Ed Egl - David P. Steiner - Chief Executive Officer, President and Director Steven C.

Preston - Principal Financial Officer and Executive Vice President of Finance, Recycling & Energy Services

Scott J. Levine - JP Morgan Chase & Co, Research Division Vance Edelson - Morgan Stanley, Research Division Albert Leo Kaschalk - Wedbush Securities Inc., Research Division William H.

Fisher - Raymond James & Associates, Inc., Research Division Michael E. Hoffman - Wunderlich Securities Inc., Research Division Christopher S.

Parkinson - Crédit Suisse AG, Research Division David Warner - First Analysis Corporation Tatiana Vasilyev

Thank you, Ashley. Good morning, everyone, and thank you for joining us for the First Quarter 2012 Earnings Conference Call.

With me this morning are David Steiner, Chief Executive Officer; and Steve Preston, Executive Vice President of Finance, Recycling and Energy Services. David will start things off with a summary of the financial results of the quarter.

Steve will cover our revenue growth, including price and volume trends, operating costs and financial statements. We will conclude with questions and answers.

During their statements, any comparisons made by David and Steve, unless otherwise stated, will be with the first quarter of 2011. Before we get started, let me remind you that in addition to our earnings press release that was issued this morning, we have filed a Form 8-K that includes the earnings press release as Exhibit 99.1 and is available on our website at www.wm.com.

The Form 8-K, the press release and the schedule for the release include important information that you should refer to. During the call, you will hear certain forward-looking statements based on current expectations, projections, estimates, opinions or beliefs about future periods.

Such 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 filings with the Securities and Exchange Commission, including our most recent Form 10-K.

Additionally, during the call, David and Steve will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, on an "as adjusted" basis. Our EPS has been adjusted to exclude items detailed in our earnings press release that management believes do not reflect our fundamental business performance or are not indicative of our results of operations.

Adjusted EPS, projected 2012 EPS and free cash flow are non-GAAP measures. Please refer to the earnings press release footnote and schedule attached thereto, which can be found on the company's website at www.wm.com, for reconciliation to the most comparable GAAP measures and additional information about the use of non-GAAP measures.

David and Steve will also discuss our results in the areas of internal revenue growth from yield and internal revenue growth from volume. Unless stated otherwise, please note that any references to yield or volume results are more specifically referring to internal revenue growth from yield or volume.

This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m. Eastern Time today until 5:00 p.m.

Eastern Time on May 10. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com.

To hear a telephonic replay of the call, dial (855) 859-2056 and enter reservation code 61793696. Time-sensitive information provided during today's call, which is occurring on April 26, 2012, may no longer be accurate at the time of the 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 CEO, David Steiner.

Thanks, Ed. Good morning from Houston.

The first quarter of 2012 showed encouraging signs that our core solid waste business continues to do well and to improve, and that our cost reduction efforts are beginning to take hold. We did have some big challenges in the quarter that we had to overcome, and we did so.

During our fourth quarter earnings call, we discussed $0.05 to $0.06 of headwinds that would negatively impact our earnings per share when compared to the first quarter of 2011. These headwinds occurred as expected, and we had an additional $0.01 of headwind from higher fuel costs, but our core solid waste operations helped to offset those headwinds.

We saw our procurement and other savings programs continue to take hold, and we saw improving volumes due to our customer-focused growth initiatives. All of this allowed us to overcome the significant headwinds to earn $0.38 per share, which was slightly down, as we said it would be in our full year guidance earlier this year.

So the decrease was expected and $0.38 per share gives us a good start toward achieving our full year target. Looking at our volumes, our customer-focused growth initiatives are beginning to gain traction with customers, and in the quarter, we signed a contract with one of the largest national big box retailers.

Our public sector team also showed good progress in the quarter. We won a number of municipal bids by offering differentiated services like single-stream recycling, recycling rewards and household hazardous waste removal, which the municipalities increasingly require as part of their sustainability efforts.

Our manufacturing and industrial segment grew our oilfield environmental services revenue dramatically in the quarter. And in our health care segment, we added a number of new hospital accounts, including one of the premier hospitals in the country.

So our customer-focused growth initiative is gaining traction with customers, and we expect it to continue to pick up steam. Internal revenue growth from volumes was positive in the first quarter, even after adjusting for the additional 1.3 workdays in 2012.

This is the first positive overall volume growth we've seen since the second quarter of 2006. We saw a positive volume growth in our industrial or roll-off volumes for the first time since the second quarter of 2006.

