Republic Services Inc (RSG) 2002 Q2 法說會逐字稿

Hello and thank you all for holding. I'd like to inform you that you're holding for the Republic Services second quarter conference call. Also on the call is Mr. Tod Holmes, Chief Financial Officer. I'd like to remind you that this call is being recorded and transcribed. At this time, I'll turn it over to Mr. O'Connor. Thank you for using Sprint conferences.

Thank you. And good morning for joining us. This is Jim O'Connor. And I'd like to welcome everyone to our conference call. This morning, Tod Holmes, our Chief Financial Officer and Ed Lang, our chief Executive Officer are joining us for this call in 2002. I would like to remind all of you that some of our statements will contain forward-looking statements. Actual results could differ materially from expectations. Additionally, the material we discuss today is time sensitive. Additionally, if you listen to the rebroadcast of this call, you should pay attention to the date of this call, which is August 2nd, 2002. Please note that this call is the property of Republic Services and any reproduction of this call without the express consent of Republic Services is strictly prohibited.

I'm pleased to report today that our operating and financial performances has exceeded our expectations during the first six months of 2002. But before we talk about our results, I would like to let our investors know that both Tod and I will be certifying our financial statements without hesitation. It is nothing new for Republic Services. We have a solid system of internal controls and a comprehensive set of business policies and procedures which set forth the highest level of business conduct. It is increased financial figures that we've included in our statements, and our filings with the SEC since 1999. I want to stress that we strongly believe that the management of Republic Services is responsible for the integrity and honesty of our financial statements, and we have no reservations in certifying their accuracy.

Year-to-date on internal growth is 2.1%, with 1.4% from price and .7% from volume. We had given guidance in January that we expect internal growth to be 1.5 to 2%. We are raising this guidance to 2% to 3%. A key factor in our improved internal growth has been our ability to secure new residential contracts in Florida and California, accounting for $35 million in annual revenue broth growth. In addition, we are benefiting from commodity prices and contracts in our noncore businesses. We are raising guidance from free cash flow to $155 million. It includes the increased capital for through residential contracts.

We've completed our implementation of our new general ledger system in May. Although we will continue to update our systems, we have now completed the installation of all major information systems for the past few years. It includes tools to provide our field personnel with support for daily decision making. For example, we completed the upgrade ahead of schedule and under our original budget of $10 million. And to support this information systems business, we've only added an additional 4 people.

We have rolled out strategic initiatives related to revenue. Most these initiatives involve providing the field with specific tools to enhance productivity in the areas of sales, maintenance, and operations. The use of these tools is a continual process, and the results are evaluated during our monthly operating reviews. We are committed to providing with the appropriate support and training to be sure we continue to improve our performance, and these iniatives are providing positive benefit. In the second quarter we saw a 30-basis point improvement in operating margins due to the increase in activity and lower maintenance costs.

In the fourth quarter, we took a charge that included a writedown of assets in three markets that we intended to exit. As of June 30 we have signed contracts to settle two of these three markets, and are in negotiating a contract with the third. We have also entered into a purchase agreement to acquire collection and disposal assets. And positive revenue impact of all these transactions will be approximately $20 million in annual revenue. We expect all these transactions to close prior to year-end. And our acquisition pipeline is approximately $50 million.

We are seeing higher risk and insurance cost, both our medical insurance and our business risk insurance. To offset future increases in business risk, we continue to evaluate and to look to improve our safety programs. Earlier in the year, we entered into an arrangement to work with safety professionals from Dupont Safety Resources. This program includes safety leadership training for everyone in our organization, including me. To date, all senior management, midlevel management personnel have received the first round of training. More than 90% of our general managers have been trained, and the remaining managers are scheduled to complete their training by August 15th. We believe that the savings from an improved focus on safety will be realized over the next two to three years. For medical insurance, we are making copay and other adjustments to the medical benefits in order to control our costs while continuing to provide comprehensive medical coverage to our employees at an affordable rate.

Standard and Poors raised the outlook on our triple B rating to positive. Republic continues to maintain a strongest credit profile in the solid waste industry, and our credit quality is reflected in the credit spreads and our bank facilities and secondary markets for our public debt. We renewed $750 million of bank credit facilities. The multiyear of this portion of this facility matures in 2007. Republic has no debt maturities until 2004. Approximately 75% of our debt is fixed at very favorable rates.

Republic is committed to generating free cash flow and utilizing these funds to enhance share-holder value. During the quarter, we repurchase 2.3 million shares for $46.2 million. Since we instituted our repurchase program in July 2000, we have returned over $240 million to our shareholders by purchasing 14.24 million shares of stock. During that same period of time, we've reduced our net debt-to-capital to 39%. And we will continue to have a balanced approach utilizing our free cash flow.

