Republic Services Inc (RSG) 2003 Q1 法說會逐字稿

Good morning, everyone. Welcome to your Republic Services first quarter 2003 earnings call. Your Chairperson will be Mr. Jim O’Connor O'Connor. Mr. O’Connor, I'll turn the conference over to you. Later during the conference there and there will be a chance for questions. At that time I will turn the over to you Mr. O'Connor. And thank you for using Sprint Conference Serv.

Good morning even I thank you all of you for joining us. This is Jim O'Connor and I would like to welcome everyone to the Republic Services first quarter earnings conference call. This morning, Tod Holmes our Chief Financial Officer and Ed Lang our Treasurer are joining me as we discus our first quarter performance. I'd like to take a moment to remind everyone that some of the information we will discuss with you today contains forward-looking statements which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. Additionally, the material we will discuss today is time sensitive. If in the future you wish to do a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call which is April 30th, 2003. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written concept of Republic Services is strictly prohibited.

I'm pleased to report to you today that Republic Services is on track to deliver financial performance that is in line with the guidance we gave on our previous call on February 4th. Although we have not seen an improvement in economic conditions and experienced high fuel costs during the first quarter, we are able to overcome these obstacles due to our pricing discipline, continued focus on strategic cost initiatives and the high quality of our field organization that was able to adopt our business plans to meet and exceed objectives.

During the quarter, Republic keas revenue grew 7.7% to $595 million. We had 5.3% internal growth in the quarter. Pricing improved by 2.2%, driven primarily by our collection business and commodity prices. This price increase excludes the impact of higher rental taxes. Our total volume growth was 3.1% . Predominantly due to new franchise agreements in Florida and California which was key to our performance. In the first quarter, we generated $78 million of free cash flow. We clearly exceeded our objective of having free cash flow that is equal to at least 90% of net income. Tod will provide a free cash flow reconciliation late on in the call.

We returned a portion of this free cash flow to our shareholders through our share repurchase program. During the quarter, we purchased 2.9 million shares for. $56 million. We will complete the remaining $94 million of share repurchase authorized by our board during 2003. Since the inception of our share repurchase program in July, 2000 we've returned to approximately to $356 million to our shareholders by purchasing 20.1 million shares or about 11% of our outstanding shares.

We're comfortable with our previous EPS guidance for 2003 of $1.46 to $1.48 after the impact of SFAS 143. We have been able to stay the course with our financial guidance despite higher fuel costs. During the first quarter, we acquired $7 million of run rate revenue, annual run rate revenue for $10,500,000. We currently have deals totally $16 million in annual revenue where offers have been accepted our acquisition pipeline is approximately $40 million in annual revenue.

Although acquisition opportunities are limited, we continue to find candidates in our existing geographic footprint. I'd like to highlight a number of accomplishments that occurred in the quarter. We continue to roll out our optimization program [Rasumark] (ph)and our larger commercial collection operations. We are working to implement Rasumark in five locations and we expect to have 45% of our commercial wealth analyzed during 2003.

We continue to work with our strategic partner, Dupont to further improve our safety performance. This is a multiyear relationship and will provide a better work environment for our employees. The long-term, the program will assist us in controlling the costs of our insurance programs. During March, we held five regional meet eggs. We were able to meet and discuss our business plan with key decision makers throughout the company. Although we operate in 22 states Mike Cordesman, Tod Holmes and myself regularly meet with our field organization which allows us to understand local market conditions and support the requirements throughout the Republic network. Our internalization rate increased to 54%, driven by our two new disposal facilities in South Carolina and new transportation station in Winston Salem North Carolina I'll turn it over to Tod.

An online recording is available at our web site, www.republicservices.com for replays. I'll begin with the financial results of the first quarter revenue. First quarter 2003 revenue rose 7.7% to $595 million from $552 million last year. Our internal growth from core operations is 4.5%, 1.7% from price and 2.8% from volume. Our core volume growth comes primarily from a residential collection business, where we've been awarded a number of new municipal contracts and our landfill and transfer stations that we've recently opened new sites and secured new contracts.

