美國廢棄物管理公司 (WM) 2003 Q2 法說會逐字稿

Good morning. My name is Tamiya and I will be your conference facilitator today.

At this time I'd like to welcome everyone to the Waste Management second quarter 2003 earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.

I will now like to turn the call over to your host, Cherie Rice, Vice President of Investor Relations.

Miss Rice, you may begin your conference.

Thank you, Tamiya.

Good morning, everyone and thank you for joining us.

With me this morning are Maury Myers, Chairman, President, and CEO of Waste Management; David Steiner, Executive Vice President and Chief Financial Officer; and Larry O'Donnell, Executive Vice President Operations Support and Chief Administrative Officer.

Maury will start things off with a review of business trends and our cost-savings programs followed by comments on the dividend program announced this morning. Then David will review the financial statements in detail and discuss other financial topics. After that, we will open the lines for questions and answers.

This call is being recorded and will be available 24 hours a day, beginning by 1:00 p.m. central time today until 5:00 p.m. on August 19th. To hear a replay of the call over the internet, you can access the Waste Management website at www.WM.com. To hear a telephonic replay of the call, dial 800-642-1687 and enter reservation code 1101575.

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 10-K 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 August 5th, 2003, may no longer be accurate at the time of a re-play.

Any redistribution, retransmission or re-broadcast of this call, in any form, without the expressed written consent of Waste Management is prohibited.

Now I will turn the call over to Waste Management's Chief Executive, Maury Myers.

Thanks, Cherie and welcome to hot and humid Houston, Texas to all our conference call and webcast listeners.

As we noted in the press release this morning, business conditions have remained similar to what we've seen over the past several quarters. Volumes generally continue to be sluggish and pricing for new and temporary work remains quite competitive.

Looking forward, there's a certain amount of optimism from the Federal Reserve and some of the recent economic data, for example second quarter GDP rose at 2.4% annual rate versus 1.4% in each of the previous two quarters. For two consecutive weeks in July the initial jobless claims were under 400,000 and at five-month lows. And then, more recently, U.S. manufacturing activity was reported to have grown for the first time in five months in July.

So, while we're encouraged by these signs, as we've previously stated, we intend to keep approaching our business as though an economic rebound will not occur. And consistent with that approach, we announced another work force reduction of approximately 600 employees and 200 contract workers in late June.

This was the natural evolution of the work that we've been doing in developing automation and implementing process improvements. While taking steps like reductions in force are never pleasant, at this point in time we have to take out costs that -- as our newly-developed systems and processes are implemented. Some of these reductions, specifically the contract worker reductions in IT, will impact our future plans for system development and deployment, including a few of the higher-profile programs.

The deployment of Compass, our fleet maintenance information system has been slowed down. Currently we're working on plans that will rely more on self-deployment by the field, rather than through a corporate implementation team.

Deployment of the new revenue management system is being reconfigured as well. The driving factor here is that we're working on new models for call centers and for the credit collection processes. The new models should allow us to obtain additional cost savings as we deploy portions of the new revenue management system.

With respect to the other portions of revenue management, we now likely won't begin development until later in 2004. This approach allows us to get cost savings in a staged approach, rather than all at once, and we think this is a smart way to allocate our resources.

We've been focusing specifically on SG&A costs for a couple of years and now I'm happy to point to the significant progress we've made in reducing these expenses. In the second quarter SG&A was $301 million or 10.3% of revenue.

Effective with results for the second quarter 2002, certain costs and expenses that were previously included in SG&A have been reclassified to operating expenses. After this $43 million reclassification, the prior year's quarter SG&A was $316 million or 11.2% of revenue. David will talk about - more about the SG&A costs in the quarter when he reviews the financials.

We've been working hard at driving cost savings in the operations portion of our cost structure as well. Some of this progress is masked by the reclassification of costs from SG&A, the recycling brokerage business we bought in January, the pass-through costs, such as the Pennsylvania landfill tax, certain changes in accounting at Wheelabrator and as a result of FAS 143 and other cost increases.

In the second quarter the market business strategy and our procurement efforts resulted in estimated EBIT improvements versus last years second quarter of $14 million and $10 respectively. A sizable portions of these improvements are from reducing operating costs.

We continue to make progress on reducing costs on several fronts and have added routing optimization in 2003 and in 2004 as a key driver of our projected margin enhancements. More on that program a little later.

In addition, our senior leadership team recently spent a weekend planning other cost reductions and profit improvements to be implemented in the second half of the year and targeted to ensure that we achieve forecasted results.

I want to be clear that I'm quite satisfied with the improvements we've made during the course of the past 3 1/2 years to position Waste Management for a solid future. Especially when considering the tough economic conditions we've faced, the uphill battle we fought by walking away from some of our lowest margin business, and the escalating costs of risk management, health benefits and fuel, to name a few.

We've implemented specific tactics for fighting back and winning on all of these fronts. To succeed in this tough economy, we've focused on customer retention. We've established retention desks in all our call centers to deal with the very aggressive pricing tactics of our competition. We receive weekly customer retention data and measurements by business unit and we compare them closely against specific goals. We have largely finished calling unprofitable accounts. We're continuing to concentrate on increasing our market share through smart tuck-in acquisitions.

In the first and second quarters we closed on transactions with $283 million of annual revenues, $80 million of that in Solid Waste and $203 million in Recycling. Currently, we have purchase agreements or letters of intent on over $250 million of additional revenue, including approximately $160 million from the previously announced transactions with Allied. Given this level of activity, we believe we will meet our acquisition goals for the year.