Due to our strong operating performance, we are raising our guidance for 2002 earnings per share from a range of $1.37 to $1.39 to a new range of $1.39 to $1.41. Since we have no bank debt outstanding and no debt maturities until 2004, the board of directors have authorized an increase of $25 million in our share repurchase program, which will allow us to buy back stock at these under-valued levels.

At this time I'd like to thank all of the employees of Republic Services for their dedication and hard work and execution of our business plan during these tough economic times. Now I'd like to turn the call over to Tod Holmes for a financial review.

Thank you, Jim. I'd like to start this morning by updating you on our financial controls and our financial initiatives. In 1999, as many of you know, Republic significantly expanded our accounting disclosures in a number of areas that required subjective or complex judgments, including landfill accounting, fixed asset accounting, and the activity in various balance sheet accounts. As part of our continuing commitment to provide reliable and transparent financial reporting in our form 10-k for the year ending December 21st, 2001, we added a number of additional disclosures, including a summary of our critical accounting policies, a summary of future obligations, and other disclosures that provide the users of our financial statements with additional information concerning our liquidity and future obligations. A great deal of press has been given recently to the personal liability that CEOs and CFOs have in light of the Sarbanes-Oxley act and SEC's requirement to have executives attest to accuracy of their financial statements. Jim, I, and other managers of management responsible for financial reporting here at Republic Services have attested to the accuracy of the company's financial statements for 19 -- excuse me -- for 2001 on page 49 of our form 10-k. Republic Services has maintained and will continue to maintain the highest level of financial integrity. And as Jim indicated, we look forward to certifying the accuracy and completeness of our filings with the SEC.

During the second quarter of 2002, our audit committee completed the process of selecting new auditors. As previously announced, we selected Ernst & Young as our auditors, and have agreed to annual audit fees similar to prior years. We believe that these modest fees are a reflection of our straightforward financial structure, our solid financial systems, our strong internal audit function, and most importantly, the integrity of all our people.

In May of 2002, we successfully converted, as Jim indicated, our remaining locations to the Lawson general ledger software. We now have the entire company converted to Lawson and are beginning to realize the benefits of this standardized general ledger system. As I will discuss in more detail later, at the end of the second quarter, we had $110 million in unrestricted cash after repurchasing over $46 million of our stock during the quarter. In July, 2002, we used approximately $74 million of this cash to terminate our vehicle leasing program. I want to emphasize that the company at this time now has no off-balance sheet financing arrangements of any kind.

I'm going to begin now the financial results review with free cash flow. As Republic has said in the past, one of the most attractive aspects of this business is its ability to generate free cash flow. We believe that strong, sustainable cash flow is indicative of a high-quality of earnings. We use a very simple definition of free cash flow. It's net income, plus depreciation, depletion, and amortization, less capital expenditures, plus or minus changes in working capital. Please keep in mind that our statements of cash flows show even greater cash flow generating capabilities, as they include other common components of free cash, excluded by our simple definition such as non-cash taxes and proceeds from equipment sales.

Our focus on free cash flow continues to provide financial benefits. Our accounts receivable increased $22 million in the second quarter of 2002 to $246 million at June 30th. This is because of higher second quarter revenue. However, our day sales outstanding has remained at 37 days, which is consistent with March 31of 2002, and down from 38 days in December, 2001.

Let's turn now to what makes up our free cash flow. For the second quarter of 2002, it was $71 million. This is based upon net income of $61 million, plus DD&A of $49 million, less capital expending of $68 million, plus an estimated improvement in working capital of approximately $29 million. Again, that equals free cash flow of $71 million for the second quarter. Our free cash flow for the six months ended June 30, 2002, was $160 million. This is based upon net income of $116 million, plus DD&A of 94 million, less capital spending of $105 million plus the estimated improvement in working capital of approximately $55 million. Again, that equals the free cash flow of $160 million for the first six months of 2002. Our free cash flow is historically high in the first and second quarters because of the timing of capital expenditures and tax payments. If we normalize free cash flow for expected annual capex and cash taxes, it would be reduced by $22 million for normalized capital spending, and $66 million for normalized tax payments. This results in normalized free cash flow $78 million for the six months ended June 30th, 2002, or approximately $155 million projected for the full year.

As Jim already indicated, we are increasing our cash flow guidance from $147 million to $155 million. This increase is a result of an increase in our expected earnings, increased DD&A, primarily due to equipment that is being put in service for the new residential contracts as well as our environmental remediation business, and it's reduced by increased capex attributable to that additional business and also an increase in working capital or improvement in working capital, primarily due to better accounts receivable collections management.

