Republic Services, Inc. (RSG) Q4 2010 Earnings Report, Transcript and Summary

Good afternoon, 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 hosts for this afternoon's call are Don Slager, President and CEO; Tod Holmes, CFO; and Ed Lang, Republic's Senior Vice President and Treasurer. [Operator Instructions] At this time, it is my pleasure to turn the call over to Mr. Ed Lang. Good afternoon, Mr. Ed Lang.

Thank you, Jacqueline. Welcome, and good afternoon, and thank you for joining us. This is Ed Lang, and I would like to welcome everyone to Republic Services' Fourth Quarter 2010 Conference Call. Don Slager, our CEO; Tod Holmes, our CFO, are joining me as we discuss our fourth quarter and full year performance. Before we get started, 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 risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that would 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 10, 2011. 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 expressed written consent of Republic Services is strictly prohibited. With that, I would like to turn the call over to Don.

Thanks, Ed. Republic Services has concluded a very successful fourth quarter and fiscal year. Financial and operational highlights include revenue of approximately $2 billion for the quarter and $8.1 billion for the full year. This is the third consecutive quarter with positive internal growth. Sequentially, volume improved 140 basis points, including a 90 basis point improvement in collection and a 680 basis point improvement in landfill. We secured price increases across all lines of business and continued our focus on retaining existing business that generates appropriate returns. This resulted in record EBITDA margin performance of 31.1% in 2010. Our fourth quarter EPS was $0.42 and $1.71 for the full year. Our full year performance exceeded the guidance that we provided in February of 2010. Our fourth quarter free cash flow was $197 million and $776 million for the full year. Our strong free cash flow allowed Republic to increase its dividend and authorize a $400 million share repurchase program. We repurchased over 1.4 million shares in the fourth quarter for approximately $41 million. We are on track to complete the existing authorization before the end of 2011. We remain committed to an efficient cash-utilization strategy, which includes increasing cash returns to our shareholders. Our field organization continues to effectively manage our cost structure. Productivity has improved, which reflects the gradual conversion of our residential fleet to automated collection. We expect that 55% of our residential routes will be automated by the end of 2011. Maintenance expenses were 40 basis points lower in 2010 when compared to the prior year. We adjusted our maintenance staffing levels to the proper ratio of collection routes resulting in lower maintenance costs per engine hour. We continue to see reduction in frequency of insurance claims. Our accident and injury frequency improved by approximately 12% as compared to 2009. In 2010, we increased our investments in single-stream recycling facilities, alternative fuel trucks and landfill gas-to-energy projects. These investments are not only environmentally beneficial but are good business decisions, which enhance infrastructure and generate solid returns. We will continue to pursue these investments in 2011. I would like to thank our field operations for their commitment to a high level of execution in all aspects of our business and delivering another year of outperformance for Republic Services. Before turning the call over to Tod, I'll provide our 2011 financial guidance. Consistent with our comments on the third quarter call, we expect 2011 EPS to be in a range of $1.86 to $1.89 or a 9% to 11% increase compared to 2010. Free cash flow for the full year is expected to be in a range of $875 million to $900 million. This is a 13% to 16% increase over 2010 performance. This includes the benefit we expect from the recent extension of tax bonus depreciation. Revenue is expected to improve by up to 1.5% with total internal growth of 2% to 3%, offset by the impact of San Mateo and Toronto contract losses. Net capital expenditures in 2011 are expected to be $735 million. This level of spending allows us to maintain our current fleet age of less than seven years. Our EBITDA margin guidance for the full year 2011 is 31.6%, which is a 50 basis point improvement over 2010. Tod will now provide further detail on our financial performance and guidance.

