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Republic Services, Inc. (NYSE:RSG)

Q4 2008 Earnings Call

February 27, 2009 08:30 AM ET

Executives

James E. O'Connor - Chairman and Chief Executive Officer

Donald W. Slager - President and Chief Operating Officer

Tod C. Holmes - Executive Vice President and Chief Financial Officer

Analysts

Scott Levine - JPMorgan

Michael Hoffman - Wunderlich Securities, Inc.

Jonathan Ellis - BAS-ML

William Fisher - Raymond James

Corey Greendale - First Analysis Corp.

Operator

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's Chairman and CEO, Mr. Jim O'Connor.

Today's call is being recorded, and all participants are in a listen-only mode. There will be a question-and-answer session following 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.

James E. O'Connor

Good morning, Charlene and welcome. Good morning and thank you for joining us. This is Jim O'Connor and I'd 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 to 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 2010.

Our Board of Directors had 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 continue to execute our integration plan and expect to be finished with staffing the remaining management positions within 60 days. Our greatest focus is a systems integration in overlap markets, route density and disposable optimization will generate significant benefits. By merging the overlap markets under a single building and operating system, we'll be able to rollout our decision support tools for vehicle routing and disposable optimization.

The system integration process for overlap markets is divided into multiple phases. Phase I, 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 realized 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 through advanced disposal. This transaction includes 13 commercial routes to transfer sessions. 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're 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 a $1.73 for the full year before the impact of merger related costs, remediation expenses, and other one-time 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 online 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 online 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 discuss actions that we are taking to adjust for economic environment that we're in today.

Donald W. Slager

Thanks Jim. Our consolidated operating performance for the fourth quarter of 2008 consists of three months of Republic and one month of Allied. However, in my comments we'll look at our operating performance as if the two companies were combined for the entire fourth quarter.

Tod will speak to report 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 improved 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 a temporary roll-off in 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 can not control the volumes that are lost as a result of a weakened economy, we're fully engaged in reducing cost to maintain our margins. On a pro forma combined basis, and excluding the unusual cost for quarter 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 Clarke and I are actively engaged with our region and market area teams to ensure, we're 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 date to more cost effective landfills.

Our internalization rate at the end of the year was approximately 68%. As we worked 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.

And 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 am 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 returns and producing high levels of cash flow.

As I traveled around the country participating in regional operating reviews and visiting numerous divisions, I can tell you that 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 teams we have assembled, and we are proud of what they are accomplishing in the business. And 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, to review our financial performance.

Tod C. Holmes

Thank you, Don. First, there is 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 a $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 then 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 we 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 standalone core price growth is 4.1%. Republic standalone fee increase is 1.8%. Republic standalone commodity price declines was negative 1.3%, for a total price for 4.6%. Now, Republic standalone volumes are down about 6.6%, actually as we moved through the quarter they continue to decline into the latter part of the third quarter.

In addition, we had about three tenths 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 remained 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 standalone business commodity prices were down approximately 45% to an average $83 per ton this compares to about $150 a ton in the prior year.

For your information current prices are up in the approximately $63 for ton range. Also for your reference to give you some sort of go forward idea with the magnitude of commodities, if we'd merged on October 1, 2008, our fourth quarter commodity volumes would have been above 430,000 tons.

With respect to volume declines for Republic standalone business during the quarter, residential volumes were essentially 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 the business which experienced low teen year-over-year volume declines, both of which are a reflection of the weak economy. And 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 of 2009.

For your reference Allied's business when we examined it, it experienced similar price and volume impacts as Allied standalone operation, so certainly a very much a positive on the pricing side and the volume side as a function of the economy.

Now, let me turn to the fourth quarter year-over-year operating margins. As a reminder, again fourth quarter includes only one month about 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 particularly meaningful.

There are a number of unusual costs and charges recorded during the fourth quarter. If we excluded these fourth quarter one-time 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 then some of that was a negative 10 basis points.

