Feb 6, 2008
Operator
Good morning and welcome to the Fourth Quarter Conference Call for Investors and Republic Services. Republic is traded on the New York Stock Exchange under the symbol RSG.
Your host this morning is Republic Chairman and CEO, Jim O'Connor. Today's call is being recorded and all participants are in a listen-only mode.
There will be a questions-and-answer session following Republic's summary of quarterly earnings. I will provide you with specific instructions for questions later in the call.
At this time it is my pleasure to turn the call over to Mr. O'Connor.
James E. O'Connor
Good morning and thank you all for joining us. This is Jim O'Connor, and I would like to welcome everyone to Republic Services Fourth Quarter Conference Call.
In addition to reviewing our fourth quarter and full year performance, we will also discuss our guidance for 2008. Tod Holmes, our Chief Financial Officer; and Ed Lang, our Treasurer, are joining me as we discuss our fourth quarter performance.
I would like to take a moment to remind everyone that some of the information that we discuss on today's call contains forward-looking statements, which involves risk 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 that we will discuss today is time sensitive, if in the future you listen to a rebroadcast or a recording of this conference call, you should be sensitive to the date of the original call, which is February 6, 2008. Please note that this call is the property of Republic Services Incorporated.
Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. During the fourth quarter, we continued to deliver on our pricing initiatives and realize margin improvement.
We believe the current pricing environment is sustainable across all lines of business and our key results for the quarter were Republic's revenue growth of 3.9% to $796 million, we achieved internal growth of 4.7% with 6% of price improvement and volume decline of 1.3%. Our fourth quarter volume growth comparison was affected by a slow down in residential housing construction activity and lower associated landfill volumes.
Price growth continues to be strong. Core price is up 4.3%, price is the most important factor for covering rising costs and increasing operating margins and return on invested capital.
Within our landfill business, our core price was up approximately 3.3% in the quarter. We continue to see sequential improvement in landfill pricing particularly in our MSW volumes.
As landfill and residential collection contracts renew, we are seeing consistent price increases and higher retention levels. The biggest impact on our volume growth was in our temporary roll-off business, where residential construction volumes decreased approximately 15%, which is similar to the trend we experienced during the first three quarters of 2007.
Additionally residential construction related C&D volumes are down at our landfills we are still experiencing single digit growth in our residential collection, commercial collection and permanent industrial roll-off collection volumes. Despite the net volume reductions, temporary roll-off pricing has remained stable.
Operating margins for the fourth quarter improved by 70 basis points to 17.6. For the full year, our operating margins improved by 170 basis points to 18.6 after adjustments for remediation costs.
We remain focused on all the components of cost to ensure we remain competitive in our market places. Republic's had a number of significant achievements in the quarter, including our free cash flow for the fourth quarter, it was $116 million, we exceeded our full year objective, by generating $375 million of free cash flow, during 2007.
During the quarter, we continued to return cash to shareholders. In fourth quarter, we repurchased 2.1 million shares of stock for $71 million.
During 2007, Republic repurchased approximately 5.7% of our outstanding shares. Our Board recently approved an additional $250 million per share repurchase.
Therefore, we have $386 million authorized to buyback Republic stock during 2008, which represents 7% of our outstanding shares. Share repurchase will continue to be the cornerstone of our cash return strategy in 2008.
Since the inception of our share repurchased program in July 2000, we have repurchased over $2.1 billion of Republic stock or 41% of our outstanding shares. Upon completion of the existing Board authorization, our share repurchase program will total $2.5 billion or 48% of our outstanding shares.
In addition, Republic Services increased its dividend by 60% during 2007, and currently has a yield of 2.3%. Our current cash yield to shareholders is approximately 8% per annum.
Moody's Investor Services upgraded our long-term credit rating to BAA1 in December. Republic maintains the highest credit rating in the solid waste industry.
During the fourth quarter, Republic divested of a non-core business involved in the processing and sales landscaping materials. This business had an annual revenue of approximately $50 million.
As a result of the sales, we decided to consolidate our south west and western regions. This reorganization will increase the productivity of our regional staff.
