Republic Services Inc (RSG) 2002 Q1 法說會逐字稿

I'd like to thank everyone for holding and welcome you to your conference call today for Republic Services. Just a few brief reminders. Today's conference call is being recorded for replay purposes as well as transcription purposes. Also you are ions are in a lecture only mode till the end of the series of presentations where they will be taking questions from the floor at the end. Right now I'd like to turn the conference over to Jim O'Connor and thanks for using Sprint conference service. Mr. Connor.

Good morning and thank you for joining us. This is Jim O'Connor and I'd like to welcome everyone to Republic Services first quarter conference call.

This morning, Tod Holmes, our chief financial officer, Ed Lang, our treasurer, are joining me as we discuss our performance in the first quarter.

As we get started, I'd like to remind everyone that some of the information we will discuss with you today contains forward-looking statements which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.

I'm pleased to report that Republic continues to perform in line with the goals we reviewed with you during our fourth quarter call in January. In addition, we've improved the strength of our management team by promoting Mike Cordesman to chief operating officer and hiring Gary SOVAas vice president of sales and marketing. Mike will speak later in this call.

With these additions, we have completed the staffing of our corporate management team. As you know, our company is focused on improving our ability to generate free cash flow. During the quarter, our operations delivered $38 million in free cash flow, after normalizing for capital and the timing of tax payments. And we are on target for generate our stated goal of $147 million in free cash flow. We have maintained a balanced approach in the utilization of our free cash. During the quarter, we have purchased over 2.7 million shares of Republic's stock for 46-and-a-half million dollars and we've reduced our net debt to total capitalization to 40.1%.

We earned 32 cents in the quarter, compared to 32 sentence a year ago. Both earnings-per-share figures reflect the impact of the change in goodwill accounting.

Although the economic slowdown has impacted our internal volume growth, we continue to demonstrate our ability to achieve moderate price increases. Our price increases, along with other internal cost improvements, were the key drivers in our ability to achieve a 19.4 operating margin and a 27.4 EBITDA margin. The cost areas where we saw the greatest improvement were in maintenance and labor productivity.

Our margin performance is a significant improvement versus the fourth quarter of 2001 after adjusting for the change in goodwill accounting. If you discount the charge that Republic took in the fourth quarter and adjust for the impact of goodwill accounting, our operating margins improved by 90 basis points, and our EBITDA margin was up 100 basis points on a sequential comparison.

Since the first quarter is typically the softest quarter in respect to margin performance, we are extremely pleased with our sequential results. We are not in a position to state that the economy is in full recovery. Our internal volume growth was flat, and we have not seen improvement in commodity prices, construction and demolition activity tied to the expansion of industrial space, and special waste volumes.

During the first quarter, we had extended meetings with each of our five regions. These regional meetings were an opportunity to reinforce our existing strategic initiatives regarding revenue enhancements, operating productivity, quality of our maintenance programs, and the continued improvement in our financial systems and policies.

With the systems and training we've implemented over the past year, we have developed an infrastructure to allow our employees to improve their productivity on a daily basis, and I am impressed with the commitment our field personnel has regarding these broad-based initiatives.

Other significant accomplishments in the quarter. We secured three franchise agreements in the state of Florida for approximately $30 million in annual revenue. We've continued to roll out the new general ledger system, and have completed the transition on 40% of our operations, and will complete implementation during the second quarter of this year.

We've entered into a partnership with DuPont to reduce insurance costs. This partnership is focused on maintaining a safe work environment for our employees, and providing appropriate training.

DuPont's compensation is based -- is incentive-based and will only be realized if we have actual savings related to workmen's compensation and auto and general liability claims.

In his role as chief operating officer, Mike Cordesman will actively be involved with our regional vice presidents to be sure that we are providing proper support and capital investment to our field organization so that they can continue to deliver improved operating results.

At this time, I'd like to turn the call over to Mike Cordesman.

Thanks, Jim.

I have been in the solid waste business for over 20 years, and am looking forward to this opportunity to serve as the chief operating officer for Republic.

I will be working with our regional vice presidents and field organization on a daily basis to reinforce the strategic initiatives instituted last year, and also be focused on business expansion, both internal and external.

Our strategic initiatives have not changed in the past 18 months. We are simply focused on growing our revenue with a strong focus on pricing, ensuring we are achieving high levels of productivity on each of our routes, implementing cost-effective maintenance programs, and proper utilizing our financial information systems.

The completion of the Lawson general ledger rollout will help us to identify new cost savings opportunities in the areas of purchasing and payables management. Republic has a strong operating platform and talented management throughout the organization. During the past two months, I've had the opportunity to visit all five regions and participate in the monthly operating reviews. When the economy improves, I believe we are well positioned to achieve improved operating results because of the discipline in our organization regarding pricing and productivity.

I will now turn the call back to Jim.

Thanks, Mike. Mike will be focused on our internal operations.

Tod, Ed, and I will continue to be the contact point for external financial community. Although we do not provide quarterly guidance, we believe that 48% of our earnings will be generated in the first half of the year. We do not see a strong economic rebound this year, but we do not believe financial forecasts should fall into the same trap as last year, assuming a V-shaped economy.

This morning, I brought a number of analysts' releases with regards to our press release last night. Again, at this time, I'd like to reiterate our previous stated guidance of $1.37 to $1.39 earnings-per-share for the full year. We feel very comfortable in this range and any guidance outside of this range is not the direction of management of Republic Services.

I'd like to thank all of the employees of Republic Services for their continued dedication and the high quality of work that they've performed over the course of the last 18 months. Now I'd like to turn the call over to Tod Holmes, our chief financial officer.