Thanks, Don. Fourth quarter 2010 revenue, as Don indicated, was just over $2 billion. After considering the impact to revenue from divested operations, same-store revenue increased $31 million for the quarter consisting of the following. Core price growth of plus 1%. In total, the Collection line of business saw a price increase of 1% with all lines of Collection business reporting positive price increases in the fourth quarter. Our total disposal price increased by 1.1%, which includes landfill MSW of 2.8%, partially offset by relatively lower-priced C&D and special waste event-driven work. For the full year, we reported core price of 1.6%, which was in line with our expectations that we discussed in our third quarter earnings call. Current pricing levels reflect the lower CPI environment, which has a direct impact on our index-based business. I'd like to remind everybody that approximately 50% of our customer contracts contained pricing restrictions, a majority tied to CPI. These restrictions are weighted to the Residential and Commercial Collection businesses but are also somewhat present in the landfill MSW volumes. The pricing in these contracts has been negatively impacted by low levels of CPI. You might recall our 2010 original guidance assumed a full year CPI of approximately 2.5%. The actual CPI for 2010 was 1.6%. Both pricing and costs were lower than originally anticipated due to the lower inflationary environment. But, as Don mentioned, we are able to achieve our overall objectives of increased cash flow and margin expansion. The commodity revenue increased by 1.4%. Commodity prices increased approximately 38% to an average of $137 per ton in the current quarter from $99 per ton in the prior year. Q4 recycling facility commodity volume of 450,000 tons was flat sequentially and was up approximately 3% from the prior year. Now our 2011 guidance is based upon December average commodity prices of approximately $143 per ton. And if prices hold at current February levels of approximately $151 per ton, our EPS would increase by about $1.05. Just for reference purposes, a $10 change per ton in commodity values equals approximately $0.02 of EPS, which includes the impact of rebates. Now let me about our Fuel Recovery Fee, which increased 0.3%. The increase in Fuel Recovery Fees relates to an increase in fuel costs. The average price per gallon of diesel increased to $3.14 in Q4 of 2010 from $2.74 in the prior like quarter, an increase of about 15%. Again, our 2011 guidance is based upon December average fuel price of $3.24 per gallon. Now if prices hold at current February levels of $3.51 per gallon, our EPS would actually decrease by about $0.025 for the full year. For reference purposes, a $0.10 change in diesel fuel per gallon is approximately $0.01 of EPS, and again, this includes the impact of Fuel Recovery Fees. Our volumes were down 1.1% for the quarter and on a year-over-year basis with a sequential improvement from the third quarter 2010 of 140 basis points. We continue to see volume improvement in the Collection business, which is now down only 2% over the prior year. Volumes are improving in all Collection lines sequentially, including a 210 basis point increase in the Industrial business and an 80 basis point increase in the Commercial business. Our landfill and transfer volumes had year-over-year growth of 3.3%, a sequential increase also of 480 basis points. The improvement in volume is due to an increase in special waste received at our landfills. As Don had indicated, we expect 2011 volumes to be between zero and 0.5% positive. This volume guidance specifically excludes the impact of the San Mateo and Toronto contracts, which ended effective December 31, 2010. For those of you who have followed the companies for quite a while, you will recall that our landfill disposal contract with the City of Toronto expired at the end of 2010, and the San Mateo contract serviced by Allied was lost in 2008. The combined revenue of these contracts was approximately $115 million annually. Now let me talk about our fourth quarter year-over-year margin. Fourth quarter 2010 adjusted EBITDA margin expanded 110 basis points to 30.5% from 29.4% in the prior year. I would like to remind you that a reconciliation of EBITDA and cost detail information can be found in our 8-K filing. I will comment on some of the more significant changes, which are indicated in that filing. First, labor and benefit-related costs. The 40 basis point increase in expense relates to favorable adjustments recorded to health and welfare costs in the prior year. Last year, we mentioned a 70 basis point benefit from finalizing actuarial assumptions associated with the new combined health and welfare benefit plans. The increase in the expense results from the absence of this benefit in the current year, and that was partially offset by staffing reductions in the current year and also an overall improvement in Collection productivity during 2010. Second, transfer and disposal costs. The 70 basis point improvement primarily relates to the margin benefit of incremental landfill volumes that carry little or no associated disposal cost and internalizing volumes that were historically exposed to third-party facilities. Third, I'll talk about our maintenance and repair costs. The 40 basis point improvement in margin there relates primarily to procurement-driven cost reductions and the benefit realized from our focus on fleet and heavy-equipment maintenance practices. Fourth, transportation and subcontract expenses. The 30 basis point improvement in margin here results from redirecting waste streams within our transfer and disposal network. Fifth is the fuel cost category. The unfavorable fuel expense increase of 50 basis points was due to a 15% increase in the cost of diesel. Again, the average price per gallon of diesel increased to $3.14 in the fourth quarter of 2010 from $2.74 in the fourth quarter of 2009. Partially offsetting the increase in fuel cost was an increase in related Fuel Recovery Fee, resulting in a net decrease in EBITDA margin of approximately 40 basis points. Sixth, our landfill operating cost. The 30 basis point increase in expense for the quarter relates primarily to a $6 million charge recorded in the fourth quarter of 2010 for a closed landfill in the Midwest. Seventh, our risk-management cost. The 60 basis point improvement primarily results from a couple of significant factors: First, 70 basis points of favorable actuarial adjustments recorded in the fourth quarter of 2010; and second, a 50 basis point unfavorable actuarial and premium adjustment recorded in the fourth quarter of 2009. The actuarial adjustments in both periods are related to claims developments for prior plan years and relate to comments Don made earlier about the performance improvement and better safety record. Additionally, there were reductions in the current year plan cost due to decreases in claims frequency and third-party premium costs. Next, our recycling cost of goods sold. There is an unfavorable 50 basis point increase in expense, and that relates to increases in rebates to customers for volumes delivered to our recycling facilities. Cost of goods sold at our recycling facilities increased to an average of $40 a ton from $26 a ton in the prior year. Commodity revenue increases more than offset this increase in cost, resulting in an increased spread of approximately $24 per ton. The net impact was a favorable 50 basis point improvement in EBITDA margin. Finally, SG&A. SG&A expense, excluding the cost to achieved synergies, was 10.9% of revenue compared to 10.6% in the prior year. The 30 basis point increase in expense relates primarily to an acceleration of executive retirement expenses and relocation costs for senior management changes. SG&A expense for the full year, excluding cost to achieve synergies, was 10.2% of revenue. We expect 2011 SG&A expenses to be approximately 10% of revenue. All of these improvements drove a 110 basis point EBITDA margin expansion for the quarter, and as Don indicated earlier, enabled to us to exceed our full year EBITDA margin guidance of 31%. Now our DD&A also improved by 50 basis points. This relates primarily to a reduction in landfill amortization expense and accretion. This resulted from the cumulative impact of expansions and permit modifications that extend the life and reduce construction costs. DD&A as a percentage of revenue approximated 11.1%. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles resulting from the merger. Now I'll turn the call back to Ed.

