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Republic Services, Inc. (NYSE:RSG)

Q4 2009 Earnings Call

February 11, 2010 5:00 pm ET

Executives

Jim O’Connor - Chairman & CEO

Tod Holmes - EVP & CFO

Don Slager - President and COO

Ed Lang - SVP & Treasurer

Analysts

Scott Levine - JPMorgan

Michael Hoffman - WSI

Vance Edelson - Morgan Stanley

Hamzah Mazari - Credit Suisse

Jonathan Ellis - Bank of America-Merrill Lynch

Corey Greendale - First Analysis

Richard Skidmore - Goldman Sachs

Bill Fisher - Raymond James

Operator

Good afternoon and welcome to the fourth quarter 2009 conference call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your host this afternoon is Republic 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 afternoon, Mr. O’Connor.

Jim O'Connor

Good afternoon. Welcome everyone and thank you for joining us this afternoon. This is Jim O’Connor and I’d like to welcome everyone to Republic Services fourth quarter conference call.

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 performance.

I’d 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 maybe materially different from 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 a recording of this conference call, you should be sensitive to the date of the original call, which is February 11, 2010. Please note that this call is the property of Republic Services Incorporated. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited.

I’m pleased to report that we exceeded our original guidance for earnings per share, free cash flow, merger synergies and EBITDA margins. This solid performance was achieved during the significant economic downturn and the integration of two large solid waste companies.

We believe we are well positioned for strong results in 2010 due to our pricing discipline, cost controls, realization of merger synergies and our commitment to improve return on investor capital.

Let me give you some of financial highlights for the full year. Revenue, $8.2 billion; net income adjusted for merger related and debt refinancing expenses, $565 million or $1.48 per share. Full year EBITDA margins were 30.6%, this strong performance highlights the ability of our field organization to maintain pricing discipline and implement cost controls, while working through the integration process.

Core price for the full year was 3%. We continue to use our return on investment pricing tool to be sure all business activity meets our requirements. Volumes declined at 9.5% in 2009 due to the weak economic conditions particularly in construction business.

Full year adjusted free cash flow was $746 million or $1.96 per share, which is 132% of adjusted book earnings. Again, free cash flow is the best measurement of the quality of earnings. Our Board has approved $0.19 per share dividend payable April 15th, 2010.

During the fourth quarter, we issued $600 million of 12 year notes with a coupon of 5.25% and called approximately $1.1 billion of existing debt. This debt called was retired with the 12 year note issuance, bank borrowing and cash. Total debt reduction in 2009 was $740 million. We continue to look at liability management opportunities to realize future reductions in interest expense.

Also want to provide some information on our integration. During 2009, our integration schedule and subsequent financial savings ran ahead of plan. Target of $150 million is one year ahead of schedule. We expect run rate synergies achieved by the end of 2010 to be $165 million to $175 million. Our management team will continue to identify further margin improvement opportunities going into 2011.

We realized $115 million of those synergies that I just mentioned. During 2009, we expect to realize $40 to $45 million of additional synergies during 2010. Our field organization under Don’s leadership has far exceeded expectations regarding the amount and the timeliness of the synergies achieved.

So now I’d like to have Don Slager, our President and Chief Operating Officer talk to those achievements.

Don Slager

Thanks, Jim. 2009 was a year of great accomplishment for Republic, not only did we hit our $150 million synergy target and half the time expected, we are developing a single business culture that is focused on customer service, safety and improving return on invested capital.

I’d like to highlight a number of our achievements in the integration process. First, in our overlap markets which represent approximately 1/3rd of our revenue base, we have eliminated 70 routes through our optimization tools used to enhance labor productivity. We have redirected approximately 13,000 tons of waste per day within our transfer station and landfill network. All divisions are utilizing the same billing and operating system which is wile to driving further productivity initiatives.

Looking at information technology, which is key to our long-term success, many of our large scale conversions are behind us. Our detailed planning efforts completed in 2008 provided the foundation for solid execution. In Q4, we moved all human resource and payroll systems to a single platform, which was fully operational for the first payroll in January, 2010.

