Waste Management, Inc. (WM) Q4 2010 Earnings Report, Transcript and Summary

Good morning, my name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management Fourth Quarter and Full Year 2010 Earnings Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Jim Alderson, Director, Investor Relations. Sir, you may begin your conference.

Thank you, Nicole. Good morning, everyone, and thank you for joining us for our fourth quarter 2010 earnings conference call. With me this morning are David Steiner, Chief Executive Officer; and Bob Simpson, Senior Vice President and Chief Financial Officer. David will start things off with a summary of the financial results for the quarter and a review of the details of our revenue growth, including price and volume trends. Bob will cover operating costs and the financial statement. We will conclude with questions and answers. During their statements, any comparisons made by David and Bob, unless otherwise stated, will be with the fourth quarter of 2009. Before we get started, let me remind you that in addition to our press release that was issued this morning, we have filed a Form 8-K that includes the press release as an attachment and is available on our website at wm.com. The Form 8-K, the press release and the schedules to the release include important information that you should refer to. During the call, David and Bob will discuss our results on an as-adjusted basis including SG&A costs, earnings per fully diluted share which they may refer to as EPS, operating expenses, effective tax rate and income from operations margin. These financial measures have been adjusted for items management believes do not reflect our fundamental business performance and are not indicative of our result of operations. All of these measures, in addition to free cash flow, are non-GAAP measures. Please refer to the reconciliations to the most comparable GAAP measures in the schedules to the earnings press release, which can be found attached to the Form 8-K filed today and on the company's website at wm.com. Additionally, during the call, you will hear certain forward-looking statements based on current expectations, opinions or belief about future periods. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are detailed in our earnings press release this morning and in our filings with the Securities and Exchange Commission, including our most recent Form 10-K. This call is being recorded and will be available 24 hours a day, beginning approximately 1:00 p.m. Eastern Time today until 5:00 p.m. Eastern Time on March 3. To hear a replay of the call over the Internet, access the Waste Management website at wm.com. To hear a telephonic replay of the call, dial (800) 642-1687 and enter reservation code 33194439. Time-sensitive information provided during today's call, which is occurring on February 17, 2011, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now I will turn the call over to Waste Management's CEO, David Steiner.

