Republic Services Inc (RSG) 2002 Q3 法說會逐字稿

Welcome to your conference call with Mr. O'Connor of Republic Services. I'd like to remind you that this conference is being recorded.

Good morning and thank you for joining us. This is Jim O'Connor and I'd like to welcome everyone to the Republic Services third quarter conference call this morning our chief financial officer Tod Holmes and Ed Lang, our Treasurer are joining me as we discuss our performance for 2002. 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 different results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. Additionally the material we discussed with you today is time sensitive. If in the future you listen to a rebroadcast or a recording of this call, you should be sensitive to the date of the original call, which is October 29th, 2002. Please note this call is the property of Republic Services, Inc. and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited.

I'm pleased to report today that our business continues to be within the guidance we provided you last August. After commenting our operating performance for the third quarter, I'll review the results of our recent board meeting regarding strategies of the use of our free cash flow. I'd like to highlight a number of our accomplishments during the quarter. Revenue grew by $27 million dollars to 4.7 percent, compared to the third quarter of 2001. Internal growth was 4.9 percent, with 2 percent coming from price and 2.9 percent from volume. As we have previously discussed the key driver of internal growth this year has been our ability to secure new residential collection contracts in Florida and California. We generated 49 million dollars of free cash flow in the quarter, and we are on track to exceed our goal of 155 million and achieve 160 million dollars for the full year in free cash flow.

During the quarter we had net acquired revenue of approximately 30 million dollars. The assets we acquired are based in vertically integrated markets in Indiana, New Jersey and Pennsylvania. We also completed the sale of several markets which we contemplated in our charge in the fourth quarter of 2001. And we continue to invest in infrastructure projects to improve our vertical integration. We opened an new MSW landfill in Union County South Carolina in July and we're completing construction of a new C and D landfill in Greenville, South Carolina which will open up in the fourth quarter. In addition, we'll open a new transfer station in Winston Salem North Carolina in the fourth quarter which will allow us to internalize our volumes.

We continue to see positive results from a number of revenue and productivity initiatives. During the quarter our margins improved by 30 basis points as a result of these programs. We repurchased approximately 2.4 million shares in the quarter for 45.7 million dollars. Through September 30th we have repurchased 7.4 million shares this year of approximately four and a half percent of our outstanding shares. And we anticipate completing the current 150 million dollar authorization before year-end.

Our strong operating performance this year will allow Republic to exceed our original earnings guidance by three to four cents. And we believe the full year earnings will be at the upper end of our current guidance of a 1.39 to a 1.41. Our field organization has performed extremely well during these tough economic times. Although we've had positive internal growth for 18 consecutive quarters, we have not seen a rebound in the cyclical portion of our revenue base. Construction and demolition revenue is still depressed, and current commodity prices are lower than the second quarter levels. And, again, we will not provide 2003 earning guidance until the fourth quarter earnings call.

As many of you know, in September we had a special board meeting to discuss strategic uses of our free cash flow. Due to our strong operating position, Republic can generate significant levels of predictable free cash flow. Our priorities for the utilization of these funds are as follows. Continue to invest in internal growth. We will also continue to acquire revenue at appropriate valuations. However, there are limited opportunities for acquisitions. Therefore, we plan to use 60 to 75 percent of our excess cash for share repurchase. Our board has recently authorized an additional 150 million dollar share repurchase program. And at current equity valuations, this represents another four to five percent of our outstanding shares. Again, we remain committed to maintaining or investment grade rating, therefore we'll adjust our share repurchase activity if we can acquire businesses that achieve higher rates of return. We believe investing in growth of our business is the best way to increase shareholder value. We will only acquire businesses in the domestic, municipal, solid waste industry. In the event we are not able to acquire businesses at a significant pace during the next 15 months, our board will reconsider instituting a dividend. I'd like to thank all the employees for their continued dedication to Republic Services and their high quality performance during these tough economic times. Now at this time I'd like to turn the call over to Tod Holmes, our chief financial officer for a financial review.

I'd like to start by updating you on a significant financial event that occurred early in the third quarter. On July 30th we paid 73 million dollars to terminate the 100 million dollar vehicle leasing program that Republic put into place in late 1999 and early 2000. Therefore, at this time Republic has no off balance sheet financing of any kind. In the third quarter we also repurchased 46 million dollars of our stock Jim had indicated and paid about 27 million dollars net for acquisitions. Despite all of this spending, at the end of the third quarter we had approximately 63 million dollars in unrestricted cash invested.

Now, let me begin my review of the company's financial results for free cash flow. As we said in the past, one of the most attractive aspects of this business is its ability to generate free cash flow. We believe that a strong sustainable cash flow is indicative of a high quality of earnings. We use a simple definition of free cash flow. It's net income plus DD&A, less capital expenditures, plus or minus changes in working capital. Keep in mind that our statements of cash flows show even greater cash generating capabilities as they include other common components of free cash flow excluded by our simple definition, such as non-cash taxes, and proceeds from the sale of equipment that we are retiring. Our focus on free cash flow continues to provide financial benefits. Our accounts receivable increased 4 million dollars in the third quarter of 2002 to 250 million, as of September 30th. This is primarily because of higher third quarter revenue. However, our days sales outstanding has remained consistent at 37 days throughout the year, and it's down from 38 days at December 31st, 2001.