Thank you, Jim. Jim's already discussed our maintenance, operating, and sales initiatives, along with Mike, and I'd like to start this morning by discussing in a little more detail our financial initiatives. Our focus on free cash flow, particularly accounts receivable, continues to provide financial benefits to the company and its shareholders. Our accounts receivable decreased by about $9 million in the first quarter of 2002 to 224 million as of March 31st. This results in a decrease in day sales outstanding from 38 days to 37 days. Our controllership organization in the field has done an outstanding job in this area, and our DSO is the best in the industry.

But I believe we still have room for improvement. For example, some of our locations have day sales outstanding in the range of 45 to 55 days, and I believe that by focusing on the basics and implementing best practices that are already in place in other locations, these locations can continue to reduce our day sales outstanding. In addition, our focus on accounts -- our focus on accounts receivable, we currently have initiatives under way aimed at improving our financial reporting systems. These initiatives will allow us to make quicker and more informed business decisions. The most significant of these systems was the selection of Lawson in 2001 as our enterprise-wide general ledger package. By February 2002, as Jim indicated, we'd successfully converted over 40% of our locations to the Lawson general software

I'm confident that we will successfully have the entire company converted to Lawson by the end of May of 2002. And again, the benefits of this system include better accounts payable information and procurement processes and cost savings in purchasing. Let me begin my review of the financial results with free cash flow. As we've said in the past, one of the most attractive aspects of this business is its ability to generate free cash. We believe that strong sustainable cash flow is indicative of a high quality of earnings. As you know, our primary goal in 2002 is to generate 147 million of free cash. We use a simple definition for free cash flow. It's net income plus DD&A, less capital expenditures, plus or minus debt changes and working capital. Now, I -- we would ask you to keep in mind that our statements of cash flow show even greater cash-generating capabilities as they include other common components of free cash flow excluded by our simple definition, such as noncash taxes and proceeds from equipment sales. Our free cash flow for the first quarter of 2002 was 88 million. This is based on net income of 55 million plus DD&A of 44 million, less capital spending of 38 million, plus estimated increase in working capital of approximately 27 million. Again, that equals free cash flow of 88 million. Please keep in mind also that our free cash flow historically is high in the first quarter because of the timing of capital expenditures and tax payments. If we're to normalize our free cash flow for our expected annual capex and cash taxes, it would be reduced by 22 million for normalized capital spending and 28 million for normalized tax payments. This results in a normalized free cash flow of approximately 38 million for the quarter, or 152 million for the year, which is slightly ahead of our goal. Again, the 152 million is before our noncash -- adding back our noncash taxes. During the first quarter of 2002, we purchased 2.7 million shares of our common stock for approximately 46-and-a-half million dollars or about $17.32 per share. Even after this substantial repurchase of shares during the first quarter, we had $48 million in short-term investments available as of March 31st to fund future internal growth, future acquisitions, and additional share repurchases. Next I'll discuss our first quarter revenue. First quarter 2002 revenue rose 3.1% from 551.9 million -- excuse me, to 551.9 from 535.4 million last year. Internal growth from core operations is nine-tenths of one percent. 1.3 percent from price and negative four-tenths of one percent from volume. Acquisitions were responsible for the remaining increase in revenue. Our first-quarter price growth from core operations of 1.3% was negatively impacted by a decline in commodity prices, including the .3% decline in revenue attributable to commodity prices, our net price growth was in line with our expectations at 1%. First-quarter volume growth from core operations of negative four-tenths of one percent was positively impacted by our environmental contracting operations, including the four-tenths of one percent increase in revenue attributable to these operations, our volume growth was essentially zero. Therefore, internal growth for the first quarter on a reported basis, including the negative impact of commodity prices and the positive impact of noncore operations was 1%. Now I'll discuss our changes in sequential operating margins. Sequentially, our first-quarter operating margins increased by 270 basis points from 16.7% in the fourth quarter of 2001 to 19.4% in the first quarter of 2002.

In accordance with Statement of Financial Accounting Standards No. 142, the company ceased amortizing goodwill effective January 1st of 2002. This change in accounting increased margins by 180 basis points. Therefore, our actual business improved sequentially by 90 basis points.

The key components of this increase are as follows:

Fuel. We had a positive impact of 30 basis points.

Our company-wide initiatives that Jim and Mike spoke of had a positive impact of 50 basis points

Insurance, both health and risk insurance, had a negative impact of 60 basis points. Our SG&A, while on a dollar basis was unchanged, seasonally the cost was a negative 20 basis points due to the seasonal revenue change.

Our fourth quarter 2001 onetime costs were a positive 40 basis points. We didn't have those, obviously, in the first quarter.

And lower disposal and subcontractor costs was a positive 50 basis points.

So the net of all of that is positive 90 basis points.

Now, let me give you a little color on each of those.

First, fuel. During the first quarter, fuel prices did trend downward. Our average price per gallon in the first quarter was approximately $1.08, down about 10% from the fourth quarter average.

Second, the company-wide initiatives, as Jim previously indicated, we introduced a number of initiatives in early 2001 designed to reduce costs and increase operating efficiencies.

During the first quarter of 2002, we began to realize the benefit from these programs, particularly in the areas of hauling productivity and reduced maintenance costs, and with a stable economy, these numbers -- or this improvement actually emerged out beyond the economic numbers that we saw last year that were negative.

Third, insurance. During the fourth quarter of 2001, we began to see a tightening in the insurance markets. We continue to see higher insurance premiums and claims costs.

Also, our medical costs and health-related benefits have increased 15 to 20%. Obviously, the DuPont program is focused on improving our performance in the longer term in this area. Fourth, SG&A. The increase in SG&A as a percentage of revenue is due to seasonal revenue decreases, and SG&A remained you know -- essentially unchanged at $58.6 million from Q4 of 2001 to Q1 of 2002.