Thanks, Tod. Q4 2010 interest expense of $120 million includes $23 million of noncash amortization. As we continue to refinance our debt, the portion related to the Allied debt discount of $10 million will decline. In 2011, we expect to refinance debt that matures throughout the year as well as call the notes due in May of 2016. Our EPS guidance includes the favorable impact of refinancing this debt with total interest expense in a range of $445 million to $455 million. This includes noncash interest of about $70 million. Our guidance excludes any premiums paid or discounts written off in connection with the early extinguishments. I will now discuss the full year free cash flow. Full year adjusted free cash flow was $776 million which consisted of: Cash provided by operating activities of $1.434 billion; less property and equipment received of $849 million; plus proceeds from the sale of property of $37 million; merger-related expenditures net of tax of $20 million; divestiture-related tax payments of $23 million; and legacy tax settlements related to BFI of $111 million. And the adjusted free cash flow, again, was $776 million. I want to note that we spent $14 million more on capital expenditures than our most recent guidance, primarily due to an acceleration of planned 2011 purchases. As Don talked about in our guidance, we expect 2011 adjusted free cash flow in a range of $875 million to $900 million. This includes approximately $100 million of cash tax benefit from the new tax laws extending bonus depreciation. Since this is an acceleration of the tax deduction for depreciation on vehicles and equipment purchase, this cash tax benefit will reverse in future periods. Now I'd like to comment on the balance sheet. At December 31, our accounts receivable balance was $829 million, and our day sales outstanding was 37 days or 24 days net of deferred revenue. Reported debt was approximately $6.7 billion at December 31, and excess credit availability under our bank facility was approximately $1.6 billion. In the last two years, we have paid off more than $1.3 billion of outstanding debt, and we closed 2010 with a debt-to-EBITDA ratio of less than 2.9x. By the end of 2011, we expect this ratio to improve to approximately 2.7x. Before I turn the call over to Don, I would like to talk about the timing of earnings in 2011. We expect 2011 to be a little more weighted to the second half of the year, with approximately 47% of earnings being realized in the first half and 53% in the second half. This occurs in part due to the lagging nature of Fuel Recovery Fees and a rising fuel cost environment and the timing of the intended refinancing activity. Additionally, the harsh weather that most of the country has been experiencing lately will put some pressure on the first quarter, which was not contemplated in our guidance. I will now turn the call back to Don.

