Allied Waste Industries, Inc. Q1 2008 Earnings Call Transcript

Allied Waste Industries, Inc. (AW)

Q1 FY08 Earnings Call

April 30, 2008, 05:00 PM ET

Executives

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

John J. Zillmer - Chairman of the Board & CEO

Donald W. Slager - President and COO

Peter S. Hathaway - EVP and CFO

Analysts

Jonathan Ellis - Merrill Lynch

Leone Young - Citigroup

Emily Shanks - Lehman Brothers

Corey Greendale - First Analysis

Scott Levine - JPMorgan

Brian Butler - FBR

Matt Vittorioso - Barclays Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Allied Waste Industries' first quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. After the prepared remarks by the company, we will conduct the question-and-answer session. [Operator Instructions]

As a reminder, this call is being recorded Wednesday, April 30, 2008. I will now turn the call over to Jim Zeumer, Senior Vice President, Communications. Please go ahead, sir.

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

Thank you, Holly, and good afternoon, and welcome to Allied Waste conference call to discuss operating and financial results for our first quarter ended March 31, 2008. Our earnings release issued earlier today provides information on Allied Waste's strong first quarter results.

On the call to discuss our results 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, let me remind everyone that certain matters discussed during this call are forward-looking statements, intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements are generally 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. The description of such risks, uncertainties and other factors can be found in our periodic reports filed with the Securities and Exchange Commission. Shareholders, potential investors and other participants are encouraged to consider these facts carefully in evaluating the forward-looking statements and are 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'll now turn the call over to John Zillmer, Chairman and CEO.

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Thanks, Jim. We are very pleased to provide today's update on Allied Waste business results with solid first quarter revenue growth, a 9% gain in continuing EBITDA and record profits, including adjusted EPS from continuing operations increasing by more than 40%. It is clear that the operating and financial gains we saw at some rate over the course of 2007 and carry through into 2008. Allied Waste is a company with a lot of positive momentum.

Over the past several years, the strategic initiatives we've successfully implemented to improve our core operations have put Allied Waste in a strong position heading into these more challenging economic times. As we discussed on our Q4 call, in addition to these longer-term programs, we proactively took steps, including adjusting our staffing levels, to position the business for sustained success.

On our last conference call, I talked about Allied Waste being a changed company, a company with the support of capital structure, improved operations and free cash flow generation, centralized pricing and purchasing. I talked about how these and other durable capabilities are taking hold in our organization. I'd like to continue this discussion and talk about next steps in the long-term development of Allied Waste.

Going forward, we will continue to advance some of our strategic pricing programs. Q1 price was up 6.1%, a clear indication that we are still reaping tremendous benefits from our ongoing efforts to enhance our pricing model. Through upgrades of our information systems, expanded use of our customer data and analytical capabilities and growing expertise within our pricing team, there remain a lot of opportunities for these programs to deliver benefits well into the future.

While price is a powerful driver of financial performance, we are also leveraging these gains by capturing greater efficiency at all levels of the organization. From centralized procurement to local implementation of best practices, we are aggressively working to lower our costs.

Now, we'll review our operating expenses for the quarter, and you will see that on an absolute dollar basis, costs excluding fuel were essentially flat year-over-year and were down in a number of key categories. We believe we can continue to translate the expertise of our people, best practices and innovation into better service for our customers and improved financial performance for our investors.

We have talked about an interim goal of increasing EBITDA margins to roughly 30%. For the full year 2007, we achieved an EBITDA of about 27% and realized 140-basis point increase in our year-over-year 2008 Q1 margin. Allied Waste's results demonstrate that we are capturing opportunities to improve performance and turning them into tangible financial results.

As we look ahead to the ongoing growth and development of our company, we will continue enhancing our offering to the customer. This means improving the value and quality of service we provide as well as expanding our overall service portfolio.

One of our four strategy pillars focuses on the customer. We believe that our vertically-integrated operating model and customer focus can help differentiate us as we work to become the recognized leader in service quality as defined by what of customers' value. A research tells us the customers want the fundamentals done right, and that they're willing to pay for great service.

Beyond the basics, our growing number of larger businesses have an expanding idea of what waste disposal means. These customers want help managing their entire waste stream and are looking for innovative ideas to help them achieve their goals around sustainability and environmentally sound waste practices.

