Republic Services Inc (RSG) 2008 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter and year-end conference call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your host this morning is Republic Chairman and CEO, Mr. Jim O'Connor. Today's conference is being recorded and all participants are in a listen-only mode. There will be a question-and-answer session following Republic's summary of quarterly earnings. (Operator Instructions)

At this time it is my pleasure to turn the call over to Mr. O'Connor. Good morning, Mr. O'Connor.

Good morning, Caroline, and welcome. Good morning and thank you 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 2009. Don Slager, our President and Chief Operating Officer, Tod Holmes, our Chief Financial Officer, and Ed Lang, our Treasurer, are joining me as we discuss our fourth quarter and year-end performance. I'd like to take a moment and remind everyone that some of the information we discuss on today's call contains forward-looking statements which involve risks and uncertainties and may be materially different from our actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.

Additionally, the material we discuss today is 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 27, 2009. Please note that this call is the property of Republic Services, Incorporated. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to start this call with a review of our integration process and tell you how the merger is progressing before Don reviews operating performance and Tod discusses financial results. We're confident in our guidance of achieving $150 million of annual run rate synergies by the end of 2010. We expect to be on a run rate of $100 million by the end of 2009. The cost to achieve these synergies are anticipated to be approximately $135 million in 2009 and $55 million in 20 10.

Our board of directors has established a committee to oversee the Company's progress towards integration. The board has engaged Deloitte to track and validate synergies as they are reported. As of March 31st we expect a run rate synergies achieved to be approximately $70 million. These savings are being achieved through the restructuring of the corporate and field organization, disposal optimization, and efficiencies gained through rerouting and consolidation of divisions. Let me provide you some detail on the integration process. As I explained on our last call, we've invested more than 35,000 man-hours in planning and integration processes to ensure a smooth day one start-up and integration. Back in December we completed the organizational design and filled a number of leadership positions at the corporate, regional, and area levels.

During the first quarter we continued to execute our integration plan and expect to be finished with staffing the remaining management positions within 60 days. Our greatest focus is the systems integration in overlap markets. Route density and disposal optimization will generate significant benefits. By merging the overlap markets onto a single billing and operating system, we will be able to roll out our decision support tools for vehicle routing and disposal optimization. The system integration process for overlap markets is divided into multiple phases. Phase 1, which includes Denver, Lubbock, Charlotte and Greenville, is complete and the integration teams have moved to the next phase, which includes six markets. We expect to complete all systems integration in overlap markets by the end of the third quarter. The overlap markets represent approximately 30% of our total revenue.

The financial benefits we realize during integration will assist our financial performance in this weakened economic environment. The synergies realized will be on an ongoing benefit -- will deliver ongoing benefit to the Company. As you know, we announced an agreement with Waste Connections on February 9th to divest a group of assets in seven markets that have approximately $110 million in annual revenue. We are working with Waste Connections to close this portion of the divestiture process and expect to receive all sales proceeds before the end of the second quarter. Our agreement with Waste Connections represents more than two-thirds of the business that will be sold. All after tax divestiture proceeds will be used to reduce debt. On December 20, 2009, we signed an agreement to sell assets in the Atlanta marketplace to Advanced Disposal. This transaction includes 13 commercial routes, two transfer stations. This transaction is also expected to close in the second quarter of 2009.

We continue to make progress on all remaining divested assets. After a thorough screening process we are negotiating with multiple potential buyers in each of these markets and expect to sign agreements and close before the end of the second quarter. Now let me briefly comment on the results of the fourth quarter and the full year. Earnings per share in the fourth quarter was $0.41 and $1.73 for the full year before the impact of merger related costs, remediation expenses, and other onetime costs as detailed in the Company's 8 K. GAAP EPS in the fourth quarter was a loss of $0.55. Full year GAAP EPS was $0.37. Capital expenditures in the quarter were $123 million. Free cash flow was $136 million for the fourth quarter and $352 million for the full year before merger-related items and legacy Allied tax payments. During the quarter, Republic paid an increased dividend of $0.19 a share, which was an increase of 12% over the prior year.

We secured significant increases in our surety bond capacity, which will lower our financial assurance costs. And we brought on-line two significant new landfill gas to energy projects recently in Pennsylvania and Georgia. Additionally, we have a pipeline of 18 energy projects that are expected to come on-line over the next two years. This will bring our total number of landfill projects to more than 80 in operation and will generate enough energy to power 480,000 homes annually. At this time I would like to ask Don to comment on our operating performance and to discuss actions that we are taking to adjust for the economic environment that we're in today.