We continue to utilize the return on investment pricing on all renewals of franchising municipal contracts. During the fourth quarter, Republic renewed an expanded franchises and municipal contracts in South Florida, Illinois, Texas and while improving our return on investment.
And we also renewed an operating contract for Orlando and Kentucky. At this time, I would like turn the call over to Tod Holmes, our Chief Financial Officer for a review of the fourth quarter financials.
Tod C. Holmes
Thank you, Jim. I will begin my review of the company's financial results by discussing revenue.
Again as Jim indicated, the fourth quarter revenue rose 3.9% to $796 million from $766 last year. Internal growth was 4.7; total price growth was 6% with 4.3 from core price, 60 basis point increase from fuel charges, and a 1.1% increase from commodities.
During the quarter, we benefited from our ongoing price increase initiatives and strategies in all lines of business. And we have been successful in 2007 in securing adequate price increases to provide decent returns on our substantial investments.
For 2008, we expect price in the 4% range. I might add that the current fuel prices, we could see an additional 60 basis points of price due to higher fuel cost that we saw in the fourth quarter.
Also, for 2008, we did not forecast any increase or decrease in the price commodities and for the full year 2007, we actually benefited from a 90 basis point increase in commodity prices. Our fourth quarter volume declined by 1.3%; however we had one additional work day in the fourth quarter.
And if we adjust it for that that additional work day, the fourth quarter decline would have been about 1.9% or consistent with what we saw in the third quarter. Our quarter volume was down 1.5%, non-core volume was up two-tens of 1%.
Temporary roll-off volume was down as Jim indicated 15% and landfill volume particularly in the C&D area was down 1.6%. Our commercial and residential volumes were both up about up 1%.
Our divestitures did account for the remaining eight-tens of 1% reduction in our revenue and that was primarily due to the let-go [ph] divestiture in the fourth quarter. So, we will see that rollover impact as we go into 2008 with our other revenue.
Fourth quarter year-over-year operating margin, year-over-year Republic's operating margins increased by 70 basis points, from 16.9% to 17.6%. Key components of our year-over-year margin increase, excluding the landfill charge are as follows.
Truck maintenance was benefit of 30 basis points, risk and insurance, health insurance costs were a decline of 60 basis points, fuel was a decline of 100 basis points, landfill operating was a benefit of 80 basis points, disposal and subcontracting cost was a benefit of 110 basis points; labor, a benefit of 10 basis points; DD&A, a benefit of 30 basis points; and SG&A, decline of 30 basis points, to give us a net 70 basis points benefit. I will briefly comment on these fourth quarter changes in year-over-year margin.
First, truck maintenance, again during the fourth quarter of 2007, our continued focus on cost savings initiatives and also the improved pricing resulted in a reduction truck maintenance expense., Second, the health and risk insurance, insurance expense during the fourth quarter of 2007 was 6.4% of revenue, this is higher than the fourth quarter of 06, due to one time adverse development in a few general liability claims and also higher year-over-year medical costs. We believe that risk in health insurance costs as a percentage of revenue should be in the range of 5.5% to 6% during 2008.
Third, fuel, our average wholesale price per gallon increased from $2.44 in the fourth quarter of 06 to $3.11 in the fourth quarter of 07. Current fuel prices, I might add, are approximately $3.13 a gallon, so that's very close to our fourth quarter average.
Fourth, the landfill operating expense during the fourth quarter, certainly our landfills benefited from improved pricing as that all lines of business, but in addition in the fourth quarter of 2006, we saw...that was when we began to see higher costs our Countywide facility in Ohio and therefore our cost were higher in 06 than in 07. The fifth category, disposal and sub-contracting cost; this is our largest cost category through which the impact of improved pricing is clearly visible.
Also dry whether, particularly in the south east also helped to lower the disposal costs by about 40 basis points. The sixth category is labor.
During the fourth quarter, we continue to benefit from productivity improvements in labor, which contributed to some modest margin expansion. Seventh, is DD&A.
The decrease in DD&A as a percentage of revenue is primarily due to higher year-over-year revenue and improved pricing. And finally SG&A; fourth quarter SG&A was 10.6% of revenue.
