美國廢棄物管理公司 (WM) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin. Good morning everyone and welcome to today's Waste Management Inc. first quarter 2003 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, Ms. Cherie Rice. Please go ahead.

Thank you Jamie (ph) . First of all, for any folks who are listening to us via the web cast and were trying to get in through the dial in phone number, and weren't able to get in, you can try an alternate number if you wanted to get on to ask questions.

That number is 800-289-0518. And thank everybody for joining us this morning. With me today are Maury Myers, our Chairman, President and CEO of Waste Management; and David Steiner, the Executive Vice President and Chief Financial Officer. Maury will start things off with a review of business trends and the weather impacts in the quarter, followed by an update on the progress of our cost savings program.

Then David 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 1:00 p.m. Central time today until 5:00 p.m. on May 13. 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 718-457-0820 and enter reservation code 454873. 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 meaning of section 27A of the Securities Act of 1933 and Section 21E 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 10K for the year ended December 31, 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. Time sensitive information given during the course of today's call, which is occurring on April 29, 2003, may no longer be accurate at the time of the replay.

Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's Chief Executive, Maury Myers.

Thanks Cherie, and welcome from Houston to all of our listeners. As noted in the press release this morning, and likely not a surprise to anyone especially those of you who live in the Northeast, the major winter storms that occurred during the first quarter cost us about two cents a share in earnings.

Providing service to our customers at the time of the storms and then handling the much higher than normal volumes of waste weeks later, when some of the waste finally made its way through the system, cost us in terms of overtime and other excess expenses. And, in fact, you'll see in our segment reporting in the 10Q for those parts of the country hardest hit by the weather, mainly the East and the Midwest, are the only groups whose margins really suffered.

The Western groups operating margin is actually up and the Southern groups is basically flat year over year. The rising fuel prices cost us another penny per share in the quarter. With the war in Iraq, fuel prices were rising during the course of the quarter. As a reminder, our fuel surcharge billing program has covered about sixty percent of the fuel increase for each of the past two years. But because there is a lag in the surcharge vs. the actual fuel prices we don't cover the cost increases immediately.

With the cost of fuel now stable and even beginning to modestly drop in some markets, we'd expect the impact to be less in the second quarter. In fact, if the price at the pumps drops significantly enough during the course of this quarter, there may be very little negative year over year impact. Adjusting for these two operational issues and taking into account the restructuring charge and the expense relating to the change in the inflation rate used for our estimate of remediation liabilities, the first quarter results were in line with what we had anticipated and the Street had initially projected for the quarter. As a reminded, the seasonality impact of reduced waste production in the colder climates that we serve generally results in first quarter having the lowest revenues and the lowest normalized margins for the year.

Improving waste trends during the second quarter are beneficial to both the top line and the margins.

Let me review volume trends during the course of the quarter and through the first few weeks of April, starting with volumes deposited into our landfills. On a same store basis, January landfill volumes were off modestly, down seven tenths of one percent on a per day basis vs. January 2002. The early part of January actually showed increased weekly volumes, but by mid-month, the volumes had declined on a year over year basis.

February, the month we were hardest hit by winter storms was a completely different story. Same store average daily tons were off by 5.7 percent for the full month, with the worst weeks total volumes off 8.9 percent, then beginning with the second full week of March we started to see improvements vs. the prior year at our same store average daily volume for the full month were higher than last year by 4.4 percent, making up for most of February's lost ground. On the whole, the first three weeks of April have looked pretty good. We've had some further -- but we have had some further weak weather events to deal with in certain markets.

Looking at roll-off bowls (ph) , we see similar trends. What most of you really want to know is whether or not we see indications of an improving economy and volumes. While the late March, early April volumes both at our landfills and at our roll-off business are encouraging, we don't have evidence to say the improved volumes are the result of improved economic activity. In fact, we certainly believe that some portion, if not all, of the year over year improvements these past weeks are simply a result of this year's weather patterns as compared to last year's.

The seasonal volume increases tend to have similar slopes from year to year, but the point in time where the volume pickup begins can move by a few weeks from year to year. Right now we'd say that we're seeing normal seasonal improvements in our volumes. Until we get through June or July, when seasonality is peak, we think it's unlikely that we'll be able to come to any firm conclusions regarding the economic impacts from our volumes.

Meanwhile, as we stated for a number of months now, we'll continue to run our business with the expectation it will not see any economy related improvements whatsoever. As reported in our earnings release, revenue growth excluding acquisitions, commodities, and fuel surcharge came more from volume, a half of one percent, than it did from price, three tenths of one percent in the quarter. The volume increase was favorably impacted by a mix change to a higher yield in tons.

In terms of impact related to the weather, we have estimated that revenues were reduced by 30 million dollars in the quarter, but 30 million dollars translates to 1.2 percent of internal revenue growth.

As noted in the press release, we have estimated 20 million of the pretax income shortfall related to weather. Seven million of that is estimated to be from increased cost, and the remaining 13 million is a result of the 30 million of revenues that did not materialize. Recycling commodity prices improved during the quarter, although volumes were off similarly, affected by weather.

Based on the OBM Yellow Sheet, cardboard prices started the year at an average of $50 to $55 per ton. In March, the average market price was about $67 a ton, and in April, the price moved up slightly to over $70 per ton. The driving factors for this price increase were the lower domestic supply related to bad weather that we had in Northeast and increased demand out of Asia. In recent weeks, however, there's been a cost increase on ocean freight for shipments to Asia.

