Republic Services Inc (RSG) 2007 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'Conner. (OPERATOR INSTRUCTIONS) At this time, it is my pleasure to turn the call over to Mr. O'Conner.

Good morning and thank you all for joining us. This is Jim O'Connor. and I would like to welcome everyone to Republic Services' fourth quarter conference call.

In addition to reviewing our fourth quarter and full year performance, we will also discuss our guidance for 2008. Todd Holmes, our Chief Financial Officer, and Ed Lang, our Treasurer are joining me as we discuss our fourth quarter performance.

I would like to take a moment to remind everyone that some of the information that we discuss on today's call contains forward-looking statements which involve risk 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 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 6th, 2008. 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 expressed written consent of Republic Services is strictly prohibited.

During the fourth quarter we continued to deliver on our pricing initiatives and realize margin improvement. We believe the current pricing environment is sustainable across all lines of business and our key results for the quarter were: Republic's revenue growth 3.9% to $796 million; we achieved internal growth of 4.7%, with 6% of price improvement and volume decline of 1.3%.

Our fourth quarter volume growth comparison was effected by a slow down in residential housing construction activity, and lower associated landfill volumes. Price growth continues to be strong. Core price is up 4.3%. Price is the most important factor for covering rising costs and increasing operating margins and return on invested capital. Within our landfill business, our core price was up approximately 3.3% in the quarter. We continue to see sequential improvement in landfill pricing, particularly in our MSW volumes.

As landfill and residential collection contracts renew, we are seeing consistent price increases and higher retention levels. The biggest impact on our volume growth was in our temporary roll off business where residential construction volumes decreased approximately 15%, which is similar to the trend we experienced during the first three quarters of 2007. Additionally, residential construction related C&D volumes are down at our landfills. We are still experiencing single digit growth in our residential collection, commercial collection and permanent industrial roll off collection volumes. Despite the net volume reductions, temporary roll off pricing being has remained stable. Operating margins for the fourth quarter improved by 70 basis points to 17.6. For the full year, our operating being margins improved by 170 basis points, to 18.6 after adjustments for remediation costs. We remain focused on all the components of cost, to insure we remain competitive in our market places.

Republic's had a number of significant achievements in the quarter, including our free cash flow for the fourth quarter was $116 million, we exceeded our full year objective by generating $375 million of free cash flow during 2007. During the quarter, we continued to return cash to our shareholders. In the fourth quarter we repurchased 2.1 million shares of stock for $71 million. During 2007, Republic repurchased approximately 5.7% of our outstanding shares. Our board recently approved an additional $250 million share repurchase. Therefore, we had $386 million authorized to buy back Republic stock during 2008, which represents 7% of our outstanding shares. Share repurchase will continue to be the cornerstone of our cash return strategy in 2008. Since the inception of our share repurchase program in July 2000, we have repurchased over $2.1billion of Republic stock, or 41% of our outstanding shares. Upon completion of the existing board authorization, our share repurchase program will total $2.5 billion or 48% of of our outstanding shares.

In addition, Republic Services increased its dividend by 60% during 2007. And currently has a yield of 2.3%. Our current cash yield to shareholders is approximately 8% per annum. Moody's investor services upgraded our long-term credit rating to BAA 1 in December. Republic maintains the highest credit rating in the solid waste industry.

During the fourth quarter, Republic divested of a noncore business involved in the processing and sale of landscaping materials. This business had an annual revenue of approximately $50 million. As a result of this sale, we decided to consolidate our southwest and western regions. This reorganization will increase the productivity of our regional staff. We continue to utilize a return on investment pricing on all renewals of franchise and municipal contracts. Occur the fourth quarter Republic renewed and expanded franchises and municipal contracts in South Florida, Illinois, Texas and while improving our return on investment. And we also renewed an operating contract for a landfill in Kentucky. At this time, I would like to turn the call over to Todd Holmes, our Chief Financial Officer, for a review of the fourth quarter financials.

Thank you, Jim.

I'll begin my review of the company's financial results by discussing revenue. Again, as Jim indicated, the fourth quarter reference rose 3.9% to $796 million from $766 million last year. Internal growth was 4.7%. Total price growth was 6%, with 4.3% from core price. 60 basis point increase from fuel charges and a 1.1% increase from commodities. During the quarter, we benefited from our ongoing price increase initiatives and strategies in all lines of business, and we have been successful in 2007 in securing adequate price increases to provide decent returns on our substantial investment.