Thanks, Jim, and good morning from Houston. We had a very good fourth quarter, earning $0.60 per share, an increase of over 15% compared to the $0.52 we earned in the prior-year quarter. Our Collection, Landfill and Recycling businesses all performed very solidly. We increased operating earnings and improved operating margins in each of these lines of business. Revenue increased by $181 million or 6% from the prior-year period. This is the fourth consecutive quarter of year-over-year revenue growth. Our revenue improvement was driven by better Recycling commodity prices, acquisitions and year-over-year increases in revenue growth from yield. On the pricing front, the fourth quarter was our strongest quarter of the year. Internal revenue growth from yield on our collection and disposal operations was 2.6% in the fourth quarter. We remain committed to our pricing discipline and in the fourth quarter, we again overcame the pricing headwind we faced on the roughly 40% of our collection revenue that has price adjustments based on a CPI index. CPI adjustment had caused a drag to our revenue growth from yield of approximately 40 basis points in the quarter and about 70 basis points for the year. So for both the quarter and the full year, we outpaced our long-term pricing objective to achieve price increases in the range of 50 to 100 basis points above CPI on our entire Collection and Disposal business. The combined internal revenue growth from yield in the industrial, commercial and residential lines of our Collection business was 3.1% in the fourth quarter. Internal revenue growth from yield was 3.5% in both our commercial and industrial lines. While internal revenue growth from yield on our residential line of business was 2.2%. Commercial new business pricing increased for the sixth consecutive quarter. Service increases, net of service decreases, were slightly negative for the quarter but improved significantly compared with the prior-year quarter. The winter quarters are typically the weakest of the year for service increases, net of decreases. On the volume side of the business, internal revenue growth from volume in our Collection and Disposal business declined by 1.8% in the quarter. At the end of October, volumes were trending such that we expected volumes to be flat or slightly up for the quarter. However, the severe winter weather we saw in December negatively impacted volumes. Also impacting volumes were contract losses in our residential line of business and a slowing in the rate of growth in the special waste landfill volumes. For the fourth quarter, commercial and residential collection lines saw declines of 5% and 5.9%, respectively. In our Industrial line of business, internal revenue growth from volume was down 3%, an improvement from prior quarters. Our strong pricing in our traditional Solid Waste Collection business overcame these volume losses and drove margin improvement. Overall, in the fourth quarter, we grew collection income from operations margin by 220 basis points compared with the prior-year period. In the landfill side of the business, fourth quarter 2010 internal revenue growth from volume was positive 4.3%, which is the best quarterly performance for the year and the fifth consecutive quarter of year-over-year volume improvement. Internal revenue growth from volume for special waste was positive 12.5%. For MSW, internal revenue growth from volume was negative 5%. In our C&D line, internal revenue growth from volume was flat, which is the best performance since the fourth quarter of 2008. On the landfill pricing front, MSW per unit pricing was up by 2.4%, reflecting our continued focus on landfill pricing. So our Landfill business also improved significantly in the quarter and we continue to see a strong pipeline for special waste volumes. Overall, we grew income from operations in the landfill line of business and increased the income from operations margin by 190 basis points compared with the prior-year period. When we look at our collection and landfill line businesses combined, income from operations grew approximately 12% compared with the fourth quarter of 2009, and our income from operations margin improved by 210 basis points. Turning to our Recycling business, increased commodity prices contributed about $0.04 of positive year-over-year earnings per diluted share in the fourth quarter of 2010. For 2011, we expect recycling commodity sales prices to have a slightly positive year-over-year impact on earnings per share. Average electricity sales prices at our waste-to-energy plants were flat in the fourth quarter. For 2011, we expect average electricity sales prices to be similar to 2010 levels and therefore, we do not expect electricity sales prices to significantly impact earnings in 2011 compared with 2010. Looking at volumes in 2011, we expect them to be flat to slightly positive, with volumes steadily improving throughout the year. Certainly, the severe winter weather in the first quarter of 2011 has affected volumes, and we expect this to have a negative impact on first quarter earnings. But starting in the second quarter of 2011, we expect volumes to resume the previous trend of slow but steady improvement. With respect to price, CPI is running at about approximately 1%, and we expect CPI headwinds in our Residential and Franchise business to continue. We've also seen more competitive pricing on new residential municipal contracts. So the pricing headwinds in 2011 will come primarily from our residential line of business. We will continue to aggressively push industrial, commercial and landfill prices. As a result, we expect our overall yield in 2011 to be 2%. Our waste-to-energy operations are expected to have a negative impact of about $28 million on earnings in the first half of 2011 compared with 2010, primarily from upgrades being made at our recently-acquired waste-to-energy plant in Virginia. Our waste-to-energy operations are expected to have a positive impact of about $11 million in the second half of 2011. We expect increased labor costs due primarily to annual merit increases, which will add approximately $65 million to 2011 expenses. We're planning to increase expenses by up to $50 million for information technology upgrades, start-up costs associated with new cost-saving programs and customer-focused growth initiatives. Interest expense is expected to increase approximately $25 million principally because of higher fees and rates from the revolving credit facility that was executed in June of 2010. We've previously discussed certain growth initiatives that had negative $0.03 impact to earnings in the third quarter. The headwinds from those initiatives were about the same in the fourth quarter. We expect to see the results from these initiatives continue to negatively impact earnings in the first half of the year but to turn positive by the end of the year. So when we look ahead to 2011, we'll face some headwinds, mostly in the first half of the year. But our strategy remains clear. We'll remain committed to our pricing discipline while at the same time investing in the future. In looking at our first quarter, our preliminary data shows that January 2011 earnings were basically flat year-over-year, driven by negative volumes and start-up spending on new cost-reduction initiatives that will be implemented in 2011. The negative volumes were driven by the severe winter weather experienced throughout North America, and we expect that to abate as we enter the spring season and to improve throughout the year. We've also begun to bring in internal and external resources to develop cost-saving plans, and the spending on those resources are not yet offset by savings. We expect the savings to begin to occur in the second half of the year and to accelerate in 2012. So earnings improvement will be muted in the first half of the year and pick up in the second half of the year. Overall, we estimate our 2011 fully diluted earnings to be between $2.24 and $2.30 per share. In summary, our results in the fourth quarter build strong momentum going into 2011. Our entire organization is aligned around our pricing and cost savings strategies. This will serve us well in accomplishing our goals of growing our revenue, expanding our operating margins, increasing our return on invested capital, increasing our free cash flow and returning cash to our shareholders. And with that, I'll turn the call over to Bob.

