美國廢棄物管理公司 (WM) 2003 Q3 法說會逐字稿

Good morning. My name is Angelique, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Waste Management third quarter 2003 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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. Thank you. Miss Rice, you may begin your conference.

Good morning, everyone, and thank you for joining us. With me this morning are Maury Meyers, 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 our achievements during the quarter, price and volume trends, and various operational items, and David will review the financial statements in detail and cover a few related 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 about 1:00 p.m. Central time today until 5:00 p.m. Central on November 13th.

To hear a replay of the call over the Internet, access the Waste Management website at www.WM.com. To hear a telephonic replay of the call, dial 800-642-1687 and enter reservation code 2659101. 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. Additionally, during the course of the presentation we will discuss free cash flow, a non-GAAP financial measure. Waste Management defines free cash flow as net cash provided by operating activities less capital expenditures plus proceeds from divestitures of business net of cash divested and other sales of assets. The company includes this discussion because the amount of cash produced by non-financing activities that is available for uses, such as acquisitions, share repurchase, debt reduction and the payment of dividends is important to the company's capital allocation process and its goal of providing returns to its shareholders. In 2003, the company is also giving adjusted free cash flow.

The adjustments made are related to the payment of the shareholder class action settlement net of certain related favorable cash flow items including cash tax benefits. 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 October 30, 2003, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's Chief Executive, Maurice Meyers.

Thanks, Cherie, and welcome to all our conversation call and webcast listeners. We have a number of positive accomplishments to report from third quarter activities, including momentum in our price increase program, great success at reducing both SG&A and the number of routes through the use of a proprietary waste route technology and continued execution of our stepped up acquisition program. At the same time, the challenges that we faced in previous quarters continues. The economy has not yet resulted in increased business levels from our customers. The pricing atmosphere is competitive and certain costs continue to increase.

Taking all these challenges together, we persist in tackling our cost structure and enforcing price discipline. The net result is that Waste Management once again has delivered strong free cash flow, $251 million in the third quarter and $791 million for the nine months after adjusting for the net cash outflow related to paying the class action settlement. You also saw in our press release this morning that we now expect adjusted free cash flow for the year to be a minimum of $950 million. This year free cash flow has been our number one commitment to our shareholders, and we're pleased with our results.

And now on to a review of some of the third quarter highlights beginning with internal revenue growth. As reported in the press release this morning, revenue growth from base price was 8/10ths of a percent while revenue from volumes was down 7/10ths of a percent. While total growth of 1/10ths of a percent is certainly minimal, this does mark our third quarter in a row that our total internal revenue growth was positive growth and several quarters with volume losses overshadow price gains. As a reminder, about 5/10ths of the total company volume loss this year and about 6/10ths of a percent of the third quarter is a direct result of our losing the Chicago Blue Bag contract in February of 2003, which was operating at a loss. During the economic downturn we've taken the approach that we want to maintain and even increase our overall level of pricing at the risk of losing some volumes.

This is just what we've done, and we believe that the benefits will be evident when the economy takes off and we're working from what we think will be a higher average rate than many of our competitors. Regionally, the greatest weakness in volumes outside the Blue Bag contract loss continues to be in the east and the Midwest. However, in recent weeks both the Midwest and East have seen some improvements in activity, which we find encouraging. During the third quarter, the southern group had notably higher third party volumes at their landfills than in 2002 and the western group is seeing the best trends of all, with both rolloff and landfill volume growth versus last year.

As you may recall, the west was the last of our four major groups to see volumes weaken, and anecdotally it has been said that in past downturns the west has been the last to slow down and the first to come back. So, in may being a good time. Certainly there's been an abundance of positive economic indicators in the recent past, including very strong New York empire and Philadelphia fed surveys in manufacturing activity for October, the October page book indicating that 10 of 12 districts are reported expanding activity, a surprisingly strong September durable goods report and this morning's strong GDP report.

Several of the sector analysts have predicted about a six-month lag between the time the indicators increase and the time that waste companies actually start seeing the benefits. If they're correct, we'd expect to see those results in the spring of next year and the signs are certainly encouraging. However, as we've said in the past several quarters, we plan to stay focused on those things we can control, and we will not project volume upturns until we see them turning consistently in the business.

During the past couple of months, we've taken steps to reinvigorate our price increase activities with the goal of covering our increased costs, and we're beginning to see positive results from these steps. The new approach includes our corporate pricing department taking a more active role in determining and executing price increases on existing customers. We're now able to download relevant pricing and profitability data for a targeted set of customers at the corporate office, analyze the information and then propose customer-by-customer price increases to the local management. The local management then reviews the proposed price increases, makes adjustments as they deem necessary and sends the revised information back to the corporate office.

The corporate group then executes the price increase, insuring that customers are sent the proper notification and that the future bills reflect the new rates. The benefits derived from this process are twofold. First, it enables us to leverage our dedicated central staff who have broad pricing experience both within our industry and in other industries. Second, it takes some of the price increase process burden off of our field staff enabling them to focus on other activities, such as pursuing new customers, while at the same time keeping them involved in the ultimate pricing decision.

