美國廢棄物管理公司 (WM) 2002 Q2 法說會逐字稿

Good morning, everyone. And welcome to today's Waste Management, Inc., First Quarter 2002 Earnings Conference Call. This call is being recorded. At this time I'd like to turn the call over to the Vice President of Investor Relations, Miss Cherie Rice. Please go ahead.

Thank you. Good morning and thank you for joining us. With me this morning are Maury Meyers, Chairman, President, and CEO of Waste Management and Bill Trubeck, Executive Vice President, Operations Support, and Chief Administrative Officer.

This morning we'll start things off with a review of business trends, an update on initiatives, and we'll discuss other improvements opportunities for the company. Then Bill will review the financial statements in detail and cover a few related topics. After that we will off the lines for questions and answers.

This call is being recorded and will be available 24 hours a day beginning about 1:00 pm central time today until 5:00 pm on August 15. To hear a replay of the call over the internet, access the Waste Management web site at www.wm.com. To hear a telephonic replay, dial 719-457-0820. Enter reservation code 171361.

As is our custom, I will remind that you during the course of this presentation we will be providing estimates, projections, and other forward-looking statements within the meeting of section 27-a of the Securities Act of 1933 and section 21-E as the Securities and Exchange Act of 1934. These forward- looking statements are subject to a number of risks and uncertainties which are described in detail in Waste Management's annual report on form 10-K for the year end December 31, 2001, and its form 10-Q for the period ending March, 2002. And in the company's press release this morning. The risks and uncertainties could cause results to differ materially from those described in the forward-looking statements.

As I stated earlier this call will be available for replay for a two-week period. Time sensitive information given during the course of today's call, which is occurring August 1, 2002, may no longer be accurate at the time of a replay. Any redistributions, 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 Chief Executive, Maury Meyers.

Good morning and thanks for joining us on our second quarter conference call. I'll start off the call today with a review of the trends we're seeing in volumes and pricing, give an update on our key initiatives, and then talk about the recent reorganization and the opportunities we see for further cost reductions. After that, Bill Trubeck will review the financials in detail.

Starting with internal revenue growth, the good news on the volumes is that while volumes are still down year over year, they did improve for the first quarter. Both in terms of normal seasonality as well as year over year change.

As you recall, first quarter volumes were down 3.3% versus prior year, where as second quarter volumes are down only 2%. This is what we had expected directionally, that the first quarter was the trough for the year in terms of year over year change. In fact, for us the low point now was clearly March.

Looking at disposal volumes specifically, second quarter volumes were up 4.3 million tons or 15.5% sequentially from the first quarter. Last year second quarter tons were up 4 million or 13.6% sequentially, confirming that we did see reasonable, seasonal impact this year. We anticipate that the improved year-to-year volume trend will continue through the remainder of the year. And volume data through the 27th of July appears to support that forecast.

The pricing environment in the collection business has become more competitive during the course of this past quarter. This change has been broad based across the groups, although most prominent in the south, in the west. The pricing pressures appear in some cases to be driven by competitors looking to prop up volumes in the tough economy and in others to be driven by customers managing their expenses more tightly.

For example, price rollbacks, meaning price increases refused by customers, have increased from about 15% in previous quarters to about 19% in the second quarter. We continue to go after price increases when and where we can, but the environment has been less accepting.

On our last conference call we mentioned that in April, the price for old corrugated cardboard started to improve. Each month since then we've continued to see improving cardboard prices, both as reported by the official board markets and in the prices we are being paid. In the last few months -- the last few months has been one of the fastest run-ups for cardboard price that these markets have ever seen. From an average of about $42 per ton in March to about $120 in July we do think that cardboard prices have peaked and the official board market prices for August are down $30 a ton. We're optimistic that cardboard pricing will hold up pretty well for the rest of the year. But we accept it will trend down to $80 per ton range by the fourth quarter.

Old newspaper prices have also improved recently. Newspaper prices were only modestly up during the course of the second quarter,end of July and now August pricing for Grade [H] is up an average $15-20 per ton over June's pricing across the country.

On a year over year comparative basis, commodity revenues were up $10 million in the second quarter due to price. We sell roughly 1.5 million tons each of cardboard and newspaper per year which can translate into fairly significant revenue swings.

In fact, as you may recall, 2001 commodity revenues were down about $160 million from 2000. One of the biggest year-to-year swings in commodity revenues the company has seen. Generally, about half of the commodity revenue change falls to the EBIT line. The remainder goes to our customers.

While higher commodity prices were not anticipated for the year, they're a welcome offset to the pricing challenges we've seen in the collection business.

As we have mentioned in the past, we have been working to determine what specific economic indicators are predicted to our business. Recent analytical work that we've performed with the assistance of an econometrics firm indicates that there's strong correlation between put total landfill volumes and rolloff hauls with housing permits and certain components of the industrial production index. The strongest correlation coeffients with industrial production components from the mid 70% and into the low 80% are for the mining, cement, and the stone, clay, glass, and construction supplies component of the industrial production index.

We've anticipated that our volume changes would lack the changes in the economic indicators by a couple of months or more. But what we found is that monthly trends in these components correlate strongly with monthly hauls and total tons with little or no lag. Since our volumes correlate directly with change and housing permits and these components of industrial production, we're now looking at forecasts for those metrics to help forecast our volumes.

Housing starts are now forecast to be up 2% to 3% -- 2% in the third quarter and 4% in the fourth quarter, which is a good indicator for second half volumes. Using these and other economic statistic correlation coefficients and predictive value, we're working on a more sophisticated methodology to develop a volume forecast model for our business as opposed to depending on anecdotal information.

Let's move on to a review of our key initiatives.

