Waste Management, Inc. (WM) Q2 2007 Earnings Report, Transcript and Summary

Good morning. My name is Nicole and I'll be your conference operator today. At this time, I would like to welcome everyone to the Waste Management Second Quarter 2007 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions) Thank you. I would now like to turn the conference over to Mr. Greg Nikkel, Director of Investor Relations. Mr. Nikkel, you may begin your conference.

Thank you, Nicole. Good morning, everyone, and thank you for joining us. 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. I will review up the details of our revenue growth including price and volume trends and our updated 2007 earnings guidance. Larry will discuss operating costs and other related topics, Bob will then cover the financial statements with an update on our Section 45k tax credits. We will conclude with questions and answers. This call has been recorded and will be available 24 hours a day beginning approximately noon Central Time today, until 5:00 p.m. on August the 14. To hear a replay of the call over the internet, access the Waste Management web site at WM.Com. To hear a telephonic replay of the call dial 1-800-642-1687 and enter reservation code 4344708. As is our custom, I will remind you that during the course of this presentation we will be providing estimates projections and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, which are described in detail in Waste Management's annual report on Form 10-K for the year-ended December 31, 2006, and in the Company's press release this morning. These risk and uncertainties could cause actual results to differ materially from those described in the forward-looking statements. During the course of the presentation, we will discuss free cash flow, which are the non- GAAP financial measure. We will also discuss earnings per share, earnings per share growth, earnings per share projections, effective tax rate, income from operations or EBIT, and income from operations as a percent of revenue, all adjusted for certain one-time items, which are also non-GAAP financial measures. David’s and Bob's comments on these measures will be on an as adjusted basis. We have defined and reconciled those items as part of the earnings press release or the release 8-K filed today which can be found on the Company's website at WM.Com. As I stated earlier, this call will be available for replay during a two week period. Time sensitive information given during the course of today's call, which is occurring on July 31, 2007 may no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now, I will turn the call over to Waste Management's CEO, David Steiner.