This new process has been widely used in the eastern group beginning with their August price increase activities and all four of the U.S. groups have implemented price increases utilizing this system. Based on this stepped up activity, we're projecting about $15 million in revenue and operating income benefits for price increase activity in the fourth quarter. Another interesting avenue we're exploring in terms of enhancing our revenues is the opportunity to add fees or surcharges to certain customers' invoices to cover our significant environmental costs. Several industries, such as the telephone industry, have had success with this approach. We expect to start testing the viability of our ideas in selected markets in the early part of next year.

While we are proactively pursuing improved prices from existing customers, we do continue to see pricing pressures from various sources. Some of the pressure is specific to customer types, for example, grocery markets. The effects of the economy along with inroads made by Wal-Mart into the grocery business has caused many of the major food chains to aggressively look for ways to cut their costs. As you can imagine, waste service is a fairly significant cost to grocery stores.

Waste Management is actively working with these customers to find ways to reduce the cost of providing their service, including recycling options. Our large national competitors also continue to offer extremely low pricing on new accounts, which has led to us having to increase our retention efforts. Outside of the market and economic factors impacting our revenues, it's recently become apparent to us that our sales effectiveness program is beginning to fire on all cylinders. The program has seven specific measures that we watch closely from week to week. At the group level we're seeing these seven targets met with increasing consistency. As a result, we've seen the commercial customer addition rates increase and the defection rates decrease.

Another encouraging measure is that in the third quarter three of the four U.S.-based groups posted higher average monthly revenue per new commercial customer than the average monthly revenue per lost commercial customer. Generally it's been just the opposite. New customers have been brought in at a lower monthly revenue than the customers we lose. These signs are very positive and are exactly the kind of results we were aiming for with our sales effectiveness program. We expect the program to create meaningful benefits for the company in the months and quarters ahead.

There was a notable change in the New York City market mid-September that we expect will result in favorable impacts to both our volumes and pricing there. The recap for commercial customers has been revised with the addition of a weight-based cap of $8 per hundred pounds of refuse. Additionally, a customer wiaver process has been adopted whereby the customer can simply agree with the hauler's weight estimates in pricing. The previously strict volume-based rate cap has caused us to choose not do business with several thousand heavily weighted customers, such as restaurants, over the past few years. Those customers were simply not economical. With the relief measure now in place, we are optimistic that we'll regain some of that lost market share.

In fact, during the past few weeks we've been receiving an increase in the number of calls to quote new business in the city and we've stepped up our sales prospecting efforts. Further, it's been difficult to cover the full cost of transportation to distant disposal sites following the closure of fresh fills landfill and the significantly increased demand put on the region's disposal facilities. We have literally been absorbing some of the increased costs of transportation, and with the change in the rate cap it will be easier to insure that the waste generators bear this expense.

This is a very large and important market for us, and we're pleased that there's now an opportunity to profitably service all customers, not just those of lightweight waste. On the acquisition front, we've continued to make progress with the announced asset purchases from Allied, as well as with our ongoing tuck-in program. During the third quarter we purchased approximately $120 million in annual revenues, bringing the year to date acquired revenues to over $450 million, including the Recycle America alliance purchases.

Just last week we closed the Allied South Florida deal, which is about $70 million in predivestiture revenues and $65 million once we make the required commercial route divestiture required by the DOJ. We appear to be on track to spend in the range of $325 million to $375 million, depending on closing dates for deals that are in the works. Moving on to our cost structure, let's first review our progress with waste route. As we previously announced, our goal was to eliminate 750 full commercial and residential routes by the end of the year. We are now confident that we'll meet and probably exceed that goal.

While success with optimizing existing routes and eliminating trucks and routes from our system has been exceptional, we're finding that the previously estimated cost of about $10,000 dollars per route per month are not being eliminated as quickly as we had expected. This is due in part to the process itself. Post--optimization. Our drivers are having to get accustomed to their new routes, and in addition, some of the associated costs just don't go away immediately. And let me give you some examples.

In terms of the process itself in running the revised routes, what we're finding is there's a period of time for the drivers to learn their new routes and begin running them as efficiently as possible. During this interim period of learning a new route, we find that overtime is higher and we may even have to run an extra truck to assist with mispickups for awhile. After about 60 days this issue largely disappears. In the case of costs not all going away immediately, good examples are truck licensing and insurance costs. Generally these kinds of costs are spent up-front for the entire year.

So, until renewal time comes around, we continue to incur the cost. And then, additionally, there's the truck maintenance portion of the cost. We generally have one mechanic for about every 10 trucks. If we remove two routes, we can't take out a full-time mechanic. What we can do is tighten up on overtime and make staffing adjustments, and we're working hard on seeing to it that those adjustments happen as quickly as possible. At this point in time we estimate that we are generally achieving $3,500 to $7,000 in monthly savings per route within 60 to 90 days.

We still believe we can get the $10,000 per month in savings through productivity improvements and other adjustments as we get the new routes stabilized and our field management is both focused and incentivized to do so. One of our major costs has been the reduction of SG&A costs. We have made terrific progress with the third quarter coming in at 10% even as a percent of revenue. We have focused on all categories of costs where we can manage our spending and our progress shows how great an impact our people can have on our cost structure. It's notable that for the first time in the four years I've been here that the absolute expense dollars in SG&A in a quarter is under $300 million.