As reported in the press release this morning, expense savings from the procurement initiatives were $20 million in the quarter, $37 million year to date, and capital savings were $11 million in the quarter, $19 million year to date.

As you will recall, our expense savings goal for 2002 is $70 million, and our full-year capital savings goal is $25 million, putting us more than half way to those goals as the of the end of June. We continue to expect to meet the full-year combined expense in capital savings of $95 million for the procurement initiative.

The market business strategy initiative helped our second quarter EBIT by approximately 22 million for a total of $45 million year to date.

Since the beginning of this program in fourth quarter 2000 we've reviewed markets representing 80% of our total revenue base and 79% of our EBIT. Market business strategy is becoming well integrated into the ongoing management of our markets and has proven to be a key initiative in our turn around. We also expect to meet our full-year 2002 goal of $70 million and EBIT improvements related to this program.

Another key initiative we've been rolling out for the past several quarters is service machine. Over 20% of our districts have been gold certified in service machine. Of the non-gold districts, about 60% are consistently operating at the green level or better.

Again, we have two levels of certification. The gold level being the more -- the higher level of performance.

Importantly, over the past year, we've reduced our churn level by two points from 12% now down 10%. So we feel that the service machine is certainly having an impact.

In 2001, we also implemented a program to significantly change the way we think about safety. The operating performance results of this program are very real and encouraging.

For example, our total reportable injury rate or TRIR, which is an OSHA measurement, for the first half of 2002 improved 25% versus the rate in the first half of 2001. The trend lines for automobile accidents and employee injuries have both been consistently trending down over the past four quarters, indicating we've taken our safety program to a new level. Due to the fact that claims for these types of accidents and injuries tend to develop over a period of 2-3 years, we have yet to see the claims cost reductions associated with the reduced rates.

However, the claims cost reductions will follow and we anticipate seeing these reductions start early next year.

With the increasing cost of insurance, we plan to continue to take higher deductibles in the future. We're confident that by improving our operating performance, and combining that with higher levels of self insurance, additional cost savings will be realized. We expect to be in a position to more accurately forecast our savings from these measures by early next year.

In March we announced a field reorganization in the market areas. Organized around the country's major MSAs or [metropolitan] statistical areas. The two primary goals of the reorganization were first to create a management structure that would be more conducive to utilizing our assets to their highest level, and second to remove one layer of management from the overall structure. At that time we defined 85 market areas in the United States.

The new organizational structure was implemented immediately in the 85 U.S. markets back in March. Currently, we're fine-tuning the organizations within each of these markets looking at each market area organization, insuring the job titles are correct, and adjusting reporting structures is necessary.

Also, recently we've consolidated a few of the original 85 markets and continued effort to streamline this new organizational structure, such that today there are 82 markets in the U.S.

In July, we similarly organized our Canadian operations into 10 market areas. We believe that this structure will become one of the key differentiators between Waste Management an our competitors.

We think establishing one unified management team in each market to manage and integrate all operations including collection, recycling, transfer and disposal, creates better business decisions than the industry standard of multiple management teams in a single marketplace. With our major initiatives from 2001 either completed or well under way we've turned our attention to a number of other fronts where we have identified improvement opportunities.

One example is our new monthly and quarterly operation scorecard made possible by the new systems we've implemented over the past several quarters. The scorecard ranks our collection districts on a number of different components, including health and safety, procurement, maintenance, service, productivity, and environmental compliance. Results in each category are ranked by court dials with assigned grades of A, B, C, or D.

The resulting lists identified those districts underperforming across the board and also pin points specific areas of improvement for each district. The scorecard is become a valuable tool for the group management teams to both identify where their efforts need to be focused and identify best practice leaders from the high performers.

Another result of publishing this scorecard is that many of the local managers are undertaking improvement actions on their own once they see how they stack up against their peers. With the operation scorecard, we're continuing to improve the tools and information available to assist our field in making better business decisions.

Another significant opportunity for improvement that we're actively pursuing is in the area of fleet maintenance. We have several qualified and trained teams in the field, auditing our maintenance shops. The goal is to audit 88 shops this year. And as of mid July, we've completed 56 of those audits.

The most common finding is that we've not been doing a good enough job of scheduling and performing preventative maintenance on our fleet. Too much of our maintenance is just responding to breakdowns.

To reduce costs in the inefficiency associated with breakdowns, we need to get ahead of the curve, perform preventative maintenance, and prevent costly breakdowns with the more expensive repairs.

The audit teams do much more than just audit the shops. They help the local management implement an efficient and proven preventative maintenance program.

In some cases it takes many weeks to get caught up and actually begin to see the benefits of the program. But the benefits have been meaningful.

As I've said many times in the past, Waste Management has opportunities for improvement everywhere we look. We continue to tackle those opportunities one by one. We've made significant progress over the past two and a half years. And I believe we can continue to make substantial progress during the second half of 2002 and into the foreseeable future.

Let me stress that we continue to look for productivity improvements and cost-cutting opportunities, especially in the lower -- current lower volume environment. With the system we now have in place, we have the ability to identify areas of opportunities and quickly go out and get the savings. We believe these efforts will not only help in the short term but will position the company well to take advantage of increased levels of business as the economy improves.

Before turning the call over to Bill, I want to address one of the more important topics related to corporate America that we read about every day in the newspapers. When I got to Waste Management nearly three years ago, one of the first items on my agenda was to address corporate ethics and governance, insuring corporate integrity would have high visibility throughout the company. As you may recall, one of the first people I hired was a Corporate Vice President of Business, Ethics, and Compliance who reports directly to me and also reports to the board on a quarterly basis.

He's instituted a number of important changes here at the company. Such as -- instituting an integrity help line which provides a confidential vehicle for employees to voice concerns and raise issues. And regular communications on ethics and compliance issues via a weekly column in our newspaper called "core volumes" and a code of conduct, an ethics refresher course for all 55,000 of our employees, including our drivers. Today we've trained about 40,000 people.

