Waste Management, Inc. (WM)

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Waste Management, Inc. (WM)

Q3 2010 Earnings Call Transcript

October 28, 2010 10:00 am ET

Executives

Jim Alderson – Director, IR

David Steiner – CEO

Bob Simpson – SVP and CFO

Analysts

Hamzah Mazari – Credit Suisse

Scott Levine – J.P. Morgan

Jonathan Ellis – Bank of America/Merrill Lynch

Al Kaschalk – Wedbush Securities

Michael Hoffman – Wunderlich Securities

Bill Fisher – Raymond James

Vance Edelson – Morgan Stanley

Rick Skidmore – Goldman Sachs

Presentation

Operator

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management third quarter 2010 earnings release conference call. (Operator Instructions)

I would now like to turn the call over to Jim Alderson, Director of Investor Relations. Thank you, Mr. Alderson, you may begin your conference.

Jim Alderson

Thank you, Nicole. Good morning, everyone and thank you for joining us for our third quarter of 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 statements. We will conclude with questions and answers. During their statements, any comparisons made by David and Bob, unless otherwise stated, will be with the third 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 the 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 net income, 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, opinion 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 the Form 10-K filed for 2009.

This call is being recorded and will be available 24 hours a day beginning approximately 1 PM Eastern time today until 5 PM Eastern time on November 11. 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 15149014.

Time sensitive information provided during today's call, which is occurring on October 28, 2010, 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.

David Steiner

Thanks, Jim. Good morning from Houston. We earned $0.55 per share in the third quarter, with our collection, landfill and recycling businesses all performing very solidly. We increased operating earnings and improved operating margins in each of these lines of business.

If we didn't have headwinds from areas not related to those lines of business, we would have earned $0.60 per diluted share, in line with our expectations. The headwinds come from unexpected expenses at certain of our waste energy facilities that cost us $0.02 per diluted share in the quarter and start-up costs from certain of our growth initiatives, which cost approximately $0.03 per diluted share in the quarter. The expenses of our waste-to-energy facilities primarily relate to unexpected maintenance costs, including costs to upgrade the SIPSA facility that we recently acquired. The start-up costs for our growth initiatives include our Bagster retail product and our initiatives in medical waste.

We had a lot of start-up advertising and other expenses related to Bagster and the advertising is working. In April, when we started our advertising campaign, we picked up 3,800 Bags. In October, we picked up 13,000. That's a 22% per month compounded growth rate and we expect to continue to see high growth rates in the future. We have now sold over 100,000 Bags. So we expect Bagster to become profitable over the next 12 months.

With respect to our medical waste initiatives, most of the additional costs relate to hiring new sales people and getting new facilities in place. Because the sales cycle in medical waste is longer than in traditional solid waste, getting to profitability takes some time. But we expect our medical waste initiatives to become profitable in the second half of 2011.

We are seeing some wins in our medical waste business and we expect this to accelerate, but we expected revenue to grow faster through acquisitions. However, we do have a competitor that continues to purchase businesses at prices that we aren't willing to pay, which has hindered our efforts to enter certain strategic markets. So overall, our growth has been slower than we expected, but we still believe these customer-focused growth initiatives are the right thing to do for the long-term growth of our company.

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