Republic Services Inc (RSG) 2004 Q3 法說會逐字稿

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

Good morning and thank you all for joining us. This is Jim O'Connor and I would like to welcome everyone to Republic Services third-quarter conference call. This morning Tod Holmes, our Chief Financial Officer and Ed Lang, our Treasurer are joining me as we discuss our third-quarter performance. I would like 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 that we will discuss with you 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 November 4, 2004. Please note that this call is the property of Republic Services Incorporated, any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited.

I'm pleased to report today that we are meeting all of the 2004 financial objectives that we discussed with you in January of '04. Our achievements in the third quarter of 2004 include revenue growing by 8 percent or 51.9 million to 699.9 million. Internal growth of 6.9 percent was the key driver in this revenue improvement. Price improved by 2.8 percent and volume grew by 4.1 percent. We continue to exceed our expectations for internal growth.

Republic earned 41 cents in the quarter. This is the best quarterly EPS performance in the Company's history. We generated $98 million of free cash in the third quarter. We continue to return excess cash to our shareholders. In the third quarter, Republic repurchased approximately 1.7 million shares for $50 million. Through the first 9 months of 2004, Republic has repurchased over 8.8 million shares for approximately $242 million. And in October, our quarterly dividend increased by 100 percent to 12 cents per share.

Our Board of Directors recently approved a new authorization to purchase $275 million in common stock. When we complete this authorization in 2005, the total cash return to our shareholders via share repurchase will be approximately $1,025,000,000. We continue to focus on our pricing initiatives. Our year-to-date core pricing is 2.2 percent. If we excluded the impact of higher fuel costs and expenses associated with the hurricanes in Florida, our sequential operating income would have improved approximately 10 basis points.

We continue to maintain the strongest credit profile in the industry. Our financial flexibility allows us to reinvest in our business to maintain an average fleet (ph) age of approximate 6.5 years while returning free cash flow to our shareholders through share repurchase and dividends. We maintain a financial discipline throughout our organization reflected in our DSO in the third quarter being 37 days which is the lowest in the industry. And our internalization rate remains at 54 percent.

Now I would like to turn the call over to Tod Holmes for our financial review.

Thank you Jim. As Jim indicated we expect the 2004 earnings to be in the mid to upper end of our original earnings guidance. The strong cash flow performance allows us to provide a return in excess of 7 percent to our shareholders during 2004 in the form of dividends and share repurchase. Now I want to begin my review of the Company's financial results by highlighting 3 significant accomplishments so far this year.

First, during the 9 months ended September 30, we repurchased approximately 5.6 percent of our common stock or 8.8 million shares. As of September 30, we have approximately 23 million remaining under the existing share repurchase program and in addition to that the Board has authorized 275 million of additional share repurchases.

Second, in October 2004 we increased the quarterly dividend from 12 cents per share and through October 2004, the Company has returned 36.5 million of cash to the shareholders in the form of dividend.

Third, during 2004, we repaid 225 million of public debt that matured in May using our available cash and cash flow from operations. Even after repurchasing a substantial portion of our shares, doubling our dividend, and repaying 225 million of public notes, at September 30, our cash available to funds internal growth, acquisitions, dividends and share repurchases is approximately $287 million. In addition, as a result of our strong continued financial performance, during 2004, we received positive outlooks from both Standard & Poor's and Fitch.

Now I will discuss the Company's third quarter revenue. Third quarter 2004 revenue rose 8 percent to $699.9 million, up from 648 million last year. Internal growth from core operations is 5.8 percent; 2.1 from price and 3.7 from volume. As we mentioned during our last conference call, during the latter part of 2003, we initiated a price increase strategy. During the third quarter of 2004, we continue to realize the benefit of this initiative through higher core price growth. As Jim mentioned, we are currently in the process of planning a similar pricing initiative for 2005.

Our core volume growth comes from all lines of business including our residential collection business where earlier this year we have 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 and the first quarter of next year, which would lower our core volume growth.

