James O’Connor will tell you there is nothing sexy about Republic Services. In fact, the CEO and chairman of the $2.5 billion solid waste collection company is proud that his company leans toward the boring. It’s something his shareholders count on.
“Our top five or six shareholders own about 70 percent of the company – Fidelity, Wellington, Cascade (Bill Gates’ investment company), T. Rowe Price, Legg Mason — these are all huge financial institutions,” O’Connor says. “Over the last three or four years, their ownership hasn’t varied very much in our company. They like what they see. They like the predictability of it. They know now after five or six years of the management team being in place, at least they feel comfortable that we are very predictable.”
Boring, O’Connor says, means being a good steward with the company’s cash flow — between 110 percent and 120 percent of net income — which amounts to about $300 million a year. The company’s first priority is to use the cash for internal growth, something the smart investors understand. The second priority is growth through acquisition.
“We’ve done a very good job in managing the businesses that Republic has put together,” O’Connor says. “I think our shareholders would like us to continue to do that, assuming the opportunities exist. We’ve developed a significant acquisition discipline, so we’re not going to dilute our shareholders’ return on investment through bad acquisitions. But where we can find good ones, they’d like to see us go there second.”
Once those first two goals have been achieved, the money is returned to shareholders in the form of dividends and stock repurchases.
O’Connor learned from some of the most recognizable names in business — including H. Wayne Huizenga, former president of Waste Management Inc. and former chairman of Republic Services — how to run his company. Through dedication to people, a focus on execution, proper cash management and targeted acquisition, O’Connor has made his own name, building Republic Services — which employs 12,700 people in 22 states — from $40 million in 1996 to more than $2.5 billion today.
“(Shareholders) would rather not see us accumulate a lot of cash so that management all of a sudden takes off on a tangent and does something stupid with it,” he says. “One hundred percent of the cash flows over the last two years have been distributed back to the shareholders. We established the dividend in October of last year at about 1 percent, which is a little less than the average Standard & Poor’s 500 dividend payout. We doubled it, effective this October, and the yield will be 1 1/2 to 2 percent, which will be right at the S&P 500 average.”
O’Connor says the company will pay about $80 million in dividends this year. The rest of the $300 million-plus cash flow will be used to repurchase about 5 percent of the company’s outstanding stock.
“When you couple that with a dividend yield of about 1.7 percent, you’re actually getting a return to the longer-term shareholders of approximately 7 percent,” O’Connor says. “There’re not too many investments where the shareholders are physically getting returned to them 7 percent. You have to take a look at Republic Services and look at your portfolio; if you’re an investor, we fit more in the value side of a portfolio.”
Republic Services may be a value company now, but when it was founded in 1996 after spinning off from Huizenga’s Republic Industries, it was focused on growth through acquisition.
“For the first several years, the company was out obviously trying to buy (other) companies in the Sun Belt,” O’Connor says. “Today, we’ve got about 60 percent of our revenues in the Sun Belt. That lays the groundwork from the period from 1997 to 2000 when the company was more a growth company than a value company. This industry has been consolidating since 1970. After we went through that spurt of growth, we pretty much bought up what we thought would be the best companies that were made to be consolidated in the solid waste industry.”
The decision to focus on the Sun Belt was key to the company’s success.
“The solid waste business grows on GDP — household formation and business formation indexes,” O’Connor says. “So, to be in those kinds of demographics that the Sun Belt offers was going to actually allow us to grow faster than our competition. It was a part of the original goals, objectives and strategies of the company to found the business there.”
Republic Services has two main competitors, Waste Management and Allied, both of which are much larger than Republic. But for O’Connor, his company’s smaller size is a competitive advantage.
“While we’re approaching almost $3 billion in size, Allied is twice that size and Waste Management is four times that size,” he says. The reason that is a competitive advantage, at least today, is that it allows me, and Mike Cordesman, COO and president of the company, to get out to see about 60 to 70 percent of our locations in the course of a year. We can deliver the message to the field and not necessarily have to rely on a number of people to carry the message. The message doesn’t get distorted. There’s a certain amount of clarity that we can bring to the field as to what we’re trying to accomplish as an organization and what the real goals and objectives are.”