On the corporate governance front, I'm happy to report that Waste Management has been in front of a number of the New York Stock Exchange proposed additional requirements for the listed companies.

For example, our corporate governance guidelines already require that nonemployee directors constitute a substantial majority of the board and currently all of our directors other than me are not employees. Our guidelines provide that an executive session of nonemployee directors should be held before each board meeting. And that is, indeed, our practice here.

Our audit committees is comprised entirely of independent directors and the independent chair has significant finance and accounting experience. Further, the committee meets separately and independently with the CFO, the head of internal audit, and our independent accountants.

While not part, or not one of the proposed New York Stock Exchange requirements, Waste Management took the initiative when engaging our new auditors earlier this year to set a policy that the auditors will not be allowed to do any nonaudit-related consulting work for the company. Thus eliminating my concerns related to conflict of interest on the part of our auditors. We've also reviewed both the New York stock exchange rules and the [Sarbains-Oxely] Act and we already comply with most all the suggested changes. For those items that are new suggestions, such as accelerated reporting of stock trading activity, we will fully comply with the law and welcome the changes.

In short, we're committed to upholding the highest ethical standards here at Waste Management. And we believe our record as a management team has proven and will continue to prove that fact.

And now I'll turn the call over to Bill.

Thank you. Before I go through the quarters results, let me first follow-up on what Maury was talking about and address an issue that is of top priority on many minds right now.

That is the request by the FCC for the CEO and CFO of nearly 1000 of the largest US companies to make a one-time personal certification that their companies recent FCC filings do not include omissions of material fact and the new similar requirements contained in the [Sarbains-Oxely] Act. Both Maury and I are absolutely comfortable with Waste Management's filings. We intend to sign both of the certifications without qualification. And file them with the SEC by the applicable deadlines.

Let me also mention that for quite a while we have had a process in place where by the finance and accounting manager and the operational manager of each market area and each other financial and operational manager in the chain up through the group controllers and senior vice presidents, signs a representation letter each quarter, confirming that the financial result they're responsible for are fairly presented and a conformity with company policies and procedures as well as accepted accounting principals.

Additionally, over two years ago we changed the reporting structure so that the finance and accounting managers do not report to the operating managers. But rather, report directly through the financial ranks such that they ultimately report report to the CFO. And it would point out that their compensation is no longer solely tied to the operating results of their business unit.

The combination of the reporting structure and the representation letters contribute to the confidence that Maury and I have in our financial reports. Consequently, we are prepared for both the one-time verification and any continuing obligations imposed by the [Sarbains-Oxely] Act and the SEC in the future.

Similarly, let me point out that this earnings release is about a full week earlier than our quarterly earnings releases have been for the past few years. Last year we reported the second quarter results on August 8, exactly one week later than today. We expect to report our third quarter's earnings in October this year.

Our goal from now on is to report the non year-end quarters within that first month after the quarter is over. This is clear progress. The shortened time frame is a direct result of the system's conversion as well as improved accounting and finance processes.

Additionally, we expect to file our 10-Q tomorrow, also having accelerated that schedule.

Let's turn now to a review of key items of interest in the quarter's financial statements, beginning with revenues.

Total revenue is down $90 million versus second quarter of 2001. With $42 million of the reduction in our core North American solid waste business and the other $48 million difference largely related to having sold the last our international and noncore businesses.

There were wide variety of factors that resulted in the negative year over year comparison in our core business. For example, due to lower electricity prices in 2002, revenues our independent power production facilities were $18 million less than last year.

Also, in the second quarter of 2001, [Whillabrator] had $12 million more in construction revenues than the second quarter of this year.

Lower diesel costs in the current year resulted in our fuel surcharge in the second quarter, being $7 million less than the prior year quarter. Of course, also reflecting a lower fuel expense in the quarter.

The remaining $5 million negative variance can be explained primarily by other volumes being off a total of $45 million, largely offset by the $40 million in year over year price increases. Improved commodity prices, and the net of acquired and domestic revenue. Operating expenses in the quarter were $1 billion, 689 million, or 59.8% of revenue, as opposed to $1 billion, 732 million or 59.4% of revenue in the year ago quarter. Showing that we reduced operating costs by $43 million quarter over quarter.

SG&A expenses were $359 million in the quarter, or 12.7% of revenue. As compared with $398 million or 13.6% of revenue in the year ago quarter. A year over year reduction of $39 million.

The SG&A savings from the reorganization implemented in the late first quarter are certainly evident in the second quarter results, marking clear progress towards our target of 11% of revenue. In fact, as a percent of revenue, this is the lowest level we have seen in SG&A in the past three years.

I should mention that as a result of getting all of our employees on to the people soft HR system, as of the beginning of the second quarter, we were able to review the general ledger of coding for all 55,000 of our employees. As a result, about 10 million in wages and benefits were reclassified to cost of operations this quarter from SG&A.

I would also note that although we are not reporting pro forma numbers any longer, we did have about $9 million of SG&A expense related to billing out our information systems infrastructure that are the same types of expenses we adjusted out for proforma purposes in 2001.

Depreciation amortization expense in the quarter was $313 million or 11.1% of revenue. This compares to $341 million last year. Except that last year's number included $39 million of good will amortization expense.

On an apples to apples basis then, second quarter 2001 depression and amortization would have been $302 million, or 10.4% of revenue. The primary drivers of our increasing depreciation and amortization expense on a comparative basis are the investments we have been making both in 2001 and in 2002 to reduce the average age of our fleet and to upgrade our information systems.

Interest expense, minority interest, interest income and other income were all relatively flat in the first quarter. I don't think there's anything here that requires much explanation.

