Republic Services Inc (RSG) 2004 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter conference call for investors in Republic Services. Republic is traded on the New York Stock Exchange under the symbol RSG. Your host this morning is Republic Chairman and CEO, Jim O'Connor. Today's call is being recorded, and all participants are in the listen-only mode. (OPERATOR INSTRUCTIONS) At this time it is my pleasure to turn the call over to Mr. O'Connor. Good morning, Mr. O'Connor. Thank you, sir. You may begin.

Good morning, and thanks to all of you for joining us today. I'd like to welcome everyone to 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 and full-year 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 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 February 9, 2005.

Please note that is 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'm pleased to report that Republic has exceeded our 2004 financial guidance. During the fourth quarter we achieved the following. Total revenue was $687 million. This was an improvement of $49 million or 7.8 percent. Our full-year revenue was 2.7 billion. Internal growth for the quarter was 7.2 percent, with 3.5 percent from price and 3.7 percent from volume. Our core price increase was 2.4 percent. Fuel surcharges accounted for 4/10 of a percent of our price growth and commodities contributed 0.7 percent. Republic earned 38 cents per share in the fourth quarter and $1.53 per share for the full-year. During the quarter Republic generated $52 million of free cash flow. For the full-year we provided $397 million of free cash flow to our shareholders, which exceeded our original guidance of 340 million.

We continue to return our excess free cash flow to our shareholders. For the full-year we repurchased over 9.5 million shares for approximately $266 million or approximately 6 percent of our outstanding shares. Since the inception of our repurchase program in July of 2000, Republic has repurchased 35.1 million shares or 20 percent of our outstanding shares. In addition, effective October 2004 we doubled our quarterly dividend to 12 cents per share.

Republic maintains the strongest balance sheet and the highest credit ratings in the industry. We continue to reinvest in our operating platform, exhibited by our fleet age being approximately 6.2 years in average life. In addition, we are reinvesting in other capital development projects, developments of expanding our landfill capacity and permitting new transfer stations. Our DSO in the fourth quarter was 35 days, which is the lowest in the industry. Our internalization rate was 54 percent.

During 2004 we had a number of significant accomplishments. Republic had a strong financial performance in 2004. Revenue grew by 7.6 percent or $190 million to 2.7 billion. This revenue improvement was driven by our internal growth of 6.7 percent with 3 percent from price and 3.7 percent from volume. Earnings per share improved 15 percent to $1.53. Free cash flow grew by 18 percent to 397 million or an improvement of 60 million. Capital expenditures were 284 million.

We continue to reinforce a culture of safety throughout Republic. We completed a number of safety reviews in our large operations and initiated new procedures and practices throughout Republic. And we've seen financial results from this program since our insurance costs improved in the second half of 2004. We've implemented RouteSmart through a significant portion of our commercial collection business with positive results. We also completed our rollout of our maintenance software dossier, which has resulted in lowering our maintenance costs. Although these costs initiative programs are important to ensure that we are a cost-effective competitor, improved pricing along all lines of business is key to margin expansion in 2005.

After Tod's financial review, I will discuss our 2005 guidance.

I will begin my review of the Company's 2004 financial results by highlighting a few significant accomplishments.

First, during fiscal 2004 we repurchased approximately 6.1 percent of our common stock or 9.6 million shares. We also had some stock option exercises of approximately 1.5 percent of our common stock for 2.3 million shares. Therefore, our net share reduction in 2004 was about 4.6 percent or 7.3 million shares. As of December 31, 2004 we have approximately $275 million remaining under our share repurchase program that the Board authorized in October.

Second, in October 2004, as Jim indicated, we doubled our quarterly dividend from 6 cents to 12 cents per share. Our annual yield is now currently about 1.4 percent. This dividend, combined with the 2004 share repurchase, currently returns about 6 percent to our shareholders through both share repurchase and dividend payments.

Third, during 2004 we repaid 225 million of public debt that matured in May using our available cash.

Fourth, the Company earned record levels of free cash flow in 2004. The tax benefit from bonus depreciation expired on December 31, 2004, and Congress has not indicated that this benefit will be extended. Despite the end of bonus depreciation, we expect free cash flow to exceed net income in 2005 and be in the range of 110 to 120 percent of net income beyond 2005.

Even after repaying 225 million of public debt, repurchasing a substantial portion of our shares and doubling our dividends, at December 31, 2004 our cash available to fund future internal growth, acquisitions and development projects, dividends and share repurchases is approximately $333 million. In addition, as a result of our continued strong financial performance, during 2004 Republic received positive outlooks from Standard & Poor's and Fitch. And as Jim indicated, we currently have the highest credit ratings in the solid waste industry.

