美國廢棄物管理公司 (WM) 2002 Q4 法說會逐字稿

Good morning, welcome to today's Waste Management Incorporated fourth 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 investors relation, Ms. Cherie Rice. Please go ahead, ma'am.

Thank you, Lisa. Good morning, everyone and thank you for joining us. With me this morning are Maury Myers, chairman, president and CEO of Waste Management and Bill Trubeck, executive vice president and chief administrative officer. Maury will start things off with a review of 2002 and a look forward to 2003. Then Bill will review the financial statements in detail and cover a few related topics. After that, we'll open up the lines for questions and answers. This call is being recorded and will be available 24 hours a day beginning about 1 p.m. central time today until 3 p.m. on March 3rd. 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 of the call, dial 719-457-0820 and enter reservation code 649387.

As is our custom, I will remind you that 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) of 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 year ended December 31, 2001 and form 10-Q for the period ended September 30, 2002, and in the company's press release this morning. These risks and uncertainties could cause actual 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. Times and information given during the course of information which is occurring on February 18th, 2003, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express, written consent of Waste Management is prohibited. Now I will turn the call over to Waste Management's chief executive, Maury Myers.

Thanks, Cherie. I'll add my welcome to the year end 2002 investor call. Year end gives me an opportunity to step back and assess where we are in the turnaround of Waste Management and take a look at the past year and a look at the future.

I continue to be pleased with the progress we're making turning this company into a modern fortune 200 enterprise from a collection of 1500 largely autonomous units with inherent in inefficiencies and with widely varying performance. The new Waste Management bench marks off top performance and brings lagging operations up to speed in terms of efficiency, safety, profit performance and customer service. Our high profile improvement initiatives are aimed at these goals. Our performance in 2002, once again, confirms that this company is first and foremost a big cash flow generation machine with total free cash flow and as asset sales totaling $1.41 billion for the year. This cash was used to buy back a $1 billion in stock or 6% of outstanding shares.

In 2000 we continue to build an infrastructure that will serve this company well far into the future. Investments are being made to capitalize on this company's unique and impressive assets. Taking a more detailed look at 2002 and as noted in the press release, internal revenue growth was negative, half of 1% in the fourth quarter with volumes off by 1.1% and price, excluding recycling commodities, fuel surcharge and independent power production electricity changes favorable 6/10 of 1%. The price component was basically the same as we've seen in the previous two quarters. We continue to use our pricing software tools to get price increases where we can.

Volumes were better than what we had seen in the second quarter down 2%, although not quite as good as the third quarter, down 6/10 of 1%. Bill will have some other details on the components of volume change for you when he does his financial review.

As we look at it, fourth quarter volumes continue to reflect the easier year over year comparisons we began to see in the later part of the second quarter and reflect an economy that seems to be bouncing along the bottom. We do not see evidence that the economy is improving or getting any worse. Searching for a little good economic news, we've seen a strengthening of special waste volumes in the west and Midwest over the last several months. Still, we're not ready to say we see a positive turn in the economy.

As further indication of economic performance, the recycling commodity markets continue on a downward course during the past few months. In October, cardboard was averaging $70 a ton, and number 8 news was between $80 and $85 per ton. The February yellow sheet pricing is at $45 to $50 per ton for cardboard and $60 per ton on the return on average for number 8 news. These current prices put cardboard at overall floor prices while news is still somewhat below the floors. We have some concern about a short-term weakening of the newspaper pricing due to domestic mill down time and are thus cautious on our outlook on that sector.

We announced the newly formed recycle America alliance. The goal of this unit is to enhance profitability and sustainability of the recycling business by combining assets and operations with a number of other key domestic recycling processors and marketers. Our first partner in the alliance is the Pelch (ph) group, previously the country's largest private fiber recycler based in Milwaukee, handling over $2 million tons of recyclable fiber annually. With the Pelch group, we add $200 million in revenues to our recycling business. The alliance will operate a separate subsidiary of Waste Management, with results consolidated in our financial statements. With the Pelch group, our annual recycled tons are anticipated to be $8 million with the split of those tons approximately $2.2 million in cardboard, $1.7 in newspapers, $2.5 million in other fiber and the rest non-fiber such as glass and plastics. This is a strategic move with the goal of optimizing Waste Management's and the industry's recycling capacity which currently runs at about 40% utilization. In addition, the alliance is larger commodity volumes will be a stronger force in the commodity markets. The overall goal at Waste Management is to improve recycling margins and returns per the company average.

Now, let me review our various programs and initiatives, including our plans for 2003, starting with safety. As I've said before, safety is a core value at Waste Management. We call our safety program "mission to zero" or M to Z. We continue to make good progress in 2002. Our injury rate improved by 26% in 2002 and by 48% as compared to the year 2000. Obviously, while the numbers show improvement, we're not yet satisfied. In 2003, our M to Z focus will be on business units with a history of sub par safety results. These business units account for only about 25% of the total units, but they produce about half of our casualties and associated costs.

Emphasis on safety improvement will continue to be among my highest priorities because it's the right thing to do and it makes good business sense. Here again, we're making an investment in the future. Good safety experience translates into lower insurance premiums, lower worker's compensation expense over the long run and a safe workplace for our employees.

We continue to make a significant investment in information technology. We have now rescheduled our plans to reduce costs and better synchronize the rollout of complementary projects. Our biggest single project is the implementation of our new revenue management system. Our current plan is to proceed with our pilot in the Phoenix market, which in fact we just started, expand the pilot in a few other markets in the second and third quarters and then go live in those markets beginning in the fourth quarter. Full-fledged rollout of the new system will begin early in 2004 and should be complete by mid-2005. This is slower than the schedule we previously announced but by extending the pilot, we'll be able to accomplish a couple of things. First of all, we'll be delaying some of the expenses, more importantly, we'll take advantage of the extra time, such that we'll be able to roll out consolidated call centers and a consolidated billing center as we implement. Our previous plans were to implement the billing system first and follow with the consolidated call centers later.

