美國廢棄物管理公司 (WM) 2005 Q4 法說會逐字稿

Good morning. My name is Kim and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2005 earnings release. [OPERATOR INSTRUCTIONS] Thank you.

I would now like the turn the call over to Mr. Greg Nikkel, Director Investor Relations. Sir, you may begin.

Thank you, Kim. Good morning and thank you for joining us. With me this morning are David 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 a summary of the financial results for the quarter, and he will review the details of our revenue growth including price and volume trends. He will also discuss an outlook for 2006. Larry will discuss operating costs and some of our operating plans for 2006. Bob will then cover the financial statements with an update on our divesture program and other financial matters. We will conclude with questions and answers. This call is being recorded and will be available 24 hours a day beginning approximately 11:00 a.m. central time today until 5:00 p.m. on February 28th.

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 1-800-642-1687 and enter reservation code 4193513.

As is our custom I will remind you that during the course of this presentation we will providing estimates, projections, and other forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties which are described in detail in Waste Management's annual report on form 10K for the year ended December 31, 2004, 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, earnings per share growth after adjusting for certain one time items, and margins on earnings before interest and taxes after adjusting for certain one time items, all of which are nonGAAP financial measures. We have defined and reconciled those items as part of the earnings press release and the release AK filed today, which can be found on the Company's website at www.wm.com. 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 calls which is occurring on February 14, 2006, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now I will turn the call over to Waste Management's CEO, David Steiner.

Thanks, Greg. And good morning from Houston to everyone joining us this morning on our call. I am going to first review our operating results for the quarter and the full year and then I'll discuss our outlook for 2006. I am very pleased to say that for the second straight quarter we accomplished our primary goals of growing our earnings, expanding our margins and generating strong free cash flow to return to our shareholders. After adjusting for tax audit settlements and a reduction in our effective state income tax rate, and asset impairments and unusual items, we earned $0.46 per diluted share in the fourth quarter. This is an increase of $0.07 per diluted share or nearly 18% when compared with our fourth quarter 2004 earnings per diluted share after adjusting for similar items. Income from operations increased by over 11% during the fourth quarter of 2005 compared with the prior year quarter. Our adjusted EBIT margins expanded by approximately 90 basis points to 15.1% during the fourth quarter, and we produced $286 million in free cash flow bringing our free cash flow for the entire year of 2005 to over $1.4 billion.

Strong revenue growth from yield was the primary driver behind the improved quarterly results. Our base business revenue growth from yield of 3.9% was the highest level we've achieved in over five years. If you include the 1.6% from our fuel surcharge program, internal revenue growth from yield increased a total of 5.5%. We saw pricing improvement across a very broad cross-section of our business. The three largest contributors to our internal revenue growth from yield were the industrial, commercial and residential lines of our collection business. Combined, the internal revenue growth from yield for these lines of business was 4.7% in the fourth quarter which excludes the benefit of our fuel surcharge. This higher revenue growth from yield is significant because it shows how far we've come in just a year.

In the fourth quarter of 2004 the combined growth in yield for the same three lines of business reached 1.6%. This indicates that our disciplined and scientific approach to pricing is working well. In my estimation, this also shows that our pricing organization is the best in the waste industry and given the level of improvement in one year, would stack up well against all industries. In addition to the improvements in the collection lines of business we saw positive internal revenue growth from yield at our transfer stations and on the municipal solid waste construction and demolition streams coming into our landfills.

For the last two quarters our pricing team has been implementing the lessons we learned from our 2005 disposal pricing study across all of our landfills and transfer stations. The internal revenue growth from yield for MSW volume coming into our landfills was 3.5% while for the C&D volume was 6.5%. These yield results indicate that we're making progress in pricing at our landfills. We'll remain focused on raising prices on MSW, C&D and special waste volumes in order to capture all the costs associated with running our business and to generate the returns we expect. Our Wheelabrator Waste Energy Operation, also contributed to internal revenue growth due primarily to the increase in electricity prices we obtained on our plant's output.

I'll now turn our attention to the volume component of our internal revenue growth which was a negative .3% during the fourth quarter of 2005. You'll remember that in the 2004 fourth quarter we had hurricane clean-up volumes that added about $56 million to revenue. In the 2005 fourth quarter hurricane revenues were approximately $50 million. Absent the volume impact these hurricanes had on revenues in both years, our internal revenue growth from volumes declined only 10 basis points in the fourth quarter of 2005. This normalized decline was due primarily to lower collection volumes which were partially offset by higher disposal and recycling volumes. We saw the continuation of a solid economy and seasonally mild weather in many parts of the country which contributed to the strong disposal volumes.

Internal revenue growth due to volume for our commercial, industrial and residential lines of business was a combined negative 2.3% in the quarter. It's important to note that the volume decline was the most significant in our residential line of business where the internal revenue growth from volume was a negative 3.7%. We saw the largest declines in the east and the Midwest as we continue to bid large municipal residential contracts with the objective of increasing our margins in this line of business, which have trailed the margins of our commercial and industrial lines. That approach has led to a loss of volumes which we expected to occur as we bid residential work in a more disciplined manner to obtain an acceptable return on our invested capital.

The trade off between the higher collection yield and lower volumes remained positive for us, the evidence of which is the 90 basis point margin improvement and free cash flow generation I described earlier. And keep in mind that our field operators are diligent in flexing down variable costs in response to loss of volumes. Our people in the field have seen the rewards that come from losing some jobs but keeping business at rates that generate greater profits and higher returns on their assets.

On the disposal side of our business we saw strong internal revenue growth from volumes. During 2006 we'll continue our pricing excellence programs which we expect will continue to impact our volumes. We've not provided a projection 2006 revenues due to the variables involving our pricing and divesture programs. It is just too early for us to project the timing and amount of revenue that will be sold in 2006 or how quickly the resulting sales proceeds will be reinvested. We target our cash flow from operations for 2006 to be within a range of 2.4 to $2.5 billion. And our free cash flow to be within a range of 1.2 to $1.3 billion which will adequately fund our cash dividends and share repurchases for the year. We project that our capital expenditures will increase to approximately $1.45 billion due to several important investments we're making.