The tax provision was 38.2% of pretax income. Which is consistent with our full-year expectations.

Our share [income] both shares outstanding and diluted shares has decreased as a result of our share buyback program. As noted in the release, through the end of the second quarter, we have repurchased over 18 million shares of common stock. The effect of this has been to reduce our shares outstanding as of June 30, 2002 to approximately 611 million shares.

Based on an average stock price of $25 for the additional 500 million of share repurchases that we intend to complete this year, we could see the share count reduced by and additional 20 million shares by year end. Currently our plan is to take advantage of the recent downturn of the market and repurchase approximately $300 billion worth of shares during the third quarter. We expect to three this year's buyback program in the fourth quarter, spending roughly another $200 million for a grand total of approximately $1 billion in share repurchases for 2002.

I would add that in view of the currently depressed price of our shares, we are also considering a modest increase in this year's program, potentially repurchasing a portion of the shares that would otherwise be repurchased in 2003.

While not material to our financial statements I would like to mention that during this past quarter we reviewed the accounting and reporting for contractual arrangement that been in existence since the mid-1980s relating to a waste energy plan owned by a subsidiary of Whillabrator. Waste Management had acquired a majority interest in this subsidiary party to the contract in 1990 and then became 100% owner of Whillabrator and the subsidiary in 1998.

Debt payments for the facility are made by the municipalities that benefit from the plant. And thus far the municipalities have made interest and principle payments on 20-year debt for 17 years. And the remaining three years of the payments are also expected to be funded by the municipalities.

However, our subsidiary is listed as the borrower on the debt. So the company and our independent auditors concluded the assets and liabilities associated with this contractual arrangement should be reflected on the company's balance sheet.

Accordingly and as reflected in the financials sent out this morning, we recorded an increase at property plant and equipment of approximately $72 million, an increase in other long-term assets of approximately $52 million, and an increase in long-term debt, including the current portion of approximately $114 million, and an increase to other liabilities of $5 million and net income of approximately $5 million.

As Maury mentioned in his comments earlier, we are satisfied with the second quarter results. The slow economy kept us focused on controlling costs during the quarter and the reorganization further reduced expenses. We think we're doing a good job on controlling our variable costs. And we continue to look for more opportunities to save money by reducing expenses and managing the business more efficiently.

The systems we have put into place over the past couple of years have greatly improved our ability to internally benchmark the market areas against one another which allows to us -- exactly what we need to focus our improvement efforts. In fact, we currently have a team in the process of performing a review of 10 of our lowest performing markets. With a goal of identifying a specific profitability improvement plan for each. The information gathered in this process should provide -- prove valuable to all of our markets so we hope the savings will extend beyond the 10 reviews.

Let's turn our attention to cash and cash flow. Free cash flow in the quarter was $76 million.

A few key line items to take a look at.

In this quarter's free cash flow statement are capital expenditures, interest paid, and change in assets and liabilities.

First of all, please recall that capital spending had had been fairly low in the first quarter. At just $180 million. But it was much higher at $372 million in the second quarter. Putting us at about 42% of our anticipated $1.3 billion, full-year capital spending as of the end of the first half.

Cash interest paid in the quarter was $149 million. $33 million more than our interest expense. Due to the timing of interest payments on our long-term debt, we have significantly higher interest payments due in the second and fourth quarters than we have in the first and third quarters.

In fact, for those of you working on quarterly cash flow projections, our projected interest payments in the upcome quarters are $86 million in the third quarter and $162 million in the fourth quarter. I would also like to point out that the significant driver to the change in assets and liabilities was receivables. Which was a $169 million use of cash due to a combination of higher daily sales and an increase in DSOs to 49 days.

As normally occurs in the second quarter, seasonally increasing revenues caused our receivable balance to grow. With revenues in the quarter up 2.4 million per day, that translates continue to increased receivables of about $110 million.

Additionally, due to a combination of several municipal contracts that bill in four-month cycle and a slow down on payments from certain municipal customers, total receivables from municipalities increased by $27 million during the quarter, causing a one day increase to our DSO.

The good news is the percentage of total dollars of receivables over 90 days has declined during the past three months. We have no reason to believe that there's a collections issue with the municipal buildings. More likely, we're just seeing a slowdown in payments related in part to the slower economy that is impacting governments as well as businesses. We will be working diligently to get DSOs back down below 47 days during the second half of the year.

Another use of working capital is cash restructuring payments of $19 million in the quarter. The reserve or liability was established in the first quarter and then severance and other payments were made during the course of the second quarter. Importantly, we anticipate producing $1-1.1 billion in free cash flow of the year before payment of the class action settlement. As a reminder, the payment of the class action settlement will be approximately $368 million, net of insurance proceeds.

It is difficult to predict just when the payment will be made as there is still a action pending in court it could be as early as late in the third quarter. But our most likely scenario at this point in time is that we'll pay the settlement during the fourth quarter.

Turning to to our bank lines and debt, we have had a few noteworthy transactions since our last conference call.

First of all, in May, the company issued $500 million of 7 3/4% senior notes with a 30-year term. This was another successful debt offering for us with a rate at 212.5 basis points over treasuries. Once again competitive with investment grade names that had offerings within a week or two of ours. As in the past we had an oversubscription to the issue of almost four times.

I should note that as Moody's was rating this issue, they changed our outlook to stable from negative.

A portion of the proceeds from this issuance was used to pay off the $300 million section five 8% notes that came due on July 15.

Additionally, we used approximately $135 million - we issued, rather approximately $135 million in industrial [INAUDIBLE] bonds during the second quarter: During the course of the quarter we also swapped more of our fixed rate debt to floating. And June 30, approximately $2.37 billion of our debt had been swapped from fixed to floating.