To fight rising costs, we've employed a variety of strategies. In terms of risk management costs, our focus on safety and the significant reduction in the number of injuries we have obtained over the last couple of years is helping to keep those costs in check.

On health benefits, we changed our program offerings for 2003 and asked our employees to join us at covering the increased cost of coverage. While many companies have seen their healthcare costs increase by 15% or more during 2002, or versus 2002, ours are basically flat through the first half of the year.

And the fuel surcharge program we implemented in 2000 has continued to be an effective hedge against a substantial part of the increases we've seen in the prices of oil. The surcharge program saved us 2 cents of EPS in the second quarter alone.

A moment ago I mentioned that this year and next we are implementing a route optimization program, which we call "Waste Route". This is a very important program for the company, so let me update you on our progress.

During the second quarter we met our route reduction goal, eliminating 210 in addition to the 33 routes reduced in the first quarter. Our full-year 2003 goal is to reduce a total of 750 routes, which means we need to eliminate just over 500 more in the second half of the year.

The implementation teams are working hard on this project. In July we reduced additional 132 routes and I believe we have a good chance of achieving our second half goal.

Now let's review internal revenue growth and the price in volume trends for the second quarter. Total IRG for the quarter, excluding recycling commodity prices, fuel surcharges and IPP electricity rate changes, was 2/10 of a percent with 6/10 of a percent from pricing and negative 4/10 of a percent from volumes. As you may recall, our full-year expectations were for 1% price growth and volume losses of 6/10 of a percent for a net 4/10 of a percent positive IRG.

In the first quarter we posted a half a percent volume growth and 3/10 price growth, or 8/10 total. This puts our first-half total revenue growth on target with pricing a bit weaker than we had expected and volumes a bit stronger.

Pricing trends continue to be similar to what we've seen in the past, but weaker than what we had hoped for. In the second quarter, price growth on the collection business was 1.2% favorable, but we're seeing negative offsets from landfill business, primarily from special waste.

And, while we're able to get price increases from many of our existing customers, pricing on new business is very competitive. In certain markets we're seeing increased solicitation of our customers based on much lower pricing.

This solicitation is coming from brokers as well as from our traditional competitors. In some cases, the pricing being quoted is as low as $1 to $1.25 per yard, where as our pricing, depending on the market, is generally in the range of $3 to $4 a yard.

Giving away price to gain volume is a short-sighted strategy of desperation to generate short-term results. Over the longer-term, the growth through price adds to margins, while growth through volume while reducing price squeezes margins and ultimately cash.

In terms of volumes, as we noted in our June 30th press release announcing the work force reduction, rolloff volumes have been generally running at lower levels than last year. This has been the most noticeable in the Eastern group. Many of our permanent roll-off customers, especially those in industrial businesses, simply are not requesting as many polls per month as they used to.

The construction or temporary part of the rolloff business varies in strength across our market areas. We will continue to market this line of business closely, looking for trends.

Somewhat surprisingly, we've seen better volumes than we expected in the disposal business. Third period volumes at our landfills showed favorable branches in May and June, as compared to the same months last year. I should point out that much of the landfill volume increase is in our recently-organized industrial landfill market area in the west, which includes four sites that accept industrial waste volumes, two of which are hazardous waste sites.

Last year their volumes dropped significantly, especially at the Kettleman Hills hazardous site. This year with a more coordinated sales effort, their volumes have rebounded nicely.

Recycling commodity prices had a modestly favorable revenue impact this quarter, about $5 million or 2/10 of a percent. We averaged about $75 a ton for cardboard in the quarter and $55 a ton for newspaper. July's average yellow sheet pricing for cardboard is down $7 per ton from June and newspaper is down $4 per ton.

These are normal to above-normal prices for our two largest commodities but they're much lower than the prices that we had in the third quarter of last year, when cardboard was in a range of up to $120 per ton and newspaper was over $80 per ton for much of the quarter. In other words, on a year-over-year basis, we expect to have negative commodity price comparisons in the third quarter.

Undoubtedly, you all saw the announcement this morning on our dividend program this morning. As we've stated in the past, the old tax laws and the double taxation of dividends made payment of significant dividends unattractive in our analysis of providing the best financial returns to our shareholders. With the new tax legislation recently passed, the Board decided that this was an appropriate time to review our cash flow allocation.

This company is first and foremost a big cash flow generator. The reallocation of the companies cash flow to accommodate a 75 cent per share annual dividend program signals our confidence in the ability to sustain and grow cash. At today's share count a 75 cent dividend would use about $450 million of our free cash flow annually.

We expect that the balance of our discretionary cash will primarily be used for a share buy-back program as long as such purchases are deemed accretive and in our shareholders' best interests. Free cash flow is also planned to be used for selective tuck-in acquisitions when those acquisitions meet our return criteria, are accretive to earnings, and are more accretive than the stock buy-back.

Finally, let me say I'm optimistic about Waste Management's future. We're taking steps to accelerate the growth of our revenue base, while at the same time, we're continuing to squeeze costs out of the operation.

Our senior leadership team is committed to making the company the best it can be and to driving down the cost structure so that we can be competitive in all markets in which we compete. You can see the progress in our SG&A as a percent of revenue and we're determined to produce visible results in the cost of operations as well.