We've begun a project to implement our new revenue management system which will be a key asset to improving our relationship with our customers. Further engaging our employees and optimizing our operations. We budgeted funds to buy land around our landfills with an eye on future expansions and we intend to continue to invest in medical waste projects and an additional methane gas plant at our landfills as we seek ways to enhance the alternative energy generation capabilities of our business. As we think of the strategic future of our Company, now's the time to make these investments all of which meet our criteria for profitable growth and acceptable returns on our investment. We truly believe that these investments will further separate us from the pack in our industry so these expenditures are a smart move.

Consequently, both capital expenditures and SG&A will increase during 2006, but we expect to recoup the benefits from these investments for years to come. Even with the higher levels of expense due to our investments in the future, we're confident that we can achieve the full year 2006 consensus of $1.65 per share currently forecast by analysts. 2006 will be an important year in the future of Waste Management. We'll invest more in the people and tools that we need to build upon our success in 2005. We studied these investments thoroughly and we believe although the investments will dampen current year results, they will meet or exceed our expected pay back analysis over the long-term. And the long-term is where our focus will remain.

As many of you know we put if place a three-year long-term incentive plan which is based on return on invested capital, excluding goodwill. Our incentive plan is designed to reward our top managers if we achieve an average increase in return on invested capital as we compute it of 300 to 400 basis points over the three-year period ending in 2008. With the tools and the people we have in place, and through the investments I've out lined for you, we should be well poised to meet that goal. Our people feel the momentum that we created in 2005, and we're excited about our future in 2006 and beyond. And with that, I'll turn it over to Larry.

Thank you, David, and good morning. I am very pleased with the progress we continue to make in the fourth quarter on our operational excellence initiatives. We were able to show year-over-year improvement in our operating expenses as a percent of revenue again this quarter. I'll begin my remarks this morning with the review of our operating costs results for the quarter and I'll then discuss our plans to further improve our performance during 2006. Operating expenses in the fourth quarter of 2005 were $2,212,000,000 or $95 million higher than in the fourth quarter of 2004. As a percent of revenue, operating expenses declined from 66% in the fourth quarter of 2004 to 65.6% in the fourth quarter of 2005. This 40 basis point improvement marks the second consecutive quarter in which our year-over-year results have improved.

I'm very pleased that we could accomplish this in spite of the sharp increase in diesel fuel prices that incurred in the quarter. Without the revenue and costs associated with higher diesel fuel prices, our operating costs improved by 80 basis points. As a percent of revenue, we lowered our costs in eight of the ten cost categories that we break out in our financial statement. The two exceptions were the categories of fuel and other costs. With this progress we remain focused on delivering further operating improvements in 2006.

Higher diesel fuel costs caused a 120 basis point increase in operating expense as a percent of revenue. This increase consisted of 90 basis points from direct fuel costs and 30 basis points from indirect fuel costs passed through by our subcontractor haulers. Although this negatively affected our operating margins, it did not lower earnings because the revenue from our fuel surcharge program fully covered both the $35 million in higher direct fuel costs and the $12 million in indirect fuel costs.

Transfer and disposal expenses which include those costs that our collection companies pay to third party landfills and transfer stations improved by $14 million or 90 basis points during the fourth quarter of 2005. The decline in collection volumes from our pricing initiative as well as our focus on exiting low margin collection business where we don't internalize the volume were the major contributors to the improvement. The decline in these collection volumes also contributed to the increase in our internalization rate from 65% during the fourth quarter of 2004 to 66.3% in the fourth quarter of 2005.

As a percent of revenue, labor and related benefits costs improved 40 basis points. Our new labor management tool is assisting our operations in planning labor and flexing down labor costs when volumes decline and we continue our efforts to control salaries and wages, health insurance and employee benefit costs.

During the fourth quarter we continued our significant progress towards becoming a leader in safety. We achieved a 21% improvement in our OSHA injury rate in a 28% improvement in our Fleet accident rate. Our focus on preventing injuries and accidents has enabled us to improve our OSHA injury rate by over 70% since we began the program in 2000. As a result, we reduced our workers' compensation expense which drove a 20 basis point improvement in our overall risk management costs in the fourth quarter. Achieving world class safety performance remains one of our top priorities.

In the fourth quarter we continued our progress in our Fleet maintenance programs. We reduced our maintenance costs by 10 basis points, an impressive performance given the inflation we saw in parts, supplies, lubes and oils. Subcontractor costs improved by over 10 basis points in the quarter. In our 2004 hurricane clean-up work, we served as a general contractor and utilized many subcontractor haulers to pick up debris at a cost of $32 million. This gave us a lower margin on the overall clean-up work. During the fourth quarter of 2005 we changed our approach. We did not use as many third party haulers, and we were able to internalize more of the volume. This resulted in a $10 million reduction in third party hauling costs in the hurricane impacted areas of the Gulf Coast. On a combined basis operating expenses in the categories of cost of goods sold, fees and taxes and landfill operating costs improved 50 basis points as a percent of revenue.

Offsetting the progress we made in all categories was a 100 basis point increase in other operating expenses. A large component of the increase was $10 million in hurricane Katrina related support costs particularly in the Louisiana area where we built Camp Waste Management to house and feed hundreds of Waste Management employees who helped with the clean-up effort in New Orleans. The effort to restore our service and locate adequate housing for our employees have progressed to the point that we were able to close our camp Waste Management in January. During our third quarter of 2005 earnings announcement, we indicated that we expected to lose about $0.01 per share in the fourth quarter due to the higher costs associated with hurricanes Katrina and Rita.

Hurricane Wilma had just struck Florida, and we were making our initial assessments of the situation at that time. Hurricane Wilma had a positive financial impact on our Florida operations as we received more waste into our landfills and waste energy facilities. As a result we were able to more than offset the negative impact of hurricanes Katrina and Rita which led to a $0.01 per share overall benefit from a hurricane work. I'm very proud of how our people across the country have responded to the hurricane disasters, and it is a reflection of our commitment to serve our customers in the communities in which they live.