Free cash flow for the third quarter of 2002 as Jim indicated was 49 million dollars. This is based on net income of 62 million, plus DD&A of 54 million, less capital spending of 57 million, less the use of working capital of 10 million. Again, that's the 49 million of free cash flow for the quarter. Free cash flow for the nine months ended September 30th, 2002 was 210 million. This is based upon net income of 178 million, DD&A of 147 million. Less capital spending of 162 million, plus an estimated decrease in working capital of approximately 47 million. Again, that's the nine month free cash flow of 210 million. Please keep in mind that our free cash flow is historically high in the first three-quarters of the year because of the timing of capital expenditures and tax payments. If we normalize our free cash flow for our expected annual capital expenditures and cash taxes, it would be reduced by 28 million for normalized capital spending and 60 million for normalized tax payments. This results in normalized free cash flow of 122 million dollars for the nine months ended September 30th.

As Jim previously mentioned, we are increasing our free cash flow guidance from 155 million to 160 million. This is again the second time we've done this, this year. Note that the 160 million is based upon our simple definition of free cash flow. And after considering about 35 to 40 million dollars for non-cash taxes, our real cash flow for the year is probably in the range of 195 to 200 million dollars, or approximately 85 percent of our net income.

How will we use our free cash flow? Again, as Jim indicated, primarily for share repurchases asset acquisition opportunities. During the third quarter of 2002 we repurchased 2.4 million, for approximately 45.8 million dollars at about 19.21 a share. This brings the total shares repurchased in 2002 to 7.4 million shares, or about 138.4 million dollars. The average purchase price this year has been $18.75. We have 11.5 million dollars remaining in our 2002 share repurchase. Even after the substantial repurchase of shares during the first three-quarters, our balance of cash available in short-term investments at September 30th to fund future internal growth, future acquisitions and future share repurchases is approximately $63 million. Incidentally, as of today our cash balance invested, short-term, is even stronger at over $100 million.

Next I'll discuss our third quarter revenue. Third quarter 2002 revenue rose 4.7 percent to approximately 610 million dollars from about 583 million dollars last year. Internal growth in core operations is 3.8 percent. 1.2 from price and 2.6 from volume. An increase in state assessed taxes at certain of our land fills that are passed through to our customers comprise four tenth of one percent of our revenue growth. Acquisitions were responsible for the remaining increase in third quarter revenue.

In our third quarter, price growth from core operations was about 1.2 percent, and it was positively impacted by commodity prices. Including the eight tenths of one percent increase in revenue attributable to commodity prices our price growth was two percent. Our core volume growth comes primarily from our residential and collection businesses -- excuse me, our collection residential business where we've been awarded a number of new municipal contracts. Our volumes in commercial business are holding steady and as we've indicated in the past, volumes from our industrial construction business are down year-over-year.

Next I'll discuss our changes in sequential margins. Sequentially, our third quarter operating margins were flat compared to the second quarter of 2002. Key components of our sequential margins are as follows. Commodities a positive 40 basis points. The impact of the economy and the revenue mix is a negative 40 basis points. Fuel is a negative 10 basis points. Determination of our operating lease facility where the offset is in DD&A is a positive 30 basis points. DD&A is a negative 50 basis points, and SG&A is a positive 30 basis points. And that all nets to zero.

First, our commodities, during the third quarter, commodity volumes decreased slightly and commodity prices trended upward approximately 30 percent from the prior quarter. Our quarter 2 average price per ton was 50 dollars, compared to about 65 dollars in the third quarter. Keep in mind that only a portion of this benefit from increased pricing drops to the bottom line because of price sharing agreements that we had at many of our locations, with customers.

Second, the economy and revenue mix, during the third quarter we generated more revenue from our residential collection business and transfer stations, both of which have lower margins. Pricing on temporary roll off was also lower during the quarter. In addition, we experienced an increase in taxes levied on land fill volumes in certain states that were passed through to customers at no margin.

Third, fuels. During the third quarter of 2002, fuel prices increased by about five percent per gallon and averaged about $1.25 per gallon. Incidentally our fuel prices are now about a 1.30 a gallon or up about 10 percent from where they were in the second quarter. Fourth, our operating lease facility, as I previously discussed, the company had repaid that during the third quarter. Fifth, DD&A, during the third quarter the company experienced sequential increase in depreciation expense primarily due to the operating lease facility and also the cumulative effect of capital expenditures and acquisitions. Six, SG&A, sequentially it decreased by 30 basis points due to increased revenue and slightly lower bad debt expense. We continue to believe that SG&A in the range of 10 percent is appropriate for our existing business platform and given current economic conditions.

Our EBITDA sequentially, EBITDA increased by 59 million dollars, excuse me, 5.9 million dollars, or 40 basis points, from 167.5 million or 27.7 percent in Q2 to 171.6 or 28.1 percent in Q3. Year-over-year operating margins, operating margins increased by 40 basis points from the third quarter of 2001 to the third quarter of 2002. Now, in accordance with statement of financial accounting standard No. 142, the company ceased amortizing goodwill effective January 1st, 2002. This change in accounting improved margins by 190 basis points. Therefore, excluding this accounting change our actual margins declined by 150 basis points. The key components of this decrease are as follows. Our insurance costs, it was a negative 50 basis points. Our fuel costs is a positive 20 basis points. The termination of the operating lease facility is positive 30 basis points. Commodities is a positive 70 basis points. Our operating improvements as Jim had indicated is a positive 30 basis points. We had if you'll recall in the fourth quarter changed our subcontractor for our transfer hauling and that was a negative 20 basis points. And then of course the economy with lower industrial and construction activity is a negative 50 basis points. The mix of business is a negative 80 basis points. DD&A is a negative 90 basis points and SG&A is a negative 10 basis points. Now that comprises this total decrease in margins of 150 basis points, excluding the goodwill change.

