Republic Services Inc (RSG) 2004 Q2 法說會逐字稿

Welcome to the second quarter 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 turn the call over to Mr. O'Connor and thank you for using Sprint. Good morning Mr. O'Connor.

Good morning. Thank you for joining us. This is Jim O'Connor, and I would like to welcome everyone to Republic Services second-quarter conference call. This morning Tod Holmes, our Chief Financial Officer and Ed Lang, our Treasurer are joining me as we discuss our second-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 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 listen to a rebroadcast or a recording of this conference call, you should be sensitive to the date of the original call, which is July 29, 2004.

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 consent of Republic Services is strictly prohibited. I am pleased to report today that we are meeting our 2004 financial objectives that we discussed in January. Our achievements in the second quarter of 2004 include revenue growing by 7.2 percent or 45.9 million to 683.2 million. Internal growth of 6.2 percent was the driver in this revenue improvement.

Price improved by 2.7 percent, and our volume grew by 3.5 percent. We continue to exceed our expectations on internal growth. Republic earned 39 cents in the quarter. We're on track to achieve earnings guidance we provided in January of $1.50 to $1.55 per share. We generated $93 million of cash flow in the second quarter. We continue to return our excess cash flow to our shareholders. In the second quarter Republic repurchased approximately 3.5 million shares for $99.6 million.

Through the first six months of 2004 Republic has repurchased over 7 million shares for approximately $193 million. In October our quarterly dividend will increase by 100 percent to 12 cents per share. Most importantly, our year-to-year gross operating profit in the second quarter improved by 20 basis points before the impact of higher fuel costs. And we continue to maintain the strongest credit profile in the industry. In May we repaid $245 million in public debt using our excess cash. We do not have another debt maturity until 2009, and earlier this month Standard & Poor's and Finch rating raised our outlook for Republic's debt BBB+ positive.

We continue to maintain financial discipline throughout our organization. As an example our DSO in the second quarter was 35 days, which is the lowest in the industry. We acquired in the second quarter a landfill in Richmond, Virginia in April. We are exceeding our original volume estimates for this site. In addition to this landfill we expect to increase our internalization rate to 55 percent by year end. We also renewed our 364 day credit facility in June. This transaction was well over-subscribed at lower pricing levels. We appreciate the strong support that we have from our banking grew.

At this time I will turn the call over to Tod Holmes our Chief Financial Officer for a financial review.

Thank you, Jim. I'll begin my review of the Company's financial results with the first quarter revenue. Excuse me, second quarter revenue. Second-quarter 2004 revenue rose 7.2 percent to 683.2 million from 637.3 million last year. Our internal growth from core operations is 5.6 percent, 2.1 for core (ph) price and 3.5 before volume. As we mentioned during our last conference call during the latter part of 2003 we initiated a price increase strategy. During the second quarter of 2004 we continue to realize the benefit of this initiative for higher core price growth.

Our core volume growth comes from all lines of businesses, including our residential collection business where we had been awarded a number of new municipal contracts. Please keep in mind that a number of these contracts anniversary in the fourth quarter of this year which should lower our core volume growth in the fourth quarter to the 2 percent range. Volumes in our commercial and industrial landfill business were also up. The remaining 1.6 percent of revenue growth comes from commodities, non-core businesses, fuel surcharges and acquisitions.

Next, I will discuss our changes in sequential margins. During the first quarter of 2004 the Company completed its review of the actual and projected costs associated with capping, closure and post closure in accordance with statement of financial accounting standards number 143. As a result of this review, the Company reported a 2.6 million or 40 basis point reduction in landfill amortization during the first quarter. This reduction as you might recall was due to the reversal of contractor profits and projected inflation, which needed to be included in the cost estimates according to the accounting statement. Now excluding this 40 basis point adjustment our sequential operating margins increased by 10 basis points.

The key components of our increase in sequential margins are as follows. Fuel, 20 basis points negative, risk and health insurance a positive 60 basis points, revenue mix and disposal costs a negative 20 basis points, DD&A excluding the assay S143 adjustment a negative 10 basis points, and SG&A was constant sequentially. For total improvement of 10 basis points. Now let me briefly discuss the components of our sequential margin change.