There is a real opportunity for Allied Waste to differentiate its service offering by extending its capabilities to match the evolving needs of our customers. Where it makes sense, customers are looking for opportunities to increase the amount of waste that can be a most cost efficiently recycled, reduced and diverted. Over the near term, this is shaping up to mean expanding our position in both traditional as well as C&D recycling.

Today we have 53 recycling operations around the country, but we are developing plans to gradually increase our capacity in select markets. In Chicago, we will shortly complete construction of a new state-of-the-art C&D processing center that will offer a number of operating benefits along with what we expect will be great returns on invested capital.

Becoming a complete waste stream manager and responding to customer needs on sustainability and environmentally sound waste practices also means expanding our activities around landfill gas to energy. More and more municipalities and industrial customers are looking at landfills as an environmentally friendly source of renewable energy.

We currently have approximately 55 facilities in operation with a dozen more in various stages of development. For environmentally responsible landfill management practices, to process gas, it is naturally produced allowing us to reduce our carbon footprint and provide an added benefit to customers and communities, it's a win-win opportunity.

When Allied Waste started in this business, we picked up trash, which was and is an incredibly valuable service. In the future, we will become a true waste stream manager for our customers that can provide a variety of solutions to meet their unique and evolving needs.

I want to thank all of our employees for getting Allied Waste off to a great start in 2008. It is through their hard work that we will deliver unmatched service and innovative solutions to our customers along with consistent profitable growth for our shareholders.

Let me now turn the call over to Don Slager.

Donald W. Slager - President and Chief Operating Officer

Thanks, John.

Q1 saw a continuation of business trends we experienced throughout 2007: strong price, the economy impacting waste volumes and Allied Waste continuing to improve operating efficiency and effectively responding to changing market conditions.

Specific to the quarter, the positive price trends realized over the past 24 months continue with year-over-year price up a solid 6.1% for the quarter. Core pricing was up 4.8%, and our fuel recovery fee accounted for the remaining 1.3 percentage points of gain. Given the dramatic increase in the price of diesel, we expect that the fuel recovery fee would represent a larger component of total pricing.

Core price, up 4.8%, exclusive of any impact from recycling or higher commodity prices, was comparable to Q1 of last year as we continue to benefit from our strategic pricing program and overall better customer account management.

Price was up across all lines of business with collection services up 6.8% and disposable operations gaining 4.8%. On the collection side, our commercial and roll-off lines of business were particularly strong with price gaining 9.6% and 6.1% respectively. Residential collection also showed pricing gains of 3.8% in the quarter.

For our disposal operations, price increased to 4.8% for the quarter. Landfill price increased 5.1% and remains in area of particular focus as we continue to stress achieving better returns on our valuable landfill assets.

Moving beyond price, Q1 saw ongoing volume softness as the slowing economy and our account rationalization efforts continue to impact reported volume. Volume for the quarter was down 4.1% compared with the same period in 2007 with approximately 60% of this driven by the economy.

To give a better understanding of what is happening in the business, let me provide some additional data points. Total collection volume for the quarter was down 3.2%. This change was comparable to what we've experienced in Q4 of '07, but 50 basis points better than in the same period last year.

Commercial and residential volumes were both lower by roughly 2.5%. As expected, roll-off remained the weakest segment with volume declining 5.6% in Q1. Total disposal volumes in the quarter were down 5%. This compares with a decrease of 7.1% realized in Q4 2007 and a decrease of 3.9% in Q1 of last year.

Landfill volumes exclusive of transfer stations showed a meaningful improvement, being down only 2.7% compared from a decrease of 7.3% in Q4 and 6.6% in the first quarter of 2007. However, transfer volumes in the quarter showed a 9% decline from the prior year.

MSW landfill volumes were below expectation, but still showed sequential improvement from 2007. Other third-party landfill volumes showed shifts in economy-driven segments. For example, special waste volumes were down slightly from last year, although they were stronger than our forecast.

C&D landfill volumes also came at slightly better than plan and were actually up a couple of percentage points from last year in a large part because of a shift in significant west region contract from a third-party transfer customer to a third-party landfill customer.