Our uses of free cash flow are focused on share repurchases at this time. During the second quarter of 2002, we purchased 2.3 million shares of our common stock for approximately $46 million, or about $19.90 per share. This brings our total shares of our common stock we repurchased in 2002 to 5 million shares for approximately $93 million. We have 57.3 million remaining in our 2002 share repurchase program. Even after this substantial repurchase of shares in the first half of 2002, our balance sheet of cash -- excuse me -- our balance of cash available in short-term investments at June 30th to fund future internal growth for acquisitions and for share repurchases is approximately $110 million. Now, if we completed the $74 million buyout of our vehicle leasing program prior to the end of the second quarter, our available cash balance as of June 30th would still have been positive $36 million.

Next, I'm going to talk about our second quarter revenue. Second quarter revenue for 2002 rose 3.9% to $598.2 million from $576 million last year. Internal growth from core operations is 2.6%. Equally divided, 1.3 from price and 1.3 from volume. Acquisitions, primarily the Richmond acquisition in May of last year, was responsible for the remaining increase in the second quarter revenue year over year. Our second quarter price growth from core operations from 1.3% was positively impacted by an increase in commodity prices, including the .4% increase, attributable to commodity prices, our price growth was actually 1.7%.

Our core volume growth comes primarily from our residential collection business, which is not as sensitive to economic slowdown as our other lines of businesses. Volumes from commercial businesses are holding steady and as expected, volumes from our industrial and construction business are down year over year.

Next, I'll discuss our changes to sequential operating margins. Sequentially, our second quarter operating margins increase by approximately 10 basis points. The key components of this increase are as follows: Commodities gave us a positive 30 basis point impact, fuel was negative 20 basis points, seasonality and primarily the economic slowdown was a negative 20 basis points, DD&A was a negative 20 basis points, and SG&A, which is seasonally related was a positive 40 basis points. So that gave us this net sequential improvement of 10 basis points. First, commodities during the second quarter, commodity volumes increased slightly and commodity prices trended upward approximately 24% from the prior quarter. Our Q1 2002 average price per ton was $41, compared to $51 per ton in the second quarter. Please keep in mind that only a portion of this benefit from increased pricing drops to the bottom line, since we have price sharing agreements at many of our locations with our customers.

Second, fuel during the second quarter of 2002, we saw fuel prices increase by about 10% per gallon, up to about $1.20 per gallon. Third, seasonality in the economy; the normal seasonal margin expansion, which we tend to experience during the second quarter was offset this year by continued softness in industrial and construction rolloff activity and pricing pressure from temporary construction rolloff activity. Fourth, DD&A; during the second quarter of 2002, the company experienced a sequential increase in expense, much of which is due to the seasonal increase in disposal revenue. And finally, SG&A, sequentially decreased 40 basis points, again due to seasonality.

EBITDA increased by 14.3 million from $151.4 million, or 27.4% during Q1 2002 to $165.7 million, or 27.7% during Q2 of 2002. Turning to year-over-year results, our operating margins remain constant from the second quarter of 2001 to the second quarter of 2002. In accordance with statement of financial accounting standards, number 142, the company ceased amortization of good will, effective January 1st, 2002. This change in accounting improved margins by 170 basis points. Therefore, excluding this impact, our actual margins actually declined by 170 basis points. The key components it to this decrease are as follows: The biggest impact was insurance. Our health and risk insurance, as Jim had indicated previously, caused a decrease of 90 basis points. Fuel was a positive 40 basis points. Commodities a positive 20 basis points. The operating improvements, which Jim spoke of, positive 30 basis points. The economic impact, negative 40 basis points. Subcontractor costs, this is a contractor that had gone bankrupt last year, if you may recall, was a negative 20 basis points. Increased depreciation and depletion was a negative 60 basis points, and SG&A negative 150 basis points. Again the total of that is a negative impact of 170 basis points, excluding the accounting change for goodwill.

Now, let me briefly comment on these components on a year-over-year margin change. First, insurance. Fourth quarter of 2001, we begin to see a tightening insurance market during the first and second quarters of '02. We continue to see higher risk costs and health insurance costs. Second, fuel. Fuel prices are down from the prior year. Average price per gallon decreased from 10% from $1.33 in Q3 of '01 to $1.20 in Q2 of '02. Third, commodities; commodities increased about 13% from the second quarter of last year. Our Q2 2001 average price was approximately $45 per ton. This compares to the $51 per ton price in Q2 of 2002. Fourth, operating improvements; As Jim previously mentioned during the second quarter we continued to benefit from the initiatives that we put in place during 2001. Fifth, the economy; during the second half of '01, we began to experience a downward trend in our industrial business. And I think we spoke of that in June of last year. And then in the third quarter, we began to see the construction rolloff decline.

