Republic Services Inc (RSG) 2005 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 a listen-only mode. There will be a question and answer session following the Republic 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. Good morning, Mr. O'Connor.

Good morning, Shirley, and good morning to all of you and thank you for joining us. This is Jim O'Connor and I would like to welcome everyone to the Republic Services' fourth quarter Conference Call.

This morning Tod Holmes, our Chief Financial Officer and Ed Lang, our Treasurer, are joining me as we discuss our fourth quarter and full-year performance. I'm in California and Tod and Ed are in Fort Lauderdale.

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 materials we discuss today are time-sensitive. If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 7th, 2006. 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 prohibited.

I'm pleased to report to you today that Republic has exceeded the financial targets we set last year. During the fourth quarter, Republic's revenue grew 7.3% to $738 million and for the full-year, growth was 5.8% to $2.863 billion. A key to our organic growth was our successful pricing strategy. Core price growth in the quarter was 3.3%. For the full year, core price improvement was 3%. Republic achieved its full-year free cash flow goal by generating $276 million in free cash flow and continued to enhance shareholder value through share repurchase and dividends.

during the fourth quarter we purchased 3 million shares for $107.8 million. For the full year, we purchased 16.3 million shares or approximately 11% of our outstanding shares on 12-31-04. Since the inception of our share repurchase program we have bought 51.5 million shares or 29% of our outstanding shares for $1.3 billion, and we increased our annual dividend by 17% to $0.56 per share, effective October.

We earned $0.43 per share in the fourth quarter and $1.75 for the full year. This EPS performance exceeded our guidance of $1.70 to $1.74, and our pricing discipline allowed Republic to improve EBITDA margins for the fourth quarter and full year.

Republic had many other accomplishments in 2005, including better utilization of our return on investment pricing model throughout the Company for acquisitions, municipal and franchise bids, and market planning. Due to our pricing discipline and the improvement in the economy, we have achieved greater success in our pricing strategy.

We continue to roll out our routing software, which has assisted us in achieving greater labor productivity. Republic has doubled its Company match to the 401(k) program. Republic recognizes it's retaining quality people that will enhance our ability to grow and strengthen the Company's financial future and contribute to our long-term success.

We also renewed our $750 million five-year bank facility at very competitive rates and extended a portion of our public debt for 30 years. Republic has the highest credit rating in the industry and has no significant debt maturities until 2009.

Republic has been recognized as a member of the Forbes Magazine Platinum 400 as one of America's best-managed companies. In addition, Republic was also recognized as a Top-10 performer in business services, based on a 5-year total return to shareholders. This recognition reflects the high quality of employees we have in the public services.

I will now turn the call over to Tod Holmes for a financial review. After Tod's comments I will discuss our 2006 objectives and financial guidance.

Thank you, Jim. I'll begin my review of the Company's 2005 financial results by highlighting a number of significant accomplishments.

First, during fiscal 2005, Republic repurchased approximately 11% of our Common Stock, or 16.3 million shares. And we also had stock option exercises of approximately 3% of our Common Stock, or 4.3 million shares. Therefore, our net share reduction in 2005 was about 8% or 12 million shares. As of December 31, 2005, we have approximately 216 million remaining under existing share repurchase program plus another 275 million that our Board authorized in January.

Second, as Jim indicated, in October 2005 we increased our quarterly dividend by approximately 17%, from $0.12 a quarter to $0.14 a quarter per share. Our annual dividend yield is now about 1.5%. And this dividend, combined with the net share repurchased, returned about 9.5% to our shareholders in 2005.

Third, during 2005 we exchanged about $276 million of public notes due in 2009 for new notes due in 2035 at favorable long-term rates of slightly above 6%.

Fourth, during 2005 we completed several transactions that will further strengthen our market positions. We sold our operations in western New York and we also sold our ESI, our environmental remediation company, which is a non-core business.

We were awarded a life-of-site contract to operate a landfill in Arlington, Texas, which fully integrates the Dallas/Ft. Worth/Arlington mid-cities area marketplace, and in addition, we acquired approximately $15 million of revenue in the Cincinnati market during December.