And with that, let me turn the call over to our CFO, David Steiner.

Thanks, Maury.

I'll start out this morning with a year-over-year comparative review of the quarter's financial statements, beginning with revenues.

North American Solid Waste revenues of $2,915 million are higher than second quarter 2002 by $90 million or 3.2%. Single largest driver of this increase was acquisitions net of divestitures, which combined, account for $53 million of the revenue increase in the quarter. $48 million of that increase relates to our recycling acquisitions.

Going forward, given our closed and announced acquisitions with Allied and other solid waste tuck-in's, we expect revenue increases will be weighted more toward more toward our solid waste line of business.

Foreign currency translation from the Canadian dollar favorably impacted revenues by about $13 million.

Fuel surcharges were $11 million higher than they were in the year-ago quarter. As you may recall, our fuel surcharge lags actual fuel prices by about 30 days. So some of this $11 million is is a recovery of our higher first quarter fuel costs.

Higher recycling commodity prices and higher IPP electricity rates resulted in revenue increases of approximately $5 million and $2 million respectively. And the core internal revenue growth components, as reported in our press release, of positive .6% price and negative .4% volume, translate to about $17 million of favorable impact from pricing and $11 million of negative impact from lower volumes.

Note that the loss of the Chicago Blueback contract with a $19 million year-over-year impact accounts for more than the $11 million in total volume losses in the quarter.

Operating expenses in the quarter were $1,887 million or $155 million higher than the prior year. As a percent of revenue, the year-over-year increase is about 340 basis points.

The main components driving the increase are $54 million of increased cost of goods sold, largely related to our Recycle America Alliance fiber brokerage activities. Most of this is simply a pass-through of the price we pay to buy fiber and then sell to third parties. The margin impact related to these cost of goods changes is 61 basis points.

Disposal fees and taxes are up $22 million, approximately $9 million of which is related to the $4 per ton Pennsylvania landfill tax increase that was implemented last July.

I should note that we've been successful in passing on about 90% of this increase to our customers. The margin impact from the fees and taxes is 53 basis points.

Foreign currency translation added $11 million in the quarter and had a 12 basis point impact. The cost of fuel was up $10 million versus last year, but that higher cost was fully offset this quarter by our fuel surcharges. The margin impact related to fuel was 12 basis points.

Those four items, which totalled $97 million, are primarily pass-throughs to customers and are thus included in revenues as well as costs. The total margin impact from these was approximately 138 basis points or over 40% of the total margin change.

Wages increased approximately $15 million over the second quarter last year. The increase is primarily driven by a combination of annual merit increases of approximately 3% and increased overtime, partially offset by our February head count reductions and a continued focus on productivity. Wages increases, negatively impacted margins by 52 basis points.

Subcontractor costs threw out $11 million with an estimated 35 basis point impact. The significant drivers of this increase include the redirection of waste in Pennsylvania and higher volumes requiring long hauls, including New York MSW and hazardous and special waste in the western group.

Risk management insurance and claims costs are up about $10 million with a 36 basis point impact. While, as Maury mentioned, we've made improvements in the number of on-job injuries, the average cost per claim has increased. Further, risk management costs can be lumpy in nature and this particular quarter we did see these costs higher overall than last year.

Disposal costs threw up $9 million, impacting margins by 30 basis points. This increase was driven in part by heavier waste, especially in the Eastern group. A variety of other smaller cost changes -- some favorable, some unfavorable, explain the remaining year to year difference.

SG&A costs of $301 million are $15 million lower than prior year on an apples-to-apples basis. We continue to focus on all categories of spend within SG&A and are pleased that as a percent of revenue we're getting to levels that are more comparable with our competitors.

This quarter we did note a year-over-year increase in bad debt expense, specifically related to bankruptcies of some customers, but that expense was more than offset by a favorable settlement of a legal dispute.

We said at the beginning of the year that we would end the year at a run rate, whereby we will have reduced SG&A by over 100 basis points above and beyond the reclassifications, and we're well on our way to meet or exceed that target.

Depreciation and amortization of $325 million remains consistent as a percent of revenue versus last year at 11.1%. Note that the implementation of FAS 143 had the impact of increasing D&A by $7 million as compared to pre-FAS 143.

The restructuring charge of $23 million in the quarter is related to the work force reduction that we announced on June 30th. On an annualized basis we expect to realize approximately $50 million of benefit as result of this reduction in force, this should also reduce our SG&A costs.

The $6 million credit to asset impairments and unusual items in the quarter is primarily related to divestitures of certain small operations.

Interest expense at $110 million for the quarter, was about the same as in the first quarter and $6 million lower than a year ago. As we've mentioned previously, our interest rate expense is being favorably impacted as a result of the amortization of terminated interest rate swaps. That impact was $11 million in the quarter.

The provision for tax in the quarter is recorded at a 37.5% rate to reflect an updated full-year 2003 expected rate of 38.1%.

On a sequential basis, we saw significant margin improvements. Costs of operations as a percent of revenue went from 66% in the first quarter to 64.7% in the second quarter, improving by 130 basis points. SG&A improved from 11.9% to 10.3% or 160 basis points. Depreciation and amortization remains stable at 11.1% of revenue. Combined, costs of operations and SG&A improved by 290 basis points.

Much of this improvement is a reflection of a seasonal improvement in revenues, but we did also reduce costs approximately $6 million sequentially and over $9 million year to year as a direct result of the February work force reduction.