During the second quarter of 2002, volumes and pricing in our industrial construction rolloff businesses continue to be negatively impacted by the economic slowdown. Sixth, the subcontractor costs; during the fourth quarter of 2001, a subcontractor has provided the company with transfer station hauling services filed bankruptcy. Since that time, we have been forced to replace these services with other higher-cost service providers. Seventh, depreciation and depletion, this expense is increased by approximately 60 basis points, primarily due to capital expenditures in the intervening 12 months and the Richmond acquisition. And finally, SG&A; the increase is primarily attributable to normal wage increases, professional fees and training costs associated with our systems initiatives.

Our EBITDA remain constant in terms of dollars at $165.7 million but decreased as a percentage of revenue from 28.8% in the second quarter of 2001 to 27.7% in 2002. Our year-to-date results, starting with revenue. Second quarter year-to-date revenue rose 3.5% to $1 billion,150 million from $1 billion, 111 million last year. Internal growth from our core business for the six months was 1.8%. 1.3% from price and .5% from volume. The impact of commodity pricing and noncore operations on our second quarter year-to-date internal growth was negligible. Acquisitions accounted for the remaining increase in revenue.

Now I'll discuss the year-to-date operating margins. Year-to-date operating margins increased by 40 basis points from 19% in 2001 to 19.4% in 2002. 170 basis points of this improvement came from the change in good will accounting. Therefore, our actual margins declined by 130 basis points. Approximately 100 basis points of this decline is attributable to increased insurance cost. 50 basis points is attributable to increase in depreciation and depletion. And 30 basis points are due to the slowdown in our industrial construction rolloff business resulting from the economic slowdown. 20 basis points of the decline is due to the higher subcontractor costs, and 30 basis points of this margin decline is due to increased SG&A. These declines in margin were partially offset by operating improvements from our company-wide initiatives as we previously discussed of 40 basis points, and a decrease in fuel costs, which gave us a benefit of 60 basis points. EBITDA increased from $315 million during 2001 to $317 million, or 27.6% of revenue for the six months ended June 30th, 2002. Our balance sheet remains very strong at June 30th, our accounts receivable balance was $246 million, and again our day sales outstanding was 37 days.

Net debt at June 30th was $1 billion, 135 million, compared to $1 billion, 236 million at December 31, 2001. Approximately $1billion, 50 million of our debt at June 30th is long-term public debt, and approximately $305 million is tax exempt financing at very favorable interest rates. Consistent with our cash flow performance and previous guidance, our debt-to-total capital in June 2002 is 38.8%. Republic remains committed to maintaining our investment grade rating; as of June 30th, 2002, we had nothing drawn down on our $750 million revolving credit facility. And as I said earlier, we have $110 million in cash even after repurchasing 40 million of our -- 6 million of our stock during the quarter.

Consistent with our focus on free cash flow, we've maintained a disciplined approach to our capital expenditures. Capital expenditures for the second quarter were $68 million, consisting of $38.1 million for replacement capital, $30 million for internal growth capital, and $7 million fo -- infrastructure capital. We are increasing our capital spending guidance for 2002 to $255 million from $240 million. This increase reflects approximately 5 million of additional capital for our remediation business, resulting from the recent award of a multi-year contract, and an $10 million increase due to the residential contracts that we were awarded this year.

Now I'll turn the call back over to Jim. Thank you.

Thank you, Tod. And at this time, operator, you can open the lines up for questions.

At this time, if you have a question, press star 1 on your touch tone phone. It will be just one moment. Star 1 if you have a question.

That's a first, Tod. We don't have any questions.

The first question is from Mr. Bill Fisher from Raymond James; sir, go ahead.

Good morning.

Good morning, Bill.

Just a couple of questions. You mentioned upfront the acquisitions, and I was just wanting to clarify. The 20 million figure, was that a net --

That's a net of divestitures that we're anticipating in those three markets. We've closed two of them, Bill. We've closed Baltimore was one of the markets. And other market was Toledo. Both of those markets, we've exited. We have one remaining market that will close here hopefully in the -- in the next several weeks and we're not ready to disclose that because obviously the transaction has not been finalized. But the $20 million is net, so we actually have some acquisitions that we are -- we have signed contracts on and are completing due dill diligence on.

That was 20 million in net divestitures, then?

That is net of divestitures, so that would be new-acquisitioned revenue minus the divestitures, equals $20 million.

Okay. Did you say where the new acquisitions were or...

Well, a lot of the contracts were signed. We're completing a due diligence and contract and permit assignments. So we'll be announcing that shortly.

Okay. Great. And you guys still had -- I think two landfills you were working on in the Carolinas, could they still open this year?