Please keep in mind that a substantial portion of our SG&A costs are fixed, and that we believe SG&A of approximately 10% on an annual basis is appropriate for our existing business platform.

Fifth, the onetime costs. Again, during the fourth quarter of 2001, the company experienced certain onetime costs relating to a labor strike in Orange County, California, and the bankruptcy of a third-party transfer station trucking subcontractor.

Finally, the lower disposal and subcontractor costs. The remaining increase in margins is due to lower disposal and subcontractor costs resulting somewhat from disposal swaps and also from lighter disposal volumes in our commercial and residential systems. Now, our year over year operating margins increased by 90 basis points, from 18.5% in the first quarter of 2001 to 19.4% in the first quarter of 2002. 160 basis points of this improvement came from the change in goodwill accounting. Therefore, our actual busier over year declined by 70 basis points.

The key components of this decrease are as follows.

Insurance, both health and risk, was a negative 120 basis points. Our fuel, however, was a positive 80 basis points. Commodity pricing, which you'll recall were a little bit higher in the first half of last year, were a negative 30 basis points. Our operating improvements again was a positive 50 basis points, and our subcontractor costs were a negative 20 basis points year over year, with depreciation and depletion being an additional negative 30 basis points.

So the net total of this is negative 70 basis points.

Components of this year over year margin change.

First, insurance. As I'd previously indicated, in the fourth quarter we saw a tightening in the insurance markets. During 2002, we continue to see higher costs in both risk and health insurance.

Second, fuel. During the first quarter of 2002, fuel prices trended downward. Our average price per gallon decreased about 20% from about $1.36 in Q1 of '01 to about $1.08 in Q1 of '02.

Third, commodities. Commodities declined about 20% from the first quarter last year. Our quarter one 2001 average price was about $54 per ton, compared to $43 per ton in the first quarter of 2002.

Now, a portion of this decline was recovered in lower supplier rebates.

Fourth, operating improvements. Again, as previously mentioned, during the first quarter we began to see the benefits from the initiatives put in place beginning in early 2001.

Fifth, subcontractor. Again, during the fourth quarter, a subcontractor that provided the company with a transfer station, trucking services, filed bankruptcy, and since that time we've been forced to replace these services with slightly higher cost providers.

Finally, depreciation and depletion. This expense has increased by approximately 30 basis points due to capital expenditures as we continue to reinvest in our business and provide our operations with young fleets and good equipment. EBITDA. EBITDA increased from 149 million, or 26.4% of revenue in Q4 of 2001, to 151 million, or 27.4% of revenue in Q1 of 2002.

Our balance sheet remains very strong. At March 31st, our accounts receivable balance was 224 million, and our days sales outstanding, as I indicated, improved to 37 days. Our net debt at March 31st was 1,182,000,000, compared toe 1,236,000,000 at December 31st, 2001. And approximately 1,050,000,000 of our debt at March 31st is long-term public debt. Consistent with our cash flow performance and previous guidance, our debt to total capital at March 31st is 40.1%. We remain committed to maintaining our investment-grade rating. As of March 31st, 2002, we had nothing drawn under our revolving credit facility, and had 48 million in cash invested short-term, even after repurchasing 46 million of our stock during the first quarter. Consistent with our free -- focus on free cash flow, we have maintained tight controls over our capital spending. Capital expenditures for the first quarter were 38 million, consisting of 16 million for replacement capital, 13 million for internal growth capital, and 9 million for infrastructure.

Again, we are confident with our capital spending guidance of 240 million for the full year of 2002.

We have a very simple capital structure. As we previously discussed and as we've disclosed in our filings with the SEC, we have a vehicle leasing program that has an outstanding balance of approximately 76 million, as of March 31st, 2002. Republic Services has no other off-balance-sheet financing.

Now let me turn the call back over to Jim.

Thank you, Tod. At this time, I'd like to open up the call to any questions that you may have. As we begin our Q and A, I want to stress to everyone on the call that Mike Cordesman is going to be focused on our field operations. Any questions from analysts or investors must continue to be directed to Tod Holmes, Ed Lang, and me here at the corporate office.

Operator, we're ready for questions.

Okay. Very well. If you have questions at this time, if you will press star 1, your line will be placed into queue and your name will be announced in the order in which it arrives. Once again, if there are questions, please press star 1 and the first question will come from Amanda Tepper of JP Morgan. Go ahead, Amanda.

Good morning, Amanda.

Good morning, can you hear me.

Yes, we can.

Okay. Well, this was obviously a strong quarter for you guys and I'm trying to understand on the cost save side a couple of questions.

Could you break out or -- you know, how do you identify which savings you got between the higher route productivity and the lower maintenance costs? And then I'm wondering, you know, how -- you're saying that this is actually showing up because the economy has stabilized, so whether it's actually more than the 50/60 basis points, if it was a stronger economy and, you know, therefore how much up side your margins would have as recovery starts to be evident in waste volumes.

Amanda, the initiatives that we started 18 months ago, I think, you know, up until we saw similar financial results from quarter to quarter, wasn't convoluted with a lot of noise from the economy or commodity prices and/or fuel escalating or declining.

We can actually start to identify this.

Maintenance is broken out on our P&L separately. It's the easiest to identify. And probably about half of the 50 basis points improvement we saw we can actually tie in to our maintenance savings, which is predominantly related to training and adherence to a strict preventive maintenance program, as well as a focus on some basic preventive maintenance as it relates to tires and tire costs, which is, again, a primary focus of ours during the course of 2002.

As it relates to productivity, obviously we track productivity by line of business, and across all lines of business, we've seen increased productivity. Most of which is, I think, related to the field's acceptance of some of the tools that we've put out in place and a lot of the additional training that we've done to improve productivity.