First, fuel. During the second quarter of 2004 fuel prices were up again from the first quarter. Our average price per gallon increased over 6 percent from about $1.50 in first quarter to about $1.60 in second quarter. And that is based on a sample of locations that we track.

Second, risk and health insurance; as we previously indicated risk and health insurance as a percentage of revenues significantly decreased during the quarter. This is a reflection of the efforts that we have made on both the safety side and also in the health cost area with Blue Cross and Blue Shield.

Third, revenue mix and disposal costs. During the second quarter the Company experienced an increase in disposal cost because of a seasonal increase in residential volumes and increased industrial volumes in higher disposal markets.

Fourth, DD&A. During the second quarter the Company experienced higher depletion due to seasonally higher landfill volumes, and finally SG&A. Sequentially SG&A was constant at 9.8 percent of revenue. During the second quarter of 2004 the Company experienced a slight increase in compensation costs offset by seasonally higher revenue.

Operating income before depreciation, amortization, depletion and accretion. Sequentially operating income before depreciation, amortization, depletion and accretion increased by 13.8 million or 8.1 percent from 171.3 million in the first quarter to 185.1 million in the second quarter. Now let me talk about our year-over-year operating margins. Operating margins decreased by 80 basis points from the second quarter of 2003 to the second quarter of 2004. The key components of our margin decrease are as follows. We actually had a 30 basis point improvement in risk and health insurance. The key driver, the largest was a negative 60 basis points in fuel as Jim had mentioned earlier.

Third, our disposal and third party hauling in revenue mix was a negative 10 basis points. DD&A was a negative 30 basis points. SG&A was a negative 10 basis points for a total of negative 80 basis points. Now let me briefly comment on these components of year-over-year margin change. Again, first risk and health insurance. During the second quarter of 2004 our insurance expense was approximately 6.1 percent of revenue or about 30 basis points lower than the prior year. We expect health insurance to be in the range of 6 percent of revenue for the remainder of this year. So we going forward we expect continued improvement here.

Second, fuel. Fuel prices were higher during the second quarter of '04 versus '03. Our average price per gallon increased by about 26 percent from about $1.27 a gallon in the second quarter of 2003 to $1.60 a gallon in the second quarter of 2004, based upon a number of locations that we sample.

Third, disposal third party in revenue mix. During the second quarter of 2004 we experienced increased transfer volumes and third party transportation costs; obviously fuel is a key component of those third party transportation costs. Disposal costs also increased because of an increase in residential and industrial volumes.

Fourth, DD&A. Again, this increase in DD&A is due primarily to an increase in depletion and amortization expense associated with higher landfill volumes.

And finally, SG&A. The increase year-over-year in SG&A as a percentage of revenue is primarily due to higher compensation expense partially offset by lower bad debt expense. Keep in mind that during 2003 the Company delayed its annual salary increases that were normally effective in March or the beginning of April until August of last year. Hence we did not have those higher costs in the second quarter of last year.

Operating income before depreciation, amortization, depletion and accretion year-over-year. Year-over-year this operating income before depreciation, amortization, depletion and accretion increased by 9.1 million or 5.2 percent from 176 million in the second quarter of '03 to 185.1 million in the second quarter of '04.

Next I will discuss our free cash flow. Again, our definition of free cash flow is very straightforward. It comes off the cash flow statements. It's cash flow provided by operating activities less the purchase of property and equipment, plus the proceeds from the sale of equipment that is being retired as presented in the Company's totality statement of cash flows. Using this simple definition of free cash flow for the second quarter of 2004, it was 193 million. This is based upon cash from operating activities of 171 million less purchases of property and equipment of 79 million, plus proceeds from the sale of equipment of 1 million and that equals the free cash flow for the second quarter of 93 million.

Free cash flow for the six months ended June 30, 2004 was $247 million. This is based on cash from operations of $362 million less purchases of property and equipment of $118 million plus the proceeds from sale of equipment of $3 million. So for the six months our free cash flow was $247 million. Now it's important again that we keep in mind that our cash flow is historically high in the first half of the year because of timing for tax payments and also capital expenditures. If we normalize our free cash flow for expected annual capital spending of $280 million and tax refunds received during the first half of the year, it would be reduced by 22 million and 50 million, respectively. This results in normalized free cash flow of $175 million, which is slightly ahead of our fiscal 2004 goal, which would be $340 million for the full year.

