Republic Services Inc (RSG) 2003 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter year end conference call for investors of Republic Services. Your host this morning is Republic Chairman and CEO Jim O'Connor. Today's call is being recorded and all participants are in listen only mode. There will be a question-and-answer session following Republic's summary of quarterly earnings. I will provide you with specific instructions for questions later in the call. At this time it is my pleasure to the call over to Mr. O'Connor. Thank you for using Sprint and good morning, Mr. O'Connor. Go ahead, please.

Thanks, Scott, and good morning and thank you for joining us. This is Jim O'Connor and I would like to welcome everyone to the Republic Services fourth-quarter conference call. This morning, Tod Holmes, our Chief Financial Officer, and Ed Lang, our Treasurer, are joining me as we discuss our fourth-quarter performance. I would 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 maybe materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. Additionally the material that we discuss today is time sensitive. If in the future you listen to a rebroadcast or a recording of this conference call you should be sensitive to the date of the original call which is Feb. 5th, 2004.

Please note that this call is the property of Republic Services Inc. Any redistribution, retransmission, or rebroadcasts of this call in any form without the express written consent of Republic Services is strictly prohibited.

Our operations performed within our expectations during the fourth-quarter. Total revenue in the fourth-quarter was $638 million. This was an improvement of $33 million or 5.4 percent compared to the fourth-quarter of 2002. Internal growth was 3 1/2 percent with 2.7 percent on price and .8 percent from volume. Our core price increase price increase was 2.3 percent with the remaining increase of .4 percent attributed to fuel surcharges and commodities.

This core price improvement is the strongest we've seen since the fourth-quarter of 2002. This improvement reflects the early results of the price initiative we discussed during our third-quarter call.

Republic earned 35 cents per share in the fourth-quarter and $1.33 per share for the full year. Republic generated $81 million of free cash flow in the quarter and $336 million during 2003. We continue to reinvest in our existing business platform and in the fourth-quarter we acquired $11 million of annual run rate revenue including a C&D landfill in Charleston, South Carolina. During the fourth-quarter, Republic paid its first quarterly dividend and we've repurchased approximately 2 million shares for $48.7 million.

For the full year we've repurchased 8.4 million or 5.2 percent of our outstanding shares or $184.2 million. We are committed to improving our free cash flow performance and returns on invested capital. We continue to return this increase in cash flow to our investors through a share repurchase program which is the cornerstone for our returning cash to our shareholders.

And we also have maintained our strong -- the strongest credit profile in the solid waste industry and ended the year with a net debt to total capitalization at 36 percent.

I'll now turn the call over to Tod for the fourth-quarter financial review and I'll outline our 2004 guidance after his review.

Thank you, Jim. I'll begin my review of the Company's financial results with fourth-quarter revenue. Fourth-quarter revenue for 2003 rose by 5.4 percent to 638 million from 605 million last year. Internal growth from core operations is 4 percent -- 2.3 percent from price and 1.7 from volume.

As Jim indicated, during the fourth-quarter we began to initiate a price increase strategy which is reflected in our core price growth. Our core volume growth comes primarily from residential collection businesses where we have been awarded a number of new municipal contracts and also our landfills and transfer stations where we have recently opened new sites and secured new contracts.

Volumes in our commercial business is holding steady and industrial landfill volumes are up. The remaining 1.4 percent of revenue growth comes from commodities, non-core businesses, state taxes, fuel surcharges and the small amount of [indiscernible] acquisitions that we've accomplished.

Next I'll discuss our changes in sequential operating margins. Sequentially our fourth-quarter operating margins increased by 320 basis points. The additional $24 million of self-insurance expense we recorded during the third quarter of 2003 accounted for 370 basis points of this improvement. The key components of our increase in sequential margins are as follows. Risk and health insurance, net benefit of 360 basis points, fuel -- a negative impact of 10 basis points, DD&A -- a negative impact of 10 basis points; SG&A -- a negative impact of 20 basis point, giving us a total of 320 basis point increase in margins from third- to fourth-quarter.