Fifth, the Company generated substantial levels of free cash flow in 2005, and we expect free cash flow to continue to exceed net income in 2006. Even after repurchasing a substantial portion of our shares, increasing our dividends, at December 31 our cash balance available upon future internal growth, acquisitions, dividends, and share repurchases is approximately $300 million. So we have a very strong cash position going into 2006.

Now let me discuss the Company's fourth quarter revenue. Fourth quarter 2005 revenue rose 7.3% to $738 million from $688 million last year. Internal growth was 8.3%, of which 6.6 was from core operations: 3.1 from price and 3.5 from volume.

During the quarter we continued to benefit from our ongoing price increase strategy. Price remains a key initiative in 2006. Our core volume growth comes from all lines of business, including residential, commercial, industrial, and landfill businesses.

Our hurricane cleanup in the fourth quarter positively impacted core volume growth by approximately $14 million, of which 7.6 million or 1.1% occurred during the fourth quarter of 2005. Keep in mind that margin on this type of work is in the low single digits. The remaining 1.7% of our internal growth comes from commodities, non-core businesses, fuel surcharges, and environmental fees.

Internal growth was partially offset by a 1.1% reduction in revenue due to asset divestitures and a 10-basis point increase in state taxes.

Now I will discuss changes in our sequential operating margins. Sequentially, our fourth quarter operating margins decreased by 80 basis points, of which 60 basis points were one-time items. The key components of this decrease in sequential margins are as follows: Fuel, negative 30 basis points; Risk and health insurance, positive 10 basis points; Disposal and subcontracting costs, negative 20 basis points; DD&A, negative 30 basis points; SG&A, negative 10 basis points. Totals to a negative 80 basis point margin sequential change.

Commenting on each of these factors: First, fuel: the average wholesale price per gallon increased about 5% from 2.47 in the third quarter to $2.60 a gallon in the fourth quarter. Incidentally, prices currently, at the wholesale level, are about $2.41 or $2.42 a gallon, which is close to our business model for the 2006 business plan.

Second, risk and health insurance: Risk and health insurance was a slight benefit during the quarter due to continued favorable actual claims experienced.

Third, disposal and subcontracting costs: During the fourth quarter we experienced higher sequential disposal and subcontracting costs, due primarily to the hurricane cleanup efforts.

Fourth, DD&A: During the fourth quarter of 2005, the Company completed its annual review of projected costs associated with landfill capping, closure, and post-closure in accordance with FAS143. As a result of this review, the Company recorded a $2.1 million increase in landfill amortization during the quarter. This increase is due to actual and projected inflation for costs such as synthetic liner, excavation, and construction, and is partially offset by the reversal of contractor profit that was included in previous cost estimates as required by the statement.

The Company will complete its next review of landfill-related costs in accordance with Financial Accounting Standards 143 during the fourth quarter of 2006. So we're essentially reviewing this each year at the end of the year in the fourth quarter, whereas in 2005 we actually looked at it in the first quarter and then again in the fourth quarter.

Finally, SG&A: During the fourth quarter of 2005, the Company recorded a non-cash charge of 2.1 million related to the acceleration of vesting in all outstanding stock options previously awarded to employees. This charge was partially offset by lower bad debt expense. For 2006, we expect statement of Financial Accounting Standards 123R, which relates to the expensing of stock options, to have a cost that will be approximately $0.03 per share.

Operating income before depreciation, amortization, depletion, and accretion: The sequential operating income before DD&A decreased by $1.3 million or 7/10ths of 1%, from 195.3 million during the third quarter of 2005 to 194 million during the fourth quarter of 2005. And again, this decrease was a function of the one-time charge that we took for 123R.

Fourth quarter year-over-year operating margin: operating margins decreased by 30 basis points from the fourth quarter of 2004 to the fourth quarter of 2005. Key components of this margin decrease are as follows: fuel, negative 100 basis points; insurance, positive 30 basis points; labor, disposal, and subcontracting costs, positive 60 basis points; DD&A, negative 50 basis points; and SG&A, 30 basis points positive, for a net total of a negative 30 basis points.

Now let me briefly comment on these components of year-over-year margin change.

First, fuel: fuel was approximately 5.7% of revenue during the fourth quarter of 2005. Our average wholesale price per gallon increased about 28% from $2.03 in Q4 of '04 to $2.60 in Q4 of '05. Again, the price per gallon we assumed for 2006 business planning is consistent with the current prices slightly over $2.40 a gallon.