Compass, our new fleet maintenance control system is already in the deployment stage with approximately 30 sites installed. Our original plan was to deploy compass to 320 sites in 2003. Our new plan is to deploy 60 to 80 sites in 2003, targeting the current year deployment at those sites which we have assessed as having the highest return potential. E-procurement is scheduled to follow right on the heels of the compass installations and thus is being slowed down as well this year.

On the other hand, we're speeding up our deployment of our computer assisted routing dubbed fleet route. Originally we had planned to deploy this system generally in conjunction with revenue management, however, in 2002, we conducted several pilots and found very encouraging results in both residential and commercial collection applications. Over the past year, in pilots at 27 different hauling locations, we've reduced drivers and trucks by up to 17% and on average 10%. The company operates 15,000 commercial and residential routes, our goal is to achieve the average pilot reduction at 10%. Each route is estimated to cost $120,000 annually. A 10% reduction would yield up to $180 million in savings before implementation costs of an estimated $10 million in 2003 and $10 million in 2004. In addition 1500 trucks would equate to approximately $240 million in capital savings at new truck prices.

To help ensure a speedy and efficient rollout our fleet route installation team members have been provided with a special incentive program and each team member can earn up to $15,000 a year in cash incentives. In any project we undertake, one of the first thing we look at is the effect on our employees. Driver turnover averages over 20% per year so it's anticipated that no driver layoffs will be necessary as a result of fleet route and reductions will be accomplished through attrition. I just returned from kick-off meetings in the field to get fleet route underway. For 2003, benefits will start to occur in the second quarter with 2003 savings estimated at $40 million and costs at $10 million for a net $30 million savings. 2004 could achieve full-year impact of 2003 route reductions of $114 million, plus 2004 route reductions savings of $33 million for a total 2004 savings of $147 million. While this level of potential savings, it's clear why we have reprioritized some of our efforts.

Some of our early consulting work done by McKenzie identified this route optimization potential. With our new proprietary optimizer software, we believe these savings are now within reach. The potential of the fleet route project is very significant and our goals are ambitious. I plan to continue to devote my personal attention to this important project. As we roll out this project over the next few quarters, we'll keep you up to date as to how much of the potential savings we're achieving.

Many of the improvement projects that we've described for you in the past are now part of our way of doing business and institutionalized. For example market business strategy where we calculate we generated $95 million improvement in 2002 EBIT is now part of our annual business planning process with no incremental cost. Likewise, our procurement program saved $108 million in 2002, $74 million in expense and $34 million in capital, and will continue to yield savings as we continue to analyze additional categories of purchase. Our procurement department is now set at 40 staff is clearly paying for itself and will continue at that level without consulting our other nonrecurring costs.

However, it's now quite clear that as fast as we've reduced costs, this favorable impact has been offset by weak revenues and the difficulty in reducing associated fixed costs. As a result, we've not made as much improvement to margins as one might expect. But, of course, as the economy improves and revenue strengthens, the same leverage works to our benefit.

In sales and marketing, we're in the process of completing the rollout of our sales effectiveness program. Our goal is to make this new approach to sales a part of everyday culture in each and every market. Key to the program are improved metrics in accountability, along with the right sizing of our sales force. In addition to having a specific sales effectiveness program for our standard collection business, we're in the process of tailoring our program specific to industrial sales. We expect to begin rolling out that program in the second half of 2003. Our centralized outbound call center is up and running now too, and we're pleased with the results that we're seeing with that effort.

As part of our fourth quarter review of our key initiatives, we determined that service machine is far enough along at this point to disband our audit and implementation teams, which is done. The people who were on those teams have now been redeployed. Service machine now is squarely the responsibility of our local managers. We continue to have weekly scorecard and the visibility of the scorecard is very high within each level of management.

Our pricing software continues to yield positive results in a difficult pricing environment. At year end 2002, the company had increased monthly revenue by $9.8 million using the pricing software introduced in the fall of 2001. We continue to use this tool on a customer by customer basis to move prices up. And we'll continue to resist giving away price to gain volume. We see evidence that our service machine work is differentiated our service and helped us gain price increases and reduce customer churn. Customer churn has been reduced to under 10%.

Looking forward to 2003, we believe that we've built an achievable business plan. It assumes that we'll not see an improvement in the economy, especially in the segment most important to us, industrial production. We assume the uncertainty over the war on terrorism and the possible war in Iraq will combine to continue to stifle meaningful economic growth. If we're wrong, it would impact our performance positively. At this point, we'll guide you to the lower end of the existing analyst range of $1.40 to $1.50 per share. Should we see some life from the economy in the second half of the year, we could move up in the range.

Our 2003 plan assumes that we have substantially finished shedding unprofitable and undesirable revenue. In the past two years, we've shed $45 million in low margin slow pay broker business, by bidding up losing municipal contracts, we've given up approximately $240 million in revenue that went to other bidders. And in New York, we dropped 25,000 commercial accounts that represented $34 million in revenue and were operating at a loss. We think this was all smart business, but it is revenue at the margin that requires the reduction of the associated fixed costs.

At the revenue line for 2003, we plan a slight volume decrease of 6/10 of 1% and price increase of approximately 1%. We could gain some volume through added recycling acquisitions and several other solid waste acquisitions that appear promising. We've budgeted up to $375 million for acquisitions in 2003, up from the actual $162 million we spent on acquisitions in 2002.

We believe our 2003 year will be made successful primarily through cost reductions and continued productivity improvements. Yesterday we began a net reduction in force of 700 employees and 270 contract workers, totaling 970 people and $50 million in annual savings with $42 million to be saved this year. In conjunction with the work force reduction, we're streamlining our organization by reducing the number of U.S. and Canadian market areas from a total of 91 to 66. We'll take a charge of $20 million in the first quarter to cover severance and related expenses with the full-year charge at about $23 million.

In addition through other SG&A expense reductions, we expect to be at 11% to 11.5% SG&A to revenue ratio by year end 2003. We'll continue to reduce SG&A as we roll out our revenue management project at 2004. Approximately one point of the 2003 reduction will be achieved by reclassifying certain costs out of the SG&A category into costs of operations based on a specific review of how our costs should be classified in the new organization structure. In part this reclassification is made possible now that our people soft HR program is in place and has correctly identified various jobs.