Newspaper prices have been less robust, although we've seen rate eight (ph) prices rise by about $5 a ton from a range of around $65 to a range around $70. It's our expectation that the price of newspaper will hold fairly steady, while cardboard may see a modest drop.

Let me just point - or let me just note that the prices for cardboard and newspaper that I've mentioned here are all per the Yellow Sheet. As the largest recycler of these commodities in the U.S., Waste Management generally receives a premium to Yellow Sheet pricing, and in the past few months, we have significantly increased our premium on bulk rates.

Let me now turn to our various programs and initiatives, beginning with our route optimization program. As discussed in our year-end conference call, we believe this is the most important cost-saving opportunity for 2003 and 2004. We have developed proprietary software programs to assist us at optimizing our residential and commercial routes. With a combined total of 15,000 of these types of routes, a goal of reducing the routes by 10 percent or 1,500 we see great opportunity for cost reductions.

Each route costs us approximately $120,000 a year to operate including driver wages and benefits, truck maintenance costs, and fuel. If we can take out all 1,500 routes that we've set as a goal, this would result in $180 million of annual expense savings.

For calendar year 2003, our goal is to obtain 40 million of cost reductions with a program implementation cost of 10 million or net 2003 savings of 30 million. Through April 18, we've optimized 277 commercial routes, resulting in a net reduction of 33 routes or 12 percent. This puts us on track with our expectations, and we expect to see the number of routes reviewed and reduced increase substantially in each of the coming two quarters.

As I said before, I will continue to remain personally involved in making sure that we follow through with our optimization program.

Market business strategy and procurement - two initiatives that we kicked off a couple of years ago and are now part of the way we run the day-to-day business - continue to benefit us. Combined, we estimate these programs benefited our operating margin by 17 million in the quarter.

Responsibility for the market business strategy efforts has been integrated into the market areas in groups with only minimal oversight from headquarters. Procurement is largely a centralized function with some of the department members actually stationed in the field. We still expect that market business strategy and procurement combined will improve our EBIT by close to $100 million this year.

The one-month review of our operations being performed by McKinsey is about complete. They have concluded that our primary opportunity is not in new initiatives, but rather in the acceleration of the capture of savings in our existing programs. They found wide variability in the rate of success of our initiatives among our many operating units.

In particular, their work will focus or refocus the company on additional savings in SG&A, a look at spans of management and operations, a reduction in the cost of our IT projects, getting more from our procurement program and a reemphasis on cost savings and productivity improvements in our maintenance operations.

Detailed plans to capture these identified savings and improvements are in the process of preparation by Waste Management employees. We continue to reduce our workforce and rationalize operations even beyond a reduction announced in February. For example, in our recycling operations we've reduced a total of 130 workers, about 65 employees and 65 contract workers, at the beginning of the second quarter.

And we're in the process of closing five plants. We continue to look for operating efficiencies and are committed to this process of improving margins. The lowest seasonal volumes and winter storms really mask our progress in the first quarter results, but I expect progress to be more evident in the second quarter.

I'd also like to point out that we did purchase $71 million of stock as part of our stock buy back program during the course of the quarter. There had been some speculation that we'd not be able to repurchase any shares during the first half of the year, but that's not been the case.

We do expect the majority of our repurchases for the year will be in our second half, consistent with our projections for free cash flow and timing of the payment of our shareholder class action settlement. Finally, last night we issued a joint news release with Allied announcing that we've agreed to purchase certain assets from them in the states of New Jersey, North Carolina, South Carolina, Georgia, Oklahoma and Colorado.

The acquired operations represent about 125 million in annual revenues and they tuck in very well with our existing operations. We'll be able to eliminate a number of routes by combining the operations and we'll additionally have the opportunity to internalize much of the waste. We look at this transaction as very much in line with our 2003 acquisition plans and look forward to closing the deal.

And now I'll turn the call over to our recently appointed CFO, David Steiner, who will review further details of the financial statements with you.

Thanks Maury. I'll start out this morning with a year over year comparative review of the quarter's financial statements beginning with revenue.

North American solid waste revenues of $2.716b are higher than first quarter revenues by $115 million. The single largest driver of this increase was acquisition, accounting for $66 million of the change but offset somewhat by a $12 million decrease related to divestitures, or a net change of $54 million from acquisitions and divestitures combined.

The Recycle America Alliance acquisition of the Pelts Group in January comprises $47 million of the acquired revenues in the quarter. Commodity prices added $22 million to revenues in the quarter principally through higher prices for cardboard and newspaper. The effect of combined price and volume, added $21 million to revenue.

Fuel surcharges were up by $14 million versus the prior year quarter and the remaining $4 million increased revenues is largely related to foreign currency translation from our Canadian operation. Operating expenses in the quarter were $1.793b or $228 million higher than the prior year.

This reflects the 600 basis point increase. So let me review with you the items reflected in here. About $55 million in increased costs are related to the acquisitions we've made. As you may know, about 75 percent of the Pelts revenues are from fiber brokerage activity whereby we purchase fiber from other company's and then market them to the mills along with our own volume.

The accounting on this is that we book all of the sales proceeds as revenue and we book the price we paid to our customers for the commodities as cost of goods sold, which is included in the operating cost line. So the margins on this portion of the business are very slim, and the impact to our cost of operations from the addition of the felt (ph) operations as a percent of revenues is about 60 basis points in the quarter. Obviously, although the GAAP margins are slim, this business has good cash flow with basically no capital requirement.