Volumes in our commercial, industrial and landfill businesses are also up. The remaining 2.2 percent of revenue growth comes from commodities, our non-core businesses, state taxes, fuel surcharges, and about 1 percent from acquisitions.

Next I will discuss changes in our sequential operating margins. Sequentially, our third quarter operating margins decreased by 40 basis points. However, as Jim indicated, excluding the impact of fuel and the hurricanes, our sequential margins would have increased by 10 basis points. The hurricane impact was approximately 20 basis points. We had about $4 million of additional cost and about 3.7 of additional revenue.

Key components for our decrease in sequential margins are as follows. Fuel, negative 30 basis points; risk and insurance, positive 60; labor and subcontracting costs including the hurricane, negative 40 basis points; DD&A, negative 30 basis points; and SG&A was constant for a negative 40 basis points.

Now, I will briefly discuss components of our sequential margins change. First fuel. During the third quarter of 2004 fuel prices were up from the second quarter. Average price per gallon increased about 11 percent from $1.60 in the second quarter to $1.77 in the third quarter. Current prices for point out reference are currently a little over $2.00.

Second, risk and health insurance. Risk and health insurance as a percentage of revenue significantly decreased during the third quarter. This is a direct result of our ongoing focus on safety and Workers' Compensation costs.

Third, labor and subcontracting costs. During the third quarter, we experienced additional labor and subcontracting costs associated with the hurricanes that ravaged the Southeast. We expect to offset a portion of these costs by way of additional work created by the storms during the fourth quarter of this year and the first quarter of next year.

Fourth, DD&A. During the third quarter the Company experienced higher depletion due to higher -- seasonally higher landfill volumes and a higher expense associated with amortization of intangibles.

Finally, SG&A. Sequentially SG&A remained constant at 9.8 percent of revenue. During the third quarter of 2004, we experienced a slight increase in legal and bad debt expenses which were offset by seasonally higher revenue.

Operating income before depreciation, amortization, depletion and accretion. Sequentially operating income before DD&A increased by $4 million or 2.2 percent from 185.1 million in the second quarter to 189.2 million in the third quarter.

Now let's turn our attention to the year-over-year operating margins. Operating margins increased by 310 basis points from the third quarter 2003 to the third quarter of 2004. Key components of our margin increase are as follows. Risk and health insurance was about a 500 basis point improvement; fuel year-over-year is negative 80 basis points; the labor and subcontracting costs, including the hurricane was a negative 50 basis points; DD&A was a negative 40 basis points; and SG&A is a negative 20 basis points. So year-over-year, the net margins improved by 310 basis points.

Now I will briefly comment on the individual components. First, risk and health insurance. During the third quarter of 2003, we recorded an additional 24 million of self-insurance. During the third quarter of 2004, insurance expense is approximately 5.5 percent of revenue. We expect health insurance to be in the range of 5.5 to 6 percent of revenue on a go-forward basis.

Second, fuel. Fuel prices again were significantly higher during the third quarter of '04. Our average price per gallon increased 30 percent year-over-year, from a $1.30 to $1.77.

Third, labor and subcontracting costs. During the third quarter, we increased the seasonal -- excuse me -- due to the hurricanes an increase in labor and subcontracting costs and also subcontracting costs was increased due to the past year of increased fuel prices on long-haul trucking.

Fourth, DD&A. Again the increase in DD&A is primarily due to an increase associated with landfill volumes and also the higher expense associated with the amortization of intangibles under SFAS 141.

Finally, SG&A. The increase in SG&A as a percentage of revenue is primarily due to higher legal expenses and incentive compensation, partially offset by lower bad debt expense.

Operating income before DD&A. Year-over-year, operating income before DD&A increased by $37 million, or 24.3 percent from 152.2 million in the third quarter of '03, to 189.2 million in the third quarter of '04.