Thank you, David. I will begin by discussing operating costs. These costs increased by $77 million in the fourth quarter but improved 110 basis points as a percentage of revenue to 61.2%. Cost of goods sold increased $67 million in the quarter, mainly because of rebates due to higher recycling commodity prices. Because of these higher prices, earnings per diluted share at our recycling operations increased approximately $0.04 in the quarter. Subcontractor costs increased $22 million in the quarter, primarily relating to the work we performed on the cleanup effort in the Gulf Coast region. Maintenance costs decreased $14 million. Direct fuel costs increased approximately $9 million, primarily because of a 15% increase in diesel fuel prices. The increase in our fuel costs was less than the increase in our fuel surcharge revenue for the quarter, providing a $5 million benefit to income from operations. Foreign currency translation for our Canadian operations accounted for an increase in operating costs of approximately $7 million. SG&A costs were $367 million in the fourth quarter. As a percentage of revenue, SG&A costs improved 60 basis points to 11.5%. Interest expense for the fourth quarter increased by $9 million compared with the prior-year period. This is primarily due to higher upfront costs in usage fees on the new revolving credit facility which we executed in June 2010. On December 31, 2010, our weighted average cost of debt was 5.6%, and our debt-to-total capital ratio for the quarter was 57.5%, consistent with our target ratio of about 60%. The floating rate portion of our total Debt portfolio was 13% at the end of the quarter. Our income tax rate, as reported for the fourth quarter 2010, was 35.1%. After adjusting for the items referenced in our press release, our income tax rate for the fourth quarter would have been 36.6%. For 2011, we expect the effective tax rate to be approximately 35.7%. Turning to cash flow, fourth quarter 2010 net cash provided by operating activities was $622 million. During the fourth quarter, we received a benefit of about $50 million from a reduction of our federal income tax payments due to bonus depreciation. Our capital expenditures for the fourth quarter were $367 million and our free cash flow for the fourth quarter was $263 million. For the full year 2010, free cash flow was about $1.2 billion after capital expenditures of approximately $1.1 billion. Our 2010 cash provided by operating activities was negatively impacted by the changes in working capital, primarily an increase in accounts receivable due to our strong revenue growth. For 2011, we expect capital expenditures of between $1.35 billion and $1.45 billion. We have increased our capital spending plans to take advantage of the bonus depreciation legislation recently passed. The additional spend will focus on natural gas vehicles and fueling infrastructure, IT infrastructure and growth initiatives. In 2011, we expect our free cash flow benefit from bonus depreciation of between $110 million and $140 million. Free cash flow in 2011 is expected to be in the range of $1.25 billion and $1.35 billion despite the increase in capital expenditures. In the fourth quarter of 2010, we paid $150 million in dividend, and we repurchased $58 million of our common stock. For the full year 2010, we paid $604 million in dividends, and we repurchased $501 million of our common stock. As you know, our capital allocation program over the past few years has been very clear, return cash to our shareholders through dividends and share repurchases while opportunistically making strategic investments and acquiring assets. For 2011, our capital allocation plan is to return up to $1.2 billion to our shareholders through a combination of dividends and share repurchases. The plan anticipates increasing future declared dividends by 8% to $1.36 per share on an annual basis, which would result in a dividend yield of approximately 3.7%. We also intend to repurchase as much as $575 million of common stock. We expect to spend between $250 million and $350 million in business acquisitions and investments, with the majority of these investments on the Solid Waste side of the business. The cost savings program that David mentioned will focus on procurement, operational efficiency and back-office efficiency. The implementation costs of these initiatives will cause a drag on earnings in the first half of 2011. However, we expect to begin to realize the benefits of these initiatives in the second half of 2011, and they should accelerate through 2012. Despite the cost of these initiatives, we expect full year 2011 SG&A costs to decline as a percentage of revenue. Coupled with improved operating performance, we expect income from operations margins to continue to improve in 2011. Finally, some news about our Investor Relations area. We have recently named Ed Egle [ph] as Director, Investor Relations. Ed will be taking over from Jim Alderson, who is recently named Director of Finance for our waste-to-energy operations in the United Kingdom. Congratulations, Jim, on his new position, and we thank him for his contributions to Investor Relations. Ed was recently Director of Financial Analysis and has over 15 years of experience with our company both in the field and at the corporate office. He'll be able to hit the ground running. Ed will be reporting to our Vice President of Finance and Treasurer, Cherie Rice, who will continue to oversee the Investor Relations program, as she has done the last several years. We will be introducing Ed to you at Investor Meetings during the coming months. And with that, Nicole, let's open the line for questions.

[Operator Instructions] Your first question comes from the line of Scott Levine with JPMorgan. Scott Levine - JP Morgan Chase & Co: David, I think you flagged for Q4 the impact of storms on the volume growth, but the price and the margins both came in above our expectations for the quarter. So if you could normalize for the storms specifically, could you characterize the results relative to your expectations into the quarter and maybe any pleasant or negative surprises relative to internal expectations?

Scott, I think overall, I think we were pretty much in line from an operating basis. Frankly, we did worse on volumes than we thought we'd do. We did a lot better than we thought we'd do on both the price and cost. And so when we looked at the quarter, we saw October trending volumes, as I recall, October volumes were negative 0.4%, and so we sort of saw the volumes trending toward positive like we thought would happen in the fourth quarter. Obviously, the winter storm started hitting in sort of mid-December and that in December, as I recall, was negative 4.9% in volumes. And so you can see the dramatic change that we believe the weather had in December. And so, overall, the volumes were disappointing, but there was nothing we could do about it. The two things that we could do something about on the cost side and on the yield side, we exceeded our expectations. Scott Levine - JP Morgan Chase & Co: And regarding the municipal contracts, the residential contracts that you flagged, were those recent developments? And can you quantify the impact in basis points of the hit to volumes associated with that?