Thanks, Ed. Before we get to Q&A, I want to talk about a few key areas of focus for 2011. First, internal growth. We will continue our broad-based pricing program in 2011 to recover inflation and drive margin expansion. We will continue to use ROI pricing tools to ensure that all business activity meets our return requirements. We built a substantial network of operating facilities and are well-positioned for growth as the economy improves. Second, acquisition growth and infrastructure development. We have a pipeline of potential acquisitions and are focused on strengthening our infrastructure, especially in the area of recycling to enhance our capabilities. We will update you on our acquisition activity throughout 2011. The team's priorities in 2011 remain consistent with our focus in 2010, including: Compliance and safety; development of our people; creation of lasting operational excellence, something that we call durability; customer experience, that is making sure that we are easy to do business with and that we meet our customers' expectations every day; and finally, targeted profitable growth. We believe that as we execute these business priorities, we will continue to grow free cash flow and provide increasing cash returns to our shareholders. At this time, operator, I'd like to open the call to questions.

[Operator Instructions] Our first question comes from Hamzah Mazari from Credit Suisse.

The first question is on your pricing guidance of 1% to 1.5%. How much visibility do you have into pricing at this stage? By that, I mean, how much of your business or portfolio have you repriced already? What percent? And then could you give an update on some of the pricing pressures you faced in Houston and in L.A. that caused you to cut pricing guidance last year, if we could get color there as well?

Well, Hamzah, it's Don. To start off, remember half of our businesses is CPI-indexed, or indexed to some type of CPI, and that again, changes throughout the year. So a big portion of that reprice in the second half, and then it takes 12 to 18 months for that to kind of roll through based on the individual contract language about how that index works. And so we have visibility on those contracts. We know what type of CPI escalator they have. As far as the open market business, generally, as we've done in years past, we have our open market business really in somewhat 12 buckets across the year, and we are out in the open market pricing those customers on a regular basis throughout the year, so that every customer gets an annual review and adjustment to recover inflation. So we've got that all built into our plan. One of the questions you had on Houston and L.A., I think we've got that all anniversaried at this point. I think L.A. anniversaried already. Houston, I think in Q4, Q3 of last year. So that's just now, those new lower prices are baked into our plan. So we've already anniversaried that letdown.

And just one follow-up, on the volume side, what percent of your landfills had positive volumes? And where are you seeing negative volumes at this stage? And also, in your volume guidance, are you baking in special waste, or continuing the special waste benefit that most saw in 2010? Are you expecting that again? How should we think about that?

Yes, we actually -- well, first, I don't off the top of my head have the answer on the percentage volume growth geographically by landfill. But overall, our landfill volume will be probably about flat next year to this year, and we are thinking that the special waste market will hold up pretty well. So we had a couple of big jobs that we shared with you throughout last year, and one of them is holding up into this year already. So we're pretty confident in our team and in the pipeline itself. So we're feeling pretty good about special waste right now.

Our next question is from Scott Levine, JPMorgan.

I was hoping you could comment on churn rates and general trends. It seems like competition is fairly stable within the industry, but what are you seeing in terms of churn throughout your business?

Scott, a definition of churn. So when we talk about churn here, we talk about the spread between a price per yard of Commercial business gain and price per yard of Commercial business loss. So that's spread on a per-unit basis. That type of churn is pretty flat with what it's been. So we haven't seen that change. So that's pretty good news. Defection, you may be thinking defection in your term churn, how many or what percent of our customers do we lose on an annual basis? And that's been pretty consistent for us, between 7% and 8%. And again, that's been probably the last three year, four quarters pretty much held in that range. It slightly improved from 8% to 7% toward the end of the year.

And then if we think about what you guys were communicating vis-à-vis volumes, in the middle of the year you were kind of thinking you were going to inflect positive potentially exiting '10. You posted negative 1% or thereabouts. Can you comment maybe about the aspects of the waste stream that maybe drove the downside or maybe slowed relative to expectations into the end of the year? And if you could update your thoughts regarding those aspects of the waste stream as we look out into 2011, that would be helpful.