After paying the $300 million of notes that were due in July 15 the total amount of debt effectively at floating rates was about 33%. For the third quarter we are projecting all in interest expense to be approximately 6% of total debt.

As a reminder, we do still intend to go out with another bond offering yet this year. Likely middle of the fourth quarter, and probably for $400 million or less. In addition, we replaced our $750 million, 364-day line of credit with a $650 million three-year revolving credit facility. By converting our 364-day facility which required annual renewal to a three-year facility, we have substantially improved our long-term liquidity position.

This conversion shows the confidence that our bank group has in the company and we expect that this conversion will be viewed favorably by the rating agencies. As of June 30, the company had unused and available credit capacity under our two facilities of approximately $920 million with no outstanding borrowings.

Taking a look at the quarter end balance sheet and particularly at the debt to total capital ratio, let me just point out that because we issued $500 million of new debt in May, but did not pay off the $300 million of notes until July, the debt to total cap ratio is skewed at quarter end. As noted in the press release, net of cash and cash equivalence, debt to total capital was 59.9%. I think that a review of the balance sheet clearly shows that it is a solid balance sheet that can and is effectively supporting our share buy back program.

In closing, we continue to make progress on the turn around here at Waste Management. Despite the challenges that the current economic environment has brought to the business. Fortunately, the majority of our revenues are predictable and non-discretionary to our customers. And those segments of business where volumes fluctuate the most, specifically rolloff and special waste, we are focused on understanding the customer base and their needs. Knowing our cost to service the customer and pricing the business in a smart way.

As the economy begins to turn and waste generation begins to improve again, we believe Waste Management will be well positioned to add new customers, increase the level of service to existing customers, and leverage our assets in such a way that our industry leadership will be clear to the investment community as well as to our customers and our employees.

As Maury mentioned, we are pleased with our results this quarter in view of the economy. And will continue to describe to meet our full-year goals through emphasis on cost and productivity initiatives. With that operator, let's open the lines for questions.

If you would like to ask a question today, please press the star key followed by the digit one on your touch-tone phone. Again that is star one on your phones to ask a question. If you find your question has been answered and would like to remove yourself, press the pound key. I'd like to begin with Alan Pavese of Credit Suisse First Boston.

Good quarter. A question on the tactical cost savings program. You didn't go into much detail. Could you break out how much of the savings was from the restructuring versus the tactical cost savings program? It looks like I guess combined of the number was 24 million which seems like it might have been a little below target. Is that at the run rate? Is that going to get better in the next couple of quarters?

Of that only about four million was from the tactical savings, which was a little below to our expectations. We are renewing our focus on all of that as we speak. I think where we fell short was from what we can see, in the labor and overtime area which we just didn't do as well as we'd anticipated.

Is the opportunity pushed out? Does it look like it's going to be smaller than you expected?

The opportunity is still there. We just need to refocus on it problems that our people have is that we're leaning on them in a lot of directions at the same time. I'm afraid they took their eye off the ball on this one temporarily. But the opportunity is still there.

Great. And one of the other things, on the service machine initiative. I think that was originally characterized as an investment that would pay off in terms reduced customer churn. Could you characterize the impact of that has been, what the investment cost has been to date and whether or not you think you're seeing benefits in terms of reduced customer churn or will?

Yeah. We've already seen two points of customer churn reduction. We were at 12% when we began all of this. We're at 10.

I think what we said in the past is every point of customer churn reduction is about $20 million of EBIT improvement so we're seeing substantial improvement of the other thing that happen is the customer survey work we're doing indicates the customers are seeing the improvement so we're pleased with the results of that.

Could you tell me the DSOs, do you think they're going to come down? Are you going to get most of that money back in the next couple of quarters, specifically, and also if could you say how much fixed versus floating was swapped?

I'll give that to Bill.

The DSO issue is one we are focused on. It's important to us. Day change in DSO is about $30 million. Part of the explanation might be as Maury mentioned, what the -- perhaps with the restructuring and the people in different positions and the like, there might have been a little bit of a lack after tension to AR and continued focus of the DSO. I expect that will change in the current quarter. We'll look for that DSO work its way down by two or three days between here and the end of the year. The opportunity is still there to do that.

I'd only add to that that we've got a track record here of being able to put together a strong team and go out and chase DSO, if you remember, when we arrived here, DSO was at 72 days. Obviously that's been substantially reduced. That same team is being activated to go out and make sure this thing gets driven in the right direction.

And just the fixed versus floating swap amount?

We're going to look that one up for you. We'll mention it in a minute.

Thank you.

Next to Leone Young. With Salomon Smith Barney.

Good morning. There have been some tax hikes. Notably I guess in Pennsylvania -- well, Wisconsin was last year. Are you successfully putting through increases to cover your costs there?

It remains to be seen because it's just getting under way. But we're certainly raising prices. And we anticipate being able to pass those through. And as we look at our competitors, they're all doing the same thing. So we think that will go well.

Thanks, that's what I thought. Also, do you anticipate in a stronger economic environment, too, that some of the pricing pressures you're talking about should ease?

Yeah. That's just logical. There's more business for everybody. I don't think anybody wants to cut prices to get volume.

I guess I should have been more explicit in that you think it's really an economic issue on pricing and not that anyone's really changed strategy here in terms of going for market share fights?

I don't think that's the case. From what we can see, we do see varying degrees of competitive pressure around the country. In particular, we're seeing more pricing pressure in the south and in the west.

But again, everybody's trying to do the same thing here I think. I think it's just a tougher environment. You see a lot of the small competitors, you know, who - for who- cash is very dear. It's dear to all of us, but specifically more so to them, I guess. They're seeing pressure from those guys.

Thanks a lot.

Thank you.