MSW volumes were positive for the second consecutive quarter, and special waste volumes continued the strong growth that we've seen over the last 4 quarters. Although volumes in our commercial and residential lines of business remain negative, we saw sequential improvement in the rate of decline in those volumes.

Certainly, good weather across the country helped volumes as compared to last year, when we had harsher winter weather. Looking forward, we expect to see volumes running about that 0.4% growth rate that we saw in the first quarter.

Looking at our yield in the first quarter of 2012, we continue to see the same trends that we saw in 2011. We saw competitive pricing on new residential municipal contracts and in the commercial line of business, but we maintained our pricing discipline and saw a positive growth from both yield and volume in our industrial, MSW and C&D lines of business, as well as in our overall company results.

Of course, we're not satisfied with yield at 1.2%, but that number is not a true reflection of our commitment to pricing discipline. To see what's really happening in our pricing programs, we look at what we call core price increases or increases to current customers.

Core pricing is basically price increases plus all fees, other than our fuel surcharge, less all price rollbacks to commercial and industrial customers. When we look at the core price component of yield, it increased 3.1% in the first quarter, which was virtually identical to last year.

We achieved that despite higher rollbacks in 2012 than we had in 2011, so you can see that we've maintained our commitment to our pricing programs, but we can certainly improve the net effect to our bottom line by better managing our rollbacks and our fee programs. Average recycling commodity prices were 20% lower during the first quarter when compared to the first quarter of 2011.

This resulted in approximately a $0.03 decline in our earnings per share for the first quarter of 2012. On a positive note, the average price for OCC has trended up each month throughout the quarter and has remained above the 5-year average.

We projected that the price of OCC would improve from the December levels when we issued our 2012 guidance, but we do still expect to see additional commodity price headwinds in the second and third quarters of 2012. In the fourth quarter we expect to see slightly favorable year-over-year comparisons in recycling commodity prices.

For the full year, we still project that the lower recycling commodity prices should have a negative year-over-year impact on earnings per share of approximately $0.05. Turning to our waste-to-energy business.

Average electricity pricing declined a little more than 8% in the first quarter when compared to the first quarter of 2011. We experienced headwinds in the first quarter of 2012 from rollbacks on tip fees in our South Florida waste-to-energy business, as well as low electricity pricing.

Those drove a $0.02 drag on earnings per share for the first quarter compared to the first quarter of 2011. We still expect the full year impact on earnings per share from our waste-to-energy operations to be approximately a negative $0.06 compared to 2011.

In order to achieve our full year earnings growth, we continue to focus on our 3 key long-term strategies: first, knowing our customers better, which will lead to higher sales and retention; second, investing in recycling and other conversion assets to extract more value from the waste stream; and third, investing in programs to increase our operational efficiency. From a customer perspective, our Oakleaf acquisition is progressing very smoothly.

Our combined offerings were pivotal in winning the bid for the national big box store chain that I mentioned earlier. The combined offering is also quickly spreading among our sales force, and we're in the final stages of wrapping up a number of other large bids.

The customers appreciate that the Waste Management and Oakleaf combination provides a wide breadth of differentiated offerings that help customers meet their sustainability goals. This is exactly the kind of business combination synergy that we anticipated when we purchased Oakleaf.

With respect to extracting value from the waste stream, customers are increasingly asking for new methods of handling their waste, and we're well positioned as the leader in recycling and other conversion technologies. We've made a number of investments in alternative technologies and in other non-core assets, and we would expect some of them to be monetized over the next 18 months.

We also continue to make investments in recycling assets. Turning to our efficiency efforts, our procurement initiatives continued to take hold throughout the organization and perform as expected, delivering about $0.01 of earnings per share in the quarter.

We're using these cost savings to help pay for deployment of our onboard computer systems and our routing and logistics improvements. To-date, our spending has been higher than our savings as we gear up for these initiatives, but we should begin to see some savings in the programs in the back half of the year and they should increase in 2013 as we roll out the program to all of our business units.

In summary, we're on plan through the first quarter and encouraged by the pickup in our overall internal revenue growth. Recycling and waste-to-energy will continue to be a drag in the second quarter.

However, we expect the second half of the year to benefit from improved pricing, a normal seasonal volume uptick, procurement savings and integration of our acquired Oakleaf operations. By continuing the focus and hard work that each of our 44,000 employees put into the first quarter, we expect to achieve our full year earnings guidance of between $2.22 and $2.30 per share.

And with that, I'll turn the call over to Steve to discuss our first quarter results in more detail.