Now I will discuss briefly the fourth-quarter revenue for the Company. Fourth-quarter 2004 revenue rose by 7.8 percent or 687.7 million from 637.9 million last year. Internal growth from core operations was 6.1 percent, 2.4 from price, 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 fourth quarter of 2004 we continued to realize the benefit of this initiative for higher collection business price growth. Price growth remains a key initiative in 2005.

Our core volume growth comes from all lines of business, including our residential collection business, where we have been awarded a number of new municipal contracts in early 2004. Please keep in mind that a number of these contracts anniversary out in the fourth quarter of this year and the first quarter of next year. Volumes from commercial and industrial landfill businesses are also up.

The remaining 1.7 percent of revenue growth comes from commodities, non-core business, state taxes, fuel surcharges, and acquisitions.

Looking ahead to 2005, we expect volume growth from our core business to be in the 1.5 to 2 percent range. Our business models are based on fourth quarter 2004 business conditions. Therefore, we do not assume 2005 revenue growth from changing commodity prices, non-core business, state taxes, fuel surcharges or acquisitions.

Next I will discuss changes in our sequential operating margins. Sequentially our fourth-quarter operating margins decreased by 70 basis points. However, excluding the impact of fuel, sequential margins would have decreased by 20 basis points. This is consistent with our sequential decrease in revenue. The key components of decrease in sequential margins are as follows -- fuel, -50 basis points; risk and insurance, -40 basis points; labor and disposal and subcontracting costs, 40 basis points; DD&A, 20 basis points; SG&A -40 basis points, for a net negative of 70 basis points.

Now I will briefly discuss the components of our sequential margin change. First, during the fourth quarter of 2004, fuel prices were up from the third quarter. Our average price per gallon based on wholesale prices increased about 9 percent from $1.77 in Q3 to $1.93 in Q4.

Second, risk and health insurance. Risk and health insurance as a percentage of revenue increased during the fourth quarter. These costs were approximately 6 percent of revenue at the higher end of our expected by 5.5 to 6 percent range, due in part to lower seasonal revenue. I might also add that every quarter we have an actuarial review, and so the actual amount that we run through expense is a function of that actuarial process.

Third, labor, disposal and subcontracting costs. During the fourth quarter, we experienced additional labor, disposal and subcontracting costs associated with the hurricanes that ravaged the Southeast. We were able to offset a portion of these costs by way of additional work created by the storms during the fourth quarter.

Four, during the fourth quarter the Company experienced lower depletion due to seasonally lower landfill volumes.

Finally, SG&A. Sequentially SG&A increased by 40 basis points. During the fourth quarter we experienced an increase in bad debt expenses. This is a non-cash expense, and it was associated with special work that we performed in connection with the hurricanes and some special waste jobs for which we had not yet been paid. We fully expect to be compensated for this work in early 2005. However, because of the timing associated with these payments under our bad debt policy, we are required to increase our year-end allowance for bad debts. Bad debt expense was 70 basis points in the fourth quarter, and we believe that a normal range of bad debt expense is about 30 to 50 basis points.

Operating income before depreciation, amortization and depletion -- sequential operating income before the DD&A decreased by 9.4 million or 5 percent from 189.2 million during the third quarter to 179.8 million during the fourth quarter, primarily due to seasonally lower landfill and revenue volumes.

During the fourth quarters year-over-year operating margin, operating margins decreased by 80 basis points from the fourth quarter of 2003 to the fourth quarter of 2004. However, excluding the impact of higher fuel expense, our margins expanded by 50 basis points, indicating effective management of controllable costs. Key components of this margin decreased are as follows -- risk and health insurance, positive 90 basis points; fuel, a decrease of 130 basis points; labor, disposal and subcontracting costs, positive 20 basis points; DD&A, a decrease of 10 basis points; SG&A, a decrease of 50 basis points, for a total decrease of 80 basis points.

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

First, risk and health insurance. During the fourth quarter, as I said earlier, insurance expense was approximately 6 percent of revenue. Again, we expect self-insurance to be in the range of 5.5 percent on a go-forward basis. The margin expansion that we saw here is a function of our long-term efforts to improve our safety programs.

Second, fuel. Fuel prices were significantly higher during the fourth quarter of 2004 versus 2003. Average wholesale price per gallon increased 41 percent from $1.37 in the fourth quarter of '03 to $1.93 in the fourth quarter of '04.