Thanks, Greg. Good morning from Houston. I'll begin by summarizing our quarterly results and will then review our pricing and volume performance in the second quarter. I'll close by updating you on our expectations for the remainder of the year. I am pleased to say that we again accomplished our primarily financial goals of earnings growth, margin expansion, and strong free cash flow generation that we can return to our shareholders. This strong performance shows, that our strategy of executing our disciplined pricing program along with operational improvements continues to be the right approach. We are in $0.56 per diluted share in the second quarter, this is an increase of $0.11 per share or over 24% when compared with our second quarter 2006 earnings. Income from operations as a percent of revenue increased by 210 basis point to 17.9%, and we produce $475 million in free cash flow in the quarter, bringing out free cash flow in the quarter -- bringing out free cash flow for the first half of the year to over $800 million. Revenue growth from yields is again a key driver behind our strong results this quarter. We generated waste business revenue growth from yield of 3.4%. If we include the 2.2% benefit from higher recycling commodity prices yield increase a total of 5.6%. And total revenue growth from yield increased across all four of our geographic operating groups and in our Wheelabrator and Recycle America units. The largest contribution to our internal revenue growth from yield was again from our collection business. Combined, the revenue growth from yield in the industrial, commercial and residential line of our collection business was 4.6% this quarter. Pricing in the commercial collection line of business lead the way with internal revenue growth from yield reaching 5.7% in the second quarter of this year, which is the highest level we have achieved dating back to at least 2002. Pricing is also stronger for the residential and rolloff lines of our collection business. In our rolloff line yield was up 4.3% despite volumes being down over 8%. This shows our disciplined approach to pricing despite the downturn in rolloff volumes and more importantly even with volumes down over 8% EBIT dollars were up in the rolloff line of business. So the price volume tradeoff continues to be positive. Finally, an increase in our environmental fee from 2% to 3% also contributed to the higher yield in our collection line of business. In total, revenue growth from yield and are landfills and transfer station also improved in the second quarter of 2007, and we expect that to continue as we began to see more benefits from our Disposal Pricing Excellence program. The pricing on MSW volumes coming into our landfills continues to grow. On a per ton basis, pricing on the MSW ton progressively increased over the last several years. The percentage increases in price are comparable to the percentage price increases we’re achieving in our collection line of business. Revenue was down $52 million in the second quarter of this year and we continue to execute our strategy to divest underperforming operation and to price increase or divest underperforming accounts in our three collection lines of business. Second quarter revenues would have actually increased $52 million or about 1.5% compared with the prior year, if you adjust for the $104 million in divested revenue. Turning to the volume component of our internal revenue growth, we saw an overall decline in IRG from volumes of 4.4% in the second quarter of this year. In total, revenue growth from volume and our collection line business declined 4.8% in the second quarter of 2007. The volume loss in the collection side of the business is a combination of our pricing strategy and a continued softness in rolloff hauls related to economic condition. We can’t control the economy, but we can control our pricing strategy and it's working. Our strategy remains to price our services to fully recover our cost, to expand our operating margins and to generate adequate returns in our investments. In doing so, we’ve targeted unprofitable and low-margin business. Where we have lost volumes, we’ve focused on flexing down our operating cost. The net result is higher income from operations and significant margin expansion in our collection line of business. Income from operation’s dollars from our collection business grew by 20% in the second quarter of this year compared with the same period of 2006. And our income from operations margin in our collection business expanded by nearly 400 basis points. We are achieving growth in income from operations and margin across all three lines of our collection business, again, despite lower volumes. This again confirms what we’ve have stated for some time, that not all collection volume is good volume, particularly if the revenue from that volume doesn't even cover the cost of disposal. When you can shed those volumes and flex costs down, EBIT dollars, EBIT margins and Return on Capital all grow. That’s exactly what we did with our collection business again in the second quarter, growing EBIT dollars by 20% and we'll maintain that focus going forward. And our landfills, our internal revenue growth from volumes was a negative 4.4% during the second quarter of 2007. External volumes coming into our landfill showed steady seasonal improvement during the quarter, but on a year-over-year basis volumes were still lower than the volumes we saw in the second quarter of 2006. The decline in internal revenue growth due to lower MSW volumes was negative 2% and was primarily due to the closure of our service hill landfill in the Chicago area at the end of 2006, and our Bradley landfill in Los Angeles, in April of this year. Without those events volumes would have been flat in the MSW line. In light of the lower landfill volumes received this quarter, our financial performance was quie impressive and again demonstrates the quality of our pricing and operating costs program in our collection line of business. Our strong first half results along with our expectations for the last two quarters of the year let us to update our earnings outlook for the full year of 2007. We now expect our full year 2007 earnings to be within a range of $2.7 to $2.11 per diluted share, excluding certain items as noted in our press release press release today.. If we look ahead for the remainder of 2007, we assume the economy in the second half of the year will be similar to the first half of the year. We certainly expect our earnings growth will continue to be driven by our pricing efforts and our shedding of unprofitable and low margin collection volumes, and we expect continued to improve our operating cost structure. Our result from the last few years clearly shows that our strategy is working. Quarter after quarter we continue to show significant earnings and margin expansion driven by the sustainability of our pricing excellence program. We certainly expect that trend be continued near future and stronger and expected landfill volumes and rolloff holds would only accelerate that growth. The success behind our strategy is due to the quality of our waste management employees who were responsible for developing and executing the strategy. I believe that this is the best group of people on the industry, and that they will maintain the level of achievement necessary to accomplish our goals for the remained or the year. And with that, I'll turn the call over to Larry.