Thanks, Jim. Our consolidated operating performance for the fourth quarter of 2008 consists of three months of Republic and one month of Allied. However, my comments will look at our operating performance as if the two companies were combined for the entire fourth quarter. Tod will speak to reported internal growth, but on a pro forma combined basis fourth quarter core price was strong at 4.1% and fuel fees were 1.7%. Our landfill price improvement in the fourth quarter was approximately 4%. We continue to succeed in maintaining our price strategy to achieve an appropriate return on capital. On a pro forma combined basis the revenue impact from commodities was negative 1.8%, average price per ton of commodities decreased approximately 43% from Q4 2007. On a pro forma combined basis, fourth quarter volume loss was negative at 6.8%.

If we exclude the positive volumes from hurricane Ike, fourth quarter volumes were down 7.8%, which reflects the challenging economic environment. The greatest impact of volume loss was in the temporary roll-off and landfill lines of business. Additionally, we saw decline in volumes from the third quarter 2008 to the fourth quarter 2008 in the commercial collection and permanent roll-off businesses. These volume declines are a result of the weak economy and are not a result of loss of market share. Although we cannot control the volumes that are lost as a result of a the weakened economy, we are fully engaged in reducing costs to maintain our margins. On a pro forma combined basis and excluding the unusual costs recorded during the fourth quarter, EBITDA margins were approximately 28%.

This strong operating performance in a weak economic environment demonstrates the quality of our field organization and our financial discipline. Our operations controller, Jerry Clark, and I are actively engaged with our region and market area teams to ensure we are adjusting our business plans on a real-time basis to account for the current operating environment. Our region and local management teams are aggressively managing productivity, staffing levels and capital expenditures, while maintaining a strong focus on business fundamentals, such as safety, customer service delivery, pricing, and maintenance excellence. As Jim said, the integration is on track. Keep in mind it's been less than 90 days since the merger closed. We have already reorganized our region, area, and business unit management structure, completed the system conversions in four of the 17 overlap markets, and as it relates to disposal optimization, we have redirected 5,000 tons per day to more cost-effective landfills.

Our internalization rate at the end of the year was approximately 68%. As we work through integration of our operations and disposal optimization, we expect to see further improvement. Regarding route consolidations, in the four overlap markets where conversions have taken place we have nearly completed two reroute projects and the other two are underway. Finally, we are working to identify further procurement savings by leveraging our scale. As we work through the integration process, we continue to learn from established best practices of both companies and see additional opportunity as a result. We are truly building on our combined strengths. I'm confident that through these strengths, that is our team, our assets, our systems and our plan, we will take full advantage of the synergy potential of this merger.

We will scale our business accordingly to meet the opportunities that exist in the market and adjust to the condition of the economy, while continually generating appropriate turns and producing high levels of cash flow. As I have traveled around the country participating in regional operating reviews and visiting numerous division, I can tell that you our people are energized about the benefits of this merger, they are complimentary about the smoothness of the transition and very optimistic about the future of our Company. We are pleased with the team we have assembled and we are proud of what they're accomplishing in the business. We thank all of them, all of our dedicated people, for their hard work and commitment. Now I will turn the call over to Tod for review of our financial performance.

Thank you, Don. First, there's a lot of accounting noise here and I want to remind everybody that the key premise for this merger was and continues to be cash and the generation of cash flows. We will have every year $150 million of cash synergies upon full integration of both businesses, which will occur by the end of 2010. Let me turn now to the 2008 fourth quarter results and remind everyone that the 2008 financial results include about one month of post-merger Allied results, and therefore financial comparisons to prior years are not particularly meaningful. There are two months of Allied results that do not get reported since their last SEC filing was the September 30th Q, and in our financial results, only one month of their numbers are included. So we do have some pro forma financial information which Don provided to you.

Let me talk now to fourth quarter 2008 revenue. As reported, revenue rose 56.3% to $1.24 billion from $796 million last year. This increase of $448 million consisted primarily of $462 million or 58% from the merger with Allied. Again, approximately one month of revenue. And a decline of about $14 million or about 1.7% for standalone Republic revenues. For Q4, we are reporting the addition of Allied revenues as acquisition growth. Accordingly, the following components of internal growth relate only to the Republic standalone business. Republic's standalone core price growth is 4.1%. Republic's standalone fee increases is 1.8%. Republic's standalone commodity price declines was negative 1.3% for a total price of 4.6%. Now, Republic's standalone volumes were down about 6.6%. Actually, as we move through the quarter, they continue to decline into the latter part of the quarter. Additionally we had about 0.3 of 1% for tax fees that were added on to the top-line.