Third, labor, disposal and subcontracting costs. Improved pricing in our collection lines of business, together with continued focus on productivity improvements, resulted in a modest margin benefit.

Fourth, DD&A. The increase in DD&A is primarily due to an increase in depletion expense associated with increased landfill volumes.

Finally, SG&A. The increase in SG&A as a percentage of revenue is primarily due to higher bad debt expense, as previously discussed. We believe that SG&A at or slightly below 10 percent of revenue is appropriate to sustain this business in the longer term. So we would expect our SG&A from the fourth quarter to move down modestly as we move into 2005.

Fourth-quarter operating income before depreciation, amortization and depletion. Year-over-year operating income before the DD&A increased by a 8.8 million or 5.1 percent from 171 million in the fourth quarter of 2003 to 179.8 million in the fourth quarter of 2004.

Next I will discuss free cash flow. Again, 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 on the Company's consolidated statement of cash flows.

Using our definition of free cash flow for the fourth quarter of 2004, it was $52 million. This is based upon cash provided by operating activities of $137 million, less purchases of property and equipment of 87 million, plus proceeds from the sale of equipment of 2 million. Again, that equals free cash of 52 million for the quarter.

Our free cash flow for the year ended December 31, 2004 was 397 million. This is based on cash provided by operations of 675 million, less purchases of property and equipment of 284 million, plus proceeds from the sale of equipment of 6 million. And that's again, 397 million of free cash flow for the year.

As Jim indicated, our free cash flow for the goal was 340 million. We substantially exceeded that because of the following. First, we had higher landfill volumes, and our DD&A was up by about $10 million. Second, more bonus depreciation than expected added about $10 million. And during 2004, we focused on bonus depreciation allowable assets to get more of that tax benefit since Congress was allowing this benefit to expire at the end of '04. Finally, a larger-than-expected benefit for our 2004 change in landfill tax depreciation methods -- $12 million for federal taxes and $25 million for state taxes. The state tax benefit was not included in our original guidance because of uncertainty at that time associated with its realization.

Our free cash flow for 2005 is $260 million. This is 137 million lower than our 2004 actual results, and there are some very specific reasons that caused this.

First, a decrease due to higher capital expanding of about $25 million for landfill development projects that will occur late in 2005. This project will benefit 2006 cash flows and certainly our cash flows beyond that longer term. Again, one of the objectives in the Company longer-term is to protect existing cash flows and enhance future cash flows of the business. So we invest for the long-term.

Second, a decrease due to the 2004 benefit we received from change in landfill tax depreciation methods of 62 million for federal taxes and 25 million for state taxes. That was a onetime benefit, which if you look at it over a two-year period has provided about $137 million of cash to the Company.

Third, a decreased due to the reversal of bonus depreciation of $46 million.

And finally, net of all of that we expect an increase of about $20 million due to the normal expected business growth.

Let me talk briefly about non-cash taxes. Again, non-cash taxes had a significant positive impact on 2004 free cash flow. Therefore, I thought it would be beneficial to give you a perspective on the future expectations for non-cash taxes.

During 2004, non-cash taxes represented about 76 percent of our total tax expense. In 2005, we expect non-cash taxes of about 20 percent of total tax expense. The end of bonus depreciation represents 30 percent of this 56 percent change, and the remaining 26 percent is due to the change in landfill tax depreciation method, which was a onetime benefit in 2004. The reversal of bonus depreciation will be less of an impact in two or three years as we continue to replace equipment and assets on which we took bonus depreciation as they become more fully depreciated. Longer-term we would expect our non-cash taxes to be approximately 30 percent of our total taxes.

Other items impacting cash balances -- during the fourth quarter 2004 we paid 8.4 million for businesses with a run rate of 4.2 million and purchased 700,000 shares of our common stock for approximately $23.3 million, or $31.51 per share. During the year ended December 31, 2004, as I indicated earlier, approximately 12.3 million shares were issued in connection with option exercises, and this generated 36.6 million cash proceeds. As of December 31, 2004, the Company has 11.1 million stock options and restricted shares outstanding at a weighted average exercise price of $18.51.

It might be worthwhile also to mention that the Financial Accounting Standards Board and the Public Accounting Oversight Board have a new pronouncement out there for the accounting for stock options, 123 R. That's going to be effective in July of 2005. We have not yet adopted that, and that is not in our guidance at this time, the impact of that. We don't feel it would be a substantial change.