Yes, when you look at residential contracts -- look, our pricing program over the last few years has been sort of an up or out mentality with respect to residential contracts. We've raised prices basically across the board. As we look at that, we're going to look at those contracts that we have, particularly where we already have the capital invested, and we're going to look at them purely from a return-on-capital point of view. We're going to keep the contracts that give us sufficient return on capital, and we're going to let them go when we have competitors that are putting out prices there that don't meet our hurdles from a return-on-capital point of view. The losses have been fairly widespread. The numbers that I have seen recently show that it's about $33 million. You can translate that into basis points, but it was about $33 million of residential contract that we lost year-over-year. Scott Levine - JP Morgan Chase & Co: So is that -- it sounds like it's kind of a trend, and maybe that's evolving and your expectations that's -- kind of it is what it is, and we'll kind of watch and monitor?

No, not really. I mean, when we talked in the last year about the customer-focused growth, one of the things that we did is we put an emphasis on our municipal contracts. And just like we're looking at in our other customer segments, we're going to look at this customer segment as to how do we create a value proposition for the customer such that price doesn't become the primary driving factor. So when you look at municipal contracts, you've got to find out what municipalities want. And today, what they want are more options for diversion. So we're going to give them more options from a recycling point of view, from an organics point of view. If you can do that, you can create value out of the materials. If you can recycle more materials and create value that you can then can share with the customer, we can get the contract at a higher price, or at least at a higher return on capital. And so going forward, we are not going to go out and compete on price. That's never been our strategy in any line of business. But we are going to compete to maintain those contracts that give us a good return on capital, and then we're going to try to find a way to meet the customers' need better than anyone else in the industry. Scott Levine - JP Morgan Chase & Co: And one last one, if I may, the D&A came in a little bit lower than we were looking for in the quarter. Is there anything unusual there? Or how did that come in relative to internal?

It was a little bit lower than we thought. We have every year at the end of the fourth quarter, we have a certain amount of adjustments we make due to capping closure, post-closure analysis. We do landfill to landfill. This year, that number was just a little bit higher than what it was last year, and last year was probably pretty typical, but that's what drove the D&A down. You'll see that it happened last year in the fourth quarter as well.

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

First question I want to ask about is just on your pricing outlook for 2011. Can you help us to understand what you're assuming for pricing in your CPI-based revenue versus non-CPI-based revenue? And then within the CPI based component, is all that tied to CPI for '10? Or is some of that more realtime where '11 CPI will drive the pricing in some of those markets?

Yes, it's really -- all those contracts are different. Some of them are localized CPI, some of them are more regionalized and national CPIs, some try to get to sort of a waste industry-specific type of CPI. So they're all over the board. What we looked at for CPI in the year was about 1% to 1.3% on CPI. And so you can do the math there to figure out what effect that has on the overall yield for the year. And then I think the other thing to keep in mind is that we anniversaried a lot of our fees. So for example, our environmental fee, our minimum ton-per-load fee, our administrative fee, that's about $50 million of headwinds. All the fees and surcharges, we're expecting to be year-over-year about a $50 million headwind, which tells you that we've got to do a pretty good job on price increases to hit our 2% goal. If you remember last year, in order to hit our goal, we had to have an average price increase on our open-market Commercial business of about 8%. And that type of trend continues this year. I mean, in order to get to our 2%, we've got further headwinds to overcome from CPI and from the various fees and surcharges. And so we expect the open-market portion of our Commercial business to be in the 6% to 8% range.

And then just on the landfill side, David, I know you talked in the past about working towards a pricing growth target of 8% to 10%. Can you give us some sense of where you think you may be able to get to this year on landfill pricing?

Yes, just a rule of thumb, you sort of assume that those are three-year contracts, so you hit about a third a year at 2.4%. You do the math and multiply it by three, and you'd figure your gate rate's up probably closer to 5% to 7%. And some of the studies I've seen that folks go out and do would verify that we're being pretty aggressive at the landfill. What we're going to do is pick a few markets where we can test our landfill pricing. We did this -- frankly, that was the first thing we did when I became CEO back in 2004, and it's time to do it again. We've got huge investments in capital in those landfills. When you look at our business over the last three years, landfill volumes have obviously been down dramatically, which has had a dramatic effect on return on invested capital, and we need to raise prices in order to get the return on capital that we expect out of our landfills. So we're going to push them across the board, but then we're also going to go out and find some markets where we can test those types of price increases that you talked about.

Just quickly on the volume side, do you have an estimate for how much of a drag is being factored in to your volume forecast from special waste this year?