Thank you, David. I'm going to begin by expanding on David's discussion of yield and volume in our business lines, then I'll go into the drivers of expense and cash flow.

Revenue for the first quarter increased $192 million or 6.2% from the prior-year period. This is the ninth consecutive quarter of year-over-year revenue growth.

Our revenue improvement was driven by increases in acquisitions, primarily Oakleaf, as well as positive internal revenue growth both from yield and volume. As David mentioned, some of that was offset by a decrease in revenue from lower commodity pricing.

Yield on our collection and disposal operations grew 0.9% in the first quarter. Adjusting for the change in pricing at our waste-to-energy plants in South Florida, our yield growth for the first quarter of 2012 would have been 1.2%.

More specifically, in the collection business, yield grew 1.4% in the quarter. Commercial and industrial grew 2.2% and residential was essentially flat.

As we've mentioned in the past, in the landfill line of business, the most important indicator of yield is MSW, which grew 1.8%. This is the highest yield in MSW that we've seen in the past 5 quarters.

In addition, C&D yield improved 2.5%. And special waste yield, which has a highly variable pricing based on the type and the location of the work, was negative 2.1%.

This brought down the overall yield for disposal to 0.2%. Overall, internal volume growth was 1.3% in the quarter and 0.4% when you adjust for the additional workdays.

This is the first time since the second quarter of 2006 that we've seen positive volume growth. Volume growth in our landfill and industrial businesses was also the best result that we've seen since 2006.

And while volumes declined in our commercial and residential lines of business, the rate of that decline was the best that we've seen since before 2005. More specifically, collection volumes declined 2.2% in commercial and 0.8% in residential.

In industrial business, volumes grew by 2.8%. So we're encouraged to see growth again in roll-off, which is the most economically sensitive of the 3 collection lines of business.

On the landfill side, volumes grew 7.5%, which is the best quarterly performance that we've seen in several years. Volumes grew 3.0% in MSW, 1.4% in C&D and 16.9% in special waste.

That increase in special waste was primarily in our Eastern and Midwest groups, where we can see the direct impact of our customer-focused growth initiatives. In addition, recycling volumes improved 2.6% organically in the quarter and 12% when you include acquisitions.

We remain committed to extracting value from the materials that we collect, and that has been evident in the significant growth in volumes that we've been producing in recycling. With improved internal revenue growth from both yield and volume, income from operations in the landfill business improved 13.7% when compared to the first quarter of 2011, and operating margins improved 200 basis points, which demonstrates the stong incremental margins that we realized when we add volume in that landfill business.

This represents the best first quarter that landfill has had since 2008. Operating costs increased $171 million in the first quarter to 65.7% of revenues compared with 64.3% in the first quarter of 2011.

The largest driver was subcontractor costs, which increased $96 million. That was primarily related to the addition of Oakleaf, which delivers most of its services through third parties.

The remaining $75 million of increase consist of approximately $30 million related to the additional workdays in the first quarter of 2012; labor costs increasing due to acquisitions; new recycling plant start-ups; and the 2011 annual merit increase. Higher commodity prices contributed to an increase in our cost for tires, parts and lubricants as well, and direct fuel cost increased $18 million.

SG&A costs were $407 million in the first quarter, up $25 million. That was roughly in line with the first quarter last year as a percentage of revenue.

The acquisition of Oakleaf added approximately $15 million, and our investment in customer-focused growth added about $8 million. We also internalized important implementation competencies to support our cost savings programs focused on procurement, operational and back-office efficiency.

By doing so, we reduced our consulting spend for a net benefit of $6 million. The benefits from these 2 programs will be reflected initially in operating costs, but also in SG&A over time.

Our core collection and disposal lines expanded margins significantly, contributing 50 basis points of improvement to the overall margin of the company. However, the recycling and waste-to-energy headwinds that David mentioned reduced margins by 100 basis points.

Our acquisition of Oakleaf further reduced margins 70 basis points, and fuel impacted margins negatively by 20 basis points. So as a result, our income from operation margin declined 150 basis points when compared to the first quarter of 2011.

At the end of the quarter, our weighted average cost of debt was 5.2%, and our debt-to-total capital ratio was 60.3%, consistent with our target ratio of about 60%. And the floating rate portion of our total debt portfolio was 19% at the end of the quarter.

Our income tax rate, as reported for the first quarter of 2012, was 32.8%. That compared with 35.9% in 2011.

That improvement was in part due to energy tax credits that were awarded in the first quarter of 2012. We would expect the tax rate for the year to be slightly below 35%.