Year-over-year, however, operations and SG&A costs combined were up about 250 basis points. And we continue to seek improvement to those margins through our cost reduction efforts.

When we review our cost structure, we see three different types of costs. First are those that I mentioned previously, that are direct pass-through, like the Pennsylvania landfill taxes. Obviously we can't directly affect those costs.

Second, a cost related to specific market issues, such as our New York, Chicago, and L.A. markets. In these markets we've seen increased costs relating to capacity issues.

The increases costs are primarily transportation and disposal costs. We're attacking these higher costs through a variety of strategic efforts. We're using strategic price increases, such as the four price increases in Pennsylvania in the last 12 to 18 months to off-set our increased costs. We're also looking for lower cost transportation alternatives, and finally, we're looking to increase our disposal capacity through expansions, strategic acquisitions, and new development.

The third type of costs are our typical operating costs, -- maintenance and labor for example. As you can see through our job actions and efforts, we have reduced those costs dramatically, including moving SG&A below 11 percent.

But as Maury indicated, we can do more. And Maury has set specific goals for cost-savings throughout the remainder of the year. We will continue to monitor and attack those costs.

Now I'd like to spend a few minutes on cash flow and liquidity.

As shown on the table, included with our press release this morning, free cash flow, a non-GAAP financial measure, which we define as net cash provided by operating activities, less capital expenditures, plus proceeds from divested assets, was $373 million for the quarter.

We've also shown an adjusted free cash flow, which takes into account the fact that our cash taxes saved in the quarter ,would have been an estimated $66 million higher, if we had not assumed that we'll be paying the class action settlement later this year. So, on an adjusted basis, taking into account the class action settlement-related impact, free cash flow was $307 million for the quarter.

These are excellent results in what is generally a more difficult quarter for free cash generation because of increasing receivables related to higher sales per day versus the first quarter and our higher interest payments. Two of the driving factors in the strength of adjusted free cash flow in the quarter were a 1-day reduction in days sales outstanding from the previous quarter to 46.5 days in the second quarter, a $33 million benefit, and $84 million of proceeds from the termination of interest rate swaps.

I should note that year-over-year, days sales outstanding are down 2 1/2 days.

We continue to monitor our debt fixed to floating ratio to achieve a desired ratio of fixed and floating rate debt, which has generally been 30% - 35% floating as a percent of total debt. At the end of the second quarter our fixed floating ratio was 67% fixed and 33% floating. And our weighted average cost of debt was approximately 5.5%, just slightly more than 100 basis points over the current 10-year treasury.

Bank line availability remains strong with $870 million of unused and available credit capacity at June 30th. In addition, on June 30th we completed new letters of credit and term loan agreements totaling $295 million and with terms ranging from 5 to 10 years.

We entered into these transactions to supplement our previously existing letter of credit and bonding capacity, which we require to support tax-exempt bonds and to guarantee various contract and performance requirements, including landfill closure and post-closure obligations. We continue to expand our use of tax-exempt bonds, accounting for $1,376 million of our debt at the end of the quarter and believe that this new financing transaction provides an attractive alternative for providing the letter of credit coverage that we need at attractive rates.

In regards to the increase in debt balances of $128 million during the quarter, I want to point out we issued $79 million of tax-exempt bonds during the quarter at an average interest rate of approximately 1.9%. The effect of which, is an increase to our debt and an increase to restricted funds, which is included in other assets on our balance sheet. Additionally, the net fair value of our interest rate swaps increased $34 million during the quarter, increasing the fair value of our debt instruments by the same amount as required by hedge accounting.

At the end of the quarter, our debt to total capital ratio was 60.2% and 58.4%, excluding IRB cash and swap values.

I know that important topics to all of you are our use of free cash flow and the share repurchases. Due to the possibility of having to pay out the class action settlement, we did not re-purchase any stock in the second quarter.

Let me go ahead and take a minute right now to update you on the status of the class action settlement. As you know, the settlement was delayed by an appeal. On Thursday of last week, Judge Harmon approved a settlement that ends the appeal. After an additional 30 days, assuming that there's no other appeal, the case becomes final.

The resolution of the appeal was reached among the plaintiffs and does not change Waste Management's total obligations. Consequently, we now anticipate that we will pay the settlement within the next 45 days.

I'd also like to point out that while we look -- while we took the charge for the June 30th work force reduction in the second quarter, the associated cash costs, primarily severance, will be incurred in the coming quarters.

At June 30th, we had $753 million of cash on hand, and we are now in a comfortable cash position for not only paying out the settlements, but also resuming our share buy-back program in the third and fourth quarters.

At this point in time we estimate that total share repurchases for the year will be in the range of $600 to $700 million, with about $500 million to $600 million of that in the third and fourth quarters. We anticipate making open market purchases once our window opens in two days, as well as possibly entering into an accelerated purchase program during the course of the third quarter.

In closing, we continue to expect to meet our key goal of $900 million to $1 billion in free cash flow for the year, excluding the net cash impact related to the payment of the class action settlement. We're over halfway to that goal already and we'll continue to keep a close watch on capital spending, receivables and other working capital items during the second half.

The work force reductions and other action items we've identified should reduce our costs in the coming quarters and we fully intend to maintain SG&A costs below 11% of revenue. We'll also continue to attack operating costs with the goal of posting improvements to our gross margins.