Let me speak briefly about each of these components. First, risk and health insurance. As we mentioned during the third-quarter, we recorded additional self-insurance expense of $24 million on a pretax basis or 9 cents a share related to existing claims. This increase in self-insurance is attributable to various changes and estimates through the Company's current policy year based upon recent actual claims experience, expected claims development, and medical cost inflation.

During the fourth-quarter, our insurance expense was approximately 7 percent of revenue or approximately 10 basis points greater than the normalized third-quarter. Now looking ahead, we expect self-insurance to range from 6 1/2 to 7 percent of revenue in the first-quarter 2004 and then move down to the 6 to 6 1/2 percent range for the remainder of 2004.

This improvement is based upon many actions already in place at the Company. Such as a change in our health insurance administrator from CIGNA to Blue Cross and Blue Shield. We believe the strength of the Blue Cross Blue Shield medical network will allow us to secure greater group discounts from doctors and hospitals.

Second -- fuel. During the fourth-quarter at 2003 fuel prices were up from the third-quarter and on a test basis we looked at our pricing per gallon -- at an average increase by about five percent from about $1.30 in the third-quarter to $1.37 in the fourth-quarter.

Third DD&A during the fourth-quarter the Company experienced higher DD&A as a percentage of revenue due to higher depreciation on fixed assets placed in service during the third and fourth-quarter, partially offset by lower depletion on our landfills due to seasonally lower landfill volumes.

Finally, SG&A. Sequentially SG&A increased by 20 basis points from 9.6 percent to 9.8 percent, due primarily to increased bad debt expense and seasonally lower revenue. And looking forward, we believe that SG&A expense at or slightly below 10 percent is appropriate for the Company.

Operating income before DD&A and accretion, sequential operating income before depreciation amortization, depletion and accretion increased by 18.8 million or 12.4 percent from 152 million during the third quarter of 2003 to 171 million during the fourth-quarter. This increase is primarily attributable to additional self-insurance expense reported during the third-quarter as I previously mentioned.

Now I'll turn to our year-over-year operating margin. Operating margins decreased by 190 basis points from the fourth-quarter of 2002 to the fourth-quarter of 2003. Key components of this margin decrease are as follows -- risk and health insurance, negative 80 basis points, commodity, negative 10 basis points; fuel, negative 10 basis points; waste taxes, negative 20 basis points; the economy higher third party hauling and revenue mix, negative 30 basis points; the adoption of statement of financial accounting standards 143 is a negative 10 basis points; DD&A negative 20 and estimate native 10. The sum of that year-over-year is 190 basis point decline.

Now again I will briefly comment on components of year-over-year margin change.

First -- risk and health insurance. As previously mentioned, during the fourth-quarter of 2003, insurance expense was approximately 7 percent of revenue for 80 basis points higher than the prior year. Second, commodities. During the fourth-quarter of 2003 commodity prices increased by about 9 percent from about $54 a ton to $59 a ton in 2003. However, this increase was offset by increased cost primarily related to rebates.

Third, fuel. During the fourth-quarter of 2003 fuel prices were up from the prior year. Our average price per gallon increased about 5 percent from $1.31 in the fourth-quarter of 2002 to $1.37 in the fourth-quarter of 2003.

Fourth, waste taxes. During the fourth-quarter of 2003 we continued to experience taxes levied on landfill volumes in certain states that were passed through to customers at no margin.

Fifth, the economy. Third party hauling and revenue mix. Again during the third-quarter, volume and pricing in our event business continued to be impacted by the economic slowdown. We also experienced some increase costs associated with the long haul transport of waste by third party vendors.

Furthermore, we generated more revenue proportionally from our residential line of business and our transfer stations which have lower margins.

Sixth, statement of financial accounting standards 143. The Company's cost of operations improved by 110 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 (ph) and 50 basis points of additional accretion expense.

