美國廢棄物管理公司 (WM) 2004 Q1 法說會逐字稿

Good morning. My name is Janice, and I'll be your conference facilitator today. At this time I would like to welcome everyone to the Waste Management first-quarter 2004 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 one on your telephone keypad. If you would like to withdraw your question, press the pound key. At this time, I would like to introduce Ms. Cherie Rice, vice president of investor relations and treasurer. Ma'am, you may go ahead.

Thank you, Janice. Good morning, everyone, and thank you for joining us. With me this morning are Maury Myers, the chairman of the board; David Steiner, chief executive officer; Larry O'Donnell, president and chief operating officer; and Bob Simpson, senior vice president and chief financial officer. Maury will start things off with a brief overview of the quarter and the management transition. Next, David will review price and volume trends, cost impacts in the quarter, and our goals and strategies. Larry will delve into specific operating costs and activities. And then Bob will review the financial statements in detail and cover a few related topics. After that, we will open the line 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 1:00 p.m. on May 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 6388827.

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 the Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities and Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties which are described in detail in Waste Management's annual report on Form 10-K for the year ended December 31, 2003, 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. For the same reason, the company believes investors are interested in this measure.

As I stated earlier, this call will be available for replay for a two-week period. Time-sensitive information given during the course of today's call, which is occurring on April 29, 2004, 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, finally, I will turn the call over to Waste Management's chairman, Maury Myers.

Thanks, Cherie, and welcome to all of our conference call and webcast participants. My remarks will be brief this morning, as it seems appropriate to have our three new key company officers cover the quarter's details.

Looking at the first quarter from a high level, I can tell you that we are happy with the results. Both revenues and income were somewhat stronger than we'd anticipated. The main drivers of our performance were tough weather in January, followed by fairly normal weather conditions during February and March. Volumes that improved not only with the weather during the course of the quarter and the expected seasonal upturn, but we believe volumes also began showing signs of economic improvement during the months of March and April. And then our pricing environment, similar to what we've seen in previous months. Generally, we're having continued success raising prices to our existing customers. At the same time, pricing for new business is very competitive, and as a result of lower-priced offers from competitors, in some cases we have to reduce prices to retain customers.

And then certain costs continue to pressure our margins, including fuel, state-mandated fees and taxes, and employee healthcare costs. On the other hand, we had ongoing success with our cost initiatives, resulting in year-over-year improvements in our margins. Our route optimization program, procurement efforts and focus on both safety and fleet maintenance costs benefited us during the quarter. Dave, Larry, and Bob will review the details behind both our strengths and our challenges in the quarter. All in all, we view this as a good, solid start to the new year.

I want to take a moment to talk about the management transition process we're in the midst of here at Waste Management. As I'm certain you all know, I am now filling the role of chairman of the board only. David Steiner is our chief executive officer, Larry O'Donnell is president and chief operating officer, and Bob Simpson is chief financial officer. I am, and will continue to be, very involved on a daily basis until my retirement in November. The new team has done a great job of jumping into their new roles and responsibilities and, as expected, it's been a seamless change to the organization.

Our senior leadership team has spent the last four years developing and implementing the company's current strategy, and that strategy has not changed. As members of the team that established the company's direction, Dave, Larry, and Bob will continue to mine the operation for improvement opportunities, just as we've done in the past. Without a doubt, those efforts will result in new areas of emphasis and new tactics to help us reach our goals. These goals continue to be operating excellence and financial strength. Our board, our management team, and our employees remain committed to this strategy for success, and I believe that the coming years will prove to be even more fruitful for Waste Management.

And now, I'll turn the call over to David for his review of the first quarter.

Thanks, Maury, and good morning again, everyone. To start out, I'll jump right in and build on what Maury reviewed in terms of the quarter's performance and trends, beginning with revenues. As reported in our press release this morning, base business internal revenue growth was 1.9%, much higher than we've experienced in any quarter over the past two years. We're optimistic that we can sustain this level of growth in the coming quarters, but we'll continue to remain cautious until we see definitive and sustained evidence of an economic upturn. In the meantime, we'll continue to drive our cost improvement initiatives, which Larry and Bob will discuss.