Approximately 50 million dollars of costs have been reclassified from SG&A vs. last year's classification, principally facility and employee costs. This reclassification increased our cost of operation as a percent of revenue by about 190 basis points in the quarter.

Fuel costs were up 26 million dollars, vs. the first quarter of last year. As noted previously, our fuel surcharge in the revenue line was up 14 million dollars, so the overall impact on the quarter was only 12 million dollars. However, the negative margin impact from this 26 million dollar cost increase is another 70 basis points.

Landfill closure, post (ph) closure and landfill site costs were up a combined 19 million versus last year, or about 75 basis points in margin. Part of this increase, six million dollars, is the increased accretion expense for the period resulting from the implementation of FAS 143. 7 million dollars of the remaining cost increase is the impact from the inflation rate change on the mediation costs, and this change in rate came about as the result of FAS 143 implementation. This 7 million dollar cost increase is anticipated to be in the first quarter of this year only and we would only be required to book an additional cost increase or decrease at this time if the inflation rate changes again.

Moving on, wage increases are estimated to have increased our labor costs by 17 million dollars vs. the quarter a year ago, resulting in a 65 basis point margin impact. As a result of the reduction in force in February, wage increases are expected to be largely offset in future quarters. Rebates to our recycling customers related to the increased commodity prices cost us an estimated 14 million dollars in the quarter, with a discernible impact on the profit margin. Disposal fees and taxes have increased 14 million dollars, about half of which is related to the Pennsylvania 4 dollar per ton fee implemented last July. These impact margins by about 25 basis points.

Maintenance costs, primarily attributable to the timing and scope of maintenance projects at certain of our waste energy facilities were up 11 million dollars another margin impact of 40 basis points. Disposal costs are up 11 million dollars, or another 40 basis points.

Subcontractor costs, primarily related to national counts (ph) activity, are up 8 million dollars, or about 10 basis points.

In summary, about 112 million dollars of the cost increases are related to the reclass out of SG&A, acquisitions and one-time accounting changes. 60 million dollars of the increase relates to volumes: disposal costs, subcontractor costs, landfill costs, and fees and taxes.

43 million dollars of the costs are non-controllable: fuel and wages, and 11 million dollars relate to maintenance expenses, which we had budgeted to be higher in the first quarter, due to Wheelabrator's planned outages.

SG&A costs are down to 323 million dollars, or 64 million dollars less than first quarter 2002. This is largely driven by the 50 million dollar reclass to cost of operations that I mentioned previously. The remainder is primarily related to the workforce reductions that occurred in early March 2002, and mid February 2003.

Although this shows significant progress, we will continue to focus on SG&A costs as we continue through the year, and full expect to reach our goal of 11 to 11.5 percent of revenue by year end.

Depreciation was 302 million dollars, or 11.1 percent of revenue, as compared to $294 million or 11.3 percent of revenue in the year-ago period.

The restructuring charge of $20 million in the quarter represent the majority of the $23 million we projected when we announced the workforce reduction. We do not - we do expect to record small amounts of additional cost related to this workforce reduction in the coming quarter.

Interest expense in the quarter was $109 million, down $9 million from prior year. Approximately 33 percent of our debt is effectively a floating rate primarily via interest rate swap agreements, and thus the lower rate environment has had a positive impact here.

The one other income statement line I would point out is the cumulative effects of changes in accounting principles line which was an expense of $46 million in the quarter. There are three separate accounting changes reflected within this item.

The largest item is a result of the implementation of FAS 143, which was a charge of $101 million net of taxes or 17 cents per diluted share. This cumulative change effect and the 2003 current year impact, which we now estimate at about six cents per diluted share, are both smaller than we had previously estimated. Our previous estimates were based on the best information available at that time, but since then we've completed, reviewed, and refined our analysis, resulting in the smaller impact.

Next is the change in how we account for lost contracts. We've changed from our policy of reserving for estimated future losses and utilizing the reserve as those losses are incurred through the life of the contract to our new policy whereby we allow these losses to flow through to income as incurred. This change resulted in a benefit of $30 million net of taxes or five cents per diluted share.

And finally, we've changed how we treat major repairs, maintenance expenditures, and deferred costs associated with annual plant outages at our waste-to-energy facilities and independent power production plants. In the past, we accrued in advance for major repairs and maintenance costs and deferred annual outages costs over the subsequent 12-month period benefited. This change resulted in a benefit of $25 million net of taxes or four cents per diluted share.

I should note that the accounting changes for lost contracts and major repairs are a matter of preferability. During the course of 2002, which was the first year [Inaudible] auditor, we jointly reviewed all of our accounting methods and in these two cases, we came to the conclusion that these new methods are preferable to our old methods and will better reflect period-to-period changes.

Let me make one further comment regarding the Wheelabrator repair and maintenance expenses. We plan much of these repair and maintenance projects for the first quarter of each year as that is the slowest time of year for volumes. As compared to their total repair and maintenance expenses booked in the first quarter this year, we expect the second quarter's total costs to be about $10 million to $15 million lower and the third and fourth quarters to each be roughly $20 million lower than the first quarter.

I know that many of you are also interested in understanding cost changes sequentially. Operating costs are up $50 million versus the fourth quarter. These are a bit more difficult to look at this quarter due to the significant seasonality and weather impacts, but here are some specific items.