Now let me briefly comment on these items. First, insurance. During the fourth quarter of 2001, we began to see a tightening in the insurance markets. During the first three-quarters of 2002, we continued to see higher costs for risks and health insurance. Second, fuel, during the third quarter of 2002, fuel prices were down from the prior year. And our average price had dropped about five percent from a 1.30 in the third quarter of 2001 to about a 1.25 in 2002. Third, the operating lease facility which was repaid in the third quarter. Fourth, commodities. Our commodities year-over-year increased from up about 45 percent from the third quarter of last year. Our third quarter 2001 average price was about 45 dollars per ton, compared to 65 dollars per ton in the third quarter of 2002. Fifth, operating improvements. As Jim mentioned we continue to benefit from the initiatives we put in place during 2001, which continued through 2002. Subcontractor costs, this is the fourth quarter event where subcontractor that provided long distance hauling to our land fills from transfer stations filed bankruptcy and we were forced to replace those services with higher cost providers. Second, the economy. I think if you'll recall during the second half of 2001, we had indicated that in our conference calls that we were beginning to see a downward trend in our industrial construction and roll off business. That trend has continued throughout the first half of this year and during the third quarter of 2002, volumes and pricing in our construction roll off business continue to be negatively impacted by this economic slow down. Eight, the mix of business. During the third quarter of this year we generated more revenue from residential collection business and our transfer stations. Both of which physically could carry lower margins but still provide adequate returns to us on our investment capital. In addition, we experienced an increase in taxes levied on landfill volumes in certain states that were passed through to customers at no margin. Ninth, the depreciation and depletion. This is increased by 90 basis points, due again to the lease that we had bought out, terminated and also normal capital expenditures and acquisitions. And finally SG&A, it's attributable year-over-year to normal wage increases, professional fees and training costs associated with our systems initiatives.

Our year-over-year EBITDA increased from 167 million in the third quarter of 2001 to 171.6 million in the third quarter of 2002. Year-to-date revenue, year -to-date third quarter revenue rose 3.9 percent to 1,760 million from 1,694 million last year. Internal growth from our core business for the nine months was two and a half percent. 1.3 percent from price and 1.2 percent from volume. This is consistent with the guidance that we've given in the range of two to three percent. Our third quarter year-to-date price growth from core operations of 1.3 percent was positively impacted by an increase in commodity prices. Including the three tenths percent increase attributable to commodity prices, our price growth for the nine months was 1.6 percent. In addition, our third quarter year-to-date volume growth from core operations of 1.2 percent was positively impacted by an increase in noncore operations. Including this two tenths of one percent increase in revenue from noncore operations, our volume growth was 1.4 percent. Acquisitions as I mentioned earlier would account for the remaining increase in revenue.

Now let me discuss our year-to-date operating margins. Year-to-date operating margins increased by 40 basis points from 19 percent in 2001 to 19.4 percent in 2002. 100 basis point, -- 180 basis points of this improvement came from the change in goodwill accounting. Therefore our actual margins have declined by 140 basis points. Approximately 80 basis points of this decline is attributable to increased insurance costs. Incidentally, we would see these insurance costs start to abate as we move into the fourth quarter of this year. 70 basis points of the decline is due to an increase in depreciation and depletion. 20 basis points is due to the decline or slow down in our roll off business due to the slowing economy. 30 basis points is due to revenue mix. Again, higher transfer and residential revenue at lower margins. 20 basis points of the decline is due to higher subcontractor costs. And 20 basis points of this margin decline is due to an increase in SG&A. Again primarily due to normal wage increases and professional and training costs associated with our systems and implements. These declines in margins were partially offset by operating improvements from our company wide initiatives, which we previously discussed, which is positive 30 basis points. A decrease in fuel costs which is a positive 40 basis points. The termination of the operating lease facility, which is positive 10 basis points, and the increase in commodity prices which is positive 20 basis points.

EBITDA increased from 482 million during 2001 to 489 million or 27.8 percent of revenue for the nine months ended September 2002. Our balance sheet remains very strong. At September 30th our accounts receivable balance was 250 million. And the days sales outstanding was 37 days. Net debt at September 30th was 1,223 million compared to 1,236 million at December 31st. Approximately 1,050 million of our debt at September 30th is long-term public debt. And approximately 320 million is tax-exempt financing at favorable rates.

Consistent with our cash flow performance and previous guidance, our debt to total capital at September 30th was approximately 40 percent. We remain committed to maintaining our investment grade rating. And as of September 30th, we had nothing drawn on our 750 million dollar revolving credit facility. And as I mentioned earlier we have over 100 million dollars of cash invested short-term.

Consistent with our focus on free cash flow, Republic has maintained a disciplined approach to capital expenditures. Capital expenditures for the third quarter were 57 million, consisting of 35 million for replacement capital, 14 million for internal growth capital, and eight million for infrastructure. During our second quarter conference call we had increased our 2002 guidance for capital to 255 million dollars. We remain comfortable with that guidance. This 255 million represents 140 million of replacement capital. 75 million of internal growth capital, and 140 million of infrastructure capital. Now I'll turn the call back over to Jim O'Connor for questions.

Thank you, Tod. We'll open up the line for questions now.

If you have a question, please press star 1 on your touchtone telephone. Stand by for the first question, please. The first question is from Alan (ph) Pavese with Credit Suisse First Boston.

Tod on your industry overview you talked about the residential business being steady and you took market share, commercial being steady and industrial continuing to be weak. Could you characterize on the industrial in particular whether it's as weak as it was in the second quarter, whether there's more deterioration or less?

I think it's comparable. Again, we haven't seen a whole lot of change. We didn't see the seasonal, necessarily a seasonal up tick that we would normally see in the third quarter sequentially. And so the volumes are still relatively weak. But I don't think it's substantial. And then we continue to see weakness in price and that price has been really somewhat holding in the area of five to 15 dollars per load. So I don't think we've really seen much change there.