In addition, I've ordered an account by account dissection of this company which Bill and I will direct. Each week, we'll review a new cost category and its associated accounts, organization by organization. This effort will report directly to me and we expect to find significant new cost reductions.

In summary, we've had a good year of progress. The economic climate was disappointing, but we continue to build infrastructure and position this company for an excellent future. We continued using this company's big cash flow to invest for the future and at the same time buy back 6% of the stock.

2002 was a year when the company hired new auditors. As you expect, they turned over every rock and looked in every closet. It took a lot of effort on the part of the Ernst and Young people and our own accounting team. The net result is a clean audit. We're having fewer and fewer legacy issues to deal with. In this past quarter the two primary Issues, an old legal dispute and the sale of brand services about offset.

We moved forward on many fronts with improvements that I know strained our people. And I'm proud of the way they responded. All in all, a very good year.

As we look forward to 2003, we see continued pricing improvement and a more active look at acquisitions to be the main thrust of the revenue plan. A more effective sales team will focus on profitable revenue and reduce business loss. In an expected slow economic environment, we'll aggressively tackle cost reduction and bring our SG&A levels in line with the competition. With that review, I'll turn the call over to Bill Trubeck for some further details on our financials.

Thank you, Maury. For those of you who may not have caught up with the announcement by Moody’s last week, I would like to begin with some good news, which is that Moody’s has placed Waste Management on review for possible upgrade. In their release, Moody’s cited the strength and stability of the company's cash generation despite the economic downturn. Improvement in liquidity related to the relaxation of a financial covenant under a bank agreement and the prudent management of our large share repurchase program to date. The covenant that was modified was the debt to EBITDA ratio, which was increased from 3 to 3.25 times, giving us some cushion on this one covenant.

Assuming that the upgrade is established, the projected effect on annual borrowing costs and bank fees is a reduction $2.6 million. In addition, as we look to the refinancing requirements of 2003, the improvement in spreads will have a positive impact. As a point of reference, our most recent debt placement of $400 million carried a spread over treasuries of 235 basis points. Based upon the current market, that spread is improved by 60 to 70 basis points. Needless to say, we're pleased that Moody’s is reviewing Waste Management for a possible upgrade.

Now let's review some key items of interest in the quarter's financial statements beginning with revenues. Total revenue is up $21 million on a year over year basis. Primary driver of the increase over 2001 is recycling commodity prices, which were up $45 million quarter over quarter. As a reminder, $14 million of this increase is due to certain fourth quarter 2001 paper commodity swaps that we entered into with Enron, which were accounted for as hedges, were deemed ineffective, and thus that quarter’s commodity revenue was reduced by $14 million.

IPP electricity sales and fuel surcharges were also higher than in the prior year by $1 million and $2 million respectively. Core prices were up $18 million or 6/10 of 1%. And we continue to have our best pricing improvement in the commercial and residential collection lines of business, each with prices up between 1% and 1.5% over the prior year. But of continued challenges with pricing in the roll off and special waste lines of business, which is not surprising given the weakness of the economy.

Volume declined by $32 million after the impact from some revenue adjustments that I would like to speak to. There are favorable adjustments within Wheelabrator (ph) totaling $19 million, reduced by a negative impact in Canada of $5 million for a net favorable impact from adjustments of $14 million. The Wheelabrator adjustments primarily consist of revenue resulting from the consolidation of our North Andover project, which we discussed in the second quarter, and a change in how we treat certain property tax and similar costs. Previously we passed the amounts we collected from our customers for property tax and similar costs directly to the party to whom they were owed without reflecting them on our income statement. Now we record the amounts collected as additional revenue and the payment as additional expense. The net effect of this change on EBIT is zero. When we adjust for those impacts to revenue and the volume change, underlying volumes were down $46 million or 1.6% from the fourth quarter 2001. Within a range of lower volumes we saw in the second and third quarters, a portion of this $9 million or .3% is a result of lower Wheelabrator construction revenues. And finally, revenue from disposition of primarily non-core businesses since fourth quarter 2001, outweighed the acquisitions we made in the solid waste business by $13 million in the quarter.

Operating expenses in the quarter were at $1.743 billion as compared to 1.559 billion in the year ago quarter or a $148 million increase. The single largest contributor to this difference is that in the fourth quarter of 2001, operating costs were benefited by $86 million of insurance recoveries. This leaves $62 million of other operational net cost increases, which included increased operating expenses at Wheelabrator of $23 million, primarily related to the recognition of the additional property tax and similar costs previously discussed, an increase in expense related to lost contract accruals and an increase in contract labor as a direct result of the timing of repairs and maintenance at our Wheelabrator plant. $15 million of that $62 million was disposal cost increase of which $8 million is directly related to the $4.00 per ton Pennsylvania landfill tax. And $14 million is in cost of goods sold increases largely related to higher commodity prices and resulting higher customer rebates. Also please note that in accordance with GAAP and due to the lower interest rate environment we're currently in, we've reduced the discount rate that we utilize in conjunction with calculating the long-term liabilities at closed landfills and other environmental liabilities. This change to the discount rate resulted in a $13 million expense in the quarter.

Labor was up just $12 million with some of the initiative savings coming through this category. The cost of fuel was also up $10 million as compared to the fourth quarter of 2001. As previously noted, fuel surcharges were only up $2 million. While generally, we're able to cover most of the fluctuation in fuel price with our fuel surcharges, there is a 30 to 60 day lag in the surcharge to our customers. So the spike in fuel prices this past December is being recognized in our February billings. And in fourth quarter 2001, the prices were generally trending down, giving us a favorable timing difference.

Additionally we had increased healthcare costs of $9 million. And reducing these and other net cost increases with the savings from other various initiatives as well as the elimination of $27 million in operating expense we had in the 2001 quarter related to the business as we divested.