Cost of goods sold were up $40 million - again, largely related to the acquired pelts brokerage (ph) volumes. On a sequential basis, the cost reclassified from SG&A to cost of operations were $32 million. The reason this is substantially lower than year-over-year is that some of the costs are reclassified over the course of the second, third, and fourth quarters of last year.

Salaries and wages were down $19 million in the fourth quarter due in large part to two less workdays in the first quarter and due in part to the reclass (ph) and the reduction in force. Disposal costs were down $17 million. Subcontractor costs were down $16 million. Landfill site costs were up $13 million, $7 million of which relates to a change in inflation rate and moved on our remediation liabilities. The remainder was related to a number of other increased costs, including increased leach eight management costs resulting from the higher levels of precipitation in the quarter.

Maintenance and repairs were up $12 million at all real (ph) rate (ph) . Payroll tax expense was up $11 million due to withholding taxes coming back in for all employees with the new year. SG&A costs were down $84 million sequentially. The significant drivers to this decrease were the $32 million of expense declassification to cost of operations, the $26 million litigation settlement that occurred in the fourth quarter, approximately $8 million in lower wages resulting from fewer work days and the workforce reduction, absent of the $7 million Wheelabrator pass through cost that we had in the fourth quarter and other various cost decreases, including bad debt, consulting and legal expenses.

Now lets move on a review of cash flow. Net cash provided by operating activities was $429 million in the quarter. I will point out that this is very similar to the $436 million in the first quarter last year. So, although certain accounting issues such as the FAS 143 implementation and the change in the inflation rate on remediation projects, have impacted earnings. They have no impact on our cash flow.

Capital expenditures were $212 million and proceeds from sales of assets were $16 million. Combining these sources and uses of cash, which is our definition of free cash flow, results in $233 million of free cash flow for the quarter. As Maury mentioned, we spent $71 million during the quarter on current year share repurchases.

Twenty-three million dollars of this amount represented shares repurchased in open market transactions with share prices ranging from $19.72 to $20.77. And the remaining $48 million was in an accelerated purchase programs with a nominal price of $20 per share. Cash on hand at the end of the quarter, was $381 million, an unused and available bank line for $830 million.

The company's debt levels and debt to total capital ratio were virtually unchanged from year-end. While on the topic of cash flow, let me just also remind you that two working capital issues will impact our cash flow in the second quarter. First of all, due to the timing of payment schedules on a bond issuance, cash interest payments are much higher in the second and fourth quarters than in the first and third quarters by about $85 million in each quarter.

The other issue, is the seasonal rise in our sales per day, which results in increased receivables and a use of working capital. For example, if sales per day in the latter part of the second quarter are $2 million higher than they are in the latter part of the first quarter, and we have 45 days of receivables, this will result in a use of working capital of $90 million.

I would also like to highlight the fact here that since our last earnings conference call we received an upgrade from Moody's to AAA3. We're pleased to see this acknowledgement from Moody's as a testament to the continuing turnaround at Waste Management and our commitment to maintaining a strong financial condition.

Finally, to update you on our search for a person to lead our newly reconstituted profit and budget analysis department, we have retained a search fund and has begun to interview candidates. We expect that we will begin to see the top candidates within the next two to three weeks. Obviously, filling that role is important to me and to the company but we've not let the search slow down our progress in evaluating our cost structure.

And with that, Operator, we can open the lines for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time you may do so by pressing the star key followed by the digit one on your touchtone telephone. Again, that was star one. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

If you find that your question has been asked and or answered, you may remove yourself by pressing the pound key. Again, star one to ask a question, pound to remove yourself. We'll take our first question from Alan Pavese with Credit Suisse First Boston.

Hi guys. Just a couple of questions. First, on the volumes. Maury (ph) , you were saying that you didn't think the volume growth was related to the economy. I was just wondering if you think, then, that that's -- I think, as you alluded to, just due to the easy comp from a year ago, or if you think you've gained some market share during the quarter.

Yeah, actually the volume increases are not very large, Alan, as you can see. And I think you're right; I think the easy comps from last year, when we really hit a trough in terms of volumes, is the primary reason.

OK. In the financial overview, I think the one thing in the sequential analysis that wasn't touched on -- maybe I just missed it -- but was fuel. Can you talk about the difference in fuel costs were in the first quarter versus the fourth quarter?

Yeah, we can get you that number, Alan. We did not talk about fuel sequentially, but we'll get you that number and answer it as we go along.

OK. And on the class action, is there any update? Has there been any response from the courts as to, you know, the outlook and the timing of that?

There has not been. As most of you know, we filed for an expedited appeal of that. We will know if we got that expedited appeal, we believe, by early June. So, in early June we'll get some clarity as to when we're gonna pay that.

OK. Now, one other last piece of financial data. On the debt, could you tell us what the outstanding IRB debt level was at the end of the quarter, and what, I guess, the change was from last quarter? One or the other.

Do you have that number, Cherie?

I have the fuel number.

OK.

We'll dig that one up, too, Alan. [Inaudible] as we go along here.

Alright. Thank you.

The fuel number was -- it was up nine million dollars, sequentially.

OK. Thanks.

Here comes Mr. IRB.

David Steiner On the IRB, it's about $540 million.

Great. Thank you.

We'll take our next question from Amanda Tepper with JP Morgan.

Hi. Good morning.

Good morning, Amanda.

A couple of questions. You commented that you had a mix change to higher-yielding tons that helped a little bit on the volume side. Could you give a little more elaboration on that?