And Jim, you also talked about in your evaluation of the uses for free cash flow, not on the dividend at this point. I was wondering if you could maybe help quantify or point to what you see as the opportunities that make that not such a great idea near term and what you think might change in the future? I mean clearly there hasn't been a great number of opportunities over the last four quarters. And what makes you think there might be more opportunities going forward?

Again, we continue to have a pipeline of acquisition activities. Upwards to 50 to 75 million in the pipeline. We would anticipate closing before year-end another anywhere 15 to 25 million dollars worth of annualized revenue. And, again, we continue to stay in contact with some large private operators that could represent a substantial acquisition. So again, until we start to see that either acquisitions are not going to materialize over the next 10 to 15 months, we still feel that it's wise and it's best for us to grow the business through acquisitions. But, again, we want to make sure we're clear in conveying to the investment community that if in fact they don't materialize and we continue to accumulate cash as we have, then obviously we would look to institute a dividend.

Great. And Tod, one last quick question. On cash taxes can you tell us if you've paid any in the quarter and what your target is for this quarter in the cash taxes.

In the third quarter we paid some cash taxes. Our target for the full year, I think we probably paid somewhere between 30 and 40, 35 to 40 million. Our target for the year is probably about 75 percent probably of cash taxes and 25 percent of our tax expense being deferred on cash taxes, somewhere in that range.

Okay. Thank you

Your next question is from bill Fisher with Raymond James.

Good morning. Just on the landfill and transfer revenues. They look like they're 10 or 11 percent year to year. You mentioned I guess a tax pass-through and the landfill in Carolinas. Anything else worth noting on there that drives that growth?

I think we've seen, Bill, increases in volume in our Michigan facilities. Predominantly due to some special waste activity and the importation of additional Canadian waste. We've seen again some additional special waste activity in our Wisconsin facilities. And we've experienced somewhat higher volumes in our taxes operations.

Tod, do you have the cubic yards figure yet for this quarter from the disposal side?

I don't have it handy, but Bill I think sequentially it was up slightly from the second quarter. And again that's a function of this being typically the strongest quarter for volume standpoint. I think we see it up there in the Michigan area or the Wisconsin area. Obviously in the fourth quarter that would taper off as the weather starts to move in there.

One other thing, I know you mentioned obviously depreciation was up. Part of that was due to the landfill side. But you've also been adding a newer, upgrading your truck fleet a bit. I'm wondering if that's contributing to it. Is that helping at all on the maintenance side or any other benefits out of that?

I think there's some benefit on the maintenance side. Probably the greater benefit that we see on the maintenance side really comes from the preventive maintenance programs that our regional vice presidents and regional managers have put in place, together with our division maintenance managers. It's that focus that drives the longer term cost. Certainly some of this growth in DD&A is a function of bringing that lease facility back on the balance sheet and also the revenue growth. The fact that we've got some additional municipal contracts with equipment and we need additional capital depreciation to fund that internal growth.

Thank you

Your next question comes from Leone Young with Salomon Smith Barney.

Good morning. A couple of things. First of all on fuel, if you look where you stand right now or as we go into the fourth quarter, do you all have a feel for how that, assuming you use that as a base for budgeting into next year, do you have a feel for how that compares to your overall fuel costs for all of last year, or, excuse me, all of 2002?

It's slightly higher. It's probably about 10 to 15 percent higher where we are today. I think fuel, in the first quarter, was, at January it was probably low in terms of certainly in terms of futures contracts and fuel pricing. So it has continued to move up. Obviously that is our guidance is above last year. We would use the October/November pricing. And then to the extent that there's, whether it's some war risk with higher fuel prices or maybe some abatement in fuel, with that war risk that's is already in the market goes away we see our fuel costs to trend up or down from where we are today.

Terrific. A similar type of question, Tod. You mentioned you see insurance costs abating in the third quarter. Does that mean you think we've seen the peak negative impact on margins?

On a percentage basis, I think we have. On a dollar basis, our insurance costs are still going to grow. All you have to do is just read what the insurance analysts are writing about that sector and the pricing that they're pushing through to us. I'll give you a simple example. Our D&O insurance is probably up 50 percent year over year and we're taking a higher deductible in conjunction with a much higher premium. Essentially we're being taxed for Enron and all these other problems that are out there in the marketplace. Our fixed insurance is about 20 percent of our total insurance expense, and I think this is just a guess at this point. But my guess would be that we might have somewhere between 15 and 30 basis points improvement in from 2002 to 2003 in insurance, due to the increase in premiums. And then also we'll have to take maybe some higher deductibles to get those premium increases and therefore we'll have some greater business risk or self-insurance costs.

And finally, Jim, you prepared or are you willing to give any color on the 10 to 15 million in acquisitions you talked about hopefully closing by year-end here in the fourth quarter?

No. Again, we've always been aggressively looking. We have kind of refocused the field operation on acquisition growth to make sure that they understood that we had an intense interest in growing through acquisitions. And we're starting to see some increased activity there for tuck in acquisitions. So the key to us is maintaining the discipline and the financial metrics associated with the acquisitions, so that we don't get caught up in trying to deliver growth again for growth sake. This is about delivering the bottom line. And the top line obviously has to be a significant contributor.

And just last housekeeping question, any change in the cost to debt?

No. It's right at about six percent.

Thank you

Next question comes from Amanda Tepper with JP Morgan.

Good morning. A couple questions left that haven't been gotten to. First I was a little surprised that sequentially this quarter versus last quarter, Tod, you didn't cite any margin, positive margin impact from your operating improvements. You did on a year over year basis. Aren't you still rolling out new initiatives and more improvement to come.

We have seen improvement year over year it's been consistent at 30 basis points.

But sequentially you didn't, right?