Turning to cash flow, first quarter 2011 net cash provided by operating activities was $475 million. That's a decrease of $125 million from the first quarter of 2011.

That decrease is primarily related to changes in working capital. There were clearly working capital timing issues we had, some of which will work themselves out during the course of the year.

For example, the quarter ended on a Saturday, so we had an extra salary payroll which negatively impacted working capital by $32 million. In addition, tax payments fell more heavily in Q1 this year than they have in other years.

Our capital expenditures in the first quarter were $379 million, an increase of $63 million. As we mentioned on the last call, we're expecting higher CapEx this year, in part from our investment in CNG trucks, and a significant portion of these trucks have already been purchased year-to-date.

Our free cash flow for the first quarter was $102 million, and as the year progresses, we would expect to generate between $1.1 billion and $1.2 billion of free cash flow for the year as earnings improve and we focus on effective capital management. We returned $164 million to shareholders through our first quarter dividend as we invested $124 million in acquisitions.

And as we have mentioned, we expect sequential improvement in our financial result throughout the year for very specific reasons. David already mentioned the impact of commodity prices and from our waste-to-energy operations, both of which should improve in the back half of 2012.

And while the benefits from Oakleaf integration continue to be minimal in the second quarter, we expect them to accelerate in the second half as we complete this consolidation of our national account operations and complete negotiations with our vendor hauler network to increase their use of our disposal facilities and other services. In addition, we're on track to increase benefits from our operational improvement programs throughout the year.

So far, the year is proceeding as expected, and we are on track to achieve our full year objectives. So with that, Ashley, we would like to open the line for questions.

So yes, I mean, it seems like from your results, really the volumes were probably the most notable upside variance versus our expectations. It seems like the business environment is, at a minimum, as good as you expected.

And maybe you can help us understand, because I know typically you don't get a great read on the seasonal uptick until May, June, but how much of this upside from volumes -- and it seems like you think that should be sustainable going forward, how much of that is the weather versus any improvement you're seeing on the cyclical front?

Yes, Scott, as you know, weather does have a big effect on our business. And I think everybody's been hearing, for example, retailers talk about how the first quarter was helped by good weather and so they actually see their volumes go up.

We're a little bit different. When the weather is harsh and volumes go down, we don't generally see pent-up demand and see more waste as the weather gets worse.

I expect it to be the same way here, which is just because folks went out and shopped more, it doesn't mean that they're getting rid of their waste and there's going to be less waste going forward. So we probably aren't as affected by weather as some companies.

So I don't expect it to have a big negative effect in the second quarter. In other words, I don't think that people did their business in the first quarter and they're going to stop doing business in the second quarter.

So the weather certainly helped us in the first quarter. I don't see it hurting us in the second quarter, and we haven't seen any evidence of that in volumes going forward in April.

So from our perspective, it's great news that we saw the volumes turn positive at 0.4%, workday adjusted. We're expecting to see about that kind of level for the rest of the year and, frankly, to see about the same kind of mix, right?

We still continue -- we expect to see strong landfill volumes, strong special waste volumes and to see the overall volumes grow slightly.

Does your confidence in the macro environment and the impact on volumes improve since the last earnings call? Or is it consistent with the last earnings call?

When I look at the economy, I think we all would agree that the economy is sort of slow and steadily improving. You know that we generally sort of lag the economy.

And so even if we saw a dramatic change to the economy, I wouldn't see our volumes dramatically change over the next few quarters. So I think we're pretty confident that we're going to see positive volumes for the full year.

Okay, that's helpful. And then turning maybe to pricing, could you help us -- I mean, the pricing number was -- it was in line with your guidance, it was in line with what you were looking for.

Is your expectation -- maybe if you can just characterize the competitive landscape, number one, and what impact CPI-linked pricing is expected to have in your overall pricing metrics as the year progresses.

Yes, from a competitive point of view, I don't think we've seen a big change. Look, as you all know, this has always been a very competitive business, and you see some pockets of more competitive actions throughout the country.

In some places, you see a more rational behavior. So I haven't seen a dramatic change during the course of the year.

And then on the CPI front, it's interesting when we look at the yield -- and it's very important to note that we basically got these 2 big components of yield, what we would call the core price increases on the commercial and industrial customers, and those are running just like we want them to. The problem is that we're losing some money on the other side.

It happens to be the same way on the residential line of business. So we're expecting to get a pickup in the back half of the year from CPI, but some of that pickup gets given away as we've made some small price concessions to renew contracts for a longer term and as we've seen sort of the service offerings to municipalities change.