For the Republic standalone business we continue to see core price improvements in all lines of business led by commercial, residential businesses. Core landfill price remains strong at 3.6% for the fourth quarter, which improved about 20 basis points from 3.4%, which we experienced in the third quarter. For Republic's standalone business, commodity prices were down approximately 45% to an average $83 per ton as compares to about $1 -- $150 a ton in the prior year. For your information, current prices are in the approximately $63 per ton range. Also, for your reference to give you some sort of go forward idea of the magnitude of commodities, if we had merged on October 1, 2008, our fourth quarter commodity volumes would have been about 430,000 tons. Now, with respect to volume declines for Republic's standalone business during the quarter, residential volumes were essential flat with the prior year and commercial volumes experienced low single-digit declines.

Volume loss, as you can imagine, was most significant in the roll-off and landfill lines of th business, which experienced low teen year-over-year volume declines, both of which are a reflection of the weak economy. Again, the volume loss accelerated within the fourth quarter as we continue to see sequential months of declining volumes. We also see this in the first quarter 2009. For your reference, Allied's business, when we examined it, experienced similar price and volume impacts as Allied's standalone operations. So certainly very much a positive on the pricing side and the volume side as a function of the economy. Let me turn to the fourth quarter year-over-year operating margins. As a reminder, again, fourth quarter includes only one month, December, approximately for Allied. And since December margins tend to be lower than other months within the quarter, year-over-year margin comparisons are not particular meaningful.

There are a number of unusual costs and charges recorded during the fourth quarter. If we excluded these fourth quarter onetime items our fourth quarter adjusted operating margin is 17.5% compared to 17.6% in the prior year. And that's in light of, obviously, a much weaker commodity pricing environment. The more significant items impacting the negative 10 basis points of change in the adjusted operating margins include -- the impact from net fuel, which was a positive 215 basis points; the impact from net commodity, which was a negative 85 basis points; DD&A, which was a negative 60 basis points; accretion, which was a negative 30 basis points; SG&A a negative 50 basis points and some of that was negative 10 basis points. Now I will briefly comment on each of these components in the fourth quarter. First, net fuel. The year-over-year increase from fuel recovery fees added approximately 110 basis points to operating margins.

Additionally, our average fuel costs decreased resulting in a 105-basis point improvement in operating margins. Wholesale price per gallon decreased from $3 .11 in the fourth quarter or 2007 to $2.78 in the fourth quarter of 2008, or approximately 11.9%. More significantly, current fuel prices are now approximately $2.08 a gallon. Second, the net commodity impact. Commodity revenues decreased approximately 130 basis points compared to the prior year. This was the price decline which was partially offset by amounts rebated to customers for volumes delivered to our material recycling facilities. The overall impact to operating margins from commodities was a negative 85 basis points. Third, DD&A. The 60-basis-point decline in margins primarily relates to a favorable adjustment that Republic recorded in its capping and closure and post closure liabilities in the prior year.

As you may recall, Republic's practice was in the fourth quarter every year to make that adjustment for 143. This adjustment did not repeat in 2008. Next is accretion. The 30-basis-point decline primarily relates to the increase in the credit adjusted discount rate used for capping, closure, and post-closure liabilities. This resulted from the valuation of Allied's liabilities, which were completed in connection with the merger. Finally, SG&A. SG&A as reported was 14.7% of revenue in the fourth quarter. Excluding restructuring and integration costs and costs associated with conforming Allied's bad debt expense to Republic's accounting policy and settlement charges associated with various legal matters, SG&A as a percentage of the revenue for the fourth quarter was 10.9%. Our expectation is that 2009 SG&A will be approximately 10% of revenue, excluding the onetime merger related costs to be incurred in 2009.

Reported operating margins is actually a negative 9%. And again, this includes $316 million of unusual fourth quarter onetime costs and also $14 million of insurance charges, which I will talk about in a minute. These unusual costs again relate primarily to environmental charges, asset impairments and restructuring costs, and they are summarized in detail in our 10-K. If these items were excluded, again the margins in the fourth quarter would have been 17.5%, fairly similar to the prior year. Let me talk briefly about insurance. In the fourth quarter of 2008, we have an additional $14 million of insurance expense. This was a result of an actuarial review of Republic's insurance reserves that was completed in connection with the merger and it was a function of the Company changing actuaries. We have a new actuary to handle the larger combined business, which we will be using on a quarterly basis going forward.

Now let me talk about our noncash interest expense. This is a significant item as we move forward. The Company recorded noncash interest expense of $10 million in the fourth quarter of 2008, all of which was recorded in December and directly results from the merger. The noncash expense arises from amortization on Allied debt that was recorded at a significant discount. The credit markets at the date of the merger were illiquid, hence despite an upgrade to the investment grade rating of Allied's debt, it traded at a significant discount at the time of merger. Now, we expect in 2009, noncash interest expense to be approximately $137 million. Next, let me talk about free cash flow. And again, this is free cash flow for Republic as reported. The free cash flow as reported includes approximately one month of Allied activity. Free cash flow for the fourth quarter of 2008 was negative approximately $82 million.