Again, in the second quarter we had a 30 basis point benefit. In the third quarter we had approximately a 30 basis point benefit from these operating improvements. So we are continuing to see some of the benefits of the programs we put in place last year. I think that when you look at that type of activity sequentially, it's incremental. You don't really see that much movement.

I guess what I'm trying to get at is this going to start to anniversary by next quarter or should we go next year, because I know you're still doing other --

No. It's similar, I think, to the discussions we had when we went out on tour, with your firm, to see investors and potential investors. Again, a lot of the initiatives were depending on what's moving within the business, whether it's commodities, fuel, sometimes there's a certain amount of noise or static in the delivery here. But, again, I think we've always said we're going to take a conservative approach to how much the initiatives will deliver. And I think if I recall properly, I think what we said on the road show was we were looking at, and I guess this was a month or two ago, the next 12 to 24 months, in that range we would see anywhere from 50 to 100 basis point improvement. We're not there yet. So your point, we will continue to see a margin improvement from the initiatives over the next 12 months.

And that would be regardless of the economy? I mean that would be, in other words, if things stay where they are today?

I think when you say that, I mean obviously if prices were to go south on us, we would still be able to define improvement from productivity or some of the other initiatives related to maintenance. But it wouldn't necessarily be evident on its face of the financial statements.

I think another good example of that is in the roll off business, where what you see is some rerouting efforts and efforts greater productivity, making sure we have the disposable optimized to the best site. And as the economy slows, if we were to see an economic slow down in residential construction, then maybe we have fewer pulls and therefore have to look at the number of vehicles we have out on the road. So you're continually adjusting your operating structure, not just to maximize the productivity, but you're also adjusting it to reflect the changes in the economy. I think that dynamic probably sometimes clouds a little bit what you're really getting out of the business.

It's fluid. I understand. If you could, in the quarter, looking at your pricing and your volume growth, how much of that came from the big two new municipal contracts that you had coming in and how much just came from --

The price, the volume, if we looked at the contracts we've been awarded in probably about the last nine months or 10 months, we probably had about 55 million of contracts, excluding our ES. I contract which is that noncore business. And I would say over one percent of that volume growth is coming from those contracts. Maybe somewhere between one and one and a half percent.

But none of the price, you said.

No, no price. Again, that price has been pretty consistent throughout this year. It's obviously down from 2001 where core price was almost two percent. And that's a function. Economy.

Okay. And then similarly, the DD&A being up, is bulk was more than just I expected. Can you quantify how much of that is coming from the closing of that lease deal?

It's about 30 basis points from the lease.

I'm sorry, you did give that. And then finally, the share count, what was the actual quarter ending share count?

I'm glad you asked that question it's 163 million shares. If you're going to model using that, keep in mind that our options using the treasury stock method probably you need to add another million and a half shares.

Okay.

Or the equivalent for the options.

Then for the rest of the year, if I heard you right, you said you're going to spend what's left in the existing 150. So that's just about another 11 million, so you're not going to start to spend the new?

I can't say whether we would or not. You have to remember our approach to share repurchase. We're not in the market in any specific pattern. We're opportunistic. We're not looking to buy stock to send a signal. We're looking to buy it for our shareholders that want to stay with us for the long-term and create a benefit for those shareholders.

Okay. Thank you very much

The next question is from Brad Coltman with Deutsche Bank.

Coltman (ph): I just wanted to know if you could break out your net acquisitions in the quarter. You mentioned Illinois and Pennsylvania, New Jersey, something like that. But how much of that was Lumpdee (ph) That closed in the number, and what else was acquisitions and what was divestitures.

It was all predominantly Lumpdee (ph) and we had a small amount in acquisitions about a million dollars, and offset by some of the other assets being sold. But Lumpdee (ph)was the largest share of that. We purchased about, we purchased Lumpdee (ph) at about a multiple of five times EBITDA which incorporated six collection divisions, one transfer station and one MSW facility in a recycling facility in independent Indianapolis.

Coltman (ph): Did that close early September?

Yes.

Coltman (ph): Secondly, you mentioned a few special waste projects in Michigan, Wisconsin. Are those just kind of isolated events in those markets? Are you seeing any kind of pickup in projects and then if you could talk about pricing for those projects.

No, those are isolated cases, other than possibly additional importation from Toronto, which is unrelated to the contract and related to third quarter third party commercial transfer stations. Would I say we're not really seeing any changes in the volume. Again, this is what we noted in Michigan and Wisconsin was event driven in Texas. So pricing in that we haven't seen any increase in pricing in disposal, and probably maybe a little bit of a further tightening of pricing as it relates to special waste. You know, maybe just to change gears on you, Brad, maybe just take advantage of a question here earlier. We keep talking about the downside of the economy and what's happening. And everybody is kind of predicting that we're going to move out of this economy that we're in currently.

I think the important thing here to look at is that being true, when we look at the truly cyclical component of our business, which is about 500 million dollars other than the event disposal business, 500 million dollars being approximately our roll off revenue, and that pricing being off five to 10 percent, one can extrapolate in a better economy immediately what that does to margins and to earnings. And that's not again looking at how that drives through the entire business when it gets into the landfill and the additional margins generated on the landfill. So there's a tremendous amount of expansion I think in Republic's bottom line as we move through a better economy, even though I know a lot of the things that I've seen written on the company say that we do not have the ability to expand margins and I think it's important that everybody understand that we do, that I think that's investing in the company, and we have almost as much opportunity to expand margins as our competitors do. And that's irregardless of a landfill pricing atmosphere that doesn't yet quite exist that hopefully will exist here in the 2003 calendar year.

There's another factor there, Brad, and that's our cash flows. The fact is Republic continues to make substantial investments throughout this economic slow down on the capital side of the business, whether it's in infrastructure or replacement capital. So we should be well positioned to see accelerating free cash flow in an expanding economy.