Next I will discuss our free cash flow. Our definition of free cash flow is cash flow provided by operating activities less purchases of property and equipment plus proceeds from the sale of equipment, as presented in the Company's consolidated statement of cash flows. Using our definition, free cash flow for the third quarter was $98 million. This is based upon cash flow provided by operating activities of 175 million, less the purchases of property and equipment of 79 million, plus the proceeds from the sale of equipment of 2 million and that yields the 98 million of free cash flow.

Free cash flow for the 9 months ended September 30, 2004, was 344 million. This is based upon cash provided by operating activities of 537 million, less purchases of property and equipment of 197 million, plus the proceeds from the sale of equipment of 4 million. And again, that yields free cash flow of 344 million.

Please keep in mind that our cash flow is historically high during the first part of the year due to the timing of capital expenditures and tax payments. But even after normalizing our free cash flow for the expected annual capital expenditure of 290 million and expected tax payments, we still anticipate generating a modest positive free cash flow during the fourth quarter of the 2004.

Some other items impacting our cash flow. During the third quarter, we paid 1.8 million for businesses and acquisitions. With a run rate revenue of $1.9 million, we purchased 1.7 million shares of common stock for approximately $50 million or $28.44 per share. During the 9 months ended September 30, 2004, approximately 1.6 million shares of stock were issued in connection with stock option exercises and this generated $26.2 million of cash proceeds. As of September 30, 2004, the Company has 11.8 million stock options outstanding at a weighted average exercise price of $18.41.

Our balance sheet remains very strong. At September 30, our accounts receivable balance was 286 million, and our Days Sales Outstanding was 37 days. As Jim indicated, Republic continues to lead the industry in managing accounts receivable and working capital.

Our net debt is $1,030,000,000 which is down from 1,075,000,000 at December 31, 2003. Consistent with our cash flow performance and previous guidance, our net debt to total capital at September 30 is 35.9 percent and Republic remains committed to maintaining its investment-grade rating.

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

Thanks Tod. Before taking questions I would like to update our guidance for 2004. Tod mentioned this in his comments earlier. We expect our 2004 EPS to be in the upper half of our guidance of $1.50 to $1.55. And our free cash flow will slightly exceed our goal of 340 million. We are currently in the budget planning process for 2005. We will provide financial guidance for 2005 on our fourth quarter conference call. As part of the budget package, I provided 3 directives to our field management.

First, we will continue to focus on improving price for all services provided. We have implemented return on investment pricing tools which will be used to prioritize our effort. A disciplined approach to achieving higher prices is required for margin expansion. We will continue to evaluate return on invested capital for all marketplaces and develop plans that will further enhance our financial performance.

Finally, we will complete the implementation of our routing software by utilizing this tool in our residential collection business in 2005.

I would like to thank all the numbers of the Republic team for their dedication and their support. Our solid results speak to the high-quality of our field operations and the leadership of our management team. Operator, you can now open the call for questions.

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

Good morning. My main question would be on price and your thoughts about next year. Both your thoughts on what waste management has been saying about their landfill pricing tests? Are there any markets you think would be particularly great for them to start with where you could respond and see what is going on? Also can you comment on these return on capital pricing tools you just mentioned? Is this new and is there a change in field incentives that goes with that?

Let me first say that I'm not going to do comment on waste management's activities in pricing. I think again this is a discipline that is in our approach to the marketplace. Again, this is, with cost escalating, Amanda, this is something that with or without our competitors' movement is something that we have been focusing on. We continue to see our competitors positively price in the marketplace. But again, this is a discipline that has to reside within our own Company. And I will let our competitors speak for themselves about price.

As it relates to where our initiative is at, this is an ongoing initiative obviously -- pricing. And the tools that we have developed have been tools that we have implemented over the course of the last 24 months. These tools were first used to analyze the marketplace in general, and now those tools have been further refined to analyze on account by account basis. So these tools when I've been out in the field and Mike Cordesman has been in the field the last 60 to 90 days, we have probably reviewed at least 15 to 20 locations the use of this tool and we find it to be a very useful tool, in raising the customers that are not necessarily contributing to the performance of the division.