No, we haven't broken it down that specifically, Jonathan.

And then just on recycling, if my math is correct based on where recycling prices are right now, which I realize you may not be assuming in your guidance, but that would imply about at least a $0.05 EPS benefit year-over-year. Do you have an estimate of where, if recycling prices held where they are right now, what that would mean for year-over-year EPS contribution in '11?

You're about right. As I recall it, if fourth quarter average pricing holds, which is basically where the prices are right now, there was a $0.04 to $0.05 benefit for the year. We expect the pricing to hold through the first quarter, but then we expect it to soften towards the back end of the year.

We're not as optimistic as some of the third-party information available.

Just quickly on costs, first, on the labor cost increase, if my math is correct, it looks like if I take your labor cost for '10 and then apply the dollar impact you're talking about, it's about a 3% increase. Just given where CPI is this year, can you help us understand, is there something that's driving that inflation in your labor base? Is it union contracts or anything else along those lines?

Jonathan, it's 2.5% is basically what we've been using as the number that we expect our wages to go up in 2011 and it's driven -- so some of it is driven by union contracts, but it's really driven by local market conditions. The thing about CPI is it doesn't capture necessarily all the costs people face. It's impacted significantly by housing, for example, at least in some ways in which it's measured. So the real cost that a lot of our folks are facing is closer to 2.5% than it is to 1%.

And then just my final question is on SG&A. I know you talked sort of qualitatively about starting to see some benefit from the investments that you're making in the second half of the year. Can you help to try to quantify that? And as we think towards 2012, what the progression may be towards that targeted 9% run rate exiting next year?

Well, yes. In fact, I would expect you'll see in the first two quarters of this year an impact of around $0.02 per quarter from these investments we're making in the start-up costs, and most of that will be SG&A. We've had negative. We expect though, by the way, in the second half of the year to see the benefit start to be realized to the point where for the year, it will offset, and maybe even a little better. We'll talk more about that as the year goes on. If we don't start investing in these cost savings programs, I think my ability to deliver on the 9% run rate at the end of 2012 will not be realized. So we just have to go after some of these things. We do expect to still see an improvement in SG&A during 2011, just in part by continuing to manage the other cost but also by higher revenue.

So the point is, in dollar terms, you really wouldn't start to see material impact from your cost savings initiatives on SG&A until 2012 in terms of the year-over-year...

You'll begin to see it in the third and fourth quarters of this year. But yes, 2012 is when you'll really see it.

Your next question comes from the line of Hamzah Mazari with Credit Suisse. Hamzah Mazari - Crédit Suisse AG: Just a question on the volume side. I'm curious to see what you're baking in on the commercial piece of your business for this year? You spoke of the special waste pipeline being strong. But on commercial, I know you said that sort of that business was service increases were negative relative to decreases because of seasonality. But how should we think about that business as we go through this year?

Yes, again, when we put together our guidance, we didn't go through specific elements of the volumes. But just from a commentary point of view on the commercial volumes, these will be the special waste. Special waste has held up tremendously well during the year, and we don't particularly see that changing in 2011. The pipeline still looks pretty strong. Now the pipeline there is probably only a quarter, your visibility is probably only a quarter out. But it still looks pretty strong. On the commercial side, those volumes have very stubbornly stayed sort of in the negative 5% range, and we just haven't seen a dramatic move in those volumes. And I've said it before, that I would much prefer to see those commercial volumes move toward black because I think that would be more indicative of a strong economy. They've remained stubbornly negative at about negative 5%. Hopefully, we'll see that change. But as you know, with our business, you really don't start to see the change until the spring weather breaks and folks start -- and I mean, there's not that many people as you know in the Northeast that are adding new businesses during the winter months. And so I think we'll get a better feel in the second quarter as to whether we're going to see significant improvement in commercial volumes year-over-year. Hamzah Mazari - Crédit Suisse AG: And then on pricing, you spoke of open-market pricing being up 6% to 8%. You're being aggressive on the landfill side. Could you maybe add some commentary on how investors should think about the rest of the larger players following you guys? Are you going to see others be aggressive as well, or do you have to lead the charge here?

I really can't control nor comment upon what others are going to do. I can only comment upon what we're going to do. And look, I think you all recognize that everything we've done since I've been here has been focused on return on capital. And what we've seen in the last three years as volumes, you all know very well that we're very highly leveraged from a fixed cost point of view at our landfills. And so as the volumes have come down the last three years, the margins have come down fairly dramatically and the return on capital has come down fairly dramatically. We make huge investments in these landfills every year. And so if we're going to get the return on capital up, we don't have a lot of opportunity to pull out variable costs. So there's only one way to get the return on capital up, and that is to push pricing. And that's exactly what we'll do. Hamzah Mazari - Crédit Suisse AG: And just last question, on the waste-to-energy side, could you just remind us what your exposure is to market pricing and whether you're still committed to growing that business aggressively? It seems like you're putting more money towards buybacks, which is a good thing, but just curious to see how you are thinking about the pipeline there?