Thank you, David, and good morning. I'll begin by reviewing our operating cost results for the quarter. I am very pleased with the continued success of our operational excellences initiative. During the second quarter of 2007, we again reduced our operating expenses when compared with the prior year quarter. Operating expenses in the second quarter of 2007 were $2.92 billion or $107 million lower than in the second quarter 2006. This is a 4.9% improvement and marks the fourth consecutive quarter in which we've reduced year-over-year operating cost on an absolute dollar basis. As we have seen for sometime, a number of factors contributed to the reduction in cost this quarter. These included our success in flexing down our operations as we shed volumes due to our pricing efforts and the ongoing divestiture of non-strategic operations. Also, we continue to see a positive impact from our operational excellence initiatives, particularly in the area of safety. As a percent of revenue, operating expenses improved to 62.3% in the second quarter 2007 compared with 64.5% in the second quarter of 2006. This 220 basis point improvement marks the eighth consecutive quarter in which our year-over-year results have improved on a percent of revenue basis, due to the combination of our pricing and operational excellence initiatives. I will now review our performance in a number of cost categories using basis point changes as a percent of revenue in my explanation. As a percent of revenue, we reduced labor and related benefits cost by about 50 basis points. On an absolute dollar basis, we lowered our labor and related benefits cost by $26 millions compared with the second quarter of 2006. We achieved the most significant savings in the areas of overtime expense, hourly wages, and contract labor which indicates that we are successfully managing our workforce and flexing down costs, as we have reduced volumes. Improved efficiencies in all three of our collection lines of business also contributed to the reduction in cost. We lowered our maintenance cost by about 40 basis points in the quarter. I am pleased with this result considering that we estimate the annual inflation rate on our maintenance cost to be about 4% to 5%. We continue to utilize our Compass Maintenance Information System along with our standardization of best practices and tools to lower our fleet maintenance cost as we reduced driver hours. Our field mangers continue to use the better information available to them to maximize vehicle utilization leading to the retirement of the excess vehicles and the identification of the highest cost vehicles that we can target for replacement. Risk management cost as a percent of revenue, improved by over 70 basis points. Once again, this was driven by lower workers compensation cost and a reduction in auto and general liability claim expenses. Our safety performance as measured by a total recordable injury rate and OSHA safety measure continues to improve. We lowered our TRIR year-over-year for the 26th consecutive quarter. For the second quarter of 2007, we improved our TRIR performance to 4.5, which is over a 9% reduction compared with the second quarter of 2006. There is nothing I am more proud of than the progress we have made in safety. Safety is the core value for us here at Waste Management, and our people's dedication to safety continues to give us what we believe to be industry leading results. The progress we are making in safety is translating the bottom line savings. We reduced our total risk management cost by $25 million in the second quarter of 2007 compared to the same period in 2006, over half of which is due to the reduction of actuarial projections to claim losses. Subcontractor costs improved by over 50 basis points in the quarter, as we utilized fewer third party contractors due to lower volumes and divestitures. Lower direct diesel fuel cost translated into about a 25 basis points improvement in our operating expense as a percent of revenue. This was caused primarily by the decline in our overall fuel consumption due to the reduction in our collection volumes. The impact of the change in diesel fuel prices was minimal as they were relatively flat between periods. Transfer and disposal expenses improved by 80 basis points during the second quarter of 2007. Our focus on exiting low margin collection businesses where we don't internalize the volume contributed to the improvement. One significant head win on our operating cost in the quarter was the cost of goods sold, which increased by over a 130 basis points during the second quarter of 2007 due to higher recycling commodity prices in the higher rebates we paid to our customers. In the other cost category, we lowered operating expenses as a percent of revenue by over 30 basis points in the second quarter of this year. You may recall that in the second quarter of 2006 cost relating primarily to a strike in New York City increased operating expenses by about $11 million, $8 million of that amount go in to this cost category in 2006, the assets of which largely explains the year-over-year improvement in this years quarter. Many of you have read recent news accounts about our union contract negotiation in our early July lockout of approximately 500 workers in the Auckland, California area. I’m pleased to report that we reached an agreement with the union last Thursday July 26, and our union employees have returned to work. This labor disruption had no material impact on second quarter 2007 results. We do expect it to have a financial impact on third quarter 2007 results and we will inform you about that in our third quarter conference call. In all of our labor union negotiations, we have a primary objective to ensure that we treat all of our employee, both union and non-union in a fair and equitable manner. This includes offering competitive wages and benefits and safe working conditions to each and every employee within Waste Management. Before the lockout, we had certain goals for the Auckland collective bargaining agreement. We achieved all of our goals through the lockout. And our union employees clearly found a new agreement to be fair as they overwhelmingly approved the new agreement on Saturday. I’m proud of the efforts of our Green Team and other Waste Management replacement workers who were some of the best drivers, mechanics, and route managers we have in the company; along with the outstanding efforts of our local team on the West Coast; the Call Center Employees around the country, who handle calls for Auckland; and others within Waste Management, who helped us during the duration of the labor disruption. As I stated at the beginning of my remarks, the second quarter marks the eighth straight quarter in which the combination of our pricing in operational excellence initiatives have enabled us to reduce year-over-year operating expenses as a percent of revenue. An overall cost decrease of 4.9% on an absolute dollar basis is our best performance in a number of years. I'm pleased that we have continued to make improvements to our various initiatives, in spite of inflationary pressures. This demonstrates to me, that our team is focused on the right things, and we remained committed to showing sustained improvements. With that, I'll turn the call over the Bob.