Our uses of cash flow during the second quarter of 2004, we paid $33.7 million for businesses with a run rate revenue of $5.6 million. We also purchased 3.5 million shares of our common stock for approximately $99.6 million, and average price is 28 33 per share. During the six months ended June 30th, we've repurchased approximately 4.5 percent of our stock or about 7.1 million shares. That's about 192.7 million or about $27.28 per share. As of June 30th, we have approximately $73 million remaining under our existing share repurchase programs. We will complete that share repurchase program this year, and we expect upon completion these programs will allow us to repurchase approximately 6 percent of our outstanding shares in 2004. Even after this substantial repurchase of shares and repaying the 225 million of public debt that matured in May of '04 that Jim spoke about, our available cash today to fund future growth, acquisitions, dividends and share repurchases is approximately $240 million. So you can see we still have a very strong cash position.

Our balance sheet remains very strong. At June 30th our accounts receivable balance was $269 million, and our days sales outstanding was constant at 35 days. Republic does continue to lead the industry in managing accounts receivable. Our net debt is $1.59 billion which is down from $1.75 billion at December 31, 2003. Consistent with our cash flow performance and previous guidance, our debt to total capital at June 30, 2004 is 36.5 percent. We remain committed to maintaining our investment-grade rating.

Now I will turn the call back over to Jim.

Thank you, Tod. Before taking your questions I'd like to reconfirm our guidance for 2004. We expect earnings per share to be in the range of $1.50 to $1.55. Free cash flow will meet or slightly exceed our goal of $340 million. Capital spending is estimated to be approximately $275 million net of proceeds from the sale of assets.

At this time, too, I'd like to thank all the members of the Republic team for their dedication and support. Our solid results speak to the high quality of our field operations and the leadership of our management team. We look forward to continued success in 2004. Operator, we can open it up for questions.

(OPERATOR INSTRUCTIONS) Amanda Tepper with J.P. Morgan.

Nice quarter. One question, one follow-up. Question, where you recently I think were on look for another debt upgrade. Are you happy where your leverages now? Do you want to deleverage substantially further, or what would it take for you to consider relevering?

I don't think that we are looking to relever the business. We are comfortable where we are. Obviously we've got the credit capacity to take advantage of opportunities as they arise. We are looking at a number of both development and acquisition opportunities. So that is one application of our cash. And then the other application is the continued share repurchase and of course, the doubling of the dividend which occurs in October, our first payout will double there from about $9 million a quarter to $18 million. So I guess long answer to a straightforward question. We are comfortable where we are in the mid 30s, and we could lever up for the right opportunity into the higher 30s or lower 40s.

Debt to Cap you mean?

Bad debt to Cap, right.

I think, Amanda, too that we do have a number of acquisitions that we are pursuing now, some are in due diligence. And whether or not they come to fruition or not, but they are sizable acquisitions. So there is a number of activities that are going on here that kind of when you look at our balance sheet, these are the kinds of opportunities we've been waiting for.

Okay, and Jim, as a follow-up, can you comment on where you think we are in the macroenvironment in your long career of the waste industry? We're hearing a lot of conflicting stories from different waste companies this earning season. Are we getting a recovery in cyclical volumes? Do you think we're in the very early innings of that?

I think we are in the early innings of an economic recovery. I think -- and I think its reflected and some of it is reflected in our landfill transfer volumes. Some of it is reflected in our role of our industrial collection volumes. Again, I think whether it is sustainable or not, I think there are probably other people out there who are much better at predicting that than I am. But right now we're seeing it; we are continuing to see it into the third quarter, and I think we continue to see responsible pricing in the sector across almost all of our regions. So again, I think when you look at our volume growth, I think one too has to discount when reviewing some of the other companies where our business is located and the demographics of our business are in high growth areas. And so some of that is reflected in our numbers.

Okay. Thank you.

Jamie Cook with CSFB.