With respect to the exposure to the market merchant, our merchant plans represent about 53% of the total amount of electricity we sell. And right now, we've got about 30% of that, 30 percentage points of that hedged. We'll have more hedged as the year goes on. In terms of the pipeline, we're continuing to invest in the business. We haven't changed our view of that at all.

But this year, the investment in the business will be more -- won't be out of our pocket. Last year, obviously, we made an investment in China and we bought a plant. The total of that was about $300 million. This year, China should self-fund, so we won't be making investments there. And we don't see us acquiring any plants this year. So what you'll see in waste-to-energy is that we'll continue to invest in it, but it won't be -- we won't have to put material dollars out from a capital or acquisition point of view.

Yes, that's right.

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

In your guidance of $224 million to $230 million, what share count are you using so we understand how you've modeled your share buyback?

We'll go dig that out for you, Michael...

But generally, we use the mid-year standard on the buyback, and I think we modeled $400 million, $500 million of share buyback.

$500 million , spread evenly through the year.

And then your historic split on your -- you made a comment, David, that warrants following up. The historic split's kind of 40%, 45% first half; 55%, 60% second half earnings mix. Based on the comment you made in your prepared remarks, does that change given you're investing in the weather?

Yes, I think it does. I mean, we talked about it in the script, but the way I sort of look at the year, Michael, is that in the first two quarters, we're still going to have some headwinds from the growth initiatives that we talked about in the third quarter and a little bit this quarter. Things like Bagster and customer-focused growth. And the first two quarters of the year, that's going to be about a $0.02 per quarter drag. We've got waste-to-energy. We're going to put $28 million into refurbishing this plant in Virginia that hits in the first of the year and now goes positive '11 in the back half of the year. So you've got $0.03 of headwind in the first half from waste-to-energy, so that's a penny and a half in a quarter. And then as Bob mentioned, we're making investments in these cost savings programs to starting paying off in the back half of the year and the first two quarters, that's about $0.02 a quarter. So you've got $0.04 to $0.06 a quarter sort of investment. And then in the first quarter, we talked about the weather in January making earnings flat in January. Normally, we'd expect to see January up $0.01 or $0.02. So you've got that effect in the first quarter. So I think, very clearly, we're going to see that historical trend to be a little bit different for us this year. We certainly are going to be more back-end loaded than front-end loaded for every reason that we have, which is the price should be a little bit better in the back half of the year because CPI should get better for those contracts that reprice on June 30. The volume is going to be better because we won't have the weather coming out of the first part of the year, and we expect the economy to continue to improve. So the volume is going to get better during the course of the year. And then on the cost side, we're going to be making some investments in cost savings in the first half of the year that are going to reap the cost savings from the back half of the year. So when you look at the three primary drivers of our earnings, you're going to have some headwinds in the front part of the year, you're going to have tailwinds in the back of the year.

And Michael, by the way, on that share count, what we used was about 477 million shares.

And your working capital cost you a couple of hundred million dollars this year. Why can't we get that to be at least a neutral?

That's a very good...

Yes.

I think that's a very good point and I think when your business is growing, when your revenue is growing, and your receivables are going up, it makes it a little bit harder to bring your working capital down. And this year, we added at the end of the year $157 million more in working capital, and our DSOs every quarter this year except the fourth, our DSOs improved by at least a day. In the fourth quarter, they didn't, they just stayed flat. And we've just got to do a better job.

Right. The point is that when working capital changes because revenue's higher, that's not such a bad thing.

I'd rather have that than -- I'd rather just have working capital to be something as neutral. I'd rather have that. And I think we'll be able to -- we're certainly working to accomplish that this year even though we're continuing to expect revenue to grow.

It seems that it changed faster than the rate of revenue growth. And if your focus is on return on capital, is there a disconnect at the local level on the working capital side of that, that they're not as tied to that and therefore...

You don't have collections as part of our incentive program, Michael, and maybe that would make a difference. But we continue to see improvements except for the fourth quarter. We continue to see improvements in our collection efforts. So I don't think there's much of a disconnect there. And there may have been some other noise in our cash flow from ops in this quarter that it contributed to it. And then on days payable, Michael, we get discounts for paying early. So we're not really trying to lengthen out the DPF [ph].

It appears that you're counting on a reasonable working capital savings, though, in '11 to hit your free cash flow target.

Michael, it's not that much. If we can just take as we did this year and improve it by $30 million, we'll probably be just fine.

So what do you account for -- it's a pretty significant improvement from cash provided from operating activity to get to that free cash flow calculations and...

It is going to require some discipline on payables and receivables. That's really what drives our working capital.