There were two recent abnormal events that I should briefly talk about. The hurricane that hit the mid-Atlantic area in late September and the strike that occurred in Chicago in early October. While both of these events disrupted certain operations and had the potential to negatively impact our earnings, in the long run neither has had a material impact on income. The hurricane did cause some of our facilities to close down for a number of days, but the extra costs and lost revenues related to the closure will ultimately be recovered by increased volumes due to the storm damage which largely showed up in October.

In the case of the Chicago strike, the largest negative was overtime required to ultimately get the waste picked up. The positives resulted from not paying any wages to those employees who were on strike for several days and having two of the only landfills open in the area while the strike had others shutdowns. Finally, let me spend a few minutes summarizing the first three quarters of 2003 and looking forward a bit to 2004. In terms of revenue growth expectations for the year, through the first nine months we've done better than our projection of negative volume of 6/10ths of %.

Most of the unexpected upside came in the first quarter with the following two quarters running more as anticipated. On the other hand, pricing growth has been more difficult than we had projected. Many competitors have become more aggressive going after our customer base with lower prices than we've seen in the recent past and we've had to defend our business. As I mentioned previously, however, we're taking a new tack with our price increase program on our existing base of customers to cover our increasing cost of doing business, and that appears to be going well.

We expect that our competitors will also come to the realization that increasing costs combined with lower prices is a bad combination and that market pricing will reflect that realization. At Waste Management, our primary goal each year is the generation of free cash flow. By making free cash flow our key financial focus we're able to set aside the year-to-year differences created by the ever-changing world of GAAP accounting and we prove our ability as managers through discipline and capital allocation and working capital management. This year we set a goal of reducing $900 million to a billion in free cash flow adjusted for the net cash impact of the class action settlement.

As I mentioned earlier, we're well on our way to that goal, having produced nearly $800 million through the first nine months of the year, and we're currently expecting a minimum of $950 million for the full year. Further, our goal is to provide the best total return possible to our shareholders by allocating our available cash to share repurchase, dividends and acquisitions. As we announced in August, beginning in 2004 we'll be allocating about $425 million of the available cash to a 75 cent per share per year dividend.

This will provide approximately a 3% yield based on the current share price and we'll still have significant cash available to allocate to share repurchase and tuck-in acquisitions. We think the free cash flow and the commitment to provide a return to the shareholders exemplify the underlying strength of this business. We're in the process of working on the details of our 2004 plan to continue providing significant value to our shareholders and we'll share those details with you in February when we report our fourth quarter results. And with that, let me turn the call over to our Chief Financial Officer, David Steiner.

Thanks, Maury. As usual, I'll start out this morning with a year-over-year comparative review of the quarter's financial statements. As noted in the press release, applying the accounting changes that we've implemented in 2003 to the results for the third quarter of 2002, we show a comparison of 35 cents per share this year versus 36 cents last year. While our goal is to show improvement year-over-year, this is a more favorable comparison than we've had in the previous two quarters of the year and a step in the right direction.

The 2 cents per share reduction to 2002's reported 38 cents to put the quarters on a comparable basis, is primarily related to the implementation of FAS 143, which impacts the way we account for our closure and post--closure obligations at our landfills and to the change in accounting for lost contracts whereby we now spend such losss as they're incurred. You can find more detail with these accounting exchanges and their impacts from year to year in our 10Q, which we expect to file tomorrow. We actually were ready to file it today, but as some of you may know, yesterday afternoon the FASB changed their mind on the implementation of FAS 150, which had a minor effect on us, causing us to make the resulting changes to the quarter.

Moving on to the review of the changes in revenues, North American solid waste revenues of $2 billion $975 million dollars are higher than third quarter 2002 by $79 million dollars, or 2.7%. The single largest driver of this increase was acquisitions net of divestitures, which accounts for $66 million dollars of revenue increase in the quarter. $53 million dollars of that increase relates to our recycling acquisitions. Volumes negatively impacted the overall revenue growth by $19 million dollars in the quarter, attributable almost entirely to the loss of the Chicago Blue Bag contract as previously mentioned by Maury. Foreign currency translation from the Canadian dollar favorably impacted revenues by $16 million dollars.

In total, revenues from price were up $16 million dollars this quarter, including $6 million dollars from fuel surcharges. However, certain commodity prices, primarily cardboard and other fibers which peaked during the third quarter of 2002, were lower this year than they were last year, negatively impacting price growth by $19 million dollars. In the fourth quarter, we should see this year-over-year impact lessen. Excluding the impact of the lower commodity prices, as well as higher fuel surcharges and electricity rates at our independent power plants, revenues from price actually increased $24 million dollars in the quarter.

Operating expenses in the quarter were $1 billion $920 million dollars or $129 million dollars higher than the prior year on a reclassified basis. As a percent of revenue, the year-over-year increase is about 270 basis points. I'll remind you that last quarter that same gap was quite a bit higher at $155 million dollars and 340 basis points. So, you can see improvement. But we'll continue to work to reduce those expenses that we can directly control in the coming quarters. As we've said before, some costs rise because of increased revenue, such as cost of goods sold to broker commodities.

Some rise because of events outside of our control, such as fuel. And some rise because of longer term strategic issues, such as disposal and transportation costs associated with capacity constraints in our northeastern landfills. Those costs make up the bulk of the year-over-year variance and include $44 million dollars 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 it to third parties. The margin impact related to this costs of goods change is 47 basis points.