Second, risk and health insurance: insurance expense during the fourth quarter was 5.6% of revenue or 30 basis points lower than the fourth quarter of 2004. And this is due, again, to favorable claims experience. Our 2006 business plan assumes risk and insurance expense as a percentage of revenue that is in that 5.5% range.

Third, labor, disposal, and subcontracting cost: Improved pricing in our collection lines of business, change in mix and revenue, and continued focus on productivity improvements resulted in a margin benefit. This benefit was partially offset by higher subcontractor cost due to higher fuel and hurricane cleanup.

Fourth, DD&A: As I previously mentioned, during the fourth quarter the Company recorded a $2.1 million increase in landfill amortization in connection with Statement of Financial Accounting Standards 143. DD&A was also impacted by an increase in depreciation associated with assets recently placed in service throughout 2005.

Finally, SG&A: During the fourth quarter of 2005, the Company recorded a non-cash charge of 2.1 million related to the acceleration of the vesting of options. This charge was offset by a decrease in bad debt expense of about 50 basis points. You might recall, last year in the fourth quarter our bad debt expense was unusually high because of some of the hurricanes that we had and collection efforts associated with hurricane cleanups, that receivables stretched out quite a ways at last year's year-end.

Overall, we believe the Company will continue to experience modest margin expansion during 2006 as a result of better pricing and continued focus on cost control. Now, this assumes no major changes in current fuel prices.

Fourth quarter, the operating income before depreciation, amortization, depletion, and accretion improved. The year-over-year operating income before DD&A increased by 14.2 million or 7.9% from 180 million or 26.2% of revenue in the fourth quarter of '04 to 194 million or 26.3% of revenue in the fourth quarter of 2005.

Next I will discuss free cash flow. Using our definition of free cash flow, which is very simple, off a statement of cash flows, free cash flow for the fourth quarter of 2005 was $197 million. This is based upon cash provided by operating activities of 274 million, less purchases of property, plant, and equipment of 79 million, plus the proceeds from the sale of equipment of 2 million. That equals free cash flow of 197 million.

Free cash flow for the 12 months ended December 30, 2005 was 449 million. This is based upon cash provided by operating activities of 768 million less purchases of property and equipment of 329 million, plus the proceeds from the sale of equipment of 10 million. And again, that yields free cash flow of 449 million.

Now, our free cash flow for the 3 and 12 months ended December 31, 2005, was higher than expected because of 113 million of federal income tax payment that were deferred until February 2006, as a result of the hurricanes that hit South Florida. Businesses headquartered in Broward and Dade County were exempted, as many were in the other states hit by Katrina.

And also we had a $60 million increase in payables and accrued liabilities associated with the timing of payments for capital and other expenditures. After normalizing for these items, our 2005 free cash flow was $276 million. And again, I want to point out that while we normalized for those two items in 2005, obviously in the first quarter of 2006 we'll be paying out the federal income taxes and also paying down those payables.

Items impacting cash balances: during the fourth quarter of 2005 we purchased 3 million shares of our Common Stock for approximately $108 million, or 35.86 per share. During fiscal 2005 we repurchased 16.3 million shares or approximately 11% of the shares outstanding at the beginning of the year.

During 2006 we expect to spend about 491 million to repurchase approximately 13 million shares of our Common Stock, assuming current prices, or approximately 9% of the shares outstanding as of December 31, 2005. Incidentally, our actual share count at December 31, 2005 was 138.6 million shares.

Finally, Republic's balance sheet remains very strong. At December 31st our accounts receivable balance was 280 million and our day sales outstanding improved to 34 days. This compares to 35 days at December 31, 2004, and 36 days for September 30, '05.

Republic continues to lead the industry in managing working capital and accounts receivable. Our net debt is $1,173,000,000 at the end of 2005. That's up from $1,020,000,000 at December 31, 2004. Consistent with our cash flow performance in previous guidance, net debt to total capital at December 31, 2005 was 42%. And as Jim indicated, Republic remains committed to maintaining a strong investment profile and our investment-grade ratings.

Now let me turn the call back over to Jim.