This is based upon cash provided by operating activities of $38 million, less purchases of property and equipment of approximately $123 million, plus the proceeds from the sale of equipment of about $2 million. Again, that's the free cash flow of the negative $82 million. Free cash flow for the 12 months ended December 31, 2008 was $133 million. This is based upon cash provided by operating activities of $512 million, less purchases of property and equipment of $387 million, plus proceeds from the sale of equipment of $8.2 million. Again, that's the $133 million. During the fourth quarter of 2008, we made $130 million of tax payments associated with the legacy Allied tax issues and we also paid $88 million of transaction-related costs. Excluding these payments, free cash flow for the three and 12 months ended December 31, 2008 would have been $136 million and $352 million respectively.

Excluding merger related cash distributions, our 2008 free cash flow of $352 million compares favorably to our original 2008 guidance of $340 million to $350 million, especially when you consider the lower commodity prices and the deteriorating economic conditions in the latter part of 2008. Now let me talk briefly about accounting policies. Republic is the acquirer for accounting purposes in the December merger with Allied. Therefore, we were required to merge two different sets of accounting conventions into one. We were also required to revalue, for accounting purposes, all of Allied's assets, intangible assets and debt. While cash flows are not significantly impacted by the merger and all of this accounting noise, our accounting EPS is and will be significantly lower due to many factors. We expect these accounting charges -- or changes rather, to lower 2009 EPS by about $0.40.

And this is all detailed in the recent 8-K filing. Key components of these changes are, first of all, depreciation, depletion, and amortization, noncash $0.17. We recorded over $500 million of intangible assets associated with customer relationships, franchise agreements, and municipal contracts. These assets are amortized to expense over the next three to ten years. Additionally, the fair value assigned to landfills was an increase over the prior net book values. These amounts, therefore, will be amortized over the remaining lifes of the landfill as we consume the airspace. Also, secondly, the amortization of discounted Allied debt and accretion of liabilities is $0.18. Third, conforming accounting policies and taxes, particularly the asset lives and fixed asset capitalization policies cost about $0.05. Again, all of these taken together are strictly accounting noise. It is not cash.

Finally, we expect the average tax rate of -- to be 44% in 2009. Now, historically, DD&A has run for both companies probably about 10% of revenues. Due to these noncash accounting changes, we would expect DD&A for the combined Company now to increase by approximately 150 basis points in 2009 and run at a rate of maybe a little bit more than 11.5%. Let me talk a little bit about our normalized 2009 EPS. Our normalized EPS for 2009 is expected to be $1.70 to $1.75. And I just explained $0.40 of merger related accounting changes that I just noted above. In addition to that we have $0.20 of 2009 expected nonrecurring costs to integrate the Company's various information systems and business units. So there's a total of $0.60 there. Our balance sheet remains very strong. At December 31st, Republic's accounts receivable balance was $946 million and days sales outstanding was 40.

Our net debt, excluding discounts, is $7.5 billion at December 31, 2008, and we had approximately $400 million of excess credit capacity available under our bank facility. Republic has maintained its investment grade rating and does not have any significant maturities due in 2009. The $99 million that comes due in May will be paid out of free cash flow. Furthermore, we expect cash taxes to be approximately 90% of the income tax expense in 2009. Now, additional, we're going to pay about $70 million of 2008 taxes. Actually, we paid them in January. We were able to hold off paying them as a result of the merger, so that was a cash outage in January. At December 31st, we had 378.5 million shares outstanding. Currently we have about 18.7 million options outstanding, of which 14.8 million are exercisable. We will return -- we will file our 10-K on Monday. I would be remiss if I didn't thank a number of people, particularly our controllers and our field management.

Also, the financial and accounting team here in Phoenix. This team was led by Chuck Serianni, our Chief Accounting Officer, Brian Delgachio, Julia Hokinson, Jennifer Swanson, Cassandra Rossi, and Mark Mahoney. These folks have been working seven days a week since the time of the merger to combine two different budgets, to go through all this purchase accounting noise, set up an opening balance sheet as of December 5th, close out the year-end, and put together a final budget for 2009. Again, they came together from two companies, but they are operating now as one team. So I would like to thank all of those. As a result, we're able to meet these SEC deadlines. Now I will turn the call back to Jim.

Thank you, Tod. I would echo those comments about the financial staff of Republic Services and to the operational staff under Don. We've done a tremendous amount of work here in the last three or four months in planning for the integration, and then once the merger was closed in early December, starting to execute against that plan, as well as putting the two companies together financially and then putting a '09 plan together. So again, Tod, your staffs and Don's, yours in the field are to be commended on the hard work that they put forward to put this business plan together and to -- which now I will go into our guidance for 2009. 2009 assumes there will be no recovery in the economic environment. Revenue is expected to decline approximately 10%, with a 4% increase from core price, a volume decline of 8%, commodities will be down 2%, fuel fees down 2.5%, divestitures are expected to reduce revenues by 1.5%.

