indicated for couple of years now that by the end of 07 we would be exhausting those NOLs and in fact we have. So we will be going to the full cash tax payer and a full... excuse me full federal tax payer and a full state cash tax payer beginning in 2008. So when you take those three significant components that basically result in a slight decrease. But I would also point out that I think we are comfortable in indicating that a $400 million free cash flow generation establishes a new fore for Allied and we look for upside performance from there.

Corey Greendale - First Analysis

Okay, and Pete it sounds like the benefit you got on risk management was due to your good performance there does that suggest that if we use the dollar amount this quarter it's going to be jumping off point to model going forward that that would be reasonable?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Yes, I think it's a good start. It's essentially a permanent reduction. There may be a little bit of... the way these estimates work as you get the way to the end of the year to figure out exactly what's your performance was for the year so there's some benefit in Q4 relating to Qs 1 and 2, so you might want to back that number off a little bit but there is certainly a permanent reduction in property and casualty costs given the new performance levels.

Corey Greendale - First Analysis

Okay and John in talking about the capital structure, you used the word appropriate for what you re at now and I realize you don't want to lever up from here, but does that suggest that once you pass things like this, this IRS payment that you might consider remaining at this leverage level and as you generally cash using it for other things like maybe a share repurchase program or something like that?

John J. Zillmer - Chairman and Chief Executive Officer

Yes Corey that's a good point, and we will continue to evaluate what the best alternative use of the cash is. My belief is that we want Allied to be a growing platform and our preference would be to make strategic acquisitions to grow the company but we will never rule out the opportunity to return cash to shareholders either through a buyback or dividend program it really just depends on the strength of the cash flows and what alternative uses we have for the capital.

Operator

The next question comes from Jagdeep Ghuman, Credit Suisse. Your line is open.

Jagdeep Ghuman - Credit Suisse

Hi, I was wondering if you could talk a little bit on the guidance the volume assumption there, does it assume the volumes declines or continue to come from roll off and CD related business or is there anything else beyond that that you guys are anticipating?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

The guidance we put out is negative 1.5% to negative 3% I think our perspective on those volumes going into 2008 is that there will be some continued weakness or additional weakness I guess I should say in the construction sectors. That said, we believe that we were early participant in this economic downturn, we meaning the industry in particular. And so we've seen quite a bit of volume decline resulting from the decline of the construction activity. So at some point that begins to hit a bottom once you lose it you cannot lose it once.

Jagdeep Ghuman - Credit Suisse

Sure.

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

And we think that that's probably there is probably little bit more to it there but not a lot more and we give ourselves a little bit of flexibility on an increased decline up to say 3% just based on the overall view of what's going on with economic conditions today, but we feel pretty comfortable that this is a business that has a very solid foundation of wage flow and therefore cash flow but certainly wage flow and then the volumes tend to be relatively stable. So the economically sensitive volumes that go away as I just said they only go away once. At some point just sort of hit a bottom.

Jagdeep Ghuman - Credit Suisse

Okay. Fair enough. And then just expand upon the question earlier in terms of timing for that the tax issue is there a sense in terms of timing when we might see final resolution from the IRS, I know originally you guys suppose to see trial this year and that's been pushed off is there any update on that?

John J. Zillmer - Chairman and Chief Executive Officer

There is really no change to trial date. We've been involved in a couple of different matters one was specifically related to the court of jurisdiction that's been... that's continued to delay the process by several months. There is really now resolution on that issue yet so it's likely that there is really no resolution from a trial perspective into 2009, potentially 2010.

Operator

Nichol Dabbles [ph], Deutsche Bank. Your line is open.

Unidentified Analyst

Hi guys, congratulations on the quarter.

John J. Zillmer - Chairman and Chief Executive Officer

Thank you.

Unidentified Analyst

Just a couple for you. Looking at your CapEx guidance for 2008, its interesting because a couple of other ways that you have mentioned increasing your CapEx as a result of the truck spending ahead of the 2010 emission standard. Why is that, that you guys are cutting your CapEx guidance for 2008?

Donald W. Slager - President and Chief Operating Officer

This is Don. We have cut back a little bit on our roll-off fleet investment for '08 based on the softness in the construction. We just pulled it in a little bit because again through the continued rationalization of business and just little softer economy going forward, we just don't see the need to spend it. We have been very... our teams are very good at spending the CapEx wisely with 670 this year, about 670... '07, 670 '06 and we think bring it in about $20 million in light of the economies is just good economics for us.

John J. Zillmer - Chairman and Chief Executive Officer

It also relates to the lower need for landfill sale development as a result of lower volumes. So, we don't... we aren't significantly contracting our CapEx. People shouldn't read this as Allied is going back on the programs to invest capital in their fleet and anything else. This is just a normal management based on contraction and volumes.

Unidentified Analyst

Okay, got it. And, then one more, where are you guys on the customer re-pricing initiative?

Donald W. Slager - President and Chief Operating Officer

Well, we continue with the strategies, we said in our comments, we've got our pricing team build, our pricing systems, established, the field organization is very much appreciates and believes in the approach we have taken in the marketplace. We still have a number of large customers under contract that have to be renewed over the course of the next year and half or so. We'll continue to work at those; aggressively as we have over the past two years. So, we've got a number of contractual limitations that we're still living with and we'll continue to work those off over as I said in the next 18 months or so.

Operator

Scott Levine, J. P. Morgan. You may ask your question.

Scott Levine - J.P. Morgan

Good afternoon.

John J. Zillmer - Chairman and Chief Executive Officer

Hey Scott.

Scott Levine - J.P. Morgan

With regard to the economy, I think you gave the same number on the third quarter call, 70% you said of the volume loss coming from the economy. Is that still primarily residential construction and/or are there any variances along geographic lines that are worth highlighting?