Additionally, we converted 63% of our divisions to a common billing and operating system. As I’ve said, we’ve completed 100% in overlap markets. We expect to finish the remaining conversions by the end of Q3, 2010. Over 70, 000 hours of training has been delivered to enhance the capability of our people. We will continue to make this investment and training to extract the value from the systems and processes implemented.

I also want to comment on the overall performance of operations in 2009. We have some outstanding successes especially in the area of safety and productivity. Our accident and injury frequency decreased again in 2009 with 30% fewer claims in the previous year. Collection productivity improved despite a decrease in route density due to the weaker economy.

We’ve continued our progress toward automated collection in our residential business. In 2009, we converted more than 200 routes to automated collection service and plan to convert an additional 200 routes in 2010. By the end of 2010 we expect our residential system to be approximately 50% automated.

I’d like to thank all of our field management and various integration teams for their ongoing efforts to achieve the most successful merger in the solid waste industry, while maintaining a focus on excellent customer service.

I will now turn the call the over to Tod, for a recap of our forth quarter financial performance.

Tod Holmes

Okay, thanks, Don. Fourth quarter 2009 revenue as reported rose by 61% to $2 billion from $1.240 billion last year, this increase of $755 million relates primarily to the merger with Allied on December 5 of last year.

Since we are measuring the performance of the operations on a combined company basis, the remainder of my comments assume the companies merged on January 1, 2008, therefore the prior year combined company financials data is included and can be reference in my comments, it’s particularly found on our website.

On a combined company basis there was a year-over-year decline in Q4 internal growth of 8.7% now this consists of core pricing growth of a positive 2.5%. Again, this quarter we see core pricing improvements in all line of business including collection at a positive 3%, industrial pricing of 2.7% was less than other lines of business, however, because temporary work had price increases less than average.

The total landfill price of 1.1% includes MSW landfill pricing of 3.1%, which is consistent with prior quarters. This however was partially offset by relatively flat construction and demolition pricing and lower special waste type event price work.

Price increases to our index based customers were pressured by lower CPI, which is simply a function of contractual terms. And again, approximately 50% of our revenue are tied to index-based pricing. Price increases to other customers remained strong, this will be the non-indexed based 50% of our customer base and again consistent with prior quarters.

Commodity revenue increased by about 0.07%. We saw commodity prices up 37% to an average of $130 per ton in the current quarter from $75 per ton in the fourth quarter of 2008. Q4 MERS commodity volume of 421,000 tons reflects a 2% decrease from the prior year. And also Q4 average price increased $8 a ton from $95 in the third quarter of 2009 with prices actually ending the month of December higher than the average for the quarter.

Our fuel recovery fee actually decreased 2.2%, the reduction in fuel recovery fees relates to a decrease in fuel cost, the average price per gallon of diesel decreased to $2.74 in the fourth quarter from $2.97 in the fourth quarter of 2008 or approximately 8% low. Current fuel prices are very to close to that at $2.78 per gallon.

Our volumes were down 9.7%. This also includes a decline of 100 basis points from the impact of hurricane Ike in the prior year. So excluding hurricane Ike, the volume loss was actually 8.7%, which is a sequential improvement of about 140 basis points, a little over 10% volume loss in the third quarter, so little bit better than the third quarter.

Residential and commercial volumes experienced low-to-mid single digit declines. Volume loss was most significant again in the industrial and landfill lines of our business, which experienced mid teen year-over-year volume declines, both reflection of the weak economy and also some weather related issues across the countries late in the fourth quarter of 2009.

Now let me turn to our fourth quarter year-over-year margins. Similar to internal growth, I will discuss fourth quarter year-over-year margins as if the companies had merged on January 1, 2008. Let me again remind you that we’ve posted this combined financial data on our website.

Fourth quarter 2009 EBITDA margin, excluding divestiture loss, restructuring charges, and cost to achieve synergies and remediation charges was 29.4% in the fourth quarter of ’09 compared to a combined margin of 26% in the prior year. This represents an improvement of 340 basis points.

In the fourth quarter of 2008, we had included the results of the DOJ divestitures that generally carried higher margins in the company average because of the concentration of landfills and commercial collection assets that had to be sold. The impact of these divestitures resulted in a year-over-year decrease in EBITDA margin of approximately 30 basis points.