We will be putting and standardizing some software with regards to route productivity in the course of the next 60 days in the business, and we can see that in lowering -- or flattening labor costs. We can see the improvement through our incentive pay programs and a flattening labor cost in a number of markets.

Okay. That's -- that's very helpful. And then as a follow-up, on the improvements that it sounds like you're getting on the working capital side through the systems, sort of a similar question.

Is there -- you know, is there more to come? Because I -- you know, that's been a lot of your cash flow growth even before these systems, is just squeezing down on working capital, and you've got another improvement in DSOs this quarter, so I'm wondering how much more room you think you have on that.

Sure. Well, Amanda, you know, I think we might have a day or more opporunity assuming those locations that already have seen excellent performance hold constant.

Again, this is a focus on the basics. You know, it's making sure that we have the appropriate staffing in our operating locations. It's such things as our business process or procedures for calling customers as they start to move from 30 to 45 days. It's making sure that locations are billing either twice a month or weekly. Some locations are not doing that. And so a greater frequency of billing, particularly where we have a -- you know, a larger roll-off customer or, at our landfills and transfer stations, will accelerate the day sales outstanding for those locations, and also should serve to reduce a little bit our bad debt expense or help us to identify customers that might go bad.

You know, on the other side of working capital, though it's not as great as receivables, the Lawson system now gives us the opportunity to drill down into our payables and really start to benchmark our payable performance in our operating locations. So it may not be as great as receivables, but I believe, you know, there's some working capital opportunity there. So, you know, again, I don't think that we're at the end of this road, and I do want to emphasize that the progress that we've made, which I believe is substantial, is a function of having the right staffing, the training for our people, and, you know, a sense of teamwork and working on it. It's not just the -- the controllers or an accounting function. It's the general managers leading the process with the controllers and having a very good group of people in our credit and collections function.

Right. I mean, that was my -- my follow-up question is that you're saying the 10% is the right SG&A run rate for a company of your size, which is up from where it used to be, and it seems like, you know, would it be -- would it be safe to say from your point of view that that's hand in hand with all the systems that enable being able to reap all the benefits from these systems, is a function of having the right level of increased staffing out in the field to make sure that it's all getting done at a very local basis?

I think that's part of it, Amanda, but I -- but again, you know, the guidance of 10% is with regards to the company and the economy today that we're in. I mean, again, as the economy starts to recover and as pricing becomes more flexible in the marketplace, and volumes, you know, come back in, again, there's not any reason to believe that our SG&A as a percent of revenue shouldn't be in that 9-and-a-half to 10% range. So I don't think that's a deviation at all, and the first quarter that you're looking at here, again, is the softest quarter that we have, irregardless of the economy, and would (inaudible) reflect a higher margin.

Okay. Thank you very much.

Thank you.

And the next question goes -- comes from William JENKO of Merrill Lynch. Go ahead, William.

Thank you. Could you talk a little bit about where you're going with these cost savings? It sounds like you're in the initial stages of coming down the curve, and with standardizing the software, ultimately how much cost do you think you can take out of the system?

Well, Bill, as I've always said, it's a little hard in a very decentralized business to give a hard estimate as to what the potential benefits are.

I mean, we have seen cases, as I've said in previous calls, where we've seen significant improvements in productivity and reduction of maintenance costs, and we've seen some facilities where we've got very little. And it depends on the sophistication of the business unit that we had purchased a number of years ago, where they were at in their life cycle, and so it's a little hard to tell. But I mean I think right now, the good news is that because we've -- I guess it's good and bad. We'd like to see the economy much better and things escalating here, but because we've had a static set of economic conditions between the fourth and first quarters, we can identify this for you, and I guess, you know, I'd be remiss if I didn't say that I think there was some more up side to this, because as we become more familiar with utilization of tools and our training becomes better, that there should be some up side. But again, if I were -- you know, if I were to give any guidance at all, possibly we can see, you know, in the next 18 months, another 20 to maybe 30 basis points of improvement. And Tod, you mentioned lighter loads helping the collection margins. I assume you're referring to the drought conditions on the East Coast. To what extent did that affect your disposal revenue?

Well, you know, if we look at our mix of revenue, our collection revenue, you know, is much larger. So it has a slight decrease, a negative impact on our disposal revenue, but, you know, the -- the collection benefit outweighs that. Typically, you don't see it but, you know, as we look at monthly results, our shorter months tend to be higher margin months for us just because of the fixed revenue nature of our commercial and residential systems, and having a lower disposal cost associated with those months.

Okay. And one final question. You continue to raise your accrual on bad debts. What is that telling you about the economy?

Well, you know, again, I think that has stabilized. You know, there continue to be some bankruptcies that we see, and some business closures. This first quarter was actually about 70 basis points, which was consistent with the fourth quarter. You know, our focus there -- and I think, you know, that we should have some opportunity for improvement -- is making sure that we've got the right billing frequency and, you know, with that, I would think we'd fall back into a more normal range of about 40 to 60 basis points of bad debt expense.

And again, Bill, I think there's probably some -- some amount of conservatism in our -- in that -- in those provisions, only because we have seen the economy falter and, you know, again our past experiences have told us that that usually shows an escalation in bad debts and we've taken a much more conservative position on our P&L.

Okay. Thanks, guys.

Thanks, Bill.

Next question comes from Stacy Divine of Deutsche Banc. Go ahead, Stacy.

Hi. I want to actually follow up on one of Bill's questions about the lighter volumes.

How much do you think that has to do with lighter weight due to the weather versus maybe, you know, people -- commercial and residential customers throwing away less?