Seventh, DD&A. The increase in DD&A was primarily due to the adoption of SFAS 143 as previously discussed and also to a small extent from normal capital expenditures.

Finally, SG&A. The increase in SG&A is primarily due to higher health insurance costs. Operating income before depreciation, amortization, depletion and accretion -- year-over-year the operating income before DD&A and accretion increased by $6.1 million or a 3.7 percent from 165 million in the fourth-quarter of 2002 to 171 million in the fourth-quarter of 2003.

Now let me talk about our 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 strong, sustainable cash flow is indicative of a high quality of earnings. Our definition of free cash flow is cash provided by operating activities less purchases of property and equipment plus proceeds from the sale of equipment as presented on the Company's consolidated statement of cash flows.

Using this definition, free cash flow for the fourth-quarter of 2003 was 81 million. This is based upon cash from operating activities of 168, purchases of property and equipment of 92, and proceeds from the sale of equipment of 5 million. Again that gives us 81 million of free cash flow for the quarter. For the year ended December 31st, 2003 it was 336 million. Again, this is based on cash provided by operating activities of 600 million; purchases of property and equipment of 273 million; and proceeds from the sale of equipment of 9 million. That equals free cash flow of 336.

Now let me turn to the strength of our cash flow for the fourth-quarter and the full year and explain that. In September of 2002, Jim and I asked our tax department to investigate an opportunity to reduce our cash taxes by adopting a policy of expensing landfills cost for tax purposes based solely on permanent airspace.

Rather than recognizing the potential benefit in 2002, we chose the approach of first obtaining IRS approval. In December 2003, the Company received final written approval from the Internal Revenue Service for this change. As a result, the Company will reduce its cash taxes by approximately $100 million of which $50 million was realized during the fourth-quarter 2003 and $50 million will be realized during the -- excuse me -- during 2004. Free cash flow for 2004 is, therefore, expected to be approximately $340 million, including this $50 million onetime opportunity.

After 2004, we expect this change in tax accounting policy will reduce cash taxes by about five to 10 percent each year. Since our landfills have average lives in excess of 30 years this is a substantial long-term benefit.

Uses of cash flow. Again, Republic has a very clear policy in terms of the use of our cash flow. As Jim indicated, our share repurchase is a cornerstone of that policy. During the fourth-quarter at 2003, we paid $21 million for businesses with a run rate revenue of $11 million and purchased $2 million dollars of our common stock for approximately $49 million or just over $24 a share.

From the inception of our stock repurchase program through December 31st, 2003, we have repurchased approximately 14 percent of our common stock or 25.6 million shares for approximately $384 million. About $18.92 per share.

During 2003, we repurchased over 5 percent of our outstanding stock and as of December 31st, 2003, we have 157.8 million shares outstanding. Even after the substantial repurchase of shares during 2003, at December 31st, 2003, our cash available to pay off the 225 million of public debt maturing in May of '04 and to fund future internal growth acquisitions, dividends and share repurchases is approximately $440 million.

Our balance sheet remains very strong. At December 31st our accounts receivable balance was 249 million and our day sales outstanding was 35 days. Republic once again continues to lead the industry in managing accounts receivable. Net debt is $1,080,000,000 of which approximately $1,050,000,000 is public debt and approximately $463 million is tax exempt financing at favorable interest rates. Consistent with our cash flow performance and previous guidance, our debt to total capital as Jim indicated at December 31st, 2003, is 36 percent.

And Republic remains committed to maintaining its investment-grade rating.

Now I'll turn the call back to Jim O'Connor.

Thanks.I'd like to correct an earlier comment I made -- I should've said that the core price increase in the fourth-quarter was as strong as we've seen since the fourth-quarter of 2000 -- not 2002.

As I mentioned, Republic began to implement its pricing initiatives in the fourth-quarter. We've seen these price increases hold and we've been able to maintain a high customer retention rate. Although we are only -- only have figures through January Republic continues to say successful execution of our pricing initiative. As we discussed in our (indiscernible) quarter call this is a broad based initiative over approximately 50 percent of our revenue base and across all lines of service including landfills. We've not seen any of our competitors adopt a market share strategy in response to our initiative.