We're going to continue to do that, and we're going to continue to push price. We have been successful over the course of 2005 in doing so, and I mean 2004, and we continue to say that we are going to stem or stop margin erosion and I think we should see some of the margin erosion stop in the fourth quarter. And I think we have seen it here other than the hurricanes in the third quarter.

Okay, great. As a follow-up, could you comment on the volume impact of those new municipal contracts that you won that are going in the third quarter or year-to-date or the ones that are going to roll off next year?

Amanda, they are split between the third quarter and the fourth quarter and I think it is probably maybe on a run rate basis about 50 or 60 basis points each quarter.

Jamie Cook with CSFB.

Good morning everyone. First, could you talk a little bit about acquisitions? What you're seeing on the acquisition front and whether we can expect any in the near-term?

We continue to search out acquisitions, Jamie, but there aren't that many good quality acquisitions out there. The ones that are out there of quality are not sellers today. Again we stay in contact as I've said in past phone calls with approximately $200 million worth of revenue. In the third quarter call I did give some indication that we were talking to a large independent hauler and disposer, and we were. But I think we have concluded our discussions being that we couldn't meet the seller's expectations. So we will continue to be in the acquisition market. Obviously our balance sheet allows us to do that but again the discipline in our acquisition program is that we are not going to look to overpay for businesses for the sake of revenue growth rate. We are going to stick with our discipline.

Next, can you talk specifically about your pricing initiatives at the landfill? I guess in the markets that are competitive with what the pricing is like and whether you think you'll be able to increase price there or wait for your competitors? And then what the price increase has been in the areas where Republic is the leader?

Again, as far as our pricing in general, it is across the board. Obviously there are certain parts of our business that are more sensitive. We look at this on a market-by-market basis. If you go into the central region obviously it's much more competitive in our central region; the Midwestern part of the United States and the mid Atlanta. And that is where we have the most trouble securing additional price and even growing the business. Our organic growth in those areas is much slower because the economy is not yet as strong as it is in other parts of the geography that we cover.

I guess as it relates to landfill pricing, again, we look at each market, we look at the integration that we have in that market, and in those particular markets, we have been securing modest disposal increases either at our gates at our landfills or at the gate of our transfer stations. Again I think if you -- for those of you who have listened to our presentations in the past, either at conferences or reviewed them on our websites, we talk to that third of our business or a third of our revenue that in small to midsize markets -- in those markets we have been able to secure a better pricing because we are the market leader. When we get into the larger urban markets, those have been the areas that have been more sensitive and more competitive.

Lorraine Maikis with Merrill Lynch.

Good morning. You have been able to secure 2 plus percent price increases over the past few quarters, and margins remain flat. As you look into 2005, what type of price increase do you think you would need to actually get some margin expansion from here?

One issue -- and I'm going to let Tod address some of this but -- one of the issues is we have got to get into a position where costs are rising reasonably. We have got steel costs as we get into repair being surcharged at anywhere from 8 to 15 percent now over last year's prices. And we've got fuel escalating. If we go even into the fourth quarter, we're looking at average fuel costs, as Tod related in the third quarter of being about $1.77 and we are in excess of $2.00 now in the fourth quarter. These are very hard to stay on top of, but obviously we're going to be more aggressive with our pricing. I think you can start to see it in our third quarter pricing; hopefully you'll see it in our fourth quarter pricing and as we go into '05, we're going to be much more aggressive.

I mean, this is a major focus of the Company. Margin erosion is going to be stopped, one way or the other. We are either going to get it on the price side or we are going to get more efficient. More likely is we are going to get it on the topline here if we're going to be successful. Tod, do you have anything else?

Are there any specific plans to improve efficiency from here? Any areas that you're looking at besides the routing initiative?