So we won't see a dramatic pickup from CPI in the back half of the year, but certainly it's going to support the pricing programs.

On the competitive front, it sounds like the smaller players are still fairly aggressive, but you're saying disciplined. Any signs of changing behavior on their part since they might be feeling the pinch of the higher diesel and the lower commodity prices a little bit more than you are?

Are they perhaps staying a bit more disciplined as a result of those pressures?

Yes, it's a great point. I've always said to a certain extent, the high fuel prices are our friends because we have a fuel surcharge that generally covers it.

As you know, this quarter, we were $0.01 behind on fuel, net of our fuel surcharge. But the small local competitors that don't have a fuel surcharge have 2 choices, make less money or raise their prices.

I wouldn't say that's had a dramatic effect. A lot of -- yes, I think fuel surcharges have become a lot more common across the entire industry, whether it's the national players or the small local folks.

And so I wouldn't say, Vance, that we've seen a dramatic change in their behavior. But as you know, the longer fuel stays up high, the more they're going to have to react to it.

So I would think, over time, it can't but help the pricing programs.

Okay, that's terrific. And any granularity you can provide on what's driving the strength in roll-off?

I assume it's commercial construction, not a lot of single-family work at this point. But given what you've seen in past cycles, what's your outlook on what's going to be the stronger driver for roll-off over the next 6 months?

Yes, for us, it's interesting because I think everybody has seen a little bit of improvement on the construction side. But for us, we've been talking a lot lately about customer-focused growth, and the positive roll-off volumes for us is a perfect example of customer-focused growth.

We've got our oil field environmental services segment now that didn't exist 2 years ago because customers weren't asking for it. And then as you've seen, drilling for natural gas in the Marcellus Shale and other areas of the country, you've started to see need for both solid waste and liquid waste disposal.

That was a business that 2 years ago didn't exist. This year, we'll do north of $100 million in revenue in that line of business.

Most of it is going to be in roll-off. So for us, it's a matter of saying, "Okay, if there's not going to be a big construction turn, how are we going to put these assets to use and what do our customers need?"

Our oilfield environmental services has been a great addition to our business. It started primarily in our Eastern group but now spreading across the country, and it's great work at great margins.

Just wanted to follow up on the oilfield service side. Is the majority of the roll-off solid or liquid, or how do you make that split [ph]?

The majority of that would be solid, drill cuttings basically, from wells.

Okay. David, if you take a step back on the business -- and I know there's a lot of dynamics going on here and a lot of initiatives, if I look at the margin profile, we still seem to be tracking downward.

And I don't know if that's something that's frustrating on your part or not, but clearly, it's something that to me looks like either the rollbacks are being very aggressive or the mix of business you're going after is lower-margin business in general. So with all of the recycling, recovery, following the resource or waste stream to recover resources and commodities, can you talk about that maybe as we look further out here than just maybe a quarter profile?

Yes, absolutely. And you're absolutely right when you talk about the margins.

I think everybody that's followed this business since I took over as CEO knows that one of the core fundamental metrics that we focus on at this company is expanding our margins. And so it's absolutely frustrating to see them going backwards.

I would say a couple of things. First, just when you start to make some progress on the cost side and you start to see progress on the volume side, you see the commodity side go backwards.

So of the 150 basis points of margin deterioration, 100 of it is from waste-to-energy and recycling. Pure, simple commodity prices, not a heck of a lot we can do about that if we want to stay in those businesses.

And increasingly, recycling is a business that you have to have in order to meet customer needs on the solid waste side. So of the 150 basis points, 100 basis point slides out the door right there.

Another 70 basis points slide out the door with the Oakleaf acquisition, because until we fully monetize that -- basically, what's going on right now is we want to keep that third-party vendor network together so that we can increase landfill volumes and let them maintain the collection volumes. But that takes a lot of negotiations with a lot of vendors.

And that's not going to happen until sort of the third quarter of this year. So it's been a little slower integrating those folks, frankly, than we had expected.

But you basically got very low-margin brokerage business that we're maintaining because we don't want to put that volume on our trucks. We want to put it into the third-party vendor network as long as that third-party vendor network brings volumes to our landfills, where we get higher margins.

So that's 170 basis points right there between commodity prices and Oakleaf. If you don't have that, you've got positive margins.

And then you got another 20 basis points of fuel. Again, not a heck of a lot we can do there, but we -- our revenue goes up because fuel goes up, but it doesn't have a dramatic effect on our earnings because of the fuel surcharge.

