美國廢棄物管理公司 (WM) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Waste Management fourth-quarter 2004 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question-and-answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Greg Nikkel, Director of Investor Relations. Please go ahead, sir.

Thank you, Angelique. Good morning, everyone, and thank you for joining us. With me this morning are Dave Steiner, Chief Executive Officer; Larry O'Donnell, President and Chief Operating Officer; Bob Simpson, Senior Vice President and Chief Financial Officer; and Cherie Rice, Vice President of Finance and Treasurer.

David will start things off with an overview of the quarter, a detailed look at price and volume trends, and a discussion of our 2005 projections. Larry will delve into operating cost, including the continued impact related to the four hurricanes, the cost of fuel, and increased commodity prices. Then Bob will review the financial statements in detail and cover a few related topics.

This call is being recorded and will be available 24 hours a day beginning approximately 12 PM Eastern Time today until 5 PM on February 24. To hear a replay of the call over the Internet, access the Waste Management website at www.WDM.com. To hear a telephonic replay of the call, dial 1-800-642-1687 and enter reservation code 3014360.

As is our custom, I will remind you that during the course of this presentation, we will be providing estimates, projections, and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties which are described in detail in Waste Management's annual report on Form 10-K for the year ended December 31, 2003, and in the Company's press release this morning. These risks and uncertainties could cause action 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 nonfinancing 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 it 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 2-week period. Time-sensitive information given during the course of today's call, which is occurring on February 10, 2005, 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.

Also, Waste Management is hosting an investor and analyst day beginning at 10 AM Eastern Time today. A live webcast of the meeting and accompanying presentations will be available on the Waste Management website at www.WM.com in the investor relations section. A replay of the webcast will be archived on the website until 5 PM Eastern Time on February 24, 2005. Now, I will turn the call over to Waste Management's CEO, David Steiner.

Thanks, Greg. Good morning to all of our conference call and webcast participants. We are conducting this call today from New York City, because we will be hosting our 2005 investor and analyst day starting in about 2 hours. I will talk a little bit about that later in the call, but first I want to discuss our results for both the fourth quarter and the full year.

I'm very pleased with our results for the fourth quarter. We earned 47 cents per share as we saw building momentum in our pricing programs, the continuation of our strong revenue growth, and the benefits of several additional tax audit settlements. After adjusting for the favorable impact of the tax audit settlements, we earned 39 cents per share, which compares very favorably to our reported earnings for the same quarter in the prior year.

The momentum of our revenue growth was driven by a sharp increase in our yield and another quarter of positive volume trends. We gained 120 basis points in our base business yield compared to the fourth-quarter 2003. This is the highest level of improvement we have seen since the fourth quarter of 2001. It also marks the 14th straight quarter in which our yield change has been positive. If you include the 100 basis points from our fuel surcharge program, yield actually increased a total of 2.2 percent in the quarter.

One of the highlights of our yield growth was the pricing improvement in the industrial, commercial, and residential lines of our collection business. These were the three largest contributors to the 1.2 percent yield growth. In studying our internal revenue growth data for the period spanning from the first quarter of 2002 through the current quarter, we determined that this quarter is the first time that the yield improvement exceeded 1 percent for each of the distinct residential, commercial, and industrial lines of business. The combined yield improvement for these three collection lines of business reached its highest level in that 3-year period.

The average year-over-year price increase for our collection customers was 2.8 percent during the fourth quarter, and 3.5 percent for just the commercial line of our customer base. Our improved collection yield results show that we have retained a bigger portion of our price increases than we have in prior quarters. Obviously, one quarter does not constitute a trend, but our success in the fourth quarter is due to the effect of a number of initiatives that we expect will continue to deliver results in 2005.

As we have discussed with you over the last several quarters, we've heightened management's attention to the importance of pricing to improve our margins, cash flow, and return on capital performance. We have developed a discipline pricing approach, which utilizes pricing experts at both corporate and field offices. Our pricing teams have improved our tools and have performed in-depth market studies, which have allowed us to better understand the pricing dynamics of our commercial customers. We expect that our landfill pricing study will provide us with similar results. And we will maintain and improve our focus on customer service and the use of specialists to maximize the retentions on our price increases.

In addition to the strong improvements in the collection line of business, higher rates at our transfer stations added to the increase in yield. The yield on the municipal solid waste streams coming into our landfills also contributed to the higher internal revenue growth. For the fifth straight quarter, yield has been positive in the MSW segment, which is the largest component of our landfall revenues.