Now, let me talk about some of the more significant changes in cost as a percentage of revenue. First fuel, fuel expense improved 10 basis points primarily due to an 8% decrease in the cost of fuel as I mentioned earlier. Again, average diesel prices decreased to $2.74 in the fourth quarter of 2009 compared to $2.97 in the fourth quarter of 2008. And again current prices are fairly close to the fourth quarter ’09 of $2.78 a gallon.

More than offsetting the decrease in the fuel cost was a decrease in related fuel recovery fee revenue resulting in a net decrease in EBITDA margin of 100 basis points. And I would remind everybody that those recoveries to use lag by one month either going down or going up.

Second, cost of good sold, the 20 basis point increase in expense relates to increases in rebased to customers for volume deliver to our MERS. Cost of goods sold at our MERS increased approximately 10% to an average of $27 a ton for about $24 a ton in the prior year.

Commodity revenue (inaudible) more than offset this increase in cost resulting in an increase spread of approximately $26 per ton. The net impact was a favorable 40 basis point improvement on EBITDA margin.

Third, labor. The 10 basis point improvement in margin relates to a 70 basis point benefit from finalizing actuarial assumptions associated with new the combined health and welfare plans and this is partially offset by cost increasing as a percentage revenue in the post collection business. Again, we merged both of our health plans mid-year in 2009. Labor is relatively fixed in the post production line of business and does not decrease proportionately with volumes.

Fourth, disposal expense. Disposal expense decreased in absolute dollars, but increased by 50 basis points as a percentage of revenue. These variable cost decreases in the collection business as volumes declined, but we are impacted by changes in the post collection business whether relatively fixed. Therefore, as post collection revenues decrease as result of volume loss, these costs increased as a percentage of total revenue.

Next transportation and subcontract expense, the 140 basis point improvements in margin results from four factors. First, synergy related cost reductions from redirecting waste streams to our more efficient disposal network; second, internalizing national accounts collection work that was historically subcontracted before the merger. Third, impact of volume mix depending on changes in volume in the business; and then fourth would be lower fuel surcharges.

Finally, let me talk about SG&A. The 250 basis point improvement in margin for SG&A relates to the following. 170 basis point increase primarily associated with one-time items in Q4 2008 including conforming bad debt policies of $19.6 million and then also a year-over-year reduction and legal settlements of about $14.6 million.

Additionally, there were favorable actuarial adjustments to our health and welfare benefits in the current year of about $4.4 million. And again we combined both plans on July 1st and then ended up in the later part of the year getting a better track record of combined experience and then actuarial rate base on that combined experience. The second SG&A item is 60 basis points increase realized from synergy related headcount and overhead reductions as a result of the merger.

Let me bring it all together here, again 340 basis points of EBITDA margin expansion and it can be summarized as follows. First, the impact of the divestitures was a negative 30 basis points. Second, the net fuel impact was a negative 100 basis points. Third, the net commodity was a positive 40 basis points. Fourth, the actuarial adjustments to health and welfare plans, and that’s both in the direct LIBOR as well as in SG&A, was a positive 90 basis points.

Fifth, the impact of conforming bad debt policies in the prior year and the change in legal adjustments in the prior year was a positive 150 basis points. Sixth, the realization of synergies a positive 140 basis points; and finally, seventh, and this is really a part of our business. Price increases and cost controls partially offset by fixed cost and lower volumes, we had a positive 50 basis points there really in the core of our business.

Depreciation and amortization and accretion increased by 130 basis points also year-over-year, of this increase 90 basis points relates to increased non-cash expenses associated with purchase accounting valuations of Allied assets and liabilities and connection with the merger.

Again we had to put a substantial amount of value, which was formally in goodwill and not amortized into landfill our space to be amortized. The remaining 40 basis point variants relates to this fixed cost relative to lower revenue.

Let me talk briefly about our interest expense. The company recorded non-cash interest expense of $41 million in the fourth quarter of 2009. This arises primarily from amortization on Allied debt that was reported that a significant discount. We also recorded a $102 million loss or $0.17 per share related to premiums paid and non-cash write-offs of discounts and fees associated with the recently completed note refinancing in tender. And again these refinancing have a very quick pay back, probably in the range of two to three years. So we’re advantage of this favorable interest rate environment.

Now I’ll turn the call over to our Treasure, Ed Lang to further discuss financing initiatives. Ed?