For 2008, we expect price in the 4% range. I might add that at current fuel prices, we could see an additional 60 basis points of price, due to higher fuel costs that we saw in the fourth quarter. Also, for 2008, we did not forecast any increase or decrease in the price of commodities and for the full year, 2007, we actually benefited from a 90 basis point increase in commodity prices. Our fourth quarter volume declined by 1.3%. However, we had one additional work day in the fourth quarter and if we adjusted for that additional work day, the fourth quarter decline would have been about 1.9% or consistent with what we saw in the third quarter.

Core volume was down 1.5%, noncore volume was up 0.20 of 1%. Temporary rolloff volume was down, as Jim indicated, 15% and landfill volume, particularly in the C&D area, was down 1.6%. Our commercial and residential volumes were both up about 1%. Divestitures did account for the remaining 0.80 of 1% reduction in our revenue and that was primarily due to the let go divestiture in the fourth quarter. So we will see that roll over impact as we go into 2008. With more -- other revenue.

Fourth quarter year-over-year operating margin: year-over-year Republic's operating margins increased by 70 basis points from 16.9% to 17.6%. Key components of our year-over-year margin increase, excluding the landfill charge are as follows. Truck maintenance was benefit of 20 -- excuse me, 30 basis points, risk and insurance -- health insurance costs were a decline of 60 basis points. Fuel was a decline of 100 basis points. Landfill operating was a benefit of 80 basis points, disposal and subcontracting costs was a benefit of 110 basis points. Labor a benefit of ten basis points, DD&A a benefit of 30 basis points and SG&A decline of 30 basis points to give us a net 70 basis point benefit.

Now we'll briefly comment on these fourth quarter changes in year-over-year margin. First, truck maintenance. Again, during the fourth quarter of 2007, our continued focus on cost savings initiatives and also the improved pricing resulted in a reduction in truck maintenance expense. Second, the health and risk insurance. Insurance expense during the fourth quarter of 2007 was 6.4% of revenue.

This is higher than the fourth quarter of '06, due to one-time adverse development and a few general liability claims and also higher year-over-year medical costs. We believe that risk and health insurance cost as a percentage of revenue should be in the range of 5.5% on to 6% during 2008. Third, fuel. Our average wholesale price per gallon increased from $2.44 in the fourth quarter of '06 to $3.11 in the fourth quarter of '07. Current fuel prices, I might add, are approximately $3.13 a gallon. So that's very close to our fourth quarter average. Fourth, the landfill operating expense.

During the fourth quarter, certainly our landfills benefited from improved pricing as did all lines of business. But in addition, in the fourth quarter of 2006, we saw -- that was when we began to see higher costs at our county-wide facility in Ohio. And therefore our costs were higher in '06 than in '07. The fifth category, disposal and subcontracting costs. This is our largest cost category through which the impact of improved pricing is clearly visible. Also, dry weather, particularly in the southeast, also helped to lower disposal costs by about 40 basis points. The sixth category is labor. During the fourth quarter, we continued to benefit from productivity improvements in labor which contributed to some modest margin expansion. Seventh is DD&A. The decrease in DD&A as a percentage of revenue is primarily due to higher year-over-year revenue and improved pricing. And finally, SG&A. fourth quarter SG&A was 10.6% of revenue. This increase in SG&A is primarily due to higher bad debt expense.

We believe, looking ahead that SG&A as a percentage of revenue should be approximately 10% to 10.5%. Also, looking ahead, we believe that operating margins for fiscal 2008 in the 19% range is achievable, and EBITDA in the 29% range is also achievable. That's an improvement of about 50 basis points for both. And that, again, assumes the current fuel prices that we saw in the fourth quarter, and obviously now in the beginning of the first quarter. Our fourth quarter operating income before depreciation amortization, depletion and accretion. Year-over-year operating income before DD&A increased by $11 million or 5.2% from $205 million or 26.8% in the fourth quarter of '06 to $216 million or 27.1% in the fourth quarter of '07, a 30 basis point improvement. Next I'll discuss our free cash flow.

Free cash flow for the fourth quarter of 2007 was $116 million. This is based upon cash provided by operating activities of $191 million, less purchases of property and equipment of $76 million dollars, plus the proceeds of the sale and property equipment of $1 million. Again, that yields a free cash flow of $116 million. Our free cash flow for the year ended December 31, 2007 was $375 million. This is based upon cash from operating activities of $661 million. Less purchases of property and equipment of $292 million, plus the proceeds of property of $6 million. And that equals free cash flow of $375 million.

Our free cash flow for the year ended December 31, 2007 was positively impacted by several one-time items including lower than expected CapEx, capital spending of $20 million. Higher deferred income taxes of $10 million, and higher remediation accruals of $30 million. Looking ahead to 2008, we believe that free cash flow should be in the range of $340 million to $350 million. Or, as we have said before, in the range of 100% to 110% of net income. Let's talk about items impacting our cash balances.