This increase in SG&A is primarily due to higher bad debt expense. We believe looking ahead that SG&A as a percentage of revenue should be approximately 10% to 10.5%.
Also looking ahead, we believe that operating margins for fiscal 2008 in the 19% range is achieve able and EBITDA in the 29% range is also achievable that's an improvement of about 50 basis points from above and that again assumes the current fuel prices that we saw in fourth quarter and obviously now in the beginning of the first quarter. Our fourth quarter operating income before depreciation, amortization, depletion, integration, our year-over-year operating income before DD&A increased by $11 million or 5.2% from $205 million or 26.8% in the fourth quarter of 06 to $216 million or 27.1% in the fourth quarter of 07, a 30 basis point improvement.
Next I will discuss our free cash flow. Free cash flow for the fourth quarter of 2007 was $116 million this is based upon cash provided by operating activities of $191 million plus purchases of property and equipment of $76 million, plus the proceeds of sale of property and equipment of 1 million; again that yields the free cash flow of $116 million.
Our free cash flow for the year ended December 31st, 2007 was $375 million, this is based upon cash from operating activities of $661 million, less purchases of property and equipment of $292 million, plus the proceeds of property of $6 million and that equals free cash flow of 375. Our free cash flow for the year ended December 31st, 2007, was positively impacted by several one-time items including lower than expected CapEx, capital spending of $20 million, higher differed income taxes of $10 million and higher remediation accruals of $30 million.
Looking ahead to 2008, we believe that free cash flow should be in the range of $340 million to $350 million, or as we have said before, in the range of 100% to 110% of net income. Now let's talk about our items impacting our cash balances, during the fourth quarter of 2007, as Jim indicated, we repurchased 2.1 million shares of stock for $71 million at an average price of $33.18 per share.
Our actual share count on December 31st, 2007 was 185.4 million shares. Republic's balance sheet remains very strong.
At December 31st, our accounts receivable balance was $298 million, and our days sales outstanding was 34 days. Our net debt was $1.450 billion, which was up slightly from $1.430 billion at December 31st, 2006.
And our net debt to total capital at December 31st, 2007 was 53%. Now I'll turn the call back over to Jim.
James E. O'Connor
Thank you, Tod. Republic's EPS for the fourth quarter was $0.44, which is 29% improvement versus the fourth quarter of 2006.
Our full year as reported EPS was $1.51. After adjusting for remediation costs and the sale of our processing and landscape business, full year earning per share was $1.66.
This performance is inline with the increased guidance we provided on our third quarter call. I will now review our financial guidance for 2008.
We anticipate that full year earning per share would be in the range of $1.78 to $1.82. Republic's operating margins will continue to improve to approximately 19% for the full year 2008.
Free cash flow will be $340 to $350 million, which is in excess of 100% of net income. Internal growth will be 2% to 3.5%.
We expect core price to increase by 3.5% to 4% and volumes will be down 0.5% to 1.5%. Our cash flow guidance assumes capital spending of approximately $325 million.
2008 business objectives continue to be focused on improving margins by achieving appropriate price increases to offset inflationary costs and business risks improving our market position, standardizing significant business processes, maximizing efficiency of service delivery and customer service and rationalizing our cost structure. I would like to thank all of the employees of Republic Services for their dedication and hard work, which resulted in our strong performance in fourth quarter.
Republic organization would also like to thank Art Dudzinski, who served as Western Region Vice President and we wish him the best in his retirement. Operator, at this time we would like to open the call to questions.
Question And Answer
Operator
Thank you we will now begin the question-and-answer session. [Operator Instructions].
Our first question comes from Brian Butler.
Brian Butler
Good morning.
James E. O'Connor
Good morning Brian.
Brian Butler
First question just kind of looking at the outlook for 2008, you had a huge improvement in margins between 2006, 2007 somewhat in the order of 160 basis points, and when you are looking at 2008 you kind of got into 50 basis points with...it's kind of similar pricing outlook 3.5% to 4% with some volume decline, is there some costs that are really growing more than expected that's eliminating kind of the margin expansion there?
Tod C. Holmes
I think we have got headwind from fuel pricing and then some from insurance.