Nice quarter. Can you talk a little bit about designs you saw by month, I guess was it in line with seasonal expectations, and what are you seeing in July? And then my follow-up question is I think this recession has been different in the sense that the housing market has been very strong, and I know you guys also benefit because of the markets that you play in, which have higher growth areas. But is there any way that sort of look at and see how much of a percentage of sales or how you guys benefited from that? And I guess if we saw a decline in the housing market how do you think that would impact your business?

I think the latter part of it is, it is difficult to tell. We are in high growth markets, that is a contributor to our volume growth numbers. But even in the worst part of the economy we saw a lot of our high growth markets only drop a small amount. And as interest rates change, in the economy or move upward, what you end up seeing is less new building and more remodeling. So while it may not be quite as strong, we will see people move those dollars into expanding or remodeling their existing homes, which again, will sustain some of the industrial rollup (ph) collections.

I think your volume by month question, it's process has been fairly consistent. There is a little bit of seasonality in our business that would occur up in our central region, those more northern states for us. But essentially volumes from an economic standpoint seem to have moved up this spring, and we haven't seen a lot of fluctuation there. They are a little better than we thought, and they seem to be consistently a little bit better.

Great, guys. Thanks a lot.

Tom Ford with Lehman Brothers.

Jim, Todd, good morning. Sticking with the first question here on the volume, Todd, if we can stick with that -- you had 3.5 percent growth, which was the same as the first quarter. But do you have -- could you tell us how much sort of the anniversary on franchise wins was? I imagine that because you kept it flat it is actually showing the economic improvement there under the surface.

Actually -- and this might have been an error on my part in terms of being a little pessimistic on these contracts or just missing the impact of the contracts a little bit -- the contracts are consistent in the first quarter and in the second quarter. And actually they should be pretty consistent in the third quarter. And then it should -- the bulk of it drops off in October, maybe a little bit of it in August and a little bit of it in December. But for the most part there's probably somewhere between 1.1 and 1.5 percent of that 3.5 percent that should be anniversarying out here in October. And therefore all else being equal, we would expect our volumes to go from 3.5 percent to a little over 2 percent in the fourth quarter.

Okay, and Jim you talked about acquisitions and the fact that there are some that are coming. So I guess I'll have to ask you how do you feel about the ridge, and is that something that can be notably positive for you out into I guess more so probably looking out to '05?

Well, actually the ridge isn't really what I was relating to, but we are actively pursuing and having discussions with waste management on the ridge. Whether or not we will be successful there I guess we'll see over the next several weeks. But the acquisitions that I was relating to our other acquisitions that are either in new markets or will bolster existing markets on the disposal side. So they turn the focus to integrate our business; while they have been slow in coming we hope that these will come to fruition here in the latter part of the year. But that remains to be seen. Again, I guess the point here is that when we talk about that balance sheet and the amount of flexibility we have in it, we've been looking at the markets that we need to bolster and looking at some new markets. And a lot of these transactions take a long time to come about. I think we are well on our way hopefully to getting a few of them accomplished in the fourth quarter.

Thank you.

Lorraine Maikis with Merrill Lynch.

Could you comment on trends in your rolloff business, particularly on pricing competition in that area?

The volumes are strong and are moving up. They are still -- the pricing I think is flat. It may be escalating a little bit depending on what markets we are in and how great the demand is. Probably somewhere out in the Southwest we see a little bit more demand, and therefore we see a little bit more pricing flexibility. Remember this gets priced to market this work, for the most part. But across the country, across the Midwest and across the mid-Atlantic states I would say it's probably flat.

How have the acceptance rates been on your landfill pricing program?

Well, I think for the most part it has been successful, but I would be misleading the listeners on the call today if I told you that it was extremely aggressive. While we've moved out transfer pricing and we moved out some landfill pricing, it is predominately been in markets where we've got -- where we have a fully integrated operation, and we are the number one and number two player in the marketplace. And we have had certain amount of success in Southern California in our transfer disposal operations out there.

Bill Fisher with Raymond James.

Tod went over the Q2 margins year-over-year trend. As you look to Q3 can you touch on some factors there? Do you have some easier wage comps with that August price and what else are a factor there?