Now let's review average yield. As noted in the press release, what we're now calling yield is the same measure that we used to call price. This measure includes not only price increases, but also price decreases to retain customers, change in average price as a result of churn, and certain changes related to business mix. Base business yield was up 0.6% in the quarter, similar to what we've experienced over the past several quarters. We continue to have good success implementing price increases on our existing collection customer base. By that measure, we've effected 2.5% in average price increases over our total collection customer base, and 3.4% average price increases on the commercial customer segment.

The overall yield is lower due to a number of factors, including other lines of business where we've not been able to realize the same levels of price increase, such as landfills and waste to energy, price decreases we've had to extend to customers to retain their business as competitors have offered them lower rates, and lower yield as a result of business churn, whereby new customers generally have a lower average rate than customers we lose. Our goal for the year is to attain a 1% increase in yield. So from that perspective, the quarter's results are short of plan. Our commercial price increase program continues to excel, but in order to reach our overall goal for the year, we'll need to implement larger price increases at our landfills, and that will be a primary focus for the year. The pricing environment at the landfills continues to be difficult, and competitive pressures at landfills have not abated. But we will test pricing in select markets, and expect that as the economy improves, the pricing environment in landfills will also improve.

We also plan to continue to forge ahead on our commercial base, inducing new opportunities for improving our yield near-term. Finally, the rolloff pricing environment remains very difficult in the industrial belt, mostly in Illinois, Michigan, Indiana, and Ohio. We continue to emphasize pricing in these areas, but pricing in those markets has actually gone backwards. We expect that trend to reverse as the economy improves.

I should point out that recycling commodity prices were very strong in the quarter, adding $30.5 million, or 1.1%, to our total revenue increase in the quarter. As you all know, those increases are not included in our base business yield of 0.6%. Many of you have been tracking the yellow sheet pricing of OCC, ONP and other recycled fibers, and know they've been on a favorable track through the first four months of the year. While fiber makes up the bulk of our recycled materials, other important commodities that we process and sell, such as plastics, aluminum and steel, have increased lately as well. The commodity price improvements obviously had a very favorable impact on our revenue growth in the quarter, but keep in mind that of the $30.5 million increase, $21 million was rebated directly to our customers who provide the material to us.

Getting back to the other component of base business internal revenue growth, year-over-year change in revenue due to volumes was the strongest we've seen since back to the year 2000, at 1.3% favorable for the quarter. While this is certainly a very favorable outcome, there are a couple of factors that give us pause in extrapolating this growth rate to future quarters. First of all, we did have a very harsh winter in the first quarter 2003, resulting in an estimated $30 million lower-than-normal revenues for that period. That, of course, means our year-to-year comps were much easier this quarter. Additionally, 2004 is a leap year, meaning there was an extra day of rolloff transfer in landfill volumes in the quarter, as compared to last year.

Adjusting for our estimated 2003 weather impact, the extra day from leap year, and the loss of the Chicago Blue Bag contract in mid-February 2003, volumes were actually slightly down year-over-year. The underlying trends during the course of the quarter, however, and into April, tell a somewhat different story. Looking at just the month of March 2004, base business revenue growth from volumes, adjusted for the actual number of working days, was an increase of 1.6% versus March 2003, and March 2003 was a rebound month. In other words, in February last year, there were significant snow storms in a number of our largest markets, causing some of the waste volumes created in February to not be picked up and deposited in our landfills until March. Similar issues occurred in the rolloff last February and March. That type of weather did not occur in March 2004. So the month of March had difficult year-over-year volume comparisons, yet we experienced strong March-over-March revenue growth from volume, which is a very encouraging sign.

For April, through the 24th, we continue to see strength in year-over-year unit measures. After adjusting for acquisitions, average daily rolloff hauls, for example, are 4.6% higher than in the comparable days of April 2003. Average daily total landfill tons are up 6.4% by the same measure. Construction and demolition landfill tons, which are generally around 12% of our total landfill tons, are exceptionally strong. Month-to-date through April 24th, they've been 13.6% higher than last year on an average daily basis. Looking at that statistic, combined with the rolloff statistic, we believe that C&D activity has really taken off this year, driving a fair amount of our increased volumes to date.