We'll go next to Tom Ford of Lehman Brothers.

Good morning. Just a few questions for you. You guys talked about the commodity impact in the quarter. Do you have an estimate as to what you think the benefit will be for the third quarter?

It looks like if the prices stay up, you know, where they're at through the quarterer, which, of course, may or may not happen, it will probably be about $20-25 million in the third quarter year over year, positive impact.

Of revenue?

Yeah. Revenue.

Of which about half --.

Right. Have we done anything with respect to floor programs or hedging? You know to try and take advantage of the high prices?

We continue to do that.

About 75%.

Right. Of our volumes have floors. We also have hedges in place for about $10 million -- 10%. I think -- what is it, $5 million of hedges? Anyway about 10% is hedged.

Great. And in the release -- in the commentary in the release, Maury, it says -- it cites new efforts getting under way in terms of the cost savings initiatives. I'm just wondering, is that new as in new parts of the same initiatives announced, or is it new as in new things that you really haven't talked about yet?

It's new things we really haven't talked about yet. They're still at work.

I think Bill talked specifically about some teams we have in the field. Now looking at our reorganization to make sure that we've got that running smoothly. In addition, looking for cost savings opportunities.

We think there are some there. We just -- we're not to the point yet where we want to forecast them.

Ok. And the last thing -- looking at it real on the surface here. You did $325 million year to date in free cash. So you're quite a bit away from the billion to billion one. I just want to get a sense from you.

What can you say or talk about makes you feel very comfortable that that target is easily achievable?

I think easily achievable --.

Maybe not easily. But achievable.

It is achievable. It absolutely is achievable.

I think the way we look at it is there has to be some improvement. I describe some of the reasons for the change. There has to be some improvement in that DSO, in our working capital. That's something that we are going to work. I think there's room to make that shift between here and the end of the year.

Additionally there's flexibility in terms of cap ex and how we look at that, what's essential, what's necessary and what's next. So I think we've got a handle on it we're not concerned. I think we're still comfortable with the rates we predicted.

With respect to the DSOs you were saying two days you'd like to bring that down?

Well, we would like to bring that down two or three days actually. I would tell you, too, that we've got even at this point in time, as is use of the case, we do have some areas that are already operating again in the sub 45 day range. So I think a target where we have to go, what we have to do and we're going to be taking a very good, hard look at that and making sure it happens.

And you had said earlier, one day equals $30 million so that in and of itself is 60-90.

That's correct.

I just want to make sure I remember this correctly from the last call. On the last call did we -- did you say that Cap Ex flexibility was 50 to potentially 100 million?

I think it's at least that. Yeah.

Okay. Thanks very much.

You bet.

We'll go next to William Genco, Merrill Lynch.

Good morning. On your Cap Ex for the final half of the year, could that be biased towards the third quarter, to beat these new air emmision regulations for the trucks?

Not so much I don't think. We bought at this point about half of our year's requirement -- actually a little more of our year's requirement. I don't think there's going to be a spike as a result of that that's what you're asking, right?

Right. Just so there's no deviation on our models, could you give us a sense on the cost cuts that you enunciated so far that were derived in the second quarter and as you look into the final half in terms of ascertaining your goals what portion of these cost cuts are going to come out of the cost of sales line and how much out of the SG&A line? And in relation to that, Bill, how much of the savings are from the carry-over effect of what you did in 2001 versus new initiatives in 2002?

That's a whole bunch of questions.

Sorry.

SG&A would represent -- the reduction there's would represent about 60% of the total. I'm sorry, Bill. The other part of your question?

How much -- basically your goal is $140 million on the old [INAUDIBLE] and procurement programs. How much of that is new initiatives versus a carry over of what you did last year? What I'm trying to get at is how much stuff going to start carrying over into 2003?

It's a mix. I'm not sure I know --

Not sure we can break it right now.

How much, Bill. You know, market business strategy had a pretty big carry-over impact in the first half of the year, much less so in the second half. Procurement probably a little bit more of a 50/50 proposition throughout the year. Because there's a lot of ongoing work on the procurement side yet this year.

Thank you.

Thanks.

We'll go next to Trip Rogers, UBS Warburg.

Could you talk briefly about the Peoplesoft program. I think you were going to start some pilot programs regarding to the billing. Can you tell us when that starts and what kind of impact you might see from that?

We're getting ready to start the pilot program. The actual Peoplesoft installation then extends actually through 2003 and into 2004. In terms of expense, we've built that into our capital program, as well as into our expense budgets.

And I think the other question is in terms of business interruption. I think we've proven that we can take these things off-line, do pilot projects, and install them efficiently.

We're very aware of the business impacts of a billing program. We have to make sure that we don't damage our DSO, 'cause the whole focus is to drive it down.

So we're confident after we finished pilot program that we can do this efficiently and smoothly. And not have any business interruptions impacts.

Can you remind me how long the pilot program will last?

The pilot program -- I can't remember precisely. But it's like 90-120 days in that range.

And the time to implement that for the whole system? If I remember correctly, it's quite some time. Right?

It does. It rolls through next year and into the following year. Into the first part of 2004.

Okay. And just to be clear. The 24 million in the cost savings from tactical and reorganization, was that 24 million all in SG&A?

No. That was probably about 60% in SG&A. I think Bill may want to go back. The question before -- I'm trying to remember who asked it. If he was asking how much out of all of those initiatives savings comes out of cost of Ops versus SG&A, Bill, did you want to answer that differently?

Obviously, all of it wouldn't come out of SG&A. We have to contend with the savings that would come out of procurement, the market business strategy tactical and the like, which are all operational related.

Okay. So then the 60% it s --

on restructuring.

Then for the procurement then, market strategy, that's pretty much mostly all gross market?

Correct.