Thank you, Larry. I will start with a review of SG&A costs of the second quarter of 2007. SG&A expenses were 10.2% of revenue during the second quarter of 2007, which was better than our expectations. Our year-over-year costs increased $15 million to $343 million in the second quarter of 2007. The primary drivers of the year-over-year increases were annual salary merit increases and the implementation costs of our strategic initiatives including the SAP revenue management system. Depreciation and amortization expense of the second quarter of 2007 was down $23 million when compared with the second quarter of 2006. This year-over-year declines due to the impacts of lower landfill volumes, divestitures, and reduced depreciation expense as we have fully depreciated in information technology system. As the percent of revenue, depreciation and amortization expense was 9.6% compared with 10.1% in the prior year quarter. Moving down the income statement, income from the gains and divestitures totaled $33 million during the second quarter of 2007. During the second 2007, we divested operations with annualized revenues of $172 million. Interest expense was $132 million in the second quarter of this year a $6 million decrease from the same period of 2006. This decrease is due primarily to the $351 million decrease in total reported debt compared with the second quarter of 2006. Our debt to total capital ratio decreased to 57.6% in line with our objective to be at or below 60% and largely unchanged from last years second quarter. The floating rate portion of our total debt portfolio stood at 37% at the end of the quarter. Interest income decreased from $20 million to $11 million for the second quarter of 2007 due to the expected reduction in cash balances and short-term investments with a lower interest income related to a second quarter 2006 income tax audit settlement. I now want to take a few moments to discuss several income tax related matters. After adjusting for the tax related benefits that we noted in today’s press release, our effective tax rate in the second quarter was 34% which reflect a 29% phase out of our Section 45K tax credit. This phase out percentage is based on our estimated at June 30 of the average crude oil price for the full year related to that phase out percentage the expenses associated with our two synthetic fuel investments. These are included on the line items entitled equity in net losses of unconsolidated entities" which totaled $22 million for the second quarter of 2007. For the third quarter of 2007, we currently project a benefit of $0.02 per diluted share related to our Section 45 K tax credits and the operations of the two synthetic fuel plants. At the projected phase out level of 29%, we expect a full year 2007 effective tax rate of 34%, and a benefit from Section 45 K tax credits of $0.09 per diluted share for the full year 2007 down from $0.11 had there been no phase out of the credits. Regarding 2008 expectations, section 45 K tax credits and the related EPS benefit go away at the end of 2007. Consequently, we expect our 2008 effective tax rate to increase to approximately 40%. Also in 2008, the income statement line titled Equity and Net Losses of Unconsolidated Entities will not include any ongoing costs relating to the investments in the two synthetic fuel plants, which account for virtually all of the dollars in the line item. So in 2008, there will not be any earnings per share benefit from Section 45 K tax credits. We generated $537 million in net cash from operations during the second quarter of 2007, a decline of $20 million when compared with the second quarter of 2006. The drop in net cash from operations resulted primarily from higher income tax payments in the second quarter of 2007 and unfavorable changes in working capital due to the timing of payments. These items were offset in part by a $45 million increase in Earnings before Interest, Taxes, Depreciation and Amortization. Capital expenditures were recorded at $209 million, adding in the $147 million in proceeds from divestitures and other asset sales, our free cash flow was $475 million in the second quarter of 2007. That brings our free cash flow for the first half of 2007 to $810 million. As noted in the press release we now expect a need or exceed our previously projected free cash flow range of 1.3 to $1.4 billion for the full year 2007. During the second quarter we utilized our free cash flow and available cash to repurchase approximately 5.5 million shares for $196 million. We also paid $125 million in cash dividend during the second quarter of 2007. We are very pleased with the first half of the year. As David and Larry indicated, we will continue to pursue our pricing and operational strategy which we expect will lead to the improved financial performance we outlined for the full year of 2007. And with that operator, let's open the lines for questions.

(Operator Instructions) Your first question comes from the line of Jagdeep Ghuman with Credit Suisse.

Good Morning.

Good morning.

How are you?

No not too bad, a good quarter, just had a couple of questions here. One, can you give us an update on the progress in terms of your account by account review on your commercial accounts, where do you stand there, and at what point you are going to start pushing pricing even more so on that end.

Yeah, there is really two bases to it. First, we go out and we audit those customers as we’ve talked about before of our auditor checking waste and time to the service, and then we pass those costs on to our sales department who then goes out and talks with the customers about our underperforming customers. So there is two pieces to it. The second piece which is fastened on to the sales folks also has two pieces to it. There are customers that we go out and we immediately talk to, and there are customers like national account or regional accounts where we’ve got get through all of the locations before we go and talk to them. So, having said all that we’ve been through about 350,000 customers so far. We found very consistently that about 15% to 20 % of those customers are under water. Other customers that we’ve passed over to our sales department, the average price increase has between 25% to 30%. So it continues to work very well. We expect it to continue to provide benefits to our year throughout 2007-2008.

Got you. Okay. Fair enough. Also, can you provide a progress update on your divestitures you have outlined as far as asset up for sale, kind of, how much is left, what kind of progress are you are seeing there?