Stacy, I think it's probably a little of both. You know, when we -- you know, and again, I want to make sure that everybody understands this. This 50 basis points we talked about related to some of the initiatives we put forth on productivity and maintenance has nothing to do with disposal costs being less, okay?

So I just want to make sure they're separated.

But I mean I -- I think it's natural. In the economy, we're starting to see, you know, our residential routes, you know, producing less volume. We're seeing residential routes from third-party deliverers to our landfills delivering less volume. We haven't really seen any lowering of the weights in our industrial collections system on a per-load basis.

Our commercial business, we've probably seen a slight decrease in the pounds per yard that we measure. And I think -- I think a lot of it is the weather and the wetness of the winter in the Midwest and the Northeast but I do believe some of it is the economy. But, again, I want to make sure, too, that everyone understands that our commercial business, we've still not seen any significant reduction in frequency or sizing of equipment at a number of our commercial accounts.

So -- or at most of our commercial accounts, we've not seen any requests for adjustment. So we're starting to see a decrease in disposal, but yet we're not seeing necessarily a decrease in our revenue stream.

Okay. And back also on the productivity of the routes and maintenance type of improvements, is your approach been sort of a market going -- market by market, where you could say you've covered sort of X percent of your markets, or how is that working?

The initiatives have been introduced to every one of our local locations, so whether we want to talk in terms of a market or a local operating unit, every one of our locations have been trained. Again, when I talked about the regional meetings that we've had annualee now for two years, we bring in our local division general manager, sales manager, operations manager, and maintenance manager, to these meetings for general sessions to reinforce the company's goals and objectives, and then they go into two days of breakouts for specific training or additional training on the utilization of these tools, and not just on how to implement, but how to analyze the information and then, you know, act on the information.

So every one of our units have been trained. Again, you know, again, we're in a decentralized organization, Stacy, and we have, you know, various levels of understanding or competency levels out there, so while we've seen a significant amount of improvement to date, I still believe that there is still a significant amount of productivity improvement yet to be had from the field. So again, we're sticking to the basics and we're going to continue to reenforce the training and the tools that we've already put forth not only en route productivity but in sales productivity, the initiatives that relate to that, because all of these initiatives at the end of the day relate to enhancing productivity and it doesn't make any difference whether we're talking about sales productivity or operational productivity.

Okay. Does the cost of the conversion in this quarter and in the second quarter add any to your SG&A costs.

You mean the general ledger conversion? No, it doesn't really add any significant costs. There's a little bit of training that's in there, but, you know, we -- we implemented this process in the summer of 2001, so we -- you know, we staffed up at that point in time, so it's been pretty consistent.

Okay.

No, you know, I don't think so. You know, we continue to -- you know, to focus on -- these initiatives are not just a one time and you're done. Particularly from a systems standpoint. You know, we could change systems and have the greatest and best system out there, but unless you continue to invest in training your people on the use of the system, to get the true value out of it, you're paying for something that really isn't worth it.

So we will continue to invest in our training, whether it's in our Lawson general ledger system or also in our billing, operating system.

Okay.

And actually, on the Lawson system, this is -- installing the general ledger package is the first phase. I mean, you know, there are another -- other initiatives associated with payroll, you know, with fixed assets, that we'll be looking at over time to put out additional modules using the Lawson platform.

So it's not a one-shot deal. It's an ongoing process.

Okay.

But Stacy, one shouldn't anticipate that we're going to be adding additional staff to support the process here. I mean, the reality is, what we've been doing over the last 18 months with the regional reorganizations is we've been staffing, you know, our financial organization out in the field, and over the course of the last six months, we've spent a lot of time training our financial staff and our systems specialists out in the region as to how these systems work so that they can support the field and support the go-forward of these systems with regards to planning and enhancements.

So we don't anticipate any further staffing with regards to these systems.

These system rollouts are really led by a joint team of, you know -- you know, a few people in our controllership group here and, you know, the regional controllers and people out there.

Okay. Thanks.

Next question will come from Alan PAVEESof Credit Suisse first Boston. Go ahead, Allen.

Thank you. Good quarter, guys.

Thanks, Alan. I was wondering if you could touch on the industrial revenue line. Obviously that was the weakest year over year growth. Could you give us an idea of how much of that decline might have come from the recurring part of the business versus the nonrecurring part of the business?

It's a little hard to identify that right now, Allen. I mean, we don't have those stats in front of us but I've seen that we've seen a decline in -- sequentially to a lesser degree in our permanent industrial collection, and a flattening in our temporary roll-off collection. So I think that probably the biggest piece is not so much as it relates to volume, but as it relates to price sensitivity on the temporary industrial collection. I think the numbers that we're reviewing now show about a 8 -- 5 to 8% decline in pricing.

Okay. So it's really just a price competitive environment more so than a volume problem.

Yes. remember, we've seen some decline in volume, but obviously when we're scrambling to move equipment into the field for temporary collection, obviously that is what we've always said is going to be most price sensitive and I think it's proving out. And is there any difference amongst those roll-off types of business whether it's the special wastes and C-soil jobs or the more prevalent, you know, regular C and D work?

Well, I mean I think there's more price sensitivity when we're talking about special waste disposal. I think I even mentioned this at -- at your conference, that we were seeing pricing sensitivity on special waste disposal anywhere from 15 to 20, 25% discounting from where we were historically. You know, so that -- that has had a tremendous amount of pressure on landfill margins, as well as margins overall. And we have not seen any -- any return to better pricing there, but we -- again, much -- very similar to the fourth quarter, we've seen price stabilizing in the -- in the first quarter, so I guess that's the first good sign we've seen.

All right. And how much of that, of the industrial business or the roll-off business, is that special waste versus, you know, what we'll call nonspecial waste?

Alan, that's not something that we disclose.

Could you give us a rough estimate?