Free cash flow from operations and before divestitures and after capital spending is expected to be $550 million or $650 million excluding merger related payments. Net capital expenditures are expected to be $845 million. This level of spending has been adjusted for the economic environment. With our strong capital structure and excess free cash flow, our business operations provide ongoing liquidity and we have no need to look to the debt capital markets for the next two years. EBITDA margins are expected to be approximately 28% or approximately 29.5% before costs related to integrating our businesses. This is an improvement of 150 basis points when compared to full year adjust to 2008 EBITDA performance. Excluding the integration impact, operating margins will be in a range of 17.5% to 18%. Earnings per share before merger and purchase accounting related expenses is expected to be $1.70 to $1.75 in 2009.

As Tod noted, merger related costs will represent $0.20 of earnings per share and purchase accounting related costs will represent $0.40 earnings per share. As you know, our practice is to provide financial guidance based on current conditions and update these expectations on second quarter earnings call in July. That will be -- that will be the practice that we will follow in 2009. So with that operator, I'd like now to open up the lines for questions.

(Operator Instructions) And our first question comes from Scott Levine of JPMorgan. Your line is open.

Good morning, guys.

Good morning, Scott.

You mentioned you have Deloitte in place to kind of track the achievement of synergies versus your targets. How would you guide investors to kind of think about how you guys are hitting your bogeys there and tying in with that the idea that maybe you guys would be ratcheting down your workforce or flexing the workforce down given the steep drop-off in the economic environment beginning in Q4?

I think, Scott, going forward we will be able to separate out the synergies versus the adjustments that Don will be making in the field organizations, we'll make in at corporate related to the economy. As we move forward, I think -- these synergies fall into three buckets predominantly. That's going to be the restructuring of corporate and the field organization and that will represent the lion's share or the majority of the $150 million. Actually, the plan that we're executing against is upwards to $170 million of synergies. So the way it will breakout going into '09, or at the end of '09, will be on a run rate going into '10 of $100 million -- about $50 million to $60 million will be from reorganization and headcount; transportation and disposal, which is disposal optimization, which will be another roughly $15 million to $20 million; route consolidations, which will occur in the latter part of the year once we have the overlap markets on our systems will represent about $5 million to $8 million; then we've got procurement, financing, which will relate to some surety and other financing that Ed Lang can talk about; and then some facility consolidation.

So that will comprise the $100 million. As I said, we are already and on-line through the end March to have a $70 million run rate going into '09. So significantly well into that. And, again, the lion's share is coming from, again, the restructuring of the corporate office and the field organization. And we feel really good about this. And I think if you were, if we were to talk to the board today, they feel very good about it and Deloitte has made those same representations as they accounted for a number of these with along with our internal staff.

And will you guys be providing like quantified synergy updates quarter to quarter going forward or is that not the right expectation there?

We will be quarterly reporting on our progress.

Got it. One additional one if I may. The volume guidance may be a little bit below what we had anticipated, but the core pricing that you guided to a little bit above what we were looking for. Could you talk about what gives you the level of confidence regarding sustainability of pricing with the economy dropping off the way it is and also what the implications of this merger and more consolidated industry might be for the sustainability of pricing into a pretty rough economic environment?

Scott, I've always said pricing is a discipline and I think we have it in Republic Services and I think Allied was practicing it, but I think the real headline here is when you continue to look at disposal pricing in the business, you are seeing disposal pricing move anywhere from 3.5% to in excess of 4%. This is going to continue to sustain pricing in the marketplace and again, we feel very good about our guidance in '09 and we feel that we will be able to attain the guidance that we have given up 4% price.

If I could add, on a trend basis to the -- sequentially Q3 toQ4 we saw pricing move directionally right. All lines of business are priced per unit from Q3 to Q4 continued to move up. Our Q4 price is directly in-line with the 4% that we're giving you guidance on in 2009 and also prices to customers are going to come down a little bit because the overall reduction in the fuel recovery fee. And so the price that the customers will see, will see a slight reduction because fuel is off. And again our 2009 guidance that we've given you projects fuel being kind of consistent with what we're seeing here in January, what we saw in January.

I guess one other thing, I would just echo Tod's comments, we've got a lot of accounting noise here related to the merger. Again, the focus here should be on cash. I think when you look at EBITDA margins, our cash flow guidance, our cash flow performance in 2008, those are all, I think, depicting a very strong business plan and a management team that can execute against a plan. While the economy is weak, we believe that we're adjusting the business accordingly, and I think the guidance reflects it.