We opened July 18th, our Union County facility in South Carolina. And currently, the facility is taking anywhere from 300 upwards to 500 tons a day. We're trying to get the first lift over the initial sell now. We will be opening up in the beginning of the fourth quarter a construction and demolition facility in greenville, South Carolina. One is online and the other will be on line in the first part of the fourth quarter.

And last thing was on insurance for Tod. If I remember your key insurance last year really had the biggest spike in terms of your accrual. Does that comp get easier this year? Or how did you look at the Q3 on insurance?

Well, I think, you know, Q3 will -- We began to see the increases in Q3. So I think we'll still have a difficult comp in Q3 of 2002. However in Q4, it should be a favorable comp. That's really when it stepped up. We're seeing it throughout the summer months, as we were out renegotiating. For example, DNO insurance went up by 300%. And actually, based on all the news that's been out there in the past few months, I suppose we could all expect it to continue to go up in 2003. But our accounts become much more favorable in the fourth quarter.

Okay. Great. Thank you.

Next question is from William Jenko from Merrill Lynch; go ahead.

Good morning. I was curious as to your transfer and disposal revenues, accelerated quite a bit on a year-on-year basis in the second quarter from where they were in the first quarter. Were there any unusual events that caused that?

You're saying second quarter the fourth quarter?

No. Year over year, second quarter versus second quarter versus the gain you had Q1 to Q1.

I think there are a couple of gains here. The biggest of which was the Richmond acquisition. That Richmond acquisition in the second quarter of last year, basically, gave us about one month of revenue. That's a business, as you know, who is integrated with two landfills and a fair bit of transfer and disposal revenue. I think we also had, you know, volumes and some other transfer station contracts that we're ramping up. So there's certainly some transfer station activity there.

Okay. And on the $35 million in residential revenue, I want to be clear. Is that the $35 million contribution this year? Or is that an annualized rate where you won't see --

That's an annualized rate, Bill.

Run rate.

That's run rate.

Okay. And of the 35, how much are you getting this year?

I'd say about 75% of it.

And one final question. Where in the pecking order of the use of cash flow does dividend start to come into play mere?

Bill, one of the things we had mentioned, I think, in our first quarter conference call, is that we have is scheduled a special board meeting for September 11th of this year. And that special board meeting is -- has one focus to it. And that is to develop an intermediate plan for the utilization of free cash flow. So I think, you know, the subject of dividends, obviously, will be a subject matter that will be reviewed at that meeting. You know, as well as other alternatives for the use of our free cash flow.

Okay. Thanks a lot.

Next question is from Leon Young from Salomon Smith Barney. Go ahead.

Good morning.

Just a couple of little detailed questions. Any changes in your cost of debt, your average interest rate?

No. Our average cost of debt is approximately 6%. And as you know, about 75% of it is fixed.

All right. Also, Tod, I apologize, but could you repeat the two debt levels this quarter and a year ago?

Well, I think December 31, we were at about 1 billion, 236, as I recall. And that was December 31st. And I think right at June 30th, we were 1 billion, 135 million. So we're down about $100 million in the first six months of this year. And that's after spending $92 million of free cash to repurchase our stock.

Okay. And finally, Jim, could you discuss anything you've seen in July in terms of volume turns?

I think they have been fairly consistent with what we saw in month of June. A little bit of uptick in our rolloff volumes and some of our disposal volumes, but not anything significant. But again, it's enough to see the next piece of seasonal uptick for the third quarter results. So I mean, that's one of the things that lead us to look very, you know, very closely at the new guidance that we just issued. We wanted to make sure that we could see some further impact in the month of July, and we are seeing it. Or continued impact.

Terrific. Thanks a lot.

You're welcome.

Next question is from Amanda Tepper from JP Morgan; go ahead. Go ahead.

Good morning.

Good morning.

I'd like to focus a little bit for a minute on the organic growth that you're getting. You -- it sound like it's mostly coming from your recent municipal contract wins. I'm wondering, who are you winning them from and what does your pipeline look like on things you're biding on for the contracts? I'm wondering how you get up to the higher organic growth guidance that you gave and whether there could even are more upside to that.

Well, Amanda, two of the contracts that we were awarded in south Florida were with Allied Waste Systems. And the contract in Southern California was Belvedere and was Waste Management. Now, again, you know, those contracts are both very high growth areas. We applied the very same business criteria and financial criteria that we do in any of our other markets. And I think as I've said before, when we announced that we awarded these contracts from south Florida, that they would be at lower margins, the margins of operating margins at 7% to 10%, but that more than meet our return on capital investment criteria of 9.5% to 10% and our internal rates of return criteria of 11 to 13%. So again, you know, it falls very much within the financial criteria, whether we're looking at a new market or an existing competitive bid.