Coltman (ph): Absolutely.

I had to editorialize there, Brad. Sorry to interrupt your question.

Coltman (ph): I think part of the perception is you just don't seem as impacted as the current down turn as the other companies.

By the way, that wasn't directed at you. I wanted to make sure I got it out.

Coltman (ph): Good point.

Before the call ended.

Coltman (ph): Maybe just a quick follow-up question, not follow, but an additional question. On the noncore volume, I guess how much more of a benefit, how many more quarters will those projects last?

The key project there is our ESI, environmental services, Inc., business, which has a contract in Kansas City. And it's an Army core of engineer contract. Typically what we've seen with these contracts is change orders that will occur as we move through the project. So that's the contract that we would see extending through 2003. It might end in the fourth quarter of 2003. Pretty much through the entire year.

We've seen a minimal impact on our internal growth on that contract to date. I mean the project, if I'm not mistaken, I don't have the numbers in front of me, Brad, but I think the project at award was somewhere in the area of eight million.

No, it was higher than that T it was like 50 million dollars. It was 50 million dollars over a 30 month period. So I mean we haven't really seen a whole lot of that activity again and we're going into the winter. So we wouldn't see, I don't think, any real significant amount of growth in that project until we hit the spring of next year.

Coltman (ph): Thank you

The next question is from Mark Farano with First Analysis Securities.

Maybe I missed it, but did you give the internalization number.

We didn't but we'll give it to you. It's 53 percent. Up about a percent.

Okay. And then if you could just help me put two pieces together here. You were net 30 million positive on acquisitions for the quarter. But we are negative six-tenths of a percent on the acquisition line and the revenue growth --

That's year-over-year. I think what you have to look at first of all is divestitures that occurred in the intervening 12 months. In other words the second half of last year, the first half of this year. And then also the acquisitions. Lumpdee (ph) Is a big piece of that and that closed in September. So the impact on the quarter was not all that great.

Although you would have had them for the full month of September?

I think somewhere in the first or second week.

And then you mentioned some additional volumes coming into Michigan from Toronto. Does that benefit -- has that change fully in the quarter or will there be additional volumes coming from Toronto to Michigan as the quarters roll out here?

Again, I think we're seeing our ability to secure some additional volumes from commercial transfer stations in and around metropolitan Toronto area. We do anticipate in the first quarter an escalation in volumes from the Metro Toronto contract. So I guess the answer to the question is the contract escalates in the first quarter. The volumes will ramp up substantially. And the volumes that we've secured from third quarter transfer station we would hope that those volumes would become annuity and not event volumes.

And then lastly, the four tenths that came from the landfill tax pass-through, should we think of that as continuing for the next three-quarters until it anniversaries, the benefit?

Yes.

Thank you

The next question is from Trip Rogers with UBS Warburg. Please go ahead.

Good morning. Just a quick question on internalization. With the new land fill projects that you have going in the Lumpdee (ph) Will that do anything to change your internalization?

It will probably slightly improve it. But I don't anticipate substantial increase. Maybe we could look from anywhere from a quarter to three-quarters of a percent improvement at least in short-term which will be defined the next six months while we integrate the business.

That's from Lumpdee (ph) And the new landfill projects?

Let me talk to those. I think our last quarter call, our Union County South Carolina facility was just opening up. And I think we related that we had three to 500 tons of daily volume at that time. Our current volumes are now ranging anywhere from 700 to 900 tons a day. So we continue to ramp that up, some of which is internalization from our operating facilities in the Charlotte North Carolina area. And some of it is from third quarter deliveries on a convenience factor, related to the location of the site. Greenville will be a facility that will open up and in the fourth quarter. So I think what we'll see there is probably some additional internalization from volumes currently being delivered to waste management and a better utilization of that transfer station, the volumes moving possibly into the Union County facility from the Greenville area. The other transfer station that will be opening up is in Winston Salem, North Carolina, where we'll start to hopefully better utilize our war RI disposal facility which is located outside of Charlotte. So we should see some benefits coming. Again, right now I don't want to give any guidance that we'll see significant movements in the internalization number. But again we're continuing to look at that. That's one of our primary focuses. It makes economic sense and you should continue to look forward to continued improvement in our internalization factor.

Tod, can you remind me what level your hedge for fuel next several quarters.

We've got about one-third of our fuel requirement hedged with heating oil. And that hedge actually expires in December. We have not put a hedge in place for 2003. Because as we look at the fuel markets, we feel that they're not appropriately priced with this war premium that seems to be in the market already.

Thanks a lot

Your next question is from Tom Ford with Lehman Brothers. Please go ahead.

Ford (ph): Good morning. Just a couple questions for you. With respect to Lumpdee (ph), Jim, was that between 30 and 35 million?

It's about, let me get my sheet here. It's about 31 million dollars and again it's six collection divisions, one transfer station. One MSW landfill and a recycling facility in independent nap police.

We paid about five times EBITDA for that. Ford (ph): When you say five times EBITDA, I assume that's on a pre-basis?

Yes.

Ford (ph): I mean my sense was that the operations weren't particularly profitable. I mean do you have an idea as to what you might be paying on a post basis?

I don't have that offhand. But the one -- whether the operations were profitable or not for the seller, this is a business that integrates quite well with our collection roll off business.