Thank you, Tod.

As background, our annual financial planning process consolidates the forecast of individual operating results in units. Our divisions do not make any assumptions or forecasts related to economic trends or commodity values. The planning process is based on the business environment in the fourth quarter of 2005.

Our business objectives for 2006 are: we will continue to increase prices in order to improve margins, return on capital, and free cash flow.

Second, Republic will evaluate opportunities to improve individual market positions and vertical integration. This will include looking at acquisitions, landfill expansion projects, and asset exchanges, with the same disciplined process that we've had in place.

During 2005 we executed transactions with Waste Management and Allied and look forward to future activity in 2006.

To boost our organic growth we have implemented a Customer First program in 2006. Our Company theme in 2006 is Adding Value at Every Stop. This is an effort that goes across all functions and disciplines in Republic. Internally, we want to be sure that we are fully utilizing all the resources we have available in the Company. And externally, we must be certain that we're providing greater value to our customers at every level of our organization.

Our financial guidance for 2006: First, earnings per share: $1.90 to $1.93. This guidance incorporates the impact of accounting for stock options and increases in our employee benefit programs.

Second, internal growth is expected to be 5%: 3.5% from price, including fuel surcharges, environmental fees, and commodities; and 1.5% from volume.

Republic will continue to be and industry leader in pricing. Normalized free cash flow will be 270 to $280 million, which is in excess of 100% of net income. Net capital spending is expected to be $350 million. Our continued focus on higher pricing is the basis for achieving a moderate margin expansion.

Based on our continued strong performance, Republic's Board of Directors has approved an additional share repurchase of $275 million. Along with the remaining amount under the April 2005 authorization, Republic will repurchase $491 million of its stock in 2006. At yesterday's closing price, Republic would have repurchased over 9% of its outstanding shares this year. At year-end, our total repurchase since July of 2000 will be approximately $1.8 billion.

I'm extremely confident that our Company is well positioned to achieve our objectives in 2006, and I would like to thank all the members of the Republic team for their commitment to the organization.

Operator, we'll open the call for questions now.

Thank you. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Michael Hoffman. You may ask your question, and please state your company name.

Hi. It's FBR. Nice job, guys. Great year.

Thank you.

Free cash flow target for '06 seems modest in comparison to the delta between free cash flow and net income in '05. Can you talk about what is going on in some of your assumptions, maybe some additional spending in advance of the '07 diesel emission standards, something of that nature, or working capital?

Tod?

Well, Michael, I think there is a couple things. First of all on a deferred tax basis, we're assuming about a 10 to 15% non-cash tax benefit. I think our actual experience is 2005 was about 17 or 18%.

On the capital spending front, you know, one thing that we saw in this 143 adjustment in the fourth quarter is higher costs on the landfill side associated with construction for capping and all of the construction activity that goes on. And our landfill -- people throughout the Company have put the work out for bid, seen some higher pricing coming back, and therefore, that is in our capital spending number.

Again, when we look at our free cash flow as a percentage of earnings, we think we're going to be in that 105 to 110% range in 2006, free cash flow relative to net income, and that's consistent with 2005.

I guess one final point would be working capital. Republic certainly has done a very good job on the receivable side. On the payable side we take a very straightforward approach. Our number one objective on managing payables, which is our second largest working capital component, is to secure cash discounts. And our purchasing group I think does a pretty good job of negotiating those.

And in conjunction with that then, depending on the vendor and the type of service, our typical payment terms are 30 to 60 days, somewhere in that range. And I think payables and accrued liabilities are a little bit harder to forecast. So maybe we're a little bit conservative at the end of the year on that, maybe we'll come out a little bit better. But we tend to take a consistent approach and a consistent view.

Okay. And then the follow-up question: a lot of your competitors have talked about a need to reposition assets in an attempt to drive improving returns on capital. Big numbers have bandied about about the size of that pool of assets. Have you actually seen any real activity on their part in your opening data rooms or in actual discussions with regards to this?

Michael, we have. And we are in receipt of one of the national company's lists. We're currently evaluating that list. And we've had activity with Waste Management, Allied in '05, and we welcome a look at what is available. Again, we're going to apply the same discipline to the the asset swaps that may occur in '06 with our national competitors as we did and as we do for every acquisition. So, again, we're in the early stages of the review and we look forward to a lot of activity in '06.