Our balance sheet remains very strong. At December 31st our accounts receivable balance was 269 million and our day sales outstanding was 35 days. Republic continues to lead the industry, as Jim indicated, in managing accounts receivable. And our net debt is $1,020,000,000, which is down from $1,075,000,000 at December 31, '03. Consistent with our cash flow performance and previous guidance, our net debt to total capital at December 31, 2004 is 35.3 percent. Republic does remain committed to maintaining our investment-grade rating while returning substantial amounts of value to our shareholders through the share repurchase and dividend program.

Finally, I would like to comment the Company has, and Ernst & Young, substantially completed the review and testing of internal controls as required by Section 404 of Sarbanes-Oxley Act. There are no material weaknesses. I might also add thanks to a broad cross-section of our employees; our field controllership people, our general managers came together with a tremendous effort led by some of our people in our corporate staff. This is a project that we did solely with in-house resources over the past 18 months. I would also like to make a special thank you to our Chief Accounting Officer, Chuck Serianni, for leading this effort, together with our Director of Internal Audit, Laurie Ford (ph) for the superb work that they did and allowing this process to go very smoothly.

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

I would also like to express my thanks to all of the staff at Republic Services for the additional work that was placed on them during the last 18 months to comply and verify our internal controls. And again, thank you very much.

During 2005 business planning process in the fourth quarter, we provided four directives our field organization. First, our primary directive is to continue with our broad-based pricing initiative across all lines of services. We've implemented our ROI pricing model by customer, and we'll have a focused effort on achieving improved margin performance through higher pricing this year. Second, we must address our long-term strategy in markets or lines of business that are not achieving appropriate returns on capital. We will continue to work on improving these under performing components of our business. Third, we believe that talented people are the most important factor to our success. Our investment in training programs and recruitment of talented managers are key drivers for improved performance. Fourth, we remain focused on our cost initiatives, particularly routing for our residential business. This will help to ensure our position as a cost-effective competitor.

During 2005 we expect to achieve earnings per share of $1.65 to $1.70. As we have discussed before, approximately 48 percent of our earnings will be achieved in the first two quarters, and 52 percent in the second half of the year. This pattern represents our normal seasonality in earnings. Free cash flow of $260 million, which represents more than 100 percent of net income, and is consistent with past years' guidance that free cash flow will be in the intermediate term in excess of 110 to 120 percent of net income. Internal growth is expected to be approximately 4 to 4.5 percent with 2.5 percent from price and 1.5 to 2 percent from volume. Based on our pricing strategy and cost initiatives, we expect to achieve margin expansion during 2005. We anticipate capital expenditures to be in the area of $300 million.

I'd like to thank all of the members of the Republic team for their significant achievements in 2004 and our record performance, and we look forward to higher levels of performance in 2005. Now, Operator, we will open the call to questions.

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

Could you first talk about the pricing outlook that you have that's embedded in your 2.5 percent '05 price guidance? It sounds like you're thinking that in your competitive markets it's still going to be tough, because I know you get a fair amount of CPI indexing and that should be in your favor this year.

Obviously is competitive in the markets that are open, but we do believe that we are seeing a -- that our competitors are starting to move price out, which I think is a good sign, in isolated markets. But it's not all coming from the competitive market, the pressure. While the CPI has reported I think on an all-urban -- all-consumer, all-urban is 3.3 percent, and when we look at various franchises around the country, California, for example, is below that in '05 projection. We're looking at being at about -- in '04, in Southern California we received 1.5 percent. In Nevada we received 2.3 percent. In South Florida we received 2.7 percent. So while I know the consumer price index for US is 3.3 percent, that's not what it is across the whole country. So we are seeing competitive pressures, but I think we are starting to see rational pricing starting to occur in isolated markets.

My one follow-up will be on margin. You just said you're expecting margins to actually expand in '05. And when we did the math on our model on your revenue and EPS guidance, we're getting margins down. So is there something happening with the higher book tax rate or higher interest expense below the line?

The tax rate is unchanged, and I'm not sure what kind of share count people use. Certainly our stock price has expanded, so under the treasury stock method there's a higher equivalent number of shares outstanding as a result of that.

The other thing I would add is we look at the interest expense below the line, and have seen and the indications are the Fed will continue to move interest rates up. So there's probably a little bit of head wind there for the 30 percent of our debt that floats.

The other issue would be capitalized interest. As we built our model, while we do have some substantial projects that we're investing in for the longer-term, they come later in the year. We're not aggressive in playing that game of capitalizing a lot of interest just to get earnings below the line. So there may be some differences down there in addition to the share count.