Ed Lang

Thanks, Todd. During the fourth quarter we continue to execute our liability management strategies by calling approximately $1.1 billion of existing debt that would have been repaid over the next four years. We used cash investments, a new 12 year note for $600 million at a coupon of 5.25% and bank borrowings to retire the call debt. As Todd mentioned, this high coupon debt, because this was high coupon debt that that was called the average cash payback period is less than two years.

The public has three benefits from this refinancing effort. First lower cash interest expense; second, extinguishment of the debt discount associated with these maturities, as you member the debt discount was a result of the purchase accounting required at merger close; and third, extending debt maturities.

The negative impact of the cash premium and the extinguishment of a discount was $0.17 of EPS. The 2010 EPS benefit of this refinancing is approximately $0.07 of EPS. Republic issued another call of debt maturing in 2014 earlier this week for planning purposes we have assumed that we can refinance this debt at existing rates and included this positive $0.01 EPS impact in our guidance.

There will be one-time costs of approximately $52 million or $0.08 of EPS to retire this maturity. Of this charge only $9 million relates to cash premiums paid and $43 million relates to a non-cash write-off of the debt discount. We will continue to take advantage of other liability management opportunities since credit markets remain attractive.

In 2010, we expect total interest expense to be in a range of $500 million to $550 million with non-cash interest of approximately $100 million. This excludes any premiums paid or discounts written-off in connection with early extinguishments.

I will now discuss free cash flow. Year-to-date adjusted free cash flow was $746 million which consisted of cash provided by operating activities of $1.4 billion less property and equipment received of $862 million plus proceeds from the sale of property of $32 million plus merger related expenditures net of tax of $75 million plus divestiture related tax payments of $105 million and this equals the adjusted free cash flow of $746 million.

We defined adjusted free cash flow based on CapEx received during the period. We have included a reconciliation of the timing difference between CapEx received versus paid on page 13 of our 8-K filings.

Now I’ll talk about our balance sheet. At December 31, our accounts receivable balance was $865.1 million and our days sales outstanding was 39 or 24 days net of deferred revenue. Reported debt was approximately $7 billion at December 31. During 2009, total debt was reduced by $740 million and excess credit availability under our bank facility is approximately $800 million.

Now, I’ll turn the call back to, Jim.

Jim O’Connor

Thank you, Ed. During 2010, we will be focused on the same performance metrics in order to deliver higher return on invested capital and improve margin performance. 2010 financial guidance, which is based on economic conditions and commodity values remain consistent with levels exiting the fourth quarter of 2009.

Our financial guidance then for 2010, we anticipate that our full year adjusted EPS will be in a range $1.63 to $1.67. We expect internal price growth to be 2% to 2.5% and volume declines of 3% to 4%. Our pricing is impacted by the lower CPI statistics since approximately 50% our revenue is index priced. Some of our contracts use a trailing 12 month average to reset pricing, others use a single month-over-month to reset. We do expect commodity prices to be positive this year.

Our adjusted cash flow guidance is $700 to $725 million. This guidance assumes determination of bonus depreciation expense. If bonus depreciation is extended into 2010, adjusted free cash low would be $750 to $775 million.

Our planned capital received is $775 million. Anticipated full year EITDA margin is 31% before integration cost. We expect to achieve 165 to $175 million dollar of run rate merger synergies by year end and anticipate further opportunities in 2011. We expect our effective tax rate to be approximately 42%.

Now before going to Q&A, I’d like to comment on the exceptional performance of our entire organization. Don and I have recently concluded the annual planning process. And we were impressed with our fuels organization’s ability to adjust to the merger integration process and the economic environment.

We identified opportunities to further expand margins over the next two to three years including opportunities and procurement national accounts and lot optimization. We’ll build on everything we’ve learned during the past year and take advantage of the revenue growth opportunities and the operating leverage that exist in our business when the economy recovers.

Our success and working as a single team as allowed us to execute the most successful integration solid waste industry. Our detailed planning efforts laid the ground work for the only large waste industry integration that is delivered shareholder value and exceeded its synergy guidance both in terms of financial performance and the timing of completion.

