Good morning, my name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Waste Management first quarter 2010 earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

I will now turn the conference over to Mr. Jim Alderson, Director of Investor Relations.

Sir, you may begin. Thank you, Tina.

Good morning, everyone, and thank you for joining us for our first quarter 2010 earnings conference call. 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 and a review of the details of our revenue growth, including price and volume trends. Larry will discuss operating costs, and Bob will cover the financial statements.

We will conclude with questions and answers. During their statements, any comparisons made by David, Bob, or Larry, unless otherwise stated, will be with the first 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.

That is because David, Larry, and Bob will discuss our results on an as-adjusted basis. Unless otherwise noted, all of the financial measures referenced on the call, including net income, earnings per share, income from operations, operating expenses, and operating margins, are adjusted for items we deem unusual or non-operational in nature.

All of these are non-GAAP financial measures. We have given detailed information on all of our non-GAAP measures that will be discussed on this morning's call and have reconciled them to the most comparable GAAP measures.

You can find that information in the schedules to the earnings press release and the Form 8-K filed today, which can be found on the company's website at WM. com.

Additionally, during the call, you will hear certain forward-looking statements concerning our plans and expectations for second quarter and full year 2010. Actual results could differ materially from our plans and expectations.

Certain factors related to future expectations are detailed in our press release this morning and in our filings with the Securities and Exchange Commission, including Form 10-K filed for 2009. This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m.

Eastern Time today until 5 p.m. Eastern Time on May 13th.

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 647-135-77.

Time-sensitive information given during the course of today's call, which is occurring on April 29, 2010, will 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, Jim, and good morning from Houston.

We earned 41 cents per share in the first quarter, consistent with our full-year expectations. We also saw some very positive signs in volumes as the quarter progressed.

We performed solidly in the first quarter, despite some headwinds. Winter weather was unusually severe in the first two months of this year, which adversely affected operations during the quarter.

The year-over-year impact of fuel costs, net of fuel surcharge revenues, was negative two cents per diluted share this quarter. In the quarter, we had one cent of expense relating to the switch to stock options as part of our long-term compensation plan.

We had a few headwinds in the quarter, but as the quarter progressed, we saw some very positive trends that point to further volume improvements as the year progresses. We still expect our volumes to turn positive in the second half of the year.

Despite the impact of weather in the first quarter, revenue increased by $125 million, or 4.4 percent, from the prior year period. This is the first positive year-over-year revenue comparison since the third quarter of 2008.

Major drivers of our revenue improvement are the steady upward trend in recycling commodity prices and year-over-year yield increases. Internal revenue growth from yield on our collection and disposal operations was 1.8 percent in the quarter.

The decline in the Consumer Price Index experienced in the second half of 2009 impacted our yield in the first quarter. Annual price adjustments for most of our municipal and franchise contracts are based on CPI, and approximately 35 percent of our collection revenue comes from those contracts.

Excluding the price impact associated with municipal and franchise contracts, which are primarily driven by CPI adjustments, internal revenue growth from yield would have been 2.5 percent for the quarter. CPI has increased to over 2 percent for the first three months of 2010, and many of our contracts adjust on July 1st, CPI should not be as significant of a drag in the second half of the year.

In addition, we raised our environmental fee from 6 percent to 7. 5 percent.

We're also focused on our normal price increase process. Each field management team has a specific pricing plan tailored to their customer base and designed to meet their area's 2010 pricing goals.

We remain committed to our pricing discipline, and as I've stated previously, we designed our annual management incentive plan for the second year in a row with minimum pricing targets. Those targets have increased by 50 basis points in 2010.

If we do not achieve the pricing targets, then no bonuses will be paid under the 2010 annual incentive program. For the first quarter, we did not meet our pricing gate, unless we increase our pricing activity, there will be no bonuses paid in 2010.

As you can imagine, that has our managers focused on utilizing all of their pricing levers. The combined internal revenue growth from yield in the industrial, commercial, and residential lines of our collection business was 2.1 percent in the first quarter.

Commercial and industrial yields were 2 percent and 2.6 percent, respectively. The yield component of internal revenue growth in our residential line of business was 1.9 percent.

New business pricing for the first quarter was strongest in our commercial line of business, increasing by over 9 percent. Our customer churn has been improving steadily since the first quarter of 2009 and improved to 9.3 percent in the first quarter of 2010, the best performance we've seen since the fourth quarter of 2006.

We monitor service increases, net of service decreases, because we believe this metric is an indicator of underlying business trends in our industry. It's been improving steadily since the first quarter of last year, and in the first quarter of 2010, it turned positive, which is the first time it's been positive since the third quarter of 2008.

On the volume side of the business, internal revenue growth from volume declined 4.9 percent in the quarter, a 150 basis point improvement from the fourth quarter of 2009. Despite the weather impact in the first quarter of 2010, we're on track to meet our previously announced full-year 2010 volume guidance of between negative 1 percent and negative 3 percent.