Volumes in our commercial and industrial business are holding steady. The remaining 3.2% of revenue growth comes from commodity pricing, non-core businesses, state taxes and acquisitions. Next I'll discuss our sequential operating margins. Sequentially or first quarter operating margins decreased by 90 basis points. Key components of our sequential margins are as follows, fuel negative 40 basis points, statement of financial coming standards 143, had a negative 20 basis point impact. Internalization and lower seasonal disposal was a positive 60 basis points DD&A was a negative 20 basis and SG&A was a negative 70 basis points, for a net sequential decline of 90 basis points in operating margins.

First, fuel. During the first quarter of 2003 , our fuel prices increased sequentially by about 9% or 10% per gallon from roughly $1.30, $1.31 to about $1.43 per gallon. Second, SFAS 143, as you know, during the first quarter of 2003, the company adopted statement of financial accounting standards 143, accounting for asset retirement obligations. SFAS 143 required the company to change methodology used to record closure and post closure costs at its landfills. During the three months ended March 31st, 2003, the company reported an after tax expense of $37.8 million, as a cumulative effect for the change in accounting principle related to the adoption of SFAS 143, and also the change in accounting related to methane gas collection systems. These changes do not effect the company's cash flows. As a result of these changes, the company's overall costs increased by 20 basis points. Sequential costs of operations improved by 100 basis points. This improvement was offset by a 70 basis point increase in landfill amortization and a 50 basis point increase in accretion expense.

Third, internalization and lower seasonal disposal. During the first quarter 2003 , we experienced a 60 basis point improvement and sequential operating margins due to lower disposal costs resulting from increased internalization and also lower seasonal residential disposal volumes.

Fourth, DD&A. During the first quarter of 2003 the company experience higher DD&A due primarily to the adoption of SFAS 143 as previously mentioned and normal capital expenditure activity.

Fifth, SG&A. Sequentially it increased by 70 basis points from 9.7% to 10.4%, due to the seasonal increase in payroll taxes and bonus accrual, due to increased D&O insurance and finally, increased bad debt. We continue to believe that SG&A in the range of 10% is appropriate for our existing business platform, given the current economic conditions. EBITDA sequentially EBITDA increased by $400,000 or 50 basis points from $164.9 million or 27.3% during the fourth quarter of 2002. To $165.3 million or 27.8% during the first quarter of 2003.

Now let's talk about our year over year operating margin. Operating margins decreased by 170 basis points from the first quarter of 2002 to the first quarter of 2003. Key components of this decrease are as follows. Fuel, a negative 80 basis points. The termination of an operating lease facility in 2002 positive 60 basis points, commodities positive 30 basis points, waste taxes a negative 50 basis points the economy and third party hauling costs, negative 50 basis points, adoption of SFAS 143 a negative 20 basis points, increased DD&A, a negative 80 basis points and lower SG&A positive 20 basis points.

Again, a net decrease in operating margins of 170 basis points. I'll briefly comment on these components are year over year margin change. First, fuel. During the first quarter of 2003 fuel prices were up from the prior year. Our average price per gallon increased about 30% from about $1.09 in the first quarter of 2002 to $1.43 in the first quarter of 2003. Second, the operating lease facility, the company repaid its operating lease facility during the third quarter of 2002.

Third, commodities. Commodities increased about 15% to 20% from the first quarter last year. Fourth, waste taxes, during the first quarter of 2003, we continue to experience an increase in taxes levy on landfill volumes in certain states. These taxes were passed through to our customers at no margin.

Fifth, the economy and third party hauling, during the first quarter of 2003, volume and pricing in our invent business continue to be impacted by the economic slow down. Furthermore, we experienced an increase in costs primarily fuel associated with a long haul transported waste by third party vendors from our transfer stations.

Sixth, SFAS 143. The company's cost of operations improved by 100 basis points as a result of the adoption of SFAS 143, and this improvement was offset by a 70 basis point increase in landfill amortization and 50 basis points of accretion expense.

Seventh, DD&A. The increase in DD&A is primarily due to the adoption of SFAS 143 as previously discussed also the termination of the company's operating lease facility in July of 2002, and normal capital expenditure activity.

Finally, SG&A. The decrease in SG&A is primarily attributable year over year to lower bad debt expense. Our year over year EBITDA increased by $14 million, or 40 basis points from $151.3 million or 27.4% in the first quarter of 2002 to $165.3 million or 27.8% in the first quarter of 2003.