Stronger pricing is the most important factor on improving operating margins. Increasing cash flow and achieving higher returns on invested capital for Republic and the solid waste industry.

During 2004, our financial guidance is based on current economic conditions without any assumptions regarding improvement or deterioration in these conditions. We expect free cash flow to be approximately $340 million. Free cash flow is taken from our Company's consolidated statement of cash flows and is equal to cash provided by operations less capital expenditures plus proceeds from the sale of equipment.

We anticipate a range of earnings per share of $1.50 to $1.55. The key driver in our earnings per share performance will be our success of our price striking initiative. We expect to achieve internal growth of 3 percent -- 2 percent from price and 1 percent from volume. Capital spending is expected to be approximately $275 million.

At this time, I'd like to thank all the members of Republic Services for their dedication and their support. And we look forward to an extremely successful 2004. With that, Operator, we will open the lines for questions.

[Operator Instructions] Amanda Tepper of J.P. Morgan.

First question -- No. 1 -- is on price. You say it's across all of your lines of business, how much is -- can you give a little more detail and also where are you -- if anywhere -- is volumes coming down? Is it mostly commercial collections? How much of it is landfills? What parts of collection are being impacted?

You mean from our guidance?

Well where are you in the market right now out raising price? How much -- you say it's 50 percent of your revenues being impacted so how much of that is collection vs. disposal and indiscernible (MULTIPLE SPEAKERS) commercial collections?

It's predominantly from our collection business and it's covering all lines of collection and again we have -- we have the ability to petition in some of our contracted residential work and we still have a fairly good share of subscription work there and our commercial business has obviously been a major focus for several years in our pricing (indiscernible) -- our pricing initiatives as well as industrial. Industrial, we haven't seen others than in some of our permit industrial collection business -- we've been able to secure some price there. Probably less than what we are reporting today but we still are going to be successful there.

Temporary industrial collection is flat so we have seen no recovery in what was the most price-sensitive component of our collection business. And in our landfill transfer business we have been successful in raising not at every location but the majority of our locations a -- our [indiscernible] rates.

And my second question is on your cash. Your 36 percent debt to cap -- what do you consider optimal for Republic? When would the board revisit your dividend path (ph) or your buyback strategy?

Well -- we've -- every quarter obviously we address these utilizations, the best utilization of our cash flow for our shareholders. We just have recently again gone through and spent a significant amount of time in our fourth-quarter board meeting with our outside consultants to review the best utilization.

And, again, we continue to look at -- currently -- with the opportunities that are out there for acquisitions we still say share repurchases being the best utilization. We will revisit the dividend and we will revisit the share repurchase at our second quarter meeting.

And, Amanda, you asked about the optimal debt to total capitalizations I think that, realistically, something in the 40s would be optimal from a financial engineering standpoint. Obviously, we are a little bit more conservative than that but, again, we're maintaining some flexibility on the balance sheet as we've said in prior quarters.

Lorraine Maikis of Merrill Lynch.

We saw 2.3 percent core pricing increase in the fourth-quarter and then your guidance [inaudible] 2 percent -- is that some sort of indication of what you've been seeing out there in a market or do you think that you're just (indiscernible) at this point.

I think it's probably the latter. The 2.3 percent represents the fact that we really got off to a good start on this whole pricing initiative that Jim spoke about on our third-quarter call and so, realistically, price in the range of 2 percent and, hopefully, it will be a little bit stronger than that.

And then with the one percent volume statistic that you have in your '04 guidance, does that assume any share loss because of the pricing increase or...?

No, not at all. That's a function of I think really the very strong performance this Company has had in the past two or three years where we have consistently delivered both positive price and volume every year and positive internal growth every quarter. So it is a function really of a lot of these municipal contracts that we've been awarded or ramp up in landfill volumes that anniversary out and, again, 1 percent growth, I think, if you look across the industry, is still relatively strong.