Yes, we actually saw improvement in industrial, it probably came in about where we thought it would. Commercial, a little more weakness in commercial than we thought. We always talk about how we track service decreases and service increases, and we thought at sort of the midpoint of the year we would get, to your point, we would get flat. But it's really kind of across-the-board. We just didn't have as much movement there toward the end as we thought we'd have.

And then, Scott, I also think it was kind of how the math worked. Keep in mind our Q3 volume decline was 2.5%, so just how we were entering the fourth quarter around that negative 2% level. And even though it was improving, the math still works out that you were at negative 1% for the quarter. So it's pretty much at kind of a breakeven flat level entering the new year, but just the way the math works, you're at negative 1% for the quarter.

And I guess we're all going to chime in here. I would add that, as we look ahead to 2011, where we see a little bit more of a bright spot, as Don said earlier, in the industrial area.

Maybe a little bit of color geographically, any outliers to the positive side or negative?

No, I still think the West and South lagging a little bit across the rest of the country. That's probably consistent with what we said here last year. But even with the volume number not getting quite where we would hope by the end of the year, you saw the margins and you saw the cash flow, so we're still pretty happy with the way the business has performed.

Our next question is from Jonathan Ellis, Bank of America Merrill Lynch.

Just on the pricing guidance for the year, 1% to 1.5%. First off, I guess, help us understand the breakdown as you're thinking about the CPI versus non-CPI based markets. And I guess in the context of, Tod, as you mentioned, CPI of 1.6% for the full year 2010, presumably, you're assuming pricing in franchise markets below pricing in competitive markets. So help us understand why you're assuming pricing in competitive markets that is somewhat different than the CPI levels for 2010. And then, obviously, just on the competitive side, what kind of spread over CPI you think you can achieve there.

I would say that the last part of your question probably is something around 50 to 100 basis points over CPI in terms of the spread in the open markets. On the contractual markets, probably the best example is Las Vegas. While we have a number of contracts and some are specific, some are CPI-based and they reset it different times. That's a big piece of business and it's pretty indicative, I think, of what happens. Our Las Vegas reset last year was probably about a negative 0.4%. And so that negative pricing carries through June of this year, and then it resets at a positive 1.6% starting July, and it's that piece. Even though you may say that CPI is somewhere in that 1.5% range, we've got this lag effect and this drag that is causing our contractual pricing to be less than what we think our average pricing is going to be.

So to be clear, you're assuming franchise or CPI-based pricing, contracts tied to CPI pricing around 1% this year?

Yes, maybe it's a little less than 1:1, somewhere in that range. On a full year average basis. Now it's going to be higher, obviously, in the second half of the year. And I think, Ed talked earlier a little bit about how our earnings would change throughout this year. Normally, we have talked about kind of a 50-50 split in earnings. But I think the CPI, the fact that it was so bad, it's improving slightly, gives us a little bit more pricing momentum in the second half of the year. So we will be well positioned exiting '11 into '12 from a pricing standpoint. And so kind of a combination of the debt refinancing, the CPI pricing, the share repurchase, all of that should give us earnings momentum as we move through this year and into next year.

My second question, this is on volume, to make sure I understand the reference point. Are you assuming a typical seasonality off of current volume levels? Are you assuming no seasonality off of current volume levels? If you could just help clarify there.

Yes, I think we would, at this point, assume typical. We saw decent seasonality this year, or in '10, where we didn't see any in '09. So we do think as things are stable up, we expect this seasonality to go into '11.

But we need to remind you that the housing market, the construction market, isn't bright.

We're not saying that's coming back.

We're not saying that's any better than it was this past year. It's just not getting worse.

And our next question is from Al Kaschalk from Wedbush.

I'm going to try and focus on the volume question for '11, and I know we've kind of beaten around this one a little bit. But if you strip out specialty waste with the view that it's not ongoing, it's a one-time event, is it fair to say that volumes you're forecasting for '11 would be down 1% to flat?

Well, I think would say, first of all, I think we could debate that first assumption. Well, as Don had indicated, we've got a strong team that's done a superb job across the country of delivering special waste volumes. And while this past year we had a couple of contracts that were substantial in terms of delivering volumes as we go into 2011, we've got a very broad-based pipeline. So we feel pretty good about that. I guess, frankly, we haven't done the math to see, if you stripped out special waste, what it would be. Obviously, it would be less than our guidance of positive zero to positive 0.5%. So it would obviously be slightly negative. What that number is, I don't know, because I haven't done the math, because we don't see our thoughts going there.