I mentioned earlier that we see opportunity for increasing rolloff prices. As you just heard, the volumes are very strong right now. It seems that demand is finally catching up to supply again, changing the overall pricing dynamics, so we're in the process of raising our rolloff prices. Another reason for us to begin to have some optimism about the top-line prospects for 2004 is the prospect of reducing the impact of losing customers to competitors who offer lower pricing. As I said before, that's part of what is hampering our ability to show a higher yield.

As our competitors' resources are increasingly directed to servicing new business from a stronger economy, rather than looking for growth from existing volumes in the market, we believe that our average yield will improve. Finally, regardless of what our competitors do, we'll continue to focus on customer service to differentiate ourselves from the competition and to allow us to retain our customers at a higher pricing level. In that regard, our churn rate for the quarter was 9%, down from 9.8% in the same quarter of 2003.

Now let me talk a little bit about the cost side of the equation. As Maury mentioned, we do continue to have some pressures impacting our margins, including fuel costs, state-mandated fees and taxes, and employee healthcare costs. The fuel cost pressure has been more than we budgeted for this year. As compared to our budget, fuel cost was $9 million higher, and fuel surcharges passed through to our customers were $6 million higher in the quarter, for a net cost impact of $3 million. Similarly, utility costs were $3 million more than what we projected for the quarter. As we expected, our employee healthcare costs have also increased versus 2003. The increased cost in the first quarter was about $3 million, in line with our budget and our projections.

As noted on the financial statements included with our press release today, the issue with state-mandated fees and taxes primarily pertains to how we record and present these items in our financial statements. Historically, because we collected the fees and passed them on to the collecting authority, we didn't run them through the income statement. We've now determined they are more appropriately grossed up on our income statement as revenues, with offsetting expenses. This change, which resulted in an increase to first quarter 2003's revenues and operating expenses by $16 million each, is not a change to our business or to our cash flow, but it does have the impact of squeezing our gross operating income margins as compared to how they were reported in 2003. On a comparable basis for the change in presentation to fees and taxes, our operating income margin before asset impairments, unusual items and restructuring charges, improved 65 basis points during the first quarter, versus the same quarter last year, showing clear benefits in terms of our cost structure, even with the cost pressures we've experienced. Larry will review the operating cost changes from year to year, and Bob will review the SG&A cost changes a little later in the call.

Finally, I'd like to follow up on Maury's comments about the management transition. One week after the public announcement of the management changes, we held our Waste Management leadership conference, at which we had nearly 1,500 of our leaders from across the country together for three days. This was a great opportunity to talk about our successes over the past four years, where we're heading in the future in terms of operational excellence, financial strength allocation of capital, training and development of our people, and environmental leadership. At the conference, we presented Waste Management's first annual summit award. Each of our operating groups had two summit award winners, one for their best market area and another for their most improved market area. Over the past few weeks, Larry and I, along with other key members of our senior leadership team, have vowed to visit most of the summit award-winning market areas around the country. Our main focus of these visits has been to formally present the awards and to celebrate the successes with the entire team, through forum breakfasts with the front-line workers, to meeting with the office staff, to serving up barbecue to drivers as they come in off their routes at the end of the day. The winners of these awards have all worked very hard on the things that we measure: safety, productivity, service excellence, and cost-saving initiatives. And it's important that they hear directly from us how much we appreciate their efforts and accomplishments.

It's also been a great opportunity for the senior team to hear what these folks have to say about what motivates them, what programs are working, and what needs some fine-tuning. What we've learned over the past three weeks is that our people are very optimistic about the future of the company. They're very proud to be employees of Waste Management. They recognize that we're the biggest and the best in the industry, and the know that with the opportunities that our industry leadership presents, comes great responsibilities to our communities and to our environment. We also learned that they are up to those challenges, and I truly look forward to leading them to great achievements in the future. These visits have provided a great start for Larry and me in our new roles.

As Maury said, this team is working with the same strategy and toward the same goals that we've been working toward for the past four years. That won't change. Of course, our senior leadership team will also continue to look for new and innovative ways to leverage the progress we've made in the last four years to continue to drive improvements. Larry and I certainly don't believe the company is operating anywhere near its full potential yet. It's operating well. In fact it's operating very well. It's producing strong, predictable and sustainable cash flow, right around $1 billion, year in and year out, even through a very difficult economy.