SG&A expenses were $407 million as compared to $452 million in the year ago quarter, or a $45 million improvement. On a comparable basis SG&A would be down even further year to year were it not for the following items. Included in SG&A this quarter is a $26 million litigation settlement cost. Also bad debt expense of $7 million higher than in the fourth quarter of 2002 than the prior year's quarter and there is a $7 million increase related to the Wheelabrator adjustments I just previously mentioned.

Exclusive of these three increased cost items our SG&A costs are down $85 million. Professional fees are down $23 million. And as you'll recall, in 2001, we were utilizing a number of consultants to assist us with the development and implementation of our various initiatives. But for most part handle those types of efforts in house in 2002. Salaries and wages were $20 million lower in 2002 than 2001, primarily as a result of our reorganization last March. Outside legal fees are down $14 million. Partially related to the $9 million of legal expenses in 2001, which were directly associated with the $86 million of insurance recoveries. Contract labor used primarily for staff augmentation and in the IT department is $7 million lower than in fourth quarter 2001. The divestiture of a non-core business, reduced SG&A costs by $7 million. Supply costs and travel and entertainment costs were each $4 million lower in 2001,down 41% and 21% respectively, reflecting our focus on managing our [inaudible] expenses.

As with operating costs, there were other changes to various line items both positive and negative, but the items I detailed for you cover the majority of the year to year difference. Depreciation and amortization was $304 million as compared to $343 million in a year ago period. As a reminder in 2001, we had goodwill amortization expense of $39 million per quarter. But as a result of the implementation of FAS142, such amortization has been discontinued in 2002.

On a comparative basis, fourth quarter 2001 amortization and depreciation would have been $304 million, the same as this quarter, if goodwill had not been amortized. [inaudible] impairments and unusual items accounted for a net $25 million pretax income in the quarter. The three major items within this line item are $16 million in gains from sales, $5 million of which is directly related to the $5 million reduction to Canadian revenues and $8 million related to the favorable conclusion of some legal matters.

Interest expense and minority interest are relatively unchanged from the fourth quarter of 2001. Interest income and other, however, is $54 million in this quarter or $47 million higher than a year ago. As you may recall, when we reported third quarter earnings, we told you that we had sold our interest in brand services and that we expected to book a gain of about 4 cents per share from that sale on the fourth quarter. That transaction accounts for $43 million of the other income in the quarter.

Finally as noted in the press release, we had a reduction of $31 million in our tax provision for the quarter as a result of completing the tax return for our Dutch subsidiary and determining that a portion of our 2000 losses related to the sale of our international operations was deductible. I might add that this is actual cash that has been or will be returned to the company and we've received $8 million in the fourth quarter and anticipate receiving the remainder during 2003.

On the last earnings call a number of you were also interested in sequential quarterly changes in operating and SG&A expenses. So let me review the changes from third quarter to fourth quarter with you as well. Operating costs are down $3 million in the fourth quarter but as a percent of revenue, they were up 170 basis points. A portion of the increase as a percent of revenue is related to lower total revenues in the quarter due to seasonality. Then we have some of the same items that I reviewed in the fourth quarter to fourth quarter analysis. The $13 million expense related to the change in discount rate used in calculating the long-term liabilities of closed sites which equates to 50 basis points, $30 million related to Wheelabrator, primarily due to the difference in timing of repairs and maintenance associated with major outages between periods and the recognition of the additional property tax and similar costs previously discussed for 105 basis costs and fuel costs was up $5 million sequentially, up another 20 basis points.

SG&A expenses are up $31 million sequentially all due to items I previously discussed. Litigation expense is up $14 million, primarily due to this quarter's $26 million litigation settlement. $7 million for Wheelabrator related to the recognition of additional property tax and similar costs previously discussed, bad debt expense is up $7 million from the third quarter. I should add here that while bad debt is higher than the average in the fourth quarter, we do not have any concerns regarding our receivables and in fact our days sales outstanding improved about 2-1/2 days during the quarter to 46 days.

Another request made on the last conference call was for some data on the implementation costs of the various initiatives and programs that we have been implementing during the past year. By quarter, the combined implementation costs for service machine and sales force effectiveness were $8 million in the first quarter, $10 million in the second quarter, $8 million in the third quarter, and $7 million in the fourth quarter for a total year cost of $33 million.

Now lets move on to a review of the cash flow. Free cash flow was $253 million in the quarter, bringing the full year of free cash flow to $866 million. As I'm sure you all recall, we have projected about $1 billion of free cash flow this year. While we've made significant progress in reducing receivables garnering $104 million of positive cash flow in the quarter, we spent more capital than we had budgeted. Most of this higher capital spend was landfill related, both land purchases and weather permitting actions on [inaudible] construction. This capital was necessary and prudent as Maury noted, including proceeds from assets sales which were $93 million in the quarter and $175 million for the full year, along with free cash flow provided by operations, we have produced a total of $1.41 billion in cash in 2002, thus providing the means for our $1 billion share repurchase that we accomplished over the course of the year.

As we stated in the past, with the economy slower than we had anticipated we are actively pursuing all avenues reasonably available for to us produce cash. Part of getting this company turned around and its value maximized includes monetizing non-producing assets and investments which is exactly what we've been doing this past year. Specifically regarding our share repurchase, we did complete the $1 billion share repurchase program for 2002 during the course of the fourth quarter. During the fourth quarter we completed a total $421 million in repurchases, buying back almost 17 million shares, primarily through open market activity. The total number of shares repurchased in 2002 was 38.25 million or about 6% of the shares that were outstanding at the beginning of 2002. To have effected a $1 billion share repurchase in only about 10 months time was a significant achievement. One which we believe makes a strong statement about Waste Management as a company. Our total debt declined by $233 million during the quarter. We repaid $286 million of our 7.7% notes on October 1st, we repaid $350 million of our 6.5% notes on December 15th. We repurchased $145 million of senior debt in the market, and issued $400 million of 10 years, 6-3/8% notes in November plus $230 million of industrial revenue bonds at various rates and at various times throughout the quarter. Once again, the $400 million senior note issue was nearly 5 times oversubscribed and was completed at a very attractive [inaudible] rate of 6-3/8%.