Beyond this contract, strong volumes from tornado damage in the Mississippi valley, ice storm volumes in Oklahoma and a significant demolition event in Montana affected reported C&D volumes. Finally, as much as 50 basis points of the total reported volume decline was related to our national account subcontract work.

Subcontract volume represents that portion of our national account work that is serviced by third-party haulers. This is low margin service, but requires no capital investment by Allied Waste. As with other parts of our business, we are rationalizing the subcontracted work to best serve our customers and optimize the profit on this part of our national account business.

Overall, Q1 volumes were within the range of expectations we had in planning for 2008. The normal seasonality and this year's severe weather resulted in Q1 volumes being more volatile. So, we will continue to closely monitor quarterly trends across all lines of the business and adjust as necessary. Thus far, we have been extremely pleased with how well our local management teams have adjusted their costs in response to changing market conditions.

For the quarter, operating expense as a percent of revenue were 63.9%, which is unchanged from the prior year despite significant increase in fuel expenses, which had us paying an average price of roughly $3.50 per gallon, which is up 43% from last year. The impact of that fuel cost in Q1 jumped by about $25 million or almost 40%. We estimated that higher fuel cost negatively impacted Q1 margins by as much as 110 basis points.

To best manage fuel costs, we have consolidated our fuel purchases with a couple of primary suppliers. And we continue to successfully recover much of the higher fuel cost through our fuel recovery fee. We are also constantly looking for ways to maximize fleet and route efficiency to control cost where we can. For 2008, we anticipate that our fuel recovery fee will effectively offset the impact of higher direct fuel costs.

We are once again successful in capturing greater labor efficiency as lobar cost for the quarter dropped as a percent of revenue by 60 basis points. And on an absolute dollar basis, cost declined by $1 million.

As we discussed in our last call, in February, we took action to proactively manage our cost in light of expected volume declines. We adjusted down our workforce by approximately 2%. In addition, we collapsed our region structure from five to four and the action designed to create more robust organizational capabilities for today and for tomorrow.

Along with labor, we continue to make tremendous strides on another major cost item, maintenance and repairs. We continue to invest appropriately in fleet maintenance, and we are successful in controlling cost, which dropped in the quarter by more than $6 million or over 5% compared to the prior year.

As we highlighted on our fourth quarter call, we purchased 900 new trucks in '07, along with retiring approximately 1,300 vehicles. These actions combined with purchasing another 140 vehicles in Q1 have helped to lower our average fleet age to roughly 7.5 years.

There are certain programs that I look at and say that one is making a real difference. Our fleet strategy including consistent investment along with our model shop and related maintenance programs are clearly having a big impact in terms of lowering operating cost and raising service levels.

Continuing this success we realized in 2007, our programs to improve safety have resulted in premium reductions in Q1 totaling $4 million in year-over-year savings or 9% reduction in costs.

Reflecting on our focus on safety, I want to highlight that we recently completed our annual driver review and are very pleased to report that we had over 6,000 drivers complete 2007 accident and injury-free. This was roughly 13 million safe driving hours, which is a great accomplishment. I want to recognize and commend each of the men and women who are under place on this list and thank all of our drivers for the tremendous efforts in creating a safer work environment for our employees, our customers and the communities in which we operate.

Just a few more numbers. For the quarter, capital expenditures totaled $160 million, which is down 28% from last year. The large swing between periods is primarily related to the timing of truck purchases. 2007 truck purchases were heavily weighted to the front half of the year, whereas '08 purchases will be weighted to the back half of the year.

In closing, market conditions and our performance were in line with our expectations heading into 2008. Overall, I am extremely pleased with our operating results and the progress we have continued to make in advancing key programs in support of better pricing, efficiency, safety and people development.

Now, I'll turn the call over to Pete Hathaway.

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

Thanks, Don. Let me take just a few more minutes to provide final details on our first quarter.

As reported in our release, strong pricing drove Q1 revenue to a record $1.5 billion, while adjusted EBITDA for the period increased by 8.5% to $392 million, a significant achievement considering the business conditions we faced. Also reflective of our strong performance, cash flow from operations excluding the BFI related tax payment was approximately $136 million, which represents a year-over-year increase of 60%.