And the pipeline of other deals like this? Are there -- can we expect more to come this year?

Well, I mean, obviously, probably like our competitors, we're continuing to renew our own contracts and look for other privatization opportunities, whether they're competitive bid situations and/or privatizations. So yeah, we would anticipate more to come. But again, these processes take a long time. We have a number of bids that are currently submitted, one-is the city of Fort Worth, Texas, that is pending review right now. The contract, if awarded, or when awarded, will have a startup date of 2003. But that would be a fairly significant contract. I think currently Waste Management has it. But I'm sure all of the national companies are vying for that contract right now.

Okay. And the flip side of all this municipal work on the DSOs, in this down environment, with the municipalities being squeezed by a shrinking tax base, and this is obviously good effort on your part and partially and perhaps the software that kept it flat at 37 days; I'm wondering if you are finding you have to lean on the municipalities harder than normal or if you're getting good terms an whether have you any worries about this creeping up going forward.

No. We have -- one, like any other discipline we try to exhibit in managing the business here at Republic Services, all of these contracts need to get off to the right start. And I think it's like any other collection procedure that we have in place, whether it be for industrial collection or landfill disposal or commercial collection, the municipal sector is no different. We need to get them started on the right foot. The terms and conditions are all ready outlined on our contracts, but like anything else you have to stay on top of it. And I think our staff has the discipline now after the last year of revising a number of our collection procedures to keep the day sales in that 37 to 38 day range. Tod, anything you want to add to that?

I do think it is really a function of the people. We do make the PNL investment in the SG&A area to make sure we have adequate staffing for credit and collections personnel. And obviously, the analysis that we go through as the time value of money versus the compensation expense for this additional head count. And we believe that it's well worth the investment.

Okay. And one last question on the insurance. Do you self insure at all? And if you don't, are you looking at it?

Yes, we do self-insure. So about 80% of our insurance expense is self-insurance insurance cost.

Okay. Thank you.

Next question is from Alan Pavees from Credit Suisse.

Just a couple of questions; on the net 20 million in revenues being acquired, what's the net purchase price or what are you spending for all those transactions with the net proceeds?

Alan, we'll talk about that when we have our Q3 call.

Okay. Jim, I was wondering if you could also comment on these municipal contracts. Have the new contracts -- have they been at below-existing price levels? And what's the general trend in municipal business? Are contract pricing levels still going down overall as they get rebid?

Well, I think, you know, the contracts that we have recently acquired, or at least two of them, were extremely -- they were long-term contracts that a competitor had. They had seen the benefits of a compounding CPI for a long period of time. I don't think that the rates that we bid at and the rest of the competitors bid at are a reflection of a decreasing residential market pricing. I mean, I think it's more than an indication of a contract that's been long term, that has -- had seen the effects of compounding CPIs.

But it didn't see the effect of compounding growth in cost as well? Are you saying --

Well, I think it's basically from the benefit of the CPI over and above the costs that were experiencing in the contract.

Okay.

So the margins. If you were to look at the margins that the competitor had on those contracts, they were fairly healthy margins. But again, I look at the competitive bids that took place in those communities, of which we were not the lowest, by the way; as being the kinds of returns that meet our share holder expectations. So it's kind of hard for me to talk to the competitors, but I don't see that as a decline in pricing base, I see it as rational pricing.

I understand. In Greenville, can you talk about volume that you expect to get to in terms of a run rate?

Well, it's not going to be a large market for us. I think what we're probably looking at is in the area of 300 to 400 tons a day, once we get the site up and running. And figure out exactly whether or not we'll be transferring any waste in from the surrounding areas.

Okay. And on the financial side, Tod, the increasing capital spending, that doesn't include any of the $75 million for the lease cancellation and equipment purchase there, does it?

No, it doesn't. But you need to remember that when we went out and did that, that leased facility, we viewed that lease facility and always have viewed that as strictly a financing transaction. So three years ago, when we entered into that transaction, at the time, I think it was about $95 million.

Right. You broke it out.

We indicated that that was capital spending, and we included that in all of our capital spending guidance.

I understand. So that won't show up in the capex line?

Well, from our guidance standpoint, it will not show up in the capex line. But you know, on the cash flow statement, you will see it.

Okay. Fair enough. And cash taxes in the quarter? Just last question.

The cash taxes that we paid in the quarter were very nominal. And as I indicated, we tend to see our cash taxes paid in the -- starting about now -- in the third and fourth quarter for the most part.

Okay.

So we would expect -- I'm not sure what you got in your model, but say it's $110 million or so, it's going to be paid in the second half of the year.