Now, I'll 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 a 110 basis points to operating margins. Additionally, our average fuel cost decreased resulting in a 105 basis points improvement in operating margins.

Wholesale price per gallon decreased from $3.11 in the fourth quarter of 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 of operating margins from commodities was a negative 85 basis points.

Third, DD&A; the 60 basis points 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 one-time 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 one-time costs and also $14 million of insurance charges which I'll 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.

Now, 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 non-cash interest expense. This is a significant item as we move forward. The company recorded non-cash 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 non-cash expense arises from amortization on Allied debt that was recorded at a significant discount. The credit markets at the date of the merger were really illiquid. Hence despite, an upgrade to the investment grade rating of Allied's debt, they traded at a significant discount at the time of merger. Now, we expect in 2009 non-cash 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 2008, was negative approximately 82 million. This is based upon cash provided by operating activities of 38 million, plus 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 a 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, plus purchases of property and equipment of $387 million, plus proceeds from the sale of equipment of $8.2 million. And again, that's the $133 million.

During the fourth quarter of 2008, we made $130 million 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 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 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, non-cash $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 10 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 lives 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's not cash.

Finally, we expect the average tax rate to be 44% in 2009.

Now historically, DD&A has run for both companies probably about 10% of revenues. Due to these non-cash 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 a little more than 11.5%.

Let me talk a little bit about our normalized 2009 EPS, our normalized EPS for 2009 is expected to be a $1.70 to $1.75 and I just explained the $0.40 of merger related accounting changes that I just noted above, in addition to that we have $0.20 of 2009 expected non-recurring cost to integrate the company's various information systems and business units. So there is a total of $0.60 to that.

Our balance sheet remains very strong at December 31st, Republic's account receivable balance was $946 million and day 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, additionally we're going to pay about $70 million of 2008 taxes. Actually, we paid them in January. We were able to hold our payments as a result of the merger. So that was a cash out 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 file our 10-K on Monday.

I'd be remised, 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 Dobbaccio, Julie Hogedson Jennifer Swanson, Kasandra 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 of this purchase accounting noise, set-up an opening balance sheet as of December 5th, closeout the year-end and put together our 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 who as a result we're able to meet these SEC deadlines.

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

James E. O'Connor

Thank you. Tod. I'd 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 and planning for the integration, and then once the merger was closed in early December, starting to executing against that plan as well as putting the two companies together financially and then putting the '09 plan together.

So again Tod your staffs and Don 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 we're now are going to our guidance for 2009.

2009 assumes there will be no recovery in the economic environment. Our revenue is expected to decline approximately 10% with a 4% increase from core price, a volume decline of 8%. Our commodities will be down 2%. Fuel fees is down 2.5%, divestitures are expected to reduce revenues by 1.5%. Free cash flow from operations and before divestitures and accrued 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 cost related to integrating our businesses. This is an improvement of 150 basis points when compared to full year. Adjusted 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 the practice that we will follow in 2009.

So with that, operator I'd like now to open up the lines for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Scott Levine of JPMorgan. Your line is open.

Scott Levine - JPMorgan

Good morning, guys.

James O'Connor

Good morning, Scott.

Tod Holmes

Hi, Scott.

Scott Levine - JPMorgan

You mentioned that you have to wait in place to kind of attract the achievement of synergies versus your targets, how would you guide investors to kind of think about how you guys are hitting your boogies there and tying in with that the idea that may be you guys will be ratcheting down your work force reflecting the work force down giving you the step drop-off in the economic environment beginning in Q4?

James O'Connor

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 a corporate related to the economy. As we move forward, I think what these synergies fall into three buckets predominantly and that's going to be the restructuring of corporate and the field organization. And that will represent the lion's share of the majority of $150 million. Actually, the plan that we're executing against is upwards to $170 million of synergies.

