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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Welcome to the Waste Management fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Miss Rice, you may begin your conference.
CHERIE RICE, IR, WASTE MANAGEMENT: Thank you. Good morning, everyone and thanks for joining us. With me this morning are Maury Myers, Chairman, President, and CEO of Waste Management; and David Steiner, Executive Vice President and Chief Financial Officer. Maury will start things off with a review of our achievements during the quarter and the year, as well as price and volume trends and will talk about our plans for the coming year. Then David will review the 2003 financial statements, and 2004 guidance in more detail and cover a few related topics. After that, we will open the lines for questions and answers. This call is being recorded and will be available 24 hours a day beginning about 1:00 p.m. central time today until 1:00 p.m. on February 26. 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 4861246.
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 27-A of the Securities Act of 1933 and section 21-E of the Securities and Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, which are described in detail in Waste Management's annual report on form 10K for the year ended December 31, 2002; and in the company's press release this morning. These risks and uncertainties could cause actual results to differ materially from those described in the forward-looking statements. Additionally, during the course of the presentation, we will discuss free cash flow, a non-GAAP financial measure. Waste Management defines free cash flow as net cash provided by operating activities, less capital expenditures plus proceeds from divestitures of business net of cash divested, and other sales of assets.
The Company includes this discussion because the amount of cash produced by non-financing activities, that is available for uses such as acquisitions, share repurchase, debt reduction and the payment of dividends is important to the Company's capital allocation process and it's goal of providing returns to it's shareholders. For the same reason, the Company believes investors are interested in this measure. In 2003, the Company is also giving adjusted free cash flow. The adjustments made are related to the payment of a shareholder class action settlement net of certain related favorable cash flow items, including cash tax benefits. As I stated earlier, this call will be available for replay for a two-week period. Time sensitive information given during the course of today's call, which is occurring on February 12, 2004, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited.
Before turning the call over to Maury, I just wanted to note that there appears to be some confusion this morning, regarding the impact of the current quarter's tax rate. On the third quarter call, Waste Management specified an expectation for a 37.3% tax rate in the fourth quarter. The actual rate as reported was 32.9%. For a $15 million difference. This $15 million difference translates to about 2.5 cents in earnings per share. Combined with the $17 million litigation settlement that we discussed in the press release, which translates to about 1.5 cents in earnings per share. These two items together are about 4 cents in quarterly EPS, which we did note in the press release. If you deduct the settlement, the litigation settlement from our 39-cent result, you'd end up with 37 cents, deducting the tax difference, as well, results in 35 cents for the quarter. We just wanted to make sure that was all clear to everybody up front before we started the call. Now let me turn the call over to our chief executive, Maury Myers.
MAURY MYERS, CEO, WASTE MANAGEMENT: Thanks, Cherie and welcome to all of our conference call and webcast listeners. The fourth quarter results reflect positive momentum for the company. We're very proud of our continued progress in cost reduction, margin improvement, revenue growth and, most importantly, production of cash flow. During the past few years, the tough economy accounting changes and our trimming of unprofitable customers have created challenges in terms of visible evidence of improvements in our financial statements. We saw progress in 2003, and in 2004 we expect more clarity as we focus on bringing the company's fourth quartile operating unit performers up to the median and continue to manage this company for the long-term. Let me review now the most important initiatives in areas of focus in terms of both the progress we have made through the end of 2003, and what we expect to achieve in the future. I'll start with one of our four original initiatives procurement.
This initiative has been ongoing for three full years now and, in total, we have achieved approximately $236 million in annual run rate cost savings. These savings have primarily been in expense items, about $148 million; but also on the capital side at about $88 million. Long-term our goal is to achieve $350 million of annual savings. Our 2004 goal is to increase savings by another $44 million, $10 million in capital and $34 million in expense. We're looking for these savings to come primarily in the areas of IT, trucks, truck parts, local services, and landfill-related costs.
Safety is another very important matter for us here at Waste Management. In 2001 we launched an initiative we call mission to zero with a goal of achieving zero recordable injuries in each of our operating units. The progress we've made is absolutely amazing. In each successive year since 2000 we've improved our total recordable injury rate, an important OSHA measure, by more than 20% from the previous year. While we've made great progress, we're not where we want to be yet. Forty percent of our operating units proved in 2003 that zero is an achievable goal, and we continue to push for all of our operations toward this level of achievement. To date, in terms of cost savings, the rising cost of insurance, and the increased average cost per incident have largely offset the savings achieved from the reduction of injuries. In 2004, we're taking an aggressive approach on post-injury management in order to reduce the cost per claim. In addition, we're focused on substantially reducing our vehicle accidents. We had a 10% reduction in 2003, and are targeting another 20% reduction this year. It's more difficult to estimate the timing and magnitude of the potential savings that will result from improved safety statistics, but without a doubt, reduced claim costs and reduced premiums will eventually follow.
A third cost initiative that has received much of our attention is fleet maintenance. Our primary performance metric is cost per driver hour. In 2001, cost per hour was $12.31. In 2003, we reduced it to $11.87, or by about 3.6%. Our 2004 goal is to further reduce maintenance cost per hour to $11.32, or by another 4.5%. We plan to do this by focusing on the fourth quartile performers, as well as by challenging the second and third quartile business units. Within another three or four years, we think we can get the cost down to around $10 per hour; and with 50 million driver hours per year, these reductions translate to real money. We know what we need to do to reach the $10 per hour goal, and we have many locations already at or below this $10 level. This is just a matter of continuing to execute our plan.
In a similar vein, a recent cost improvement target has been container maintenance. While the total spend and thus the available opportunity here is smaller than vehicle maintenance, maintaining our containers is another very important activity in this business and we need to do it as efficiently as possible. We've just received improvement plans from the 14 U.S. market areas that are in the bottom quartile and estimate that we can reduce cost in these markets by $6 million in 2004. Additionally, we're testing opportunities for outsourcing container repair in certain markets. Through outsourcing, we estimate an additional $2 million of savings this year. While outsourcing is only feasible in certain locations, a pilot test has shown that it can be a much better alternative to keeping this activity in-house. We are also looking at the entire container life cycle, beginning with procurement and continuing through the decision to sell the used bins as scrap metal. Our combined annual expense and capital respond containers is nearly $300 million. This current work just scratches the surface of our opportunities here.
Waste route or the optimization of routing through the use of propriety technology was our biggest single initiative in 2003. We were very successful in reducing routes, well exceeding our announced goal of 750 route reductions for the year. We were not, however, as successful with our target of eliminating $10,000 of associated monthly costs for each route eliminated. Our initial goal for 2003 was to save $40 million gross, with $10 million of implementation costs. Our actual 2003 waste route gross savings were $18 million, about half our goal. The savings did ramp up late in the year, and in the fourth quarter we had savings of about $12 million from the program. We're now developing and implementing a plan for 2004 that will focus on reducing driver hours and providing additional training; and be supplemented by new productivity metrics to make the process more effective. Our goal for 2004 is an additional $44 million of savings.
In 2004, we're launching a waste route initiative for the roll-off line of our business, where we have about 4,000 routes. As opposed to looking for route reductions in the case of roll-off, we're expecting to get a combination of improved efficiencies and greater capacity out of our existing resources. We continue to believe that we can improve our overall route efficiencies by 10% during the course of the next few years.
And finally, on the customer service and sales front, we've had significant success with two separate initiatives, service machine and sales force effectiveness. Service machine was one of the major objectives rolled out in 2001. The idea was simple. Find out what service-related issues are causing our customers to leave us and fix them. The results have been evident in our customer churn rate. Before implementation of service machine, our commercial customer churn rate was running in excess of …