But we still face several pricing challenges in our business. A year-over-year decrease in yield in the Midwest prevented our overall Company yield from growing faster than 1.2 percent. Compared to the results during the third quarter this year, the yield performance in the Midwest has improved; but although the trend is positive, there is still much room for improvement in the industrial states of the Midwest.

The yield from our non MSW landfill waste streams, especially special waste, has not improved as pricing on project work remains competitive and transportation costs increase. These special waste projects remain good business and produce strong cash flow, but we need to do a better job of passing our increased costs on to our special waste customers.

Our fourth-quarter earnings were also impacted by the continuation of cleanup work from the four hurricanes which hit the South in the third quarter. We estimate that the additional work contributed approximately $7 million to earnings on a pre-tax basis, as the additional revenues were largely offset by associated subcontractor costs. During the first quarter of 2005, the revenue and earnings directly attributable to hurricane cleanup efforts are not expected to be at the same level as they were during the last 2 quarters of 2004. Larry will provide more details on the effects of hurricanes in his review of operational costs.

Growth in volumes continues to be a bright spot in the fourth quarter, as we have experienced year-over-year improvements in volumes for each quarter of 2004. For the fourth quarter, total revenue growth was 7.4 percent, and total internal revenue growth was 6.4 percent. Internal revenue growth from volumes on base business was up 4.5 percent. We gained about $56 million in third-party revenues as a result of the hurricanes. After excluding the hurricane revenues from our totals, higher volume still contributed 1.4 percent in growth during the quarter.

Recycling commodity prices remained strong, contributed about $27 million or 90 basis points of the increase in total revenues. Acquisitions net of some divestitures added $21 million in revenue or 70 basis points to our higher revenues. Surcharges on fuel added over $27 million or 100 basis points to revenues. And $11 million or 40 basis points came from the effects of Canadian foreign currency exchange rates.

Our strong free cash flow was another highlight during the quarter, as we produced $202 million, bringing our full-year total to $1,056,000,000. Returning this cash to our shareholders remained a top priority this quarter, as we repurchased $143 million worth of shares or about 4.9 million shares. This brought our total for the full year to $472 million or about 16.5 million shares and concludes the 3-year program we began in 2002.

Over those 3 years we have repurchased nearly 77 million shares at a total value of over $2 billion. That represents nearly 13 percent of the number of shares outstanding when we began the program in 2002. Our share repurchase program will continue as part of a 3-year capital allocation program that we announced in 2004. Beginning in 2005, that plan is designed to return annually up to $1.2 billion to our shareholders in the former dividend share repurchases. It reinforces our commitment to returning value to our shareholders and our confidence in our ability to generate cash from operations.

We paid our fourth consecutive quarterly dividend of 18.75 cents per share on December 23 and declared our first-quarter 2005 dividend at the higher amount of 20 cents per share on January 28. During 2004, we returned over $900 million to shareholders through share repurchases and dividend payments, which is a cash yield of about 5.5 percent.

Earlier this year we announced our landfill pricing study at 30 of our landfills. We've just begin to gather data from this study, which was effective January 1, 2005. Although the amount of data is limited at this time the preliminary results are positive. We will be covering the results in much greater detail during our investor day meetings later this morning.

In addition, we're also preparing bids for a number of large upcoming disposal contracts including those in Boston, Philadelphia, and New York City. We will closely monitor those bids.

Before I turn the discussion away from our revenue results, I would like to discuss the most recent appointment to our senior leadership team. We recently announced that Dave Aardsma has been named as the Company's Senior Vice President of Sales and Marketing. You may recall that this position has been open since Jim Trevathan took over our Eastern group operation. Dave will be responsible for overseeing our sales, marketing, pricing, and customer service efforts.

Dave has been with the Company for over 25 years, the past 4 as our Vice President of Sales. In that role he was instrumental in implementing our sales force effectiveness program and increasing our productivity in all of our sales channels. He will now be charged with leading our efforts to accelerate profitable growth through superior customer service, disciplined pricing programs, the maintenance of strong business relationships with existing customers, and the acquisition of new business.

As we announced in our press release we expect to achieve about $13 billion in revenue during 2005, with internal revenue growth on our base business of 2.7 percent. The majority of this base business growth is expected to come from higher yield and the remainder from higher volume. Note that we had assumed that the 2004 hurricane cleanup revenues would not repeat in 2005. If we did assume that revenues would repeat in 2005, our total IRG projection of 2.7 percent would have been 3.5 percent, or higher by an additional 0.8 percent.