During the fourth quarter of 2007, as Jim indicated, we repurchased, 2.1million shares of stock for $71 million at an average price of $33.18 per share. Our actual share count on December 31, 2007 was 185.4 million shares. Republic's balance sheet remains very strong. At December 31, our accounts receivable balance was $298 million and our day sales outstanding was 34 days. Our net debt was $1,450,000,000 which was up slightly from $1,430,000,000 at December 31, 2006 and our net debt to total capital at December 31 2007, was 53%.

Now I'll turn the call back over to Jim.

Thank you, Tod.

Republic's EPS for the fourth quarter was $0.44, which is 29% improvement versus the fourth quarter of 2006. Our full year as reported, EPS was $1.51. After adjusting for remediation costs, and the sale of our processing and landscape business, full year earnings per share was $1.66. This performance is in line with the increased guidance we provided on our third quarter call. I will now review our financial guidance for 2008.

We anticipate that full year earnings per share will be in the range of $1.78 to $1.82. Republic's operating margins will continue to improve to approximately 19% for the full year 2008. Free cash flow will be $340 million to $350 million, which is in excess of 100% of net income. Internal growth will be two -- will be 2% to 3.5%. We expect core price to increase by 3.5% to 4% and volumes will be down a 0.5% to 1.5%. Our cash flow guidance assumes capital spending of approximately $325 million.

2008 business objectives continued to be focused on improving margins by achieving appropriate price increases to offset inflationary costs and business risks. Improving our market position. Standardizing significant business processes, maximizing efficiency of service delivery and customer service, and rationalizing our cost structure.

I would like to thank all of the employees of Republic services for their dedication and hard work, which resulted in our strong performance in the fourth quarter. Republic's organization would also like to thank Art Dudzinski, who served as the western region Vice President, and we wish him the best in his retirement. Operator, at this time we'd like to open the call to questions.

Thank you. We will now begin the question and answer question. (OPERATOR INSTRUCTIONS) Our first question comes from Brian Butler.

Good morning.

Good morning, Brian.

First question, just kind of looking at the outlook for 2008. You had a huge improvement in margins between 2006 and 2007. Somewhere on the order of 160 basis points. When you are looking at 2008, you are kind of guiding to 50 basis points, with kind of similar pricing outlook 3.5% to 4% with some volume decline. Is there some costs that are really growing more than expected that is limiting kind of the margin expansion there?

I think we've got headwind from fuel pricing, and then some from insurance. And you know, our view looking forward would be that commodities maintain at the current level, and don't necessarily go up.

Also, Brian, we had a commodity benefit from 2006 to 2007. And our view looking forward would be that commodities maintain at the current level and don't necessarily go up, so we wouldn't see that commodity benefit.

Okay. Then my follow-up question is, on the guidance you have out there, can you talk a little bit what's built into those expectations from the perspective of economic activity in the U.S. in general?

Well, you know, Brian, I think if you have been following us, we've historically got away from trying to predict the economy. And most -- I mean for the last two or three years, we have been giving guidance on the upcoming year based on what we saw, what we were experiencing in the fourth quarter. So again, what we are forecasting for 08 is really built around what we experienced in the fourth quarter of 07.

Great. Thank you very much.

Thank you.

Next question from Bill Fisher.

Good morning.

Good morning, Bill.

Just on the landfill volumes, I think you guys had made some company specific moves on curtailing certain waste say out of Canada and some other things during the year and I know you're also I think working on expansions. Just wanted to see if you could give any color on when those events might anniversary and how that plays out during the year.

Well I think the Canadian, Bill, I don't have the exact dates here. But the volumes that we cut off in Michigan were predominantly sludges coming out of Canada, which I think was in the first part of the year and should pretty much be anniversarying out early on in 08. And we did curtail some other waste streams that we were taking in the states, again, either because of the social political impact of the waste streams or after further review, looking at how they may impact our facilities. So,t hat should anniversary out, too, about the same time. We also closed West County during 08 and -- or during 07 and that is going to have some carry over impact.

But all in all, we've got a number of expansions. We've never been refused an expansion. And we would anticipate that we would get one or two or three expansion approved early on here in 08. Predominantly, I think most of those in the southeastern part of the United States.

Okay. Great. Just to follow on, Tod, on the CapEx, is the increase this year just general inflation, or some new contracts? I was just wondering if the current economy persists and you keep having the lower run off and landfill, is there an opportunity to reduce that at all, or is that pretty cast in stone?