But we aren't satisfied with that, and we all know that we can improve. We know that there are underperformers across the country in every category that we measure. Our focus is first on bringing those underperformers up to the median, and then finding new ways to continue the improvement process across our entire base of operations. It's the same kind of continuous improvement process that you see at all the great companies in America and across the world. Our goal is to put Waste Management in that category of companies, and to make sure that the model is sustainable over the long term. That means continuous and sustainable improvement, and that's what we're up to here at Waste Management. Maury has laid the foundation for us to take that next step, and I can speak for Larry and me, and the rest of the senior leadership team here at Waste Management, when I say we will deliver.

And now I'm going to turn the call over the Larry O'Donnell, who will discuss further details on our operational performance.

Thank you, Dave, and good morning to everyone. I'll begin my comments with a detailed review of operating expenses as compared to the prior year. Operating expenses in the first quarter of 2004 were $1.920 billion, or $111 million higher than in the 2003 quarter, which is basically flat as a percent of revenue. To remind you of our recent historical operating expense comparative trend, last year in the second quarter operating expenses were 340 basis points higher than in the prior-year quarter. We are pleased that our continued cost-reduction and operational-efficiency efforts have enabled us to lower that gap each of the past three quarters to where it has now closed. Certainly, most of this year's first quarter operating expense dollar increases, as compared to first quarter 2003, are directly related to our revenue increases.

Let me review with you some of the more significant changes within our operating cost structure, as compared to last year. Salaries and wages were up $31 million from the same quarter last year. This increase is due to a variety of factors, including acquisitions, year-over-year wage increases, and increased volumes resulting in increases in overtime. Partially offsetting these increased are labor reductions related to the restructuring in February and June of 2003, and productivity increases as a result of our productivity initiatives, including waste routes.

Cost of goods sold is higher by $25 million than the same quarter last year. The majority of this increase, about $21 million, is in recycling, and is related to the increased commodity prices and the resulting increased amount we passed back to our customers, primarily in the form of recycling rebates. The remainder is primarily related to the cost of stabilization materials at our industrial landfills. Subcontractor expense is higher by $22 million than the first quarter last year. This increase is largely driven by third-party transportation costs associated with the higher volumes hauled from our transfer stations to our landfills and special waste projects, the redirection of waste to more distant landfills, primarily in the east, versus last year, and higher third-party transportation rates in the east. Third-party disposal and transfer costs increased by $17 million over the first quarter last year. Once again, this increase is largely related to higher waste volumes, as compared to the first quarter 2003.

Foreign currency translation from our Canadian operations, due to the strengthening of the Canadian dollar, added another $13 million of cost in the quarter, as compared to the same quarter in 2003. Maintenance and repair costs increased $8 million, about half of which is in the Wheelabrator business, and is primarily an issue of the timing of scheduled repairs between quarters. Other cost categories with smaller increases in dollars spent from year to year include disposal fees and taxes, insurance and claims costs, healthcare, and payroll taxes. One offset to these increased costs is an $11 million decrease in leasehold costs, primarily as a result of the Wheelabrator assets that were brought onto the balance sheet at year-end 2003 in connection with the implementation of Fin 46.

Another significant offset to cost increases is an $11 million reduction to landfill site costs from year to year. As a reminder, in the first quarter last year our closed-site and remediation liabilities increased by $7 million, as a result of a change in the inflation rate used in the accounting process. The reduction this year is primarily a result of the one-time expense booked last year related to this change in inflation rate.

I'd also like to point out some positive results and trends we saw in the quarter related to our ongoing productivity and cost-improvement initiatives. While our total insurance and claims costs, including healthcare, have risen by $7 million as compared to last year, that represents less than a 5% cost increase. Insurance cost increases at other U.S. companies have been reported in the 10 to 15% range. Safety is a cornerstone in our drive to operational excellence, and our continued focus on our Mission to Zero safety program is working to keep these costs relatively in check. As we've discussed on previous calls, we have seen our total reportable injury rate, an important OSHA measure, decrease by 60% over the last three years.