We project our diluted earnings per share to be near the lower end of the analysts' current range of $1.56 to $1.80. This is based in part on the assumptions that we listed in our press release this morning.

We also expect to generate strong cash flow during 2005, with cash flow from operations being in the range of 2.25 to $2.35 billion. We project free cash flow of 1.1 to $1.2 billion, which will enable us to execute our return of cash to our shareholders as I previously discussed.

As we will discuss later today, we're going through a process of identifying underperforming parts of our business. Our 2005 cash projections do not include proceeds from any significant divestitures that may come about as a result of that review.

Here at Waste Management our most important goal is to assure that each business leader in our organization is in alignment with the interest of our shareholders. We believe that our shareholders want us to focus on generating free cash flow that we can return to them. Growth in free cash flow comes from improving margins and increasing returns on capital. In order to meet those goals, and as a result of the coming requirement to expense stock options, we recently undertook a comprehensive review of our compensation plan. As a result, we changed our annual incentives to focus on free cash generation and margin improvement.

We replaced our stock option program with a restricted stock and long-term incentive plan that focuses on return on invested capital over a 3-year period. Like any great Company, we realize that success just leads to higher expectations, and we believe that our new incentive plans are geared to achieve those expectations. I would now like to turn the call over to Larry O'Donnell, who will cover our operational results in more detail.

Thank you, Dave, and good morning. Driven in large part by our increased volumes this year, operating expenses were $2,117,000,000 or $182 million higher than in the fourth quarter of 2003. As a percent of revenue, fourth-quarter operating expenses increased from 64.8 percent in 2003 to 66 percent in 2004. This 120 basis point increase in our operating costs was driven primarily by the same three factors that I discussed last quarter, the impact of the hurricane related cleanup work, higher fuel cost, and an increase in our cost of goods sold due to higher recycling commodity prices.

I will begin my review by detailing the impact that those three items had on our operating cost margin. I will then outline for you the impact of other cost categories, and highlight the fourth quarter progress we made in the areas of repair and maintenance and insurance and benefit costs.

As I described during our last earnings release call, we have dedicated significant resources to the Florida hurricane cleanup efforts in order to help those communities recover. Our efforts were evident again in our fourth-quarter results, as the additional work from the hurricanes generated $56 million in revenue. To we estimate the income from operations from the hurricane work in the fourth quarter to be approximately $7 million on a before-tax basis. By way of comparison, we earned about $5 million before tax on $59 million in incremental hurricane related revenues during the third quarter of this year.

The majority of the $56 million in hurricane cleanup revenue was in our collection line of business. As we increased the level of internal resources dedicated to the cleanup, our pass-through costs paid to subcontractor collection companies decreased to $32 million in the fourth quarter, compared to the $46 million we reported in the third quarter of 2004.

As I discussed in our call last quarter, we incurred high subcontractor costs on this work because the Federal Emergency Management Agency or FEMA asked us to serve as general contractor for the cleanup effort. We have worked with FEMA on disaster cleanup efforts over the years, and they understand our capability to handle these kinds of situations. Unfortunately, the high amount of pass-through subcontractor costs had a negative impact on our operating margins.

All other hurricane related operating costs, which include disposal, labor, maintenance, fuel, and landfill operating costs, totaled $16 million in the fourth quarter. Depreciation and amortization and SG&A for the hurricane cleanup work added another $1 million in the quarter. In effect, the hurricane work helped our net income but was very low gross margin business, as the related operating costs of $48 million were 86 percent of the $56 million in revenue. This percentage is significantly higher than our Companywide operating cost as a percent of revenue. The net result was that the low margin hurricane work caused a 34 basis point increase in overall fourth-quarter operating expenses.

I will now discuss the impact of higher diesel fuel prices on our results. Although diesel fuel prices moderated somewhat through the course of the fourth quarter, on average they were still 61 cents per gallon higher compared to the prior-year quarter. This drove fourth-quarter fuel cost higher by $31 million versus the prior-year quarter.

Our fuel surcharge offset nearly $27 million of this increased cost. For the year, our surcharge recovered $57 million of the $73 million in higher direct fuel cost caused by the run-up in diesel prices.