Okay. Great. Thanks, guys.

Next question is from Kevin Monroe from Thomas Weiss; sir, go ahead.

Good morning. I don't know if I missed it, but what was internalization?

You didn't miss it. We didn't give it. It's 53%.

Okay. And next question, could you guys just kind of walk through the dynamics of, you know, why your internal growth has been positive the last two quarters, why your larger competitors are declining in growth?

It's difficult for us to speak to our competitors and their growth. I think a good part of what we're about is the markets in which we operate. And while we have seen some weakening in our business, particularly in the industrial sector, that's up in the midwest; we have a lot of our business and areas that are not heavily industrialized, such as California or Texas. So I think demographics play a part of it. Certainly our ability to secure some of these contracts has also played a part of it. And I think the other key are the tools that we have in place in the focus that our operating people have in making rational business decision using the tools that we've rolled out and have been working out for the past now 18 months.

And again, I think to reinforce what Tod said, it's really about, I think, our people and the dedication that they've had to getting the job done and executing the business plan. We've got relatively small business units. You know, our average regional size is about 500 million, dropping down, you know, to the area of sizes that, you know, that are in the area of about $100 million. So the marketplaces that we're managing are -- I think are sized right. Again, we were a little ahead of the curve, I think, in right sizing our organization and changing our management structure to a regional structure with additional resources in the areas of sales, maintenance, and operations. So I think all of those things are starting to pay some dividends.

Great. Thank you.

Next question is from Mark Feradno from First Analysis.

Yeah, good morning, just a few quick questions. In the new guidance, is there kind of specific thoughts on commodity prices for the full year baked into that?

Our guidance has always been to look at the current environment and use that as a basis. There is the expectation that commodity pricing will be somewhat higher than what we had seen last fall. And, you know, we're not -- we're certainly not expecting it to go up. Again, I think if it moves down, it's not going to be --

Material.

-- that big an issue, because it's only about 2 to 3% of our revenue.

Okay. Could you just make a bit of a comment in terms of the pricing environment, perhaps, on a regional basis as to, you know, is it better in some of your markets than in other. Could you just give us a little granularity on that?

I think so where we're seen some of the bigger impacts to our business in the manufacturing sector and industrial sector would be in the midwest and mid-Atlantic states. You know, that obviously -- where we're seeing the larger impact of the economy, the greater impact of the changing economy. We're seeing a much more difficult time in securing rate increases. The population growth is still healthy. And -- which is predominantly in our sun belt areas. We're having much more success in getting modest price increases in our commercial and residential businesses. That are not contract or franchised.

Okay. And last question, what was the quarter-end share count after the repurchases on the quarter?

Yeah. It was about $165.4 million.

Dollars?

I'm sorry. Shares.

Okay. Thanks a lot.

Next question is from Mel Cody from Sanderson Moores and Harris; go ahead.

Good morning. What are you all seeing in the Las Vegas market? Is that coming back strong?

Again, we're still not seeing the levels of growth that we saw back in the early part of 2001. But it's still relatively strong. We're upwards probably to about 5% in growth in that market whereas, you know, in early 2001 and 2000, we were seeing growth up to 8 to 9%. So still relatively strong, but we haven't seen any significant comeback. I mean, they've announced the -- you know, the construction of a -- one or two new hotels, and I think the Desert Inn is one of those that is being reconstructed, that was demolished last year and is in the process of construction or will shortly begin construction. But the home sales are still relatively strong out there. But again, not near what they were in the early parts of 2001.

But you still have 5% year-over-year growth in that market?

Yeah. That's still relatively strong.

What did you see in special waste for the second quarter?

Well, actually, we have been able to secure a comparable volume of special waste. It's much more competitive. But the price sensitivity has been the greatest in that area. I mean, we probably -- as we mentioned earlier, haven't seen anything crossing my desk to lead me to believe otherwise. We've still seen pricing that is anywhere from 10 to 25% off of what it was 12 months -- 12 to 15 months ago.

Thank you.

Next question is from Tom Ford with Lehman Brothers. Go ahead.

Good morning. Just to pick up where you left there, Jim, and in terms of the pricing front, it sounds like you'd say that it's still difficult. Is that right? In terms of it isn't getting worse. It's still the same?

Yeah. I think it's consistent to what we talked about last quarter and in the latter part of the fourth quarter of last year. I think that -- again, I'm not concerned about pricing in general for the sector or the industry. I've seen nothing from any of our competitors, other than possibly in some large urban markets from larger independents that are trying to keep equipment on the street. I haven't seen any change in pricing in the marketplace. So I mean, to me, that is good news. And I think as the economy continues to get better and as there's a greater demand for service, we'll see prices continue -- we'll see a greater demand for service, we'll see price continue to escalate.