At the beginning of this year, we restructured our workers' compensation program, with a focus on post-injury management, in getting our injured employees back to work more quickly. The new program is showing positive results already. For example, our number of employees absent due to injury has improved by 25% since January. We've also seen lost work days decrease by 22%, as compared to the first quarter 2003. While it's too early to know what the total cost savings from this program can be, the results are encouraging.

Prevention of injuries and accidents remains one of our top priorities, and are programs are designed to target zero accidents as the only acceptable goal. On a similar note, we are encouraged by the newly enacted workers' compensation reform in California. We incur significant workers' comp expense in California, and we hope that the intent of the reform will be carried through the regulatory process.

Total collection fleet maintenance cost in our U.S.-based operations were flat year-over-year, which is encouraging, given the increased level of business we had first quarter 2004 versus 2003. Improving our maintenance costs has been an important initiative for us. As we've discussed before, we measure our collection fleet maintenance costs in dollars per driver hour. By that measure, we had great results in the month of March that we believe are a result of our concerted efforts to improve our preventative maintenance and planning and scheduling processes. In March, three of our U.S.-based groups, the east, the south, and the midwest, all attained an average maintenance cost per driver hour below $11. This is very encouraging performance and increases our optimism for attaining our goal of a corporate average cost of $11.32 per hour for the full year, for a 4.5% reduction from 2003.

Incremental waste route cost savings were $12.9 million in the quarter. We continue to expect that we will meet our full-year target of $44 million in new savings this year. Our procurement programs also showed good results in the quarter, providing $11 million in new incremental savings.

As Dave said, in 2004 we are focused on improving the performance of our underperforming business units. As some of you have heard me discuss before, we have a monthly operations score card that not only scores each business unit on several key measurables, but it also quartiles the performance of each of our market areas and districts. When we talk about the underperformers, we are generally talking about those that are consistently in the bottom quartile on our operations score card.

One of the most critical functions I have as chief operating officer is ensuring that each of our market areas is performing at its optimal level. So I'll be spending a lot of my time in the field with all our operations, encouraging and mentoring the top performers to help them achieve even higher levels of success, as well as working with the lowest performers to help them overcome their obstacles and adopt the best practices of our top operations. Dave mentioned that he and I visited our summit award-winning market areas the last several weeks to recognize them for their top performance. I have also visited a number of our lowest performing market areas. When I travel to a market area, I typically meet with the management team, review their financial performance, assess the challenges and opportunities in the market and, in our lower performing operations, jointly develop a specific plan for improving their performance. While many things can be learned from our top performers, each situation is unique, and some markets have strategic issues that may take a while to fix. The plans include assigning specific individuals responsible for each task, a deadline or a set of milestones for and anticipated outcomes from the completion of the task.

Working with our group leadership, I will continue to meet with each of our market areas and circle back to lower performing market areas to review the progress, reset any tasks or goals if necessary, and establish new performance goals for the future. As a market area attains acceptable performance levels and comes off the list of low performers, a new market area will be added to the program. In other words, this will be another part of Waste Management's continuous improvement process. There will always be opportunities to improve our performance and constantly raise the bar, as we strive to achieve operational excellence. It's my job to ensure that we seek out those opportunities and capitalize on each and every one of them. I am truly excited about the future here at Waste Management. This is a great time to be part of this company, and I'm looking forward to working closely with Dave and the other members of our team to take this company to even higher levels of performance.

Now I'll turn the call over to Bob Simpson for a review of SG&A costs and a financial update.

Thank you, Larry. Taking a look at SG&A costs, the comparison from year to year is favorable, both in terms of dollars spent and as a percentage of revenue. Total SG&A expense in the quarter was $316 million, $7 million less than the first quarter of 2003. As a percentage of revenue, this quarter was 10.9%, versus 11.8% last year, or a 90-basis-point reduction. The savings are largely in the labor category and a direct result of our two restructurings in 2003. This result is in line with our first-quarter expectations, and puts us well on our way to meeting our stated goal of SG&A costs in a range of 10 to 10.5% of revenue for the full year.