I think that's basically it. We simply -- the way we calculate this, when you do have a mix change, results in exactly that.

What kind of mix change, is what I'm asking.

I can give an example that illustrates it pretty well. Primarily where we saw this was within special and hazardous waste. So, for example, Amanda, if, you know, we had 1,000 more tons at a site -- like a hazardous waste site, where you might be getting $50 a ton -- that would be $50,000 in revenue from volume.

Got it. OK.

Whereas, we might have lost MSW's volumes of 1,000 tons where you're only getting $20 a ton.

OK, OK. That's helpful.

It's that kind of mix change that we saw.

Got it. OK. Thank you.

The western region, you said, margins are actually up, and that's probably away from the noise of weather that impacted your other regions. Do you read this as some early indications of getting some real traction on your various margin expansion programs? And, you know, is there anything specific going on otherwise in the west?

Yeah, I guess I do read it that way. And one of the reasons is the west has done the best job, I think, of all of the regions, in adopting the various productivity and improvement initiatives that we've had in place. In fact, we've used Phoenix as kind of our model area for all of the initiatives that we've put in place.

So, yeah, we feel good about what's happened in the west, and we think it is reflective of the hard work we've put into productivity improvements.

OK. And then, when you talked about getting more margin progress next quarter, is that implying that you think you might have margins actually up on a year-over-year basis versus last year?

I guess I'm not going to stick my neck and say that. I - what we're talking about specifically I think is getting off the - off of these first-quarter margins that we've been talking about here.

OK. And then I guess last on the - this process in budget, I guess not surprising but interesting to hear that you're finding for your initial pass-through that you need to not do anything new but just go back and get more traction like you're already getting in Phoenix.

Yes.

So, how are you going to give this mandate to this - to the new person in the new department outside? Is it just going to be a lot of going out in the field and circling back?

Yes, basically what it is is pulling together data on 1,200 operating units and figuring out which ones haven't really picked up the ball here and achieved the kind of results that they should have achieved. In some cases, there's reasons for it because of differences in operating environment. But we want to ferret out the ones that need some remedial training and make sure we get the savings out of those and we can do that now with the data we have. And so that data can now be compiled over the next few weeks.

OK, great. Thank you.

Thanks.

We'll take our next question from Michael Hoffman with FBR.

Good morning.

[Inaudible] , Michael.

Can you talk a little bit more about cash flow? Do you have the cash interest, cash taxes, and cash for closure and post-closure for the first quarter?

Cash interest is $83 million. Cash taxes is $22 million. On the closure/post-closure, we'll have to get that number for you.

OK. And then what's your sense of what you think full-year interest expense will be?

We've got full-year interest expense right now estimated at about $500 million.

OK. So clearly, it's - there used to be a pattern where it was - you were accruing it a little more smoothly through the course of the year. So is this now going to sort of track more of the cycle of payments as opposed to being smoothly accrued?

That's correct.

Well, the accrual or the - you know, what hits the income statement is still pretty smooth, but ...

Right.

... but the cash as it goes out is, you know, lumpy.

Yes, but I mean 109 (ph) times four is 436 million, so we clearly got to make up 30 - 60 million over the next three quarters.

Well, there's a - there is a fairly significant difference between cash interest and book interest, and that has to do with the swaps that we entered into last year and a number of those swaps were closed out and we're now amortizing those.

OK. Well, just so I make sure I didn't misunderstand something, the 500 million I'm asking about is what will show up in the income statement.

No, that's [Inaudible] cash interest.

No, that's cash interest.

Cash interest - what do you expect on the - on the income statement full year? What gets booked through the income statement?

We can get you that number.

OK. And then, any change in your free cash flow targets for - from the fourth quarter call?

For the year?

Yes.

No.

Very good. And so, that means the six to - hundred to a billion dollars worth of share repurchase is still on track as well?

Right.

Very good. Thank you very much.

Thanks, Michael.

We'll take our next question from Lorraine Maikis with Merrill Lynch. Ms. Maikis, your line is open. Again, Ms. Maikis, your line is open. Could you please take your hand - pick your handset up or check your mute button?

We lost her. Why don't we let her call back in?

And while we're waiting, operator, just to answer that last question, our full-year interest expense is about $445 million.

We'll take our next question from Leone Yong with Smith Barney.

Good morning. I realize you'll get some more clarity on the law suit in June, but given the fact that it looks like this payment continues to get moved up, has that influenced where you might be in the 600 to $1 billion in share repurchase?

Well, we'll revisit that in June, frankly. You know, we've got an open window coming up here. We don't expect to have a dramatic impact during that, but we may do an accelerated program in early June if it looks like we won't pay that settlement this year.

Hey great. And, I'm sorry, I wasn't sure I heard it correctly. Could you give me the basis points attached to the reclassification again?

Sure. It's ...

One hundred and ninety ...

... ninety-five, I believe, basis points. You're talking about year to year?

Yes. That's where we gave that.

I believe the 195 basis points.

One hundred and ninety.

One hundred and ninety.

Yes.

And isn't that quite a bit more than you originally anticipated?

It is. What we originally anticipated was about 100 basis points, but from an SGA reduction point of view we still target that in addition to that we'll get the extra $100 million of savings that we talked about in the first quarter.

The other thing I would point out, Leone, is, you know, the sequential was quite a bit less and the other quarters wont be as high at 190. I think, you know, full year it's probably more like 150 or less for the full year. Maybe 130 basis points even.

OK. Great.

