Fitch Affirms Republic Services IDR at 'BBB'; Outlook Stable

Tue Jul 30, 2013 3:04pm EDT

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(The following statement was released by the rating agency) CHICAGO, July 30 (Fitch) Fitch Ratings has affirmed Republic Services' (RSG) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. RSG's rating is supported by the company's stable operating profile, conservative management strategy, consistent free cash flow generation, and an improving operating environment in the waste services industry. Republic continues to perform in-line with Fitch's expectations, maintaining strong operating margins and a conservative capital structure. As of June 30, 2013 RSG's debt/EBITDA stood at 3.1x, higher than the 2.9x leverage ratio at the same point in 2012 primarily due to higher labor, maintenance, and other operating costs.. Fitch considers RSG's leverage to be appropriate for the 'BBB' rating, given the company's consistent operating results. Conditions in the waste services industry are improving. The pricing environment, which has been highly competitive coming out of the recession, has eased in recent months, with most operators reporting consistent if moderate growth in core prices. RSG reported a core price increase of 3.1% for the second quarter representing the company's fourth consecutive quarter of core price growth. Fitch expects full year core prices to grow in the low single digits, based on modest improvements in the macroeconomic environment. Waste volumes, which declined for several consecutive years coming out of the recession, have bottomed and are growing in some segments. Construction and demolition volumes are improving, and should be expected to rise modestly for the foreseeable future as construction activity comes off historic lows. Industrial and recycling volumes have also shown positive growth. Landfill volumes have been an area of weakness for Republic due to contracts that were lost in the first part of calendar 2012. Results in this area should improve in the second half of the year as comparisons become easier. Longer-term, waste volumes are expected to show modest annual growth roughly in-line with the growth of the overall population. Operating margins dipped over the past year, but Fitch expects margins to show modest improvement from current levels. Continued progress towards fleet automation, increased use of CNG vehicles, and a standardized maintenance program should support incremental margin growth over the intermediate term. Over the past year EBITDA margins have been adversely impacted by the company's One-Fleet maintenance initiative, which has had higher than expected up-front costs, but is ultimately expected to lower total maintenance costs once the program is fully implemented, likely by mid-2015. Labor costs have been impacted by a shift in volume mix with collection volumes performing better than landfill volumes. The higher incremental labor costs associated with collection vs. landfill operations have led labor costs to rise as a percentage of revenue. RSG's financial flexibility is solid. As of the end of the second quarter the company had $97 million in cash on hand and $1.7 billion in revolver capacity ($2.375 billion less $701.7 million in outstanding letters of credit). In addition to its strong liquidity, the company has no major debt maturities in the near future. RSG's two primary revolving credit facilities do not mature until April 2016 and May 2017, and none of its outstanding unsecured notes mature until 2018. Free cash flow in 2013 is expected to be in line with or incrementally higher than the $281 million that RSG generated in 2012. Free cash flow should benefit from moderately higher expected revenues and EBITDA margins, which are expected to be stable to slightly up from 2012 levels. These improvements will be partially offset by higher cash taxes as a result of bonus depreciation taken in previous years. RSG's capital deployment strategy is expected to remain consistent, prioritizing tuck-in acquisitions and steady dividend growth. RSG announced a 10.6% increase to the quarterly dividend in its 2013 second quarter earnings release to $0.26/share. This follows a 7% increase announced in July of 2012. Fitch also expects the company to continue to make share repurchases as cash flows allow but not to the detriment of a healthy balance sheet. Republic views an investment grade credit profile as strategically important and is expected to maintain credit metrics that are consistent with that view. Rating Sensitivities: A future upgrade would likely be driven by a change in RSG's cash deployment strategy prioritizing debt reduction over shareholder friendly activity. An upgrade could be considered if Debt/EBITDA were to approach levels maintained prior to the Allied acquisition, near 2.0x. This scenario is seen as unlikely at this time. A negative rating action is not anticipated but could be triggered by an increase in debt to fund share repurchases or dividends, or a large unexpected acquisition. Fitch has affirmed the following ratings: Republic Services, Inc. --IDR at 'BBB'; --Senior unsecured bank credit facilities at 'BBB'; --Senior unsecured long-term debt at 'BBB' Browning-Ferris Industries --IDR at 'BBB' --Senior unsecured rating at 'BBB' Contact: Primary Analyst Joe Rohlena, CFA Associate Director +1-312-368-3112 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Stephen Brown Senior Director +1-312-368-3139 Committee Chairperson Craig Fraser Managing Director +1-212-908-0310 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012). Applicable Criteria and Related Research: Parent and Subsidiary Rating Linkage here Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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