Compared with the lows reached during the third quarter of 2009, first quarter 2010 volumes have improved 400 basis points and the rate of volume decline has improved each quarter since the third quarter of 2009. In our collection business, the recession-resistant lines, namely commercial and residential collection, saw volume declines of 4.

8 percent and 3 percent, respectively. In our more economically sensitive industrial line of business, volumes were off 12.4 percent, a 300 basis point improvement compared with the fourth quarter of 2009.

Despite lower volumes, we maintained our focus on industrial pricing, which resulted in revenue growth from yield of 2.6% for the quarter in the industrial line of business. Overall, we continued to expand our income from operations margin in the collection line of business, which increased by 40 basis points compared with the prior year period.

In the landfill side of the business, first quarter 2010 internal revenue growth from volume decreased by 7.5%. This is a significant improvement from the fourth quarter 2009 decline of 14.3%.

Internal revenue growth from volume for special waste was positive 0.3%, which is dramatically improved compared with the 12. 1% decrease experienced in the fourth quarter of 2009.

This is the first positive year-over-year volume comparison in special waste since the third quarter of 2008. For MSW, internal revenue growth from volume was negative 1.2%, improving from a decline of 5.1% in the fourth quarter of 2009.

Volumes were softest in our more economically sensitive C&D line, which was negative by 25. 6%.

On the pricing front, pricing was strongest in our MSW line, with per-unit pricing up by 3.6%. This pricing level is an improvement of 60 basis points compared with the fourth quarter of 2009.

As we built our forecast for volumes for the remainder of the year, we looked at volume trends during the first quarter and into the first few weeks of April. What we've seen is steady sequential improvement in most of our business lines.

On the industrial side of the business, work-day adjusted internal revenue growth from volume was negative 12.7% in January, but improved to negative 9.7% by March. On the MSW side, work-day adjusted volume was negative 2.4% in January and actually turned to positive 0.5% in March.

During the first three weeks of April, we continued to see volume improvement. On the industrial side of the business, recent weekly volumes have surpassed prior year levels in the South and the East and have almost reached prior year levels in the Midwest.

On the landfill fill side of the business, we've seen some weeks where company-wide average tonnage per day has exceeded prior year levels. These signs of improvement certainly bode well for the rest of the year.

Increased commodity prices contributed about six cents of positive year-over-year earnings per diluted share in the first quarter of 2010, which is consistent with our expectations. We continue to expect a year-over-year positive impact to earnings per diluted share from commodity prices of 4 cents to 8 cents per share.

Virtually all of the benefit will occur during the first two quarters of the year. Our forecast equates to 30% higher average commodity pricing for the full year of 2010 compared with 2009.

We saw a number of encouraging signs during the first quarter and we're confident that we can meet our full-year earnings forecast of $2.09 to $2.13 per diluted share. I would note that our full-year earnings per share guidance excludes the benefit of our recent settlement with SAP.

In summary, we're quite pleased with our first quarter, and we realize that our full-year results will be driven by improving volume, a renewed focus on pricing, improved commodity prices, and our continued focus on operational excellence. With that, I'll turn the call over to Larry.

Thank you, David, and good morning. I'll now review our operating costs results for the first quarter of 2010.

Adjusting for the items noted in our press release, operating expenses in the first quarter of 2010 were $1,853 million, or 63.1% of revenue, compared with $1,725 million, or 61. 4% of revenue in the prior year period.

While the negative volume trends we've seen over the last 18 months continued into the first quarter, the rate of the volume decline is slowing significantly. Volumes in our more recession-resistant lines of business, especially residential, have held up the best.

Volumes in our more economically sensitive lines of business, primarily landfill and roll-off, have consistently seen the largest declines. Our residential collection line of business provides a very solid foundation because it's very stable, but it carries the lowest margins of all our collection lines of business.

The landfill business carries some of our highest margins, but it's very difficult to flex down costs, especially labor, as this line of business is less labor-intensive than our collection line of business. We continue to see larger percentage volume declines at our landfills than in our residential line of business, which causes a change in our business mix.

This change in mix has negatively impacted our margins as we lost more higher-margin business than lower-margin business. As David mentioned, over the last few weeks, we've seen positive year-over-year landfill and roll-off volumes in some of our groups.

As our landfill and roll-off volumes rebound, we expect to see a positive impact to our overall operating margins. We will continue to work hard at aggressively flexing and eliminating costs, and for the full year 2010, we expect margins to improve.

As many of you are aware, one of the key financial components to our annual incentive plan is expansion of our income from operations margins as a percent of revenue. If we don't expand that margin in 2010 as compared to 2009, we will not receive an incentive payout for that portion of the bonus plan.

You can be assured that everyone is working hard to find ways to control our costs and improve our margins. I'll now review our performance for the first quarter of 2010 compared to the prior year period in a number of the cost categories.

Labor and employee benefits costs improved by $4 million, or 100 basis points as a percent of revenue in the quarter, after adjusting for a $28 million charge for the partial withdrawal of an underfunded Teamster pension plan. This improvement results primarily from reducing routes in reaction to the volume decline.