Ford (ph): That's why I was asking, Tod, because I would assume that you guys are going to integrate more closely with what you already have. So I would think that you would --

Let me say, just to give you, if you're familiar with the geography, you could draw a triangle between Indianapolis, Bloomington and Tearahost (ph). What we did is filled in the substantial amount of work that we have in that particular area, as well as locating another landfill that will probably do about three to 500 tons a day by the time we get done rerouting. But, again, we're moving right now our central region and our area people are spending a significant amount of their time integrating the business. We've done a tremendous amount of rerouting and conversion of rear load commercial collection work to front load collection work. So there's a lot of activity there. When you look at this thing on a post basis, it will be at least half a time to maybe one multiple less in my mind. That's how we looked at it when we put the project together. We're also finding that we've got, in a number of the markets that they had, that we will now be the dominant maybe possibly the only player, a real significant opportunity to upgrade pricing.

Ford (ph): Great. I appreciate that. Do you know why they took Kentucky assets off the table?

No, I don't.

Ford (ph): Tod, you referenced in your comments that bad debt expense was lower in the 3Q, how much was that lower relative to 2Q.

I think it was about 10, 15 basis points. Again our bad debt expense has been very steady over a number of years. And as the economy had slowed we were running about 60 basis points. I think now we're probably at about 45. That's really a function of us being able to collect some of our older receivables. I think one thing that you'll see, when our Q comes out, when you see the disclosures, our allowance for bad debt is still holding constant. So we're not bleeding down any sort of reserves on the balance sheet. We give you that detail. It's a real reduction in net cost. Not just for adjustment of reserves.

Ford (ph): But the bad debt expense assumption that went through the P&L dropped down, though.

It's a real reduction in bad debt. It's not an assumption. And the reason for it again, is when we look at our receivables that are out there overnight and day our field organization has done an excellent job of bringing those dollar amounts down. And that's where you have your greatest risk of the bulk of bad debt.

Ford (ph): Great. And then Tod you had mentioned, you had mentioned this a lot in the past about how you don't include the deferred tax element in the free cash computation. I'm just curious, is there a lot -- I wouldn't imagine there's a great deal of variability there year over year. Why not include it?

Actually, I think we will to simplify it. We're probably not giving ourselves full credit. And obviously I think in the past few quarters we talked about it both ways I think as we give guidance for 2003 I would agree with you, what we will do is really speak of free cash flow off of our cash flow statement. So it would be cash flow from operations less capital expenditures, which, again, we view as being in the 200 million dollar range at about 85 percent of net income.

Ford (ph): Right. Okay. And then just one last question for you. You noted 100 million dollar cash balance. Is there a breakdown there between restricted?

That's not restricted. That is cash that we've got invested short-term overnight that we could use to buy businesses, to buy back our stock.

Ford (ph): Okay. Thanks very much guys

The next question is from Kevin Monroe with Thomas Weisel Partners.

Monroe (ph): A couple questions. Your volumes were up, internal growth volumes were up pretty strong due to these new municipality contracts. Any update on any new pending contracts that could be coming and what the pricing environment is for those contracts?

We've obviously got always some in review. But nothing as substantial as the ones that we've recently received. We do have a couple of targets for the fourth quarter of this year that, proprietary in nature I won't disclose where they're at. We continue to focus on a number of those opportunities that we currently don't have. And again, it's offering us a means to grow. But by no means is our only focus on our residential work. I mean we continue to focus in on all our sales initiatives and revenue enhancements relating to all lines of business.

Monroe (ph): As a follow-up to that, you can maintain these levels of internal growth going forward or can we expect decline next quarter, in the fourth quarter basically due to seasonality?

There's certainly some seasonality that would come in, particularly in land fill side. And I mentioned that earlier talking about these land fills up in Michigan or Wisconsin, when the weather comes in. That activity does slow down. We're not in a position to give growth guidance yet for 2003. So I think we'll defer that question.

Monroe (ph): Okay. Thank you.

We'll take two more questions, operator

The next question is from Michael Hoffman with SBR. Please go ahead.

Good morning, Jim and Tod. If I could follow up on some of the details on some of your answers earlier. On the dividend side, Jim, looks like you're running 75 to 100 million of acquired revenues a year as sort of the current pace. What level do you need to get to either in dollar amounts or in growth rate that says, okay, this cash needs to be used for acquisitions instead of, we'll take this cash and use it to are a dividend?

Michael, what we do is we really look at the balance sheet and say that we have a tremendous amount of capacity on our balance sheet. We have nothing available in terms of -- excuse me, we're not into our bank facility at all. We're using 75 percent of our free cash for our share repurchase. We're using additional cash for our acquisitions from our free cash flow. And at some point we could divert some of that to a dividend.

Is there something that the board is using as a TRIG tore say this is the time we ought to do this, though? Can you give us a sense of?

Michael, there's not any set criteria. It's dynamic. It's a function of what kind of acquisition opportunities are out there. It's a function of where the stock price is. I mean, again, I think as we had indicated in the past, our -- we've had some outside consultants come in, look at the valuation of the company and they believe that a fair value for the company is somewhere in the mid to high 20s. So at a 19 or 20 dollar stock price, it is attractive long-term to continue this program of buying back our stock. When the stock approaches 25 dollars a share, maybe it's more appropriate to have a dividend. The other consideration, of course, is taxability of dividend and the possibility however remote that maybe congress would eliminate this dual taxation on dividend. So it's a dynamic function, it's a function of share price and acquisition opportunities. . Again I stated in my opening comments in the middle part of next year we're probably going to be looking at that. So you can probably figure out yourself, Michael, what the amount of cash that we'll continue to accumulate. And again seeing no significant opportunities at that particular stage, I think that the board will likely probably move the share repurchase up and institute a small dividend at that time. So.

Okay. That helps a lot.

Tod, what's your comfort level with regards to how much unrestricted cash you would let pile up on the balance sheet? How big can that number get before that is something you like.