Foreign currency translation from the relatively stronger Canadian dollar added $14 million dollars in the quarter and had a 12 basis point impact. Disposal costs were up $14 million dollars, primarily in the eastern and southern groups, impacting margins by 49 basis points. In part, this increase is related to the high levels of precipitation on the east coast and in part it's due to us having to redirect some waste to third party sites. Disposal fees and taxes, which we generally pass onto our customers, are up $12 million dollars. The margin impact from these are 27 basis points.

Subcontractor costs were up $8 million dollars with an estimated 24 basis point impact. This cost increase can be fully attributed to the eastern group and is primarily related to the redirection of waste to more distant sites in the northeast corridor due to capacity constraints at our eastern Pennsylvania landfills. The cost of fuel was up $8 million dolalrs versus last year, but $6 million dollars of that was passed onto our customers through the fuel surcharge as I mentioned in the revenue reconciliation. The margin impact related to fuel was 14 basis points.

Landfill closure and post--closure expense increased $8 million dollars, largely related to the accreation expense change from the implementation of FAS 143. This impacted margins by 28 basis points. Those seven items total $108 million dollars. And although a number of them are pass-throughs to customer, we continue to work to address the strategic issues related to our capacity constraints. When we release guidance for 2004, we'll talk more specifically about the Northeast Corridor, in particular, and the steps we're taking and progress we anticipate making next year in alleviating some of the cost issues there.

For this quarter, however, the total margin impact from these items was over 200 basis points or about 75% of the total year-over-year margin change. Wages have increased $15 million dollars over third quarter last year. This increase is primarily driven by a combination of annual merit increases of about 3% and increased overtime, partially offset by our head count reductions and a continued focus on productivity. Higher wages negatively impacted margins by 52 basis points. Insurance and claims costs are up $5 million dollars or 17 basis points versus last year.

This is largely a result of higher average costs per claim, somewhat offset by a lower number of claims. A variety of other generally smaller cost changes, some favorable, some unfavorable, explain the remaining $1 million dollars year-to-year operating cost differences. Moving onto a very positive note, as Maury mentioned, SG&A costs of $297 million dollars are $34 million dollars or 140 basis points lower than last year on a reclassified basis.

As a reminder, we did have $13 million dollars of expense related to unusual litigation costs and legal issues in the 2002 quarter. Adjusting for this, current year expenses are still $21 million dollars or 6.6% lower. Obviously we're very pleased with the progress we've made on the SG&A front. As we've discussed before, SG&A at 10% of revenue puts us in a comparable range to Republic, which we believe has a similar overhead approach in structure to Waste Management than the other public companies, such as Allied and Waste Connections.

However, our short-term success will not change our ong-term plans and we will not stop working on reducing our SG&A costs. We have plans to continue to attack our costs as drive efficiencies through processes such as productivity improvement over the next two years. We're not yet claiming complete victory, but certainly our team has won the most recent battle. In terms of the sustainability of SG&A at 10%, let me just remind you that the third quarter is generally the highest revenue quarter of the year, and that certain costs, such as legal fees and bad debt expense, can be lumpy from quarter to quarter. In other words, we may have quarters where it's above 10%.

But I can assure you that I look at SG&A costs every day down to the most minute detail. Although we may have one-time type items, our core structure should not see the same type of expansion that was absolutely necessary in 1999 and 2000 when the turnaround began. Depreciation and amortization of $325 million or 10.9% of revenue is slightly higher than last year's $311 million dollars or 10.7% of revenue. Note that the implementation of FAS 143 had the impact of increasing D&A by $7 million dollars in the current quarter, explaining the difference as a percent of revenue.

Interest expense of $110 million dollars in the quarter is holding fairly stable this year and it's $8 million dollars less than in the prior year quarter. The tax provision for the quarter is recorded at a 36.3% rate, lower than prior quarters and reflecting the fact that we now estimate our full year tax rate to be 37.3%. The updated rate for the year is primarily a result of detailed projections of our state tax rates, which resulted in an expectation that the overall state tax rate will decrease to 6.2% from a previously expected 7%. On a sequential basis, not only did revenues grow by 2%, but margins also improved.

This resulted in a 3 cent per share improvement third quarter versus second quarter, excluding the 2 cent per share negative impact related to the charge taken for the work force reduction in the second quarter. Costs of operations as a percent of revenue improved by 20 basis points. SG&A costs improved by 30 basis points. And depreciation and amortization improved by 20 basis points. These three line items combined improved operating margins by 70 basis points. Again, not where we want to be, but a step in the right direction.

Now let's move onto balance sheet and cash flow items. As Maury discussed, adjusted free cash flow for the quarter was $251 million dollars for a total of $791 million daollars year-to-date. As you probably know, the adjustment we're making to free cash flow is related to the payment of the shareholder class action settlement which we made in mid-September and is finally behind us. The gross amount of that settlement, including interest, was $464 million dollars.

Netting insurance and other payments plus reduced tax payments against the $464 million dollars, we've had cash outflows of $259 million dollars which, on the consolidated cash flow statement included with the release today, is reflected in the change in operating assets and liabilities line items. Splitting between quarters, in the third quarter we had net outflows of $325 million dollars, and in the second quarter we had a tax benefit of $66 million dollars, which, as you recall, we deducted from free cash flow in that quarter. In the fourth quarter we expect an additional $35 million dollar tax benefit.