Our year end debt balance was just under $8.3 billion, down slightly from over $8.5 billion at the end of the third quarter. While gross debt to total capital was 61% on December 31st, if you measure debt to total cap excluding $349 million of available IRB cash and the increase in debt related to accounting for interest rate swaps then at year end our debt to total capital was 59.2%. You may also be interested in knowing that at December 31st our weighted average cost of debt was approximately 5.8% with approximately 70% of the debt at fixed rates and 30% at floating rates. That wraps up my review of 2002 financial results. Let's move on to our 2003 out outlook.

As stated in the press release, before considering the impact of accounting changes, including FAS 143 and the charge we anticipate taking for headcount reductions, our 2003 earnings guidance is toward the lower end of the current range of estimates. This guidance takes into account our expectation that due to the weak economy and a number of lost low profitability municipal accounts our volumes are projected to be negative .6% year to year and that we will be able to obtain price increases of about 1% excluding a negative .3% impact over cycling commodity price change. Further, this guidance, before FAS 143, assumes that income from operations as a percentage of revenue for 2003, improves by approximately 100 basis points over 2002. The estimate for our key drivers of the margin improvement include the following items. Route optimization $40 million in expense reductions and $135 million of net capital reductions, $10 million of implementation expense. And our projects initiated in previous years are expected to continue to improve to provide cost benefits estimated at $100 million in 2003. These programs are now part of the way we do business.

We also have a specific plan for getting SG&A to 11% to 11.5% of revenue which should occur by the end of 2003. Approximately 1 percentage point of this reduction is due to reclassification and the remainder is a result of cost reduction. The reason for the reclassifications is that our new financial and HR systems have given us a much better way to analyze where specific costs are being charged. We have done a detailed review of all costs and determined that some costs, employee and facility related primarily, are really more appropriately reclassified to operations. In 2004, in conjunction with the revenue management system roll out, we have further plan cost reductions related to consolidation of billing and customer service centers.

As we've discussed in previous calls, the implementation of FAS 143 which is required for 2003 will have a significant effect on our accounting for landfill capping; closure and post closure costs.

In preparing for FAS 143, we first worked with the SEC to ensure that they did not object to our approach and then we shared our work with others in the industry in a trust implementation issues with them so that a more common approach can be taken to landfill accounting. We believe that a consistent industry approach is to the benefit of our investors. Along those lines we have decided, in implementing FAS 143, to adopt an approach to computing our inflation rate that is similar to others in the industry. And consequently we will be using 2.5% inflation rate in 2003 instead of the 2% used in 2002. The current impact of FAS 143 on 2003 earnings is projected to be a negative 8 cents on non cash EPS. Additionally, we will record an after-tax adjustment to cumulative effect of a change in accounting principle in the first quarter in the range of $180 to $230 million or 32 to 38 cents per share. This adjustment is primarily driven by conforming our treatment of final capping costs to the requirements of FAS 143 as well as the effect of increasing the inflation rate to 2.5%.

On last quarter's conference call we discussed the tax rate and the fact that without new landfill gas credits from a new energy bill, our effective tax rate would increase to about 39%. As I'm sure you all know, the president's tax bill has not yet been approved and we're assuming that no new tax benefits related to the landfill gas are forthcoming in 2003. Therefore we are projecting a 39% effective tax rate for the year, which will cost about 3 cents in EPS. However, we will continue to lobby to have this important environmental legislation passed in 2003.

Moving on to our cash flow projections, as stated in the press release, we are projecting free cash flow of approximately $900 million to $1 billion in 2003 before the possible payout of a class action lawsuit which we expect to be a net after tax use of cash of approximately $230 to $240 million when it finally happens. This estimate is using the slightly different and simplified pre-cash flow calculation of cash flow provided by operations, less capital expenditures, plus proceeds from sales of assets. Some of the components of this projection include cash taxes at approximately 65% of book taxes or in the range of $150 million more in taxes than we paid in 2002. That is in cash taxes. As we mentioned previously, we have anticipated our cash taxes increasing in 2003 primarily as a result of nonrecurring items that occurred in 2002, and reduced landfill gas credits. We also expect $50 to $75 million in proceeds from asset sales. Use of working capital in the range of $120 million, $90 million of which is for landfill capping costs. And cash interest costs of approximately $510 million.

The company's plans for share repurchase this year include buying back in the range of $600 to $1 billion of shares depending largely upon the timing of approvals to pay the class action settlement. As noted in the press release, we have increased our allocation of pre-cash flow to be used for acquisitions this year. Where we spent $162 million on acquisitions in 2002, we're expecting to spend up to $200 million more than that in 2003. We believe that tougher economic times often offer excellent acquisition opportunities for companies that can afford it and we plan to take advantage of such opportunities. And of course, we may have the payment of the class action settlement in 2003.

Another potential use of cash that many investors have asked us about recently is an increased dividend. Let me tell you where we stand on that issue. We're in favor of the elimination of the double taxation on dividends. Certainly if the double taxation is eliminated, the view of dividends is more favorable to many investors. We have had a brief discussion with our board regarding the issue and plan to discuss it further in further detail at our March 4th meeting. I don't anticipate any changes in policy until after we know the final form of the tax bill. We'll keep the investment community posted via public announcements as appropriate. And with that operator, we will open the lines now for questions.

Thank you, sir. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you are on a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, that is star 1 to ask a question. We'll go first to Alan Pavese with credit Suisse First Boston.

Good morning, guys, I was wondering if you could add a little more perspective on the turnaround to outlook. As you said, your guidance which assumes a 1% revenue growth and the benefits of the ongoing share count reduction. You are kind of implying about 8% EPS growth, which is, as you said, towards the lower end of the range. It doesn't seem to assume much beyond your -- your just most newest incremental SG&A savings program. It seems like the market strategy procurement and these other issues are either not going to be contributing or are going to be offset. I'm wondering if there are some reasons that are -- that the turnaround will produce lower margin expansion this year or if 50 to 100 basis points per year is about the right rate outside of any cyclical benefits for the next couple of years.