The team here at Waste Management is focused and Maury has emphasized the importance of assuring we execute our plans and maximize the company's operations.

Finally, I'd like to take a minute to update you on our search for a person to direct our newly reconstituted profit and budget analysis department. I'm glad to announce that we've hired Robert Murray, formerly with United Airlines, to direct that department.

At United, Bob headed up their financial planning and analysis department. Bob has a degree in Industrial Engineering and Operations Research from the University of Michigan and received his MBNA in Finance and Strategic Planning from the Wharten School of Business. We think Bob will be a valuable addition to Waste Management and we look forward to having him on board.

And with that, operator, let's open up the lines for questions.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Michael Hoffman of Friedman Billings.

Hi, good morning.

Good morning, Michael.

A couple questions with regards to the cash flow.

David, can you tell us what your actual cash taxes were paid, cash interest and cash foreclosure and post-closure in the third quar - uhm, second quarter?

Sure, Michael.

I can give you off the top of my head the cash interest and the cash taxes. We'll have to look up cash closure and post-closure. In the second quarter our cash interest was $151 million. As you remember, second and fourth quarter are our big cash interest payments. And cash taxes in the quarter were $43 million.

$43 million -- and then back in the first quarter call, you talked about a cash tax outlook, sort of with and without the settlement. How do we think about cash taxes in the third and the fourth quarter?

Yeah, we look at cash taxes in the third and fourth quarter being equal at about $10 million a quarter.

Okay.

And then we're about the same $150 in the fourth quarter on cash interest, but it's a big dip in the third quarter, right?

Actually, cash interest. Yeah, we forecasted for the third quarter at $82 million and in the fourth quarter at $166 million.

Right, okay.

The program on the route reduction -- can you talk about how many trucks you've actually parked as it relates to the route program?

Yeah, the numbers that I gave you, Michael --

33 2/10.

Yeah, so about like 243 -- we actually parked all the ones that I gave you.

We kinda' -- we have a system where we kinda' -- actually take the number off of the truck and it gets put into a data base which goes onto our website and the truck then is either re-deployed or disposed of.

Okay, so if there's 750 routes that will be reduced, you'll take 750 trucks out of the system too?

Yeah, that's exactly right.

Okay, that's the way you want to think about it, okay.

Yep.

And then this morning on -- hey, you looked pretty good at 5:30 in the morning, by the way, on CNBC.

You made a comment about succession and I'm just assuming it was -- because it wasn't asked directly -- are you intending to also do an outside search in addition to the three inside candidates?

I'm not intending to do it.

You know, I guess what I've stated consistently is that I think we've got three terrific succession candidates and you know, it's my expectation that that process will play out and that one of them will succeed me so well that no one will notice that I'm gone.

Right.

And Michael, just to give you the number on closure, post-closure, for the quarter that's $21.7 million.

Okay. And what's your thoughts for the rest of the year?

On terms of what?

Closure or post-closure, sorry.

You're gonna make us go back to the book again?

We can get you that answer --

Thanks. I appreciate it.

Thanks, Mike.

Your next question comes from the line of Lorraine Maikis of Merrill Lynch.

Good morning, Lorraine.

Good morning.

Could you just quantify the legal settlement that's included in SG&A for the quarter?

In the quarter --

Yes, that settlement is the settlement of an agreement at Wheelabrator, dealing with host steam, that was $11 million, favorable.

Favorable, okay.

And then you mentioned in the press release that you were still comfortable with the analysts' range. That implies a 36% increase in second half earnings.

Could you talk a little bit about what's specific margin enhancements and pick up your expecting to get there?

Well, the primary thing that we have going is the acceleration of the waste route savings. We were just getting those off the ground in the second quarter and we really start to pick up steam in the third and fourth quarters. So you know, that's the biggest one.

Now, having said all that, we continue with all of our other cost reduction programs that we've talked to you about in the future - or in the past as well.

And then the routing program is still expected to be about $40 million, less the $10 million of implementation costs?

That's right.

Okay. Was that $10 million spent already?

It's being spent. We've got a team of probably 100 people out in the field working on this, including some industrial engineers that we've contracted, people we hired from the outside, and we're also spending money on IT. So, no, it hasn't all been spent. I can't --

It's fairly radiable over the four quarters though.

Okay.

It's not back end loaded or anything.

Alright. And then finally, the 1.4% volume pickup in June, did that have any special projects or anything unusual in it or was that just normal volume?

Well, I guess the primary thing that we've seen is we did have some MSW pickup finally, which was encouraging, and we did see our special waste volumes pick up as well. And we've got a couple of big projects in Special Waste that are favorably impacting that.

Thank you.

Your next question comes from the line of Alan Pavese of CSFB.

Good morning, Alan.

You mentioned a couple of points in your call, a couple items that are pretty detrimental to margin expansion, things like the increased brokerage commissions for recycling, the tax pass-throughs and such.

I was just wondering, more in particular, as you step back and look at the different business mix and some of these different factors, do you think still that you can get to a 30% or better EBITDA margin any time in the near future or has that kinda' changed and been lowered by these structural changes?

Well, it certainly makes it more difficult. You know, I think that's still a reasonable target.

We still have that on our radar screen. We still talk about it around here. We still look at things that we can do to get there, but I guess what I would say is that you know, we need some revenue pickup in order to have it happen, and we've said that all along.