So, you can see we had another strong cash quarter and have now tightened our guidance for the year to predict adjusted free cash flow in excess of $950 million dollars. As we've always said, this company is first and foremost a cash-generating machine, and our performance year-to-date reflects that. On our last conference call, we talked about our share repurchase program for the second half of the year and the fact that we expect to spend about $500 million dollars repurchasing stock during the course of these last six months.

As we indicated at that time, the company did begin making open market purchases during our open window period that began a couple of days after our earnings announcement and ended in early September. Once our self-imposed window was closed, we continued to buy shares based on a 10B51 plan. During the course of the quarter we bought $7 million $860 thousand shares for $205 million dollars. We expect to use a similar strategy during the fourth quarter and have been in the market already in the quarter and expect to spend approximately $300 million dollars on share buyback during the course of the fourth quarter.

Moving on, our total debt increased $102 million dollars during the quarter, driven by the fact that we issued $200 million dollars in tax-exempt bonds during the quarter. As a reminder, when we issue these bonds it increases our step balance and also increases restricted funds, which is included in other assets on our balance sheet. The primary offset within total debt to the issuance of the bonds was a decrease in the net fair value of our interest rate swaps by $72 million dollars. On the maturity front, in Decenber we had $434 million dollars of senior notes that are due. It is currently our expectation that we will pay those notes off with available cash.

At the same time we do expect to issue another $150 to $200 million of tax-exempt bonds during the course of the fourth quarter. There is one recent accounting pronouncement, FIN 46, consolidation of variable interest entities that we should discuss. On October 9th the FASB deferred the application of FIN 46 for variable interest entities existing prior to February 1st, 2003. However, FIN 46 is effective for all variable interest entities created and modified after January 31st,2003, and Waste Management did participate in the creation of such an entity during the quarter.

In short, we issued a $25.6 million dollar letter of credit to support the debt of an unrelated surety bonding company established to issue surety bonds to the waste industry and extractive industries. The letter of credit serves to guarantee the bonding company's obligations associated with its debts and represents our exposure to the loss associated with our financial interest in the entity. Because of this financial support, we determined that we are the primary beneficiary of this entity and thus consolidated onto our financial statement.

Approximately $15 million dollars of cash and cash equivalents, $6 million dollars of other current assets, $5 million dollars of other intangible assets and $26 million dollars of long-term debt have been included in our balance sheet. So, you can see there was no material impact to our balance sheet and there was no impact to our results of operations in the quarter. On December 31st, we do anticipate consolidating two variable interest entities that are previously existing.

At September 30th, these two entities, which were the waste energy LLCs that we've previously discussed in our 10Q, had an asset value of approximately $404 million dollars and debt outstanding of approximately $201 million dollars. More details on the application of FIN 46 will be presented in our 10-QQ, but these are the highlights. In summary, this quarter shows the progress we've made addressing our cost structure here at Waste Management, and we will continue to do so as we move forward in our model of operational excellence.

Like anything, credit for that success often goes to the leaders of a company. But in our case it rightly belongs to our employees. During the two-plus years of an economic down and downsizings at our and other companies, the morale of the American worker has deteriorated. But I can honestly say that our employees here at Waste Management have been up to the task and continue to provide excellent service and superior performance, even as we continue to ask them to do more. They've helped this company survive through its hard times and it is they that will lead us to a bright future. And with that, Operator, we'll open up the line for questions.

I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad.Your first question comes from Corey Greendale of First Analysis.

Hi. Good morning, guys. A question about the pricing improvement. Is any of that coming on the landfill side at this point or is that primarily collections? Can you provide a little color on that?

Actually, yes, some of it is coming on the landfill side, and collection, as well, primarily in the commercial sector.

And then I was just curious if you could give detail on a couple of segments, specifically what you're seeing in terms of rolloffs, volumes and price and also special waste volumes and price?

Yeah. What we're seeing is pretty much what we've been reporting all along, and that is that -- what we've shown for the quarter is pretty indicative of what's gone on in the quarter with industrial volumes continuing to be weak, and pricing, as well, although on the commercial and residential side we're seeing things pick up.

I think more importantly, or maybe most importantly, we're finally seeing some things pick up here in the last -- well, the last several weeks in the east and midwest where we've seen most of the weakness. So, we're pleased about that. We're not ready to call a trend yet, but things are getting better. And then as I mentioned earlier, the west and the south have continued to improve, which is also encouraging.

Okay. Great. Thanks much.

Your next question comes from Amanda Tepper, JP Morgan.

Good morning.

Hi, Amanda.

Hi. Let's see. On this pricing initiative that you're doing, it's interesting how you're bringing it centralized back to local and then executing at the central level. Can you just explain a little bit how that works? Are you calling the customers from a central location to inform them of the price increase, or are you doing the retention efforts around their reaction when they see the new bill centrally, and how are you coordinating that?