No, there certainly is an opportunity. I think you saw that in 2007. We do adjust based upon what we see in the business. And capital here is very flexible. We can move the equipment around which we have done in 2007 and slowed down the replacement capital in certain markets as was necessary. I think a lot of this increase in capital really comes from trucks.

If you think back to 2006, we were buying truck bodies and -- excuse me, chassis and the engines before the change in the emission requirements. So we had built up a pretty good inventory of trucks at the end of 06 which we then delivered to our operations in the first four months of 2007. So now in 2008, we are back to more of a normal type of truck purchase scenario. So yes, I think that's really the key driver there, would be the vehicles. Again, our capita spend should be somewhat less than DD&A and also obviously, we think our free cash flow, because of that factor, the spread between capital spend and DD&A, and -- or non-cash taxes, should allow us to get free tax flow in the range of 100% to 110% of net income. 07 was an unusual year where I think our free cash flow was 129% or something like that of net income, that was huge. But if you look steadily at this company in good times and bad, we -- cash flow has always been in excess of net income.

Thank you.

Our next question from Jonathan Ellis.

Great, good morning guys.

Good morning.

Just wanted to talk a little bit about, you mentioned some of the new contracts and expansions that you are anticipating for 2008. Can you talk about either directionally or in quantitative terms what benefit that should have to volumes this year, what you're factoring it down, 0.5% to 1.5% for the year?

Well I mean, the majority of the volume forecast being down 0.5% to 1.5% is the roll over impact of our construction decline over the course of 2007, so that's the majority of it. As far as growth goes, I mean, we've renewed contracts, we picked up a contract in Donner's Grove, Illinois. We have expanded our operating position which will -- I think we'll experience in the fourth quarter in Palm Beach County. We've successfully renewed and expanded our service offering in Orange County, Florida but that contract won't start up until January of 09.

So, some of the capital that Bill Fisher asked about will be -- probably be -- is driving our 08 capital number, but we won't really actually receive any value from it until the contract starts back up in 09, so I mean, we have been very successful in all these contracts, including other renewals in south Florida have been at significant increased prices. Which again I think are an indication that the sector is looking to improve return on invested capital. So we have seen pricing move anywhere from 5% to as high as 10% on our franchise offerings.

Great. Just the follow-up in terms of the coming year, both in price and volume, if you can talk either in quantitative terms or directionally, what your view is on how franchise versus competitive markets will trend.

Well competitive markets on pricing are going to trend higher. We've got index pricing, we anticipate, I think built into our 08 forecast is about 3% CP I. So again, with fuel headwind there, you know, we'll lag recovery there. But you know, obviously to be up at the 3.5% to 4% price, we are getting in excess of that in our competitive market or in the markets where we have discretion as it relates to pricing. So --

Just on the volume side?

Well on the -- again, I mean, on the volume side, we are basically seeing modest growth in all lines of business, other than our residential industrial collection, basically construction and demolition. And I think probably anywhere from half to 1%, maybe north of 1%, depending online of business and I think it's probably anywhere from 0.5% to 1%, maybe a little north of 1%, depending on line of business.

Great. Thanks.

Thank you.

Next question from Corey Greendale.

Good morning.

Good morning, Corey.

Jim, you sort of got to this a little bit with your answer just a second ago, but can you speak a little bit more specifically about trends you are seeing in non-residential construction and the commercial lines of business? If there is any spill over to the economy in those areas yet.

No. We are still seeing relative strength there, which should translate into continued commercial growth, small container growth and should translate into a permanent industrial growth. We still see the American Institute of Architects index in the mid 50s, which really would predict a relatively strong industrial and commercial growth for construction in 08 and 09. And I think some of their highest billings are in 07 and are anticipated in 08, which are again a reflection of continued strength there. I know we, like a lot of people, have paid a significant amount of attention to articles with regards to commercial construction but we have not experience it. And again, as you well know, we won't see that impact, assuming there even is one. I think the indexes say there won't be, but assuming there is one, we won't see that anywhere from 12 to 18 months, depending on the size of the project.

Thank you. That's helpful. And Tod, was there a closure post closure true up in the quarter? And as what was the magnitude of that?

Yes, you are referring to the 143 adjustment?

Correct.

And that was approximately $4 million. If you look back to the fourth quarter of 06, it was in the same range also.

$4 million favorable, I assume?

Yes.

Thank you.

(Operator instructions) Our next question from Jagdeep Ghuman.

Good morning.

Good morning, Jag.

Couple of questions here. One, where are you in term of your contract renewals, both of within collection and on the disposal side, just as a ballpark percent and also in 08, what do you expect to renew?