First of all, let me qualify this by saying we don't give quarterly guidance. I will give you some directional observations, and that is really about as far as we can go. You know, I think certainly one of the factors would be we do have some additional price that would be coming through in our franchise markets, which typically comes through in the month of July. So that would help a little bit sequentially. The other factor that we would have is the insurance that I spoke to earlier where we should get a little bit of benefit from that. And then of course, typically the third quarter is the strongest quarter from a seasonal standpoint. So maybe a little bit more leverage off the top line. I think those are probably the key drivers. The one continuing question out there is fuel, and the possibility of $43 a barrel but that might be a slight negative. But in our outlook it seems pretty high already, and we don't think that should be too much of a headwind from the second quarter.

Can you touch on the residential price increases there? Most of them are CPI based but is there any fuel component that you have to escalated to that.

What I just spoke to was really our franchises, which are CPI based.

Okay, thanks.

Corey Greendale with First Analysis.

Question on the repurchase run rate you've been doing, you'll burn through the 73 million if you keep up that rate. Within the quarter is there reason to think that the strategy relative to repurchases changes after this particular authorization is burned through?

Historically we've announced our intentions on share repurchase and dividend at the end of the third quarter or at the third quarter conference call. So I think consistent with that we'll revisit it at that time.

And again you look at our cash practice that ordinarily typically occurs at the end of October, first of November. And some years we've used a little bit of that in the month of December to buy back stock. And other years we haven't. But I think don't look at what we've done in the first two quarters and extrapolate that through the year and think that we are going to do $360 million a share repurchase for the year. We've got $73 million for the second half of this year, and maybe 73 million that we use, and maybe slightly more than that.

Okay, and then could you just address what you're seeing in terms of the special waste environment both activity and pricing there?

Not a significant change. Again, it has been spotty. Pricing is still -- it may be a little better than it was this time last year, but it is still relatively weak.

Okay, thank you.

Leone Young with Smith Barney.

Good morning and thanks for the good quarter. First of all can you talk a little bit about the surcharge? How much is the fuel that you are recapturing and what the lag factor has been?

The fuel surcharge for us was about 10 basis points, and again when you look at the -- what it does to revenue that is kind of a year-over-year type of surcharge. So it is not huge. We're getting it on about a third of our business, but there is a lag, a fact it's probably two or three months in some cases.

And also, Jim, if you could just talk a little bit about what might have changed or shall we say broken on the acquisition front that there may be some opportunities that are a little more front and central? Are there estate planning changes or anything in particular that is putting these on the radar screen a little bit faster?

You know, I know we've been criticized for not what appears to be buying a lot of companies. We talk to a lot of companies. We passed on a number of opportunities. I mean these particular opportunities -- we have been working on one of these opportunities for over two years. The other one probably for an excess of 12 months. So the gestation period is a long time. The drivers are different in almost every case to make the decision to sell to us or to our competitors. So I think it is a little early to tell what will happen, but again, I feel like we will be successful on these acquisitions, and it's not going to put a burden on the Company by any means. Again, we got a tremendous amount of balance sheet capacity, and as Tod mentioned to you already we've got a tremendous amount of excess cash on the balance sheet. So those two factors, we won't burn through all that, I guarantee you that.

Thanks very much.

I just might add something to Leone's question and that would be that our discipline is focused on returns. And while there are some deals that we could chase, on an accretive basis we are not going to necessarily just be out there trying to buy earnings per share at the risk of our returns.

Kevin Monroe with Thomas Weisel Partners.

Question on your internal growth is obviously tracking faster than your initial guidance at the beginning of the year, and it seems like -- will this continue to do so in the next quarter? Your margins are progressing kind of the right way. Is there anything in particular that would cause you to not really get a little more confident on the EPS guidance?

Again, we have reinforced the guidance we gave at the beginning of the year. It is a fairly good range, I think, not one that I would hope anyone would get outside of. I think you're traveling at your own risk as I said before, if you get outside our guidance. But again, a lot depends on the economy and how much stronger it gets. I read the same things you do and there is some pessimism out there that it may yet stall here in the latter part of the year. So we feel good based on what we see today, that we will achieve the $1.50 to $1.55 range.

As a follow-up has there been any new sizable contract wins?

No.

Okay. Thank you.

Brad Coltman with Longbow Research.

It's a little hard to come up with good questions when you are at the end of the queue, so I apologize and ask you (multiple speakers).