I'll start off, maybe Bill can add. I think, Alan, we simply are trying to take a conservative look at 2003. Frankly, we were disappointed in 2002. As you recall, we were optimistic about what was going to happen in the second half. That didn't materialize. And clearly as our revenues were declining, as I mentioned in my comments, we just didn't get fixed costs out fast enough. So, it's -- I think it's a conservative look at the year. As simple as that.

Do you think in looking out in future years that more than 50 to 100 basis points margin expansion is an appropriate expectation for the turnaround effort, again outside of the cyclical benefits?

Yeah. I think so. And certainly, you know, any kind of -- just stable environment will be beneficial. We've been flying into a wind mill here as the revenues have deteriorated. I think that's reasonable and, as I mentioned, we've got great hopes for this fleet route effort that we have going on. And we've got some other things, too. We're tired of being in a position where we haven't made our numbers -- we would rather try to be a little more conservative going forward, which I think is probably better fits the way we like to operate.

Okay. That makes sense. Could you also just [inaudible] what the numbers were. You gave route optimization cost savings targets for 2003, $35 million capital savings and $10 million expense. There was $100 million number after that in savings. What was that associated with.

That was associated with procurement, market business strategies and all those other things that we have had going on Alan. I think Bill had something to add.

Just -- I was going to -- Alan mention on a follow-up, Maury mentioned that what sometimes is missed is that all of these various programs which have now become part of the corporate DNA, do tie together and they are interactive, and when you get in the out years, which is what I think you're talking about, when you get that interaction to come together, whether it's a maintenance and ties to routing, ties to procurement, ties in all of those benefits. You can see where taken as a whole and integrated as they will become, you know, the benefits are going to be there.

Okay. And just lastly, could you update us on the search for a CFO?

Yeah, I can do that. Just in short, we've changed our approach. Initially the approach was we were going to hire a CFO and have it report to Bill and what happened is we simply couldn't attract the level of CFO that we wanted with that approach. So frankly, we changed search firms. We're now using [inaudible]. We have a very active search going. We're interviewing candidates. We are getting the kind of candidates that we want. That CFO will also be an executive vice president and report to me and so it's now going forward well and I have confidence that we're on track.

Great, thank you.

And Alan, I'm going to add one more thing, too. You were looking at the EPS change year to year and just take a look at the tax part of that, you know, Bill talked about the 3 cent change from just the Section 29 landfill gas tax credits but remember that we also had further benefits from some other items in our 2002 results. So we kind of got a make up for those because the taxes will be quite a bit higher.

Our next question comes from Amanda Tepper with JP Morgan.

Hi, good morning, you guys. Trying to catch up on everything. With the changes that you are making at your headquarters, I'm -- it sounds like first of all, the contract workers that are leaving, are mostly IT related; is that correct?

That's correct.

How many full time and contract workers are now left in Houston after this restructuring.

It's about the same. As we've said all along, the full-time employees are right about at 1,000, and we'll still have close to 500 people working on our IT projects, contract people.

Okay, is that --

About 450.

And that ought to be constant for the year?

Yes. Until we get through the revenue management project.

Okay. And on the $1.40 roughly guidance, there is a pretty wide range right now on what you might end up doing in terms of the buyback. What kind of share count did you use for that?

We've got that -- one second.

Yeah, let's see.

Another way of putting it is, did you use the $600 million more conservative number?

It obviously is going to depend a lot on the timing and the eventual size of the buyback, but you know, using kind of some conservative outlook with doing more of the buyback in the second half, you might come up with a year ending number around $570 and an average for the year more around $590 or even $595, depending on how close to the end of the year.

Okay. And then depending on the timing, you know, if you do end up -- well, you will eventually make the -- pay the settlement and get the cash back on taxes, and if you generate the cash you think you will, but you can't do the buyback this year, would you end up -- could you potentially end up buying back more next year?

Amanda, you are assuming that we do not make the --

If you only buyback $600 million this year, could you end up buying back $1.4 billion next year to make up for it?

The authorization from the board is to purchase up to $1 billion in each of this year and next year. If there was a modification from that, we would go back for that, really.

Okay. And then I'm interested in hearing a little bit more about what you're seeing on the commercial side. You said you are actually getting pricing there, which it sounds like your pricing program is working pretty well, because I've been hearing that in general that side has been a bit weak with customer churn going up. I'm wondering if you can elaborate a little bit what you are achieving there.

It's pretty much what we've been achieving all year, Amanda, and that is that we've worked really hard on -- especially on the commercial side with our pricing software to get a customer by customer focus on price increases, and that's why we've been successful. And at the same time, we've not given our salespeople a lot of flexibility to give away -- to give away price. You know, it's a strategy that we've employed that's worked well for us, and we just -- we feel that at this stage of the turnaround of this company, what we ought to be doing is getting our pricing squared away, getting our prices at the appropriate levels and not be chasing volume because we think over the long run, we're better off with a whole stable of customers at the appropriate prices when the economy picks up.

One last question on pricing, one of your competitors commented last week that they might try to get a little more aggressive on the landfill pricing side if there is a decent spring industrial volume up tick and I’m wondering what you're seeing on the landfill pricing side and whether you think that would be a possibility from your point of view.

Well, you know, we've continued to work on landfill pricing all year long, so for us us, that would be a welcome competitive environment for us to operate in, for the -- again, our strategy is to push prices up -- we've done it really on a market by market basis, so to see the competition becoming more aggressive would certainly be a good thing.

Okay, great. Thank you.

Thanks.

We'll go next to Lorraine Maikis with Merrill Lynch.

Thank you. Just to follow up on Amanda's question about landfills, is there any landfill price increase, included in your 1% or would it improve to competitive landscape increase that further?

That could increase it further.

Okay. And then on the FAS 143 adjustment, have you determined the size of the adjustment out of cost of operations and into depletion?

Well, we don't have that split all specifically determined out yet. And actually, in our case, both cost of ops and depreciation and amortization component we expect to go up.