Great. In terms of the new municipal contract, what was actually reflected in the second quarter revenue?

I don't have the exact start dates, but I want to say that we had --

The Florida one, right?

We had one contract start January 1st, which was Orange County, Florida. Okay? And I think we're servicing there upwards of 80,000 to 90,000 homes. We had the contract in Pembrooks Pine start, I think, March 1st, or February 1st, and we have Miramar starting April 1st.

Okay.

Okay? And those -- Miramar and Pembrooks Pines, total, I think, $20 million on an annual basis.

Okay. Great. And let's see, do you know what -- do you -- this may be a little too granular, but do you know what your per household bid was in Belvedere?

I don't think so I have that.

We don't have that, Tom. I'm sure it's public record out there.

Right.

We can get you whatever is public record. We'd be glad to do that for you.

I can tell you -- I will tell you that, you know, again, Belvedere was probably somewhat the exception. We're looking at Belvedere to be -- operating not in that 7% to 10% range, but in probably the 15% to 16% range based on the schedule and the performance I'm looking at here. Now, keep in mind, we haven't -- when I say exited, we haven't done a review, which we normally do six months following contract implementation to make sure we've met performance expectations. But I can tell you that in the case of Pembrooks Pines. Just because of the competitive nature in Southern California, we had higher operating margins attached to that contract.

Okay. Okay. And can you just run through -- I missed, what were the return requirements that you said that you imposed?

Those are the minimum return requirements, about 9.5% to 10% return on invested capital and probably about 11 to 13% internal rate of return.

Okay.

Now, municipal contracts, keep in mind one thing. Obviously when we look at contract term, we're looking at it as a terminal value and those contracts that reflect the contract term.

That was my next question. So that's a blended number over the life of the contract.

Exactly. They may be higher or lower, just depending on -- not only depending on the market and the competitive atmosphere of the market. But again, if you're looking at the three years, you're going to get a lot of residual. If you have one that goes one or two types the life cycle of equipment, you're looking at a totally different evaluation.

Right. Okay. Now, when you do bid for these contracts, are there minimum threshold returns that you don't want to violate? In other words --

The ones I just gave you, those would be it.

No. I mean in the sense of you don't want to violate year 1 or the first two years or something like that?

We're looking -- in the way we manage the business, Tom, is over the term or over the intermediate or longer term. So we're looking at -- let's take an example. Residential contract, five-year duration. I mean, we're looking to meet on average, over the five years, those return expectations. I mean, if we were to hit a minimum criteria. But in a number of cases when we look at municipal contracts, we're looking at a discounted payback.

Uh-huh.

Tom, I think another thing that's important to recognize is looking at our average cost capital, we're probably somewhere around 7.5% to 8%, again, very low debt cost, even though we have a modest debt-to-total capitalization, our cost of capital is very favorable and therefore, we're able to throw an extra three basis points on that.

Right.

If you get any deeper than this, Tom, my competitors will know exactly where I'm at. So that's about as detailed as we're going to get.

Okay. Great. And the revision and the capex, was what -- what was the revision for that?

Our revenue was going up and we need the capital to support this long-term revenue growth. So this $15 million of additional capital, five of it has to do with a contract that we were awarded by the army corps of engineer with our ESI contracting business in Kansas City, and the other $10 million has to do with these bids that we were awarded that we didn't necessarily anticipate at the beginning of the year.

Okay. Okay. Great. Thanks again.

Thank you, Tom.

One more question.

Our last question is from Tripp Rogers from UBS Warburg.

Good morning. Can you discuss the markets that you're exiting versus the markets in the acquisitions you're looking at, maybe in terms of market?

The markets we're exiting we could not internalize. We were not significant participants in the marketplace. We were probably third, fourth, or fifth, and again, which is consistent with the criteria that we've applied to, you know, our locking-at markets and evaluating those markets and recognizing that the market in the intermediate term needs to be able to internalize or be founded in a municipal disposal market where we can play on equal footing in the collection business. So both Baltimore and Toledo were markets that we did not have opportunity to internalize, nor did we see that in the near future. Therefore, we decided to exit.

And I'm assuming the markets you're looking at now do meet all those requirements?

Yeah. The acquisition is in a market that we are the dominant player. And it offers us additional opportunities.

Great. Thanks a lot.

With that, I'd like to end the call, but before that, let me spend some time and give you an idea where you can call in to get the replay here. The replay for this call is available later today by calling 1-800-252-6030. The pass code is 12947496. And additionally, this call will be archived on Republic Services website at www.republicservices.com for the next 90 days. And again, thank you for joining us, and have a great day.