Next I'll discuss our free cash flow, as we've said in the past, one of the most attractive aspects of this business is its ability to generate substantial amounts of free cash flow. We believe that strong sustainable cash flow is indicative of a high quality of earnings. For 2003, our definition of free cash flow is very simple. It's cash provided by operating activities less purchase of property and equipment, plus the proceeds from the sale of equipment as presented directly on the company's consolidated statements of cash flows. Using our definition of free cash flow for the first quarter of 2003, free cash flow was $78 million. This is based upon cash provided by operating activities of $101 million, less purchases of property and equipment of $24 million, plus the proceeds from the sale of equipment of about $1 million. Again, that's equal to free cash flow of $78 million. Please keep in mind that our free cash flow is historically high in the first quarter, because of the timing of capital expenditures and tax payments. If we normalize our free cash flow for expected annual capital spending and cash taxes, it would be reduced by $41 million for capital spending and $25 million for taxes respectively.

In addition, our free cash flow must also be normalized for. $40 million of capital spending that was received in the fourth quarter of 2002, but not paid until 2003. This results in normalized free cash flow of $52 million for the quarter, which represents approximately 93% of our net income.

Our uses of cash flow during the first quarter of 2003, we paid $10.5 million for businesses with a run rate revenue of $7 million, and we purchased $2.9 million shares of our common stock for $56.2 million dollars or -- excuse me, $19.33 per share. From the inception our stock repurchase program through March 3 1st, we've repurchased over 11% of our common stock or about 20 million shares, for. $356 million at an average price of about $17.75 per share. Even after the substantial repurchase of shares fort first quarter of 2003, our balance of [inaudible] cash available as of March 31 to fund future internal growth acquisitions and share repurchases is $166 million, and as we speak today, it's approaching $200 million.

Our balance sheet remains very strong. At March 3 1st, our accounts receivable balance was $251 million and our day sales outstanding was 38 days. This compares to 36 days as of December 31st. Republic continues to lead the industry in managing accounts receivable. Our net debt is $1,141 million of which $1 billion 50 million is long-term public debt and about $380 million is tax exempt financing at favorable interest rates. Consistent with our cash flow performance and previous guidance our debt to total capital at March 31st is 38% and republic remains committed to maintaining and improvement our investment grade rating. I'll turn the call back over to Jim.

Thanks Tod, as we discussed in previous calls our number one priority is to generate high levels of predictable cash flow in order to increase shareholder value. We're committed to our share repurchase program and in the second half of 2003, our board will consider instituting a dividend. I'd like to thank the members of the Republic team for their high quality of performance during this economic slowdown that we're experiencing, all the employees of Republic have done an outstanding job, and a number of our employees have been called in to active duty in the military, and we want to express our gratitude to all of them for their support of our country, and the war effort in Iraq. And we look forward to their safe return.

At this time, operator, I'd like to open up the call to questions. Operator? We have a little technical difficulty.

What's our code?

Hold on. We're looking into the problem we're having connecting the audio.

At this time if anyone has a question, would you please press star one on your touchtone phone if you have a question at this time. Our first question is were Amanda Tepper. Please go ahead.

Good morning.

Good morning, Amanda.

You seem to be making a point on the landfill taxes, which we've heard echoed by some of the other waste companies. And I was surprise .7% on the organic growth seemed high. Is this something that you see increasing over time and where are you seeing it and what are the trends?

Well, mostly it's being enacted in states that are net quarters of late, Pennsylvania, Wisconsin, Michigan is considering a similar tax and I guess I view the tax, while it's somewhat couched in the fact that it's to support other environmental initiatives within the state, it's a means by which they can start to limit the importation of waste into states that have been high importers.

It also helped to offset their deficits.

In the case of Pennsylvania If ,I'm not mistaken it’s about, it's about $4 a ton, which is in light of into landfill prices, $4 a ton is a lot of money.

This is something, Jim, that we had talked about back in the, I think beginning in the third quarter of 2000 -- it might have been as early as the second quarter but definitely in the third quarter of 2002.

Okay, and --

Jim O’Connor : And we broke it out so that you could see that particular component is significant.

Yes. No, I think it's helpful to have it broken out. You also mentioned the franchise agreements in Florida and California, that helped on your volume growth in the quarter. I believe those are both contracts that you won last year. I'm wondering, when does that anniversary end and what would the volumes have been roughly without those?

The anniversary is out in the second quarter for the most part.

So you'll see that benefit one more time next quarter?

Well, no, I think it will anniversary out after the end of this quarter, the first quarter. So we'll see lower volume growths, assuming that we don't have successes on other opportunities that we currently are working on.