We'll go back to Lorraine Maikis, with Merrill Lynch.

Thank you. Can you hear me now?

We can hear you Lorraine.

OK. Great. Could you break out the effects on volumes of the wheeler braider (ph) accounting change that you made in last year's second quarter?

We'll look and see if we can get that for you.

Not off the top of our head we can't. We'll see if we can for you.

OK. And then just looking at the seasonal up tick that you've been seeing, have you seen a specifically high level in areas where you have the bad weather. I mean, do you think that some of this is pent up demand from the winter storms? Or is this all purely seasonal pickup?

Well, it is difficult to sort through that, especially in the first couple of weeks of April. But, you know, generally what we've conclude now after four weeks is that we are seeing normal seasonal pickup. So - and, you know, we've got to get the last week in here to come to probably a better conclusion.

But we think it's a normal seasonal pickup.

OK. And then I know over the past couple of years you've purposely lost or culled a lot of volumes and lost some contracts. Do you guys look at this, you know, maybe a gross number before you take into account those lost contracts of your actual volumes?

I'm not sure I understand exactly what you're getting at.

Ask that once more?

Restate that, would you?

OK. Without the purposely lost volumes ...

Right.

Maybe a volume increase?

Yes. You mean, restate the volume increase without that?

Or just give us an idea.

Yes. I guess we haven't done that. I'm not - I guess we really can't do that for you.

OK. Thanks.

Great. Thanks.

We'll take our next question from Kevin Monroe with Thomas Weisel Partners.

Good morning.

Morning Kevin.

How are you? I was wondering if you could - I know you mentioned not enough to harp on the volumes here, but you mentioned that part of the volume gain was from your hazardous waste business this quarter? What was it without it?

You know, are you seeing - because volumes looked pretty impressive this quarter, and I was wondering how much is from hazardous waste and how much is from ...

I don't have that separately. You know, just like last year, we didn't try to say how much better our volumes would have been if we hadn't lost hazardous waste volumes last year.

OK.

We just haven't calculated it that way, Kevin.

OK. Also, on your gross margin expectations going forward, I know there were a lot of kind of one-time items in this quarter that are kind of clouding the picture. But what do you think gross margins shake out to be for the remainder of the year?

Well, you know, we're -- you're asking us, I guess, to forecast to you something other than what we've already put out. I guess we just stick with the guidance that we've put out previously.

OK. And how about your pricing initiatives? Have you seen Allied, you know, with their efforts to raise pricing -- how's the overall pricing environment?

Overall, I guess at this point we still would say that we haven't seen the Allied initiative. But as we understand it, it was not really to role out until May 1. So, we are anxiously waiting some market activity that we would view as certainly favorable.

What we can tell you is that as far as new business is concerned, we see the competition still very aggressively going after new business.

OK.

And, in fact, you know, in the first quarter, our price improvement is not -- hasn't been as robust as it has been in other quarters. And I think that's a result of some pretty competitive price activity.

OK. And last question. Are you guys disclosing what EBITDA was on the assets you're acquiring from Allied?

No. I'll tell you where we are with that is those assets are still under review by the Justice Department. There still could be a swizzle of the assets. So, at this point we're not ready to do that.

OK. Thank you.

Thanks.

We'll take our next question from Mark Farano with First Analysis.

Good morning.

Good morning.

Just clarifying on the volume, you know, was it -- could you say -- could you give us a sense where, in fact, hazardous and special waste -- the primary drivers? And I ask that in the context of -- you know, it looks like your landfill volumes were essentially down kind of nominally, year-over-year. And then, do you think it would be a reasonable expectation to expect another positive volume number in Q2?

Well, I guess, two things: one is, we feel we've sort of anniversaried the downturn of last year, and volumes should be easier to compare year-over-year as we go forward. And we'd expect that to be the case in the second quarter, as well.

And then, the other thing I'd tell you is that we have two large special waste jobs -- one in the west and one in Florida -- that are impacting our volumes. And those look like they're gonna continue for a while. So, you know, that should continue to have some positive impact on our volumes in the second quarter.

OK.

And as you all know, our hazardous landfills are primarily in the west and the south. So, that, also, ties into the margin impact in the first quarter.

OK. And then, in terms of price, and just given the commentary just a moment ago, do you still think a one-percent positive price is achievable for the year?

Well, it remains to be seen. I think we are - were certainly encouraged by the public pronouncements of our largest competitor with respect to their intentions in the marketplace and as a result, we certainly think that the one percent is achievable.

OK, and then just a last question - in terms of Allied and your acquisitions in general, I think you had kind of budgeted maybe up to 375 million for acquisitions this year. You did your 83 in the quarter or 73. It may be a two-part question - one, should we think of the current deal with Allied as kind of you've looked at what they have for sale and this is what you want to buy from them or is there the potential for more transactions? And then second, is there any chance that you'll end up exceeding your 375 million for acquisitions this year?

To begin with, no, this isn't - this isn't the end. There are some other assets that we - we're certainly interested in and we'll hopefully be talking to them about additional acquisitions.

I - you know, at this point I'd say there's a possibility that we could go past our 375, but they'll have to be good assets because we'll be bouncing them off the other uses of our - of our cash including stock buyback.

Right.

And there's - that possibility exists. As you point out, we've bought at this point 156 million of our 375, so we still have - still have cash to spend on acquisitions and still do our capital plan and our stock buyback.

OK. Thanks very much.

Thanks.

We'll take our next question from Brad Coltman with Deutsche Bank.