In fact, let me give you some further breakout on 143 which might be useful for you if you would like to make a couple of notes. First, with respect to the FAS 143 transition adjustment, and again, in all of these, there is a lot of in and out, [inaudible] in this stuff, but primarily the components that we have there would be first off conforming our final capping to the requirements of FAS 143, and the percentage there would be 67% of that total dollar value associated with conforming there. And then the effect using the higher inflation rate which I mentioned going to 2.5%, 33% of that amount is related to the inflation rate, and then on the current year impact, again, given the ins and outs that we have, the accretion expense on the final capping obligation would amount to 50% basically of the 8 cents and accretion expense on the closure and post closure obligation is 40%. So a capping 50% post closure, 40 and then various other adjustments would be taxed.

Okay, thank you and finally, could you talk a little bit about the possible acquisition that you are seeing out there. Have you identified anything at this point or is your spending forecast just based on an idea of what you have in the market?

Well, we've already made a about a $200 million acquisition of the Pelch group. So that is counted in that total of $375. And we have some other deals that are teed up and it's not just, you know, a guess pretty far down the road in making acquisition and some good solid waste acquisitions as well as recycling.

Just to clarify, the $200 million Pelch is their revenue and we paid $58 million in cash on it.

Our next question comes from Carey Callaghan with Goldman Sachs.

Good morning. A couple of questions if I could. You know, you didn't say this Maury or Bill, but I'm assuming you haven't backed off from your cost-cutting goals ultimately and that the reclassification of 1% from SG&A to cost of goods would result in instead of 11% SG&A target a 10%, is that fair to say?

No, in fact, from the beginning with SG&A reduction, our discussion of getting 11%, we said that it probably take revenue increase. We're not counting on revenue increase anymore as a result of the economy. Instead, we're looking at cost reductions, but in this case, also looking at, you know, also looking at some reclassification. But it's going to be about a split between -- to get to where we want to go, to get the 11% range, it's a split between cost reductions and reclassifications. And that will take us through 2003. Past that, to get under 11%, we are looking to our revenue management program, taking out additional SG&A. And can we get under 10% or under 11%? Yeah, we can.

The -- you identified in your release about $50 million of savings for SG&A. But you also talked about getting to 12% to 12-1/2% SG&A and if you backed out the litigation charge you are at 13-1/2% for the first full year 2002. 100 basis points, if you took the top end of the 12.5 would be $111 million in savings. How do you reconcile that versus the $50 of annualized savings that you talked about specifically in the release?

Well, let's see if the accounting guys can do that for you. We probably -- they are shaking their head that they don't have the details for you. We'll work through that and come up with the numbers if you want to give Cherie a call.

Okay. Your EBITDA margin in the fourth quarter was down about 230 basis points sequentially. I know you walked through the ins and outs but it looked like you had more of an EBITDA margin decline sequentially than some of your competitors did. Is there any feeling that anything in the business drove that?

No, I don't think so.

Well, you know, we talked about some of those Wheelabrator adjustments that both increased revenue and increased costs the same amount, and those had a pretty significant impact and then there was also the $26 million litigation settlement. So you know, you factor those in and those were pretty big, Carey.

So you factor those things through and then if you ask -- if I understood your question, is there any business reasons why that should be the case, relative to the competition, no, I don't think so.

Okay. Thanks guys.

Our next question comes from Stuart Pezansky with Vanguard Group.

Yes, good morning. A quick question for you. On your debt levels going forward, you are down to about 8.25 billion or so. Would you expect your debt levels to continue to reduce in '03? What type of debt maturities do you have coming up and are you looking to refinance those with bank lines in the public markets.

Basically, there are two debt maturities we have coming up in the current year. First one is -- it's unlikely this will be put, one in August of $450 million a 7.1% note. It's very unlikely that that would be put. That would extent out for an additional 23 years. So that one is unlikely. At the end of the year in December, we've got another 6-3/8% issue. $435 million coming due and that one, we would probably be in the market to refinance and I think as I mentioned before, given the current level of spread, we would expect that we could probably do that transaction, you know, if it were done today in the range of probably 5.6% to 5.7%. So that would be a positive there. And then was there something else in the question? I'm sorry, does that cover it or or -- if we would use bank lines? The answer is no plan to do that whatsoever.

Okay, so when you look at your free cash flow and then the cap ex that you'll be having, obviously that comes before the free cash flow, but with the acquisitions and the share repurchases, you intend to finance all of the acquisitions in the share repurchases strictly from free cash flow not through additional borrowing?

That's the plan right now.

Okay, great, thanks.

We'll go next to Leone young with salmon Smith Barney.

Good morning, if I could take the flip side of Carey’s question. It was helpful to have the sequential break down on the gross margin line, could you venture a guess as to how much of that Wheelabrator stuff. Is that recurring in nature? How much of that could we see reversed?

That'll primarily recur at the same levels in 2003, Leone, however the portion that was in SG&A in 2002 is one of the kinds of costs we're re-classing for 2003. It'll be an operating cost. Same level but in operating costs.

And appreciating you don't have all of the FAS 143 breakdowns yet, any sense -- you mentioned both costs of goods sold as percentage in DNA could rise. Any sense on DNA at all?

We don't have that audited and split out yet. We'll have that detail for you obviously on the first quarter conference call since it's a 2003 issue anyway.

Great, thanks.

Thanks.

Our next question comes from Tom Ford with Lehman brothers.

Good morning, Tom.

Good morning guys, good morning, Cherie. Bill, in your comments, you highlighted out and thanks very much the cost associated with the service machine. $33 million total in '02, $7 million in the fourth quarter.

It was a combination of service machine and sales effectiveness.

What about the other initiatives?

Actually, we talked about most of the other ones as we went along, procurement, for example. I think we said we've got 40 staff working on that, that's the way it's going to be. That's just an ongoing cost.

The others didn't really have implementation costs so to speak, Tom, because any costs associated with them are kind of fixed costs at this point in time.

Even for like the maintenance?

The maintenance this past year, you mean?

Yeah.