I wouldn't want to do that off the cuff and give you information that might be misleading.

Okay. Just one last question then. More for Mike Cordesman. You talked about business expansion being one of your primary focuses internally and externally. Could you maybe outline what one or two of the biggest opportunities are in that regard.

Well, Alan, this is Jim O'Connor, I'll let Mike comment here in a second, but, I mean, business expansion will be one of my primary focuses in conjunction with Mike, and currently we have pending about 20 to $25 million of acquisitions that we anticipate to close here in the next 30 to 60 days. We have the divert tour or the sale of some assets that -- that we wrote down as part of our charge in the fourth quarter that will we'll be monetizing here, we hope, in the next 30 days and I think the monetization of those assets will be in the area of about $20 million. And we closed this quarter about a million dollars worth of activity on -- unrelated to this one tracks, and we have a pipeline of about 25 to $30 million of acquisitions on a go-forward basis. Barring, you know, obviously, anything that were to happen with any of our national competitors as well as any of the other large major independents. Is that a net even revenue swap between those purchases and sales?

Not quite.

6, 7 million.

Well,' million in the first quarter.

Right.

But as we talk about the transaction that we're about to close, and the revenues we're about to sell that we were holding that were part of the charge, it should be net positive. Probably about.

Five.

five million dollars. But again, our backlog is about 20 to 25 million in addition to that transaction, and we continue to be active out there, and I think Mike, at this particular stage, is really getting oriented to the operations of the other four regions that we have, and has been out in those regions and maybe I'll let Mike talk about, for a second, what he's done in the last 30 to 45 days to get familiar with our organizations.

Well, really, Alan, I'd simply, as I said in my original comments, I've simply participated in some of the monthly operating reviews at those -- in those regions, focused more on really getting to meet the people out there and just determining what I had to work with.

But on a go-forward, you know, in terms of specific items you asked about, I mean, it just probably wouldn't be prudent at this time to name any specific item. They're just not to that level yet.

And Mike, as time goes on, Mike will become more accustomed with our backlog and our corporate acquisition program, even though he's very familiar and very active in the eastern region. But again, you know, as Alan, before, we've always focused on wanting to expand our business in high-growth markets, and while we took Mike out of the east, that is not the fastest growing area that we have. We're still looking to acquire businesses across the country.

Great. Thanks, guys.

Thank you.

Next question comes from Bill Fisher of Raymond James.

Good morning.

Good morning, Bill. Just on the Florida contracts you mentioned, did they kind of ramp up throughout the quarter and do you expect to get kind of more of the full revenue contribution in Q2.

Well , let me give you the breakdown, Bill. Orange County started January 1, approximately 6 to $7 million of revenue. February 1st, we started to see if Pembroke Pines, which has got annual revenues of roughly about 10 to $11 million, and 1st, we're starting the city of Miramar, which we've already started up, which is about 10 to $11 million.

Bill, remember on this residential business, this is business that while it carries slightly lower margins than our other business, the capital investment isn't quite as great as, you know, some of our other businesses, and therefore, it gives us a good return, but, you know, the margins aren't quite as high.

And you bought those trucks, though (inaudible) in the first quarter?

Yes.

We actually bought the Orange County vehicles in the fourth quarter.

Okay. And on the pricing, just I guess focusing on maybe the residential side more than the contractual side, is that typically weighted in January or June for you guys?

It's really more midyear. Some of our larger franchises, the pricing comes up in the midyear time cycle.

Right. Las Vegas.

Cal.

in particular, comes in July, but most of the other municipalities that we have under contract are franchises are on a fiscal year that ends 9/30, so we usually see their price increases October 1.

Okay. And I would -- I guess the last part of that, insurance, can that -- is that an element of the CPI that you can push through on those?

Yeah. The insurance costs?

Yes.

You know, it -- it would be in those franchises. Typically, the franchises look at a transportation type of index or, you know, some sort of an industrial cost index.

So there would be a component in there for insurance, but again, I think that there's a lag effect there. You know, it has to manifest itself in annual numbers. So we might not see that benefit until 2003. But it's certainly an opportunity for us.

But again, on the insurance costs, again, other than health, I mean that's one of the reasons we -- we have been talking to DuPont for the last four-and-a-half months, to arrange a program where we've in sent advised them and for many of those on the call, I hope you're aware that DuPont's probably got one of the best safety records in the -- in industrial America. We -- we engaged them because of that, and their philosophy as they put forth as it relates to safety, and we expect to see big things from them. It's a multiyear relationship. Our expectation is -- our goal with DuPont is to reduce our workmen's comp and auto liabilities claims by about 20 to 25% over the next several years, holding, you know, obviously the economy and the impacts on insurance costs constant.

So that is significant when you look at the cost of our -- of the workmen's comp and auto and general liability to be in the area of 55 to $65 million.

Okay. Great. Thank you.

Thank you.

Next question comes from trip Rogers of UBS Warburg.

Hi. Good morning.

Good morning, Tripp.

Fuel costs obviously gave you a nice benefit in the quarter and I would imagine those are going the other way now. Can you talk about what price you're seeing today, you're paying today, and kind of what price you've incorporated into your guidance?

Well, the -- you know, in the second quarter, in April actually, what we've seen is prices move up about 10%. And, you know, obviously we don't know whether it's going to stabilize at that level or, you know, continue to -- to go up. I think the biggest threat there, or issue, is the -- you know, sort of the war risk and the short-term spike that might come from that. Our business model was built upon what we saw in that September/October pricing in 2001, which is about that dollar 18 number.

So basically what we're seeing in April is really more consistent with what we would expect.

Right.

And just talking about April volumes, can you talk about the seasonal pickup you've seen? I know -- and has that been muted really by the warm weather and how much has it been muted by the soft economy?