That is because we had such good results, Brad.

Very straightforward this quarter, I think everybody appreciates that. Cash posed some investing opportunities as it (indiscernible) provided 28 million and you disclosed your CapEx which is like negative 79. I am just wondering what the positive differential is.

Could you restate that Brad?

Cash flows from investing opportunities you said provided 28 million. When you disclosed your free cash flow calculation you showed your CapEx and a couple other which is like a net use of 79 million. So is the deposit differential about 108 million?

Hold on a second, Brad, they are flipping through their volumes of paperwork.

We've got some restricted cash that probably driving that difference there. We've got restricted cash for -- one of the issues we have I think Ed has done a good job of managing this -- the cost of surety bonds had gone up dramatically from about 65, 75 basis points up to, if we had taken at 300 basis points, and what we chose to do was use our cash to offset that cost. So we're holding it at the cost of our bank facility which is in the same 65 basis point range.

Just as a follow-up, a couple years ago you guys had led the industry in disclosure filing in your SEC filings but also your press releases, and I just wondered if you were going to give consideration to releasing full financials, cash flow and balance sheet, maybe going forward soon?

Well, you'll see our 10-Q that will come out here very shortly. Again, I think that with the additional disclosures that we've got out there in the Q, it's pretty complete. We will certainly look at our 8-K and look at putting more information in. And I would say not just for whether it is the 8-K or the 10-Q, but if anyone has suggestions for us, we certainly are welcome to taking constructive criticism or suggestions in terms of disclosure to try to make the information much more transparent, although we think that the story is very straightforward and, hopefully, have given substantial transparency already. But incrementally, we would like to improve.

That's true. It was a good quarter. Thanks, guys.

Michael Hoffman with FBR.

Good morning, gentlemen. I send my congratulations as well. Service upgrades, on the commercial business are you starting to see any pattern yet with regards to service upgrades?

Nothing that stands out.

Another corollary to that would be, have you been ordering containers and what have you in anticipation or expectation of improving activity, and if you have, are you getting those on ready deliveries or are you backlogged to get them?

No, we've -- let me kind of try to approach it on a line of business. I think what we do is we try to keep a sustainable inventory for our commercial line of business, our collection line of business. And for our industrial collection business, we have tried to stay out in front with 30 days worth of capacity on containers. So that's kind of our general operating rules. When we looked at steel prices moving upwards in the early part of the year, we started to preorder. We preordered trucks, more trucks, and we preordered containers, but not necessarily with regards to economic improvement but due to savings on the cost of the containers. Due to early ordering and advanced ordering, we were able to negotiate out some of the steel price surcharge.

Okay. Then the follow-up question on fuel surcharges; do you have any thoughts about moving away from doing a surcharge and just going more aggressively on straight pricing, trying to capture your costs inflation and you're covering the inflation costs in your business more aggressively?

I think as a general statement, Michael, the company would prefer to raise prices in contemplation of all cost increases, meaning labor, maintenance and fuel. But because it has escalated so quickly, we have continued to escalate the fuel surcharge. If you recall initially, we were at about 20 percent of our customer base. We've moved that up now to 30 percent of our customer base. It is just so volatile that we couldn't wait to go through and annualize price increase in some of our marketplaces. So I guess the short answer to your question is we would prefer to incorporate all of our costs into a general price increase and move away from a fuel surcharge, but it is so visible and so volatile that we are going to maintain it for a while.

But probably at the end of the day when the time is appropriate, assuming there is one, we would probably roll it into a general price increase and no longer adjust or have to adjust it or administrate it quarterly.

Jay Leopold with Legg Mason Funds.

I just wanted to talk a little bit about your pricing initiative you started in the fourth quarter. Prior to this quarter you were running pricing up around 2.3; now we're around 2.1. Is this something that you think will continue at this level as we cycle through the beginning of the program? And secondarily, can you kind of describe a little more fully whether most of your efforts on the pricing side are on the collection business where the contracts are coming due or on the rolloff or on the landfill?