So the way it will break out going into '09 or at the end of '09, we'll be on a run-rate going into '10 of a $100 million and about $50 million to $60 million will from reorganization and head count, transportation and disposal, which is disposal optimization, which will be another roughly $15 million to $20 million, route consolidations will also 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 with that procurement financing which relates 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're already at the end of and online through the end of 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 would talk to the Board today, they feel very good about it and Deloitte has made those same representations as they've accounted for the number of these along but our internal staff.

Scott Levine - JPMorgan

And can you guys provide me a quantified synergy updates quarter-to-quarter going forward or is there are not delayed expectation there?

James O'Connor

Well, we will be quarterly reporting on our progress.

Scott Levine - JPMorgan

Got it. One additional one if I may, the volume guidance may be a little bit below 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 the 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 this sustainability of pricing into a pretty rough economic environment?

James O'Connor

Scott, we 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'll be able to retain the guidance that we given of 4% price.

Tod Holmes

If I could add on, on the trend basis to the... it's sequentially Q3 to Q4, we saw pricing move directionally right all lines of business and price per unit from Q3 to Q4 continue 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 is weak. And so, the price of the customers will see a slight reduction because fuel is up I think in our 2009 guidance that we've given you projects fuel being kind of consistent what we're seeing here a change, what we saw a change over there.

James O'Connor

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

Next question?

Operator

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

James O'Connor

Good morning, Michael.

Michael Hoffman - Wunderlich Securities, Inc.

Hi, good morning. I'll pick up on your theme Jim, so free cash flow these are approximate 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 you told the combining, Tod talking up to Scott's statement this is about cash?

James O'Connor

Sure, there is 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 relates to 2008. So that's a big step up and then of course the other thing is just the business condition with the commodity impact, that's price and that's about $80 million.

So I think to look at 2008 to 2009, and the fact that if you adjusted for the timing difference on these tax payments, it's about comparable for one year to the next. The 650 plus 70 is probably about 720 and if you looked at, probably the original guidance that both companies started out with a year ago it was in that same range. So we think that's pretty good and what is a very tough economic environment and how we're achieving it, well, as Don says we're focused on productivity and scaling the business. We are looking at the capital spend to make sure that we are right sizing the capital spend for the business. We've always said that this was a business that when it slows down, the cash flow still hold up because it is scalable.

Tod Holmes

Remember, we also have a contributions coming from the volumes coming back. We are, just.on the commodity side, we are seeing a 10% volume negative year-over-year and we saw the volume slide in the latter half of '08. So I'd say we've got as we said in the notes, we are not losing market share, the economy is depressed and we are seeing the same impact on all of our competitors that is, we see going and come into our landfills.

So we're seeing price pretty continued increase, we're seeing volume drop, as the volume returns, we wholly expect we'll get our fair share of that volume back and we'll get all the contribution and cash that comes with that.

Michael Hoffman - Wunderlich Securities, Inc.

Okay. I have to pick a second question, when there is kind of probably a thousand that need to be asked. I guess what's the starting revenue number for, because you've given all these percentage change numbers, but we need some starting numbers, January 1, what are starting numbers, revenues starting?

James O'Connor

I think what you do is you looked at the third quarter, Allied's 10-Q and the third quarter Republic 10-Q. And in the fourth quarter, we on a combined basis we probably had about 4% price and we probably had something like probably between 6% or may be close to 7% volume declines, may be a little less than 7% volume declines in the fourth quarter. So I think you use those two as the math to build your baseline for January 1st.

I think Michael, as in the past you can contact Ed Lang and I can assure you 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 and for all the listeners on the call it's really about the free cash generation and that's there is a lot of moving pieces and it's not unlike any other merger that would occur. We have got a lot of moving pieces here that relates to non-cash items.

So I think the focus here is on cash, that's the story line of the business it's historically been MO of Republic Services to deliver it. And I think even in these economic times the '09 forecast recognize fairly strong and sustainable free cash flows and a pricing environment that remains stable and a good outlook for it.

So operator next question.

Operator

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

Jonathan Ellis - BAS-ML

Thanks. And good morning, guys.

James O'Connor

Hi, good morning, Jon.