This helped offset the wage increase for hourly employees that we implemented at the end of June 2009. We reduced our driver hours by about 394,000 hours in the first quarter by taking trucks off the road as volume declined and using our routing tool to build more efficient routes.

Cost of goods sold increased by $77 million in the first quarter as a result of higher recycling commodity prices that increased our rebates to our customers. This negatively impacted our operating costs as a percent of revenue by 250 basis points.

Our direct fuel costs increased approximately $28 million, or about 80 basis points as a percent of revenue, as a result of higher diesel fuel prices. The average price of diesel fuel increased by approximately 65 cents a gallon in the first quarter of this year compared to the same period last year.

Indirect fuel costs charged to us by our subcontract transfer station haulers also increased by approximately $4 million. Compared to the first quarter of 2009, fuel costs increased more than fuel surcharge revenues, causing a 60 basis point decrease in our income from operations margin and a negative year-over-year impact to earnings of 2 cents per diluted share.

Landfill operating costs increased approximately $22 million in the first quarter. This increase is due to higher remedial liability costs and higher weather-related operating costs in the first quarter of this year.

In addition, the first quarter of last year had a $10 million favorable adjustment due to the effect of higher interest rates on the estimated present value of our environmental remediation obligations. Overall, this increase in costs caused a 70 basis point decrease in our income from operations margin.

The discipline we've used to manage our costs as volumes have declined has put us in a position to leverage our cost structure as volumes turn positive. Coupled with the disciplined approach our team has shown in executing our pricing strategies, we remain confident that we will again make progress on expanding margins, as well as our primary goals of generating strong free cash flow and growing earnings.

With that, I'll turn the call over to Bob. Thank you, Larry.

I will start by discussing our SG&A costs. These costs increased by $14 million year-over-year to $351 million during the first quarter of 2010.

This increase resulted primarily from additional costs related to our growth initiatives and information technology expenses to upgrade outdated equipment and applications, both of which we discussed at our investor day in March. Our days sales outstanding improved by 1.6 days year-over-year, and our bad debt expense decreased by $9 million.

Managing our receivables very closely remains a high priority. Depreciation and amortization expense for the first quarter of 2010 increased $2 million when compared with the first quarter of 2009.

This is primarily due to an increase in intangible amortization expense from acquisitions closed during the prior year. As a percent of revenue, depreciation and amortization expense was 9.

9 percent compared with 10.3 percent in the prior year quarter. As anticipated, our interest expense net of interest income for the first quarter increased by $11 million compared with the prior year period, primarily due to interest on $600 million of senior notes we issued in November of 2009.

Our debt-to-total capital ratio for the quarter is 57.4 percent, below our target ratio of about 60 percent. The floating rate portion of our total debt portfolio is 21 percent at the end of the quarter.

From the $600 million of proceeds from the notes we issued in November, we paid $142 million to purchase a 40 percent equity interest in the Shanghai Environment Group, a company focused on developing waste-to-energy plants in China. This transaction closed on March 23rd of this year.

We expect to close today on the purchase of a waste-to-energy plant in Virginia, which will cost $150 million. In addition to the waste-to-energy investments, we have targeted $250 to $350 million for other business acquisitions and investments, of which we spent $80 million in the first quarter of 2010.

I'd like to discuss our new electricity hedging program. Since 2008, our exposure to merchant electricity sales in our waste-to-energy business has increased as some of our long-term electricity sales contracts have expired.

Those long-term electricity sales contracts had favorable pricing compared with the merchant pricing terms we obtain in today's markets. At the beginning of 2009, approximately one-third of our electricity sales were on a merchant basis.

Today, we sell approximately 46 percent of our waste-to-energy power on a merchant basis, and we expect this to increase to approximately 53 percent by the end of 2010. For our merchant energy stream, we have implemented a more actively managed hedging program to decrease the volatility of our electricity sales prices.

We expect to have hedges in place on about 20 percent of our total annual energy stream for durations ranging from 60 days up to nine months. Our plan is to continue putting in place additional short-term rolling hedges and, when we see an opportunity to lock in portions of our portfolio longer term.

Turning to cash flow, first quarter 2010 net cash provided by operating activities was $496 million. Our capital expenditures for the quarter were about $255 million, a decrease of $70 million compared with the prior year period.

Our free cash flow for the quarter was $253 million. This is consistent with our previously discussed full-year 2010 guidance of approximately $1.2 billion for capital expenditures and a range of $1.2 to $1.

3 billion for free cash flow. In the first quarter, we paid $153 million in dividends, and we repurchased $120 million of our common stock.

Our dividend yield is currently 3.5 percent. The good results that Waste Management has demonstrated in the first quarter can be accomplished only through the hard work of our employees, and we thank them for their effort and dedication.

With that, Tina, let's open the line for questions. Ladies and gentlemen, if you would like to ask a question, you may do so by pressing star, then the number one on your telephone keypad.

Our first question will come from the line of Hamzah Mazariya with Credit Suisse. Thank you.