In recent quarters, we have seen some our third-party transportation companies begin to pass on their higher fuel cost to us in the form of fuel recovery fees or surcharges. During the fourth quarter, we identified approximately $6 million in fuel fees where third-party haulers had passed through their higher fuel cost to us as a specific charge. This does not include increased cost for fuel from subcontractors where they did not specifically identify the cost, even though we saw the rate increase.

In total, there was $10 million in higher fuel cost that we could specifically identify in the fourth quarter that we were not able to recover from our fuel surcharge, causing a 62 basis point increase in operating expenses. It also negatively impacted our earnings by at least a penny per share. We expect the headwind of higher fuel prices to continue in 2005. We're taking steps to expand our fuel surcharge program to customers that have to this point in time not been charged this fee. In addition, as our municipal franchise contracts come up for renewal, we're beginning to address fuel cost separately from the typical CPI type rate increase included in those contracts.

During the fourth quarter, prices for recycling commodities such as newspaper, cardboard, and aluminum remained relatively high when compared to the same quarter of 2003. The way the accounting works for this is to increase our revenues for the higher commodity price we receive and increase the cost of goods sold attributable to the higher recycling rebates we pay to our customers. These rebates can float with changes in commodity prices.

While our recycling profits generally increase with higher commodity prices, increased recycling rebates we pass back to our customers increase the cost of goods sold component of our operating expenses, which squeezes our operating margins. In the fourth quarter, the changes in recycling commodity revenues and cost of goods sold resulted in a 24 basis point increase in our operating costs as a percent of revenue.

Eliminating the impact of the hurricanes, higher fuel prices, and higher recycling commodity prices, our operating expenses for the fourth quarter as a percent of revenue were approximately 64.8 percent, the same as the fourth quarter of 2003. While we would like to see improvement in our operating costs as a percent of revenue, it is nice to see that our focus on productivity, maintenance, and safety are helping to offset the rising costs of labor rates, parts and steel costs, and what other companies are reporting in rising insurance rates, which I will discuss shortly.

By normalizing the impacts of the hurricanes, higher fuel costs, and higher commodity prices, I can now explain the changes in our other cost categories in terms of basis point changes. I will discuss cost increases that are squeezing our margins and highlight where our performance is improving due to our operational initiatives.

During the webcast of our investor day presentation later today, I will go into detail about our operational initiatives and the positive impact they are having on our results. Therefore, I will only touch on the few points regarding our initiatives on this call.

Subcontractor costs, excluding subcontractors used as part of the hurricane cleanup effort in Florida, increased 37 basis points in the fourth quarter of 2004, compared to the fourth quarter of 2003. This was due mainly to the use of third-party haulers on special waste event (ph) jobs in our Western group, as well as higher rates that subcontractors are charging us in other parts of the country.

On our special waste jobs in the West, we typically pass through the long-haul trucking cost to our customer with zero return, which has the effect of squeezing our operating margin even though the work is profitable business. In addition, we believe the run-up in diesel fuel prices is contributing to the higher rates we're seeing from some of our subcontractors. We must raise our prices to cover this increased cost that is not covered by our fuel surcharge program.

As I mentioned on our call last quarter, we have been focusing on improving our productivity in our commercial and residential lines of business to help offset the impact of rising costs. In the fourth quarter, productivity improvements nearly offset the absolute dollar increase in salaries and wages, resulting in only a 4 basis point increase in labor-related operating costs. The higher dollar costs were due mainly to increased volumes and wage increases attributable to annual merit raises.

Our maintenance costs showed a 20 basis point improvement in the fourth quarter due to continued improvements in our collection fleet maintenance program. Our spending was relatively flat, even as our volumes increased significantly, and increases in steel commodity prices caused our parts prices to increase. This is a strong indication that our maintenance initiatives are working to help us reduce our costs.

For the full year, we improved our key metric of maintenance cost per driver hour from $11.90 in 2003 to $11.66 in 2004, which is significant given that we incur over 50 million driver hours each year.

We have also continued to make progress in our cost of insurance and benefits, which lowered our operating expenses by 19 basis points during the fourth quarter. This group of cost includes general liability, auto liability, healthcare, workers compensation, and risk management expenditures. At a time when many other companies across the U.S. are reporting significant increases in insurance costs, I view this 19 basis point reduction in expenses as confirmation that our health and safety programs are making a difference in the management of our operating costs.

For example, we reduced our total recordable injury rate an additional 15.7 percent for the full-year 2004 compared to 2003, which gives us an overall reduction in excess of 65 percent since we started the program in 2001. This has certainly had a positive impact on our cost.