Could you just talk about your share count at year-end? Are you planning on using some of that large balance sheet cash amount at year end to do the buy backs that you will end up spending the whole 260 or so on a buy back this year?

The actual share count at the end of the year was 150.5 million shares. Again, we have the 275 million available. And typically what we've done is -- the one thing I will say about Republic is we're very consistent both in terms of the expectations that we set out there for the guidance, and then also our communications on share repurchase and dividend programs. So the October call is when we give the annual guidance for share repurchase. Typically in the first or second quarter we'll come back around and move the dividend up. And obviously the Board, because of the favorable tax treatment there, continues to look at that and view that favorably. Certainly we have substantial cash on the balance sheet. And while we're looking for development projects or other opportunities to build the cash flows, the Board recognizes that with that cash there's a possibility of returning more of it to the shareholders. But it's not something that we're going to do here in the first quarter. It would probably be more midyear if they were to do something.

Jamie Cook, Credit Suisse First Boston.

Could you talk a little bit about your guidance for volume in 2005? I think you said 1.5 to 2 percent, and when you look at the volumes you achieved in '04, it was 3.6 percent. I realize you had some contracts that you won that helped that out. But still, it still seems like your volume guidance is conservative. So if you could talk about that first.

I think our volume represents some of the very same things we're seeing in the projections for GDP for the country and some of the comments that are in a number of economists in most of the firms that are probably on this phone call. So again, we haven't seen escalating growth from our permanent industrial selection (ph) customers. We've seen not a tremendous amount of growth year-over-year in the residential component. And we haven't seen an expansion of the commercial marketplace. So I think what we're trying to depict here is something a little bit greater than what we experienced when you discount the municipal contracts that are anniversarying out in '05.

I would add to that that in addition to those municipal contracts that are probably around 100, a little over 100 basis points, we had probably about 30 or 40 basis points of annualized revenue coming from the hurricanes down here in the South. So you probably got something in the range of about 150 basis points there versus a core business growth last year of 3.6 percent. That puts us back down to around 2 percent.

Can you talk a little bit about how you came up with your pricing guidance for 2005? Some of your competitors have been publicly -- Waste Management has said that they're raising prices in 2005. Did you take that into account? And then I guess you said that the market seems to be getting a little more rational. Can you just expand on that?

Let me just comment first of all that when you look at pricing, certainly -- and internal growth in total, Republic's performance has been substantially higher than the other two companies in the sector. And I think if you looked at 2003 -- and I am talking just about core price. Forget the noise of commodities and fuels surcharge and that other stuff. Core price in '03 was 1.8 percent. Our field organization had a tremendous effort in '04; brought it up to 2.3 percent for the year, and for '05 we are moving it up to 2.5 percent.

And I think one of the keys here is while you hear companies come out, whether it was one competitor a few years ago saying that they were raising prices in some in landfills or another competitor raising prices in 30 landfills, our overlap in that situation of waste management, I think we've got maybe 7 of those 30 marketplaces. And even then, the sites may be more regional sites and not necessarily serve exactly the same markets. So while our competitors may be dipping their toe in the water and testing the water, which is a good sign, we've delivered in '04 and we're going to step it up modestly in '05.

I think the process is a process that we have followed over the last several years. Since we've implemented or developed tools to help the field, and the field has been very good and utilizing those tools, we have tipped (ph) our markets and our lines and the lines of business in those markets that we feel that we can successfully achieve price while the rest of the sector is still trying to rationalize pricing in those markets.

So as Tod said, if you look back at 2003 to 2004, you can see pricing move up very nicely. We've been aggressive. We are going to continue to be aggressive. I know a lot of people think that our guidance for '05 is conservative. But again, in past years we've been duped by the economy. And we're not going to get caught with that. Our guidance is based on the results of fourth quarter that we've been experiencing. And obviously we would hope to do better. And I think our prior experiences have shown that we will do better. But this is the guidance that we're going to the Street with today.

Kevin Monroe, Thomas Weisel Partners.

Your keys to margin expansion next year, is 2.5 percent pricing growth enough or are you counting on some cost factors to mitigate?

Again, my comments were that obviously we're relying a lot on price. But we continue to look at the cost side of the equation, and we continue to try to perfect the initiatives that we put in place a number of years ago. We're moving out now our RouteSmart initiative into our residential lines of business, and would hope to see some cost benefits from that. Those are the things that are going to lead towards some margin improvement in '05.