I must say that I'm excited about the progress we made in lowering our operating expenses as a percent of revenue in the third and fourth quarters of 2005. In spite of higher fuel prices and other inflationary pressures, our results demonstrate that our operational excellence initiatives are still creating positive results. Our full year 2005 results illustrate that point as we made notable progress in several areas.

In 2005 we reduced our spending year-over-year on the transfer and disposal costs paid to third parties. Our risk management costs were also lower due to the decline in workers' compensation expenses that I discussed earlier in my remarks. And we continued to effectively control labor and healthcare costs, Fleet maintenance expenses, and our use of subcontractor haulers. Even with the improvement we've shown I remain convinced that there is much more that we can achieve. We've identified critical next steps to further lower our costs through improved operational productivity and maintenance performance. We benchmarked a number of world class companies with similar operating characteristics to Waste Management, and we learn more about best practices in other industries. We're taking additional steps to further standardize our operating and maintenance practices, in doing so we are laying the ground work for improvement 2006 and beyond.

In the maintenance area we plan to complete the implementation of our compass maintenance system at the remaining collection, transfer station and landfill maintenance shops. Through the end of 2005 we had implemented our compass system at collection Fleet maintenance shops covering 82% of our Fleet maintenance spend up from 65% at the beginning of 2005. The percentage coverage of the compass system at our transfer station and landfill maintenance shops is much lower so we do have room for improvement by striving for 100% coverage at all of these sites by the end of 2006. Our maintenance organization is also planning to further standardize our practices with a goal to increase our Fleet asset availability and utilization.

Our Fleet group is becoming more focused on eliminating customer service interruptions, what we refer to as CSI's. This metric measures road breakdowns and maintenance events in the morning that prevent our trucks from leaving the yard on time. We've added that metric as one of our two key measures of maintenance performance. We will continue to use cost per driver hour which is clearly demonstrated the improvements we've made in controlling costs. Our move to include a measurement of customer service interruptions will even better align our maintenance shops with our Fleet operators in achieving our ultimate objective which is servicing our customers. For several years now we've demonstrated the importance of our operational excellence focus.

I am delighted with the progress we've made and I am confident in our ability to execute our new approaches to bring continued improvements to our operations. We're certainly committed to our goal to further improving our operating expense margins in 2006. With that, I'll now turn the call over to Bob.

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 9.6% which is 30 basis points lower than in the fourth quarter of 2004. This year-over-year improvement was primarily the results of savings from our restructuring and a reduction in legal fees. Combined, these savings more than offset the impact of normal annual salary and other cost increases.

For the full year 2005 SG&A costs as a percent of revenue declined by 30 basis points to 9.8%. We accomplished our stated full year goal of lowering our SG&A costs as a percent of revenue to less than 10%. The restructuring generated about $15 million in SG&A savings during the fourth quarter. We still expect annual savings of about $70 million from the restructuring with about 80% of that lowering SG&A costs and the remainder decreasing operating expenses. Depreciation and amortization expense for the fourth quarter of 2005 was up $7 million when compared with the fourth quarter of 2004. As a percent of revenue, depreciation and amortization expense was 9.6% compared with 9.9% in the same prior year quarter.

Moving down the income statement, [acts of] impairments and unusual items totaled $11 million for the fourth quarter due principally to an [acts of] impairment charge at a landfill and the impairment of two software applications these were partially offset by the gain on the divestiture of operations in Cincinnati, Ohio. Interest expense was $127 million in the fourth quarter, a $16 million increase from 2004. This increase is the result of the higher interest rate environment in 2005. We have seen LIBOR rates increase approximately 200 basis points year-over-year.

Total reported debt increased by $345 million during the quarter to $8,687,000,000 primarily due to our borrowing in Canada, related to our previously announced repatriation of funds into the United States. The floating rate portion of our total debt portfolio was 35% at the end of the quarter, and our debt to total capital ratio was 58.6%. Most of our floating rate debt will vary based on 90-day LIBOR rates and a 10 basis point change in these rates has an approximate $3 million impact on an annualized basis. Our expectation for 2006 is that LIBOR--the LIBOR rate will increase by 5% by year-end.

Interest income decreased $28 million to $11 million during the fourth quarter of 2005. Interest income in the fourth quarter of 2004 was $32 million, received based on interest received on significant tax audit settlement refunds during that period. You will note that we recognized a $43 million reduction in income tax expense in the quarter primarily resulting from favorable tax audit settlements and an adjustment to cumulative deferred taxes arising from the reduction in our effective state income tax rate.

Our 2006 effective tax rate is estimated to be about 31% which is significantly lower than statutory tax rates in part due to the section 29 tax credits we realized from our landfill gas projects and our investments in the coal based synthetic fuel partnerships. The ability to earn these credits is tied to the benchmark oil price for the year that the IRS determines after the year is over, and the credits are phased out if the average crude oil prices exceed this benchmark. Consequently, we cannot know the benchmark for 2006 until sometime in 2007. These credits contribute about $0.11 to our EPS and in 2006 our outlook assumes that we will have the full benefit of the credits. We will monitor the impact of oil prices on the credits and we will keep you updated as events warrant during our quarterly conference calls.

Turning to cash flow, we generated very strong cash flow during the quarter and for the full year. Net cash from operations for the fourth quarter was $665 million with capital expenditures of $415 million adding in the $36 million in net proceeds from divestitures and other asset sales, our free cash flow was $286 million bringing the full year total to $1,400,000,000. For the fourth quarter of 2005 our cash tax payments were $75 million and our cash interest payments were $154 million. For the full year 2005 our cash tax payments were $231 million and our cash interest payments were $505 million.