I don't have the list, but we have successfully renewed every contract. The only contract that -- of any consequence, immaterial to the whole company, was the loss of the City of Houston and it wasn't lost to a competitor. It was lost back to the public works department in Houston. But much beyond that, jag, I think we don't have any material exposure and some of the contracts I just related to you, we have a significant amount of opportunity. Again, I think we appear to be one of the leading contenders, too, in another county offering in the central western part of Florida, which we hopefully would hear something on in the next three or four months.

Okay. Fair enough. And as a follow up, Jim, you had mentioned that for 08 of course the share repurchase will remain a cornerstone for your cash balance strategy. However, as we look out to 09 and beyond, do dividend increases become more of the focal point? Have we kind of cycled through the bulk of share repurchases here?

Jag, I would say that you'll see a pattern of behavior consistent with what you saw this past -- past year or past couple of years. Where, as the cash flow grows, we put the additional cash flow into the dividend. However the share repurchase continues to remain the cornerstone for the distribution strategy of our cash, particularly at these levels in the stock price. There is a substantial value to be captured here and we intend to capture it through the share repurchase program. So, at this point, I would say looking out ahead, even with some appreciation of the stock prices, share repurchase would play a big part in cash distribution. But with a higher dividend mid-year.

Got it. Thank you very much.

Operator, anybody else on the line?

Hello, Scott, your line is open.

Hi, good morning, guys. Can you hear me?

We can hear you now, Scott.

Hi, Scott Levine, JP Morgan. You mentioned, Jim, that residential construction-related roll off pulls were down similar to the prior quarters, but was there any change in the geographies in terms of relatively weaker or stronger markets in that area?

No, I mean, I think the geographies are still -- we are seeing weakness in Florida, Nevada, California. Areas that we have big business interests and where we would have a lot of volume. I mean, we are seeing it in other parts of the country. But I think predominantly in those areas, and I don't think it's any surprise to anybody that we are seeing it and I think the key here to me is that while we would rather see this part of the economy stronger, it doesn't reflect volume lost to competition or the marketplace. It doesn't indicate that -- that the pricing environment is changing. And I think those are the real positives here. That pricing's holding up in this sector. In light of a lot of pressure, and a lot of equipment inventory build up. So I think when we get through the cycle, whenever that is, again the gain should be relatively substantial to the bottom line here.

Got it. One quick follow-up. You mentioned, or did you mention, what percentage of your debt is currently at floating rates?

I think we got it to about 44% floating and 56% fixed.

Great. Thank you.

Next question from Leone Young.

Good morning.

Good morning Leone.

It's great to see that landfill pricing go up sequentially, and I was just wondering if you could give us a little bit more color in terms of, is a lot of strength coming from renewing your contracts on the spot side or maybe a little color you have on geographies or lines of business with obviously C&D being the toughest?

Well I mean, I think,as it relates to landfill pricing in general, we said a number of quarters ago that we got contracts that are anniversarying out and as those contracts anniversary out we are going to be moving price up, and that's what you're starting to see in our landfill pricing. If you went back to the fourth quarter, I think of 06, you would see landfill pricing about 2.5%. I may be off tenth of a percent or so, but somewhere in that range. And now we are reporting well over 3%. So, we continue to stick with the plan. We are not giving out long-term contracts. And we are continuing hold our C&D pricing levels in some of our larger facilities.

Now, we have a couple of facilities that are exclusive to C&D and we have been holding our price up and those sites are in Virginia and Maryland, predominantly and we continue to hold pricing this those particular markets while we've seen, obviously, volume decreases there. So again that is our business strategy at Republic, it is easy to want to secure volume but I think in the longer term air space is expensive to build and we are going to keep the price up so we don't have to chase it back up later on.

Right, and knowing there is always exceptions, in general, are you seeing your competitors take the same line at this point?

Yes, again, I can't seek specifically to our competitors but I would think we are not -- our volume losses, when we review them, are due to the economy. And we don't see a shifting in market shares. We believe we are getting our fair share on the markets and therefore the only conclusion I can draw is that pricing is competitive.

Terrific. Thank you.

There are no further audio questions at this time. (OPERATOR INSTRUCTIONS)

Operator, I think we are growing to conclude the call at this stage.

Alright.

Okay, I would like to thank you, and I'd like to remind everyone that a recording of the call is available for the next 24 hours by calling 203-369-1381. And additionally, there is a recording of the call will be available on Republic's website as republicservices .com. And again, I would like to thank all of you for participating and spending time with us this morning. and have a good day. Thank you very much.

That does conclude today's conference, you may disconnect your line, thank you.