Again, we're not talking about significant margin improvement. We're not talking about margins going back to the 2001 timeframe. We're talking about very modest margin improvement. But again, I think that's a sign that the business is getting healthier, the economy is somewhat strengthening, and that rationalization has set into the sector.

I would add that we have both at the lower end of our guidance and the higher end of our guidance range margin improvement. Very modest obviously at the lower end.

I think the other thing to mention which everyone is aware of is the rollover impact from fuel prices. We started with fuel very low in the beginning of 2004, and obviously there's a rollover impact which creates a head wind on margins in 2005 as a result of that. And we believe we can fully offset that and then some so that we get modest margin expansion. Again, we look at '05 as an inflection point where the combination of pricing and the continued control over the controllable costs should allow us to turn the corner and be the first of a number of years where margins expand.

Lorraine Maikis, Merrill Lynch.

Just wondering what type of fuel pricing assumptions you're using for the full year of 2005 in your guidance.

Our business model is a bottoms-up approach. So it's really in that October, November timeframe. You can't really look to a price per gallon because the prices are localized and it may vary from market to market. But I would say that it's in the range of what we saw in the fourth quarter. And where we sit today, maybe the costs are modestly below, and therefore we're likely a little bit above the bottom end of our range. But certainly I think the expectations that were out there in some cases had (indiscernible) in the 30s or $40 a barrel, high-30s. I've heard everything from $35 a barrel to $65 a barrel. And again, we're not going to speculate what it's going to be. I don't think anyone really knows. And therefore, we're going out with basically what we saw in the fourth quarter, and we will see what the first quarter holds. And in the second quarter, as we have done in the past, we will adjust our guidance as appropriate.

I guess Lorraine this is the reason why we give a range. And I think when you look at our past performance other than I think maybe '01, you'll see that the guidance that we have given, we've met our own guidance. And the range is large enough, as it was in '04, that in the latter part of the year we came back and revised our guidance when we saw the economic factors or things changing to the positive. So again, if fuel is a little bit lower than our fourth-quarter expectations which we have based our '05 guidance, we are probably somewhere in the middle part of the range.

Just to follow-up, you talked about a landfill project that would cost 25 million in CapEx. Was that just for one project? Could you talk about -- give us a little more detail and talk about the impact of that going forward?

The $25 million of capital is opportunities that exist at a number of our facilities. We're looking at facilities that the time it is appropriate for us to purchase property. We have willing sellers. Again, our strategy is long-term in nature. So we will be making some of these investments to protect the cash flows of the business for the longer term.

And the other area is in some development projects where we've been unsuccessful in integrating markets because there haven't been opportunities to purchase disposal facilities or transfer stations. We are now starting to invest capital in greenfield development projects, either as outreach programs to existing landfills, or in some cases greenfield landfill project. Those projects obviously are confidential at this particular time, because they're in the development stages.

Bill Fisher, Raymond James.

Actually, following up on that, some of the -- do you have any larger contract opportunities on the radar screen this year? I think you had a contract in Atlanta for disposal. Or is it pretty lean this year? You mentioned transfer stations. Are there any that you could develop this year that would have an impact or is that further out?

Jim O'Connor Without identifying the contracts, we obviously are responding to RFPs. And we do have a number of privatizations in the works. Probably the one that offers the biggest benefit would be our response to an RFP in Arlington, which they are continuing to work through the RFP process -- Arlington, Texas -- for the privatization of their landfill. So that's still in the process, and we feel that we will be successful there. But again, that's still in the process.

You mentioned under-performing operations, your focus on improving those. Is there any opportunities do you think to swap any of that or is that further out as well?

Actually, we're having discussions with a number of our competitors on a number of markets. That's probably ticked up here in the last 60 days. So some of that, and some of it is really just focusing on turnaround plans on under-performing lines of business with some of our divisions and wondering if we necessarily need to be offering various types of service in certain markets where we see more competitive pressure. So some of it is just business planning, turnaround plans. And the other is discussions with competitors about exiting and reinforcing some markets.

Tom Ford, Lehman Brothers.

Jim, just keeping on your commentary there on the under-performing operations, do you have a sense as to how long this takes? Is it a few years? Any firm ideas there?

If it's an under-performing line of business, I think will have that corrected during the course of '05. We have plans in place as is part of the budgeting process. It was one of the directives and the goals that senior management had concluded that we need to redouble our efforts on. So I think it's something we turn around on. Let me kind of give you an idea about what that really means.