We utilized our free cash flow to purchase $133 million in shares during the fourth quarter bringing our full-year total to $706 million or 24.7 million shares. We also paid $110 million in cash dividends during the fourth quarter of 2005 bringing our full-year cash dividends to $449 million. We returned a total of $1,155,000,000 to our shareholders in 2005 through our share repurchases in cash dividend payments. We ended the year with a strong cash balance which enabled us to transact an accelerated share repurchase plan on January 4, 2006, of over 9 million shares, with a value of $275 million on that day. The initial purchase price paid per share was $30.44 with the $275 million purchase funded from available cash on hand. The repurchased shares are subject to a future price adjustment to be determined based on a volume weighted average price of our common stock.

2006 is a second year of our current three-year program to return to shareholders up to $1,200,000,000 per year in share repurchases and cash dividend payments. So we have started 2006 well in regard to that plan. Since 2002 we have returned to share holders, $3,600,000,00 through our combined dividend and share repurchase program. In 2006 we currently expect to allocate $475 million to dividend payments in up to $725 million to share repurchases.

In our press release today we discussed our projections for net cash provided by operations, capital expenditures and free cash flow. To round out that discussion, here are our projections of several other cash flow line items. We estimate cash interest paid in 2006 at approximately $550 million and cash taxes paid at approximately $300 million. We also project that we will spend approximately $50 million more in 2006 on landfill capping projects than we did in 2005. Beyond that, we project no material changes in working capital.

We also announced in today's press release we have identified additional operations representing over 500 million in annual revenue that are candidates for divesture. This is in addition to the approximate $400 million in revenue we had previously identified. These relatively low margin operations include collection businesses, transfer stations and glass and plastic recycling plants. As of today we have either sold or have a grievance to sell operations totaling approximately $100 million in revenues. The remaining operations are or will be marketed through a structured auction process or in privately negotiated transactions. This is open to both waste industry participants and financial buyers. It is possible that the timing of the divestures and the resulting reinvestment of the sales proceeds could have a dilutive effect on our 2006 earnings. On our quarterly conference calls we will update you on the progress of these divestures in our reinvestment of the proceeds.

I also want to note several items related to incentive compensation expense. We do not expect the adoption of FAZ 123-R to have any material impact on our 2006 earnings or cash flow. We recognized a $2 million pre-tax charge during the fourth quarter due to the acceleration of investing of outstanding stock options. In doing so we eliminated approximately $55 million in pre-tax compensation charges that would have been recognized in years 2006 through 2008 as a result of adopting 123-R. We do project an additional compensation expense of approximately $10 million in 2006 due to our equity compensation plans.

In their remarks both David and Larry mentioned 2006 initiatives geared to improve our profitability. These include our new revenue management system as well as initiatives in customer service, maintenance and operations productivity. All of these will impact our SG&A expenses in 2006. Our goal is to maintain our SG&A expenses as a percent of revenue under 10% for the full year. We view these investments as opportunities to significantly improve our processes and to further the use of science and data in making good business decisions.

Before I close, when we look at the first quarter, January volumes continue the same pattern we saw in the fourth quarter. However, as those of you that live in the Northeast know, there is still a lot of winter left. When we looked back over the last four years, we noted that because of seasonality, our first quarter historically accounts for only 16 to 19% of of our earnings per share for the year on an as adjusted basis. In closing we are very pleased with the momentum we built during 2005 as we accomplished our primarily financial objectives through pricing and operational excellence. And with that, Kim, let's open the line for questions.

Your first question comes from Lorraine Maikis.

Thank you. Good morning.

Good morning, Lorraine.

I understand your reluctance to forecast a total revenue number because of all the pending divestures, but could you give us a little bit of--more detail in terms of what you expect for pricing and volume growth on your existing businesses?

Yes, you know, again when we look at the existing business, I would tell you that what we expect is that we are going to continue to push our pricing excellence program, and we think that's going to have an effect on volume, so we haven't put numbers out there because as you've seen we've done a pretty good job of accelerating your pricing program over the course of this year, and any time you're going through a pricing excellence program you can't be certain of the effect on volumes, so suffice it to say we would fully expect that we'll continue to see higher waiting toward price than volume.

And do you think your internal growth will be higher or lower than your 2005 level?

You know, we've tried to look at the full-year with all the various moving pieces and say, okay, as a management team, let's try to not get too specific on all the various details, let's make sure we're focused on the bottom line. We not only wanted to get focused on the bottom line from the EPS point of view, but as you heard we want to get focused on the long-term and start letting folks know how we're incentivized to create long-term value for this Company. That's where we going to have our focuses over-- on the long-term, not the short-term numbers.

Okay, and then just looking at the investments you expect to make this year, could we just get a little bit more detail on the medical waste investments and some of your other initiatives and what type of both SG&A and CapEx requirements those will use?

On med-waste, the two primary investments that we make in 2006 that should pay immediate benefits are med-waste and our landfill gas-to-energy projects. We'll spend about $15 million on med-waste and capital for the year. That's primarily to put in the into the facilities, the autoclaves that we're using, and the or the onsite treatment mechanisms we're using and then on the landfill gas-to-energy we're going to spend about $30 million on landfill gas-to-energy. So those are the two investments that should return profits to us immediately. That's the amount that we'll spend on the SG&A side. There won't be any significant SG&A added on the landfill gas-to-energy side. We'll add sales people on the medical waste side but it won't be anything that would have any material effect.

The med-waste contracts, have they already been signed and how many hospitals do you have?

No. We haven't--we continue to sign up hospitals albeit not at a pace that would give us-- and again any material revenue effect, but the $15 million that we forecast for 2005 would be for new business.

Thank you very much.

Your next question comes from Amanda Tepper with J.P. Morgan.

Good morning. First on price, if you could go through what in your mind are the key triggers that led you to have a substantially higher yield number excluding the fuel surcharge, is it more of these other fees that you put in in the fourth quarter or are you just pushing the all-in price and getting it?