Thank you. Your next question comes from Jamie Cook. You may ask your question, and please state your company name.

Hi. Jamie Cook from Credit Suisse. My first question: can you just talk a little bit about the new contracts that you're booking today? I guess, what measures are you taking to protect yourself from rising costs like fuel, and are you seeing any more flexibility versus before, I guess.

Well, as far as fuel, I think our sales force is in a much better position now to secure fuel surcharges as well as environmental surcharges from our customer base. I think it's -- the customer base is much more receptive, I think it's much more prevalent across most of the transportation industry today. So it's clear that we're having very good success and I think in the latter part of the year we had more success in gathering up fuel surcharge from some of the customers who resisted, Jamie.

Okay. And then just a follow-up question: Can you just help me understand, on your volume forecast for '06, I think you said 1.5%. Does that include -- I think you spoke last quarter about you had 80 basis points help from new contract wins and I guess I'm also asking if there's any -- are you assuming any volume impact from hurricanes in 2006?

None from hurricanes. We do have some rollover of municipal contracts. Tod, I think -- what are we talking about there?

It's about -- net, about 40 or 50 basis points.

Right. And the hurricane I think had probably an organic impact on '05 of another, what, 40 basis points?

50 basis points, yes.

But nothing in '06?

Nothing in '06.

No, we're not --

-- hopefully we don't have one.

Okay. Okay, great. Thank you.

Thank you. Our next question comes from Amanda Tepper. You may ask your question, and please state your company name.

J.P. Morgan. Good morning.

Good morning, Amanda.

My first question would be on CapEx. You're growing volumes, you bought something in December, you've won new business. How can your CapEx be declining year-over-year?

Well, remember, our '05 capital, we had significant investment in one of our facilities just south of Philadelphia, our landfill facility. As Tod mentioned a minute ago, we've experienced some additional costs as it relates to construction of landfill space. Our liner costs are up -- I think, Tod, if I'm not mistaken, anywhere from 15 to 20%?

Yes.

And then I think when we look at the '05 capital, again, that's reflective of what we're experiencing in our landfill business.

So, does that mean you're doing less landfill development this year, basically? In '06?

Well, Amanda, there is a land purchase associated with that site that Jim spoke of, which really moved it up. We're not doing less landfill development. I think if you go back and were to listen to the call at the beginning of last year and even throughout last year we talked to that one specific asset. I think aside from that we're -- it's fairly normal. That one land purchase asset investment was about $20 million.

Right. So CapEx to revenue should be about 11%, a little less.

Yes, around 10%.

Okay.

Ten to 11%, yes. And our DD&A should be in that same range.

Okay. And then my follow-up question is on your free cash flow and what you're going to do with it, because based on your guidance, it sounds like you're looking at re-levering a little bit? And then you're also talking about being active in some swaps and perhaps some acquisitions. So I know you want to keep a strong balance sheet, but how much would you be willing to re-lever? Because that would be reversing a trend you guys have done on the de-levering side over the last several years.

Well, Amanda, we've got, as you well know, we've got tremendous capacity still yet on the balance sheet and still a tremendous amount of room before we would jeopardize the investment grade, which we will not. And most of these exchanges really have very little cash exchanging hands. So we wouldn't see very much debt at all. In fact, actually I think even when we look at this share repurchase going into next year, I think depending on when it all occurs we may or may not be dipping into the bank facility to fund it. So all in all, I don't really see our leveraging changing very much from year-end.

Amanda, again, we have about $300 million of cash on the balance sheet at year-end. Now, some of that needs to go to pay the taxes in the first quarter, but that still leaves us a sizable cash position to deal with the share repurchase program. And as Jim indicated, we may seasonally be into our bank facility a little bit, but not much.

Thank you. Our next question comes from Leone Young. You may ask your question, and please state your company name.

Yes, thank you. Citigroup. If I could follow up just a little bit more on the volume. Even if we take out the hurricane impact, you still show a slight deceleration. Is that more a conservative stance, simply because you're going to continue pricing? Or should I be thinking that there's some divestiture in there as well?