Very strong.

Trip Rodgers of UBS.

On the price increases can you talk about what level of retention you are assuming in your guidance?

I think it's our historical levels. I mean, we're in the 9 to 10 percent retention. [indiscernible] defection rate is 9 to 10 percent.

And as far as landfills price hikes can you give us the extent of what kind of -- how large those are in the price increases you're seeing there?

Again it's not (ph) 50 percent of our revenue base and so it's going to -- it's going to exceed the 2 percent overall rate guidance that we're giving for '04 so that we can achieve that. So it's very aggressive. But, again, I think we've been planning this during the third-quarter for execution in the late fourth-quarter and the first quarter of '04 and we're seeing tremendous amount of success. To give you an example it wasn't something that we just concocted prior to the third-quarter call. We had some training sessions for the majority of our sales managers. They went through price increase training here in Fort Lauderdale, they were brought in. The general managers and area presidents were also given training on pricing and how to overcome a customer's objections so a significant amount of effort went into the training. And then on top of this we got a lot better at using our stratification tools and our return on investment pricing tools.

Brad Coltman of Deutsche Bank Securities.

I guess the last quarter conference call I thought that the pricing initiative would be rolled out in January so I was pleasantly surprised with your pricing growth in the fourth-quarter but now I'm wondering how -- where are you with that program and is it pretty much done, can we expect another kind of step up in the first quarter and also maybe I know you said it crossed all lines but can you give us and -- geographically, is it broad-based or selected areas?

It's broad-based. It's across all of our marketplace is feared they are all contributing and I'd guess -- if you're looking for some color to it maybe from a competitive viewpoint is we are seeing our competitors starting to move price in the central and northern parts of the country. So I think, obviously, our success is somewhat related to our competitors not selling into it and then our competitors starting to move price [indiscernible] starting to see competitive prices move in the central and northern part of the country.

And then a lot of the price on these open markets is really December through maybe the month of April that a lot of the focus on open market price and then we typically see our franchise price kick in in the summer months which is where those contracts anniversary for CPI. So in answer to your question on where we are and -- we're maybe about 40 percent of the way through the process from a timeline standpoint.

And then I guess how would you characterize yourself positioning the market with regard to -- are you just matching what your competitors are doing (indiscernible) what's the strategy there? For pricing?

I think what we decided to do when we announced the plan in the third-quarter was I guess we saw ourselves as leaders because we didn't see much activity and I think all you have to do is look at the guidance from our competitors to see what their prices in their third-quarter and we'll see what their fourth-quarter achievement has been, but while we're not in every one of their markets, I think we are leading.

And I think it's again the tools -- the utilization of our tools, the discipline we've got within our Company and looking to get a fair return. I mean, we have not got it and, again, pricing is where -- pricing is where this industry should be shining at this particular time and while it's been slow to come I guess we're going to continue to move it out. We're not going to continue to put pressure -- take the margin pressure. We're going to continue to move it out and again this is what we've been working for over the last 24 months with the implementation of all these sales tools and the customer analytical tools we put in place.

Kevin Monroe of Thomas Weisel partners.

With the positive impact you've been having on the price increases EBITDA margins are still down year-over-year so there's probably a lag but when do you expect to see favorable comparisons on an EBITDA line as we move forward through the year? Is this first quarter event or...?

Yes, no, as I said -- I talked earlier about insurance and how in the fourth-quarter our insurance expense was 7 percent of revenue. And in the first quarter I think it's going to be in that 6 1/2 to 7 percent range. So that will be a tough -- that'll be a negative year-over-year comparison although, sequentially, it might be flattish. I mean seasonality pressures margin a little bit the first quarter.

Second quarter? I think that's when we see some, certainly, sequential margin improvement and, possibly, even year-over-year margin improvement with the combination of both pricing and also the fact that our insurance costs I firmly believe will come down and, clearly, when we get to the third, fourth-quarter we'll see substantial margin improvement.