Sequentially, this cost category increased $21 million. $17 million of that variance is related to the favorable litigation settlement we received in the fourth quarter, as discussed on our last call. The other significant factor is payroll tax expense, which is up $8 million due to bonus payouts and the imposition of FICA taxes on employees whose earnings had exceeded the cap in the fourth quarter. We have made good progress in reducing our SG&A costs over the last two years, and I wish to reiterate that we will remain focused on these costs in the future, pursuing efficiencies that will reduce them even further.

Moving down the income statement line, depreciation and amortization is slightly up as a percent of revenue. This increase is largely related to increased landfill volumes, the Fin 46 impact related to the Wheelabrator special-purpose entities, and increased depreciation as a result of placing new software systems into service during the last half of 2003. There was just a modest amount of income in the asset impairments and unusual items line, primarily related to a divestiture.

In the other income and expense section, I will note a couple of items for you. First of all, there is a new line, equity and losses of unconsolidated entities. This line shows a loss of $19 million in the current quarter, which is primarily related to the synthetic fuels investment that we made early in the year and discussed on our February conference call. Minority interest expense is higher than last year, principally as a result of the year-end Fin 46 consolidation of the Wheelabrator special-purpose entities. With these entities now on our balance sheet, we will have ongoing related minority interest expense.

The tax provision in the quarter is at a 30.25% rate, clearly benefiting from the tax credits generated by the synthetic fuels investment. The rate is lower than the 32% full-year rate we had projected because we realized a $5 million tax benefit on a favorable audit settlement. Without this benefit, we would have had a 32.65% rate in the quarter.

The synthetic fuels investment had a $2 million net negative impact on our income in the first quarter. There was $19 million associated with our equity in the losses of this entity, $2 million of interest expense, and a $19 million tax benefit in the quarter. We expect to have a favorable net impact in each of the remaining quarters of the year, and currently expect a full-year favorable net income impact of $12 million.

I also want to summarize the impact of consolidating the Wheelabrator special-purpose entity. The favorable impact from decreased leasehold costs, that Larry mentioned, is reduced by higher depreciation, interest and minority interest expenses. The net income impact of bringing these entities onto our balance sheet was a positive $2 million in the first quarter. Now that's just for the income statement.

Now I'll move on to the balance sheet and cash flow items. The two line items on the balance sheet that have substantial changes since year-end are cash and long-term debt. These line items both increased due to the issuance of $350 million of senior notes in early March. The notes were issued with a 10-year maturity, a 5% coupon, and a spread of 100 basis points over the 10-year treasury. We were very pleased with the excellent pricing we received on the transaction, as well as the level of interest from six income investors. The proceeds from this issue will be used during the course of the second quarter to repay other senior indebtedness that comes due between now and the middle of May.

That explains a good portion of the increase in cash, but there is another approximately $200 million growth in cash balance during the quarter. This growth is evidence of our strong free cash flow generation. Noting a few specifics, we did pay out $109 million in dividends to our shareholders. In addition, we spent $73 million acquiring businesses. We also received $48 million during the quarter from stock option exercises, and paid out $24 million to settle late fourth-quarter share repurchases. As noted in the press release, we have not bought back any stock yet this year, but we do plan to begin repurchases during the second quarter.

On the debt side, the combined increase to long and short-term debt was about $500 million. In addition to the senior note issue, there were $83 million in new debt related to the synthetic fuels investment and about $40 million of net new industrial revenue bond issuances. Our debt also increased by $51 million, due to the increase in the FAS 133 fair value of our interest rate swaps. These items explain almost all of the change in debt value during the quarter.

With the upcoming $350 million repayment of notes in the second quarter, we do anticipate total debt to be back well under $9 billion, and closer to 60% debt to total capital by the end of this quarter. While first quarter's free cash flow was exceptionally strong, $311 million, I want to remind you that capital spending will likely be higher in the second quarter, and interest and tax payments are each expected to be roughly $70 million higher than they were in the first quarter. Plus, with the growing levels of business that we experience during spring months, our receivables are generally a use of general capital during the second quarter. In other words, you should expect lower free cash flow in this quarter than we had in the first.