We mentioned a couple of quarters ago that we no longer are going to look upon that as a program, we are just going to continue with our normal course of our business to sell our underperforming businesses that we think that’s the right course of action. I won’t tell you though that the original program we have sold well over half of the amount we originally identified, and we still have others that we will sell as the opportunity presents itself.

Okay. Fair enough. And just one final question with regards to your free cash flow guidance, what kind of uses for this cash are you seeing in regards to share repurchase or dividend increase. Just kind of how do you rank order these things in terms of priority?

We have authority from our Board of Directors to spend $600 million in excess of what we guided at the beginning of the year. We still have much of that authority available, we haven’t used it yet, and would clearly expect to get into that as the year goes on. With respect to other opportunities, if there is a wonderful acquisition of a landfill, close-in landfill in and intercity area. We’d love to buy it, actually many of those. But since the opportunity presents itself, we would certainly move for that.

Okay. Fair enough. Thank you very much. Great quarter.

Thank you.

Thank you.

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

Great, thanks. Good morning guys.

Good morning Jonathan. Hoping you could talk a little bit about landfill volumes, you did walk through the change year-over-year on the MSW side. I'm wondering if you could speak to landfill volumes within C&D and also Special Waste.

Sure. When you look at -- we talk about Special Waste quite often that Special Waste jobs can be lumpy. What we saw this quarter is that if you exclude the hurricane volumes from last years Special Waste was basically flat. Now, flat Special Waste volumes are down a little bit from what we saw on the previous quarters, but still flat. On a C&D line, what we saw was that C&D continue to be negative, negative in the 20% to 25% range like it has been since the slowdown in the housing starts. So, basically what we saw during the quarter was the normal seasonal upturn, the volumes didn’t get back to the rate that they were at in 2006. Remember 2006, we had some great volumes in the first half of the year, and so, what we saw were volumes that we think have stabilized, we think that obviously the second half of the year has easier comps. And with respect to the dramatic drop off in C&D volumes that really only account for about 2% of our revenues. So it doesn’t have a dramatic effect on earnings on the bottom line. So, I guess the long and the short of this, that we saw volumes through this normal seasonal upturn. We saw them stabilize through the quarter, and we would expect to see that same performance in the second half of the year.

Great. And then just, turning your attention to the pricing side, I am wondering if you can talk a little bit about pricing trends both in terms of gate rates versus contracts pricing? And also within the context of contract pricing, I am curious, if you are looking at shortening any of your contract durations or strategically how you are approaching your landfill contracts now?

Yeah. When you look at – we talked about it a lot, that about 70% to 75% of the volumes at the landfill are contracted volumes. Now, again, there is two pieces to that too. There are pieces where you don’t really have much of a same duration of the contract. When a big bid comes up from a municipality, there are going to dictate what the length of the contract is, and so you are not going to play with that. Frankly, on the non-municipal contracts basically, third party haulers, we are going to do what's right for our business, whether it's a one year contract, a two year contract or a three contract. We are going to make a decision that is based on return on invested capital. If we can get a high enough price, and lock it in for a period where we get good price increases through the term of the contract, I don’t see why we would want to lock in to a one year contract. When you are the price leader, you want to stay the price leader, and if you can get a contract that keeps you as the price leader, I don’t know why we wouldn’t do that. Now, at the gate, what we have seen is that the prices at the landfill have basically come up to the same type of levels, and in some cases exceeded the levels of our collection pricing program. So, we are very happy to say that disposal pricing excellence is working. And again, we except to see continued benefits out of that through 2007 and 2008.

Great. And just a final question from me, in terms of capital spending, it looks like you lowered the high-end of your guidance from $1.3 billion to $1.35 billion, according to the press release. I'm wondering if you could talk about what precipitated that.

Well, I don’t think we did that at all. I think what we said was that we expect to meet or exceed our free cash flow guidance for the year.

Yes, I think our guidance initially was $1.3 to $1.4, and…

Correct.

And we think we'll need to get that.

Okay. I'm sorry. I was comparing the 2Q outside of 1Q press release to the 2Q press release.

Okay.

Thank you.

Certainly, thank you.

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

Hi, good morning.

Good morning.

Good morning.

On the landfill pricing, can you talk about what you are seeing from competitors as you raise price, are they going along with you or not?