The customer contact is still done all at the field level. What it does is just brings some additional tools and some additional analytical, you know, brain power to the process so that we can pull all the information up here at the corporate office, propose the increase based on what we believe to be some smart pricing theories, send it out to the field, have them look at it and provide their local viewpoint on those price increases, and then send them back here where we can actually implement them and make sure it gets onto the bill, and then monitor what happens after we get it onto the bill. So, it's just a tighter process with more software tools, and it's yielded good results.

On the software tools, are you baking into it things like where the stop is on the route and how close that particular stop would be to the disposal alternative and even how heavy it's going to weigh, or are you looking at more things like where the prevailing pricing is in the market based on the research you've done or other types of recurring characteristics?

What you get at the corporate office when we start off is more of what's going on on a regional basis in the marketplace by sector of the business, whether it's commercial, industrial or residential. Then when you get to the field, they're able to provide the more specific information on the specific customer, although the tools that we've built, the software tools that we've built are, you do take into consideration the actual cost of each customer, and that stuff is plugged in by the field.

Okay. Great. And then just on a bookkeeping issue, in terms of the share repurchase, David, you said you're looking to spend about $300 million in cash during the quarter. So , but it looks like the share count you had for year-end doesn't quite reflect everything ought to have -- I'm sorry - for quarter end doesn't quite reflect everything you would have bought. If I'm doing the math right at current prices you buy back, say, 11, 12 million shares, I'm just trying to get a sense of where you think you might end up the year for the reported share count for Q4.

I think the best way to get there, you'll see the share count in the queue, but the best way to get there is, you're right, if you look at the current share price, you're looking at about 11 million shares in the fourth quarter.

But that won't all come out of the share count because of averaging, right?

That's correct.

So, we take 593 minus some average amount. Okay. Thank you.

Your next question comes from Kevin Monroe of Thomas Weisel Partners

Good morning.

Hi, Kevin. Good morning.

One question on the volumes. If you back out the impact of, I guess, of the Blue Bag contract in Chicago, are your -- is your volume growth still negative? And if it's down, is it down because the overall industry volumes are down, or is it down because you're getting kind of an aggressive competitive reaction to your price increases?

Yeah, if you back that out --

It was 6/10 this is was the Blue Bag, and it was down 7/10.

So, it's about even.

Yeah.

And I think mostly what we're seeing in terms of volume is intense competition. Certainly you -- I guess you gotta address it sector by sector. In the industrial sector what we're seeing obviously is impact of the economy. But in the commercial sector primarily what we're seeing is intense competitive activity. So, what we've done primarily in the commercial sector again is to put a very intensive retention effort in place. And we are currently saving about 70% of the cancellation calls that we get.

One other question. Can you address maybe -- I know you said you were gonna do it on the fourth quarter call, but the capacity issues in the east, just kind of review that topic again for those of us who may not remember it?

Well, in summary, when the Fresh Kills landfill closed in New York, it substantially increased the flows for us down into our landfills in eastern Pennsylvania and into Ohio. So, those landfills started to fill up more quickly than we had anticipated. We quickly moved to try to increase our permitting activity, but not quickly enough. And as a result, what we're having to do is to pull waste all the way across Pennsylvania and redirect some to third party landfills. The combination of that is driving up our costs. At the same time what we're doing is strategically looking for alternatives. Number 1, continuing to press to get our permits, our expansion permits. But the other thing we're doing that has been widely reported is putting together a barging operation from New York down into Virginia.

Right. Any update on that?

We continue to work through the process to get all the permits we need, and we anticipate getting that underway sometime in the first quarter, first half of next year.

Can you quantify the potential benefit of that at all?

No, we'll talk about that some more when we put out our 2004 plan.

Okay. Thank you.

Your next question comes from Leone Young of Smith Barney.

Yeah, good morning.

Good morning.

A couple of just housekeeping questions. Is the tax rate then expected to stay at this lower level next year as best you can guess?

No, no.

Okay.

Now, that depends, Leone, if you look at the current energy bill, there are some things in the energy bill that would benefit us from a tax perspective point of view. But no, on a base business, we would not expect it to remain at that rate.

Okay. So, we'd normalize that. Also, I noticed your internalization rate kicked down a little bit as it has. Do you think that's going to start to stabilize in here?

It ticked down .2%. We don't really view that as a material tick down. But yeah, we expect that to be stable at about 64%.

Okay. And then just finally, in terms of your acquisition strategy, I know at the beginning of the year there was more focus on recycling, and yet, it seems to have turned more now to the Allied Waste assets and solid waste. I'm just curious as you go into the final part of the year where the focus is going to be.

Well, the focus has always been on solid waste assets. It just turned out that the largest of our recycling acquisitions occurred in the first part of the year. You won't see any recycling acquisitions as big as the Pells acquisition in the future. The additional recycling acquisitions we do will be relatively small and again, we are continuing to focus on tuck-in acquisitions and we're taking advantage of the fact that Allied is selling assets.

Great. Glad to hear it. Thank you.

Thanks.

Your next question comes from Trip Rogers of UBS Warburg.

Good morning.

Morning.

You're talking about the uptick you're seeing a little bit in the east and midwest. Just to clarify, that is mainly industrial? And I guess you also mentioned that commercial was picking up a little bit. Are you also seeing what Allied was talking about, commercial customers increasing volumes but not yet increasing level of service?