Reported earnings from continuing operations of approximately $73 million or $0.17 per share included an $18.5 million pretax charge representing $0.03 per share primarily relating to a land sale asset impairment.

As detailed in the reconciliation table in our first quarter release and 8-K, adjusted earnings for the quarter would have been $0.20 compared with an adjusted Q1 2007 earnings of $0.14 per share. This represents a year-over-year increase of 43%, which is a great way to start the year.

Reported gross profit for the quarter increased $14 million or 2.7% to $536 million. Gross margin for the quarter was unchanged at 36.1% as the benefits of higher prices, account rationalization efforts and cost savings were offset by significantly higher fuel costs.

2008 operating expenses also reflect approximately $11 million of cost related to an environmental reserve adjustment, which was recorded in other operating expenses for the quarter. On a dollar basis, total operating cost for the period increased by roughly $25 million, primarily reflecting the impact of much higher fuel. As Don indicated earlier, the fuel was a drag on margin by about a 110 basis points in Q1.

SG&A expense decreased by approximately $16 million in Q1, dropping as a percentage of revenue to 9.7%. Lower SG&A reflects success in initiatives to reduce overhead expenses throughout Allied Waste, plus the benefit of approximately $13 million related to the favorable resolution of BFI-acquisition related claim.

Offsetting these benefits was approximately $6 million in anticipated severance cost related to the workforce adjustment and regional realignment implemented during the quarter. Our preliminary estimate for the charge of approximately $10 million for these actions, but we were able to successfully implement ahead of schedule and under budget.

Depreciation and amortization costs for the quarter increased $4 million, primarily driven by a higher depreciation expense associated with recent capital expenditures.

In the quarter, we recorded an asset impairment charge of $18.5 million related primarily to an expanded closure plan at one of our Midwest landfills. This is a site we referred to in Q3 2007 over which we assumed control early last year from the third-party operator. Costs associated with the closure and post-closure monitoring plan are estimated to be greater than we are originally forecast.

Interest expense for the period was $110 million as we benefited from actions taken throughout 2007 to lower our funding costs combined with savings from the retirement of $161 million of senior notes early in the quarter. Prior year interest expense of $171 million included approximately $45 million of fees and expenses associated with debt refinancings completed in Q1 of last year.

For the first quarter, cash flow from operations showed a use of $60 million compared with cash provided by operations of $85 million last year. This change was driven by our February discretionary tax payment of $196 million related to a dispute with the IRS relating back to our acquisition of BFI.

As we discussed during last quarter's call, in 2008, we plan to make total payments relating to this issue of $315 million net of tax benefit. These payments don't settle the dispute, but do work to lower related interest rates from 9% to our revolver rate of less than 5% today.

Free cash flow for the quarter was a use of $21 million compared to a use of approximately $88 million last year. The improvement was driven by timing of capital expenditures, which resulted in lower first quarter spending in '08.

Finally, we ended the quarter with a debt to total capital of 62.7%, which is down over 300 basis points from the last year and a leverage ratio of below four times. The company has over $1 billion in availability on its revolver.

Echoing earlier comments, we are extremely pleased with our first quarter results and with the performance of our operating teams in positioning Allied Waste for success over the remainder of 2008 and beyond.

And with that, we'll now open the call to questions.

Question And Answer

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] In the interest of time, we ask that you limit yourself to one question and one follow-up question today. [Operator Instructions] Jonathan Ellis with Merrill Lynch, your line is open.

Jonathan Ellis - Merrill Lynch

Thanks, and good evening, guys. Wondering if you could just talk a little about C&D volumes at the landfill excluding that contract that you mentioned that provided a benefit during the quarter?

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

Sure, we will talk a little about that. For the quarter, C&D landfill volumes at the landfill were up about 2%. Basically, we had a shift in those volumes, which represented probably about 500 basis points to that. So, there was somewhat of a shift between that and the transfer volumes during the period.

Jonathan Ellis - Merrill Lynch

Okay, great. And then just on landfill pricing, it seems like there is a modest deceleration from last quarter. Is that just a function of anniversarying some of the larger price gains or can you talk a little bit about the trend in pricing at landfill versus last quarter?