Yes, good morning - thank you.

Morning, Brad.

Just want to follow up on a couple other questions - first, maybe with just regard to pricing, what is your current pricing strategy? And then [Inaudible] context - one, you know, where are you at with rolling out the customer profitability systems that fully implemented throughout the company? And then, two, with regard to the volume trends - the monthly trends that you've described, were there any price concession in the month of March?

To answer your first question, yes, we rolled out the profitability system through the company. We're actually in the second generation of that profitability system and we continue to use that to increase prices on a customer by customer basis based on profitability, you know, reviewing those - reviewing those customers. And I'm not sure I really understand - understood the second part of your question. Why don't you ...

[Inaudible] so is most of the pricing focusing on your unprofitable customer base still? Are you doing any kind of ...

Yes.

... proactive pricing for the markets?

No, absolutely not. It's - you know, we got through that full review of the company looking at unprofitable business and we now are looking at the entire customer list and increasing prices across the board.

OK. The second part of my question was just looking at the monthly volume trends from January, February, March with the pickup in March I know you mentioned probably that most of that's seasonal, but I was just curious what your - what your pricing looked like in those month periods - if you had done any concessions in March to kind of regain some of that volume.

No, we certainly have not purposefully backed off on price to gain - to gain volume. The first quarter, because of all the weather impacts, is very difficult to analyze and to come to any real conclusions about. But there's no - on our part there is no change in our pricing policy.

OK. Thanks. Then just one other question, with the timing of share repurchases with the litigations done, obviously you'll have better visibility in June, but looks like it will probably happen more like in the third quarter or fourth. And you had previously said your share repurchase would be second half of the year weighted.

Is it safe to assume that second quarter repurchase would be about the same level as first quarter?

I think that's generally correct. Until we get that visibility in June, we won't make any decision until then.

But that also then kind of suggest that you're share repurchase could be more loaded into the fourth quarter like last year?

They could be, but we could also do an accelerated program in early June if we feel like we're not going to pay that settlement until next year.

OK. And just final question, can you provide what the Western margins were and what the change was year over year?

We'll be filing the Q either later today or tomorrow and you'll be able to see that information in the Q.

OK. I'll wait then. Thank you.

Thanks.

We'll take our next question from Bill Fisher with Raymond James.

Good morning.

Morning Bill.

Yes. Just a question on your transfer station revenues were up, I think, seven percent in the quarter and it's like an acceleration over the last four or five quarter, you know, with landfill revenues being relatively flattish. I assume that's hurting you on the margin side.

Do you see anything that kind of makes that trend moderate or reverse as you go into Q2 and three?

As you know, Bill, last year both in Pennsylvania and Southern California, there was some situations where we had to start moving waste from one site to another site. And that primarily occurred during the second and third quarters, I believe, last year.

So, you know, we ought to start seeing that, you know, moderate anyway. But, you know, I also think that's just a trend that will continue in this business as, you know, the regional land fills become more and more prominent and the closer in land fills, you know, eventually go away. That's just the trend that's been going on for a number of years now.

OK. And just real quick, you mentioned the route optimization cost and benefits of the year, was it - in Q1 was it more of a drag, you know, with the front end cost being front end loaded and then you get the benefit more later in the year?

Yes.

OK.

Absolutely.

OK. Great. Thanks.

Thanks.

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

Good morning. Thanks.

Hi Tom.

Maury, just one question here. I don't mean to be facetious about this, and Dave you had talked about this, was with respect to the consultant report and basically the report, I guess, in short saying, you know, just do better what you've kind of already done. A little confused. I would think that the local market reviews and district reviews are kind of already being handled by field management.

I would think. And so I'm just kind of curious about, you know, saying that it's going to be more like the profit analysis folks that are going to be kind of targeting people in terms of that need improvement. I was just wondering if you could kind of talk to that?

I guess I'm not sure exactly what you're getting at but I'll explain the process. We had used Mackenzie (ph) in designing many of these initiatives that we put together. So as we saw, it was an opportunity to go back and, you know, just refocus on each of these initiatives that we implement them as initially designed.

And were there features of these various initiatives that we should have, you know, we should have done better? And are there ways now to go back and sharpen our pencil with respect to each of these initiatives?

And then, and so out of that comes just a healthy review of what we did after the fact. And then in addition to that, though, they did some good study on - in each individual operating unit for each individual initiative how they had done relative to the rest of the group. So, you know, then the outliers fall out and then you go back and analyze those.

So yes, you know, you get some of this information from your usual monthly reviews of operations. But this was a more intense look and I think gives us a better roadmap if you get after sharpening our pencil.

OK. So, I mean, I'm not wrong in assuming, right, that I mean the field management folks are still going to be responsible for doing the lions share of reviewing folks. And, you know, where there's a kick in the as needed, they're still going to be responsible for that?

Yes. Absolutely. And what comes out of this though, now, I think, is some analysis that we give them and say, hey look, these are the bottom quartile performers as far as this particular initiative is concerned. Why?

And so it just puts more focus on the, you know, on the whole process.

OK.

Yes, and the guys in the field will be the ones that watch over it. Although, you know, this is one more set of metrics that we have to monitor performance.

Right. OK. Now you might have talked to this already, because - I apologize. I know Cherie had - I remember her comment making comments about it. But, I mean, if we look at the G&A line we're at, what, something around 11.9 percent or so for revenue for one Q with a seasonally weak period?