Well you know, price like anything else we do at this Company, the primary reason that we get anything that we get from this Company is the people we have. So I would tell you that the primary reason that we're getting price is because we have the best pricing team in the industry, and as I said in my comments I think you can compare them to any pricing team in any industry. But when we look at it, there is certainly a mix and you have heard us talk about it, the mix between price increases and then fees and surcharges for services we render and fees and surcharges for things like fuel and the environmental fee. We don't try to break those out by dollar revenue but suffice it to say that the second half of the pricing, the charging fees and surcharges for services we render and for things that customers expect, that part has not been rolled out throughout the Company yet. So it will be rolled out through the Company through the first half of 2006, so we still expect there to be some upside to that.

Okay. And then, do you have what the operating margin for just the solid waste division was in Q4?

We can get that for you. We don't have it handy.

Okay. On the SG&A line, if you add up all of these extra things and the billing system in particular, how much extra spending are you going to have in '06 than you would have otherwise? And then particularly on the billing system, are you expecting any savings down the road once this is rolled out?

Oh, yes, the billing system--well the revenue management system we expect to have significant savings. It'll take about two years to implement it, and we expect the savings to start seeing the savings toward the end of 2007, perhaps a little bit quicker than that. We'll probably spend a little bit north of $30 million in SG&A in 2006, in implementing and configuring the billing system, that also is of almost similar amount, a little bit more we'll spend in terms of capital for the billing system. The internal rate of return on our investment in the billing system that we computed is well in excess of our 15% hurdle rate.

The other SG&A--significant item in SG&A worth mentioning are the--Larry called the compass--mentioned the compass system as well as fast lane. Finishing the implementation of those two systems that are key to our maintenance, our progress in maintenance and in also key to our progress in the landfill pricing. Those two add up to about--plus some other operational issues add up to $20 million in SG&A.

As you convert on this billing system are there any concerns around disrupting what you've been doing on pricing to the customers?

No, I don't think we're as concerned about that. I think there is a concern, if there's a concern, that it's just going to be so much work to do that it will be a real focus for us. I don't think it will get in the way of our current pricing initiatives.

Amanda, it is a lot more than just a billing system. It is truly a revenue management system. In fact it is being designed to enhance our pricing programs because it will allow us to now take our customer data base and slice it and dice it in ways that we currently can't do it. So we can do a much better job of making sure that we're charging customers different rates for different services and that we can truly understand pricing in much better than we do today. It is not going to -- it is going to affected pricing, it's going to affect pricing positively.

Okay. Thank you.

Your next question is from Jamie Cook with Credit Suisse.

Hi. Good morning.

Hi, Jamie. Good morning.

My first question just to follow up on Amanda's question, you talked about the pricing program as it relates to things like container fees, late payments, et cetera, I think you said you expected to roll that out in the first half of '06 verses before I thought you said you would roll it out over an 18 month program. So I guess my question is, is that true and if so, why are you accelerating that? Does that suggest the reception by the market is actually much better than you anticipated?

I think you hit the nail right on the head. Originally we started rolling it out probably six, seven months ago. So it'll end up being about a 12 to 14 month type roll out. We've done a better job of rolling it out but I think you're exactly right, that it has been received very well by the folks in the field and they've done a great job of implementing.

Great. And then next could you just talk a little bit about the reception of--by the market of the assets you guys have out there for potential sale or swap, the prices being talked about and whether or not you've changed the total size of the potential assets out there for sale or swap?

Well we added $500 million in revenue assets that generate $500 million in revenue to the group of assets we previously put out. And we're in the process -- I won't talk about prices at this point, Jamie. I think that's something we probably talk about after the fact, but not while it is going on. But we've got many pretty good reactions to what we've got out there already. As I mentioned we have about $100 million worth of revenue that we've either sold or have under contract for sale and we're making a lot of progress on some of the privately negotiated pieces.

We opened the data room, the virtual data room for most of the assets. We opened that up towards the end of January. We've got a number of parties qualified as buyers, a whole number of financial buyers not just industry participants, and those discussions are ongoing. And we expect we'll get through it sometime this year. Some of it may carry over into next year, but most of it we'd expect to be done this year.

Great. Thank you very much.

Thank you.

Your next question comes from Michael Hoffman with FBR.

Hi, Larry, I have a question with regards to your hurricane comment. In the guidance are you assuming--for '06--are you assuming ongoing hurricane benefit running out about a $0.01 a quarter?

What we've-- I had this discussion every year when we're putting our plan together, but really we look at there probably will be some events like that along the Gulf Coast. We don't know where we will be, what the magnitude would be, but certainly it seems like it has been about the same the last couple of years, so we don't plan for huge events but certainly what we've seen year-over-year that's in there.

I am kind of referring more to the sheer scale of Katrina that is really is it done?

I see what you're talking about the construction work that would occur from the events that have already happened.

Yes.

Yes, those we have--that is in our outlook.

That is in your outlook? Okay.

Yes.

And then, Bob, I have a couple questions. One, the rolling impact of all of these savings, the fuel surcharges, you're--that start lapping itself and fees that you'd started, how much of that is factored into your guidance or does it provide a cushion to the upside that this rolling effect?

Yes I mean, that's a real good question, Michael, and certainly we would expect pricing to offer us some upside in 2006 because when you can get price that drops 100% to the bottom line, but we wanted to remain conservative on our forecast because you just don't know what effect that pricing program will have on volume.

Okay. Fair enough. And then, on the tax credit issue, Bob, you made a comment that if oil prices get to a certain level it offsets the benefit of the credit. Can you give us what that threshold is?

You don't know exactly what it is until actually after the year, but we think that somewhere starting at about $60 per barrel we'll start to see our little north of $60 per barrel we start to see the credits go down. We think by the time you get to $73 per barrel, and this is all based on the [inaudible] prices, that the credits would be totally gone and the question is where do you think you're going to end up being for the full-year on average in that range, and that's of course we're talking about the average price for the year.

There is also a bill in Congress that we don't bank on, but the bill will change the method used to compute the amount of credit you get into a particular year from looking back to looking forward. You would base--you'd base the credits in 2006 based on the average prices in 2005. You base the credits on 2007 based on the average price in 2006. That's certainly a very sensible approach and would give us certainty for this year and we'll see how that bill goes forward, but that--but anyway Michael,that explains the process.