As we look back in 2009 it was a very challenging year due to the historically weak economy, the public team overcame the weak business environment successfully integrated two large companies and are now on track to achieve record financial performance in the coming year. I'm confident in the operating leverage that exists in our broad business platform and look forward to continued improvement in 2010.

So with that operator I’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question is from Scott Levine - JPMorgan

Scott Levine - JPMorgan

On the volume side the numbers where little bit lower in the fourth quarter than we expected and I know you mentioned that there was 100 basis points headwind from hike, but could you comment about how the trends came in relative to your internal expectations maybe and with regard to where things might be stronger weak on a relative basis within your footprint?

Tod Holmes

The volume sequentially are bottoming we feel good about that and to forecast what actually based on again what we experienced in the later part of the fourth quarter as far as the business in general, I think we feel very good about and in terms of the revenue mix as relates the volume, I think we're seeing again pretty much sequentially relatively the same performance as relates the volume.

Scott Levine - JPMorgan

Sequentially things are kind of stable not really getting better and not targeting worse?

Tod Holmes

Yeah, exactly.

Scott Levine - JPMorgan

And then may be if you can give us a sense as well, Jim on the CPI resets on legacy business, yet the majority of your resets are toward the middle of the year, is that still the case and may be if you can give us a sense of what your preliminary expectations or what those resets might look like and what that might imply for pricing in 2011 without giving explicit [guidance]?

Jim O’Connor

Well, I guess going into 2010, we’re looking at our index based business to be at about 1.5%. And when we look at the trailing or the month-over-month index related to December month-over-month, we’re looking at negative 4 coming into this year. Negative 0.4, I’m sorry. And the trailing 12 months is with two positive 2.5.

Tod Holmes

The trailing 12 months was negative 0.4, but if you look at December ‘09 over December ‘08, it was a positive 2.7. So it looks like inflation is starting to pick up but I think as we look at pricing, we have that expectation for 2010 that the index price contribution is 1.5% for the full year. Obviously, as we start to see the trend in the month-over-month CPI statistics, we have a better sense as to what we’re building to 11, but it’s far too early to predict that.

Operator

Your next question comes from Michael Hoffman - WSI.

Michael Hoffman - WSI

On free cash flow, this is going to be one of those multi part question, so we can squeeze it in under the rules. If you do all the adjustments for the onetime things in the year, what I'm hearing is the number that looks like 875 to 900 million and it sort of long term pattern on dividends is about 40% of free cash flow that might suggest almost 20% increase in the dividend in July plus you got tons of money left over still to buyback stocks, so balance sheet risk is gone, what are we waiting for?

Tod Holmes

Well, I think we need to go back and look at that, the 2010 free cash flow again. We’re looking at something that’s in the high 7s basically. And that assumes that the IREX bonus depreciation again for corporate America which is in the budget proposal that was presented. Somewhere as Jim has stated in that $750 million to $775 million range. Which means then you consider about $300 million for dividend that today’s rate, we’ve got something like 450 to 475 to be available to pay down debt and also available at some point to buyback stock.

Now, I think we’ve always said that we’re looking for debt-to-EBITDA coverage somewhere in the range of 2.5 times. And as we approach that we’ll be proactive and talking with credit rating agencies about cash utilization strategy, because dividends increase maybe a component although certainly we are above the S&P 500 right now. And then obviously the share repurchase is something that particularly given the values of this company is fairly low.

One other thing that I would add is you would have notice in January, we had a settlement which is very favorable settlement for us on the tax payment for the (inaudible). I think we had accrued about $200 million and that was in our liability footnote in the third quarter, we actually settled it for $125 million. So, we also have that payment. I think the company’s view is we will pay down the debt, we need to continue to move towards this 2.5 times range, see how the year is moving and talk to the credit rating agencies to make sure they feel comfortable with our strategy. But certainly given the valuation, share repurchase is something that we fell is attractive in future.

Jim O’Connor

And this is a primary topic at our Board meeting and will be through the middle part of the year. So, I would anticipate some sort of cash utilization strategy that we announced in the middle part or later part of year.

Michael Hoffman - WSI

And then valuations remain exceptionally cheap. So, are they tucking opportunities in the face of very stable business fundamentals, but none of the independents are seeing anything particularly good. So business valuations are cheap?