So, it's pretty difficult, just taking costs out to get there any time in the very short-run. But we'll get there. Adding some -- you know, had to get the economy turned around and adding some revenue to the top line will have some pretty dramatic impact.

Okay.

And also, seems like Allied Waste has been picking a page out of the airlines operating handbook and trying to be a little bit more forthright and clear on where they're trying to go for price increases. I'm just wondering, from your perspective, is that an opportunity, do you think to be a little bit more efficient in getting prices, particularly at the landfill side of this business, up in the industry over the next couple quarters?

Well -- you're advocating the signaling that airlines have gotten in trouble for?

Well, it seems like we're pretty well in the airline industry, which I'm sure you're more familiar with, but --

Yeah. Yeah, you know, what it comes down to is -- it doesn't make much difference what you say, it's more important what you do. And price increases in the marketplace are picked up very quickly when they're actually implemented. We're very attuned to those and so I guess I don't think signaling really does -- really has had much impact.

Okay. So you don't think that's a real big help. You don't see those markets as being a little more opportunistic in terms of pricing than perhaps some others in your network?

As we've looked around into the ones that have specifically been identified, we've seen a variety of things. Some places we've seen -- we've discerned, anyway, no increases. Other places prices have increased up to our levels. Other places there have been price increases, and we've matched them.

So, it's been sort of a mix of results, at least from our perspective. But you know, we keep our ear to the ground as you might imagine, market by market, constantly. So I would expect that our people will pick up those increases as they occur and we'll react accordingly.

Great, thanks.

Thanks.

Your next question comes from the line of Amanda Tepper of J.P. Morgan.

Good morning, you got up earlier than any of us today, Maury!

I know. Be careful, I'm gonna nod off here.

Speaking to price for a minute, when you talk about the competition for new business, which is what I'm hearing too, I'm wondering what happened to your retention and churn in the quarter and, you know, with these retention initiatives you talk about.

And when you're seeing the competition for new business, how much of it is coming from the big public companies versus the independent, private guys?

And then you had also mentioned brokers. What's happening there?

Yeah, it's primarily -- I mean, what gets reported to us -- and I can't give you percentage breakdown --

Sure, just trying to get a feel.

Just giving you a feel, it's kind of as you would expect in terms of market share. It's mostly from our primary big competitors, and the techniques being employed are very aggressive, including using non-employee sales groups, pound on doors and sell nothing but price.

So, it's you know, it's very aggressive, and what we've done is to set up these retention desks and give our people floor prices so that they know exactly how to handle these calls and what we've seen over the last few weeks is our retention has improved, and you know, we keep track as they call in how many are we able to save and those numbers are significantly improving as a result of all the effort we've put into it.

Overall in terms of churn, we haven't seen a big change in our churn. I think as we've reported earlier, our churn was up at a rate of 12% before we started all this retention effort and it's down in the range of 8 1/2 to 9% and it seems to still be there.

Okay. That's terrific.

Then I wanted to go back to Dave on the tax rate. I think I might have missed it, but excluding the charge, where were you and what kind of tax rate effectively are you looking for for the rest of the year. 'Cause I thought it had been 39%, was your previous guidance.

Right, we've now moved the full year tax rate to 38.1%.

And why is that?

And that's because of obviously the reduced performance and then you got bonus depreciation included in that and you've also got the class action settlement.

Okay.

And then can you tell me -- actually on the class action, how is that gonna flow through your cash flows? Because in the press release you talk about the net number, but I think the gross number is over $360 million, right?

That goes out of the door. You only start getting the tax benefit after you pay it.

So is some of that tax benefit actually going to hit next year on a cash basis or how does that work?

No. As we said, we reduced our cash taxes for the last tow quarters of the year to $10 million per quarter, so we anticipated the class action being paid in the third quarter. So we should get the full benefit of that this year.

Okay.

And Amanda, to be clear, some of that was taken in the second quarter. That's what you see as an adjustment on our free cash flow.

Yeah, Amanda, what we did was- Remember that $66 million that I mentioned for this quarter?

Yeah.

What we did is because our $900 million to $1 billion guidance on cash flow was pro forma in back end the settlement, we wanted to exclude that from cash flow for this quarter, so you're looking at it on an apples to apples basis.

Okay. So $900 to $1 billion is before any of this settlement but after the benefit from the taxes? No?

No.

Before --

That's before everything. So that's why we pro forma it as out this quarter so that you're looking at it from an apples to apples basis.

In other words, as we pay that $457 and then net out the tax in the recoveries, we'll let you know about those through the free cash.

Okay, great.

And then just one last question on the Cap Ex. For the year, where it looks like you're right on track for about $1 billion, which was your previous guidance. How much of that now is coming out of the restricted funds that you've been raising as you continue to do these financings?

Yeah, first off the guidance was actually $1.1 to $1.2 billion, coming out of the restricted funds, we can get you that number.

Okay, thanks.

Thank you.

Your next question comes from the line of Tom Ford of Lehman Brothers.

Hi. Good morning.

Good morning, Tom.

Couple questions here.

Number one, Maury, can you talk about the senior leadership team away, I guess, whatever weekend or week -- I'm not sure how long it was. But what was talked about there and anything that you can share in terms of the second half or longer outlook?

You know, what it amounted to is, we had previously reported that we had McKenzie go back and review all the programs that we put in place, kind of take the temperature of everything we've done, look at what's successful, look where we could do better, and this was an effort then to take that work and go through it all. We spent the better part of two days reviewing every single program we have and places where we thought we could accelerate.