I don't have specific numbers Amanda, but the Florida franchises that we were awarded would anniversary out in the second quarter. We had some other anniversary, contracts in other locations that were a little later in the year, but they were a lesser dollar amount, and again, when we look at our internal growth, well, the first quarter was higher, we feel very comfortable with the guidance that we gave, that 1% to 1.5% volume growth. I think the Florida contracts were about $30 million in annual revenues. Might give you an idea of the impact.

Okay, that's helpful. And then just as you are looking at other franchise contracts, are you seeing any change in the competitive environment? Is that getting more difficult, and also, is anyone on the municipality side coming and looking for relief on the annual contractual price increases that you've got in the franchises that you already have?

No. I mean one, I guess we don't have any franchises that are expiring in the near term. They're material to the company. We had no -- we do not have any franchise holders where we are entitled to price increases to petition us to relieve them of that obligation, and in fact, just the opposite, actually. We have petitioned over the last several months a number of our franchises for reimbursement of fuel expenses, you know, and whether or not we'll receive those, I guess that still remains to be seen. We have petitioned the franchises for some of the increases we've seen in fuel as of late.

Okay, great. Thank you very much.

Thank you.

Our next question at this time is from Bill Fisher. Please go ahead, sir.

Good morning.

Good morning, Bill.

You mentioned on the fuel costs, I think you put through fuel surcharge in March and just trying to touch on, was that any portion of the 1.7% or was it just not that material?

Yes, it was. It was probably about ten basis points or so, maybe a little bit more than ten basis points. What we're seeing in fuel, as I'm sure you're aware, we just went out and surveyed a number of our larger locations. Here in April we've seen in our survey, whereas first quarter it was averaging about $1.43 in April.

It was back down to about $1.34 for the most recent lift. We've done a number of things in addition to the fuel surcharge, most notably delaying our own pay increases, and pay increases throughout the organization, as well as looking at discretionary spending, whether it can be travel and entertainment or overtime that may be somewhat discretionary.

I think that's a credit, Bill to our field management team, and again, I think one of the things that I continue to talk about how the Republic differentiates ourselves from our competitors is our ability to execute and in light of the headwind from fuel, they very quickly reacted and amended their business operating plans so that we could meet consensus estimates and meet our own internal expectations.

Okay, and just obviously the landfill transfer revenues were up very strongly. You mentioned the landfill tax and the Winston-Salem transfer station. Do you have any sense what landfill volumes were up in the quarter?

I think landfill volumes might have been up probably mid to high single digits. Now sequentially I think they might be down a little bit.

Last question on the FAS 143, I think you guys had talked about it being a three cent impact this year. Is that still kind of where you're looking?

Yes.

Bill Fisher Great, thanks.

All right, Bill, thank you.

Our next question comes from Trip Rogers. Please go ahead.

Good morning. Can you talk about what benefits you've even from route smart, talking about a potential 10% reduction in a number of waste's routes. Can you qualify what your goals are?

Jim O’Connor : I tried to articulate this before, Trip. Whether in conference calls or in the field, you know, we run a decentralized organization and we're a consolidation of a number of companies that are at various points in their business life cycle, some much more sophisticated, done a much better job at routing than others. It's higher harder to quantify.

In some of the conferences, we talked about Houston and some of the benefits that we've seen in Houston and we've seen some benefits now in our Fairfax, Virginia, operation, not to the extent that we saw in Houston, but my fear about giving out those numbers again, somebody to trying to extrapolate what that means to the organization, and I think, you know, I'm not in a position to do that. I will tell you that we are receiving benefit, and I guess maybe the easiest way to explain the initiative I think that there will be a benefit, margin improvement, and it's not an expensive venture for us.

The entire investment is route smart is probably in the area of about $20,000 per location that we install it other than our own internal manpower which we're using existing manpower on site and the regional staff that we've put in place back about 18 months ago. So the bottom line here is that if you believe route optimization and use of log rhythms in routing are going to produce efficiency, then we'll see benefit, and I think the knowledge of knowing we don't do a routing issue is important so we can move on to whatever the next business issue is we need to address. That's the long answer that probably doesn't get you to where you want to be but at the end of the day it's producing benefit in Huston, we knocked off three routes in the second go-around, which is about 8% of our routes on the street commercial routes in Fairfax, Virginia, we knocked off one route, if I'm not mistaken, and about 50 of overtime a week.