From an operational perspective, I am pleased with the progress we made in 2004 on improving our operating metrics. As I look ahead to 2005, I want to emphasize that we expect continued improvement and improved margins as a result of our operational and pricing initiatives. Our operational improvement programs are mature enough that we fully expect continued improvements in our metrics and resulting reductions in costs.

At the same time, as Dave mentioned, we simply must do a better job of passing these increased costs to our customers in the form of price increases, if we are to be successful in achieving our goal to improve our margins. I believe we have the leadership and management commitment necessary to deliver these expected improvements. I look forward to discussing more details during our investor day conference webcast later today. Now I will turn the call over to Bob Simpson, who will review our SG&A costs and other financial results.

Thank you, Larry. I will start with the review of SG&A costs for the quarter. As a percent of revenue, our SG&A costs were 9.9 percent, which is the same as in the fourth quarter of 2003. As a reminder, the 2003 quarter included a $17 million favorable legal settlement. Without that benefit, SG&A costs as a percent of revenue would have improved by 50 basis points year-over-year, so we continue to produce solid year-to-year comparable improvements. In fact, for the full year, SG&A costs as a percent of revenue dropped by 30 basis points in 2004 to 10.1 percent, near the low end of our stated full-year goal of being in the range of 10 to 10.5 percent.

Depreciation and amortization was 9.9 percent of revenue in the quarter, compared with 10.5 percent in the prior-year quarter. For the full year 2003 and 2004, depreciation and amortization has been the range of 10.7 to 10.9 percent of revenue.

In the current quarter, and as a result of FAS 143 accounting requirements, we had $22 million in net benefits from landfill final capping adjustments. In prior quarters, we had a number of negative capping adjustments such that for the full year there was net approximately $20 million of favorable adjustments. These adjustments result from an annual review of the costs to cap sections of our landfills. We review these costs at all of our landfills annually or more often as facts change. 230 landfills or discrete landfill sections had adjustments based on our review. Most of the adjustments were under $250,000.

In managing our landfills, we look for ways to reduce or defer our capping costs. Most of the benefit here is the result of concerted efforts to obtain permit modifications to allow us to cap landfills using more cost-effective methods; landfill expansions that resulted in reduced or deferred capping costs; or completed caps that cost less than the accrual.

In asset impairments and unusual items, we had $7 million of expense this quarter. This is primarily related to a small landfill development project in the South we had been working on for a number of years but we have decided to no longer pursue.

Interest expense was $111 million in the quarter, $1 million more than the prior quarter last year. While the overall expense from year-to-year is relatively flat, there are some changing dynamics in the cost elements. The rising interest rate environment has increased our expense as it relates to our active interest rate swap portfolio. We received a $12 million benefit in the 2003 quarter, and only a $7 million benefit this past quarter, a reduction of $5 million.

Largely offsetting that reduced benefit are lower costs from our $650 million in refinancings during 2003, and reduced costs related to our revolving credit line. During my presentation at our investor day program this afternoon, I will talk more specifically about the rising interest rate environment and how we anticipate that we will impact future interest expense on our $3.2 billion portfolio of floating-rate debt.

Fourth-quarter interest income increased substantially versus the prior year quarter, by $36 million. This increase was driven largely by tax audit settlements, which I will cover shortly.

The next line on the income statement reflects $28 million of equity and losses of unconsolidated entities and is the result of the two investments in synthetic fuel plants that we made in early 2004. In the fourth quarter, this loss is offset by $37 million of income tax reductions and credits. After accounting for $2 million of interest expense related to these investments, the result is a net after-tax benefit of about $6 million in the quarter.

With regard to taxes, those of you who have been following Waste Management for the past few quarters will recall that we have been working through income tax audits and negotiating settlements involving tax returns from as far back as 1988. As discussed in our press release this morning, we settled several of our remaining open tax audits during the course of the quarter, and we have now closed out all federal income tax audits through 1996. The settlements reflected in the fourth quarter's results had the impact of reducing our current period effective tax rate to 20.3 percent.

We are currently in the process of concluding the appeals phase of our federal audits for the years 1997 through 2000. We anticipate completion of these audits in the next 6 months. We believe we are adequately reserved for these audits.

After eliminating the impact of the fourth-quarter settlements, our effective tax rate for the quarter was 27.2 percent. This 27.2 percent tax rate reflects the impact of more landfill gas income tax credits than we had projected at the end of last quarter. That completes my review of the income statement.