And so you got 190 basis points, a little over it when you round them up, basically 200 basis points of margin deterioration in areas that we can't do a heck of a lot about, without which, obviously, we would have a nice expansion of margin. So look, at some point in time, we're looking to see all this stuff pull together and be positive.

That some point in time is the back half of this year when we start to see the effects of the commodities turn positive and when we see the Oakleaf integration coming forward. Fuel, we can't do anything about, but as we start to see that, we should see the margin start to turn around again.

All right. And then just a follow-up.

You've talked about monetization of some of the investments you have made over the last couple of years. Should those not hit -- I guess, monetization being the public market primarily, does that change, perhaps, strategy going forward on how you partner with potential customers or the generators of waste streams?

Because theoretically, if there's some new technology out there that you don't have control over, that may evolve how volumes or resources are recovered. So just if you could just maybe talk about a little bit of the visibility on that in terms of strategy.

Yes, absolutely. We've got -- so we've made non-core investments both in conversion technologies and then in alternative energy.

And we've also made some investments in traditional carbon-based energy assets, right? And so when we talk about monetizing some of those assets, I'm looking forward to monetizing those assets because we've been investing in them over the last 3 years.

But we will not monetize those assets in such a manner that it would give up our strategic advantage, right? And so obviously, if we monetize some of our carbon-based assets, that doesn't have a dramatic effect on our strategy.

As far as the conversion technologies go, we could monetize some of those, given an opportunity, while still maintaining the commercial relationships that we have, which is what gives us the competitive advantage.

Had a couple of questions on the savings and efficiency initiatives you have. You mentioned procurement, and can you touch on some specific areas there and where you expect bigger savings, it sounds like, in the second half from some of that.

Yes, I mean, this is Steve. Yes, procurement hits a number of things.

We've worked through contracts in third-party transportation, on the IT side, on the telecom side, and it really goes through a number of our spend categories and it continues to ramp up through this year. So it's really no one area.

We're looking really across a number of spend categories and continue to layer on additional categories. I think we mentioned in the quarter, it was about $0.01 a share.

We can -- we expect that year-over-year benefit to continue even though we began to recognize some of that late last year. So it's going to be a pretty consistent contributor, very significant in absolute dollars but also significant in terms of year-over-year benefit.

And that $0.01, will that pick up or kind of just run in that kind of range in the next couple of quarters?

I think it will run in that range on a year-over-year benefit. But by definition, that means it's going to grow throughout the year.

Now if you look at some of the other things we're doing, and I think we discussed this, but there is a portion of that that's going -- that's being funneled back into other initiatives. And I think what we've described in the past, when we look at our transformation agenda, there are really 3 components to it: you've got purchasing goods and services more effectively, which is the procurement piece; you have delivering our services in the field more effectively and efficiently, which is where we talk about onboard computers and improving our routing efficiencies; and then over time, becoming more streamlined in the back office.

Obviously, a company this size has very significant back office functions. So procurement is really the lead vehicle in that 3-stage operational transformation.

Right now, we're investing heavily as well in that field-based transformation, which we think is really where a lot of the excitement goes because it's not only cost-based, it actually improves our effectiveness in the field; it helps us to be more customer-centric; we can be more responsive with our services. So there's a much broader benefit there.

And then beyond that, we think, just given the scope of our back office operations, that will be pretty significant as well. So I think net-net, as you get later in the year when all is said and done, the net contribution to the bottom line, you'll actually see a net positive in the back half of the year, certainly going into 2013.

But there is going to be a re-funneling of some of that benefit into these longer-term initiatives, really through 2013.

Okay, great. And then do you expect any improvement from the first half to second half on some of the newer consolidated business ventures, like whether it be medical waste, Baxter, or whatever that might be?

Yes, we do. We absolutely do.

And one of the exciting things, I think, on the health care side, for example, is not only are we working to make that business more efficient, but we've had some very nice wins recently in that business. We're beginning to augment our service line by partnering with other people that do unique recycling or other services within the medical waste stream.

And certainly, it has continued to support our ability to get MSW-type business with hospitals. So we think that's going to be, year-over-year, a pretty positive move in the right direction.

David, a question we've asked in the past is to do with container weights and trying to understand on a same-store basis what the behavior of the consumer is translating to your container weights. Can you talk about that?

Yes, container weights for us were slightly down, Michael. Nothing dramatic and not really different from the trend that we've seen over the last -- frankly, over the last 2.5 years.