One, these are still businesses that are producing positive cash flow; in some cases even where the lines of business are still positive cash flow. They're not meeting the expectation that we think we should receive in that particular market with the dynamics in the market. So as an example, we may look at a particular market, look at, let's say, our industrial collection component line of business, and it may be performing at, let's say, a margin of 15 percent gross operating profit or less than 15 percent. And we think that the threshold in that market should be 15 or greater. Our business improvement plan is to get it to 15 or greater. So it's not necessarily in a loss position. Businesses that we're talking about exchanging are businesses where we don't exchange them with our competitors; are business is that we're having trouble visualizing developing enough assets in the marketplace that will allow us to be competitive in the longer term.

Okay, that's great. I'll ask the question, although I think I know the answer. Would you give us an idea of the revenue number that would be impacted by this?

One thing I've been very cautious of is to look at any one of these initiatives, because again we're operating in lots of markets that have various volatility in them, and it's very difficult to determine how successful all these initiatives will be. It's kind of like trying to project what our productivity improvements will be when we're at the start of the initiative. It's just too difficult.

Again, as I've always said, I think these initiatives are built around understanding the business. And knowledge is pretty powerful. If in effect we find out that the plan can't be implemented and alternatives in the planning process can't still effectuate change in the GOP, then that's when we kind of decide that maybe we should exit the market. So as we go through this process it may identify other markets or other lines of business that we want to exit.

Turning the question around real quick on this topic, have you seen activity on the part of some of your peers out there in terms of them starting to do similar things?

I can only talk to the conversations as it relates asset exchanges that we're having with them. So it appears that they have been much more receptive to opening dialogue with us, and I see that as positive. Whether or not there are things going on amongst my competitors, I'm not aware of those.

Thanks. Just one other question. Just going back to 25 million in terms of the development opportunities, I'm just curious, if we look at '04 or '03, was there any type of money spent like this in those years? Or is this something really sort of incrementally different in '05?

We purchased a number of landfills which required additional capital investment. I think we mentioned those sites -- a couple of construction demolition sites, one outside Atlanta, one outside of Richmond, Virginia. So they required capital. We have historically, I think as we reviewed capital with the marketplace, that we have had a certain amount of infrastructure capital over and above replacement and growth capital. That's been in the range of I think about 30 to $40 million of our capital spend.

When you're looking at some of our landfills and transfer stations, because they're somewhat controversial in nature, they require local zoning. When we see the atmosphere being right in the local marketplace and in the political sector that we're dealing with, we like to strike at that stage. So what we're doing is we're looking at buying property, getting it zoned and citing transfer stations where we think the timing is correct and the community is receptive to it. It may be little in advance of when we actually need it. But again, we're developing this business for the longer term. So that's where we're going to make those investments.

I think the real point that we're trying to make here is that in the past when you looked at the statement of cash flows it came in investing activities as an acquisition (multiple speakers) to the development projects, as Jim has mentioned, we see it on the capital structure (multiple speakers)

Leone Young, Smith Barney.

Most of my questions have obviously been answered, but I was curious on the hurricane. You mentioned that as volume and costs that would probably disappear in '05, but aren't you really looking at a situation where you could get a little rebuilding without the cost incurred of the hurricane in '05?

Most of what we experience -- I can't speak for our major competitor here in South Florida, but most of what we experienced was vegetation. It's not reconstruction. So I don't think -- while we've seen a minimal amount of temporary surges, temporary industrial collection surges in a couple of these markets in the central part of the state, it's been -- I don't think it's sustainable, nor is it long-term. These are predominantly roofs (ph) that are partially damaged and its short-term event work. So I don't see anything sustainable in and throughout all of '05.

That's good to know. Also, just in terms of looking at your margin assumptions into '05, I assume -- Tod, you mentioned you expected to get that bad debt expense back, as well as the risk to go down. So on a more normalized level we'd be looking at risk at 5.5 and bad debt expense at 30 to 40 basis points lower than the fourth-quarter level?

Again, I think bad debt is 5.5 to 6 percent. First quarter -- excuse me, I misspoke. Risk expense, 5.5 to 6 percent range. Part of that is a function of the actuarial work that's done each quarter telling us what the reserves need to be. Another part of it as a percentage of revenue obviously, the seasonality of revenue. So it's probably at the higher end of the range in the winter month it could lower seasonal revenue.

One other thing I would add is first quarter, on the health side you have deductibles that need to be met. So typically our health costs are a little bit lower in the first quarter than other quarters.