So again, it's having benefit. Payback is almost immediate with the amount of investment, and I think it's just a good opportunity for us to take something off the plate, as I usually talk to the field about that is an issue, we need to fix it. If it's not, we need to move on to another business issue.

That's helpful. On a separate subject, you mentioned looking at dividend in the second half. How much of that depends upon the tax laws changing and where would you stand if they did not change?

I think it's an order of magnitude. Depending on what happens, as Congress addresses the double taxation of dividends, it's only a question of the order of magnitude. I think for the most part, we would be looking at instituting a small dividend with no changes and with changes, possibly considering something larger than the average S&P 500 average.

I think that's another factor where our stock price is trading. It's a dynamic process where we're looking not just at the tax laws but also the valuation of the company, and obviously, we have the cash flow capabilities to increase our share repurchase and introduce a small dividend if we would deem that appropriate.

Jim O’Connor : We do have a debt maturity in '04, too, and I'm going to let Tod talk to this a little bit. It kind of falls right in line with this question that we've got accumulation of cash today, as Tod mentioned, I think as of the end of the quarter we had about $165 million or about --

$166 million.

Jim O’Connor : $166 million in the bank. We have a debt maturity in May of '04 coming due of $225 million. We've got a number of utilizations of the cash. Whether that's the best utilization, again, this is something the board continues to look at, and we'll be part of our -- we'll go into the decision making process in the latter half of the year.

I think you've done a good job covering this.

Great, and just one final question, Tod. With DD&A as a percentage of revenue, can you give us guidance where you think that runs for the remainder of this year? Is there nor -- the spike we saw is there anything more?

A lot of what you saw there certainly year over year, the change was a function of both the lease facility that we bought and we have no off balance sheet financing. We have no leases of equipment. We own our equipment. We give our cost to debt and our cash balances. That's the most efficient. So certainly, in the first two quarters year over year you'll see that as an impact, but if you look at it sequentially, that's not an impact. The biggest impact is really the change for SFAS 143, where we're taking the non-cash closure post closure costs out of cost of operations and putting it into DD&A, where it belongs, and it's 70 basis points for the closure post closure dollars that are getting amortized and 50 points of accretion.

Now sequentially, we would expect the DD&A to move up a little bit in the summer months as the seasonal landfill activity picks up, and we have seen that occur already. So it will step up a little bit but not that much.

Okay, thanks a lot.

At this time, our next question comes from Tom Ford. Please go ahead.

Good morning. Jim, you had -- I was just wondering if you could -- I know the Palm Beach County award was a new franchise. I know it's not until the second half but is there anything else you could talk about with respect to the franchise outlook?

I don't have the numbers in front of me. You're right. We already had franchises in Palm Beach County. We were able to secure revenues. We picked up one additional section annual revenue of about $4 million.

Okay.

The other -- we've got a number of opportunities. Obviously they exist across the country, but the pipeline is probably, I don't know, in the area of, you know, over the next 12 to 24 months, I think we've identified about $50 million worth of opportunities.

Now, again, these are, all of these opportunities will not be won by Republic, one, because of the asset mix we have in some of those markets, others because, you know, of options that are available for possibly renewals, but those are revenues that we are actively involved in those communities, and are participating in the development of RFP’s.

Great. I noticed some acquisition activity in the quarter, and then also just if you could give some details there and then just your thoughts. Waste yesterday noted that despite the announcement with Allied, there were additional Allied assets they were looking at. Was there anything relatively new from Allied that you yourself was looking to, contemplating.

We did do a small slot with Allied, in the first quarter roughly an exchange of about $3 million of revenue between Baltimore area and the northern Virginia area. So we continue to have discussions with them. Again, I think the atmosphere that exists within the sector is good. We continue to have conversations with Waste Management. Whether or not anything will come of those conversations remains to be seen.

We're actively looking to enhance our existing markets or to integrate markets that were not fully integrated. I don't think they'll be as large, you know, as they have in the past between us and Allied, but they very well could be. It depends on what their needs are and what ours are.

And then just lastly, I know you didn't mention weather, but I was just curious, if you thought that you had any influence at all there.

Not over the weather, Tom.

Sorry?