Okay. A question with regards to free cash flow, looks like your cash taxes are going to be up fairly significantly versus '05 and yet you've got the landfill gas tax credits and such. So what's behind that?

The cash taxes are up higher because we expect our income to be up. And the landfill gas credits are pretty much fixed. We don't--while they can go up a bit they generally don't go up as much as we think our income would go up. It is really the higher cash taxes are the function of just higher income levels.

Okay. Then a question about volumes. If you look at some of the data you gave us, your year-over-year landfill volumes were up 4%, your sequential volumes are down 3.4%. If you backed out revenues in the collection side that you said I need to bid this at 100, it is at 90, and you don't get it, you lose it, versus business that you raise price $5 and people decide to go away. What's the volume impact of I raised price and businesses diverted, versus rebidding contracts and I choose to walk away?

Yes, Michael, I will tell you we wouldn't have a break down on the exact mix of that, but certainly those are the two primary factors that are leading to the volume loss, but we wouldn't--we don't have a specific break down on that. That data I am certain that our pricing department tracks, but we don't have that handy right now.

One thing to mention, though, is our churn is not as big in the fourth quarter as it was in the third. Our churn has come down a little bit. For awhile there our churn went over 10%. It is now back down to low 10%.

Michael, the other thing is that as we've been talking about over the last year, the other big factors that we've been dramatically raising new business pricing. As I recall our new business pricing in the commercial line of business was up about 17% in the quarter, so obviously a portion of it is exactly like you say, raising new business pricing, and a portion of it is raising price on current customers.

And if I take Bob's comment then it would be fair to say that you're seeing less dislocations and more discretionary losses?

Discretion, I am not sure what you mean by discretion.

Discretionary is you choose to give it up as opposed to dislocation and it chooses to go away.

That would be the implication of the lower churn rate.

Okay. On the divestitures, one of your competitors on a smaller scale reported this morning and talked about you all being a whole lot more active, you and Allied and you're out there, supporting the comments you made about this data room, et cetera, et cetera, they seemed to indicate two things. One, that the process about getting this acquisition stuff going was slow last year, it seems to have picked up pace, and that that process would be the only thing that they felt would get in the way of maybe closing some deals as early as the second quarter as far as they were concerned. What's your thoughts about your ability to do this more efficiently being the big Company you are?

I think we've got a pretty good approach organized right now with the structured auction process that we're going through with the virtual data room. As we mentioned before there are some particular assets we've decided could be sold more efficiently on privately negotiated transactions and not going through that virtual data room structured auction process, but most of it will go through this. I think it can go fairly quickly. I want to reiterate though that if we had our druthers, we'd rather do buy/sells. Buy/sells take longer to do and just by the nature of the buy/sells. But if we have our druthers we'd rather do buy/sells and those can take longer than just a plain old sale.

Okay, great. Thanks.

Thanks, Michael.

Thanks, Michael.

Your next question is from Leone Young with Citigroup.

Good morning.

Hello, Leone.

If I could approach Michael's question in maybe a little different fashion, understanding that you're going to get this price volume trade off and a lot of it is you described was on the residential side. I didn't hear as much about the roll-off side, that seemed to certainly be stronger, and so would you characterize it that perhaps the competitors are following you be the independence or the public guys, and maybe you're not so vulnerable or not so out in front on the pricing picture?

You know, we've said it before. We can't control what our competitors do on pricing, so we're just going to do what we think the right thing to do is for Waste Management, and what our competitors do is what they're going to do. When we look at the market, we know there are a lot of markets where we haven't got prices up on the commercial side are on the roll-off side. During the fourth quarter again on the roll-off side we had very strong new business pricing it was up about 7%, but the roll-off pricing is split between temporary and permanent, so you do have more seasonality that effects the roll-off lines than some of our other lines. So we're just going to continue to go through our disciplined approach to pricing recognizing that it could cost us volumes but that the trade-off from a margin perspective continues to be positive, and we're just going to keep doing what we do and we're not going to worry about what our competitors are doing.

Okay. And also I understand net, now that this year the hurricane was a positive, and you changed your way of looking at it to get it to be higher margin. Overall, though, was it still margin dilutive for the Company?

Actually the hurricane work overall, well, let me look at this way. You almost have to take Florida and look at Florida separately from New Orleans. New Orleans we incurred some significant expenses just because of the disastrous effects of what happened there. But certainly our work in Florida we saw a higher margin on that work in Florida for the reasons I mentioned. We didn't use as many subcontractors and we were able to internalize more of the volume. Certainly in Florida we saw improved margins there.

Great. And congratulations on a nice quarter.

Thank you.

Your next question is from Bill Fisher with Raymond James.

Good morning.

Good morning.

Good morning.

Just for Bob on the back on the revenue management system you mentioned about 30 million in costs I think in this year, does that cost drop off in '06 and also you mentioned some of the benefits of being on the pricing side but what are some other conceptual benefits you might drive out of that?

The cost will be about 30 million in '06 and what's left to spend in '07 will depend on how much progress we make in '06. It's not inconceivable that it'd be a similar number in '07. We haven't really put pencil to paper yet to know exactly how that'll split out. Certainly the capital number will be less in '07.

With respect to other conceptual benefits we talk about the pricing benefit, revenue leakage, something that a lot of companies have in some fashion, our ability to track our revenue and make sure that we're-- for example getting price increases we're allowed to get in contracts that we currently miss, will be enhanced. Another aspect though will be further savings on the SG&A side and once we get this implemented. We have a very manual system right now and we would with this new system once it's up and running it would be much less manual and there would be opportunity there as well, Bill.

And the huge benefit, the real benefit that you get out of is that ultimately you're going to reduce your churn rate. What it is all about is the not just eliminating people, but giving your customers much better customer service, and we think that we're truly going to differentiate ourselves from the pack once we get this revenue management system in.