Good morning. Just a couple questions.

On the volume side, you guys are looking for positive volumes in the second half. Could you comment on how much is just comps getting easier versus actual demand pickup?

Is it too early to say that you're seeing strong seasonality right now? Because usually you see that sort of at the end of May.

What are you seeing in customer churn in some of your markets as well? We've certainly seen a bigger pickup this year than we did last year, which gives us some optimism that, remember, last year we pretty much didn't see much seasonality at all.

We're encouraged by the signs. You're absolutely right.

It's hard to make a full call on it until you've seen April and May volumes, but we're encouraged by what we see so far in April. As far as customer churn goes, again, we saw the lowest customer churn that we've seen in a couple of years, and it's not particularly surprising to us.

As we've gone and put out our annual price increases, as we've raised the environmental fee from 6 to 7.5 percent, we haven't seen it significantly affect churn. Gotcha.

Then just on waste-to-energy, what are your longer-term thoughts on market exposure there? How much exposure do you want to the market longer term?

Because you're spending more money there. As that business becomes bigger as part of your portfolio mix, it'll probably make your business more cyclical.

I'm curious to see what your thoughts are there. Do you want more exposure to the market longer term?

Is sort of the 46 percent market exposure sort of what you're looking for, or do you want it lower? Just curious to see how you think about that.

The Sipsa plant that we're closing on today is basically 50 percent merchant and 50 percent fixed. The investment we made in China is 100 percent fixed because you'll sign 25-year electricity contracts.

The bids that we're making in Europe are mostly fixed-price contracts for 20-year terms, 10- to 20-year terms. What that will do is it will drive our portfolio to more fixed price than floating price.

Okay. Then just last question on your operating expenses.

It seems like you've got some growth expenditure baked in there. Could you quantify that at all?

Then your commodity rebates, is there some opportunity there to make those more favorable longer term? Should we take your current operating expense run rate and SG&A, is that going to be sequentially higher or flat going forward?

Just some color there would be appreciated. Thank you.

On some of those investments we're making, it was probably about a two-cent impact. We think those are going to be the investments that are going to pay off for us in the future to be able to deliver the type of things that our customers are going to be requiring in terms of services.

We just announced, as you saw at Investor Day, our Baxter product. Some of those, we hope to start seeing some payback very soon.

In terms on SG&A expenses, we talked about it at Investor Day. What we said at Investor Day is what we think will happen for this year, which is basically at the percent of revenue flat to last year.

Over the longer term, our goal is to get the SG&A costs down to nine percent of revenue, and not just by growing revenue. To actually get costs down, we need some help on the technology side to do that, and we expect to get it.

That's where we're shooting for. Fair enough.

Thank you. All right.

Thanks, Tom. Our next question will come from the line of Jonathan Ellis with Bank of America.

Thanks. Good morning, guys.

Good morning, Scott. Just first off on landfill pricing, you gave the MSW figure.

Can you tell us what overall landfill pricing was, and was there any implications for mix this quarter in terms of that pricing figure? There's always implications in mix.

We talked about special waste being positive in volume for the first time in a long time. The special waste was also negative in pricing by 1.

7 percent. Overall landfill pricing was basically flat for the quarter.

Great. Then just in terms of the environmental fee, was there any impact in the first quarter, or should we assume that the impact is really going to be in the second through fourth quarters?

Also a related question is what portion of the revenue base does the environmental fee apply to now? There was no impact from the increase in the environmental fee in the first quarter.

That went out with April billing. We'll see the impact of that as we go through the year.

Great. Then just if we talk a little bit about the CPI adjustments, can you help us understand what, and you mentioned where CPI is now, but for the adjustments on contracts in the first quarter, and presumably that will impact the second quarter as well, what is the average CPI that's being applied to those contracts?

The average CPI, as we talked about, some of them are negative, some of them are positive. We haven't gone back to check on the average.

My guess is the average is well below 1 percent. Okay.

Should we assume, though, that on a full-year basis that you're still committed to the previous guidance of 1 to 2 percent price growth in index-based contracts? Absolutely.

Okay. Great.

Just a couple of quick questions, if I may. Just on the waste energy business this quarter, I noticed that the downside in terms of electricity pricing was offset by increased disposal pricing, and it seemed to be a pretty material increase, I think about 7.5 percent price growth for waste energy disposal.

Anything that you're doing on the disposal side in the waste energy business to help to cushion some of the electricity volatility? As a couple of contracts came up, we were able to renegotiate the disposal side of the equation to mostly offset the impact of that contract.

That's why we didn't really mention it as a headwind this year. It was pretty much an offset in this quarter.

Now, our guidance is 1 to 3 cents negative in electricity in the first half of this year, offset by 1 to 3 cents positive in the second half, net-net flat for the year, and this is perfectly consistent with that. Great.

Then just my final question is the Sipsa plant, the Virginia waste energy plant that you're closing on, is that included in your full-year EPS guidance, and if not, what do you expect the incremental contribution to be? No, it is there.