None over the weather. But we did experience some weather obviously in the Midwest and the Mid-Atlantic states but, you know, as I tell the field, we experience weather every day, and that's kind of some of the things that we're charged with managing and that's what we have to adjust, you know, we have to adjust overtime. We have to adjust the number of drivers that we call in to work those days. So I mean again, it's a credit to the field to be able to respond to that, but it did have some impact, but it wasn't as material to us as it was to our competitors.

Okay. All right, great.

And that was probably a lot due to the geographic mix that, you know, where our revenue guide is.

That's what I figured. I just figured, you know, I know you guys didn't mention it. I was just curious if you saw anything.

We did experience it in the Midwest and the Mid-Atlantic states.

Okay, and just one follow-up there then. With respect to the Midwest or more seasonal areas, do you think -- I know it's tough to call, because we're kind of in the midst of the build, but do you think you're seeing the normal seasonal build in terms of what those local field folks were expecting?

I'll tell you what, what I've got in front of me and I don't have it geographically. When I look at our landfill tons and our transfer tons internal and external, and I look at our industrial loads per day, you know, as we look at it year over year and as we build into the spring (ph) in the Midwest and the Mid-Atlantic again we're seeing about anywhere from a 7% to 10% increase in volume.

That would be what would be, when I look back at the historical numbers, that's about the up-tick that we've seen historically in volumes. While we're not experiencing volumes "due to a change in the economy," we are still seeing the seasonal up-tick.

Thanks a lot.

Thanks. Two more questions, operator.

The next question comes from Brad Coltman. Please go ahead, sir.

Hi guys. I want to follow up on Tom's question with the acquisitions. The $16 million that you said you had accepted offers, do you expect those to close in the second quarter?

I think that we've got a number of opportunities there. They're accepted. We're going through final contract negotiations with them, and it's just hard to tell. Right now, I would assume we'll close some of them and I hope we close them all, but a lot of things happen in final negotiations.

I think, Brad, we need to go back and look at the original guidance we gave at the beginning of the year which was $25 million to $50 million of run rate revenue, 1% to 2%, and $7 million a quarter is at the low end of the range and 60 would be at the upper end. It will be somewhere in that range. It's not that significant to our business.

I just will put it in the second half contribution then. The $40 million of pipeline, can you describe that as, you know, a series of tuck in collection operations? Is there anything else in there more vertically integrated or bigger stuff?

Jim O’Connor : No, for the most part things would tuck in.

Okay. With regard to your pricing, 30 markets are the franchise, secondary, we have strong market positions and third, more urban-based models and yet your pricing is relatively good. I assume, are you getting much -- is most of that coming from the secondary markets, these strong market positions or can you break that down? I thought the franchise would be more tight to a CPI?

I think if you looked at our fourth quarter price in this first quarter, it's consistent with what we're seeing in the fourth quarter. So it's, you know, the CPI from the franchise markets which wouldn't change much from fourth to first quarter, those CPI’s in our larger franchises typically come up in the summer months, and then you know, certainly in our competitive markets, where we have our customers that we've viewed as being relatively low priced, we're moving those. So sequentially, it's the same as last quarter, basically.

Okay, and the pay increase there being deferred until at least September, you said?

August 1st.

August 1st. Are those going to be then retroactive?

Jim O’Connor : No.

No. And then finally, you mentioned about you continue to pursue rating upgrades. Are you mostly focusing on say Moody's was below everything else or all the companies and what do you think the impact could be of getting a higher debt rating?

Well, we basically look at our credit rating and say that we've got quite a higher rating. We're not going to talk specifically to a rating agency. In terms of the benefit to the company, we're not necessarily actively in the market today, and really don't see a need for funds to our cash strategy. It's what the business warrants given our performance and credit profile.

Thank you.

Operator, let's have two questions from each speaker.

Due to time constraints we ask that you ask two questions only please. Our next question is from Leone Young. Please g ahead.

Good morning. I only have one question.

Okay.

Could you comment a little bit on the political and regulatory environment in Michigan? Obviously it's popular politically to grandstand against Canadian waste. I'm wondering what you see terms of taxes or any other type of limitations they're attempting?

Jim O’Connor : I mean, I think in conjunction with the other national companies, obviously we have a lobbying effort there, and you know, this economy, any tax that would be discriminatory in a state that discourages business development and expansion of the economy, so that's kind of our position. You know, if it is a nondiscriminatory tax it has no impact on our Toronto contract, but there are a number of pieces of legislation being introduced in Michigan.