Well, you have to break it down into the various segments. It's interesting at the Special Waste line, and again, Special Waste jobs can be as a huge mix component to Special Waste, unlike some of the other line items, but we've seen great price increases on our side of the table in Special Waste quite frankly that’s why we lost volume in the quarter. What we saw was some big jobs that came up, where folks were bidding high low single -- a low single-digit or low double-digit pricing and we are just not going to go there from a Special Waste point of view. So, on Special Waste, I think the competitive arena is still very active and you haven’t seen a lot of price movement on Special Waste. You've seen more on C&D and MSW, again its -- we've talked about it now for 18 months, it's spotty, you see some places where folks are reacting, such that you know that they are taking into account return on invested capital. They are understanding that you'll never be able to sell that landfill ton again and if you can hold on to it, it's going to be worth more in the future. We are starting to see people understand that, but then you'll see some places where it’s a little bit spotty. We've talked about it before, that mostly places like the Midwest?

Okay. For Bob, could you share any thoughts, are you willing to share any thoughts on where SG&A and D&A come in for the full year, as a percent of revenue?

Well, I don't think we are going to change our view on the SG&A for the year, we've said it would be a little bit above 10.5% and I don't think that will change. I know there are some tiny issues here on some of the SG&A spending, if that does change we certainly can talk about it in the future. We expect D&A to be down comparable to what it was this time for the full year as a percent of revenue basis, it may be a little bit higher.

Okay, and is there anything – we're going to just look in at that historical seasonality on the gross margin line, any reason to think that historical trends aren’t pretty indicative of what you will see this year?

I can't imagine, why you see any change in the pattern.

Okay. And then my other question is just any revised thoughts on CapEx with volumes down or you’re certainly going to be lost about now what do you suggest that at the beginning of the year?

Yeah, I think that we haven’t updated that guidance. I think at the beginning of the year, we said $1.25 billion to $1.35 billion and I think, we will see in fact we have curtailed some of our container purchasing with the volume declines. But we haven’t updated that range, I would expect to be, still some more part in that range, that will be a little below it.

Thank you.

Thank you.

Your next question comes from the line Scott Levine with J.P. Morgan.

Good morning.

Good morning, Scott.

Good morning.

Regarding volumes, I saw a little bit of improvement here Q1 to Q2. I'm wondering if you could just discuss your thoughts on the macro landscape and how that trend is coming in relative to your expectations and what your thoughts, in particular, are on the roll off segment of the business as we move into the back half of year?

Yeah, I think it's safe to say that at the macro level member at the beginning of the year, we talked about as far as seeing in sort of a back half weighted year. I think it's safe to say that frankly their volumes have not been as robust as we expected them to be when we looked at the beginning of the year. Frankly, our operational improvements and our pricing programs have made for that decrease in volume, and so when you are growing EBIT dollars on the collection line by 15% to 20% that can make up for a little bit of softness in the landfill volumes and that’s exactly what we have seen, that’s why we say if we see landfill volumes that roll off pulls bounce back in the second half of the year there is going to be some upside to our guidance. Now, on the roll off line I think it’s safe to say remember in the first quarter roll off pulls were down over 9%, second quarter they were down 8%, the comps gets easier in the back of the year. So we would expect the pulls to stabilize, what think we've seen is that we've seen some stabilization, its going to be a U shaped recovery I think in the housing sector, its not going to be V shaped recovery but what we have seen is the bottom of that curve we believe so that we are going to see stabilizing volumes which obviously will look better in the second half of the year cause the comps will be easier

Okay, turning to price could you talk a little bit about how the other retention rates are looking on your collection business and how they are coming in relative to your expectation say at the beginning of the year as well?

Yeah, our churn rates stays at about the 9.3% level again which is well below where we've been historically in the past and that’s about what we expected at the beginning of the year. Now again when we expected that 9% to 9.5% range at beginning of the year that wasn’t taken into account that we were going to be shedding a lot of customers intentionally through our business improvement process. And so, frankly, I think it’s a great performance on the retention side given that we are voluntarily asking, when I talked about that business improvement process the one thing I've failed to mention was that, for those customers where we are asking for pricing increases on average 25% to 30%. When we are asking for those price increases, about 85% of those customers are sticking with us, about 15% are leaving. So, given that, I think the 9.3% churn rate is quite an accomplishment.

Okay. One last one on costs, are there any areas that you would point to your dollar savings on a year-over-year basis are increasing last couple of quarters. Are there any areas you’d point us to, as you see it as the greatest sources of further improvement over the next few quarters?

We are going to just keep focusing on the initiatives that we have had going here for a while everything from safety. Safety continues to give us some great results and it has the added benefit of making it a safer place to work and a safer place for our communities. So we are continuing to see the improvements there. When you look at productivity, which we now call efficiency, I think there is still opportunity there. That’s a part of what we get of our business improvement process. It's not only about pricing, it's also about finding ways to run more efficiently, and I think we will continue to see opportunities there. And maintenance is another area that we have been focused on for a while. We now have information that our maintenance technicians have available to them and that is certainly helping drive our improvements. So those are the areas that we’ll continue to focus on. I think there is still opportunity in each one of those areas to help us further improve our costs.