We expected that to close right about the time we're closing, it's in there. The benefit is really nothing this year because we've got some expenses that we come out of the gate with to improve the plant.

For this year, there's basically no benefit from the plant. Great.

Thanks, guys. Thanks, Tom.

Thank you. Our next question will come from the line of Scott Levine with J.P.

Morgan. Good morning, guys.

Morning. Following up on the question on Sipsa, is your expectation there that that will be accretive in 2011, or is there anything that you can talk about to give us a sense of how that might impact results going forward?

We do expect it to be accretive in 2011. We haven't given guidance yet on what that exactly will be, but it'll be more than a penny.

Beyond that, we'll wait till later to just talk about it. Great.

Following up on the pricing question, are you guys effectively affirming the total yield guidance for 2010, which I think was 2.5 to 3 percent positive? What we've always said is that we want to get 50 to 100 basis points above CPI, and that regardless of what CPI is, we're going to get 2 percent yield.

Obviously, the 1.8 percent that we got in the first quarter didn't meet that hurdle. That's why we've made sure that we went back and reinvigorated the pricing programs with our field.

Again, as I mentioned in the script, if we don't meet the yield gate for the year, nobody gets a bonus in this company. You can bet that folks are focused on getting there.

Now, obviously, the CPI is going to create a headwind to our overall guidance of 2.5 to 3 percent. If we see CPI pick up like we expect it, we certainly hope to get to that number.

Understood. Thanks.

One last one on the weather. Did you guys indicate, or can you quantify how much of an EPS impact weather was?

Did that show up more in the volumes or in the costs? It was in both, and we haven't given a number on that.

In 2003, we gave a number, and it's a real difficult item to quantify with any precision. It was at least what we did in 2003.

The thing is, when revenue comes back in March, is it because the revenue goes up in March? Is it because of the weather, or is it because of just economic improvement?

It's just hard to know. We chose to not give a specific number on that.

Understood. Thanks, guys.

Our next question will come from the line of Vance Edelson with Morgan Stanley. Good morning, guys.

Hi, thanks a lot for taking the questions. On that last point with the price engagements not being met of late, were there any factors beyond CPI that you could point to, and did it have anything to do with the bar just being set a bit high in order to drive the team to perform?

No, I think you're exactly right. It has to do with setting the bar high.

Look, every year when we come into our pricing year, we recognize that we've got things that we've got to improve on to lap. In other words, the environmental fee went up from 4.8 to 6 percent last year, and we knew that that's a headwind to yield.

That means we've got to go out and be more vigorous on our commercial price increases. That's where the bulk of the dollars comes from.

This year, when we saw the— remember we talked about it at Investor Day, that we saw sort of the end of 2008 start to go down in pricing. We made sure that when we went back and looked at our commercial price increase program, that we put in higher price increases earlier in the year.

You need to do that in order to lap the headwinds that you have. You need to do things like higher commercial price increases.

You need to do things like raising your landfill pricing. You need to do things like having higher new business pricing.

As we've talked about many times, and I think you all saw in Investor Day, there's a lot of pricing levers that you can pull, and you just got to go pull every one of them if you're going to make up for the headwinds from what you did last year, right? That makes sense.

There was a comment on the Iron Mountain call this morning about their relationship with Waste Management to sell their recycled paper. Would you characterize that as one of many arrangements that you have to drive your recycling volumes higher, and are there more wholesale opportunities like that with hopefully nationwide partners?

We're working with all the big players out there and looking to grow that business so we can utilize the capacity that we have. That's something we continue to be focused on.

Got it. Maybe just one more question.

Could you comment on the nature of the tuck-in acquisitions? Is this mainly contiguous geographies, and would you expect the rate of tuck-in acquisitions to kind of continue at a similar rate the rest of the year?

Our expectation is to spend as much as $350 million, and typically a typical tuck-in is contiguous geographies or within a geography where we already have some routes. Some of the acquisitions we did were also, though, in the recycling line of business, where we just were able to get into new markets more quickly, like for example the Houston, San Antonio, and Dallas markets from an acquisition we did earlier this year that allowed us to get single-stream capability throughout Texas, but first to be able to do that.

That's the kind of acquisitions we're talking about. Certainly the bulk of the acquisitions are going to be exactly as you described, tuck-in, staple-on acquisitions.

Got it. On Shanghai, I may have missed it, but any update as to when that might begin to bear fruit, or is that generally going to be a slow process?

We'll see some benefit later this year. The benefit we expect to see is already in our guidance.

Then as that business continues to grow, we'll see more and more benefit from it as time goes on. It's definitely something we'll see some profits from when it comes through.

Now remember, this will go through other income, you won't see it in the income from operations line. It'll go through other income.

Got it. All right, thanks a lot, guys.

Thanks, Ben. Thank you.

Our next question will come from the line of Alka Chawk with Wedbush Securities. Morning, guys.

Morning. Just to hammer the price question again, it was my understanding that on the contracts that there was not, you were protected somewhat on the floor from a negative pricing impact.