So we've always said that if you look at our business, you'll really know the turn is here when MSW turns positive and when commercial volumes turn positive. MSW obviously has been positive now for 2 quarters.

We still haven't seen that turn on the commercial business. And quite frankly, looking forward during the course of the year, I'm not sure we'll see a turn in the commercial business.

It's getting better, but it's stubbornly slow. And we still don't see -- looking at the volumes at least for the beginning of the second quarter, we certainly don't see any real big pickup on the commercial side.

And is there -- can you isolate a region and say that region is causing the whole thing to be that outcome? Or is this kind of evenly dispersed around the country?

Yes, on the industrial side, you've got a lot more regional differences. The commercial side, not as much.

But on the overall business, the East and the Midwest is certainly performing. We've talked about it over and over, which is this is an interesting recession in that -- because it was driven by housing.

Usually, the West and the South is sort of our last-in/first-out. This one was a little bit different.

They were first-in, they're going to be the last-out because it's driven by housing, which in the South and the West is much bigger than in the East and the Midwest. So right now we're seeing the Midwest perform as well as they have ever performed, both on a price and a volume perspective.

The East is doing a spectacular job, not only managing the business but growing the business in the new lines like through the Marcellus Shale. And then the South and the West, frankly, continue to struggle with volumes because we just haven't seen that turn in housing yet.

Okay. And then in the context of -- just a clarification.

When you say MSW, what's the source of MSW, because I think of the commercial market is being MSW. So MSW, when you say that word, what's the source of it?

Yes, it's commercial. It's certainly commercial, and then it's the residential also.

Okay, so a combination of the 2.

Right.

So in that same question, on your positive landfill volume, what's the mix of what's positive? Is it MSW or is it C&D and/or special waste?

What's the driver of the positive there?

Yes, special waste has been the big driver now for a number of quarters. I mean, we've seen some great growth in special waste over the last 6 quarters.

We've got a good pipeline going forward, so we expect special waste to continue to be strong throughout the year.

And are you seeing it being driven by the private sector versus government stimulus like it was in '10 and '11?

Yes, I think that's fair. And again, special waste is pretty dramatically different between the groups.

You see a much stronger both growth and pipeline in the Midwest and the East than you do in the West and the South.

And then I know margins matter to you, and I remember your recurring thesis about this. But at the end of the day, most of your incentives are driven around return on capital.

So how do you think about the direction of your returns in the face of where your margins are going, because recycling might be a lower-margin business but it could have great returns.

No, I think you're exactly right, Michael. And it's what we've been preaching since the day I joined, which is we focus much more on return on capital than we -- if we had one metric to focus on, it would be return on capital.

That is what drives value in the business. And look, I think this is an industry that 2 things have happened to over the last few years.

You see a much greater movement toward diversion assets, which have lower margin and -- but higher return on capital, right? And you've seen landfill volumes come down fairly dramatically, which, when you have a huge capital base, drives down return on capital.

So I think everybody knows that our strategy is to make sure that we're meeting customer needs with the diversion asset. And the good news is those diversion assets happen to have a great return on capital, although they are going to have a lower margin generally.

Okay. And one last question, are you all going to sign the NDA to look at the Veolia book or will you pass so you don't lose your opportunity to bid on contracts or hire employees?

Well, I can't read French, so I haven't been able to read the agreement myself. Frankly, we don't comment on any particular acquisitions, Michael.

So we'll -- obviously, we'll do what we think is the right thing for Waste Management.

This is Chris Parkinson on behalf of Hamzah. Most of my questions have been answered, but just real quick.

On the pricing front, can you talk a little bit about where landfill pricing is running right now and how aggressive you could -- we can expect you to be as volumes recover and then basically, just relative to last week, what we can expect?

Yes, so again, when we look at landfill pricing, we focus predominantly on MSW, right? And when you look at MSW on a per unit basis, it's running at about 2.5%, which is pretty consistent with where we've been over the last few years.

Perfect. And then just outside of anything French, could you also just comment on your acquisition pipeline and kind of your use of capital and what you're seeing on the valuation front from some smaller deals?

Yes, this is Steve. I think we're seeing a pretty normal year in terms of that in the acquisition pipeline.

I don't think there's anything notable beyond what we typically see. And so as a result, we really haven't anything out there that is different from what we typically see on the acquisition side.

This is David Warner for Cory. Most of my questions have also been answered, but I wanted to touch back on the operating margin goal for 2013.