O’Connor has intimate knowledge of at least one of his competitors. His first job out of school in 1972 was in the accounting offices at Waste Management.
“I went though the financial side of the business and saw that there was a tremendous amount of consolidation in the early ’70s left to be done in this business,” O’Connor says. “The environment at that time was really coming into focus in America. When I looked at those two things I said, ‘This looks like a pretty good area to be in.’ And as Waste Management continued to grow, I realized the opportunity for me was to get into the operational side of the business. I did that for a year or so with them before I left (in 1978) and bought my own business in Indianapolis.”
O’Connor sold that business to Laidlaw Transportation and returned to Waste Management in 1982.
“I was there at the very start; I knew a lot of the founders. Obviously, I know Wayne Huizenga and Dean Buntrock, who were the founders of Waste Management. They convinced me to come back; I was a native of Chicago. I had young children at the time; my wife wanted to get back to the area, and I went back and worked for them again.”
But he went back with a new appreciation for the work and the company founders.
“It’s easy to call up the treasurer when you’re at a public company to secure funds,” O’Connor says. “What I learned in my own business was it’s another thing when you have to make the payroll, go out and get the financing yourself and pay the bills at the end of the month. It’s the age-old story of when you make the payroll yourself, you learn a lot from making the payroll.
“Wayne Huizenga and Dean Buntrock, they were truly entrepreneurs; they were the founders of the consolidation that occurred in the solid waste industry,” he says. “They saw a sector of the economy that was segmented and had the foresight to see that the environment was coming into its own. And to deal with the environmental issues that the country was going to be dealing with, it would be better to be consolidated to be able to have access to funds, and would be a competitive advantage to the independent that would remain if they were consolidated because they would have more cash available to meet the ever-increasing regulatory environment.”
The consolidation has largely slowed, although there are still opportunities, O’Connor says. The focus right now is fine-tuning the existing operations.
“The thing that has been a challenge to us over the last few years is really to extract the most out of the businesses that we put into the portfolio,” he says. “From those first two or three years of rapid growth, we’re now going back and putting a discipline within the organization and standardizing a number of the solutions that we offered in the field to solve some of the problems that we have.”
Companies acquired by Republic operate autonomously, retaining their original names and management. There is no reason, O’Connor says, to rebrand a company with a good rapport with its local community.
“The management style employed here is decentralized, and that’s because each one of the markets that we operate in have various dynamics in them,” he says. “We have a national accounts program out of Ft. Lauderdale where we go out and market national accounts, but at the end of the day, it really doesn’t bring you a lot of benefit. There is a little bit of name recognition there, but we’re out there right in the hunt for most of the accounts that Waste Management and Allied are competing for.
“But on a local level, it allows us to maintain local identity. When it comes to dealing with a municipality and understanding how to best cultivate the marketplace, we don’t have a standard for that because we believe that’s unique to the marketplace.”
It’s an approach that has been recognized outside the solid waste industry. Forbes magazine recently named Republic Services one of the country’s best-managed services companies. But O’Connor doesn’t want to take the credit.
“It’s people,” he says. “(It is because of) the foundation that Wayne Huizenga and Harris W. Hudson, his brother-in-law, who founded the company. (They) put together the basic components of the strategic plan. I was brought on to help execute and help maintain and enhance the cash flow. It’s all about people and our business.
“When you look at our competitors, whether they are national competitors or independents, we all buy the same equipment. It’s the people behind that equipment that really (is responsible for the) success. We’ve been very fortunate to secure and maintain some of the best people in the industry.”
O’Connor hopes he can take something away from those entrepreneurs.
“I learned a lot. I never would compare myself to those to individuals,” he says. “They were the epitome of dealmakers. They had great vision. Hopefully I picked up some of the leaderships skills that they have and have some of the people talent that they had in securing good people and energizing people during some very difficult times.”
HOW TO REACH: Republic Services (954) 769-2400 or www.republicservices.com