Moving on to the balance sheet and then the cash-flow statement, while the accounts receivable balance is down about $16 million from the September 30 balance, at year end we were still carrying about $42 million of hurricane related receivables where most of the funds are coming from FEMA directly or indirectly. While we are highly confident that we will receive full payment of these balances, the number of days to payment is much longer than our normal average of 46 to 47 days.

Some of you may have noticed that deferred income taxes changed considerably on our December 31 balance sheet versus recent quarters. During the quarter we completed a detailed review of the deferred tax balances and related tax basis balance sheets. As a result, there has been a revision to our estimates of deferred tax assets and liabilities, resulting in an overaccrual of net deferred tax liability. We determined that the appropriate treatment for the identified overaccrual was to reclassify that amount to goodwill.

Further, we have determined that the effect of the change in estimate is appropriate at December 31, 2003, as well. Therefore, the deferred tax balances and goodwill at December 31, 2003, have been updated on our balance sheet presentation to reflect this revision.

Total debt decreased by $221 million during the quarter, and our debt to total capital ratio dropped to 58.9 percent. The primary driver of this decrease to total debt was the repayment of $295 million of Senior Notes that were due on October 1, offset by approximately $101 million of new tax-exempt bonds issued during the course of the quarter. At year-end, we had approximately $3.2 billion of floating-rate debt or about 37 percent of our total debt portfolio.

Capital expenditures during the quarter were $428 million, bringing our full-year total to $1,258,000,000. This was at the lower end of the range of expectations we had communicated in recent quarters, as some spending was deferred to 2005.

Free cash flow for the quarter was $202 million. This resulted in our full-year free cash flow coming in at $1,056,000,000, exceeding the high end of the $900 million to $1 billion goal. Our commitment to generating strong and consistent cash flow is part and parcel of our commitment to return cash directly to our shareholders.

In 2004, we returned $432 million to our shareholders in the form of dividend payments and spent an additional $496 million through share repurchases. This $496 million is comprised of $472 million in the current year plus 24 million that was actually related to 2003 purchases but was disbursed in early January of 2004. In addition, we have returned to our shareholders in 2004 $928 million or approximately $1.60 per share, using the average number of shares outstanding during the year.

As we discussed last quarter, our Board has announced a plan to allocate up to $1.2 billion to be returned for the benefit of shareholders each of the next 3 years, again through a combination of dividends and share repurchases. In 2005, we currently expect to allocate in the range of 450 to $460 million to dividend payments, and 600 to $700 million to share repurchases. This plan corresponds to our projection of 1.1 to $1.2 billion of free cash flow production during the year, with about $250 million allocated to acquisitions.

While these outflows combined are more than the high end of our free cash flow range, there are other sources of cash that come into play, such as requisitions from industrial revenue bond funds. Again, we will have further details in the slides associated with our presentation later today.

Just as a reminder on the upcoming quarter, Waste Management's first quarter is impacted by seasonality related to winter weather, and we do have more exposure to Northern regions than many of our competitors. The first quarter impacts are twofold. Revenues are lower primarily, as a result of construction and cleanup projects becoming inactive for the winter; additionally certain of our costs are higher in the first quarter than in other quarters.

In summary, and before we open the lines for questions, 2004 was a year of strong results for Waste Management. We believe we are taking important steps toward continuing to improve the Company in 2005. Dave and Larry mentioned many of these steps during the course of their commentary this morning; and during the webcast of our investor and analyst conference later today, we will spend several hours delving into more of the details of our programs, processes, and goals. With that, Angelique, we will open the lines to take a few questions.

(OPERATOR INSTRUCTIONS) Lorraine Maikis, Merrill Lynch.

You had given us a lot of pricing detail on your transfer station and collection lines. Can you just tell us what the associated decline in landfill pricing would be, to get you to your pricing statistic for the quarter? And how that has trended over the past few quarters?

Yes, what we have seen in the landfill side is actually that MWS line, which is the largest portion of the landfill volumes has been positive. As we said, I think the last 4 quarters, last 5 quarters, we have seen positive trend in MSW pricing.

Where we are losing the pricing on the landfill side is special waste jobs. Again every special waste a job is a little bit different. They still are good cash-flow jobs. But we just have to do a better job to increase prices on special waste jobs, as we see transportation costs increase throughout the country.

What are competitive factors on the special waste side that are preventing you from raising those prices?