Donald W. Slager - President and Chief Operating Officer

Yes, John, this is Don. It is just timing. It's just kind of quarterly timing. We are, as I said in my comments, very focused on landfill pricing, very expensive assets to own and operate. And we have a very focused plan to continue to move landfill pricing in the direction we used to go.

Jonathan Ellis - Merrill Lynch

Okay, great. Thanks guys.

Operator

Leone Young with Citigroup, your line is open.

Leone Young - Citigroup

Yes, good evening. Pete, can you give a little color on the environmental reserves that was in the cost of goods sold?

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

Sure, it's about $11 million, and roughly half of it relates to the same landfill in the Midwest that resulted in the asset impairment. The accountant requires that a split part of it between environmental, which goes through cost of operations, and then the impairment of the asset on the balance sheet. And the rest, there was a couple of smaller items. But it's really the same matter for the most part?

Leone Young - Citigroup

So, just wanted to check. And also, SG&A on a go-forward basis, if it looks like I adjust for everything, it was about maybe 10.2%. Is that a good go-forward assumption?

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

Yes, it is. We were roughly expected to be between 10% and 10.5%.

Leone Young - Citigroup

Okay. Thank you.

Donald W. Slager - President and Chief Operating Officer

Thanks, Leone.

Operator

Emily Shanks with Lehman Brothers, your line is open.

Emily Shanks - Lehman Brothers

Hi, good evening. I was hoping that you could break out for us what percent of the commercial business is related specifically to construction and if you can comment on any trends you are seeing there?

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

I can start and then Don might follow up. First of all on the commercial line of business amongst our collection activities, really very little that relates to construction. The construction activity impacts us in the roll-off line of business, which is part of our collection operations, and also at our landfills where we get third-parties that bring waste directly to our landfills, our service construction activity.

That said, in total construction, representing both commercial and residential, is less than 5% of our total revenues. So, call it 4% or so, but it's in that range.

Emily Shanks - Lehman Brothers

Okay. So, no comment on specific just to commercial construction trends, just given at such a small pace.

Donald W. Slager - President and Chief Operating Officer

Yeah, we don't really track commercial construction separately as a component of our C&D line.

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

And given the fact that it's such a small percentage of our total revenues, it's not really altogether that significant, which is just a follow-on to Don's comment that we don't really track it in particular.

Emily Shanks - Lehman Brothers

Okay, great. And then just my second question, last question is, can you just comment on what your priority is for free cash flow uses?

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

Sure. For 2008, as I mentioned in my comments, our objective is to pay on a discretionary basis an obligation that could manifest itself to the IRS. We expect to pay about $315 million this year, and we've already paid about $200 million of that, which was for the most part drawn on the revolver.

So, we'll be using the cash flow throughout the year to repay the revolver. And then whatever else we produce towards our goal of roughly $400 million of free cash flow would go to pay down debt.

Emily Shanks - Lehman Brothers

Thank you.

Operator

Corey Greendale with First Analysis, your line is open.

Corey Greendale - First Analysis

Hi, good afternoon.

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Good afternoon, Corey.

Corey Greendale - First Analysis

First question. Obviously very strong on the pricing, can you comment strategically speaking… you talked about the value proposition in paying… customers paying up for service. If you compare yourself to other national players, would you say that your strategy is to come in as the higher service… higher price provider to come in at parity on price or can you make a broad statement like that?

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Corey, I would probably shy away from making a broad statement with respect to relative price positioning. I would tell you that all the pricing work that we do relates specifically to the returns on individual customers and what our realistic pricing expectation is based on our return requirements. So, you do factor in supply and demand and all those various considerations, but we really do that on a customer by customer basis.

We do think that there is an opportunity to earn superior returns as a result of providing superior service, but I wouldn't characterize where that positions may get the other companies. We have had superior price realization over the last several quarters on a comparative basis. So, you can drive your own inferences from that.

Corey Greendale - First Analysis

Okay. And, John, I also wanted to follow-up on your comments about building recycling capacity. Can you just elaborate on that, what the timing might be if there is any CapEx implication that we should be thinking about for out years and also just what your… relatively speaking, what your return expectation is for that business as opposed to a more standardized solid waste business?