James E. O'Connor
Also Brian, we had a commodity benefit from 2006 to 2007 and our view looking forward would be that commodities maintained at the current level and don't necessarily go up, so we wouldn't see that commodity benefit.
Brian Butler
Okay, and then my follow-up question is on the guidance you have out there can you talk a little bit what's built in those expectations from the perspective of economic activity in the U.S. in general?
Tod C. Holmes
Well, Brian I think if you have been following us, we have historically got away from trying to predict the economy and most of...I mean for the last two or three years we have been giving guidance on the upcoming year based on what we saw, what we have experienced in the fourth quarter. So, again what we are forecasting for 08 is really built around what we experienced in the fourth quarter of 07.
Brian Butler
Great, thank you very much.
Tod C. Holmes
Thank you.
Operator
Our next question comes from Bill Fisher.
William Fisher
Good morning.
James E. O'Connor
Good morning, Bill.
William Fisher
Just on the landfill volumes, I think you guys had made some company specific moves on curtailing certain waste say out of Canada and some other things during the year, and then I know you are also working on some expansions. Just wanted to see if you can give any color on when some of those events might kind of anniversary and how that plays out during the year?
James E. O'Connor
I think the Canadian...I don't have...Bill, I don't have the exact dates here. But the volumes that we cut off in Michigan were predominantly sludges coming out of Canada which I think was in the first part of the year and should pretty much be annerversarying out early on in 08.
And we did curtail some other waste streams that we were taking in the States. Again either because of the social political impact of those waste streams after further review looking at, how they may affect our facility.
So that should anniversary out too about the same time. We also closed West County during 08, and that's during 07 and that had -- that's going to have some carryover impact, but all in all we have got a number of expansions, we have never been refused an expansions, and we would anticipate that we would get one or two or three expansions approved early on here in 08 predominantly I think most of those in the southeastern parts of United States.
William Fisher
Okay, great. And just to follow on, Tod on the CapEx, is there a increase this year, just general inflation or some new contracts.
I was just wondering if the current economy persists and keeps you on the lower roll-off and land field. Is there an opportunity to reduce that at all or is that pretty cash in stone?
Tod C. Holmes
No, there certainly is an opportunity, I think you saw that in 2007, we do adjust based upon what we see in the business and capital here is very flexible. We can move equipment around, which we have done in 2007 and slowed down the replacement capital in certain markets as it was necessary.
I think a lot of this increase in capital really comes from trucks, if you think back to 2006, we were buying truck bodies and...excuse me, chassis and the engines before the change in the emission requirements. So we had built up a pretty good inventory of trucks at the end of 06, which we then deliver to our operations, in the first four months of 2007.
And so now in 2008, we are back to more of a normal type of truck purchase scenario. So I think that's really the key driver there would be the vehicles.
Again our capital spend should be somewhat less than DD&A and also obviously we think our free cash flow, because of that factor the spread between capital spend and DD&A and our non-cash taxes should allow us to get free cash flow in the range of a 100% to 110% of net income. 07 was an unusual year, but I think our free cash flow was 129% or something like that of net income that was huge.
But if you look steadily at this company, good times and bad we...cash flow has always been in excess of the net income.
William Fisher
Thank you.
Operator
Our next question comes from Jonathan Ellis.
Jonathan Ellis
Great, good morning guys.
Unidentified Company Representative
Good morning.
Jonathan Ellis
Just wanted to talk a little bit about...you mentioned some of the new contracts and expansions that you are anticipating for 2008; can you talk about your directionally or in quantitative terms what benefit that should have to volumes this year, what you are factoring in that down 0.5% to 1.5% for the year ?
James E. O'Connor
Well, I mean the majority of the volume forecast been down to 0.5% to 1.5% is the rollover impact of our construction decline over the course of 07, so, that's the majority of it. As far as growth goes, I mean we have renewed contracts.
We have picked up a contract in Downers Grove, Illinois. We expanded our operating position, which will I think will experience in the fourth quarter in Palm Beach County.
We have successfully renewed and expanded our service offering in Orange County, Florida. But that contract won't start up until January of 09.