As you know, that varies from market area to market area. It could vary depending on the location of the landfill, depending on the size of the job, depending on the daily caps or the annual caps of the landfills in the area. So it is really hard to give one specific competitive factor that drives that pricing lower.

All I can tell you is that here at Waste Management we're going to make sure that we price those jobs to get a sufficient return on capital for our landfill assets; and we have got to price those jobs taking into account that transportation costs for us for third-party transport is increasing.

Thank you.

Amanda Tepper, J.P. Morgan.

I want to talk about free cash flow. Your guidance is implying again very strong free cash flow. But really looking at the trend it is more or less flat, even though you or also guiding to a nice jump in operating margins. I am wondering why it is working that way and when you guys see free cash flow really growing again.

Sure. One of the things that we have in 2005 that we didn't have in 2004 is about $200 million of the effect, the combined effect of cash taxes and cash interest. So when you look at free cash flow you have to take into effect that we have that headwind to overcome. When you look at the growth in free cash flow it is actually a little bit stronger than what you see there.

Cash taxes obviously are going to continue down the road to be higher. Cash interest payments will depend upon what happens to interest rates over the next few years.

Cash taxes, meaning it is just going up because you're earning more? Or is cash taxes really vis-a-vis book taxes actually going up?

A large portion of the increase in cash taxes, Amanda, comes from the fact that we won't have bonus depreciation, the benefit of benefit bonus depreciation on our capital purchases in 2005. That is a significant factor there.

Is that probably the biggest single piece of the 200 million combined effect?

Yes. It is the single biggest piece of all of the components.

When you look at your interest expense moving up, with the very strong cash flow you have, did the Board take another look at perhaps delevering instead of such a strong share repurchase, which could have put off some of that higher interest expense headwind?

In presenting to the Board the information that resulted in the capital allocation plan we announced in the third quarter, that was definitely part of the consideration. We still think that the approach we are taking is the better approach.

Better to stay levered at 60 percent-ish?

That or a little below that.

Okay. All right, thank you very much.

Michael Hoffman, of Friedman, Billings, Ramsey.

I had a question with regards to the ending year share count; and then what your economic assumptions were for your guidance.

We will dig out -- do you want the actual shares, Michael, or the shares for the quarter? I think that is in our press release.

The exiting shares.

Then what was the second question?

What were your economic assumptions?

For 2005?

Yes. (multiple speakers) What you think is happening; what do you believe you think is happening in the economy based on your guidance?

Sure. What we do is twofold; it is an economic assumption, which is we looked at the GDP forecast throughout the country. We did not just look at it overall for the country. We looked at it geographically for our group, and then sort of used a number of consensus GDP type of growth rates.

Then what we did was, we knew we were going to focus on pricing in 2005; and so we assumed that it was possible that we would not see such strong volume growth. We said 2.7 percent in 2005 with the majority that coming from pricing. We took a conservative view as to what would happen to volumes as we raised price in 2005.

Obviously if we find a more receptive pricing environment, those volume assumptions could be better. But we wanted to make sure that we were conservative, and we also wanted to make sure that we had our folks focused on pricing in 2005.

Okay. If most of the Wall Street economists are between 3 and 4 percent, and 50 percent of the volume that goes into your landfills is coming from third parties, isn't it a reasonable proxy to assume that you would do somewhere between a point and a half and 2 percent on volume at the landfill? Or I mean 4 percent at the landfill; and 1.5 to 2 percent of that would come through as revenue.

We certainly -- I cannot tell you, Michael; we don't have our budget here. I can't tell you what the numbers came out to on the landfill side. I think that would be a reasonable expectation in a non price raising environment. We did take a conservative view that as we raise price we may push up in volume. Now, what we are seeing is that --

(multiple speakers) balance.

What we are seeing is that as we have prices at our -- raised prices at our 30 landfills that are in the study -- Jim Fish will talk about it in a lot of detail this afternoon -- what we are seeing is that we're not pushing volume out. But again, we talked about it earlier. We have got some bids in the Northeast coming up, disposal bids in New York, in Philadelphia, in Boston, and we will see how the market reacts.

Michael, to your question on the share count, it was 570.2 million shares at year-end.

Okay, great.

Leone Young Smith Barney.

Just a couple housekeeping items. Bob, you talked about obviously the D&A and the tax rate. Could you give us a little guidance on those two items looking out into 2005? Also whether you really expect any major change in the other items below the line, ex discussing interest?