It is a topic that gets a lot of press up there, but again, to some degree it diverts the heat off of budget deficits that are occurring a in a lot of states and other means to offset some of those deficits that are occurring. We'll have to see what happens. I mean, to date, there's only been a couple of states that have introduced taxes that are nondiscriminatory, meaning that they're not necessarily going to prohibit the movement of waste across borders, because the tax is a tax that is Levied on all of the residents within the state.

Great, we also heard that the auto companies are kind of weighing in as good allies, not wanting this tax either obviously.

That must be a statement, since you only had one question.

All right.

I'm just giving you a hard time. Sorry, I didn't get it, what was it?

I was just wondering, I was also hearing that the auto companies were weighing in as allies for you, obviously trying to fight a tax as well.

Well, I mean what we try to do is get a coalition of a number of businesses that would be affected. I mean the manufacturer's association in the State of Michigan is in support of our position. So we try to put a coalition together that obviously there's strength in numbers here and hopefully we can have an impact on the Michigan legislature.

Great, thanks. That was a great quarter.

Thank you.

Thank you, Leone.

Our next question is from Lorraine Maikis. Please go ahead.

Good morning. Thanks. Could you just comment a little bit further on the fuel charge, surcharge in terms of what percentage of customers received a surcharge, and will that ten basis point effect increase throughout the year?

Jim O’Connor : Obviously it's going to get adjusted. It's on a small component of our revenue base, about 15% to 20% of our revenue base, and that was done, you know, as part of an evaluation as to where we were most likely to receive it, and again, in an attempt to stay away from the customers that have high margins contribution bottom line. It's in the area of -- Tod, what is it?

It's about $600,000 in the first quarter, and there's a lag in the first quarter, mostly really in the month of March. There's a little bit of a lag in terms of putting it in. We are seeing fuel prices, as you know, come down. There will be a little pit of a lag taking it off and we'll just have to see where prices are mid-year. It's about $25.50 a barrel for oil today. It is coming in line with last year and where our business expectations were for 2003. We don't see it as a big factor.

In terms of $40 million acquisition pipeline, is any of that related to public companies like an Allied transaction?

No, those are all private companies.

Okay, and then this is part two of my second question.

Okay.

Any privatizations in the future? Are you working with anybody on --

Well, we continue to work on privatizations, Lorraine. I mean, the -- you know, that's one of our business objectives annually with the field is to develop relationships and communities, understand the budget constraints that communities are experiencing today, and to see if there are any opportunities for public/private partnerships. That's an ongoing focus for the company, and we have those going on all over the place. It's just hard to tell which ones will turn into real business opportunities for us. You know, we try to keep you apprised of that. That's some of the opportunities we recently secured in south Florida and we feel comfortable we're about to secure one or two more in south Florida with recent bid activities that we've had.

Again, these things are hard to predict, but it's a primary business focus for us, public/private partnerships and opportunity in light of the economics that some of these communities are facing today, the economies that they're facing today.

Thank you.

Jim O’Connor : Thank you.

Our next question comes from Mark Farano.

Good morning, congratulations on the quarter.

Jim O’Connor : Thank you.

Two quick questions. One, the California and Florida contracts that benefited you on the volume part of the internal growth equation, the way, just thinking about the way you made do the price volume calculation, did they provide any benefit on the price part of that equation?

Jim O’Connor :No, because this is all new business for us this year.

Okay.

After one year, we get the CPI component and that piece would go into our price.

Okay, and then secondly, could you just quantify the benefit in the quarter of the delayed wage increase?

If I'm in the mistaken, it's about $600,000 to $700,000 a month.

Right.

And that holds off in August?

Jim O’Connor : The substantial benefit is going to be in the second quarter. I think from March 1st, which is where most of these increases were originally slated, through August 1st, it's probably in the range of $3.5 million.

I think, again, to put it in perspective, some of the adjustments that we made due to fuel, and when we were looking at fuel at that time, we were looking at about $1.5 million a month headwind. So between, let's say these are round numbers. $600,000 to $800,000 to wage deferral, a surcharge for fuel to a small component much our customer base about $500,000 to $600,000 a month, and then the review of overtime utilization in SG&A, as well as container maintenance and shop maintenance all of those things were contributing to mitigate that headwind.