Yeah, there is really not a lot of -- we've got staff here at the corporate office, but it's not extraordinary staff. It's just the staff that's normally would work on maintenance projects.

Okay. Okay. Then the other things, what is is -- what's the incremental increase in insurance costs in '03? Do you have a sense?

We'll that out for you, Tom.

On the health and welfare side, we've -- we expect it to be flat.

I know you guys had mentioned that the last quarter. I was just wondering on the -- on sort of the general liability element.

Yeah, actually, the premiums, the premiums there we expect to be pretty much exactly flat year to year in fact.

Okay. So basically, we don't expect much in the way of an insurance cost up tick in '03?

That's correct.

One other question, for the Pelch acquisition, I know it's early because we are probably in the implementation phase. Maury, you highlighted what your current capacity utilization levels were. Have the recycling guys talked about for the markets impacted by the Pelch operations, do you have a sense what happens to the capacity utilization in those specific markets? What I'm trying to get an understanding is, how much could the profitability once the recycle America alliance is fully implemented what that could impact the numbers by, setting aside commodity price, potential movement from higher share position?

Well, I guess we have all of that. Off the top of my head, I could give you some pieces of data that might help, Tom. For one, we're going to be over the next year, closing down five Merfs and consolidating them, so that's where the savings comes from. The other thing I think that maybe helps you to analyze this acquisition is that, if you look at the Pelch EBIT, it's not very high, but 75% of their business is brokering commodities. In other words, they don't touch these commodities, they just broker them, and so the -- while the margins may look low, there really is no cost of goods sold. And you know, with that, you're talking about -- you're talking about margins that are pretty strong. In fact, if you look at it on that basis, and not consider the purchase cost of those brokered commodities, you really get EBIT sales up around 20% for Pelch. So it's a good acquisition. There's good cash flow through that company. So hopefully that helps you. We can give you some more details on the consolidation and the improvement in utilization as we go forward. I think some of the others as we go forward will give us even more consolidation benefits.

Okay. And then just one last question, on the reclass, I'm just trying to get a better feel for exactly what that 1% is. I don't know if you can give us some examples of the type of people being re-classed or what have you. And then the other thing, I'm just curious, I thought that people soft had been implemented for quite a bit. So why it was that it was happening now.

The first part, the HR piece of it really was finished towards the last part of last year. The HR piece of it is what classifies our employees. And then once we get the system put in place, it's taking us time to just get people classified. Our HR people actually had to go out and do a study and get people classified and put the right categories. That took some time as well.

Maury, also on the reclass, a good piece of the reclass relates to other costs, property taxes, facility costs, consolidation, and so forth. So it's not just --

It's not just people.

A big, big piece of it Tom is that --

I think the one you might have been thinking of is that the facilities, the issue is with our reorganization, facilities that used to be used for back office functions and all of that had a lot of their costs classified at SG&A. Those facilities are operating depots, and the costs are more appropriate to be exclusively operating costs at this point in time, Tom. That's a pretty big chunk of the reclass in fact.

What I was looking at, I think probably over half of it actually comes out of facilities costs.

Okay, great. Thank you.

Thanks.

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

Good morning. Just -- one follow-up on Tom's question on insurance. You indicated it would be flattish in '03. Did you mention on cost changes was that one of the items on year to year where you may have gotten that number?

On insurance costs?

Yes.

I don't think we've mentioned that. The year -- you're talking about the year over year delta on insurance costs premiums?

Yes.

Lets see if we've got that. I think we've got it Tom -- or Bill, I'm sorry.

Bill you've got another question while you're looking for that? We'll go on and --

Actually, just -- Cherie, do you have the residential residential/commercial/industrial splits on revenue?

Oh, sure. I should have been prepared. You always ask that question.

We'll get those two questions for you. We'll take one more call, and then before we get off, we'll give you the answer. Okay, thanks.

Due to time constraints, we'll take our final question from Mark Farano with first analysis.

Good morning. When we think about the outlook for '03, we're hoping for positive price of 1% and volume to hold at negative 0.6%, relative to 2002, those would actually -- I mean, those would be fairly strong performances, relative to if you look at the four quarters of 2002 for those two metrics. Could you just give us a sense of what makes you feel that those will actually perform relatively well relative to recent history?

Well, I guess to begin with, on the price side, that is about what we've been experiencing. The volume that you're seeing is better than what we've been experiencing. And I think it's primarily because the comment that I made with respect to shedding unprofitable volume, I think we're through that. That's not to say that we don't have some unprofitable volume out there that we might still shed, but we went through a major effort of shedding unprofitable volume in New York, which was painful, because there was so many accounts, and they were all, you know, small commercial accounts. But in addition to that, we've had some big municipal contracts that finally came up for re-bid this last year, there'll the last two years, particularly in this last year, and we just bid them at prices where we could make some money, and we lost them. We don't see a lot of that happening again this next year. So we think we're kind of through that phase of shedding unprofitable business that was left for us when we showed up here.

Okay. Thanks a lot.

Thank you. And I guess a couple of the answers here for Bill.

For Bill Fisher, just a couple of quick updates there to your question. In terms of 2001 to 2002, first off, our casualty costs were up about $35 million in that period and health benefit costs were up about $6 in the same period. For 2003, we talked about this in the past. What we're anticipating is that the health benefit costs remain flat and while the costs we know do continue to escalate, as a result of our own headcount reductions the modifications we've made in the plan, and increased employee co-pays and so forth, we're managing to have no negative impact on the company's expense in 2003. And for casualty costs in 2003, we're projecting that total costs should go down $15 million with the premium portion remaining about flat.

And then on the split-out of the collection revenues in the quarter, residential was $614 million, commercial $734 million million, and industrial or roll offs $536 million, and other, $26 million. And Maury has closing comments?

Just thanks for joining us. We think we're geared up for some great progress in 2003. We're optimistic about our year. We can certainly get some help from the economy. We would be -- we would like that as well. But we are looking forward to a better 2003 and we'll talk to you on our next quarters' call. Thank you.

This does conclude Waste Management’s conference call. We thank you for your participation. You may disconnect your line at this time.