Thank you. Our next question or comment comes from Michael Hoffman from WSI. Your line is open.

Good morning, Michael.

Good morning. I'll pick up on your theme, Jim. So free cash flow, these are approximates, old RSG you were steadily doing $0.10 to $0.11 on every dollar of revenue in free cash. New RSG, that's less. How do we get back to -- how do we and when do we get back to that 10% to 11%, and can you do better with all the combining -- [tiking] into Tod's statement this is about cash.

Sure. There's a pretty direct simple answer to that. The cash flow guidance that I gave you for 2009 has about $70 million of taxes that we paid in 2009 that relate to 2008. So that's a big step-up. Then of course the other thing is just the business condition with the commodity impact. That's price and that is about $80 million. So I think to look at 2008 to 2009 and the fact that if you adjust it for the timing difference on these tax payments, it's about comparable from one year to the next. The 650 plus 70 is probably about 720. If you looked at probably the original guidance, both companies started out with a year ago it was in that same range. So we think that's pretty good in what is a very tough economic environment. How we're achieving it? As Don said, we're focused on productivity and scaling the business. We're looking at capital spend to make sure that we're right sizing the capital spend for the business. We've always said that this was a business that when it slows down, the cash flows still hold up because it is scalable.

Remember, we also have the contributions coming from the volumes that comes back. Commodities aside, we're saying with 10% volume, negative year-over-year, and we saw volumes slide in the latter half of '08. So we've got -- as we said in the notes, we're not losing market share, the economy is depressed and we're seeing the same impact on all of our competitors, that is we see volume come into our landfills. So we're seeing price per unit continue to increase, we're seeing volume drop. As the volume returns, we fully expect we'll get our fair share of that volume back and we'll get all the contribution of cash that comes with that.

Okay, how to pick a second question when there's probably 1,000 that need to be asked. What's the starting revenue number for, because you have given all these percentage change numbers, but we need some starting numbers. January 1, when are starting numbers? Revenues starting -- .

I think what you do is you look at the third quarter, Allied's 10-Q and the third quarter Republic 10-Q and in the fourth quarter on a combined basis, we probably had about 4% price and we probably had something like -- well, maybe close to 7% volume declines. Maybe a little less than 7% volume declines in the fourth quarter. So I think you use those two as the map to build your baseline for January 1st.

I think, Dan -- Michael, I think as in the past you can contact Ed Lang and I'm sure he can assist in helping you build your models. But, again, the story here is about the cash and I think you need to look at the cash. For all the listeners on the call it's really about the free cash generation. There's a lot of moving pieces and it's not unlike any other merger that would occur. We've got a lot of moving pieces here as it relates to noncash items. So I think the focus here is on cash. I mean, that's the story line of the business. It's historically been the M.O. of Republic Services to deliver it. And I think even in these economic times, the '09 forecast recognized fairly strong and sustainable free cash flows and a pricing environment that remains stable and a good outlook for it. Operator, next question.

Thank you. Our next question comes from Jonathan Ellis from Merrill Lynch. Your line is open.

Thanks and good morning, guys. Just wanted to first talk on the results for the fourth quarter. You talked about volumes in the residential and commercial collection lines being flat to modestly down, yet landfill volumes down low double-digits and given that my understanding is that a large portion of the waste streams that are coming into your landfills would be considered M.S.W. and theoretically should show similar volume trajectory to what you are seeing on the residential and commercial collection lines. I'm wondering if you can help reconcile the dramatic decline in volumes at the landfill vis-a-vis the volume trends on the collection side of the business.

I think what we're -- I'm going to let Don chime in here, Jonathan. I think a lot of what we're seeing, while we're seeing relatively slight declines in our small container business, commercial business, and continued decline in our industrial rollout, when you look at the weights per unit we're starting to see a decline. So when we look at weights per container yard, we're starting to see anywhere from 3% to 5% decreases. They have not necessarily reflected, been totally reflected in frequencies of service to customers, but we've seen disposal decline on a unit basis. So that's kind of giving rise to our competitors. I'm sure they're seeing the same thing, which is contributing to the landfill volumes being -- declining faster than what appears to be our small commercial collection business. So with that, Don, I don't know if you have anything you want to add to that, but I think that's a lot of it.

Overall, again, as I said in my comments, the roll-off industrial and temporary roll-off system took another big decline in Q4, down double-digits in the fourth quarter. As Jim said, we're starting to see declines in the commercial and residential business. We, as Jim said, we track pounds per yard, pounds per home in our collection system and we see just how much trash our customers are throwing away. So we are starting to see those containers lighten up. We're beginning to see some service decreases occur out there. Again, that ties with our guidance, the 10% volume loss, or 10% year-over-year volume change for the Company in '09. We're managing those service decreases very well. We're managing costs out of the middle in our business to deal with those volume declines. But again, as I said, it's not competitive market share loss, it's just strictly economy from all that we can see.