Let me start at the back end of that question. Most of our pricing still is generated out of the collection business. We got some isolated markets where we have market dominance and we feel that we have pricing flexibility. As it relates to our landfill and transfer stations. So the majority of it comes from that. I think the other issue on price in general, whether it's sustainable, I do believe it is sustainable and I can tell you right now that Mike Cordesman, our President and Chief Operating Officer, Jerry Clark (ph) our corporate controller as well as our regional Vice President are as we speak gathering to develop our pricing initiatives for the balance of this year and '05. So this is not something we're going to drop the ball on.

Again, I think it's a result of the discipline within the Company that the management team has put forth. Our disdain from margin deterioration, our lack of return that's evident from our landfill assets, and I think that you put all that in front of our people, and they recognize that we've got to do better, and I think our service is undervalued, and I think they realize that as we go through this strategic planning for the balance of this year and into '05.

How would you characterize your return on assets on the landfill site as it relates to maybe getting better pricing over the longer term?

I think we look at the returns on a marketplace basis. I think the issue is we've got $900 million as a Company invested in our landfills, and over a number of years we've continued to invest in those landfills modestly build that investment. We know our costs to operate and construct these landfills are going up, and yet we are not getting any additional pricing. So and plus -- all those facts is the reality that our margins -- excuse me, our returns on those individual assets are slowly eroding. I think that the returns for the Company you can see are acceptable, so overall the returns are not an issue. Its just that they are slowly deteriorating on a landfill base of assets which represent probably about 30 percent of our total asset base. Which is substantial, with no price coming in on it to speak of, there's no substantial pricing.

Steve Kohl with Matador Capital.

Two quick questions, last question I promise, Jim, on acquisitions what is the definition -- I can't remember if you used the word significant or material -- you talked about moving leverage up a little bit. Are we talking about $50 million deals? $100 million deals or can you give us some color on that.

I can't even find the definition in any of the accounting literature for what material is. So it's hard for me to give you something there. I think our pipeline is what we've said that we continue to keep alive is 200 million. It is a component of that, Steve.

Last question, just I know you guys on your definition of free cash flow make it pretty simple and don't look at changes in working capital. Can you speak to a couple things we are probably seeing this year the benefit of some of the accelerated depreciation programs, number one and also are there other things embedded in working capital? That we should be aware of in terms of either pickups or potential costs going forward?

I think the key there is taxes. If you look at our receivables -- the receivable days sales outstanding are pretty good, pretty consistent. As the business continues to grow you get a modest probably cost associated with working capital because you've got to fund those receivables which are a little greater than the payables, which would be your offset benefit. The biggest is taxes, and it is a non-cash tax component. It is the bonus depreciation, which -- it's really two things. One is the bonus depreciation which has been out there for a few years. I guess it remains to be seen whether Congress will extend it or not into 2005, which if it does not extend, that would reduce -- it would increase our cash taxes, reduce the non-cash taxes a little bit.

So sequentially year-over-year into '05 that would be a little less free cash flow. But then offsetting that is the benefit that we picked up last year in the landfill amortization for tax purposes where we created a timing difference, not a benefit. I think our non-cash taxes right now are probably somewhere in the 35 percent range of total taxes. And maybe a little bit higher than that. So that's including the landfill benefit without the bonus depreciation next year it could drop off from that number a little bit.

Troy Huff with U.S. Bancorp.

I think my question on the surcharge was a good answer so just a couple of modeling questions; what were the shares at quarter end as well as was the debt balance and cash balance? I didn't see that in the 8-K the (multiple speakers) balance --.

The shares at quarter end were 152.2 million, and the actual cash balance -- let me get that for everyone's benefit -- our unrestricted cash at June 30th is about 65.7 million. Our restricted cash, which is some of that financial assurance that we talked about for surety bonds and then also the prefunding of capital spending, its industrial revenue bonds where we receive the capital or the cash and will use it in the next 12 to 24 months for capital. That is about 176 million. So that was the 240 million that I spoke to earlier, and on the debt side the long-term debt is about 1.296 billion and the short-term debt is a whopping 2.4 million.

Great, thanks very much, great quarter.

I want to thank all of you for spending time with us today. A replay of this call is available today by calling 402-220-2491. The pass code is 24491087. Additionally this call will be archived on Republic Services website at www.RepublicServices.com. Again, thank you all and have a good day.