And then on the special waste, just so I'm clear, I mean, a great year-over-year comparison in '10, and you're still seeing good activity, but you're expecting it to be a flat comparison. That's the point.

I think we still expect it to be positive, but not nearly as positive as it was this year.

And then, remind us of some quarterly lumpiness in that because it comes in fits and waves that we ought to be wary of as we're thinking out the year.

Yes, I mean, certainly. When we look at it, probably about 65% of our special waste is actually what we'd sort of call permanent special waste so coming out of plants where we have a contract. And then about 35% is event-related. And that 35%, obviously, changes with seasonality, and I think also changes with corporate budgets for the folks that are doing the clean-up work. And so you're going to have some lumpiness. But again, so far, going into the first quarter, we don't see the rate slowing down dramatically.

And then help us -- the 5% negative on the Commercial business, tell us how you do that calculation because it seems like a stunningly large number. When you don't see your churn or your lost business number being that -- I mean, you didn't see a big change in your lost business number, so it's not a bankruptcy-driven thing. So how do you calculate that so we understand that in context?

I'll leave that up to the accounting folks. Being a CEO, I don't do a lot of calculating anymore.

Basically, Michael, I mean, it's a change in the year-over-year's unit service. Then on the commercial side of the business, we measured units by yard service.

So it's the actual -- yards, meaning the size of the container or yards meaning actual...

So downsizing of the container.

Okay, so that's how to think about it. So if you had a whole lot of 10 yarders and you went -- you came down 5% in number of yard containers.

Or you used to do three pick ups a week and now you're doing two.

So if the service intervals had been negative to the first half then got flat but got negative again, we just need the service interval to shift to a flat. And we'd see that number start to trend progressively toward zero, is the point.

Or an increase in the size of the containers. I have to tell you, this is an indicator of how just the breadth of the economic -- how the economy is doing. When that starts coming back, then that's when you'll see real indications that the economy is moving.

But you know, Michael, I do think that generally, the commercial volumes are driven more by the defection rate, right? I mean, the defection rate this quarter was 9.7%, which is down 110 basis points from the third quarter. But that's going to be the primary driver of the Commercial business is defection rate. Now you've also got -- you're adding new business, too. So the primary driver is going to be the defection rate and then the net new business that you add. The rest of it is a small portion of what drives the volume number.

Your next question comes from the line of Al Kaschalk with Wedbush securities.

I just want to push harder here on this volume outlook for '11, and I think it's a relative question here, but if price is up, churn is also up although it sounds like maybe that's decelerating. Volumes are down, and you're seeing specialty waste up, but you're guiding 0% to 1% on volumes for '11. So what's kicking in and perhaps not falling off from our perspective that the comp looks like it's pretty aggressive with the economy?

Yes, I mean, when you look at it sort from of a 10,000-foot point of view, you've got October and November that ran at negative 0.4% in October, negative 1.4% or so in November. And so you have the numbers trending. Obviously, in November, you've got the holiday season starting to kick in. But, yes, the number is starting to trend towards black, right? And that was driven through all lines of business. You've got great comparables year-to-year starting to show up in the industrial line of business, and you've got C&D and special waste holding up very handily. So everything was trending the right way until the weather hit. And this is what we faced every year when we're looking at what we're going to talk about with respect to volumes -- what we're going to talk about with respect to volumes for the year. Is negative 4.9% in December indicative of weather? Or is it indicative of a softening economy? In other words, what do you base 2011 volumes off of? Do you base it off the negative 0.4% in October or the negative 4.9% in December? And when we look at it, we think that you can compare it more to October than December because of the weather event. Now January has continued to be soft. Again, we believe it's because of weather, not because of the economy. So again, it's the same thing we're faced with every year, where we really don't know if our volume call is going to be right until we come out into the seasonally up months that start in the spring. Why do we think it's going to be flat for the year? Because we expect to see GDP positive this year. We have no reason to believe that special waste will drop off dramatically during the course of the year. We expect industrial volumes to continue to improve, and then we expect to see improvement on the commercial line of business, if not because the economy improved dramatically, because of the year-over-year comps. And so we expect every line of business to improve during the course of the year just like what we saw in October. And then you've got the overall volumes driven by that great special waste like it's been for the last three quarters. So that sort of the 10,000-foot view. The other thing that we've got going on is the investments that we started to make in customer-focused growth, the segmentation of our market areas. We're starting to see that take hold. We've talked about our medical waste initiatives, and we just had a large national hospital chain that was virtually 100% by a large competitor, we took about 30% of that business away. So we're on target to at least double the amount of medical waste we do. We're doing $20 million, $25 million. We expect to do about $50 million in 2011. And then when I talk about on the municipal side, we're going to make sure that we maintain the contracts. In the past, we've let some contracts go based strictly on our philosophy if we're going to raise prices everywhere every time. We're going to take a little harder look at the residentials line of business, and we're going to make sure that we stay at those contracts where we still get the good return on capital. So we're looking at that positive factors throughout the business. I think that will be born out once we see the spring come and you start to see normal seasonality kick in.