So, just kind of curious. Your comments are still sticking to the 11 to 11.5 range for the year. Is there something that I'm missing or are you just trying to be conservative? Because I would assume that given what you've done here, and the fact that you haven't necessarily realized the headcount reduction benefit, that we should be thinking that it likely comes in at the lower end of that range?

I think that's a fair comment.

OK. The last - or just two quick questions here. Does the landfill tonnage tax in Pennsylvania, is that in the price line or did you break that down into the commodity IPP line?

It's in the price line.

OK And then, Cherie, do we know - or Dave, with respect to maintenance. If we kind of back out what you assumed in terms of the increase, because of wheeler braiter (ph) and the seasonality there in terms of they're down time, what happened to the base operations in terms of maintenance?

They were relatively flat year over year.

OK. So maintenance costs was flat year over year?

That's correct.

And was that what was budgeted?

It was pretty close to budget. I guess I don't have that right here handy, but it wasn't - I don't think it was a huge difference.

Yes. From a budget perspective, I don't think that the total maintenance cost was far off from our budget.

OK. OK. Great. Thanks very much.

Thanks.

We'll take our next question from Trip Rodgers with UBS Warburg.

Good morning.

Good morning Trip.

Did you comment on the total workforce reduction expectation for the year? Is it still 42 million, the benefit?

That's correct. For the full year, that's correct.

OK, great. And did you give a number for share count at the end of the quarter?

That's in the press release on the second page.

Sorry. OK, I can look it up then.

OK.

[Inaudible] but, yes, it's there in that second page of tables, that is.

OK. And finally any [Inaudible] Recycling American Alliance (ph) that you can talk about in addition to the pelts (ph) group?

No, not at this point, but we continue to have a number of companies interested and we are in negotiations.

And we did buy one facility in northern Virginia that we are in the process of consolidating.

Right. So, when you look at the remaining of your - the 375 in acquisitions, should we look at that being more guided towards recycling or towards similar acquisitions to the Allied deal?

I'd say look more toward the Allied deal. The additional recycling acquisitions will not be big ones like the pelts (ph) .

Good. Thanks a lot.

Thanks.

And let me just go ahead before we take our next call and answer first of all the shares outstanding at the end of the quarter was 591.4 million.

And then to go back to Michael Hoffman's question on cash closure/post-closure payments in the quarter, they were $7 million. Then there was another $7 million related to remediation projects, so for a total of 14 million of those kind of cash costs.

And we can move on to our next caller.

We'll go next to Carey Callaghan with Goldman Sachs.

Morning, Carey.

Good morning, guys. Question for you on the fleet route initiative. You had previously indicated 750 drivers in trucks eliminated in the back half of this year and the balance the - another 750 second half of next year. Just doing the math on the - you know, if you were to still do it that way, that would indicate about 45 million of savings for half a year if you assumed half a year for half the initiative. And you talked about 40, so it sounds like by midyear, you would have accomplished that. Is that realistic to go from sort of 33 routes currently to 750 by - in the next two to three months?

No, it doesn't ramp up that fast. It ramps up, you know, in the last part of the year. To take half is not - that's too much.

Well, maybe my math's wrong here, but if the total initiative savings annualized is 180 and you take, say, half the drivers out this for half a year, wouldn't that be quarter of 180 or 45 million?

It would, but again, we're only projecting 40 million of gross savings this year because we're not getting them all out by midyear.

Right. But if 45 is half a year and 40 - you're pretty darn close to half a year, that would suggest that by, I don't know, September you'd have the drivers out. Is that ...

It's certainly third quarter-weighted [Inaudible] ...

Right. I mean, you know, we'll have - we'll have another big chunk out in the second quarter, third quarter more, fourth quarter - and it's just - it's just the way ramp-up works and the way the math works out on a - on it - on it, Carey.

Yes, it's just the assumed ramp-up. Actually, over the next few months, we'll have a much better idea as to how this thing is going to ramp. That's an assumed ramp that we've got that get you the numbers that we - that we forecast.

OK. And on the McKinsey, it sounds like you do plan to take action on the back of the findings there. When would you expect some of those actions to start to take place?

Well, I think over the next couple weeks, we'll put the plans in place. And I think toward the end of the second quarter, we ought to start seeing some benefit.

OK. OK, thank you.

Thanks.

We'll take our next question from Hal Levine (ph) with DNY Asset Management.

Good morning. I wanted to ask if the differential in the price between what you paid for the private companies and I'm looking at the 83 million for 256 million in revenues versus what you paid for the Allied Waste assets.

Does this reflect just the basic differences between buying private and publicly owned companies or is there something more within the Wasted Management, Allied assets, that make them more attractive to you and more willing for you to pay a higher price?

No. That's primarily related to the Pelts acquisition which was a large revenue number but a small purchase prices. Purchase price was 56 million and the revenue - 58 million and the revenue was about 200 million annualized.

And the I would add to that, they way you do this is to analyze each individual piece of the acquisition and, you know, you've got different kind of assets here. You've got some landfill assets, and you've got some hauling assets with different margins. And as a result, come up with different prices.

So, it's a pretty different kind of an acquisition.

And when we look at those assets from a hauling company point of view, we don't necessarily look at what we're paying for EBITDA, but what we're going to come out of the other side with from an EBITDA perspective from, you know, route consolidation and other synergies.

Thank you.

Thanks. And that was our last call. We appreciate your being with us and look forward to talking to you next quarter. Thank you.

Once again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect at this time.