If it's useful, I could go through this again - let me just list for you the annualized, if this helps you, the annualized expected benefit on the various initiatives. First was procurement. That was anticipation was 70 million in expense and 25 million in capital. Market business strategy, $70 million in EBIT improvement. The tactical cost saves] target was $50 million. Reorganization, $86 million annualized. $67 million of that in 2002.

Okay. Thanks a lot.

We'll go next to Bill Fisher, Raymond James.

Good morning. Just a follow-up on that SG&A. Just in general terms, on an absolute basis, would you expect the SG&A to be lower in the second half from the Q-2 levels?

From the Q-2 levels?

Yes.

Would I say that's where we're at for Q-2, it's a pretty good rate. In our journey towards 11, I think we made pretty good progress. I wouldn't look toward tremendous progress in the second half. We'll keep eating away at it.

And one thing for Cherie. If I missed it, I'm sorry. Do you have the splits for residential/commercial, etc. in the quarter for collection?

Let me look that up.

Then the last thing. Just on the cash flow statement. Cash from operations, you had a nice source of cash, like $127 million. Is most of that deferred tax?

What would you expect cash taxes to be in terms of reported taxes? Do you have an idea there?

Yeah, we've got that.

We're pulling that up.

I'll go back and answer your previous question. The collection revenues are split out 31% residential. 38% commercial. 29% rolloff. Leaving another 1%, 1-2% in kind of other, which includes our Port-o-Let and that stuff. It still hasn't varied much from that 30, 40, 30, split we generally see. But, of course, the economy changes have made us change a little bit.

We'll work on your cash question here.

Thank you.

I can give you that right now. Based on the settlement of the shareholder -- assumption, rather, that we settle the shareholder class-action lawsuit and pay it in the fourth quarter, the projection would be that cash payments would be about $65 million in Q-3. And then we'd have $15 million in Q-4.

Thanks.

You bet.

Thank you.

We'll go next to Mark Farano with First Analysis.

Good morning. Two questions. One, could you maybe just better define the term I think that Maury used earlier on the call, rollbacks. Pricing not accepted by a customer going from 15-19%. Does that mean that the customer actually went away to a competitor or does that include customers who came back and said I will go away if do you this, and then they stayed with you as the end result?

Most of them stay with us. They come back and say they're not going to take the price increase. We end up negotiating something else. Sometimes a smaller price increase. Sometimes no price increase.

But sometimes we let the customer go as well. If it's a loss account, we make a decision as to whether to keep the business or not. I suppose the most famous example of all of that is in New York where we turned loose of tens of thousand of accounts that were not profitable. But for the most part we keep the business.

Then just a clarification. When we brought the WTE plant subsidiary onto the balance sheet and income statement, the benefit-to-net income for the quarter was $5 million?

Just about $5 million.

Could you share, the revenue number went with that or was that somewhere -- was there a corresponding revenue number?

That impact is recognized since 1990? I think the benefit all way from 1990 brought forward.

Okay. Thanks very much.

Thanks.

We'll go next to Steve Binder, Bear Stearns.

Good morning. I might have missed it. The Q-2 benefit on the sequential basis from Q-1 from higher commodity prices. How much was that? Think you talked year over year.

What was that, Steve? $10 million.

On a sequential basis?

On a sequential -- I don't -- yeah. It was down $20 million in the first quarter versus the prior year and up 10 in the second. I don't actually have a sequential calculation. But it has to be a pretty big number.

And Maury, can you maybe just comment on business trends? You touched some pricing. But maybe you can just when you look at the collection business, the disposal business, and different regions of the country, did Q-2 trends differ much from what you're seeing in Q-1?

I think the primary trend we saw was that volumes, disposal volumes really deteriorated from February to March. Then we saw them pick up as we headed into the second quarter. So from our standpoint, that was the trough. In March.

We've actually just had two good weeks. Two good weeks -- we hate to hesitate to put too much emphasis on. Two weeks certainly doesn't make the year, doesn't make a quarter, doesn't even make a month. But we've had two good volume weeks now in the last two weeks of July.

The other thing that we see obviously that I mentioned earlier, was it's tougher to get price increases. Just to give you an example. Since the beginning of our -- of putting our software in place, get price increases from our commercial accounts, where we array the commercial accounts on a district by district basis and determine which ones we'll go after to get price increases, we implemented that stuff about last September. We picked up $6.3 million a month in additional billings to date. Of that 6.3 we picked up a million and a half of it in the first quarter, about 700,000 in the second quarter. Which is, again, an indication that price increases are tougher to come by.

I actually meant regions of the country. The trends you were seeing in Q-1. Weak pricing in the south. Volume trends you're seeing in other parts of the country. Has there been any change in that pattern from a year over year standpoint?

I think the -- the South and West continue to be tough as they were in the first quarter. I think maybe the only change that we can point out to you is the special waste did pick up finally in the Midwest where we were having trouble getting projects under way. We did see a number of good size special waste projects come into the fold. The Midwest business has picked up.

The other trend that we've seen that I think is a positive one is that we've been successful at getting price increases in the East. That's been our most -- you know, the best area for price increases all over the East.

I guess the other one is that we have raised landfill prices in Pennsylvania. We continue to try to raise those prices. Of course, now we'll be implementing a price increase associated with the debt fee that the state has applied.

And with respect to further restructuring actions, the actions taken to date have been more overhead. What you're contemplating is it more overhead reduction potentially or is it new actions with respect to operations?

Well, it's both really. I think the organizational stuff is pretty much done. I think we are organized the way we want to be. What we're doing now is kind of a cleanup of that, going through each area, making sure that the organizational structure is as it was supposed to have been implemented. I think there are some opportunities for us.