Jonathan Ellis - BAS-ML

Just wanted to first talk on the results for the fourth quarter, you talked about volumes in the residential and commercial collections line being flat to modestly down, you have rental volumes down low double digits, and given that, my understanding is that a large portion of the Waste streams that are coming you're your landfills would be considered MSW and theoretically should show similar volumes trajectory to what you're seeing on the residential and commercial collection lines, I'm wondering if you kind of help reconcile the dramatic decline in volume, the landfill vis-à-vis the volume trend on the collection side of the business?

James O'Connor

I'll 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 roll-off. When you look at the weight per unit, we're starting to see a decline.

So when you look at weights per container yard, we're starting to see anywhere from 3 to 5% decreases that have not necessarily reflected, then 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, we're just sure they're seeing the same thing, which is contributing to the landfill volumes being declining faster. And what appears today are 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 other.

Donald Slager

Yeah 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. And as Jim said, we're starting to see declines in the commercial residential business. Jim said we track pounds per yard, pounds per home in our collection system. And we see just how much thrash our customers are throwing away.

So we're starting to see those containers lighten enough, we are beginning to see some service decreases occur out there. And again that that ties with our guidance to 10% volume loss, 10% year-over-year volume change for the company in '09. So we are managing those service decreases very well, we are managing cost out of the middle in our business to deal with those volume declines. But again like I said it's not a competitive market share loss, it's just strictly economy for all that we can see.

James O'Connor

Yeah, Jonathan I think what we are seeing C&D then predominately industrial collection of volumes in our landfills down about 9% and we are seeing special waste also down 9% fourth quarter '07 to fourth quarter '08. So again we've seen significant drop-offs 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, they are not our regulatory driven.

So again we are starting to see some of those impacts. Obviously, this economy is a 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 add such as special waste. I will tell you that Don and our staff in the field have done an extraordinary job in light of kind of go through this merger and adjusting the work force. And the assets used in the business to produce the results that we are seeing and produce the guidance that we're going to be executing against in '09.

Jonathan Ellis - BAS-ML

Great. That's right I appreciate the color there. My second question I'll try to make two parts out of it since you're 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 operation savings?

And then the second part of the question is, how much of your synergy targets been impacted by the volume weakness that seems to have really intensified since you originally like your synergy targets during 2008?

Tod Holmes

Hi, this is Tod I'll take the first part and then may be 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 there. 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 that was higher than that, we expect about $60 million run-rate benefit from that this year.

Donald Slager

And the second half of that, the synergy that relates to volume is the savings by which we move waste from one facility to another. So transportation disposal savings related to now the new larger network of landfills to transfer stations that the company has at it's disposal, we're going to create, we're 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, volumes are off by 10% when we put those goals together, now that synergy goal could be impacted by 2 to $2.5 million.

Now 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 are seeing other opportunities in it's synergy columns as well. So we've got some puts and takes in this but overall we feel very comfortable that we're able to meet the 150 and frankly out perform it.

Tod Holmes

And remember what Jim said earlier, and we knew this last 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 a $170 million so we feel very, very comfortable with the 150.

James O'Connor

Okay, operator next question please.

Operator

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

William Fisher - Raymond James

Yeah, good morning.

James O'Connor

Good morning, Bill. How are you?

Donald Slager

Hi, Bill.

William Fisher - Raymond James

Okay. Yeah first, just on following up on the may be the landfill pricing obviously mentioned the special waste and C&D down 9% I think you said that therefore landfill pricing was up 3.6 to 4 can you give some color on the core recurring MSW pricing, is that higher or just kind of how you look at that basket?

Donald Slager

Yeah, MSW pricing is about the same, I mean there's as you can appreciate they are mix issues always in the business from a very high revenue East Coast side to a very low revenue per unit that's called Midwest or Midsouth site. So as all volumes move around it impacts your overall price per unit but price per unit in the MSW line is up all in the Q3 to Q4 sequentially and if you consider some of the anomalies that exist in the business.