One of the things that came out of that work, that I think we reported before, is that many of the initiatives that we've put in place have had widely-varying results. You know, we've had some really great results in some places and in others we just haven't made the progress we should make.

So, a lot of our effort was how do we get these underperforming units up at least to the average of the rest of the group? And so we talked about methods and ways to get that done. And we've got so many measures now that these people are having trouble hiding. So that was a lot of the effort.

Past that, you know, we talked about organization structure, do we have it right now? We just finished a RIF, where should we go from here?

We talked about specific cost categories and what we ended up with was a market-by-market, for all 66 markets, target for the rest of the year by cost category of where they should improve and how they should perform and that every single market manager came out of the end of that discussion and actually didn't include them, it was just the top group, but the 66 people all have a plan as to what they need to do for the rest of the year to perform up to expectations. So that's an overview.

And so you say that these sort of targeted savings, so this would be incremental, if you will -- I guess the way to look at it is this would be sort of an off-set assumption to weakness, pricing, things like that that you're seeing?

Yeah, that's exactly right. And the whole idea is to make sure we're on track and you know, identify new opportunities as well.

Okay.

But I notice that this isn't in print and you didn't talk about it. So I guess is the message you just don't want to quote any numbers at this point?

Yeah, that's right. And really, you know, it's not a -- it's not new initiatives, Tom, it's primarily a matter of going back and making sure we're on track in everything we're doing.

Okay. Another broad question for you.

What kind of message are you trying to convey with the dividend? I think it's probably maybe surprising to some folks, the order of magnitude.

Yeah.

I just wanted to hear your thoughts were in terms of what message you wanted to send.

I think what we want to send is number one, that our Board and our management is in tune with the whole concept that we run a very disciplined and analytical approach to the allocation of our free cash flow to the benefit of our shareholders.

And when things change in the environment we work in, whether it be the tax bill or interest rates or whatever it is, we go back and go through the calculation again to make sure that what we're doing makes sense. And we look at, whether it be stock buy-back, whether it be dividend, whether it be debt pay-down, whether it be acquisitions -- we bounce all of those off against each other and make sure whatever we're doing is the most accretive for our shareholders. And in this case, obviously the tax bill drove us to go back and re-look at things.

And you know, I guess the other messages that we're sending is that this company is first and foremost a big cash flow company. And that we are very confident now in the stability and adequacy of the cash flow, in order to put out a big dividend like what we just did. I think what you'll find is this dividend is at about 3.1% on a $24 stock price, which is where we've been.

We think the stock prices ought to be higher. We think the stock price you know, is probably more fairly valued up around $35. But that gets you 2.1% dividend, which is more in line then with what the S&P pays.

The S&P companies pay $1.6 overall and the companies that pay dividends in the S P is 2.4, putting us about in the middle of that range. So, we think that when the stock is more fully priced, this dividend will line up more, as you know, as it should be.

So, those are the messages, I think, and we feel very confident about our cash flow and our ability to pay the dividend. At the same time, I should point out we feel confident that we're able to continue to buy back stock.

Great.

This turns out to be about 3.1% of, as I said, yield and about half of our free cash flow. The other half we intend to continue to buy back stock. We think that's the right thing to do.

Okay, great. Just one last question.

You notice that the volume pickup in July, you said was a combination of MSW and Special Waste?

Right.

I would assume that the Special Waste contractual event jobs?

And so I'm just curious, I would think that you probably have a fairly good -- or at the local market level -- they have a fairly good understanding of the likely margin impact. I'm just curious.

I don't -- my question is not what is that number, but my question is do you have a sense of the year-over-year decline that has occurred in terms of the margin contribution from those large-event jobs?

Only to tell you that -- let's see, in terms of margin contribution, it's not -- it is not a negative margin contribution. It's a lower yield, a lower price --

Right. No, no, no, I wasn't implying that it was a negative margin contribution.

I'm just curious about how much. Because of the level of competition coupled with the lack of activity, I'm just curious about how much that contribution has declined, if we were talking about what type of yield we would have seen last year, relative to this year.

You're seeing a lower yield. I'm not sure I understand exactly where you're going here.

That's okay. I'll save it for another time.

Okay.

Thanks a lot.

Alright. Thanks.

Your next question comes from the line of Trip Rodgers of UBS Warburg.

Hi, good morning.

Just a quick question on the route authorization. Is this a case where you're attacking the easiest markets first so you can feel pretty good about the benefits in second half? It's the benefits in '04 that are a little bit more uncertain? And can you just, kind of, talk about your conviction getting those savings in '04?

That's probably somewhat fair. There's a couple of things.

One is that we started off with commercial routes, which are easier, generally, than residential. But the other thing is that we're picking up the pace substantially as we get into the third and fourth quarter. So there's just a lot more work that has to be done. I think both of those factors make it you know, more challenging in the third and fourth quarters.

And then. [ inaudible ] You'll start doing residential routes in '04, that right?

We're doing residential routes already, but we just have gotten started with residential routes.

All right. Okay.

So, what I was saying is that as we've gotten into the third and fourth quarter, it gets more challenging.

Okay.

Just a follow-up question. You talked a little bit about the McKenzie study.

Is the study, is your, you're pushing back some of the initiatives (INAUDIBLE) is that a result of this McKenzie study? And any reason to think that the ultimate benefits from the initiatives will be lower than you originally planned?