Well, again, the business is pretty straightforward in basic. Most of our tools and our markets don't change very much. But on a regular basis we are back into all of those markets with looking at optimizing disposal through some of the programs that we have developed over the years. We continue to go back in and look at some of our sales tools, our customer relationship management system because we continue to add to the funnel of sales activity or potential sales activity. That is also a good way to check how competitive the market is and what our competitors are doing.

So I mean again, really it's just blocking in tackling and continuing on with the initiatives that we started over 3 years ago. And not losing sight of those. One of the past mistakes I think in this industry is we have never -- we've kind of had initiatives and then we have lost sight of the initiatives for new ones, and there really doesn't need to be any new ones -- there just needs to be more blocking in tackling on the ones that we initiated and perfecting the ones that we have initiated.

Lorraine, I think if you look at the history in this industry, you see that obviously we all need to be focused on making sure that we've got the right cost structure so we can be competitive in the marketplace in offering value to our customers. But when you start to see these costs moving up like fuel dramatically to hold margins and then to expand margins, we really and up coming back to the pricing side of the equation. Cost will only get you so far and it is really all about being a fair price.

Brad Coltman with Longbow Research.

Good morning guys. Just a quick follow-up on the margin issue. Did you say before what the impact of just the hurricane was?

It's about 20 basis points.

Secondly, you mentioned that you expect free cash flow to be slightly above the guidance?

That's correct. What we have in the fourth quarter, again our capital spend for the year is projected to be somewhere around $290 million. So there is that traditional fourth quarter of additional seasonal capital spend and then here in Broward County, we were one of the counties that got released from the Internal Revenue Service because of the hurricanes, so we did not make the third quarter estimated tax payment. By December 31, we will need to make our final tax payment and those 2 items adjusting those into the fourth quarter cash flow leads us to believe that we will have some modest improvement in cash flow for the year and also obviously in the fourth quarter.

How much was that tax payment that was deferred?

We are in the process of calculating it. It is something that we will do -- the normal estimated tax payment is due December 15. So our tax folks are working on that and I don't have that at this point. But if you're looking for a number in terms of the bottom-line on free cash flow, I think what we have said is probably in that 250 plus or minus range -- excuse me 350 million of free cash flow.

I knew he made a mistake there.

Leone Young with Smith Barney.

Congratulations on a nice quarter. Just sort of a knit pick on some of these cost items, ex the hurricane, the component that you mentioned is a drag to labor, subcontracting. Can we assume that that is with you and there is nothing you can really do about that aspect at this point in time?

We are fuel driven. That's driven by fuel and by labor. Again you've got mobilization costs to bring equipment in. Obviously you have got a lot of overtime to get the storm damage and all the yard waste and tree limbs up off the streets. You end up with an operation that is not as efficient as it would normally be and higher costs during that clean up period.

And I don't want to beat this cost structure to death here but sort of x some of these uncontrollable prices then Jim, you're second and third initiatives for 2005 do you still being able to squeeze a little bit of margin overall out of your cost structure with these initiatives?

Again, what we are doing in the second initiative is we are going back taking another look at the marketplaces. Looking at what we're selling in the marketplaces for. Is this going to allow us to further enhance the returns for our shareholders in those markets? And what is lacking in these particular markets? Whether it's competitive pressures or things that we need to do internally with our businesses in these markets. That is what we're going to go back -- we haven't done it for about 15 months now and we're going to go head back in. We've looked at lines of business within our divisions, some of which are not performing up to our expectations. There are still positive in generating cash, but that is not enough.

We are going to reevaluate that over the next 6 to 9 months and determine whether or not those lines of business or those marketplaces are still going to -- we'll want to retain those in our portfolio if they can't be enhanced.

And Leone, I think the key issue is if you look at the third quarter year-over-year, we certainly have had some success on the Workers' Comp risk -- auto, general liability side of the equation. I think probably we are more on trying to sustain that rather than getting additional improvement out of that area. But year-over-year, the issue is fuel; it's 80 basis points and then it is a subcontractor piece which is the hurricane and also fuel in there.