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Sure. All of our… all new projects have… we have a 20% hurdle rate all new projects whether they are collection or recycling or landfill in terms of meeting our return on invested capital requirements. So, they would have meet that test first of all. Secondarily, the capacity expansion we'll do within the framework of our existing capital budget, we don't look to increase the capital budget to expand beyond that, but we think we can manage it within our normal capital operating plan.

Corey Greendale - First Analysis

Okay. And if you wouldn't mind, could you just… the other items that you footnoted in the income statements, the nonrecurring things, you said where the environmental charge was, the specific line item, could you just go through where the others are located in the specific line items?

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

Sure. You go through my transcript, you will see it. But let me just do that really quickly for you. And in cost of operations, environmental charges are included in other operating expenses. So, in cost of operations, you have the $11 million. There is also $1 million in cost of operations related to the severance associated with the workforce reduction and the realignment.

So, in total, there is $12 million there as cost. In SG&A, there is $6 million charge related to the workforce reduction and realignment. Also on SG&A is where you will find the reversal of the legal accrual that we had. So, as it relates to SG&A, there is a net $7 million benefit from those.

Corey Greendale - First Analysis

Okay. And one last one for Don, if I could. Could you comment on the commercial customer base, if they are downsizing service levels at all because of the economy or which direction that's trending?

Donald W. Slager - President and Chief Operating Officer

Yeah, Corey, we are not really seeing that. Our service decreases have been pretty consistent over the last six quarters or so. So, we are not really seeing anything change there.

Corey Greendale - First Analysis

Okay. Thanks very much.

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Thank you.

Operator

Scott Levine with JPMorgan, your line is open.

Scott Levine - JPMorgan

Good afternoon, guys.

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Hey, Scott.

Scott Levine - JPMorgan

You mentioned I think on the volume side, 60%. Yes, you made. It was driven by the economy in terms of the declines. I think in recent quarters, you mentioned a number a little bit higher. Have you seen any trends? What thoughts you have kind of driving that in a little bit more specifics would be good?

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

Yes, just in terms of number itself, the shift from 70 to 60 is primarily driven by what's going in our national accounts business or kind of kicking out the rationalization of that customer base, so that shifting the map a little bit. But as far as trends go, the economy is still having the same basic impact that it has had for several quarter now. And more broadly, we continue to have account rationalization activity in or commercial and residential lines of business as well.

Scott Levine - JPMorgan

Okay. And a couple of your peers have mentioned weather is being an impact in the quarter in various parts of the country. Do you see anything there, and can you quantify or talk about anecdotally in terms of the impact on volume.

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

Not on a net basis. In some places where we were affected by, Don mentioned in his comments, some tornadoes and things along. I guess it was tornadoes and ice storms. To some extent, that actually added to volume once all that was settled out. So, we had some weather impact, but we also have positive whether impact coming back the other way. So, I think to a large extent, they just kind of netted out.

Scott Levine - JPMorgan

Got you. And any additional clarity, I think, on the transfer, volume sit down 9%, anything unusual there or is it kind of normal, anything behind that number?

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

Well, if he gets back to the comment I made and to the first question, we had a contract where… and it was a pretty large one where there was waste being… it was coming into a transfer station, okay, and then that waste was then moving through our landfill. That contract changes with the waste is going directly to our… at the same landfill now, but bypassing the transfer station. So, you see that drop down in the transfer volumes.

But correspondingly, the decrease year-over-year in landfill volume isn't as large as it has been, because it was somewhat offset by that new waste stream.

Scott Levine - JPMorgan

Got you. Thanks, guys.

Operator

[Operator Instructions] Brian Butler with FBR, your line is open.

Brian Butler - FBR

Good afternoon, guys.

Donald W. Slager - President and Chief Operating Officer

Brian.

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Hey, Brian.

Brian Butler - FBR

First question, just following kind of a strong quarter here, where does this kind of put in your mind on your guidance for 2008? I think EBITDA was kind of $1.72 billion to $1.76 billion. You're right in the middle of that kind of on track or a little ahead or behind?

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Yeah, Brian, we're going to take the opportunity to update guidance. We did indicate in our press release that the first quarter was in line with our expectations.

Brian Butler - FBR

Okay. And then touching on the comment you made of your in term goal of 35% EBITDA margins, kind of what's the period on that if you can give a little bit more detail on kind of the timing? And also, is that required to get that level or really a change in the economy needed?