So we are confident again we are very focused on landfill pricing we continue to talk about over the years the capital intensive nature of the landfill, the fact that impacted the hard they are hard to replacing, to 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 get those appropriate returns and we're very well poised to do that.

Tod Holmes

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

William Fisher - Raymond James

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

Donald Slager

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 will get at this pace and productivity of 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 hours in our drivers, in 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. So 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 the truck.

We first cut back our driver hours and overtime we've got to actually park trucks along the fence. We've got to reduce our staffing levels. So we track those productivity metrics in the landfills, but with this kind of landfill volume loss, 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 contractor 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. And we know 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 its year long as Jim said, we don't see the economy returning in '09.

And so we're making now more and more I'd say, permanent adjustments to the work force for the new volume. 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 this launch pretty tightly on a provision and side by side basis. Is that helpful?

James O'Connor

Bill wanted... just a follow-up to Don's I mean in a good economy productivity it gets somewhat skewed on a basis that you've got a lot of organic growth. When you really find out who your A team is when you are in an economy like we're in today. And I can tell you that the field organization, I have travel with Don in particular into the southern region, hours have been addressed we are now parking trucks as Don mentioned.

But I think in further conversations that I have had with Don and in the eastern region in particular we are looking at other things because of the depth of this economy and where it's heading I mean things that we're looking at right now and now whether we do these or not I mean just to give you an idea of the things that we're analyzing is we are looking at the landfill landscape and determining whether or not we need to slowdown either receipts of some of these sites or in fact actually moth ball some of these sites for a period of time until volumes come back because of the proximity of some of our other landfill.

So there is a lot of disposal optimization. The 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.

Operator

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

Corey Greendale - First Analysis Corp.

Hi, good morning.

James O'Connor

Hi, Corey, good morning, Corey.

Corey Greendale - First Analysis Corp.

So the first question. Actually I have a couple of 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 that savings, where are you spending less in '09 and how much is of the savings is economic versus how much is more permanent because of the acquisition opportunities?

Tod Holmes

Yeah, the '09 if you took the '09 on kind of pro forma basis it be 943 million. Now, the 845 of guidance that we gave for '09 that was '08, 943, the 845 for '09 I think there is probably about $27 million of merger related capital in there. So if you excluded that would probably be around 820 or so. And I would say that for the most part a lot of this capital is the economy going from say the 940 to 820.

Donald Slager

Yeah, if you look at those numbers it's pretty consistent what we've really said that CapEx is going to be about 10% of revenue. So I don't think that lines are pretty well. We rephrase this we're not buying roll-off trucks in 2009 as you can appreciate with the roll-off trucks being parked because the economy is down in our line of business has impacted pretty greatly.

We've re-ramped our models at our landfills as far as site developments. We've got some as Jim said, moth balling consideration that's going to impact our capital spending but with landfill development and so on.

James O'Connor

Another point is our 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 of years Allied has done a good job of putting substantial build blocks on road.

Corey Greendale - First Analysis Corp.

And my second question is just about kind of look at the progression through the year, since you've got a couple two-thirds of Q1 in books of Allied. I am assuming with the 8% volume decline that it's going to get better with each of your comps, as the year goes on so that may be you are seeing a more pronounced line decline 10% or something like that, now is that fair?

Tod Holmes

I think, again our guidance is the way it will, it always has been, we don't assume a second half recovery. So I'll say it's actually thoroughly flat.

James O'Connor

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'd specially like to thank Bill Haven, the Head of our IT department and his team who have been working on system conversions round the clock.

Special thanks to all clients; Paul Novotny and Bridget Ryder, Karl Marks and their teams for their dedication over the past several months. And finally, a special thanks to Doug Brow 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 area code 203-369-2017. A recording of this call is available on Republic's website at republicservices.com. And again thank you all for spending time with us today. Have a great day.

Operator

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

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Source: Republic Services Q4 2008 Earnings Call Transcript
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