If you look at the year-over-year margins, to the GOP line here, and it's all about the fuel. We will get it. We're just getting it on a lag basis as these fuel costs are going up dramatically. At some point they are going to level out, whether they come down or not, we don't know. But when they start to flatten out, then we should be able to catch up. I think the key is maybe some incremental improvement as Jim stated with these other initiatives but the key of it is the pricing side and recovering these fuel increases.

Corey Greendale with First Analysis.

Good morning. First I just wanted to follow-up quickly, Jim on your comments about seller's expectations for acquisitions. Is that something that you have seen changing and how wide is the gap between what you're looking for and what they're looking for?

It is really not a gap. The businesses are just not for sale. At the end of the good day, remember that the better quality companies, private companies in our business have the very same cash characteristics as we do. And unless there is something driving them to the table, to sell, they are not sellers. Again I think it is a relatively -- when you look at a business that has let's say an EBITDA of 25 to 30 percent again very much similar to ours, they are generating a lot of cash. When you look at what available investment alternatives are out there, they are saying hey, I get a better return here than I can in the marketplaces. They are just not sellers. There's not very many sellers out there.

What do you think changes that?

The only thing that is going to change some of those quality companies to sell is they are going to have -- there's going to have to be a reason to sell. Estate planning, partnership squabbles, family not willing to enter the business; I think those are the things that have to change. Again as we continue to improve pricing in the sector, I think some of our independents, larger independents will also move pricing out too.

Therefore again, these costs that we have put pressure on the businesses they will be recovering also. Again I think there has got to be a driving reason for them to sell. There are a lot of sellers out there that come to us for all practical purposes are not very good companies and they don't fir our profile and again those are things that we're not going to chase for the sake of chasing. We would much rather give the money back to our shareholders. That's where the best return for our shareholders is.

Bill Fisher with Raymond James.

Good morning. Just a follow-up on the price on your franchise business, that CPI adjusted for labor and fuel among other things. Do most of those increases on roughly a third of your business go through in middle of the year, July, or are they spread throughout the year?

They are spread out Bill, but I would say the majority -- Las Vegas, a large component of our revenue base is July 1. The majority of I think of our municipalities have fiscal year ends of 9-30 so we will see that in fourth quarter pricing in a lot of cases from those. But they are spread out but I'd say the majority of them come -- Vegas being July and the balance of our contracts are on a fiscal year end 9-30.

Do you expect to see those this next year going -- I mean catching up on fuel and stuff as well?

Yes. I'm going to let Tod talk to Las Vegas. The change in the Las Vegas CPI from year-to-year I think was 2.8 this year versus last year of 1.6 so you can start to see it is picking up on some of these things like fuel.

But again it is a lag. It's a 12 month lag. The fuel that we have seen here in for example in the third quarter and again in October, we're not going to do able to recover that until next July.

Tom Ford with Lehman Brothers.

Good morning. Jim, I don't know if I -- maybe my interpretation was wrong, but I kind of thought on a last quarter that you guys were thinking that the core price was going to be up a little but sequentially. I thought that what Bill was asking about the CPI related adjustments was going to be part of that. Was I wrong in that fact or were you guys just --?

I don't think we have ever said that, Tom. Our focus if we go back to the beginning of the year, it was an objective of getting 2 percent price. We have been able to slightly exceed that and the issue you get with this year-over-year pricing is obviously in the third quarter of last year we had some pricing that came out in the second quarter of last year we did -- second quarter of I guess it would be '02 to '03. Some of the stuff anniversaries out and you've got to replace it. We're talking about the increase year-over-year. So we have always been of the mind that something modestly over 2 percent is where we would be, and that it wouldn't necessarily accelerate.