Jim O’Connor

Well, (inaudible) to the beholder. The reality is, we are out all the time, our development people talking to people, if opportunities present themselves or exchanges present themselves, we’ve got the balance sheet to take advantage of those. So, again I just really what the expectations are out there and how it fits in and bolt on to the business platform that we have.

Tod Holmes

I would add to that Michael, we would be very selective in the process as we have been.

Operator

Your next question comes from Vance Edelson - Morgan Stanley.

Vance Edelson - Morgan Stanley

Given the accelerated CapEx at the end of ’09, when do exhaust that benefit and need to start buying again?

Tod Holmes

Well, yes CapEx is really a function of what’s going on in the business. I think we’ve actually got again capital that was delivered for 2009 was $860 million. I think that was kind of what we started with, we guided down as the volume dropped off and then we recognized the issue with the additional engine requirement, the higher cost, the possibility of, we don’t think as that being an issue of some issues with new technology. So we accelerated the purchases and ended up at 860. 790 your net of proceeds, 775 is what we’ve got for 2010. We do have some leverage there. We’ve got a number of rollout trucks obviously parked and we’ve got containers. So I think as we move through 2010 and in 2011 that not only do we have operating leverage, but also capital leverage. And we won’t be able to take advantage of that (inaudible)…

Vance Edelson - Morgan Stanley

The CapEx budget for 2010 keeps our (inaudible) constant with 2009. So we have a loss in the ground there and as I said in my comments, we continue to make investments and things like automation to increase our mergers and productivity. So we’ve got some plenty of powder to operate according to the guidance we’ve given, if worked some houses start to take off and will have to look at that number?

Tod Holmes

Again, I guess what I would say is the CapEx for next years is pretty ratable over the course of the year. The capacity we have in assets because of the downturn with the equipment that is parked there is probably about 1% in our commercial system, 1% in our residential system and about 5% to 7% in our industrial collection business. Obviously, we’ve got I think probably enough capacity because of step orientated nature of our landfills to probably step up even with the reduced volumes that we have and not really have a whole lot of variable cost there.

Vance Edelson - Morgan Stanley

And then just following up on an earlier question, just for human sake if you were at 2.5 time leverage ratio today, what would be your buyers if you went in front of the Board in terms of uses of cash and the dividend versus share buyback debate or do you think that a balanced approach is always going to be best to keep a larger percentage of investors happy?

Jim O’Connor

Again, we are going through that process right now with the Board. We do believe the stock is under valued. But again I think we’re going through a very deliberate review of all the alternatives available for cash and can we make that announcement, sometime midyear or in the third quarter. But I think it’s evidence to all of us that the stock price is under valued and that we would probably move closer to move in that direction. But again we do also have a commitment to our investment grade rating and paying down some additional debt between now and year end.

Tod Holmes

If you think of what the follow up is doing pre merger, we probably had a 40% dividend payout, 60% share repurchase. We kept the dividend obviously after the merger discontinued share repurchase to delever. So logically, we would be looking at the dividend again, but the substantial change would be towards share repurchase.

Operator

Your next question comes from Hamzah Mazari - Credit Suisse.

Hamzah Mazari - Credit Suisse

The first question is just a clarification. I think you guys had 50% of your business is tied to index but previously you’ve said your franchise business is 26%. Could you comment on what you’re referring to as index and to disconnect between franchise versus index in your commentary or am I thinking about this wrong?

Jim O’Connor

I mean, in the index based would be residential contracts and then would also be which are not what we would normally classify as index, not mean the franchises and then all of the franchise were predominantly is index priced.

Hamzah Mazari - Credit Suisse

If you also have in there your municipal waste streams at the landfills, so those also are typically long-term contracts, but with CPI type as greater costs. Is that the answer to that or?

Tod Holmes

Just to kind of give you the build homes is that our franchises were about 27% or 28% of revenue. As Jim mentioned, municipal agreements which are contracts where we only provide residential collection probably about 14% to 15% of revenue and then municipal disposal agreements as Don referenced probably 6% plus and in total it comes to about 50%. So the franchise is a subset of that index business, but is unique because those are markets where we’re the exclusive provider of all services.