Obviously, that's a misunderstanding on my part, but could you comment on that? Is that something to consider going forward?

Is that not something that's even remotely feasible? Sure.

As you can imagine, we have a lot of those contracts, and they range all over the board. Some of them do have protection, many of them don't.

That's one of the things that, it's interesting, in this economic downturn, I think this whole industry has learned quite a bit. For example, when we saw the recycling commodity prices fall off the face of the earth, we restructured the contract to say, okay, if that ever happens again, we need to make sure that we're protected on the downside.

I think when you're doing municipal contracts in a 3- to 5% CPI environment, you're probably not thinking about negative CPI. Again, that's another lesson learned, that now as we do municipal contracts, we need to make sure that we provide in there that we do set a floor so that we don't go backwards if there's negative CPI.

I think that's the lessons we've got to take out of this downturn. Obviously, they hurt us a little bit today, but in the future we need to make sure it doesn't happen again.

Would it be difficult to contribute what your exposure still may be, or have you looked at that? Is that something you're willing to share in terms of expectations?

Again, I appreciate that there's a huge number of contracts here and they renew over various periods, but where do you think you're at in terms of the exposure and what's left that could potentially, if we hang out here at a flat CPI number? Obviously we won't see.

Most of the contracts that we have are going to renew pricing on July 1st, and we certainly won't see flat CPI for that with CPI running at 2% right now. Frankly, we have not gone back, because we see CPI coming up fairly consistently over the last few months, we've not gone back and found out what the effect would be if it turned back to negative, because we certainly don't expect it to turn back to negative between now and July 1st.

If I may switch to the collection business, I know there was a fair amount of commentary that everybody provided, but the collection business seemed to be pretty strong, at least relative to my expectations. Is that a function of the assessment of your customer base getting additional volumes now on customers where you can see incremental revenue from, or is it just a function of the easy comp?

When we look at the indicators, for example, pounds per yard, when we look at service increases and service decreases, that gives us the indicators that show whether it's economic or not. We certainly think that it is driven by more business.

Now, look, it's also comps. It's more business than what they had last year, which is still less business than what they had two years ago.

It's certainly driven by both. The indicators that we see, that we look at for economic activity, have been virtually all positive for the last couple months.

Finally, if I may, and I know Larry provided a lot of the one-time charges or explanations on some of these expenses, but it seems like the margins were a little bit soft, certainly from our expectations, and I was wondering if you could comment relative to your own internal expectations if that was the case. We did see our income from operations margin improve in our collection business overall.

We did see a negative impact at the landfill, just as we've been talking about. It's really hard to flex down the cost at a landfill.

You just don't have as many levers available to you. You don't have many people out there.

In terms of trying to reduce hours, you're not going to have the landfill just open for half a day because the volumes come in throughout the day. It really is a challenge at the landfill.

We certainly expect, as we see volumes rebound, that we're going to see the reverse. That will enable us to see some increasing margins, and those are our highest margin businesses, as I described.

The mix should help us as volumes turn around and go the other way. Sorry, Larry, what was the change in mix of the drop-off and the higher-margin business would have been which components?

The landfill is going to be the biggest component. That's the biggest driver of the decrease in margin.

Then, we also had the impact from our energy prices. When you look at the IRG impact, just to give you the numbers, if you look at the total collection line of business, it was only down 4.9%.

When you look at the total landfill business, it's down 7. 5%.

You've got 260 basis points of difference right there. Excellent.

Thanks a lot, guys. All right, Al.

Thanks. Our next question will come from the line of Bill Fisher with Raymond James.

Morning, Bill. Just on the diesel prices, with those moving up in the first quarter, do you see that being a catalyst at all for raising MSW landfill prices, particularly on your sites that are closer into the markets?

We continue to look at the landfill as a place that we ought to be impacting our pricing. That's something, it's not just driven by increased diesel fuel prices.

It's something that we need to do, and that's something I can assure you the whole team's focused on. I guess I was just talking about, the haulers would have more costs going through there.

Right, higher transportation costs. Yeah.

Okay. What?

When we look at pricing, it's a function—you've nailed, you've got the nail right on the head. It's a function of the tip fee plus the transportation costs.

As the transportation costs go up, the closer-in network is benefited, and we think we have the best closer-in network in the business. Thanks.

Then on the special waste, obviously you said it was up slightly this quarter. Is the bid activity picking up there as you look into Q2, Q3 versus where you've kind of seen it recently?

We're pretty much hearing that they don't think it's just a one-time blip in special waste, that there's a pretty healthy pipeline out there as projects pick up, as the economic stimulus starts to take effect. What we're hearing.

We've always said that our business sort of lags the general economy by six months, and I think that's an indicator that that's the case. As the economic activity continues, we should see the benefit from that.

Thanks. This last small one is, Bob, on the China joint venture.

You mentioned SIPCO wouldn't be accretive this year, but would China be slightly accretive coming out of the box? Both of them actually are slightly accretive.

SIPCO will be accretive this year; it's just a pretty small number. China will be accretive probably twice of what SIPCO will be.