Okay. One quick add on. I know you didn’t quantify the strike related costs in Q3, but you had a strike in the second quarter in New York and D.C. Can we use that as a rough approximation in terms of the duration and the number of people to kind of estimate what the expected cost might be here for the bearer?

We are just, the lockout just ended this week and we are just talking beginning to get the bills in from some of the cost impact and some of the replacement workers just started going home on Sunday. So, it's really too early for us to be able to give you a good number on what that number is expected to be. That is certainly something we’ll cover in our third quarter call. But we had a lot of people out there, I mean, this was a big event, big labor disruption for us, lot bigger than anyone that we have had before. And I suspect that the expense is going to be higher than what we saw in other locations, but I won't know that, none of us will know that until we start pulling together the costs as they start coming in.

Okay, great. Thank you.

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

Good morning.

Good morning, Bill.

Good morning, Bill.

Yeah, couple of things. First, if you look at the mix of your higher margin commercial collection versus lower margin industrial rolloff side, with all that divestitures and volume changes, do you see a mix move towards the commercial side, a higher mix of that, and where I am going with that is, do you also see the more volatile temporary rolloff side is really shrinking as a percentage of total from where you where, say last year?

Yeah, I mean clearly when you got 8% this quarter, 9% last quarter, when you got that kind of volume loss in the industrial side, again mostly temporary rolloff, certainly you will see a slight makeshift. It’s like when we started calling out to unprofitable residential contracts, we saw a slight mixed shift there. But Bill, again, when I look at the collection line of business I like to look at bottom line EBIT dollars because whether we make an EBIT dollar at a great margin on the residential line or commercial line of the rolloff line, it's all about dropping more EBIT dollars to the bottom line, and we were very pleased again this quarter to see those EBITD dollars grow by 20%.

Okay. Great. And just following up on the pricing you mentioned earlier on, I think it was 350,000 customers you had targeted on the one initiative, can you just remind us how many total customers you have or how far you are on that part of pricing?

We are about 50% grew on the audit side, but again you got to remember that when you are 50% though on the audit side, that doesn’t mean you’ve touched 50% of the customers because a number of those customers impact -- a good number of those customers have to be deferred until you cover all of their locations. So if you have a regional or a logo or a national customer you got to get load allocation before you go to talk to the customer. So the fact that we’ve been through 50% of the audit does not mean that we have been 50% of the customers to seek a price increase.

Okay, great. Thank you.

Thank you.

(Operator Instructions) Your next question comes from the line of Leone Young with Citigroup.

Yes, good morning.

Good morning.

Good morning.

Two things I, to the extent you can talk about it Larry, you mentioned that did achieve several goals about Larry you mentioned that you did achieve several goals with the lockout, could you be a little more specific and possibly whether they have positive or a negative ramifications of your settlements and upcoming labor negotiations?

Sure, I would be happy to. We really had a unusual agreement in Oakland, In fact, I would say the agreement that we had previously in Oakland was unlike any other union contract that certainly I am aware of and not been told probably anywhere in any industry. One of our goals was about safety. As you heard us talk for a long time we were serious about improving the safety for our employees as well as the communities we serve, and it is been for a along time our goal to be become world class in safety. When you look at our Oakland operations, as it turns out, they actually have the world safety record of anywhere in our company. I will just give you a couple of examples. Number one, the driver infinite rate is about 200 times -- 200% higher than our company average. And when you look at the number of drivers that have been involved in multiple accidents, they are about 310% above the company average. In the prior collective bargaining agreement we had, with the theme has really prevented us from being able to implement effectively the waste management safety program that would put in everywhere else, and off course you heard me report on the dramatic improvement that we had everywhere else. With a successful program, but unfortunately, we were not able to implement it effectively given the agreement that we had, previously their other collective bargaining agreement that we had in Oakland. So, we really, that was a focus for. We wanted to make sure that we were able to provide a safe environment for our employees, as well as, for our community. That’s what our safety program is all about, and so it was very important and it was a top priority for us to be able to get the appropriate safety rules in the collective bargaining agreement, so we could began to see the improvement in Oakland that we have seen everywhere else. So that was goal number one and we were successful in getting that type of language in the agreement. Number two. In this, was what was very unusual, I am not aware of this language being in any other collective bargaining agreement anywhere. They essentially had the right to go on strike anytime they want it, for whatever the reason they want it, anytime and they could actually use that as a threat, and they had used it as a threat when we're having negotiations with other unions in other cities, it would come up that Oakland was going to go out on strike and support it, if we didn’t agreed to various terms. So, we constantly had that threat hanging over our head. What you find, it's very standard language and typical, collective bargaining agreement is a provision that says, during the term of the agreement, the company won't lock out the employees, and the employees won’t strike. If you have any disagreement, there is a process, usually some form of binding arbitration or something like that. We did not have that language previously in that agreement, very, very unusual. That was important to us to get that standard type language in our agreement, so that we could ensure that we would have labor peace throughout the term of the agreement, and not constantly suffer the threats of disrupted service to our Oakland customers there. So, that was important to us, and we were able to get that language that we wanted in the agreement. So we are very pleased with that. Those we’re two primary objectives, which we were able to achieve. That -- and another reason we ended up coming up with a lock -- having to lock out the employees, it was clear to us, what they were going to try to do. They had refused to negotiate at all with us, and it appeared to us that they were trying to delay negotiations. They didn’t get it lined up in time with the negotiation that we were going to then have in Los Angeles. We have that contract -- union contract will expire at the end of September. And we just felt it important to deal with Oakland on its own, separately, while we could cover the [routes] and make sure we were able to continue to provide service to the Oakland customers and deal with that, and not have it line up with the exploration of the Los Angeles contract.