I think that our approach with the unrestricted cash is -- first of all, I think it's a practice matter when we look at the business. I don't think we're going to see it move up in the huge numbers. I wouldn't envision us having a couple hundred million dollars of unrestricted cash on the balance sheet.

All you have to do is look at our pattern of cash flow. It's been very solid. It's been growing at a decent level. But we've used consistently the vast majority of this to buy back our stock. Again I said earlier 75 percent of the cash to buy back our stock. So I don't really see free cash flow moving up dramatically. At this point it happens that it's a little over 100 million dollars. As Jim had indicated, we got some acquisition opportunities in the pipeline, although they may be small in the fourth quarter. So we can put that cash to good use. But I certainly wouldn't envision any sort of significant increases in the cash balance. And remember what I said earlier in my comments on cash flow, we do have to normalize that and make some tax payments in the fourth quarter.

Right. On to cash or another step on it. Cash interest paid in the quarter?

We don't have it at our fingertips. About 18 million.

And then do you have -- what do you expect that total to be for the full year?

Well, I think you can look at our interest expense on a quarter to quarter basis and it's been pretty consistent in that 18 million dollar range.

Then how much did you pay out in closure post-closure on a tax basis in the third quarter?

You know it was certainly less than what we had accrued. And as an expense on the balance sheet. And I don't have that information. We haven't finalized the balance sheet yet. So all I can say is you'll see it in the detail of our disclosures on the Q but we've paid out I think slightly less than what we accrued, which is our pattern.

When can you or when do you as a policy will you go back into the market or be able to go into the market from a share repurchasing standpoint?

That's something we don't disclose publicly. Again, obviously the information on the earnings needs to be disseminated into the public and the stock needs to be trading in a normal pattern before we go back in. But whether we're in the market or not it's something that we don't want to discuss.

I didn't mean it that way. I misstated that.

Generally what I can say is when the market has settled down in terms of volume and price movement standpoint.

All right. So it's somewhat fungible, then. On the bad debt allowance, if I understand what you've said, you're down on your bad debt allowance in the third quarter by 10 to 15 basis points.

What I said was our expense was down. Our allowance is still about I think the second quarter it was around almost 20 million, 19 and a half million. And third quarter the allowance is the same amount there. And I think and this is something that I don't think people understand or get confused. You really need to look at both the allowance on the balance sheet and then the expense on the P&L.

Let me get my one thing closing on this. If I interpret the other number you gave earlier is that DSOs are down it's a very positive statement here if you're controlling bad debt at a constant dollar amount or slightly down as a percent and you also have DSOs down, that's a huge statement about overall cash flow management.

Yes, I think so. And I think our track record speaks for itself. Not only are we a leader in terms of DSO, but when you look at the inter play of the balance sheet accrual that we have and the expense that we have, this organization has done a very good job of collecting the cash. And particularly this year where I think as I mentioned earlier, it's not just the total dollar amount of receivables that you have, but it's the aging of those receivables. And our general managers and our divisional controllers and credit collection people have done a superb job in managing those that move out into the 60 to 90-day category and have a higher risk of going to delinquent. Those are the amounts that are going down when we look behind the facade of the 250 million dollars of accounts receivable. I think that's a very positive statement.

Because they tend to move in opposite directions if you have them going both the same way that's good things about what you're doing.

Any visibility on what you think the impact of FAS 143 is going to have on your rate of accrual per ton.

That's something Michael we'll talk about in the first quarter RS. We certainly continue to talk to our auditors about that they're in contact with the Securities and Exchange Commission, with some questions.

And the last question on fuel swings, and you touched on this a little bit, having about a third hedged today but expires in December. Anecdotally I think about it on my commute to work I watched price go from a dollar fifty to premium and then dollar 60 then come down four or five cents. High quickly can you feel that swing?

Probably just about the same as you see it at the pump. When we fill up our tanks, which in larger locations have been on a weekly basis we'll see that movement from one week to the next.

So when premium comes out some of this issue about fuel disappears?

Right again as I said earlier it goes both ways.

Thanks .

Operator one more question

Last question is from Gary Callahan with Goldman Sachs. Go ahead, please.

Callahan (ph): Couple questions if I could. The Las Vegas, you've talked about being up four to five percent a year, kind of the economy. Is it still trending that way?

I haven't seen any indexes coming out of Las Vegas lately, Cory, but I would say that, yeah, I'd say it's probably in that range of three to four percent.

Callahan (ph): Don't see any fall off there.

Haven't seen any substantial fall off.

Callahan (ph): Can you comment generically about the pipeline of bidding opportunities you see for municipal contracts next year? Does it look kind of presuming you have some visibility on that. Does it look consistent with what you had this year, any big things we should think about?

I mean again, one we have systems that track opportunities, when we get into our 2002 guidance, we will not forecast success on any of those opportunities. But again as we look at around the markets, when we looked at acquisition of that we made in Richmond, California, I mean one of the attractive pieces to acquiring that business was that over the next five to seven years that roughly 40 to 60 million dollars worth of exclusive franchises were coming up for renewals. So obviously there's going to be some of that coming available, as well as opportunities around the country. I mean I know of at least three or four more opportunities that are coming available in Florida and Texas. So obviously we'll compete for those and hopefully we'll get our fair share.

Callahan (ph): Okay. Lastly, can you give us the capacity on the win symptom Salem transfer station?

I don't have that right at my fingertips but I'm going to guess it's in excess of a thousand tons.

Callahan (ph): Thanks, guys.

Okay. I'd like to thank all of you for spending time with us today. I think we've related some very good financial news in a very slow economy. A replay of the call will be available for the next 24 hours by calling area code four zero 402-220-2491. Pass code is 13867198. Additionally, this call will be archived on Republic's web site at www.republicservices.com for the next 90 days. Again, thank you for joining us and have a great day.