If I may pressure you a little bit on weather, why is this such an item being called out in greater emphasis from your side at least in my perspective, maybe relative to some of your competitors and other businesses in the market there. Is it exposure to certain markets that have been dramatically hit? Because historically, we've been reminded that this clears up after a couple of days as it relates to your...

Do you mean the weather? Yes, I mean, look, when you look -- I'm not sure about the other folks in our industry, but I follow the transportation industry fairly closely, and if you take a look over the last two or three weeks, you'll see that a number of transportation companies have brought down their earnings fairly dramatically because of the weather, more dramatically than we have. And basically, what happens is, as the folks up in New York know, commerce just shuts down, particularly when you have the type of snowstorms that we've been having along the East Coast and the Midwest. And when commerce shuts down, look, we move 15,000 tons a day out of New York City and when things shutdown, we move zero. And so some of that comes back, but not all of it comes back. And so the weather certainly has a dramatic effect on our business, and certainly, this weather this year has been as bad as we've ever seen. Now again, maybe what you didn't hear from the other companies is because they haven't closed their January books yet. I can't speak for the other companies. We've just closed our January books, and we were able to see that earnings were flat year-over-year and, generally, we'd expect them to be up $0.01 or $0.02. So we thought that was important for our shareholders to know and so we want to make sure to call it out.

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

So how should we think about the upgrade that the waste energy facility is going forward and what's being done in Virginia? Are these costs that you've outlined for the year, are they truly onetime in nature during the first half of the year? Or are we likely to face more of these investments in 2012 and then periodically down the road?

This should finish it. The plants needed a fair amount of repair work when we moved in. And some of what we're upgrading could have been avoided had the plant been maintained better before we bought it. Some of it, though, was truly upgrades to make it operate more efficiently. It's more of the former than the latter. But once this is done, I think you'll see that, that piece is going to be much more normal operations.

And if I could try one more angle on the special waste, if we see this having been relatively strong, especially in the third quarter, maybe slowed a bit in the fourth quarter, when you talk about the strong pipeline going forward, is it reasonable to assume those volumes will be as strong as what we had in the September quarter? If you could just give us a feel for the magnitude.

And again, special waste is generally event-driven on that 35% that is non-contracted. And so it does bump around quite a bit. Like I said, the visibility that we have is generally just about a quarter out. And what we're seeing even during January where we had bad weather, what we're seeing is that volumes are continuing to move and that there are some fairly good-sized projects that we're seeing moving despite the bad weather. So again, are we going to see the same kind of great growth that we saw in 2011 and 2012? Well, obviously, the year-over-year comps will be a little bit more difficult, but we'd expect the dollar amount to be similar to 2010.

Lastly, in terms of outpacing the pricing objective of 50 to 100 bps above CPI, is that something that has the potential to get easier as the economy improves? In other words, are you increasingly optimistic about the ease with which you'll meet that pricing objective?

Yes, there is no doubt. I mean, I think you all follow the industry. And I think there's no doubt that we continue to be more aggressive than other folks in our industry. And so when you look at it -- and when I look at it, I look at it from sort of three angles. You got the CPI effect, which we can't do anything about, but that should improve as the economy improves. We just saw the wholesale prices come out and they were -- it's the only time in my life that I actually root for inflation is because we have the CPI adjusting contracts. And then we've got the other piece that we have to overcome, which is the fees and surcharges. I talked about those, those are about $50 million. Those will be $50 million negative. You can't really do much about those when the economy improves, although you should see things like the minimum ton per load and some of those other types of fees improve as the economy improves. And then you've got just the general price increases. When you look at GPIs, better economy is always going to be better for us because customers are more willing to accept price increases. But I think the important thing to remember about us is that we are moving away from price increases for price increases' sake. And what we're trying to do is to create that value proposition with our customers so that we can get both price and volume. I mean, that is for the first year, as for our pricing program, they were price-focused, and they were focused on price to the detriment of volume. And now that we're moved towards segmenting our customer base, we believe we can get both price and volume, and that's certainly our goal.

That was our final question. Does anyone have any closing comments?

Well, you know, obviously, what we've done in the fourth quarter of 2010, I believe, portends very well for us in 2011, and we look forward to meeting you all on the road with our new Director of Investor Relations, Ed Egle [ph], and we'll see you in the coming months.

And good luck to Jim.

Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1:00 p.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on Thursday, March 3, 2011. The conference ID number for the replay is 33194439. The number to dial for the replay is 1 (800) 642-1687 or (706) 645-9291. Thank you for participating in today's conference call. You may now disconnect.