I have a couple of other topics to cover that are more housekeeping in nature. First, we sold our pulp and paper trading operations during the quarter to Cope Industries. Many of you will remember that a few years back, we started our own paper trading operation to provide improved market liquidity which was lacking at that time This worked hand-in-hand with our recycling operations, giving us the ability to offer hedged pricing as an option to our large recycle customers. The market has grown since then, and there are considerably more third-party marketmakers now. This led us to the decision that this was the right time for us to exit the business and sell it to a company that specializes in trading. We will continue to hedge a portion of our physical exposure, but we no longer own and operate a trading business.

We intend to file our 10-Q tomorrow. You will see in this filing that we have added schedules that classify our operating costs and our SG&A costs into various categories of expense. This is new disclosure that we have been looking at for the past few quarters, in the interest of providing more transparency to our investors. We wanted to be sure that the costs categories are meaningful and relevant to those analyzing our business, and we hope that you will find them to be helpful in your analysis.

And finally, some news that I'm sure will be of interest to all of you. We have recently named Greg Nickle [ph] as director, investor relations, for the company. Greg is an internal candidate who has the strength and qualities that we were looking for in an individual who will be representing Waste Management to the investment community. Greg will be reporting to Cherie, who will continue to oversee and manage our investor relations program. We think that closely tying together treasury and investor relations departments will allow us to leverage our communications with all our investor communities, shareholders, equity analysts, bondholders and analysts, and the bank. We will be introducing Greg to you at the conferences and other investor meetings during the coming months. For now, Cherie will remain your primary contact, and as Greg becomes comfortable in his new role, we will transition responsibilities to him.

With that, Janice, we are ready to open the line for questions.

Thank you. At this time, I'd like to remind everyone, in order to ask a question, please press star, then number one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from Lorraine Maikis of Merrill Lynch.

On your landfill pricing initiative, you had mentioned that the environment was weak. Could you give us a little information about how you plan on rolling that out? Will it be geographic in nature, or based on your competitive market share in each of the areas?

Sure. You know, what we have seen, Lorraine, as you know, is weak landfill pricing, particularly in the midwest and in the Michigan area. And what we're going to do is pick those markets where we think we have the ability to raise and sustain price increases, and we're going to target those and see what happens. And if we can start getting price increases in those markets, we'll going to start rolling them out to the other markets.

And have you begun to do this in the first quarter, or will this be a second-quarter or second-half event?

We have not begun doing it in the first quarter, but we fully intend to start doing it in the second quarter.

And then just finally on the landfill issue, special waste volumes. What have you been seeing this there in terms of volume and pricing?

Well, you know, special waste is always interesting from a pricing point of view. I think what we've seen is that, again, in the midwest, pricing has been very difficult. You know, throughout the rest of the country, it's really -- depends on the region. We've got a lot of special waste jobs in south Florida that are at fairly low prices, but I don't think that there's any particular trend down or up through the rest of the country.

Thank you.

Your next question is from Amanda Tepper of J.P. Morgan.

Good morning. Calling it yield on price, is that just a name change? So, in other words, it's not a change in the methodology and it's comparable to previous quarters?

That is absolutely correct.

Okay. And where is the price competition for the new customers that you talked about coming from? Are there any patterns that you can discern out of all of this?

No, it's really across the board. But what we have seen is that in -- particularly in Illinois, Ohio, Indiana, and Michigan, and then in pockets throughout the south, we've seen fierce competition. And as we said, we actually saw rolloff pricing going backwards in those four midwestern markets.

Okay And then on your lowest-quartile performers that you were talking about, the markets that are consistently showing up toward the bottom, and you said there's some strategic issues, perhaps, that need to be fixed in some of these, is there any chance that that ends up leading to some divestitures or acquisitions, as the case be, down the road?

Sure, Lorraine. We look at that all the time as part of our market business strategy. And as I go out, that's one of the things that we are looking at. When we see operations that perhaps don't have hauling -- I'm sorry, don't have landfill associated with them, that's certainly something we'll be taking a look at, as well as just lower margin operations. You know, what we're up to is improving those margins and those operations, as well as improving our overall operations, the metrics that you've heard us talk about on our operations score card. Things like productivity, employee turnover, safety, customer service, those types of things that actually can also lead to improved margins at those locations. But, certainly, looking at acquisitions and divestitures in those market areas are something that we will continue to do.