Now I don't mean to imply that the -- organically the business you picked up is just more of a semantics, kind of like churn and defection type thing.

On these type of things, just like we do every year when we give guidance and we build an operating plan, we pick a jumping-off point from Q4. And we do that with fuel, we do that with commodities. We do that with what we're seeing in trends in the business, and volume, and special waste and all those things. So just like we've done every year, we come forward with guidance based on Q4 run rate, and with visibility that we have at this point, and that's what this guidance represents.

It's certainly a fair point to raise, because there is a shift from '10 to '11. In '10, we had two very large contracts. In '11, we don't have what we had -- one of those contracts carried over for the part of the year. We don't have a distribution like that with two large contracts, and as we look at the pipeline, we believe we will be replacing that with a lot of smaller special waste the broader book of business, if you will.

The Industrial 2010, I think, was a sequential and 80 bps on commercial. I think this is more Collection area. Is that business starts? Is it new customers, just a little bit of a better economy? What's driving the positive trend there?

The volume in Industrial is coming from manufacturing, so just some better manufacturing numbers volume coming from those sites. And then some of these other things you described are just year-over-year comps.

More west, south oriented area from a geography, is that the way we should be thinking about it?

Yes, that's right.

That's what Don said earlier, a little bit stronger in the Midwest, in the East, maybe than in the South.

And our next question comes from Corey Greendale from First Analysis.

I also wanted to ask about pricing. With some of that -- I think, Tod you gave an example of the Las Vegas contract. I'm just trying to understand in the CPI-related contracts, how much of that is there still variable? Is there still some question, in other words, still Las Vegas going to 1.6% to 1.7%, you said, in July. Very set in stone based on 2010 CPI, or does that depend still on what happens in the first half of '11?

There is some influence as to what happens this year. About half of the contracts use a trailing 12-month CPI, so that one is pretty much set. Although, they do have various cut-off dates. But then the other half of the CPI type pricing is a single-month year-over-year. And those contracts in total represent about, as far as CPI or let's call it the index-based business, represents about 70% of the total. And then you have another portion -- oh, excuse me, about 80% of the total, 80% to 90%. And then you have the rest are kind of fixed rate.

You might have said this, but so what are you assuming 2011 CPI is in the guidance?

1.6%.

At least historically, Republic has not been aggressive in guidance, and I heard you mentioned a couple of sources of potential downside between the weather in Q1 and fuel prices. I know there's a little bit of upside perhaps in commodity prices. But I'm just trying to get a sense if there's other sort of obvious potential sources of upside if the economy improves, sort of the most obvious ones.

Well, that's certainly a very obvious upside with the economy improvement. Again, I think the reason that, I guess it was I that highlighted, fuel and commodity is, when you look at this business, it's very, very stable. And however, we do have volatility in the commodity price piece of the business, and obviously volatility in the fuel. So it wasn't so much of a downside on those as it was the volatility, I think, that we were trying to highlight. I mean, prices are actually, obviously on commodities, higher, and we don't know what's going to go on with oil prices. They seem to have spiked here because of the unrest in the Middle East, but possibly they could improve, the upside, downside.

On the acquisitions, I know you made a point of highlighting it. Should we be expecting that you could be deploying more capital, meaningfully more capital this year into acquisitions? And is there a chance you could even find opportunities to the extent that it could end up in your deciding to go to not just do much on the repurchases instead of -- and do acquisitions with that capital instead?

No, Corey, that won't happen. We're strongly committed to the repurchase program. We've only guided in our pipeline today, I'll call it $100 million, $150 million of revenue that we're really interested in. We don't have that baked into our budget. We would look at maybe closing some of those deals in the later half of the year. And like I said in my comments, we'll update you guys as we go forward with that. But it's not going to be the part of our story, but we wanted to highlight it, because it's something that we've been a little busy over the last couple of years. So we're going -- we've got some ideas there that we can build the business, as I said, build some of the infrastructure we need to build our recycling capability in a few more markets.