The next question is can you just walk me through, again, the tax benefit you guys are getting?

Sure, it's very straightforward. For book purposes and this has been true in this industry for over 20 years. For book purposes companies use expansion airspace (ph) in the calculation of earnings per share. So we have an amortization expense that is lower because of that expansion airspace and the denominator for the calculation of that cost. For tax purposes, we could conceivably or we thought we could look just to permanent airspace and use that to determine what our unit cost is for amortizing our landfill for tax purposes.

So back in 2002, we essentially requested what is called a 3115 which is a change in accounting for tax purposes with the Internal Revenue Service. They granted that to us that to us and therefore now at this point for tax purposes we are writing our landfills off over only a permanent airspace, not the permanent that plus deemed to be permanent airspace. That gives you a higher tax expense.

And again I think if you look at Republic's approach to the business, while earnings per share is important, we've look at this as if it is our own money and with that view, we're looking to maximize the cash that's available to us as owners of the business.

And therefore want to take advantage of any tax opportunities that exist.

Bill Fisher of Raymond James.

Just [indiscernible] you mentioned, Jim, on the temporary rolloff do you have a rough guess at what that is as a percentage of your total rolloff and how much kind of roughly the price has been down there for the last few years and, basically, how that would typically act through a cycle if [indiscernible] volumes improve there?

Again, I don't think we have quite identified that exactly. We are getting a component of our price increase in our industry collection but I guess, Bill, as I've said in prior calls that the cyclical component of that -- of our industry collection we got price sensitivity there or our price is off in the area of about 20 percent and I think when you look at that particular component of our revenue base I think it represents in a better economy over time when it recovers -- recover that component of pricing -- it's upwards to $40 million. I think it's easy on a pre-tax basis. So I think it's easy to convert that into earnings per share and it's sure easier to convert that into free cash flow. So I mean there's tremendous benefit as this economy recovers but I think right now as I said the temporary component of the industrial collection pricing is not flat so we're still not into that recovery of that 20 percent off but we have seen some of our permanent locations, some of our shopping centers, some of the larger office complexes taking on some additional price.

Great and on special waste in terms of project bids when do you get more visibility on that? Is that not till like March, April?

We continue to have a backlog of bidding opportunities and I think that's one of these volume aspects, like when you look at a go forward basis our volume you look at the Canadian waste stream does not anniversary or is anniversarying. We had upwards to $10-$15 million of large one-time special waste events in '03 that are hard to predict. So kind of going to the 1 percent volume. I mean, some of that is reflected in that guidance and our backlog is good but, again, it's just hard to predict.

Corey Greendale of First Analysis.

First of all just wanted to ask, I didn't see any mention of acquisition in the guidance. Where does that lie right now among your spectrum of priorities and what does the acquisition pipeline look like?

Well obviously it's the first priority for free cash flow if they exist at a reasonable price. So we continue to look. Our guidance is -- doesn't incorporate any acquisitions as it has -- I mean, we have not given guidance on acquisitions even for '03. So it's void of that.

Our backlog is probably about $40-$50 million. We continue to stay in touch with some larger companies outside of that so those are predominantly (indiscernible) in acquisitions. We do have -- I think -- another small C&D landfills in the pipeline. But I've probably if you're to look on a '04 basis we're looking at $25 to, again, $30 million of annual run rate revenue to be acquired during the year barring large acquisition becoming available (indiscernible) the divestitures.

Great and, Tod, I just want to ask in terms of the EPS guidance, is there anything sort of other than what's obvious in there in terms of the share accounts tax rate or anything like that.

Again the tax rate that we're looking at is 38 percent. That doesn't change and I gave you the year end share count. I guess just for clarification, we would be looking to buy back with $190 plus million that we have available something in the range of 4 1/2 to 5 percent of our total outstanding stock. 'I'd also remind everybody that this past year we had probably about 2 1/2 million shares of option exercises.

