Republic Services Class A Earnings Call Insights: Last Quarter’s Outlook and Market Pressure
Republic Services Inc Class A (NYSE:RSG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Last Quarter’s Outlook
Corey Greendale – First Analysis: First wanted to ask about the guidance and last quarter you provided some kind of initial thought on the year and it sounds like the EPS range you’re giving here is a little lower than that and the free cash range is a little higher and I just wonder if you could bridge what the reasons are for the differential?
Donald W. Slager – President and CEO: Well, our preliminary outlook that we provided last quarter, you sort of encased in this – I think we gave you $1.90 to $1.92 as per our outlook and we are now saying $1.86 to $1.91. So, we’re still in that range. We had a little softness in special waste that we built into our plan and for 2013 I would tell you that makes up the bulk of it.
Edward A. Lang, III – SVP, Treasury and Risk Management: On the cash flow, we have already talked about $650 million and bringing that number up to the $675 million to $700 million is the in-year benefit from the extension of bonus depreciation for calendar ’13. Also keep in mind, when we talked on the November 1st call, that was more of a preliminary outlook, not detailed guidance because we had not completed our full year budget planning process. So, it was just kind of a preliminary outlook, not the financial guidance which we’re providing today.
Donald W. Slager – President and CEO: That’s right.
Corey Greendale – First Analysis: Then a question on the pricing front. I was wondering if you could just speak to kind of sequential trends in competitive markets and then how should we be thinking about the quarterly trend and for 2013 CPI increases as far as this year gets better as the year goes on or is it a flat line and go the opposite direction?
Donald W. Slager – President and CEO: Well, let’s talk about sequential first, right. So, we’ve had two quarters sequentially of 1% plus core price. So, that’s a good thing coming off where we were at sort of 50 basis points for a few quarters prior, so trending up. I think we’ve given you guidance from 1 to 1.5 for the full year. We’re going to have a little bit of a headwind in CPI later in year in the second half will start to kind of show up in the following. Overall, I think the trends are pretty consistent with what we’ve seen. We don’t see the market deteriorating, maybe getting a little better, but we are going to continue doing what we do best and that is, again as I said in my comments using ROI tools and pricing consistently in the business.
Edward A. Lang, III – SVP, Treasury and Risk Management: Then on the restricted price or the index-based markets, we still see the calendar 2011 CPI influencing our restricted market pricing in the first half of this year and then the calendar ’12 CPI number will come in, in the second half of the year.
Donald W. Slager – President and CEO: Remember, we continue to remind you guys it takes 12 or 18 months for that CPI to run through our business with our contractor structure.
Edward A. Lang, III – SVP, Treasury and Risk Management: Correct. And that CPI for calendar ’12 was just a little bit above 2%. So with the combination of the open market pricing and then the restricted market pricing we are giving guidance 1 to 1.5.
Al Kaschalk – Wedbush Securities: Just to follow on, I was hoping maybe comment little more granularity about competitive market, because if you have 40% and about 2% price, it seems very challenged to get price in the other components of your business if you’re guiding 1 to 1.5. I realize it’s up, but it still seems like we are having some choppiness in the market, is that fair?
Edward A. Lang, III – SVP, Treasury and Risk Management: Well, I think what you have to also factor in to the restricted market pricing. The pressure we’ve talked about through last year on the renewals of the municipal contracts was although the contracts that are in midstream are being influenced by last year’s CPI. Keep in mind, as contracts come up for renewal, given the state of municipal finance, we are seeing some lower pricing levels on average on those contract renewals. So, although you’re getting the 2% as I mentioned in the second half of this year, on the existing business, you have to kind of look at it on a net basis. In fact, (you’re in) the fact that typically on an annual basis, we have about $350 million of municipal revenue renewing. So, on a net basis, we’re coming up to that 1% to 1.5%.
Al Kaschalk – Wedbush Securities: Then, Don, I think your recap of the growth initiatives at least for ’13. There is a nice lead into A, the announcements you made today. Then second, there has been in the press, and I think it was in one of your larger markets about recycling and some of the cost involved there. So, maybe, to the extent you want to talk about any one of those particular contracts; great. I’d hope generally it hasn’t tend to last, but maybe you can talk through what you’re seeing on the recycling side in terms of the growth?
Donald W. Slager – President and CEO: Well, let me start, Al, by kind of saying that this business was a move at a rapid pace, so when you set out a plan to invest in a certain area or moving into initiative, it takes a number of years to roll into it. So, if we take the privatization, (indiscernible) Michigan that you were referring to with – Ed mentioned, the pressure we’re getting in the municipal (ring). With the state of municipal finance, we’re having some price pressure there. The same thing that’s causing that price I think is causing some municipalities to rethink whether they should hire somebody like Republic Services to do the trash and recycling service. So, we’re going to put continued effort into that area of privatization and we’ll continue to plough that ground. We don’t have a lot of that built into our pipeline or into our plan, but we’ve got a few of those that we’re working through and we’ll continue to see some wins there I think over the next several years. As it relates to recycling, we’ve talked about this a lot. We’ve got 25 markets that we think we need to invest in across our 240 markets and we do that to the tune of three to five markets a year. So, just like we’ve done for the last years, in 2013, we’ll invest in several markets to further build our recycling capability and answer the customer demand and to be competitive and broaden our service in the market. So, it’s a very steady pace of change and a very steady pace but a focused space.
Al Kaschalk – Wedbush Securities: Could you just comment – I know we wanted to limit questions here, but on that point, has the economics changed at all because I know you were at least heating us to be a little conservative on the economics around recycling. Remember we’ve told you. When we look at those contracts and we pro forma those investments we look at the 10-year average and right now the commodity prices are right near the 10 year average. So, over the cycle we think those investments still makes sense. But as I said Al, we’re not moving at a rapid pace where we’re spending of our capital budget every year. It’s the right thing to do for the customer base. It’s answering customer demand and we’re moving I think at the right pace. The investments all have a good return.