Remember, our share repurchase and our dividend for 2011 represent about $700 million. So we've got a couple of hundred million dollars above that, some of which will go to pay down some debt. But certainly, where we see opportunities while we have this pipeline of assuming $150 million, we're very interested in taking advantage of opportunities, whether they're tuck-in or pieces of infrastructure or recycling facilities, that type of thing. So as Don said, we're interested in getting back to growing the business not just organically but also through acquisitions. And we feel we're in the right position with our balance sheet today to do that. And that is also upside. We haven't baked that acquisition pipeline growth into our numbers.

Our next question comes from Bill Fisher from Raymond James.

For Tod, maybe. You mentioned that you guys are forecasting 50 basis points improvement in margins, and that could have a little bit of fuel headwind. So implicitly you kind of have to get 80 or something improvement elsewhere. Can you just touch on some of the bigger sources of improvement you might see there?

Well, I think, if you look at our cost structure and the company's ability to control costs, we see basically about a 1% increase in our cost structure. So it's really coming from cost control combined with our pricing capabilities.

And whatever volume growth we do get, Bill, obviously comes in a much higher margin, because we've got that density. So that works in our favor too.

Is there something like insurance or something, where you might get some actual lower cost next year or any baskets like that?

We do an actuarial review every quarter, so you really can't forecast the actuarial results. Obviously, over the past year we do -- can see a little bit softening in the insurance market, so premium cost has gone down. And we have had favorable actuarial results, but those things are hard to budget.

And our next question comes from Vance Edelson of Morgan Stanley.

First, with volumes reaching the flat or breakeven point entering the new year, can you comment on how much further improvement there's been in the past five or six weeks? Is it at least safe to say we're out of the woods on the negative comps? Or is it still kind of teetering close to breakeven?

I would say it's very difficult to gauge anything on the past couple of months, from mid-December on, just because of the unusual weather patterns that we've seen across the country. I believe a number of ice storms and snowstorms in Dallas, ice in Houston, and not just inches but feet of snow in Oklahoma, the big storms in the East Coast and Chicago. So it's really very difficult to, even under normal circumstances, to look at four weeks or six weeks and try to create a trend off of that, definitely is now, given the way we operate.

Given the sensitivity to commodity and diesel prices, back on an earlier point, why base the guidance on prices as of December instead of today? You mentioned you expect the lag in fuel recovery, which is an indication you think fuel prices will keep rising from here. So why not at least use today's higher prices when setting guidance? Or is it just you're sticking with convention?

Well, we have a practice within the company of basically building the business plan. It's something that we take to the board the first week in January and discuss with the board. And so it's a practice that we've had not just with our board, and obviously the management team, but also with the Street, to use information in December and then give you the tools to understand the potential variables or volatility of which, obviously, as I said earlier, commodities and fuel are the greatest. And then you can make your own assumptions regarding where commodity prices, fuel prices may be going. I don't think the February prices are any better than the December prices. By the time we get to July, they'll be different. So it's just our practice.

And that's one of the reasons we give you a range, right? So if we thought one of those things were going to race out of control, one way or the other, then we might reset before we brought guidance forward. But we think we're going to be in pretty good shape based on the pros and cons or the threats and opportunities in the guidance or the budget.

Final question for me, just kind of shifting gears, you briefly mentioned cost control. Could you just update us on how much you can do going forward to streamline and boost margins in terms of operational efficiency improvements now that the bulk of the Allied synergies are behind you? Are there new areas of focus there?

Well, we still have this $30 million to $40 million we talked about last year, but 2010 and 2011 really are more about just building those capabilities in the company. We don't start to really see benefit until late '12 and '13. So that $30 million to $40 million still underway in areas like our maintenance initiative, our procurement initiatives, national accounts, and a handful of those things. So those are the very same things we talked to you about the last year.

And last year, you might recall, we indicated that we're spending maybe about $7 million or $8 million for those initiatives. I think this year, we're spending probably around $15 million or $16 million -- actually maybe as high as $18 million. As those activities ramp up, and then we'll start, as Don said to secure the benefit in, starting in the second half of '12.

Our last question comes from Michael Hoffman of Wunderlich Securities.

On the contract side, do you have visibility, and I look into 2012, was there a San Mateo or Toronto we should be thinking about as we're doing a multi-year model?

No. The San Mateo was sort of an anomaly, a very large contract in and of itself, very long term in nature. It was one of those kind of recurrent kind of 20-year franchise kind of deal. And we don't have anything like that in our future right now that we're aware of.