I think previously you'd indicated a target of 200 to 300 basis points of improvement in 2013. I'm wondering if you're still considering that reasonable and what kind of assumptions as far as recycled commodity prices and volume and yield growth are you sort of assuming with those targets?

Yes. Obviously, it's a little early to start thinking about 2013, but the basic assumption that we have for that is it basically goes to what happened this quarter.

The assumption that we have is that we're not going to see a drag on yield from our WMRA and our Wheelabrator operations. And those should abate into 2013 as the comps get easier.

The assumption is that we're going to integrate our Oakleaf business into our business, and we're not going to see margin deterioration from that. And obviously, we never assume that fuel is going to go up or down in our margin calculation.

So whether we get a benefit or a detriment from that, we wouldn't expect that to happen. And so again, if those hadn't happened in this quarter, you would have seen that 50 basis points of margin expansion.

Add on top of that the cost programs, our yield programs and volumes turning positive and you can see where the margin expansion comes from. Obviously, that's easy to say but we've got to see some improvement in our waste-to-energy and our recycling operations.

And the harder part is we've got to get the vendor network integrated into the Waste Management network for Oakleaf.

Yes, just few questions. First, just a follow-up on the volumes.

I'm getting -- rental [ph] volumes. I'm getting a little confused.

You guys report volumes on the press release and then you said they were up 7.5% this quarter. I mean, they're not up 7.5% on what you reported, so I'm just curious, what am I missing there?

Yes, I think what you're seeing in the press release schedules is actual tons that we generate, or that we collect, versus our IRG calculation, which is the organic growth that we have, right? And so the press release would include acquisitions.

It includes intercompany volumes, which are not included in our IRG calculation. So that's what explains the difference.

So when we look at -- when we do our, what we call our IRG volume calculation, which was basically 0.4% workday-adjusted, that is the organic growth in our volumes in the business.

Okay. And the second question is, on your working capital, you mentioned that -- I mean, it wasn't a huge use this quarter and you say it's going to improve over the course of the year.

So it's going to become a source? And I mean, what are your thoughts there?

Yes, let me cover that one. This is Steve.

What we saw in the first quarter -- if you look at the first quarter of last year, working capital in our cash flow is much more favorable than this year, okay? And there are a couple of things -- and that had a heavy impact on our first quarter cash flow.

So that's what we wanted to call out. What we wanted to call out was even though there was a significant impact in the first quarter, as we get into the year, some of the factors that drove that working capital use will actually come much more in line and sort of even out throughout the year.

One of those things, for example, is we had a payroll at the end of the quarter, and that increased our use of cash by $30 million. That obviously evens out throughout the year.

We also had some other timing issues. And so because it was such a significant swing from first quarter last year to first quarter of this year, we wanted to highlight it.

And certainly, as we get into the year, when we think about working capital management, it really is pretty much about receivables and payables, and we just -- we're going to be focusing very heavily on managing those items throughout the year.

Okay. And just last one on the Oakleaf.

How should we model it? I mean, on the volume side, should we just add Oakleaf volumes, which is, if I remember correctly, about 5 million tons.

Some you might lose probably to the landfill, or something changed?

I think if you look at the Oakleaf tons increasingly throughout the year, we think they're primarily going to be landfill tons, and a portion of those will be going to our landfills. And just to kind of expand on what David said, a big focus for us right now is to negotiate with that network of third-party vendors so that if we're giving them a ton of Oakleaf business, they're hopefully going to then bring us -- we'll be negotiating for them to bring us 3 tons of overall landfill business.

So we're working hard to improve the ratio there and to make sure that we're maximizing the back-end volume in the landfill. Now this time next quarter, we'll have a much better window into what that looks like because we are right now in the middle of kicking off negotiations with many of those vendors.

It's taking a little bit longer because it occurs one vendor at a time. We're taking great efforts and make sure we maximize the volume in each market and much more broadly taking great effort to make sure we establish the right long-term relationships with these vendors because beyond volume, there are a lot of other benefits that we can extract by working effectively with them.

So I think you're going to see that volume coming in, some in the third quarter, much more in the fourth quarter, pretty much fully realized in the 2013. But it's not just going to be the Oakleaf volumes.

It's going to be also additional volume that we get by entering the partnerships with these vendors.

Thank you. We said when we gave full year guidance that we thought the first quarter was going to be a little bit backwards because of the headwinds, and it played out just exactly as we expected it to play out.

So it was a very solid start to the year, but the hard work of the year is still ahead of us. But I'm very confident that we have the right team to execute our initiatives to meet our full year goals.

And with that, we'll see you next quarter.