We will talk at length about that. I will take you through that through the presentation this afternoon. I would expect that you'll see that the income from -- other income expense line that relates to the DT&E transaction will really be the same as it has been in the last few quarters.

Just for the full year, the effective tax rate we expect for the year will be 30.5 percent. We will talk in more depth about interest expense. I think we have already put that in the outlook.

And D&A?

D&A about 10 percent of revenue, I believe it was.

I thought it was closer to full year this year.

We will have that for you as well.

Okay.

Jamie Cook of Credit Suisse First Boston.

My first question, when you talk about pricing or internal growth in 2005 at 2.7 percent with the majority coming from price, should we assume that any type of fuel surcharge would be incremental to that, like it was in '04?

Correct, any fuel surcharge would be incremental to that. That does not include the fuel surcharge. Remember that that 2.7 percent, if you normalized it by taking out the effect of the hurricanes, would have been 3.5 percent.

Okay. My next question, what are your assumptions for fuel prices next year?

Actually what we did on that, as we typically do, we look at the forward curves throughout the country, and start working through what our assumptions will be. The way it all worked out this year, the effect of it is we ended up pricing fuel in our budget at about the same level that it ran on average in the fourth quarter. That is sort of where it ended up.

Lastly, could you just expand a little on -- you talked about changing your compensation plan. Could you just give a little more detail on that, and how far down throughout the organization the compensation plan was changed? Is it just management, or did you bring that down to the field level?

We will talk a lot about that this afternoon. So if it is okay with you, Jamie, I will hold off the detailed discussion. Because it is a fairly comprehensive change in the plan. But suffice it to say that it does change the metrics, as I talked about, and it does go down throughout the management in the organization. I will also talk about that the fact that we changed our compensation plans in our sales force too.

Okay, great. Thank you very much.

Going back to Leone's question about depreciation, we're projecting it to be a little under 11 percent of revenue, about 10.8 percent of revenue. Thank you, Angelique. Go on.

Tom Ford of Lehman Brothers.

Most of my questions are answered. But Dave, a couple things here. Number 1, you mentioned the big disposal bids that are coming. How did you factor that into the guidance?

Well, you know, Tom, obviously there's two pieces to those bids. There's portions that we currently have, and there are portions that we currently don't have. When we put together our budget for the next year, we generally assume that we will win the contracts that we currently have. Now that doesn't mean we won't win them at a higher price than what we have today. But we generally budget that we will retain those contracts.

Now are there exceptions where we budget that we will lose contracts? Absolutely. But generally we would budget that we are going to keep those contracts; and we generally would not budget that we're going to gain other contracts.

Okay. Okay. One question I have is in terms of the yield for '05; I will not go into the details because I know you want to talk about that today. But just over the course of the year, we have continued to see sort of a nice step-up 3Q over 2, 4Q over 3. Is that what we should expect in '05? That we would expect the continued incremental stepping up over the course of the year?

Sure. When you look at our pricing initiatives, again we have talked about it a lot, how we started out on the collection side, we are now moving over to the landfill side. We have done the landfill pricing study at 30 of our landfills. So we're certainly getting some traction but there is plenty of room to run.

Again Jim Fish will talk about it in a lot of detail this afternoon. But we truly are in the first couple innings of our pricing program. So absolutely we would expect it to ramp up during the year.

Okay, just one last question for you, Dave. I apologize; I didn't go through the numbers before the call. ? But how much of the improvement in the pricing in 4Q had to do with rate increases, as opposed to retaining more of just your existing level of rate increases?

Sure. If you look at the collection increases that we saw, the 2.8 percent and the 3.5 percent, those are fairly consistent, maybe slightly lower than what we have seen in the last few quarters. So what that tells you is that we have done a lot better job of retaining that business at the higher rates.

Okay, great. Thanks very much.

Certainly.

Looks like that was the last call in the queue, David.

We will have time this afternoon to answer questions, quite a few opportunities during the afternoon. So I want to thank everyone out there for joining us today. A number of you will be joining us at our investor and analyst day presentations. They're going to begin at 10 AM Eastern Time. The presentation will also be webcast at the same time.

We will provide a lot more details into some of the items that we discussed this morning. We will also cover a lot of other topics and take questions throughout the day. For those of you wishing to log in to listen to the presentations by webcast, you can do so by going to the investor relations section at WM.com. With that, operator, we will sign off for the morning.

Thank you. This concludes the Waste Management fourth-quarter 2004 earnings release conference. You may all disconnect.