Jonathan, I think what we're seeing, C&D and predominantly industrial collection volumes in our landfills down about 9% and we're seeing special waste also down 9% fourth quarter '07 to fourth quarter '08. So, again, we have seen significant dropoffs in those particular areas. Special waste in particular, discretionary spend by business out there and in these times, those particular volumes tend to dry up if they are not regulatorily driven. So again, we are starting to see some of those impacts. This is a -- obviously this economy is lot different than the economy we experienced in 2001. We are seeing it move into our commercial collection business and in other discretionary spends that some of our customers had, such as special waste. I will tell you that Don and our staff in the field have done an extraordinary job in light of trying to go through this merger and adjusting the workforce and the assets used in the business to produce the results that we are seeing and to produce the guidance that we're going to be executing against in '09.

Great. I appreciate the color there. My second question, I'll try to make two parts out of it since I'm limited, is on synergies. The first part is of the $100 million run rate for 2009, how much of that is a function of just simply closing the headquarters of Republic, really more the SG&A type savings as opposed to the cost of operations savings? The second part of the question is how much are your synergy targets been impacted by the volume weakness that seems to have really intensified since you originally laid out your synergy targets during 2008?

This is Tod. I will take the first part and then maybe Don can take the second part on the change in the economy impact on synergies. The closure of the Florida location probably gave us about $60 million of benefit, of the $100 million run rate. Again, we've got a lease that continues on for some period of time into 2010 and we've also got a number of people occupying space there that are involved in systems merger related activities. So while the cost there was higher than that, we expect about $60 million run rate benefit from that this year.

On the second half of that, the other -- the synergy as it relates to volume is the savings by which we move waste from one facility to another. So transportation is (inaudible) savings related to now the new larger network of landfills and transfer stations that the Company has at its disposal, we were going to create -- we are going to move about 20,000 tons around to more cost-effective sites, so I think that was worth about $22 million in original synergy goal. If volumes are off by 10% from when we first put those goals together, that synergy goal could be impacted by $2 million to $2.5 million. By the same token, as I said in my comments, as we're going through these, the actual integration process and actually working as one Company now, we're seeing other opportunities in the synergy columns as well. So we've got some puts and takes in this, but overall we feel very comfortable that we'll be able to meet the 150 and, frankly, outperform it.

And remember what Jim said earlier, and we knew this last you summer as we started to put together the integration plan, that there would be some gives and takes. We've got a detailed plan right now that if you went by location, by cost category, by activity, it's approximately $170 million. So we feel very comfortable with the 150.

Operator, next question please.

Our next question comes from Bill Fisher from Raymond James. Your line is open.

Good morning.

Good morning, Bill, how are you.

Fine, thanks. First just on following up on the maybe the landfill pricing. Obviously mentioned the special waste and C&D are down 9% and I think you said that overall landfill pricing was up 3.6% to 4%. Can you give some color on the core, the recurring M.S.W. pricing? Is that higher, or just kind of how you look at that basket?

Yes, M.S.W. pricing is about the same. There's, as you can appreciate, there are mix issues always in business from a very high revenue, east coast side to a very low revenue per unit, let's call it midwestern or mid south side. So as those volumes move around it impacts our overall price per unit, but price per unit in the M.S.W. line is up all-in Q3 to Q4 sequentially and if you consider some of the anomalies that exist in the business. So we're confident, again, we're very focused on landfill pricing. We've continued to talk about over the years the capital intensive nature of the landfill, the fact that they're hard to replace and duplicate, and we understand the return on invested capital in our business and so we're going to continue to move landfill pricing as we need to, to give us appropriate returns. And we are very well poised to do that.

Don, one thing to add on that is a number of the analysts, I think, over the years have looked at Republic and Allied and companies had different price/volume calculations. With this merger, we are adopting the Allied methodology of calculating price and volume. So that should give a little bit more clarity within the industry.

Okay. Thanks. And the second question, just on the cost side, kind of ex-synergies, can you just touch on some examples of how you flex down costs like labor hours or subcontractor hauling when the volumes are down 8%, just how that works?

Sure, absolutely. We have very good operating metrics in the business, very good handle on productivity across each system in every division of the Company. So we look at just basic productivity. When we see volumes fall off quickly, according to sort of seasonality, the immediate thing that we do is we adjust hours, we just work hour in our drivers and our operators. We began to do that even last year as the economy started to impact our volumes. We did things like adjust gate hours at landfills, opening half an hour later, closing half an hour earlier. But now that volumes have dropped off more dramatically, now you can begin to actually park equipment, park trucks. Very simply, in a marketplace where we have seven less roll-off hauls a day and we average seven hauls per truck per day, we need to park a truck.