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

Brian, it's Pete. I think it's pretty… if you look at what we have done in the last couple of years in terms of improving margin quarter-over-quarter with 100-basis point plus expansion in gross profit margins, with the backdrop of pretty strong pricing.

You look at some of the cost containment actions we've taken and you kind of run that out, it's not an unrealistic expectation to get the 30% EBITDA margins. And we're working hard to get there. So, we haven't really put a specific timeframe on it, but I think when you look through the math, it doesn't take tremendously long when you get the kind of margin expansion we have been seeing.

Brian Butler - FBR

Okay. That's helpful. And just got two more here. In the process of kind of rationalizing accounts, the national and the others, where do you think you stand in that process? Do you have a couple of more quarters of that or it's really contributing both to the price and also kind of the negative on the volume or if you just provide some color on, I guess, the amount you have left to do?

Donald W. Slager - President and Chief Operating Officer

Yeah, this is Don. I think it's reasonable to say we've got a few more quarters of that. I mean we've got… again, we talked about so many times we get contracts that in some cases are three years and even some five-year contracts. We've been at this for some time. So, we've got several ways to go. So, there is still some benefit commensurate on that.

Brian Butler - FBR

Okay. And then the last one on the landfill gas to energy opportunity. You said, you had 55 in operation. Can you quantify just kind of the size of that and also what do you think the opportunity might be kind of on a go-forward basis?

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Sure. Go ahead.

Donald W. Slager - President and Chief Operating Officer

I don't know if we want to quantify the size, but I think the important thing to note is today with fossil fuel price going up and we're sitting on potentially the largest untapped supply of methane gas of any of our competitors, because the company hasn't been as aggressive in building out its structure around landfill gas recovery. And so, again, it's a big benefit for us with our cash position today. It's going to be easier for us to invest correctly in some of those assets. And I think it's very meaningful for us in the future.

Brian Butler - FBR

All right. Thank you very much.

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Thank you.

Operator

Matt Vittorioso [ph] with Barclays Capital, your line is open.

Matt Vittorioso - Barclays Capital

Good evening. I was wondering if you could just remind me what the total impact of that IRS issue could be once you've paid up the or paid the $315 million that you expect to pay this year. What would be the next step in that process?

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

Well, the $315 million is essentially what we expect that outcome to be at this point. It is a payment of tax and a payment of interest on that tax for that particular matter, and it does not include an estimate or payment for penalties, because we don't think that there is a high probability that those will be successfully assorted by the IRS.

The case itself has still to be litigated, because that's really the phase that we are looking at. We don't have a court date. Discovery hasn't started. So, I will tell you that my estimation is that it is still at least a couple of years off before we have full resolution. We'd like to resolve it earlier, but following the process, it will take some time still.

Matt Vittorioso - Barclays Capital

But this $315 million would represent your best estimation of what you think the result of the case will be?

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

That's correct.

Matt Vittorioso - Barclays Capital

Okay. And then just briefly if you could just comment on the pipeline for any kind of acquisition or even asset swaps that you guys maybe contemplating at the time.

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

Yeah, I would say it's probably consistent with where you have seen it over the last year-and-a-half, two half years. It's really pretty small, and you consider our past, but it's something we are always working on. They tend to be much smaller deals, tuck-ins, nothing in new market so to speak, even there is some of the buy-sells in routes as such. They tend to be very small in various markets.

But we've got a group of people working on that, our individual market Vice Presidents continue to look at those opportunities. It's going to be just an ongoing part of what we do.

Matt Vittorioso - Barclays Capital

Okay. Thank you.

Operator

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

John J. Zillmer - Chairman of the Board & Chief Executive Officer

Perfect. Again, thank you, everybody, for joining us today. As we said earlier, we are extremely pleased with the first quarter results and where that positions us for 2008, even though we are operating in difficult and more challenging economic environments. We feel very good about the actions the company has taken to date, and we have been very proactive in terms of managing our cost structure. And we are extraordinarily pleased with the results that our employees have been able to deliver.

And with that, I would again say thank you to all of them for their hard work and dedication to the company. Thank you very much.

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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