So I think going forward 2-2 1/2 million shares which is a little over 1 percent of our outstanding share base not all that great a factor. And as a company, we continue to look at options with an eye towards the accounting profession changing the accounting for that since options and the share repurchase program really run counter to one another.

Leone Young of Smith Barney.

You talked a little bit about special waste looking brighter in the third quarter and I understand it's difficult now because it's seasonally down but maybe -- are you seeing any bright spots also in either special waste or rolloff volume?

No, basically, everything is -- well, we're seeing it. A slight amount of lien increase in our industrial collection. It is way too early to tell, I don't think we'll be able to tell anything until spring. (indiscernible) to see what's on the drawing boards and what's going to start coming out of the ground. As it relates to special waste volumes and, again, it is a very predictor. We've had jobs that had been awarded to us that have -- again, are discretionary in nature to those companies and they've been deferred. Jobs we were banking on in '03 that didn't materialize and don't appear to the materializing in '04. So it's really hard to predict whether or not all those opportunities are going to actually ultimately turn into revenue for us.

OK and secondly, there's been a rise in independent firms again backed by a lot of private capital. Are you seeing any impact on yourself -- positive negative in terms of what you're doing in pricing or what they could be doing vis a vis acquisitions?

I think it's too early to comment. In a number of cases where we're not in markets that they are expanding in and, then, for the most part -- those are -- most of the companies in the acquisitions that are occurring at least in and around our business those are acquisitions that we reviewed and didn't meet the seller's expectations because of the disciplines we've had in the business. Or we did not see as integral to our operations.

Stuart Sharpe of Standard & Poor's.

First like to know your internalization rate?

Our internalization rate is 54 percent. Right.

You have a target for '04?

Well we continue to want to, obviously, internalize our waste and some of the reasons for the most recent acquisitions of construction and demolition sites in our existing markets are to further internalize those volumes. So, again, as we said, I think what we would like to be doing over the next 18 to 36 months is moving up to the mid 50s and we would feel like we've accomplished quite a bit.

OK and as far as improving margins for the higher fuel costs that's just offset by additional surcharges or where do you see fuel costs going?

We've kind of incorporated fuel surcharges to continue to have some -- it's a minor part of how were recover fuel but, again, I think as our overall philosophy -- any of one of our costs would be to go after a general price increase on our market. One that we can retain and don't have to track over time.

And fuel -- well it's not a very large percent of our revenue. It's only 3 percent or so -- it can be somewhat volatile but where we've had fuel spikes we've been able at least on a lag basis to go back out and recover the most part of that spike. So we don't view it as that large an issue in the long run.

Michael Hoffman of Friedman Billings Ransom.

Can I get a little help on your free cash target? If you have 50 million of tax cash benefit in that number then on an apples to apples basis am I at 290 vs. 336 or does the 336 have 50 in it as well?

The 336 has 50 in it, so that would be 286 and the -- that's 2003 actual performance. The 2004 guidance of 340 would have 50 in it. So that makes our 2004 guidance absent that 290. And I think that one of the key drivers aside from just good solid cash flow coming off the business is the fact that our non-cash taxes are probably somewhere in the range of 35 to 40 percent of taxes. (MULTIPLE SPEAKERS)

If the operator doesn't cut me off, I wasn't quite finished that question -- why, then, why with what you're looking for in your outlook internal growth, improving margins are you not seeing a growth in the cash flow?

Well I think, Michael, it goes back to what the pattern that you've seen in the past and the actual performance that we deliver. We're starting out with that number, we'll see where we are partway through the year and if it's appropriate as we did last year we will move the guidance up.

The other piece of it is the movement in working capital. Again, we've done very well with our accounts receivable at 35 days and if that were to move 1 day that's $7 million so there's a little bit of additional opportunity there that we haven't baked into these numbers.

Tom Ford of Lehman Brothers.