SG&A reduction, for example. I think one of the things we've mentioned in the past is we have a service center here in Houston that does payables and benefits. I think we've got over 200 people over there. And we really haven't taken the people out of the field. We're doing that work just because we're still in a transition phase. At some point that efficiency will come home to roost. We just haven't gotten it yet.

We're doing other things like consolidating phone centers. That work goes on. We've got way too many phone centers. That's just a continuation -- a long-term effort. It's not something we can do overnight. So there are -- so there are SG&A opportunities. We've detailed the productivity things. That's in the operations.

Lastly, Bill, can you just touch on other long-term assets. It looked like they increased $250 million in the quarter. Is it a reclass? Do you know what that was off hand?

Let me look it up and we'll give you a breakout. You got another one Steve?

That was it.

Hang on and we'll get that you answer.

We'll go to the next call.

We'll go next to Amanda Tepper, JP Morgan.

Hi, guys. I want to step back from these details and ask a big picture question. I think it's impressive you're keeping churn down in this environment. It's got to be the service machine.

I'm wondering if you can give some detail maybe on -- between your gold markets and your green markets. What are the gold markets doing right? Is there a margin difference? Are they having more success in pricing? Are they able to use their better service to even win more customers and go to market in a different way?

What happened really is the green certification kind of gets things under way. It's a matter of sending out new procedures and telling people that this is a way we're going to do it. So they get it started.

By the time we get to the gold level, a team arrives and actually it stalls this program and doesn't leave until it is installed. Puts all the metrics in place. One of the biggest changes that's made is we go to what's called -- what we call a haul or call mode where on the commercial side of the business. If we can't make a pickup on a particular day, we call the customer rather than waiting for the customer to call us. We call them and tell them there's a car parked in front of the bin. We can't get at it. There's a problem of some sort. Customers are pretty well blown away by this, frankly.

And before things get to be a problem, we're there solving the problem. This is not easy to to implement, as you might imagine. The difficulty is the potential productivity decrease. But that hasn't happened. It works well. It changes people's attitudes very quickly.

So rather than let problems occur, we solve them before they occur that seems to make a huge difference. We do that at all our gold certified companies.

And do you think that that may translate into better pricing power in those markets over time? Or is that a bit of a leap?

I don't think it's a leap. I think what happens is that when a competitor walks in to one of our customers, it gives the customer an excuse to talk to that competitor if, indeed, we've had service problems. And that's exactly what our surveys have said. That too often we'll chalk up the price as the reason the customer left when, indeed, it's been a service problem that gave the competitor an opening to get in and even talk about price. That's -- that is working for us.

Great. And I'm not surprised to hear because do you have so many initiatives going on that the field wasn't quite able to get to everything in terms of reducing overtime. I'm wondering from a field perspective because I'm sure you've been out a lot. What kind of order of priority in the average, you know, 80 -- one of the average 82 markets, are they putting in the new systems, the market strategy, the tactical savings, etc..

We don't let them prioritize. We tell them they got to do it all.

Frankly, I think one of the problems with getting the overtime out in the second quarter is that we've had the seasonal upturn that you would expect. And as a result, we want to get the containers out on street and keep the operation going and take advantage of the seasonal upturn.

I think that's the primary problem. That's one that you got to give them a little slack on.

Ok. And then finally, you said you started with the 85 markets. But now you have 82.

Right.

Is that a final number? What happened? Did you just consolidate a couple sectors?

Yeah. We consolidated some markets in the Midwest, specifically in Indiana. What we're really doing now is fine-tuning this whole market organization. While we don't expect any substantial change, we will continue to look at consolidation where it makes sense.

Ok. Thank you.

Thanks.

Let me just interrupt for a second. I can give the partial reconciliation answer here, with respect to the other assets.

If you'd make a note of this new IRBs, which are really restricted funds accounted for $135 million. There was the $52 million change related to what we discussed on Whillabrator. And the fair value of long-term change in fair value of long-term hedge assets was 50. It gives you $237 million.

Also wanted to mention we went back to look up the swaps. Approximately 600 million was swapped from fixed to floating in Q-2.

We'll take our next question from Mel Cody, Sanders, Morris, Harris

Good morning.

Good morning.

You mentioned the special waste picked up a little bit in the second quarter. Was that on a year over year basis or just sequentially?

That's really sequentially. We'd had a good special waste year in 2001. The projects just didn't materialize as we had hoped in 2002. But they finally did start picking up particularly in the Midwest.

And how is pricing on those jobs?

Pricing is tough. It's deteriorated. That's pretty much cross the country.

Thank you.

Our final question Larry Taylor, Credit Suisse First Boston.

Good morning. I wonder if you could comment, sort of philosophically you're talking about the possibility of increasing the stock buyback. How you'll weigh that versus, you know, your desire to maintain a strong balance sheet as you look at things in the second half here.

I think we look at it opportunistically and take onboard, of course, Larry, what the stock is trading at currently and weigh that against per perspectively the opportunity to go forward in the ensuing years.

You'll recall that we really had the authority from the board to do a $1 billion next year and the following year so we have some flexibility here. Having said that, of course, what we're not going to do is jeopardize the strength of the balance sheet. You'll look very carefully at maintaining our state of ratio.

So we mentioned just because we don't want to surprise you if we do have the opportunity to do it. But at this point we haven't designed the program to go out there and get that done.

Thank you very much.

You bet.

This concludes our question and answer session. Gentlemen, I'll turn the call back over to you.

Thanks very much for joining us. We've gone passed our hour. We appreciate you are joining us today.

We're pleased with our quarter, especially in the environment that we've been operating in. We're looking forward to hopefully a better economic outlook for the second half. Though the indicators that we're looking at right now are somewhat muted.

So thanks again for joining us. We'll talk to you on the third quarter call.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.