That's really kind of hard to distinguish between the two. I mean, we're starting to see some escalation in volumes, but I think we would -- you know, it's a little too early, Tripp, to start to say that we've actually seen a seasonal adjustment. Again, now, in our guidance, we down -- you know, we kind of adjusted, to some degree, the amount of seasonality that we would see coming out, because we were concerned that coming out of the first quarter, the economy may not still yet be pumped up.

So I -- I don't really think we're going to get a good flavor for that until we get to the latter part of May and look at our and our landfills and our industrial collection component of our business values but right now we're starting to see some uptick but it's not substantial

Okay. Fair enough. And just finally about commodity prices. It looks like OCC prices took an uptick the early part of this month. Have you seen that yet?

Well, we were getting some spotty results from the field as to starting to see some improvement, but, you know, again, based on what I'm reading as it relates to the packaging industry, in particular International Paper, I don't see them starting to increase inventories or -- or the sales of packaging, and therefore it's a little hard for me to want to predict that we're going to start to see a sustained upswing. But irregardless of that, I have -- we have seen some individual marketplaces tick up a little bit, but nothing substantial.

Okay. Thanks a lot.

Thank you.

Next question comes from Leone young of Solomon Smith Barney.

Yes, good morning.

Good morning. Your depreciation and amortization is running a little bit higher than last year in the first quarter. Tod, I don't know if you want to comment on that with regard to any trend you see there.

Well, yeah. You know, I think what we've got is maybe a little bit of mix. You know, certainly we picked up the Richmond acquisition in May of last year with two landfills and that tends to have a higher D&A component. And then the other factor is, you know, we continue to -- we've not starved this business for capital, and we continue to invest throughout 2001 in our capital and a little bit of it is kind of the rollover impact of that.

And so you would expect it to be fairly constant, moving forward?

Sequentially, constant. It might be up -- might move up 10 basis points or so, but, you know, somewhere in that range.

And one last question. On your cash taxes, you've adjusted your free cash flow for the FASB 142. Your actual cash taxes paid out don't change, corrected?

Right. You know, the guidance that we gave in our conference call in January was 163 million for our simple definition, and that was, you know, assuming that we had goodwill as an expense on the P&L. So, you know, when you adjust it for the accounting thing, our simple definition is 147 million, but the reality is -- you know, I would direct everyone really to our cash flow statement, look at cash from operations, less our net capital spending. That's the true cash flow of the business, and that's unchanged and, you know, I think this business probably generates something in the 185, $195 million range. So that's unchanged, and obviously is a very solid performance.

Thanks a lot.

Operator, we'll take two more calls.

Okay. Very well. The next question will come from Tom Ford of Lehman Brothers. Go ahead, Tom.

Good morning.

Good morning, Tom.

Jim, when you mentioned the 20 to 30 basis points, you know, estimated realization over the next 18 months, what kind of assumptions are you making there in terms of activity levels? Because am I right to assume that this is more activity based driven?

Yes. But Tom, I think -- I mean, I hope this will answer your question. I mean, I attend all of the training sessions that we have with our people, all right? And again, as I said earlier, when you look at the decentralized nature, we have people who catch on very quickly to the process because it's not an easy process to grab and grasp the first go-round. So we've got various levels of competency out there. While we have some of the best people in the industry, I believe, we've got various levels of competency.

So when I look at what occurs in the training session and the application when we go to do our monthly operating reviews in the field, I still tend to believe that we've got more up side here. But these things don't come easily, again, as you well know, and I know people have wondered why it's taken as long to get to where we are today.

Well, these are -- while they're not necessarily new concepts, you know, to reinforce that and to get it through not just to the general manager but to the operations manager, the field supervisor, and then being able to have the field supervisor communicate with the route driver as to why these changes are necessary and what's causing them to happen. I mean, that's the key component in successfully improving productivity. It's just not saying that you're going slow. It's about being able to communicate all the way down to the route driver as to why we think there should be increased performance.

Maybe that bodes another question which is, I mean, do you think is there potentially adjustments that you make to maybe compensation structures or something to make people focus more so?

There's not my question about T you know, early on, we initiated a number of incentive programs, and they were -- they were implemented prior to a total review of where the company was at in what I call its life cycle and getting to a high level of productivity or something that's within an acceptable range. And therefore, going to your question, we have had to go in and adjust a number of incentive programs to accommodate what is a realistic and a sustainable level of productivity. So we have seen some benefits from that, you know, from a payroll review, as well as enhanced productivity.

Okay. Great. Just switching gears here, with respect to you highlighted the temporary roll-off as the primary driver. I mean, I could try and back into it. I mean, if temporary roll-off pricing is down, according to your indications, it would tend to imply that your commercial pricing is up in, what, sort of the -- are we talking low single digits level?

Yeah, you know, I think that's fair, Tom. Again, this is a -- you know, it's a local business. It's an integrated business. And, you know, when you start to look at information at a consolidated level, where you've got 250 operating locations and you're trying to measure it on a line of business, whether it's commercial or residential or industrial or landfill, the numbers, you know, start to become averages and, you know, while you might see some general trends, you can't really analyze it at this level. You need to go down to the operating location, analyze it at that operating location, and understand the dynamics. That's why, you know, our focus and Mike's focus and Jim's focus is on this monthly operating review process.

You know, we're out there looking at the local market conditions and understanding the dynamics of the various business units at that individual location.

Okay.

Yeah, I think that's very -- you know, very fair. Our commercial business and our residential business, you know, are performing as we expected, and if you look at the guidance that we had given and the comments that we had given starting in July of last year, you know, where we were the first one saying we're seeing an industrial slowdown, then in the third quarter we said, you know, we're seeing this commercial slowdown. You know, that's really where it's coming from. It's coming from the roll-off sector, and then also obviously this event-type of special waste business that goes into the landfills.