Well, yeah. In the east what we're seeing is -- and again, we're just talking about a couple of weeks here. It's been since the quarter ended, actually. Our rolloff activity has been improving in the east, and in the midwest we're seeing special waste pick up all of a sudden. What had happened in the midwest, we had jobs in the pipeline, but they kept just being delayed. And we're starting to see some of those turn loose.

Now, of course, we're also heading for the colder weather, so that could slow it down, as well. But we're interpreting this as a pickup in activity that we see as positive in the east and in the midwest. We're also seeing landfill volumes pick up a little bit in the midwest, as well. Through it all, though, both the west and the southwest continue to look very encouraging. So, you know, most important we're looking for these areas that have been laggards; that is, in the east and midwest to pick up. We can't call several weeks here, two or three weeks a turnaround, but certainly it's positive news.

Any comment on the commercial customers? Do you see more volumes being generated without that level of service increase?

The volumes are picking up. But I guess at this point we're not ready to tell you exactly what's going on.

Okay. And then looking at fourth quarter SG&A, Dave, I think you mentioned that costs can be somewhat lumpy. At the same time, you're gonna get the full benefits of these two work force reductions. What kinds of are trend -- can you say what kind of trend you might see from there? Does it come down from here?

Well, yeah. Dollarwise it should continue to come down. The point we wanted to make is that there are some one-time type items. Last year, for example, in the same quarter with had $13 million dollars of legal-related expenses. But if you take our core underlying SG&A structure, which was $297 million this quarter, you know, I and Larry O'Donnell look at every individual that's hired under the SG&A category. And so, we've got a pretty good, tight grip on who's being hired.

So, you won't see that core structure go up or down. You should see it stay flat and continue to go down as we go through productivity improvements in the next two years. So, you know, on a core basis I think it should be right here and continue to go down, but I just want to caution you that revenues move because third quarter is our highest revenue quarter and we will have some lumpy items now and again. But overall, we should see it stay at this level and continue to come down as we drive process and productivity improvements through the organization.

Great. Thanks a lot.

Your next question comes from Tom Ford of Lehman Brothers.

Good morning.

Good morning, Tom.

In terms of the route savings, just curious, what kinds of range have you seen in the areas where the routes have been rolled out, say, like -- I don't know if you were -- it seemed like you were kinds of saying, like, the 60-day period there's sort of an easing in. What happens if you look out beyond that? What kind of average savings have you seen per route?

Well, we're not there yet. You know, the program just really picked up to the high level that it's at in terms of routes coming out in the third quarter. So, you know, we're -- what we gave you is our forecast of what's happening based on since the beginning of the year. But the volumes really have just started to really pick up. So, we're, I think, you know, not quite ready to tell you exactly how it's going to work out. But you know, again, overall we're confident that the costs are going to come out. It's just taking longer than we anticipated.

Okay. Well, do you have a sense as to how much costs you actually saved in the third quarter?

Well, only on a -- you know, only on a per route basis as we reported to you.

Okay. Switching over to the sales program, I mean, it seems a little cumbersome to have sort of this corporate local corporate dialogue. And I'm just -- I mean, has there been any situations -- I guess it sounds like this is something that's relatively recent.

And I would imagine that you're keeping a close eye on it. I guess the concern would be that if you did something -- if corporate is involved, the reaction would be slow. You know, if something occurred at a local level. And so, I'm just wondering what you can say or talk about in terms of what you've seen or how it's structured, you know, that you don't think that that's right in terms of assuming that.

You're talking about the price increase program?

Yeah.

Yeah. Actually, what's happening is that it provides some new discipline into the system that we didn't have before. Too often what would happen is that a specific salesperson would get ahold of a price increase that was proposed, and for some reason cancel the price increase when it wasn't appropriate. And this way there's a better system of checks and balances to make sure that every single customer gets focus, because it's all automated, and that price increases actually get implemented. So, because so much of it's automated, Tom, it's actually a much better, more streamlined process. It turns our salespeople loose to go out and make sales calls instead of working through paperwork.

Mm-hmm. Okay.

And what we've found so far, by the way, with it is that -- you know, I think we'd reported in the past that typically our pushback had been in the range of 15%. With this new program we've put in place here over the last few weeks, whether it's a result of the process or, you know, just what's going on in the market place, I'm not sure. But we're getting about 10% pushback, which would indicate that what we're doing is working. And I really think a lot of it is just because we've got better discipline into the system now.

Okay. In other words, someone keeping a closer eye on the local sales force to make sure they really follow through.

Yeah, exactly. And then, you know, at the same time the local sales guys are having to go through the discipline of looking at every single account and justify why that particular account shouldn't get a price increase.

Right. Now, you mentioned it was the east region, right, in the third quarter?

You mean in terms of price increase?

Yeah, in terms of this program.

That is where we've really launched this thing and where they've used it the most, that's right.

Okay. If I look at the sequential change in price, and I know that there's mix also that factors in in terms of how you report that in organic growth number, but you had a pretty decent sequential step-up, number 1. And number 2, if I remember correctly the Pennsylvania tonnage tax would have also stepped down as you anniversary to a degree. Is that right?

I think that's right.

Okay. So, you had a pretty notable step-up here sequentially for what seems like a pricing program that's only really begun in one region. Is that fair?