Jim, just wanted to ask -- go back to the special waste. I'm not sure if you want to do this maybe it's just that you don't want to bank on it but one thing I was just curious about ... do you guys track how much business you bid on if you will or look at our RFP activity? Could you tell us what's happening there?

Well I don't have that information but we do on a regional basis track it. You know, and again I think the conversations with the regions and with Michael Cordesman, the President and Chief Operating Officer, are that we have a similar backlog to last year. Discounting the fact that we had two large special waste jobs. So I mean I think that's some of the conservatism that's built into the '04 guidance.

Great. Okay. And then the other question I had was I just, Tod, I apologize. I don't have all my numbers available with me right here. I just wanted to get a sense was -- because the price in the fourth quarter was a bit better than what I was expecting, but the margins were pretty much in line. Could just be my numbers that there's a problem with but I was wondering what was notable in terms of a step up? Was it kind of the pricing was better but you also had to step up in insurance element, and that's kind of offset?

Yes, I think the insurance element and then probably a little bit of bad debt I think in the SG&A that we talked about, those would be the two elements that I would describe. And, again, as we look at the first quarter and the second quarter we will see -- I feel very comfortable in saying that, finally, we've hit the bottom and we will see margins improving here.

Jamie Cook, Credit Suisse First Boston.

My question in regards to pricing you talk about your guidance and how you assume that the economy stays at today's levels. What I am trying to get a feel for is if we continue to see an improvement in pricing do you think you can get an increase of up 2 percent and I guess my question goes back to how you implement the price increases. Do you tell specific people -- you know, you have a range you need to increase the price between X and Y. I guess I am trying to get a feel of whether it could be upside from the 2 percent price increase target for '04?

Well, again, we continued to always strive here at Republic to overachieve. But the majority of the price that we're getting -- that on the pricing initiative half of it will now be coming from what we've achieved in fourth quarter and what we've achieved in the first quarter. The balance then will be coming for the most part in the second-quarter so that's kind of how you can kind of look at it coming into the revenue stream. You know, again, the analytical approach that we've taken in the past with the utilization of the tools that we've established has really tried to look at each customer and look at what a fair contribution would be from each customer. Keep in mind again that we're only looking at raising the broad-based pricing initiative over 50 percent of our revenue stream. The other component of our revenue is either fixed based in price or doesn't allow price or is coming from our franchise or municipal contracting which is index price which usually comes to us either in July or October because of their fiscal years.

Steve Cole of Matador Capital.

Three quick points of clarification. The guidance you talk about based on current economic conditions. Is it truly based on the current meeting today or are we looking back to kind of the October/November timetable?

It's really the October/November timetable.

Bad debt expense. You mentioned that was up. You have any idea what number it was and as the economy improves should we start to see that actually turn into a favorable?

Traditionally our bad debt expense has been 40 to 60 basis points and I do think that there's -- I don't have the exact number for the fourth quarter for bad debt expense as a percentage of revenue. You'll be able to see it by looking at our cash flow statement and pulling it off of there. I would say that, yes, we should see a little bit of improvement so, maybe, in that 40 percent range 30 to 40 percent -- excuse me! 30 to 40 basis points.

Okay, last question. Special waste and industrial really came in the event part of the business. I know, Jim, you mentioned one point regarding I think the event part earlier but could you clarify at where -- if we look at those two baskets and look at where they were in '03 vs. the prior peak, what is the differential? What is the Delta?

Yes I think that goes back to what Jim said earlier in terms of the 20 percent decline in price. That's the business that's price to market and you know, certainly, on the collection site of the business the three large companies all have about the same proportion of that temporary rolloff business in the collection revenue mix. So we feel like the other companies, that we have a substantial upside in that pricing.

That was the last question at this time, Sir.

Thank you very much. I want to thank all of you for spending time with us. A replay of the call is available today by calling area code 402-220-2491. The pass code is 21431085 and, additionally, this call will be archived on Republic's website at www.RepublicServices.com. Thank you very much.