Hamzah Mazari - Credit Suisse

That's very clear, I appreciate it. And the follow up question just relates to volumes, you called out last quarter like most other waste companies that volumes have stabilized and are running flat sequentially. Just trying to understand whether you're seeing any additional signs of stabilization out there or we just flat from Q3 in terms of the gap between service increases versus decreases, any kind of new business loss business et cetera, if you could just add some color surrounding that?

Jim O’Connor

I would say net-net it’s about the same. So we have a few markets where we’re seeing some improvement with the few markets that maybe lag and it’s seeing for some further decline, but unbalance, it looks a lot like it did last quarter, so its looks like we have been down.

Operator

Your next question is from Jonathan Ellis - Bank of America-Merrill Lynch.

Jonathan Ellis - Bank of America-Merrill Lynch

Wanted to ask first question and I’ll make this two part of question around the volume guidance the 3 to 4% decline. The first part is that assume just simply well over effect are you anticipating any incremental weakness in volumes throughout course of 2010. And then second part is, within that three to four expectation, are you anticipating the residential and commercial to be flat and the roll off to be down, if you can just help us understand the market segmentation within that guidance?

Ed Lang

We don’t have a great crystal ball on to what’s going to happen in 2010 and this is very consistent with what the company has done in prior years so what we see today in the business, which again is (inaudible) is very stable will let us to build the business model with basically the rollover or the rollout of the 2009 decline. So its pretty simple math, first quarter maybe sounds 7% or 8%, second quarter 4% to 5%, third quarter maybe a couple of percent and kind of zeroish in the fourth quarter and that gives you the 3% to 4%.

So again we’ll give the [screened] update when we get to mid year, we wont jump to gone in that April, May timeframe when see the seasonal up tick you got to really see that settings so its really late June or early July before you could really say what’s happening in the construction cycle for that component of our business. In terms of our question regarding the various types of services again the commercial residential business as past year was down in the low to mid single digits the industrial was in the high teens in terms of the decline and the landfill a transfer was in that same high teen range in terms its decline. And we would expect that to roll proportionately.

Jonathan Ellis - Bank of America-Merrill Lynch

And my second question can you mention the incremental merger savings that you’re going to achieve in ‘10 from the roller effect of the run rate in ’09 I think you said $40 to $45 million of savings. If I do the math based on your guidance for the revenue base

That basically all the EBITDA margin expansion that you’re assuming for this year in the 31%. So does that imply that you’re not assuming any operating leverage within the core business or is that 31% just potentially looked very conservative right now?

Tod Holmes

We just talked about volumes and that is a factor. Despite the fact in the first quarter the year wasn't great, the volumes were little bit better than they were later in the year and we lost landfill volumes, which is a higher margin business. The other factor that we have is the divestitures that I spoke to which is a mix issue. And then you have fuel, which absolutely based on current fuel prices. The first half of last year fuel prices were very low. So that's a little bit of a negative. So when we look at it, you got kind of those rollover effects of those negative items and then there is two positive components, one is the synergy that you spoke to Jonathan, maybe it's 40 or 50 basis points of benefit some of which is we’re securing intent and some of which is a positive rollover from ’09.

And then the other is really the heart of our businesses again is our ability to control operating cost and secure price, get a little bit of margin expansion there. And again I think that's a similar number, that's probably a positive 40 to 50 basis points. So you put it all together and you say, our EBITDA margins maybe are going up 50 or 60 basis points, which you got two positives that are 40 of 50 basis points, one in the price net of cost and the other in synergies and then you’ve got this other kind of rollover effect of those negative that will rollout.

Jim O’Connor

So in a much more stable business that we are in.

Tod Holmes

We actually got one margin expansion than just from synergy.

Jim O’Connor

And we expect it in ’10.

Operator

Your next question is from Corey Greendale - First Analysis.

Corey Greendale - First Analysis

Most of my question is actually been answered believe it or not. So I just wanted to ask about what you're assuming in 2010 or what you're targeting in terms of landfill pricing in the markets for volumes that are not tied to CPI?

Don Slager

Yes, we have got, right now, probably consistent what we’ve seen in ’09 which is sort of 3% or 4%. So we think that there is still some room in that business even despite the economic weakness to take advantage of those assets.

Tod Holmes

So I mean you got about 65% of our MSW, which is about half of our landfill volume. Index priced, so it's going to be probably down in amount of 1% range and the other 35% of that 50%, again MSW is going to be priced in the 3% to 4%.