Bad debt expense, again 30 to 50 basis points is what we think is normal. And we do think we get a little bounce back. For example, these municipalities; we went out and serviced them and haven't been paid. Obviously we want to be a good number of the community and provide the work, and then we go back and try to work with the community and FEMA to get paid. So some of that bad debt that we had through the hurricane works hopefully we will recover here in the first quarter of '05.

Thank you.

Corey Greendale, First Analysis.

First of all, just going back to the development projects for a second, I realize it's still early, but, Jim, are these the kinds of things (indiscernible) one sense of the magnitude, are they the kind of things that a few years out could move the internalization needle noticeably?

Noticeably is a term apart (ph). But I would say that yes, most of these projects will be focused on expansion of our markets and securing the revenue streams that we've got. I would say yes, we should see the internalization rate move up. The gestation period for these projects run anywhere from a year to three years.

So by up, you think by a couple of points or by more than that potentially?

I think we've always said that we thought as the business grows over the next three to five years that we can get the internalization rate up into the high 50 percent range.

I just wanted to ask -- obviously a lot of activity on the swap (ph) front, it sounds like. But just pure acquisitions, if there's any change there or any change in seller expectations or appetite as the economy improves.

No. Again, while nothing is in our guidance, I guess what I would say is we would probably be looking at anywhere from 10 to maybe $25 million of annual revenue assuming that the companies meet our financial metrics -- if they meet our financial metrics in acquisition process. (indiscernible) as I've always said with a lot more revenues than that, but they are just not at this particular time sellers.

One last one for Tod actually. You gave some good detail on the free cash flow for the year. I was just wondering if you could talk a little more broadly. I believe a few years ago you talked about free cash flow in the range of 85 percent to maybe 100 percent of net income.

Actually that was probably a few years ago. In the past year or two we've been saying 110 to 120 percent (multiple speakers) normalized. When we get out with the reversal of the bonus depreciation impact two or three years and get that 30 percent non-cash tax benefit again, I think we're looking at 110 to 120 percent of net income versus something slightly over 100 percent this year. And I think one of the keys here is we are continually investing in the business. And while we're generating over 100 percent of net income, as Jim indicated, the fleet age is a little over six years. We're investing in land fill equipment, land fill airspace, infrastructure, so that we're building cash flows longer-term, not just milking cash flows for the current year or the next year.

A few years out do we get to a point where (indiscernible) 85 percent to 100 percent level or (multiple speakers)

It's consistently above 100 -- again, I think that the run rate that we're looking at consistently is 110 to 120 percent. It's not going to be back to 85 percent of our net income is cash flow. It's over 100 percent.

Steve Kohl, Matador Capital.

I'll try to keep this to one question and one follow-up guys. Could you maybe speak to fuel in terms of what your thoughts are on either setting up some sort of forward-purchasing contract, hedges, at what price; what dictates that decision or do move more towards a natural gas fleet of trucks or other fuel sources?

No. I can tell you that once a week that senior management is reviewing where fuel prices are. We are looking at hedging fuel. And again, if we can probably see fuel move down into the low-40 range, we will look to pick up some hedge on a percentage of our fuel consumption. And we're going to continue to utilize our fuel surcharging as we have -- fuel surcharging our customer base as we have in the past.

One quick follow-up for Tod just on the CapEx. Can you speak, Tod, to what to what the -- if you look at those items that were impacted by bonus depreciation in 2004, what was the capital spending related to those and what will that basket look like or bucket look like out of that $300 million target for 2005?

We had -- basically in 2004 everything except for our cell (ph) construction and our land and facilities. So anything that is trucks, containers, and heavy equipment, Caterpillar-type equipment, on the landfills, which is probably about half of our capital spend. Again, our focus in '04 was we probably had a little bit of shift, a little less airspace maybe than what we originally thought at the beginning of the year, and a little bit more truck and container capital, which allowed us to take advantage of a little bit more bonus depreciation.

So if we ballpark that, let's say, 150 just for arguments say, what does that number look like in '05? Does that step down a little bit because you took advantage of it or where do we see (multiple speakers)

Gain, our total CapEx goes up. It's probably in the 140 to 150 range. 150 was the number (multiple speakers) that much.

If those assets that you're talking about that bonus depreciation applied on, I would say that they're probably -- it's pretty consistent purchase year-over-year. The increase in capital is really coming from development projects in '05.

I want to thank all of you for spending time with us today. A replay of this call is available by calling 203-369-2029. That's 203-369-2029. Ask for the Republic Services earnings conference call. Additionally, this call will be archived on Republic's website at www.RepublicServices.com. Thank you very much and have a good day.

The concludes today's conference. You may disconnect at this time.