Well, we really did begin it everywhere. But it's concentrated in the east. I think more importantly is that we've only seen the beginning of that price increase program in the third quarter and probably only about 10% of it, as a matter of fact. So, we're gonna see most of it in the fourth quarter.

Okay. So, and hence Dave's comment about $16 million of sequential pricing benefit in 4Q?

Right.

Okay. One last question for you. In terms of -- I know that there was, you know, discussion or talk of, and I know that this may be jumping the gun because it's more for '04, but I'm just trying to get a sense. I mean, it was kind of my understanding that sometime in late this year or the beginning of next year you're gonna start to address things like call center elements in terms of taking a hard look at those and maybe consolidating them. And I just want to make sure, was there anything that has changed? I know you may not want to talk about it, but has anything really changed there in terms of timing or your planning with respect to that?

No, nothing's really changed. I think it was not so much call center as it was a discussion about consolidating billing and credit collection centers. And we are -- those plans go forward as we had discussed before. Okay.

Great. Thanks very much.

Thanks.

Your next question comes from Brad Coltman of Deutsche Bank Alex Brown.

Thank you. I've just got a few follow-up questions, I guess. Going back to the route optimization pilot program, I thought that had been piloted in certain markets, and so I'm just kind of curious as to why the estimated savings of $10,000 per route are coming in so much lower than the piloted markets program.

Well, I think that what we had piloted is the processes, and we had estimated the cost that we would come out. And I think what we're saying is that actually we're ahead of schedule in terms of taking the routes out. In terms of the cost, the analysis that we've done is still right, but in the pilot, you know, you just didn't have the opportunity to see how long it took to get the costs out.

Okay. And then on the pricing program, I think Tom made a good point about the incremental -- the sequential improvement. I still -- I'm just curious. I thought that the pricing tool had been rolled out to all the field markets over the past quarters. And I'm wondering what additional tools did the corporate staff have to make them better positioned to suggest pricing increases than the field level was previously?

It's not so much new tools as it is using the tools that we had developed in a different way, although there are some tweaks to it that they use so that they can pull up the information here at the corporate level. You know, it just continues to improve. We just continue to use the tools in a different way, and it's probably more process now than it is actual new tools built.

Yeah. And let me just add one thing, Brad. You know, one of the issues is, in the field as you might imagine, our local folks have a lot of things on their plate all the time. I mean, they're always trying to do a number of different things. You know, here where the detailed work of figuring out how much increase you want to put on each customer is being done by a group. That's what they're focused on doing. That's all they're doing. So, it keeps things moving along a little bit more quickly when you've got a central group focused on it.

Okay. So, just a better focus and discipline.

The idea is to get some people involved who are pricing experts. The salespeople are not, you know? Their job is to deal with our customers and sell. And we've got people now who are indeed pricing experts, and you can bring that knowledge to bear on the process and combine the local knowledge that the salespeople have with some good tools and some expert pricing. It's just a better total package. What you don't want to do is to take away the fact that the pricing is still local. You can't do it out of a black box. And we all know that. We think we have the right combination of local and corporate oversights.

Okay. And then just one quick clarification for David with regards to the G&A expense. I understand what you're saying with regards to the core level and the longer term trend, but I just -- I think the question is more specifically to the fourth quarter as to what one-time items you may be expecting.

Yeah, we certainly don't see any one-time type items. We do have one item in Canada that occurred early in the fourth quarter, which is a positive for SG&A in the quarter. And that was a favorable settlement or a favorable verdict on an expropriation of a landfill that we had in 1995. And that's about $16 million dollars American. But that's positive for the fourth quarter. We don't see right now any lumpy increases in the fourth quarter.

No catch-up or accrual adjustments or anything like that?

Correct.

Okay. Thank you.

Your final question comes from Lorraine Maikis of Merrill Lynch.

Hi. I just wanted to follow up on -- you said that you were saying you're saving about 70% of the cancellation calls you've received. Right. Have you been able to do that in any other way other way besides bringing the pricing down to the competitive bid?

Well, we try everything. You know, the first thing you try to do, obviously, is to save the account without reducing the price, whether it's a service issue. You might send a salesperson out there to try to deal with it. If it's strictly a price issue, then we will adjust the price. If it's determined that it's the smart thing to do. Our retention people all have guidelines that they're given in terms of what they can do and what they can't do because we want to make sure that we maintain the customer on a profitable basis. The other 30% get away, and a lot of that is a result of the fact that it's just too low and we're not going to match it because it's going to be unprofitable.

Okay. And then the Pennsylvania landfill passes, what percentage of those have you been able to pass through to your customers?

About 90% of that we pass straight through to the customers.

Okay. And then what was the impact on your .8% price increase of the landfill passes?

We'll have to get that number for you, Lorraine, and let you know.

It's not as much as it sounds because a lot of that pass-through doesn't go through revenue. A lot of the pass-through is a [inaudible]. But I can find that and let you know, Lorraine.

The guys are sitting here saying it's a minimal amount, but we'll get you a number.

Thank you very much.

Thanks. That was our last call. We thank you for joining us. We'll be presenting at conferences during the first week of November and the first week of December. And for more information on these and the availability to listen to a webcast of our presentations, you can visit our Investor Relations page on our website. Thanks very much.

This concludes the Waste Management third quarter 2003 earnings release. You may all disconnect.