Okay, great. Thank you.

Thanks, Lorraine. Amanda.

Your next question comes from Leone Young of Citibank Smith Barney.

Good morning. Could you just give me a little help with the items below the line? I know you detailed them, and I'm just looking on a go-forward basis. Is the run rate we should look at in terms of tax and the equity?

I wouldn't -- the tax rate for the rest of the year, absent some new events that could happen -- we talked about it at the last call, possibly a second synthetic fuels investment. I think it'll be -- 32.65 is the rate to assume for the rest of the quarter. With respect to other -- the loss in the equity of the synthetic fuels, running through other income, that will be about the same every quarter.

As well as the minority interest?

As well as the minority interest. That's right.

Okay. So that's the new sustainable level, then? Great. Thank you very much.

Thanks, Leone.

Your next question is from Tom Ford of Lehman Brothers.

Hey, good morning. Thanks for the details, by the way. And, Dave, one of your comments, you talked about, I think it was just referencing the absolute price increases on collection.

Correct.

And you had given the number of 2.5%.

Right.

And if -- I could be wrong, but I assume that there were some transfer station increases as well in 1Q. I don't know if that was an order of magnitude impact, but I'm wondering if you guys have a number that kind of incorporates all of the absolute price increases across the company, you know, in terms of transfer and disposal as well?

No, we don't. But from transfer pricing, obviously, the primary area where we're doing transfer station work is New York City, and we've had great price increases there over the last 18 months. But we do not put together the full price increase across all lines of business.

Okay. Okay. And then the other question I had for you was, just after commenting on that, you talked about that differential between the 2.5 and the 0.6 yield. And you seemed to indicate that you thought that there was going to be a narrowing of that spread. And I just want to make sure of two things. Number one, I'd just like to know if you could just provide some specifics as to why you think so? And then number two, are you assuming a narrowing of that spread in terms of your outlook commentary that you've given us for 2004 on the prior call?

First, no, we are not assuming a narrowing of that spread on our outlook for the year. And why we're assuming that we're going to narrow that spread are two things. One, as the economy picks up, we're going to expect that our competitors, small and large, are going to spend more time going after new business rather than going after our business. And, secondly, is our retention desks. We put in place retention desks that are incentivized to save business. And the beauty of what we've done over the last four years in setting up processes and technology is that we can go in and tweak them, pretty much on a moment's notice. And so we can go in and change the save rate by raising prices. And so that's something we're also going to take a look at.

Okay. Great. Larry, I just had one question for you on the initiatives that you referenced. I just wanted to make sure, when you talked about the route savings, was that incremental from the -- I assume that that's new for this first quarter, correct?

Tom, that's correct.

Okay. Great. And then just lastly, with respect to the cost recategorizations, am I under the understanding that we're going to be breaking out the cost side of the P&L into much more -- into a larger number of categories?

Yeah, that's right, Tom.

That's great. Because it's long time coming. Thanks.

Yeah, Tom, as you know, we've been talking about that for a few quarters, and as you all see that in our Q, we'd love to get the feedback on what you think of it.

Once again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Your next question is from Bill Fisher of Raymond James.

Good morning. David, you talked about trying to raise the landfill prices going forward, which would clearly be a plus. On the key one pricing, if I did it right, it was down I think about 1%. Was most of that just higher mix on the special waste for C&D that pulls that mix average down?

Yeah, it wasn't down quite that much as I recall. And we have not broken out, as of yet, of the mix issues. You would assume that that's a mix issue, but I can't say for sure, Bill.

Okay. And the C&D may -- I mean if that business is stronger going forward, it will clearly help your EBIT, but it may impact that number a bit?

I think that's correct.

Okay, great. Thank you.

At this time, there are no further questions. Are there any closing remarks?

Well, I would just say that obviously you all like asking Maury questions more than you like asking us questions. Thank you all for joining us, and we will be seeing you out on the road in the near future.

Thank you. This concludes today's teleconference. You may now disconnect.