And then on the commodity price side. Given where they are currently versus what you've used for guidance, could you, based on just a little bit of a seat of the pants figure, that, that is strong enough given how high it is to possibly offset some of the weather pressures that are going to result in some incremental expenses?

And the fuel offsetting that, so I think as we look at commodities and fuel in the first quarter, I don't -- the net of fuel commodities and weather, I don't think there's a net-net positive, it's probably a slight negative.

Commodities will cover fuel, but we're still trying to assess the weather.

I need a point of clarification on the question that was asked about volume. And if I frame it on special waste on two ways, I'll come back to the second. If I stripped out special waste from 2010 and you did a same-store volume comparison, core solid waste business '10 going into '11, I think if I understood you, it's positive already.

No, I don't think so.

So where are the points of softness there that haven't turned to where you thought? I guess I've misunderstood part of that conversation.

Maybe I'm misunderstanding what you're asking right now.

On a core solid waste business, good old-fashioned MSW, would your outlook be positive year-over-year about volume, if you stripped out all your special wastes in 2010, and we're doing a calculation, just on the core solid waste business?

I think if you pulled, we'd be about flat. I mean, obviously, we're not going to see the same year-over-year increase special waste '11 to '10 as we did '10 to '09. But I think we would still be at least flat in volume performance in '11.

And then historically, you've been able to offset inflation through productivity improvements that sort of somewhere remain 60% and 80% of your cost increases, you've worked out through productivity. Is that trend or pattern in your business model holding up?

Yes, we've got good productivity gains built into to the plan. But as Tod said, we still get about 1% true inflation cost, true cost inflation of our cost, right?

And that includes the productivity gain.

Net off, right? Because there's the moves in insurance and all those other type of things that we've got to deal with. And that's where the pricing comes in, right? So we're always looking to, after all of our productivity gains and efficiency benefits are built in, how do we go after getting that inflation recovered through pricing plus a little bit more if we can. And that's where we get that margin expansion, so...

And just one point of clarification, the CPI that's baked in for '11 is 1%. The 1.6% is what you've finished the year, that was the CPI you actually got for in 2010, right?

I think what we said was, let's give the Las Vegas example, in that the first half of the year the pricing is negative 40 basis points because that was last year's reset on July 1. Then on July 1 of '11, the reset comes in at positive 1.6%. So obviously, on a full year basis, it's less than 1%. But you do have the strength from negative 40 basis points in the first half of the year to a positive 1.6%. So what we're saying is, so you put it together, yes, the CPI number is in slightly below 1% or about 1% for full year, but there is this first half, second half variance.

And the trend in the second half of '10 rising through the first half of '11 is rising. So if I'm here 12 months from now, we're going to be talking about something that's greater than 1.6%?

We don't bake any type of CPI forecast into the guidance. We just assume that the full year, 2010, average is what we'll see in calendar '11.

Lastly on the special waste, I get some of it last year was driven by stimulus money, but some of it I believe was economic activity improving across an industrial base that said, "Okay, I'll do that brownfield project, I'll tear that building down, I'm shedding more cars," so that it's supporting gradually improving economy. Is that accurate?

Yes, some of it was economic improvement. Some of it was just environmental regulations. Some of it volume had to moved because it was mandated to move. So it's a little bit of all that. But again, as Tod said, we look at the pipeline that our people put together in their sales funnels and we qualify whether we think those jobs are real or not, and that's how we build our business plan and that's how we create this guidance. So right now, we think it's in pretty good shape.

Thank you. That is all the time we have for questions today. I will now turn the call over to Mr. Don Slager for his closing remarks.

Thank you, operator. In closing, I would like to thank the entire Republic team for a solid performance in 2010, and for their dedication to making 2011 another successful year at Republic Services. As a reminder, a recording of this call is available through February 17, 2011, by calling (203)369-3404. Additionally, I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities along with a recording of this call are all available on Republic's website at www.republicservices.com. And finally, I want to remind you that Republic's management team routinely participates in investor conferences. Our presentations are scheduled. The dates and times are posted on our website along with instructions for listening to the live webcast of the event. Thank you for spending time with us today, and have a good evening.

Ladies and gentlemen, that concludes the Republic Services Conference Call for today. Thank you for participating. You may now disconnect.