So, some of the capital that Bill Fisher asked about will be...probably be...is driving our 08 capital number, but it won't really or actually receive any value from it until this contract starts backup in 09. So, I mean we have been very successful in all these contract including renewal...other renewals in South Florida have been a significant increase prices, which again I think our an indication that the sectors looking to improve return on invested capital.
So we have seen pricing move anywhere from five as high as 10% on some of our residential and franchise offerings.
Jonathan Ellis
Great. And just the follow-up; in term of your outlook for the coming year both on price and volume if you can talk either in quantitative terms, directionally, what your view is on how franchise versus competitive markets will trend?
James E. O'Connor
Well competitive markets on pricing are going to trend higher. We have got index pricing.
We anticipate, I think built into our 08 forecast is about 3% CPI so again with fuel headwind there we will lag recovery there, but obliviously it would be up at the 3.5% to 4% price, we are getting in excess of that in our competitive market, or in the markets, where we have discretion as it relates to pricing, so...
Jonathan Ellis
Just on the volume side.
James E. O'Connor
Well on the volume...again, I mean the volume...on the volume side, we are basically seeing modest growth in all lines of business other than our residential, industrial collection, basically construction and demolition. And I think probably anywhere from 0.5% to 1% maybe little north of 1% depending on the line of business.
Jonathan Ellis
Great, thanks.
James E. O'Connor
Thank you.
Operator
Our next question comes from Corey Greendale.
Corey Greendale
Hi, good morning.
James E. O'Connor
Good morning, Corey.
Corey Greendale
Jim, you sort of got to this little bit with your answer just a second ago, but can you speak a little bit, more specifically about trends, you are seeing in non-residential construction and the commercial lines of businesses if there is any spill over of the economy in those areas yet?
James E. O'Connor
No, we are still seeing relative strength there, which should translate into continued commercial growth from our container growth and should translate into a permanent industrial growth. We still see, the American Institute of Architects index in the mid-50s, which really would project a relatively strong industrial and commercial growth for construction in 08 and 09.
And I think some of their highest buildings are in 07 and are anticipated in 08, which again reflection of continued to strength there now. We like a lot of people have paid significant amount of intention to articles with regards to commercial construction, but we have not experienced it.
And again as you all know, we won't see that impact assuming there even is one, I think the indexes say there won't be, but assuming there is one we won't see that from anywhere from 12 to 18 months depending on the size of the project.
Corey Greendale
Thank you, that's helpful. And Tod, was there a closure, post-closure true-up in the quarter, and what was the magnitude of that?
Tod C. Holmes
Yes, you are referring to the 143 adjustment.
Corey Greendale
Correct.
Tod C. Holmes
And that was approximately $4 million. And if you look back to the fourth quarter 06, it was in that same range also.
Corey Greendale
$4 million is favorable, I assume.
Tod C. Holmes
Yes.
Corey Greendale
Thank you.
Operator
Thank you. [Operator Instructions].
Our next question comes from Jagdeep Ghuman.
Jagdeep Ghuman
Good morning.
James E. O'Connor
Good morning Jag.
Jagdeep Ghuman
A couple of questions here; one, where are you in terms of your contract renewals both within collection and on the disposal side, I just reached the ballpark percent and also in 08, what do you expect to renew?
James E. O'Connor
I don't have the list, but we have successfully renewed every contract the only contract of any consequence of immaterial to the whole company was the loss of the City of Houston, and wasn't lost to a competitor, it was lost back to the Public Works Department in Houston. But much beyond that, Jag, I think we don't have any material exposure and some of the contracts I just related to you we have a significant amount of opportunity.
Again I think we appear to be one of the leading contenders too in another county offering in the central western part of Florida, which we hopefully would hear something on here in the next three or four months.
Jagdeep Ghuman
Okay, fair enough and as a follow-up; Jim, you had mentioned that for 08 of course the share repurchase will remain cornerstone for your cash balance strategy. However as you look out to 09 and beyond, do dividend increases become more of the focal point, have we kind of cycled through the bulk of share repurchases here?