Okay. And then last, Jim, you had talked about the acquisition activity. Have you -- have you seen any change there in terms of the activity or opportunities?

Not necessarily, Tom. I mean, we have -- you know, we're actively out there trying to pursue them, but, you know, we're not chasing anybody. You know, when we see an opportunity, we obviously have the balance sheet to react to it, but we're -- we're not going to change, you know, acquisition growth just for the sake of acquisition growth. We've gone that -- that path early on in our development, and we've developed a lot of discipline here, and possibly, you know, to some degree were criticized as not being more aggressive, but again, we want to ensure that on a go-forward basis, what we've got and what we're acquiring is a very strong business.

Okay. Great. And Tod, lastly, you mentioned what the high end areas are doing in terms of DSOs. What's your best performing area doing.

We've got some locations, you know, that are less than 30 days in terms of their days sales outstanding and they have, you know, an excellent business process in place. Again, it's not just, you know, a controllership, accounting, credit, collections function. It's making sure that we've got good communication with our salespeople, making sure that the operations have good shutoff procedures when accounts go delinquent, so it's really the general manager leading the process with both our operations, sales, and financial people.

Okay. And those -- and those areas below 30 days, I mean is there any material difference in mix there or, you know, heavy franchise or anything that would stick out as different from the corporate average?

Again, I think it's the basics and the training and the dedication of the people that you have in place. The focus.

Okay. Thanks very much.

Okay. Thanks Tom. One more question, operator.

Okay. Last question will come from Jamie good friend of first analysis. Go ahead Jamie.

Good morning, guys. Nice quarter.

Thank you, Jamie.

Just a couple quick questions on the DuPont contract just to make sure I understand. When does your next renewal come up for your next insurance increase?

Well, you know, our insurance policies actually were renewed in the fourth quarter and I think we had, you know, some -- it was about November. Our insurance costs are probably about 20% of our total costs in that area, and, you know, when you see an economic slowdown, what you see is -- well, certainly the insurance markets are tight, so we've seen a substantial increase there. But also when you've got an economic slowdown, you know, you tend to see, you know, some additional claims that may not have validity that you have to defend against, and so there's also costs in the claims side.

All right. And so your first benchmark to use with the DuPont contract would be next in -- in Q4 of next year.

Well, this is a two on -- actually, it's probably a three to five year process.

It's a three year process.

You know, and over three years, we would expect about a 20% improvement. And I think that, yeah, it's probably, you know, 12 months out before we start to see a little bit of improvement here.

Jamie, what we've done, obviously we introduced DuPont at all of our regional meetings. They spent a lot of quality time with our people understanding what kind of drives us, you know, what kinds of attitudes that our field personnel have towards safety, and this is a very specialized approach that they take. I mean, again, they're adapting obviously good safety techniques to the attitude that our people employ throughout our company. So a lot of it is attitude driven and so what we're going to be doing now between now and the end of the year is really trying to get a focus on safety and getting a mind-set that everything we do has to reflect on a safe operating environment.

Okay.

Well, I mean the reality of the situation is, DuPont won't earn anything unless we -- we show improvement, and so we've established, you know, a benchmark and we go from there, and if in effect we don't get any better, they will -- they will -- they will not receive any payments from us.

I mean, and again, they've got significant resources invested in this program. They didn't just, you know, take this on Lyle. They studied our company after we had approached them a period of three to four months and to determine whether or not they thought that there was enough incentive or there was enough slack in our attention to safety that they could realize, obviously, some -- some incentive payments. But they've put a 15 to 20 people on our project just about full-time.

Okay. Last question and I apologize, I got dropped off the call for a minute, or there. The disposal prices, I think -- I think Alan asked a question about disposal prices and I think he was specific more to the industrial side of the business. Correct me if I'm wrong. I was wondering if you have a comment on disposal in general from what you've seen.

Are you speaking of disposal at our landfills or the disposal costs on the collection side.

Yeah. Actually, both.

Both. Well, you know, I'm -- on the landfill side, the pricing that we're seeing, while it's stable really from our permanent streams, whether it's residential or commercial, it's that event business where, you know, we -- because it's such a high-margin business, it's always priced to market, and so there's competitive pressures there to attract that.

Right.

On the collections side, in terms of disposal, disposal volumes are a little bit lighter, particularly in our residential and commercial systems, and, you know, in the residential and northern climate, some of it may just be the normal seasonality. You're not picking up yard waste. And on the commercial side, it's a little hard to differentiate, but as Jim said, the -- the weights per container yard are lighter than what we have traditionally trended at, and we believe that, you know, the dryness may have contributed somewhat to that. There might be a little bit in there in terms of the economy, a little bit less being thrown in the containers, but again, we haven't seen changes in our service levels.

All right, guys. Thanks a lot.

Okay. Thank you.

Thanks Jamie.

Thank you, operator. Before I go into the callback numbers that are available, I'd like to once again reiterate that our guidance here. I know I've seen a number of early releases on the company, and some upticks on earnings expectations for the full year. Again, we're going to state our original guidance and stick to it, $1.37 to $1.39 per share for the full year. Again, that is -- those are the numbers that senior management at Republic Services feels extremely comfortable with and confident with, and any numbers above that we think are very aggressive in light of what's -- you know, in light of where the economy is at and predicting where the economy will be at in the latter part of the year.

So with that, I'd like to remind everybody that this call replay will be available today by calling 1-800-252-6030. The pass code number is 11958968.

And additionally, a recording of the call will be available on Republic's website at www.RepublicServices.com. I want to thank all of you for spending time with us today, and have a great day.