No divestiture. Obviously if there were divestitures, we would treat that separately. And incidentally, the net of what we divested and what we acquired, the rollover impact from '05 to '06, is essentially zero. I think the view is a greater emphasis on the pricing, the quality of revenue side of the equation.

And again, as we've done in the past, we will give guidance as we move through the year at mid-year. So, if we see a number of bids that we're starting to win and the volume steps up as a result of that, then we would step up the internal growth guidance, mid-year.

Great. And as a follow-up, I will ask the obligatory question: what are you seeing your publicly traded competitors do, in terms of price? And also, anything you can comment on the independents activity?

I think overall the pricing environment in the marketplace is -- at least across all of our marketplaces -- is very positive, from our national competitors as well as the independents that we're seeing.

So we would expect to see, again, positive pricing and possibly maybe it would become a little bit more aggressive as the year goes on. Hopefully, we'll start to see a little bit more movement in landfill pricing. I think we're starting to see a little of it, but again, I don't think it is where it needs to be and I think we'll start to grow into that the latter part of '06.

Thank you. Our next question comes from Lorraine Maikis. You may ask your question, and please state your company name.

Thank you. Merrill Lynch. Good morning.

Good morning.

Just wanted to follow up on the cash flow guidance. The 270 to 280 is normalized for that deferred tax payment. Is that also normalized for the 60 million of working capital change?

Yes, it is.

Okay. So on a GAAP basis we should expect something like 100 million of free cash?

That's correct.

Okay. And then --

Now, again, the payable side of the working capital is a little bit difficult to forecast as -- depending on how the payable cycle ends at each quarter at year-end. But I think that's a fair assumption up front. Hopefully we'll outperform that.

Okay. And then how much more of your restricted cash balances do you expect to be able to convert and have the ability to use in your share repurchase program?

Ed, why don't you go ahead and take that?

Well, I would say, if you look at particularly the cash related to industrial revenue bond, I think we would expect that we would release at least $100 million of that restricted cash during the course of the year to pay -- or to put against our capital expenditure program.

Thank you. Our next question comes from Bill Fisher. You may ask your question, and please state your company name.

Yes, Raymond James. Good morning.

Good morning, Bill.

Anything new on -- as you're looking into '06 on the trends on your landfill volume front? Are you still seeing Arlington ramp up or anything else in local markets?

Well, we are still seeing Arlington ramp up. Most of the volumes are right now internalized. We would hope to expand those volumes during the course of '06.

As far as landfill development projects, we've got a number of them still in process, but probably nothing coming to fruition in '06. So we'll continue to reinvest in the vertical integration of a number of markets out in the Southwest and in the mid-Atlantic states.

So that's kind of what we have on our horizon here right now, Bill.

Okay. And just for Tod, what has been the historical, roughly, for participation on the 401(k) you match on your employees?

We've probably been about -- this is off the top of my head -- I'm guessing maybe 60% or so. Obviously, it's people that are nonunion. Union employees are in their own union plan. So we have seen moderate performance there.

Republic adopted a policy a couple years ago of auto-enrolling for new hires, when they became eligible. But it's still not up to probably the level it needs to be.

Certainly, I think when we talked about in December, expensing stock options, we indicated that the combination of stock option, expensing, and enhancements to our 401(k) would be a cost of about $0.05 to the Company. $0.03 for the stock option program in '06 and $0.02 for doubling the match in the 401(k).

So, hopefully that will foster a greater focus on that and get a little bit better participation there.

Thank you. Our next question comes from Corey Greendale. You may ask your question, and please state your company name.

Hi. First Analysis. Good morning.

Good morning, Corey.

First question is on your pricing approach for '06. I was hoping you could just say a little bit more about that, whether there's any particular segments, portions of the business, that you're kind of going after more than others?

Well, I think we're focussed more on disposal and the opportunities we have in disposal. I think we're also looking to accelerate our pricing in the Special Waste Event business. It's still relatively soft and it is still consuming the same airspace as MSW is. And we need to get the prices up in that particular area. So I think we'll be much more aggressive there.

And as far as generally across the business, I think our people are much more familiar with the tools that they employ and much more comfortable because of the success we've had in the past year. So I think we'll continue to be aggressive.