Great. Thank you.

Thanks. Thank you.

Thanks, Bill. Our next question will come from the line of Alex Aufschae with Goldman Sachs.

Thanks. Good morning.

Good morning. Just a question on the guidance.

In the second half of 2010, when volumes are expected to begin to show year-over-year improvement, can you share with us what you're assuming for incremental margins on the volume's growth? We went through that at the Investor Day, Alex, and I think that model still works, will work well for you.

It certainly works for us. Okay.

You've got a little model in there that I think will help you with that. That's helpful.

Then just as you think about incremental margins, once the volume recovery begins to take hold, how do you see them changing, if at all, relative to margins when volumes just begin to recover? I didn't follow, Alex.

Forgive me, that again? As the volume recovery takes hold, do you anticipate incremental margins changing at all?

We expect margins—well, at some point they do. This is a question we got at Investor Day as well.

At some point they do. The incremental margin benefit you get will be impacted by the need to add more costs, for example.

Then it's a stair-stepping arrangement, really. We didn't give a number on that.

I don't think that that's something that... We're looking forward to the opportunity to see it happen.

Fair enough. Let me just ask one question on the pricing side.

As volumes come back, as you said, you look forward to seeing, do you think there will be a greater opportunity to raise prices on the non-index contracts? I don't think there's any doubt that as you see the volumes go up and as capacity in the industry starts getting taken out because volumes are going up, that's going to give you that opportunity.

Absolutely. We talked about it when we first started our pricing programs many years ago.

We talked about the fact that, for example, in the roll-off line of business, what people used to do is wait until they ran out of cans and then raise prices, right? Every year you have seasonality, you've got to anticipate the seasonality and start raising prices before you run out of cans.

That's how I feel about the economic upturn right now. We're not going to wait for the economic upturn to start raising prices as capacity gets taken out.

We've got to get ahead of that game and make sure that we're taking advantage of it even before the volumes pick up. Again, you can be assured that everybody in this business, in this company, is laser focused on pricing right now.

Great. Thank you very much for taking my questions.

Thanks, Alex. Thank you.

Our next question will come from the line of Michael Hoffman with WSI. Good morning, Michael.

Good morning all. Can you—I hate to come back to price and beat this horse to death, but can we walk through the components?

Front-end loaders up, if you tell a percentage that'd be great, but front-end loaders up, residential flat to slightly down, industrial is— You talking pricing, Michael? Yes.

I'm trying to think of the pieces that you put together, and I get to 1. 7.

What's up, what's down across the mix? Basically every line in the collection business is up, commercial at 2, industrial 2.6, residential 1.9.

What you see is the overall collection business was 2. 1%.

That gets dragged down a little bit. As I said, landfill pricing was basically flat, but it was negative 0.2.

You start to see where you saw the drag a little bit was at the landfill. Okay.

That takes me to the next piece: the landfill volumes that you report—22 million in December, go to 20 million in March. That's a bigger-than-normal dip seasonally.

How much has the weather impacted that? It's really not a dramatically different dip than what we've seen over the last few years, but certainly weather played a part in that this year.

It's definitely bigger than normal. I get that there's a seasonal dip there, but that's— So I'm trying to understand how much of that's just the weather versus something else that's going on.

When you look back at last year, the sequential dip was about 13%, and obviously that was more economy last year. The year before that, it was about 8.5%.

It's not dramatically different, but certainly weather did play an effect there. When you look at March and then April, year-over-year, kind of what's happening on a volume basis, because you get that data every single day.

How does that start to trend relative to the pattern? Frankly, what we're seeing this year is different than what we saw last year.

Last year, we just didn't see the seasonal uptick. We think, if you just look at our volume reports, we're seeing the beginnings of a seasonal uptick.

As I said earlier, you can't really make the call on that until you're into sort of the May, early June timeframe. We're optimistic that what we're seeing is more of a normal seasonal uptick than what we saw last year.

Okay. When you think about your landfill business, when do you think the landfills go to zero volume on a comparative basis as you look at the trend in the business at this point?

Michael, it really—you really have to take it apart and look at it component by component, right? As we said, special waste is already flat.

MSW in March was already positive. The big drags that we have are in C&D and revenue-generating cover.

Those are the big drags. Once we get that C&D volume not negative 25%, but, we can absorb a negative 5 to 10% as we see special waste and MSW go positive.

That's really what we need to see. We need to see that C&D.

Look, that's for us at the landfill, that's the biggest economic indicator, C&D volumes. We'll see MSW and special waste go positive, and I think stay positive for the remainder of the year.

The question is when are we going to see some improvement in that C&D volume? Okay.

Bob, on the working capital, there's generally a pattern of slight negative in the first quarter, at least as I look back over multiple years. This year it's neutral to positive.

Is that DSO improvement a permanent improvement, or is that something that was— how do I think about that? It's incremental, right?

We don't expect to give it back. I would expect it to be what we get today we'll keep today and try to get more tomorrow.