We first cut back our driver hours and over time we've got to actually park those trucks along the fence. We have got to reduce our staffing levels. We track those productivity metrics. In the landfills, with this kind of landfill volume lost, now we've got enough loss in there that we can actually park a piece of equipment. We've got very strong metrics about how many tons per hour one bulldozer, one compactor can push and how many people it takes to move that amount of volume. So our operating team working with the regions and their operating teams, setting goals for reduction in force of individuals at various divisions, because of the volume related. We see, as you can see in our guidance, that the volume is kind of a sustained issue. This is not a one-month February, one-month January issue. We think it's year long.

As Jim said, we don't see the economy returning in '09 and so we're making now more, a more permanent adjustments to the workforce with a new volume. But those are tracked and completely separately from the synergies The synergies are resulting from the redesign of the organization. We've got really good clarity about what is synergy and what is volume reduction, because, again, we track these volumes pretty tightly on a division and site by site basis. Does that help, Bill?

Bill, just a follow-up to Don's. In a good economy productivity gets somewhat skewed on the basis that you have got a lot of organic growth. When you really find out who your A-team is, is when you are in an economy like we are in today. I can tell you that the field organization, I've traveled with Don, in particular into the southern region, hours have been addressed, we're now parking trucks, as Don mentioned, but I think in further conversations that I've had with Don and in the eastern region in particular, we're looking at other things because of the depth of this economy and what it's hitting. Things that we're looking at right now.

Now whether we do these or not, just to give you an idea of the things that we're analyzing, is we're looking at the landfill landscape and determining whether or not we need to slow down either receipts at some of these sites or in fact actually mothball some of these sites for a period of time until volumes come back because of the proximity of some of our other landfills. So there's a lot of disposal optimization, things that we're looking at and opportunities, and I think we'll be seizing a number of those over the next several months. One more question, operator.

Thank you. Our last question comes from Cory Greendale of First Analysis. Your line is open.

Hi, good morning.

Hi, Cory.

So the first question, actually I have a couple questions on the cash flow. The first is on the CapEx do you happen to have a combined number for '08 for the two companies, and relative to that number, where are the savings? Where are you spending less in '09 and how much of the savings is economic versus how much is more permanent because of the acquisition opportunities?

Yes, the '09, if you took the '09 on kind of a pro forma basis it would be $943 million. Now, the $845 million of guidance that we gave for '09 -- that was '08, $943 million. The $845 million for '09, I think there's probably about $20 million of merger related capital in there. So if you excluded that, we'd probably be around $820 million or so and I would say that for the most part a lot of this capital is the economy going from, say, the $940 million to the $820 million.

If you look at those numbers it's pretty consistent what we have always said that CapEx is going to be about 10% of revenue. I think it lines up pretty well. For instance, we aren't buying roll-up trucks in 2009, as you can appreciate, with the roll-up trucks being parked because the economy is down, that line of business has been impacted pretty greatly. We've revamped our models at our landfills as far as sell development. We've got some, as Jim said, even the mothballing consideration, that's going to impact our capital spending with landfill development and so on ?

Another point is the fleet age. We've looked at the fleet age on a combined basis and with this $845 million goal, fleet age is approximately seven years. So we feel good with the assets that we've got. Obviously Republic had a pretty good fleet age and over the past couple years Allied has done a good job of putting substantial trucks on road.

And my second question is just about how to look at the progression through the years. Since you've got a couple, two-thirds of Q1 in the books already, I'm assuming with the 8% volume decline that it's going to get better with easier comps as the year goes on so that maybe you are seeing a more pronounced volume decline, 10% or something like that now. Is that fair?

I think, again, our guidance is the way it always has been. We don't assume a second half recovery. So I would say it's actually fairly flat.

Thank you, operator. At this time, I will wrap up the call with a special thanks to all of our employees for their dedication and commitment to customer service. I would especially like to thank Bill Howland, the head of our IT department, and his team who has been working on system conversions around the clock. A special thanks to Oprim, Paula Novatny, and Brigit Ryder, Carol Marks and their teams for their dedication over the past several months. And finally, special thanks to Doug Burrow and his team for their leadership and guidance of our integration teams. I will end our call today by reminding everybody that a recording of this call is available through March 2nd by calling 203-369-2017. A recording of this call is available on Republic's website at republicservices.com. Again, thank you all for spending time with us today. Have a great day.

Ladies and gentlemen, this concludes the Republic Services conference call for today. Thank you for participating. You may now disconnect.