Corey Greendale - First Analysis

Then my second question is if volumes do what the guidance suggest in 2010, would you still be able to decrease labor cost on an absolute basis or are you getting to the point where that’s not possible anymore?

Tod Holmes

I mean that’s everything proportionate to the volume, landfill is obviously your more step orientated. So, as I said in the capacity question we’ve got probably to ability to bring back all that volumes are very little variable cost associated with it. In terms of the collection business it’s our proportional. So, as we lose it, we pull it off just as we did this year that would be the case. But we do believe we got asset capacity and we do believe we have some capacity in terms of margin at the business were come back.

Jim O'Connor

There definitely is capacity there Corey, but again look at the margins and look at how we performed in real time take in the trucks and the headcount out of the business is the volume as contracted. So, we done a good job a right size in the business its going on. Just the nature of the business we’re driving by staffs today that home that is vacant in that home is occupied that’s pretty easy productivity gain for us and we’ll see lot of that hopefully on the way backup.

Operator

Your next question is from Richard Skidmore - Goldman Sachs.

Richard Skidmore - Goldman Sachs

Just a following up on the volume assumptions for 2010 is there something that you are seeing in your business suggest the volume don’t improve from here or just you’re taking relatively conservative view that volume stay kind of it the fourth quarter levels maybe us to another way would as the economy seems to be trending better why would be not expect to see some volume pickup from here?

Tod Holmes

I mean again we based our guidance and how we access the fourth quarter, when we put the guidance together we’ve look at sequentially as we came into the fourth quarter what we have seen. So, I guess we got strong years ago when we anticipated a [B shaped] recovery in 2001 and 2002 and I guess you can call that conservative, but I think we are in historic economic environment and we are not going to predict. So, I think the key here again is we will give clear guidance as we see the economy starting to change and hopefully will be to the upside in the second quarter of 2010.

Jim O'Connor

I would that again I think historically Republic has been so on conservative service probably some service in that and then also is an industry, we can delayed coming down and we can delayed going up. And if you look at our volumes in eight, nine and that what we are saying or 10 you see at the classic (inaudible) this industry. So, in 2001 and 2002 and also in 91, where was down 4, 5% then was down 10% there final 9% and now down about 4%. So, pretty consistent, maybe somewhat conservative and will give you and update

Operator

One final question comes from Bill Fisher - Raymond James

Bill Fisher - Raymond James

Just two quick one, on you mention I think whether on the roll offs I think in First quarter, you have had some more storms or whatnot in Q1, does that color your volume across in Q1 at all or is that just a factor you deal with every year?

Jim O'Connor

Yeah we are going to deal with every year and obviously we have been shut down on the East Coast and some of our locations. But it does impact any of the guidance with have got. Not baked into the guidance.

Bill Fisher - Raymond James

And then on the recycling, it think it is well mentioned you used December pricing, roughly where were in January on that price per ton, on the cycling?

Jim O'Connor

Prices in where we came up with the guidance based on what, 103.

Tod Holmes

Yeah the guidance based on that, what we are seeing today is about a third of our recycling volumes is in cardboards. And so I think what happens is cardboards probably up may be about $30 or $35, and the other commodities are pretty flat, so we are probably somewhere around little over 110, 113 somewhere in that range. Up maybe on average about $10. For the company is probably were standing in a half it will make couple sense in earnings

Jim O’Connor

Thank you, operator. In summary, I’m very pleased with our fourth quarter results and will continue to focus on achieving appropriate return on capital through pricing discipline maintaining labor productivity through route and disposal optimization.

We continue to meet and exceed expectations for realizing merger synergies, reinvesting in our people and business platforms to ensure high quality customer service, in a safe work environment, and continuing to reduce debt, improving our credit profile and taking advantage of refinancing opportunities to reduce interest expense.

I would like to remind everyone that a recording of this call is available through February 25th, by calling 203-369-3695.

Additionally, I want to point out that our SEC fillings and a discussion of business activities along with the recording of this call are available on Republic’s website at www.republicservices.com. Again thank you for spending time with us today and have a good evening.

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, Inc. Q4 2009 Earnings Call Transcript
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