I suppose you could say it's out of the McKenzie study. Actually it's just out of a total review of what we're doing and how much we're spending and when the returns will come in, which is all part of our analysis.

No, I think what we're doing is stepping back from some of these things, some of these large programs like revenue management, and we're extracting pieces of it that we can implement now at lower cost, and getting more immediate results than we would have to -than we would have gotten by waiting until the end of a big implementation program. So, you know, I think what we're doing is probably just more effective use of our capital.

Okay, thanks a lot.

Thanks.

Your next question comes from the line of Leone Young of Smith Barney.

Hi, Leone.

Good morning. Two questions.

First of all, on SG&A -- did you get any benefit in the second quarter from that work force reduction or is this all on the come for the second half?

We did get some benefit in the second quarter, but obviously it picks up. The June 30th reduction picks up from the full second half. So the only benefit we got was from the February reduction.

Okay.

That's what I meant to say, the June reduction is all on a go-forward basis then.

The June reduction is all on a go-forward basis.

Okay, perfect.

Secondly, on the gross margin issue, traditionally the gross margin has perked up a little bit between first and second quarter for seasonal reasons, and we didn't see that this time around.

I understand all the costs and I appreciate that you laid them out, but a lot of those have been present -- or they have been pressures the last couple of quarters. Was there anything new from first to second quarter that you didn't get the gross margin rise?

I would point out that actually our margins rose 290 basis points quarter to quarter, sequentially.

Just gross margin --

I'm sorry? Gross margins by 130 basis points, so we did get the sequential increase.

You were looking for more than that, Leone?

No, excuse me. I'm looking at the wrong line, I apologize.

Okay. You're looking at the wrong company!

Still there?

Yeah, those were my two questions, thank you.

Okay, great. Thanks very much.

Your next question comes from the line of Jay Leopold of Legg Mason.

Good morning.

Hi, Jay.

Maury, you talked a little about the dividends and you discussed the message you were sending about your analytical approach to applications, but can you go into more detail as to why the Board decided to settle in on the pay-out ratio at a relatively high rate of your earnings as opposed to something lower?

I'm not trying to make a judgment one way or the other, but to get an understanding of the discussion that went on.

Sure.

You know, there certainly was a discussion as you can imagine. You know, I think I probably covered it pretty well with the exception of one thing.

That is that we really do expect that the cash flow will continue to grow as we go forward. And as a result, we will have the ability to continue to buy back stock. And at these prices, we think that's a good idea.

But we also listen to our shareholders and actually talked to most of our large shareholders -- including you as a matter of fact -- to get an idea of kind of what you thought about things, and so we swizzled that all together and decided that a dividend was a good idea, we could afford it. We had the cash stability and predictability to do it, that we could continue our stock buy-back program and we had the capital we needed to continue acquisitions as well, to the extend that they're -- accretive. And overall, it was you know, a good package. Okay. And as it relates to the rating agencies, how are they viewing a decision like this on the dividend? Well, we haven't heard from them, but you know, generally we have discussions with them on-going and it's our impression that they'll look at it favorably.

I imagine you'd probably bounce something off us just for an initial feedback.

Right.

Okay, thank you.

Thanks.

Your next question comes from the line of Brad Coltman of Deutsche Banc.

Thank you and good morning.

Good morning, Brad.

Maybe I missed this, but could you just quantify the improvement in SG&A year-over-year, how much of that was due to the reallocation and how much was costs taken out of the company?

$43 million was as a result of the reclassifications, $15 million was the actual reduction.

Okay, thanks.

And then I notice or Larry mentioned this I think, but with your endorsing the current guidance range, which obviously has come down from the fourth quarter when you last endorsed it -- can you maybe provide an EBITDA range a little more pinpointed guidance as to what you're looking for for full-year?

We just haven't given EBITDA guidance in the past and, you know, I don't think we're starting now. You know, we're obviously comfortable with the current EPS range.

Okay.

And then just lastly, I wonder if you could touch again on the information systems from two points -- one, when you do begin the conversion for the revenue management system, what would be the expected costs associated with that and how much that might offset if you're in an improved environment?

And secondly, can you update us on the thoughts are about the PeopleSoft / Oracle potential merger.

I guess with respect to the merger, I have my own personal letter from Larry Ellison, guaranteeing me they'll continue to support PeopleSoft for the next ten years, so, and I'm being fiscious , but on the other hand, I have every reason to believe that they'll do exactly that. So we're not concerned about it.

Okay.

And then if you could just detail, what is the expected timing for converting the billing system and how much costs would be involved in doing that? I thought it was a fairly large project.

When we started off, we said it was a $100 million project. And we now have slowed that project down substantially. And we've pushed it off so that we're talking about the project's off in 2004, toward the end of 2004, before we really get it up and running.

We were spending -- the last numbers that we put out, I think, we said we were spending in the range of $70 million a year that was incremental for our IT programs. That was really all -- when I say incremental, I mean development programs. That was about half capital and about half expense. So that's the rate we were running at.

We said that the revenue management program was a $100 million program. Again, about half capital, half expense. But we've slowed it down.

Okay. Thanks.

Okay, thank you.

Do we have another question? I guess we're actually past our time, and so we thank you again for joining us.

Pardon? You got another?

Okay. Thanks for joining us. Bye-bye.

This concludes today's Waste Management second quarter 2003 earnings release conference call. You may now disconnect.