Okay. The other question I had for you was transfer and disposal revenue growth has been pretty strong. I think in last quarter it was about or in this quarter it was about 7 percent. But it has been coming down a little bit on a sequential basis. I'm just wondering if you could just, Jim, could you talk about the trends there? Is that just -- you are just kind of anniversaring on strong growth and just sort of starting to anniversary on the economic pick up? Just curious?

We've got a number of regions that are not performing well as it relates -- because of the economy or being impacted by the economy and again it is basically the central part of the U.S. and the mid-Atlantic states. Those are areas where we have got -- we've had issues. And the issues are more driven by the economy than they are by competitive forces. So as far as the volumes go, I don't think we see any significant trends other than we're starting to see the economy not holding up as well.

I think -- was it manufacturing that came out, Ed?

If you look at nonresidential construction it's only increased sequentially 1.4 percent, so it is still fairly slow in some sectors of the economy.

Michael Hoffman with FBR.

Good morning gentlemen. Nice job. To beat this dead horse on price a little harder, I'm going to ask a direct question. If waste management raises prices at landfills in markets that you have a landfill, will you follow them up?

Yes.

Great. Service upgrades. Are you seeing any upgrades on your small container business?

Nothing that would lead us to believe the economy is getting stronger for small businesses. We see -- I don't think we're seeing any change in the trending over the last 18 months.

Steve Kohl with Matador Capital.

Good morning guys. A couple of quick questions. How much of -- when we talk about subpar returns, Jim, what percentage of your business falls in that category and what percentage of that is within these urban competitive areas?

The majority of it would fall -- first of all, it's a small component of our business. The second piece is most of that is found in the large urban markets where they are extremely competitive. I think some of the things that we're looking at is historically we have looked at this business, Steve, and said that we've got to have all 3 lines of service collection in every market. That may not necessarily be the case unless they are supporting the other lines of business, we may not need to have that.

And so that is what we're starting to look at. That doesn't mean we'll exit lines of business in any markets tomorrow. But we are starting to analyze this like anything else as the business matures, we're getting better at analyzing what is impacting the bottom-line and what is impacting our margins, and that is just another process of that we are going to look at very closely over 2005 as the business continues to mature.

Would that come from swaps, Jim as you --?

Some of that may result in additional swaps with our competitors. Some of it may result in sales. But again I don't want -- that doesn't mean that that business is not in a position that we can't improve it. Some of it may just very well be that we need to focus in on a particular line of business at a division and better understand the dynamics of what is causing it to look away at does. And then determine whether or not it is a market-driven activity or it's something that is an inefficiency within our own organization. So it may be an issue that is fixable and won't require us to look to our competitors to do either a swap or a sale.

I just figured you guys are so efficient that there is not that much left in inefficiencies anymore.

I appreciate that, Steve, but we have our issues around the country but again as we have matured as a Company, we tend to get more analytical in nature. That is how we we're going to continue to improve the business.

There are no questions in the queue at this time.

Thank you operator. Finally --

Can I just say something? I want to go back to Tom Ford's question on the landfill volumes and maybe give a little bit clearer answer to everyone. Obviously in our queue we disclosed the volumes with a substantial amount of detail on the landfill information and we disclosed the volumes in cubic yards. Last year, in the third quarter, we used or disposed of 10.5 million cubic yards in the third quarter. This year in the third quarter, it's 11.4 million cubic yards which is the highest we have ever done. If you look at it sequentially, last year from the second quarter to the third quarter, it was up about 600,000 cubic yards and this year, second quarter to third quarter, it was up about 600,000 cubic yards.

While we see some weakness in those Midwest or upper Midwest states, this Company has a very strong performance here in the third quarter of '04 on the landfill side of the business and the transfer station obviously beating that.

Thanks Tod. I would like to thank all of you for spending time with us today. A replay of this call is available today by calling for 402-220-2491, that's 402-220-2491. The pass code is 26659440. 26659440. Additionally this call will be archived on Republic’s website at www.RepublicServices.com. Thank you for joining us today and have a good day.