And just one final for David on the--obviously your landfill pricing and the volume were very nice in the quarter, around 6%. Does the hurricane much of a benefit there and just on mix, can you touch on some of those numbers you mentioned on where the price strength was?

Yes, certainly the hurricane absolutely provided strong volumes to the landfill in the fourth quarter. And from a mixed point of view, we probably continued to see the same thing that we have seen throughout 2005, which is that pricing on special waste jobs continue to be very competitive in the Midwest and in the Northwest, and pricing on the MSW line again sort of follows the economy. So in some of the states of the Midwest like Michigan, you see less price reaction than you see in places where the economy is expanding more. I would say that what we saw in the fourth quarter mirrored pretty much what we saw throughout the year which is where the economy was strong, we saw better pricing and in those areas where the economy lagged, certainly people were still being agressive both on MSW and on special waste.

Great. Thank you.

Your next question comes from Tom Ford with Lehman Brothers.

Thanks. Good morning.

Morning, Tom.

A couple questions for you. One, the '06 CapEx, could you guys break that down in terms of say core business and then you noted new investments like land and things like that. Just curious about if we not that that's necessarily going to go away in 2007, but I wanted to get an idea of the break down.

One way to think about it and to me this is the way we think about it when we start planning the year, is that a normal CapEx amount for us would be about 10% of revenue. That's a good rule of thumb and if you look at our 2005 revenue, that's about a billion three. We spent substantially less than that. We spent a little like 9.3 or 4% of revenue CapEx is a percent of revenue in '05, but generally we would think about 10% or close to 10% is a pretty good number. We're expecting to spend a billion 450 or thereabouts and of that incremental 150 million, the largest single component is buying land around landfills. We've got some opportunity this year we didn't expect to have and we would expect to go after that and we think the long-term benefit of that is substantial.

The second largest component is our investment in the revenue management system that we're putting in place and that is something that I would not expect to repeat after its up and running. The opportunities on the landfill land side just happen to be--happen to come to a head this year. Last year we didn't have much. The year before we had some.

It is more of a timing element right? If the opportunity arises you take it?

And we will, and we typically--particularly with landfill land we view that as good of an acquisition as any acquisition we could do, and we generally reduce our acquisition capital by the amount of the spending we do on landfill land. And David already mentioned the renewable energy projects and the healthcare, but they make up the bulk of rest of that 150 million that we're spending. We're also going to spend a little more on trucks. But you can argue whether trucks are recurring or not recurring given the 2007 engines.

Okay. In terms of the revenue management system, have you guys run that in any given markets?

No. We will pilot it later this year. I think we will pilot it in two of our market areas not too far down the road, and once those pilot-- we're going to over quite the same time. We're going to stagger the pilots and then we'll have it configured the way we want it and roll it out across the Company.

Just so -- I don't remember what you said Bob in terms of the G&A, was it 30 million?

Yes, it's about 30 --a little bit north of 30 million in G&A expenses for the year is what we're projecting right now.

Is that going to be the latter part of the year?

Yes, I think you'll see more in the last three quarters because a lot of that is training oriented and I think you'll see it--you'll see it more weighted towards the back three quarters of the year.

Okay. Okay. Alright, great. The other question I had for you guys was in the '06 free cash outlook you had noted that the proceeds number was going to be higher. I apologize. I don't have all of my stuff in front of me. What's the proceeds expectation that goes into that free cash estimate for '06?

We use $250 million or $60 million more than our proceeds were in 2005, and in what we were doing there is focusing on the incremental $150 million that of capital we're spending that is over and above what we would call a normal spending amount of 10% of revenue. And what we decided to do was to make it clear to our shareholders that we are going to spend a billion two in free cash flow to buy back stock to do dividends and we're going to be able to generate that amount of free cash flow. We just took a portion of the proceeds that we expect to generate from the sales and apply it to the free cash flow number. But that's not an indication of that's all the proceeds we're going to get. That's just an indication that that's what we're going to do with that portion of the proceeds.

Okay, because I was wondering what-- how did you look at it in terms of what -- why did you come to a 250 number, was there something in it in terms of like things that are close, and so you feel comfortable they're going to get done?

You know, Tom, we think that the proceeds that we actually will generate will be north of 250.

Right. So this is just more maybe just kind of a plug number if you will?

It's a number to explain the incremental CapEx that we're going to spend in the year.

Okay.

That's really what it is.

Okay. Great. What about, Bob, you had mentioned in your comments that you thought there might be-- there's potentially some delusion impact from divestitures. Could you give us an idea as to best case/worst case, just kind of frame it for us.

Tom, it's real dangerous to do that, and it's because of the timing is so much subject to change, so much subject to negotiations with other parties so we've been staying away--trying to stay away from that.

And Tom, when you think about that, as we've gone through and sort of tried to layout what we're going to do during the course of the year, remember that those are all underperforming operations. So it is not difficult to reinvest the proceeds such that you don't have a very dilutive effect when you have got business that first $400 million at 5% margins. It's not real difficult to not have delusion.

But one of the things that I have tasked Bob with during the year is to make sure that we don't have a material dilutive effect from the timing of the reinvestment of the proceeds. Whether that means we do additional share repurchases or we do short term investments, short term and very safe investments, we can do a lot of different things that will help offset that very low margin business, and so our job as a management team is to work as hard as we can to make sure there aren't dilutive effects from that. But we certainly wanted to pointed out when you're talking about a billion dollars in revenue there is the possibility of some dilutive effect.

Right, okay. And that's helpful. And one last question, David or Larry. Bob mentioned it earlier, I was curious, do you guys have your churn number by quarter? Because I'm curious about that comment about the churn coming down.

Yes, we do have it, Tom. In the first quarter -- let me just open to a page I have here. In the first quarter our of--our first quarter of just-- going just on our defection rate by quarter over the year of first quarter 9.7, second quarter 10.3, third quarter 10.1, fourth quarter 9.4.