Terrific. And, just my second question. Could you get an update on your SAP implementation?

Yes. Leone, the pilot into Mexico continues, and we've learnt a lot from it. It's now in the process of not only continuing that pilot but also taking the learning from that pilot and working with SAP to enhance the program to cover needs that we've identified that we didn’t understand until we went through the pilot. So, I think that it's moving along as -- perhaps not as fast as we would like but it's moving along quite well, and I think we expect we do believe we have an excellent product by the time we finish implementing, the recall for solution review. I think we are moving along just fine.

Thank you.

Your final question comes from the line of Brian Butler with FBR.

Good morning.

Good morning.

Good morning, Brian.

Just two quick ones, on new business pricing, could you just comment a little bit on the trend there and how that’s comparing to your current pricing? Is it moderated? I mean is the spread between the two widening?

Yes, remember Brian, when we started the pricing program, 18 months or two years ago, we were seeing new business pricing, that’s exactly where we focus, is our new business pricing, and we were seeing new business pricing in the range of 10 to 20% when we originally started the pricing program. Now, obviously you are not going to see that kind of increase year-over-year, you saw it earlier on. So, it has moderated, its moderated into the high single-digits on new business pricing, but one of the things that we always look at and we talked about it before, it happened first in second quarter of 2006, which is that the average price at which we're selling new business, and so if you selling new business at $5 a yard, the average price at which we are selling new business is higher than the average price at which we're losing new business. And so, if you are selling new business at $5 yard, you're losing it at $4.60 a yard, obviously you get some great earnings benefit from that. And so, we've seen that, we saw that flip second quarter of 2006. We still continue to see that in both the commercial and the industrial lines of business, and so, I think you've hit the nail on the head, new business pricing is absolutely a focus ours, and we continue to see robust increases in the new business pricing.

Okay, great. And last question, just when you think about this pricing strategy, I mean its not working great as you said for the last 18 months, you've seen very -- very good margin improvement. Over the next, lets say 18 to 24 months, how much more margin improvement is reasonable, I guess? Is there any expectation there?

We haven't talked about the particular margin improvement, but certainly, if we can get price increases that are in the range of a 100 basis points above CPI, and if we ultimately see the volumes moderate, such that we're not losing volumes, we are getting our bear share of volumes from GDP growth, and certainly you should expect to continue to see triple-digit margin expansion from us.

Great, thank you very much

Thank you.

Thanks Brian.

In summary, we once again had another great quarter here at Waste Management. We are very pleased by the price volume trade-off, and Brian, I think hit the nail on the head in the last question, which is 18 months to two years ago, everybody wondered, when we started the pricing program, is it going to be sustainable? I think what we've shown over the last two years is that the pricing program is sustainable, we absolutely expected to continue on in the future and we absolutely continue to expect to meet our three primary goals of growing earnings, growing margins, and growing free cash flow that we return to share holders. And with that operator, we’ll say thank you and we’ll see you all again next quarter.

Thank for participating in today’s Waste Management second quarter 2007 earnings release 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 Tuesday August 14, 2007. The conference ID number for the replay is 4344708. Again, the conference ID number for the replay is 4344708. The number to dial in for the replay is 1-800-642-1687 or 706-645-9291. You may now disconnect.