Donald W. Slager - President and Chief Operating Officer

No real geographic highlights there. It still continues to be construction hauling through the roll off system and either CD [ph] at landfills.

Scott Levine - J.P. Morgan

Okay. And the second one I guess on the Special Waste scenario. Could you give us a little bit more insight what the change in the quarter or quarter what you are seeing... there you are seeing improvement in the pipeline as we move in '08, here?

Donald W. Slager - President and Chief Operating Officer

It's really just in flat sequentially and we feel it will kind of remain so in the first quarter of '08, so no real change in Special Waste. Pricing though is held up very well and so that's good news for us.

Operator

Jonathan Ellis, Merrill Lynch. Your line is open.

Jonathan Ellis - Merrill Lynch

Thank you. Just one clarification on the tax resolution. Does this in any way impact the other ongoing dispute related to the asset swap and just to clarify as of the end of the last quarter I think the potential payment there including interest was about $200 million. I just want to see what the status of that dispute is?

John J. Zillmer - Chairman and Chief Executive Officer

Well so far we haven't received formal notification from the IRS, so I can't tell you where our long, long ways off from having any resolution on that, but no, what we are talking about today has no bearing on the item you mentioned.

Jonathan Ellis - Merrill Lynch

Okay, great. And just on the landfill side. I know you gave a number for volume declines overall. Would you be able to give any more detail on MSW versus C&D at landfills?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

MSW is down, I don't now its 5% or 6% some where in that range C&D probably may be a couple of points higher then that somewhere in those ranges. But that's pretty consistent also with Q3. So generally speaking the landfill volumes haven't changed a lot quarter-to-quarter. So... or sequentially I should say.

Operator

Jason Traheo [ph], Lehman Brothers. You may ask your question.

Unidentified Analyst

Thank you. Good afternoon just one question, with regard to fuel cost going forward do you expect cost to continue to increase and if so do you expect to be able to recover those costs or do you consider putting a hedge in place?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

We do... I am glad you asked that question, we do expect fuel cost year-over-year to go up probably a good $50 million. I mean and its hard to predict because you don't know exactly where those... where the diesel prices are going to go but if they stay where they were lets just call in January it could be $40-$50 million. So we will obviously push a good bid of that through with a fuel recovery fee which we have in place and yes the fuel recovery fee does lag by about a month. So we have that but over the long term we'll recover basically just most if not all of our fuel cost changes but for most peer cost perspective we do have that headwind.

Unidentified Analyst

Great thank you very much.

Operator

Chris Huskin, Oak Tree [ph] your line is open.

Unidentified Analyst

Yes could you talk about the other accrued liabilities line and the increase in that number overtime within the accrued expenses?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Yes the majority of that is... that's why we record our tax liabilities. So what you are doing is... what you are seeing there is changes in those tax liabilities a regular change if you will in that line item is the accrual of interest expense which we're addressing now with this payment although there will be some interest on that couple of other matters. But that's a part of it. Last year for example we also had a 50... I think we have got $50 million to $60 million charge at the end of 2006 that also was recorded in there. So I am not so sure how far back you are going but those are couple of reasons for the changes in that line item.

Unidentified Analyst

Thank you.

Operator

Our final question is from Brian Butler, FBR. Your line is open.

Brian Butler - Friedman, Billings, Ramsey & Co.

Good quarter guys.

John J. Zillmer - Chairman and Chief Executive Officer

Thank you Brian.

Brian Butler - Friedman, Billings, Ramsey & Co.

Just kind of a question that dive a little deeper in the roll off piece. A lot of that I hear I understand is from the residential are you seeing the non-residential I guess commercial roll off, is that also weakening or is that continuing the whole buff?

Donald W. Slager - President and Chief Operating Officer

Yes. We really don't split it out that way Brian, obviously you know we read the same kind of mails that you read about what's going on in commercial construction. Obviously at some point that will impact us. But you know we don't only split out our tracking of C&D volumes... roll off volume that precisely.

Brian Butler - Friedman, Billings, Ramsey & Co.

Okay. And then my second question just on landfill pricing, is there any kind regional differences you know kind of across the country where you are seeing more or less resistance on giving some landfill pricing.

Donald W. Slager - President and Chief Operating Officer

No really we are really very happy with the success we've had as we reported being up 6% on the year and almost 7% the quarter is real strong. So you know we are going to continue to work that strategy. As we've said so many times, is our expensive assets to own expensive assets to operate and own into perpetuity and I think generally speaking the people on the landfills understand that more than they did 5 years ago and 10 years ago certainly. So, we see continued support and strength for landfill pricing, there are obviously certain market issues from market-to-market depending on capacities and such but generally speaking we've got good success across the board.

Operator

Thank you. That is all the time we have for questions today. I will now turn the call back to Mr. Zillmer for his closing remarks.

John J. Zillmer - Chairman and Chief Executive Officer

Thank you. Well again thanks everybody for joining us today. Let me just close by saying that, Allied's excellent 2007 results put us in a very strong position heading into 2008. Unlike when we face similar conditions earlier in the decade we are a much different and stronger company today with a focus to energize management team, with significantly lower debt and greater cash flow, with centralized functions focused on pricing and purchasing and efficiency, and those parts of the organization are driving sustainable profitable growth for us and with the commitment to investing in the growth in the long-term development of the company.

In conclusion, we are extremely pleased with our results and opportunities that we have to drive additional gains for our shareholders in the future. Thanks for joining us on today's call.

Operator

Ladies and gentlemen this concludes the Allied Waste Industries conference call for today. Thank you for participating, you may now disconnect.

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