James E. O'Connor
Jag I would say that you will see a pattern of behavior consistent with what you saw this past year or past couple of years, where as the cash flow grows, we put the additional cash flow into the dividend, however the share repurchase continues to remain the cornerstone for the distribution strategy of our cash particularly at these levels in the stock price, there is substantial value to be captured here and we intend to capture through the share repurchase program. So, at this point, I would say looking out ahead even with some appreciation in stock price share repurchase will play a big part in cash distribution, but with a higher dividend mid-year.
Jagdeep Ghuman
Got it, okay thank you very much.
James E. O'Connor
Thank you. Operator, anybody else on the line?
Hello? What do we have to do to get the operator back?
Operator
Hello, Scott your line is open.
Scott Levine
Good morning guys can you hear me.
James E. O'Connor
We can hear you now, Scott.
Scott Levine
I am Scott Levine, JP Morgan. You mentioned Jim that residential construction related roll-off poles were down similar to prior quarters, but was there any change in the geographies in terms of relatively weaker or stronger markets in that area.
James E. O'Connor
No, I mean I think the geographies are still we are seeing weakness in Florida, Nevada, California areas that we have big business interest and where we would have a lot of volume. I mean we have seen it in other parts of the country, but I think prominently in those areas and I don't think it's any surprised anybody that we are seeing it.
I think that the key here to me is that we would rather see the...this part of economy stronger if it doesn't reflect volume lost to competition or the marketplace. It doesn't indicate that the pricing environment is changing.
And I think those are the real positives here that pricing totaling up in this sector in light of a lot of pressure, and a lot of equipment inventory build up. So I think when we get through the cycle whenever that is, again the gain should be relatively substantial to the bottom-line here.
Scott Levine
Got it. One quick follow-up; can you mention or did you mention what percentage of your debt is currently at floating rates?
James E. O'Connor
I think we got it about 44% floating and 56% fixed.
Scott Levine
Thank you.
Operator
Our next question comes from Leone Young.
Leone Young
Yes good morning.
James E. O'Connor
Good morning, Leone.
Leone Young
It's great to see that landfill pricing go up sequentially, and I was just wondering if you could give us a little bit more color in terms of a lot of the strength coming from renewing your contracts on the spot side or maybe a little color you have on geographies or lines business with obviously C&D being the toughest?
James E. O'Connor
I think, as it relates to landfill pricing in general, we said that number of quarters ago that we have contracts that are anniversary out we are going to be moving price up. And that's what you are starting to see in our landfill pricing.
If you went back to the fourth quarter, I think 06 you would see landfill pricing about 2.5% and maybe off, tenth of 1% or so, but somewhere in that range and now we are reporting all over 3%. So we continue to stick with the plan.
We are not giving out long-term contracts and we are continuing to hold our C&D, our pricing levels in some of our larger facilities. We have a couple of facilities that are exclusive to C&D, and we have been holding our price up and that both sites are in Virginia and Maryland predominantly.
And we continue to hold pricing in those particular markets while we are seeing obviously volume decrease is there. So, again I mean that is our business strategy, at Republic it is easy to want a secure volume, but I think in the longer-term airspaces is expensive to build.
And we are going to keep the price up, so that we don't have to chase it back up later on.
Leone Young
Right. And knowing there is always exceptions, in general, are you seeing your competitors take the same line, at this point?
James E. O'Connor
Again I can't speak specifically to our competitors, but I would think we are not...our volume loses, when we review them are due to the economy. And we don't see a shifting in market shares.
We believe that we are getting our fair share in the markets. And therefore, the only conclusion I can draw is that pricing is competitive.
Leone Young
Terrific, thank you.
Operator
There are not further audio question at this time. [Operator Instructions].
James E. O'Connor
Operator, I think we are going to conclude the call at this stage.
Operator
All right.
James E. O'Connor
Okay,I would like to thank you. And I would like to remind everyone that a recording of the call is available for the next 24 hours by calling area code 203-369-1381.
And additionally there is a recording of the call would be available on our Republic's website at republicservices.com. And again I would like thank all of you for participating and spending time with us this morning and have a good day.
Thank you very much.
Operator
That does conclude today's conference. You may disconnect your lines.
Thank you.