So some of those things will continue beyond April, or beyond August 1st when the wages kickback in, but those were offerings that, I think, the team stepped up to the plate on to mitigate the, you know, some of the expenses that we didn't anticipate when we gave our original guidance for '03.

No, very nice job. Thanks very much.

Jim O’Connor : Do we have another question?

The next question comes from Michael Hoffman.

The balance sheet looks amazing. When does this board step up and use it aggressively to create value for shareholders by levering and buying a lot more stock back?

We don't want to put ourselves in a position where we're scrambling. I think the board has been very forthright in their communications. What we said last fall and each quarter is, this is something we would address in the second half of 2003.

So we need to look at the Congress and what they're doing from a tax standpoint. We continue to actively pursue our share repurchase. In the first quarter we bought over 1.5% of our outstanding shares, over $50 million. That's substantial. I think we are being active in that regard.

But you're below 40% given our tax code in this country, you're probably under a favorable tax, relative tax positioning of leverage, and although they targeted $150 million, you could buy substantially more back and not put the company in any kind of negative position.

Well, I guess that's a question that everyone has a different view on it, and certainly, we feel comfortable where we are.

Right, and you know, again, Michael, you know, this isn't something we've done in a vacuum here. We've hired other outside experts to look at our position, and you know, one of the things that we're not about to disclose and I don't want to give anybody the impression that there's anything happening here, but at the end of the day, there are a lot of other things that we evaluate, all right, and they're not just as simple as looking at that cash balance and looking at dividends or share repurchase. So there's a lot of other things that go into the equation and we're very prudent in going through that evaluation, and you know, so again, you don't have the knowledge that our board has and that we have in looking at the alternatives.

Okay.

Jim O’Connor : One more question.

Our next question comes from Kevin Monroe. Please go ahead.

Thank you. Just on the acquisitions again, I was just wondering if the multiples you're seeing are increasing now that waste management is back being in the inquisitive?

We're not buying a recycling business.

Okay, but anything on the private company side?

No, I think the multiples, again, are pretty much where they have for us and we're buying tucking (ph) companies, they're in the Florida five times EBITDA, you know, so that's probably the area, the range that we'd be looking at buying these private companies that we got in the pipeline. We don't see any additional pressure there. Again, those are attractive to us because on a post basis, they deliver higher EBITDA.

Okay. One other question. On your industrial collection business, this is the second quarter modest but positive growth. Is that after following negative growth for the first three quarters of '02? Is that a result of easy comps or is there something else?

I think you've got a little bit of acquisition in there in the third quarter. We had picked up about $30 million of revenue from Rumkey (ph). We looked at our industrial business and consider that to be flat to down slightly, if you exclude the acquisition piece. And then there's also a piece of permanent work in there, you know, compactor work, that type of things.

So it's flat to down, excluding acquisitions? Is that stable or is that deteriorating or improving?

No, it's stable. What we see in the economy is something that's very consistent with what we've seen in prior quarters. You know, where we have manufacturing-based economies, which are primarily in the Midwest and maybe the northeast, those economies are a little tougher. When you get out to the west coast and you see a service-based economy, you know, that's actually our stronger business in these tough economic times because of the nature of the local economy.

Okay, thank you.

Our final question comes from Carey Callahan. Please go ahead.

It's John Shapiro sitting in or Carey. Just a question on the landfill pricing. Allied talked about their new pricing initiative. What are your plans, you know, should they go ahead and raise the prices in some of these markets and maybe what are you looking at in some of your other markets?

Well, again, we are going to look at those markets. As we look at every market every day, look at what the volatility that's in the market, and if there's an opportunity to raise prices, we'll take advantage of that, and I think it's evident in our own internal growth numbers, especially the price component that we have been successful in raising prices and we're not bashful about it. Where we see the opportunity exists, we'll follow. If one exists in some of the markets that overlap us, and we see that happening, we'll be looking to improve our return on our landfill assets that I understand Allied is trying to do.

You mentioned earlier that collection was one of the main drivers of the overall price increase. Was landfill pricing up year over year?

It's essentially flat.

Thank you.

Jim O’Connor : Thank you.

Thank you, operator, and thank all of you for spending time with us today. A replay of this call is available today by calling area code 402-220-2491. The pass code is 16333457. Additionally, this call will be archived on Republic's web site at www.republicservices.com. Again, thank all of you for joining us today and have a great day.--- 0