We still—our DSOs are still at the 42-day level, we still have room for improvement there. As you factor that plus the SAP settlement into the free cash flow analysis, just taking the SAP award, that puts me at the upper end of your free cash flow, plus this improvement in DSO.

Michael, the DSO improvement's in the math, right? We expected to get that, and we continue to expect to push that.

With respect to the litigation settlement item that we talked about today, or actually that we highlighted in the footnotes, I think what you can say there is that relatively recent, we'll work through the math on that and update our guidance on the free cash flow at the end of the second quarter call. Okay.

Then capital spending in the quarter, how much of that was impacted by the weather just delaying activity? Because it's just a little bit lower than I thought it was going to be.

Michael, it really wasn't. Or it was, but we made up for it, I guess.

What was going to happen in February probably didn't happen till March. The spending we had was actually pretty much what we typically spend in the first quarter, typically.

What's different this year is the carryover from last year. You may recall that at the end of the fourth quarter, with the fourth quarter, we ended up not accruing as much in the fourth quarter as we did the year before, and so we had less carryover to pay for in the first quarter.

That really is the difference. That helps.

Then on the churn, when you look at the 9-3, which is a terrific number, how's that splitting up now between that which you can control and that which you can't? The thing you can't control is somebody closes a business and moves.

It's running now still about what it's run over the past few years, which is sort of the 50-50 split between controllable, what we call controllable and uncontrollable churn. The good part of that is that, closing your business, whether it's a bankruptcy or moving to a bigger place, that's coming down too.

Absolutely right. That's a huge indicator as well.

Absolutely right. Okay.

Then on the recycling, help me understand the rebate trend as I look forward. I get the pressure in this quarter, but what you're doing going to improve that?

I get a little less pressure on margins, or am I looking at that pressure as a permanent part of the model if the prices stay where they are? Our rebate structure, if you compare year over year, it was certainly the rebates we paid out last year were low because the commodity prices were so low.

You have seen our rebates, the amount that we paid, go up. You saw it in cost of goods sold because the commodity prices have come up.

You'll continue to see that. As long as commodity prices are higher than they were last year, you're going to see that impact in our cost of goods sold.

I apologize. I didn't ask that question very clearly.

If I understood what I thought was the mix of when you get to a certain level, how much you got to give back, it just seemed like I was a little... the rebate seemed a little higher than I would have expected as the rates were rising.

I get that rebates in absolute dollars are going to be up. I'm just trying to figure out on seven million tons what your exposure on rebates are.

Did something change year over year on the exposure rebates as a percentage of the rising price? A couple of things have changed.

One is, on the downside, we're going to make sure that we are going to be covered on our... We're going to sort of ensure we get our processing costs covered.

Then we typically have a sharing of the commodity prices after that, anywhere from, 80-20, 70-30, something like that in that range. Now, that's at the MRF.

When you look at the brokerage side, those averages tend to be, we keep about maybe 3 to 4% there. As we have more brokerage, it's going to make that overall mix move to where it looks like we're paying out higher rebates.

Does that make sense? I think so, but maybe I'll follow up.

Yeah. In other words, Michael, you can't look at the increase in recycling revenue and figure that it all comes from processing rebates.

A good portion of that also comes from brokerage rebates, which are much lower than the processing rebates. It's a mixed issue.

Okay. It's harder to predict, basically, is what I'm hearing, because the mix between brokerage and processing...

It depends on where the volume comes in. Right.

Okay. Lastly, the fuel surcharge.

Just for clarity on my part, the $28 million that you've identified is exposure to not having had enough surcharge to offset, and that if you continue to press your surcharges through the course of the year, basically make that up in some later quarter. The $28 million is the direct fuel cost increase.

Now, we did get $13 million of that back through fuel surcharge, but you're correct. The way it works is that, as it lags as the fuel prices go up and down relatively quickly, but it is designed to get it all back.

You would expect us to get that back in the coming quarters. Right.

You couldn't have predicted the rate at which the price was going to go up when you're giving your guidance. I think I've got a couple pennies of play here then as a result of the success of your surcharge for the remainder of the year.

Michael, there's always ins and outs every quarter, but yeah, that's... Okay.

I just want to make sure I understood it correctly. All right.

Terrific free cash flow, folks. Hope you keep it up.

All right. Thank you, Michael.

Thank you, Michael. I would now like to turn the call back to Mr.

David Steiner for closing remarks. Thank you.

As you all can tell from what we've been saying, we're very pleased with the first quarter, but we're also very pleased with the volume trends and the other business events that occurred in April. We look forward to talking to everyone on our second quarter conference call.

Thank you. Thank you for participating in today's Waste Management first quarter 2010 earnings release conference call.

This call will be available for replay beginning at noon Central Time today, April 29th, 2010, through 11:59 p. m.

Eastern Time on Thursday, May 13th, 2010. The conference ID number for the replay is 647-135-77.

Again, the conference ID number for the replay is 647-135-77. The number to dial for the replay is 1-800-642-1687 or 1-706-645-92-91.

Thank you. Have a good day.