Okay. And second question is: I know you have been focussed on safety, as many have. I wonder if you, off the top of your head, know the reported incidents in '05 versus '04? And how long do you think that takes to start translating to lower insurance cost, assuming it was down?

Well, I think we're seeing it today. I don't have the number. I don't know, Mike Cordesman is probably also joining us. I don't know if he has it either, available, and will make it available.

But since we embarked upon changing the culture of the Company two or three years ago, with the help of DuPont, we have seen a tremendous amount of change amongst our employees on how we approach the preventative side as well as how we investigate and report accidents. And it's -- I think it's starting to show itself in our insurance expense and in our ability to hold costs down.

Corey, '05 to '04, we had a reduction of about 1600 incidents, about 18%.

I think also Jim, the other thing we have to consider from a insurance expense is that, obviously, we use a outside actuary and typically it takes several years of consistent performance to have an actuary reflect that in accrual rates. So, generally, if you have an improving trend you see it slowly, gradually, over a several year period, that it takes some time to work its way into the accrual rates.

Operator, we'll take two more questions.

Thank you. Our next question comes from Tom Ford. You may ask you question, and please state your company name.

Yes, thanks. Good morning.

Good morning, Tom.

Jim, I don't know if you can answer -- I'll ask it, but I don't know if you guys have the data. But pricing has been rising over the past couple of years. It seems like it certainly started to accelerate in '05, but I'm just wondering, how much of your customer base do you think is running at the appropriate pricing level today? I know that's always a moving target, but I'm just wondering how much of a lag effect there is?

Well, you're right. What we have been doing is obviously attacking the customer base that has presented the lowest returns to us. And I think that's what, in the latter part of '04 and all through '05, that's been our focus. We're now into that part of our customer base to become much more aggressive. Why we have hit almost all of our customers for general price increasing, it -- obviously depending on their level of contribution, that was what gave rise to how much price increase we attached to those accounts.

So, I think what you're going to see in '06 is a much more general approach to pricing. We have moved up our lease contributors to be contributors now. And you will see it much more broad-based across the customer base.

Remember that we have a third of our customer base that is in franchised areas and predominantly pricing comes from CPI.

Yes, okay. And for my follow-up, Tod, was there anything in the numbers -- I'm not sure if you guys dealt with it in 4Q or will deal with it in 1Q, but was there an incremental impact from Houston?

Well, we did have some cost there in Houston. I'll let Jim go ahead and speak.

Yes. We had an issue in Houston. We had a contract with the City of Houston for residential collection. We had a number of other municipal collection contracts there. The City of Houston directed us to a third party disposal site where the third party would bill the City of Houston for disposal. And we had some intermingling of municipal waste at the borders of a number of cities there, and in the fourth quarter we refunded to the City of Houston approximately $2 million in disposal charges that were incorrectly billed to the City of Houston, and we're already incorporated in the billings to two cities or three cities that are suburbs of Houston.

After investigating that, Tom, we have discharged the General Manager and the Operations Manager, and again, I think they were lax in utilizing the routing tools that we had there. Otherwise we would have picked up on it. But as soon as it was brought to our attention we corrected the situation. We're in the process of changing management and have refunded to the City approximately $2 million in the fourth quarter.

And currently the city is reviewing the extension of our use and collection contract for an additional year, and I think that is probably in response to the fact that once the problem was brought to our attention that Fort Lauderdale and our regional office in Dallas responded very quickly.

Thank you. Our last question comes from Stewart Scharf. You may ask your question. Please state your company name.

Good morning. Standard and Poor's Equity Group.

Good morning.

I just wanted to know the breakdown over the next couple of years for option expense and benefits plan. I know you've said that you're expecting about $0.06 in '07 and '08. Will it be about $0.03 in option expense in all those years?

Well, the way that works is it will be about $0.03 in '06 and then I think it ramps up to about $0.04 the next year, $0.05 the year after. And then I think it kind of flattens out at about $0.06. And that's based upon continuation of the option program at the current rates.

I might mention that the total number of shares that we have as current overhang in options is something in the range of about 8 million shares outstanding. Maybe about 9 million shares outstanding.

Okay, thank you.

So there is not a lot of overhang from options in Republic.

Okay.

Thanks.

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