And, I mean do you guys do you think about it at all or is it clear, because I know there's obviously a huge number of moving pieces under the surface, but what are the key factors that are contributing to that, to that starting to come down? Is it the other competitors moving with price? Is it seasonality, all of the above? Any thoughts there?

I think you're right. I think it is all of the above. Tom, going back to the churn question, the reason why churn is so important for us is because every percentage point of churn is about $25 million in EBIT for us. When we look at the revenue management system it is what Bob was talking about earlier which is we get a lot of real hard dollar savings but the reduction in churn that's why that reduction in churn is so important.

Okay. When you say 25 million EBIT, how scientific is that?

If you take the 1% churn which would be 1% revenue if you will of our $13 billion in revenue you figure $130 million in revenue multiply that by about a 20% EBIT margin and you come up with about 26 million.

So I mean with respect to the churn element, and your comments earlier, it would seem to me like you feel pretty confident about the volume, the volume trend if you will is not being something that that's going to notably -- that's going to change materially from where it is today. It doesn't sound like you guys are too worried about that? If anything, seems like you feel pretty confident the pricing momentum is going to be maintained.

Yes, we always have to worry about that price volume mix. That's why we have the 55 best market area general managers that we can possibly find out in those market areas because every day they have to be cognizant of that price volume trade-off. We have taken the stance that we are going to lean more towards price and we're going to take the chance to lose some volumes. That trade-off has been very significantly beneficial for us. It continues to be beneficial for us. But I am not going to tell you we don't worry about it because we worry about it every day.

Last question, can you guys just refresh me on the compensation drivers for those 55 market areas, how that's broken down?

The typical -- our annual incentive plan, Tom, has a financial component that's generally about 70%. That financial component is divided into two parts. Half of it is EBITDA minus CapEx at the market area level, the other half is EBIT margin improvement at the group level.

And of course then on the other 30% is usually based-- generally based on some metrics that they have to achieve and how they work toward achieving those metrics. Now our long-term incentive plan as we talked about earlier is return on incentive capital base and all of the market area GM's are in on that as well. They're focused through the compensation plans. They're focused on expanding margins on a-- with the return on invested capital and the EBITDA minus CapEx, intelligent use of spending of capital.

Great, thanks very much.

Thanks, Tom.

Your final question comes from Corey Greendale with First Analysis.

Hi, good morning.

Hello, Corey.

Question for Larry. On the margins as you break out the various components, the 90 basis point benefit from the disposal in transfer, do you think that kind of benefit is sustainable through '06 particularly given that you're going to still presumably be losing or at least possibly some low margin on internalized stuff or do you think that there's anniversary in kind of mid-year as the pricing up last year?

It is certainly Corey, something we've been focused on particularly when we look at some of the municipal contracts that we've bid on, looking at where the disposal goes for that, really bidding these contracts as they come up in a way that we're going to be happy with both the margin that we're going to receive on them as well as the return on capital. And if we can't get that, we're happy to let that business go and invest our capital somewhere else where we can improve our margin and return on--and our return on capital. And as a result of that we have exited some contracts where we had to either haul the business or haul the--go to disposal that was far away which incurred some additional transportation costs. That was a big part of it.

As we moved away from some of that business you can also see it increased our internalization rate, so it's been a focus for us. I started talking about this I want to say maybe even almost a year ago that it was something we were going to get focused on because we could see those prices increasing month after month. So we got focused on it and it is--we're doing the right thing with it and I expect that we will continue to be focused on that as we go forward.

With that in mind it is at least possible you can continue getting that kind of benefit on that line item through the year?

I can't comment on how we'll end up on the year, but I can tell you it will continue to be a focus item for us and I would expect to focus on that just like the other items that's the only way we're going to be able to continue to improve our operating costs as a percent of revenue. We have to stay focused on all of those items.

Looking down at the ten items in cost to sales, are there any others of the ten you would likely highlight as likely providing a year-over-year benefit in '06.

It is like I said, Corey. We have to stay focused on each and every one of them. If you let one get away, you can focus on one too much and take your eye off the others and they can get out of control on you. I am out in the field with several of us are out there just constantly and we're always discussing that with our market area general managers, I can tell you I certainly have the confidence that they all now understand what's important and what they need to be focused on and that's why I feel confident that we can continue to make improvements on our operating costs.

I think we have the right tools in place now. People are generally learning how to work with those tools obviously some people are better with them than others. I think overall folks understand where they need to focus and we're not going to take our eye off of any of those items.

Okay. And my last question for Dave and I apologize if I missed it. And I didn't hear any talk specifically about acquisitions at this point and I know you're more kind of in swap or divestiture mode. Just wondering are you allocating anything for acquisitions apart from that in '06? And once you're past this kind of phase of more asset optimization, do you think you return to more of an acquisition mode or do you think that is more in the past at this point?

Corey, this is Bob. Let me try to take a stab at this. We generally have budgeted about 200 to $250 million of acquisition capital every year. That's all. We generally have not spent that. Our hope is while we go through it divestiture process and hopefully with a number of buy/sell agreements as we go through it, we will continue to be looking for acquisitions, tuck-in opportunities for us during the year. We're not giving up on that. I don't think you're going to see us ever doing acquisitions like they were done at the end of the last century.

Corey, you raise a great point that exactly the point that we raised when we saw we were going through the divestiture program, and we wanted to make sure that our business developers didn't lose their focus on acquisitions. We actually put in place an added bonus program for them, that as we go through the divesture program they can make an additional bonus if they also hit their acquisition target, so we put that in place. We're in the process of hiring a few folks to help them out because they are going to be very busy this year, and so we've asked them to get the divestitures done which we know is a tough task to do and even tougher we've asked them to do it while still maintaining their focus on acquisitions. So we certainly hope we can get that accomplished.

Great, thank you.

Thanks, Corey.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Steiner, are there any closing remarks?

Well I'd like to say thank you to all of you all for joining us this morning. We look toward to seeing you many of you out on the road in the coming months. Thanks.

This concludes today's conference call. [OPERATOR INSTRUCTIONS]