Republic Services Inc (RSG) 2001 Q1 法說會逐字稿

REPUBLIC SERVICES INCORPORATED CONFERENCE CALL

Good morning ladies and gentlemen and welcome to the Republic Services Incorporated first quarter earnings release conference call. At this time all participants have been placed on a listen-only mode and the call will be opened for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host Mr. James O'Connor. Sir, the floor is yours.

Thank-you. Good morning, and thank you for joining us. This is Jim O'Connor, and I would like to welcome everyone to Republic Services' first quarter conference call. This morning Tod C. Holmes our Chief Financial Officer is joining me as we discuss our performance in the first quarter. Before we get started, I would like to remind everyone that some of the information we will discuss with you today contains forward-looking statements, which involves 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. Our first quarter performance was in line with our expectations, and I am pleased with our ability to continue to meet our free cash flow goals. As you know, we expect to generate $145 million in free cash based on our conservative definition. In the first quarter, we generated approximately $37 million in free cash and remained comfortable with our full-year expectations. During the quarter, we achieved a number of key objectives required to improve our long-term competitive position. One, we strengthened our regional management structure by adding sales maintenance and operational personnel to work with our local divisions to ensure optimal performance. We continued our training and development programs associated with our new billing and operating system that we implemented last year. Our regional management teams are actively involved in rolling out additional tools for optimizing our disposable alternatives, maintenance tracking, customer pricing, and route productivity. And third, we continue with our discipline that we have started in late 1999, our monthly review process, which involves reviews with personnel at the division area and regional levels. Our reviews cover a variety of topics including market demographics, competitive position, internal growth, productivity, and capital requirements. These initiatives did have an impact on our SG&A expenses. We expect SG&A as a percent of sales to average 9.5% to 10% on a full-year basis, which we believe provides an appropriate level of support for our operations. Now, I would like to review some of our financial highlights. Net income for the quarter and earnings per share were flat when compared to Q1 2000. We are still comfortable with our previous guidance of $36 for earnings per share for 2001. Revenue growth for the quarter was approximately 7%. Our internal growth for the quarter excluding the impact of commodities was 4.3% with 2.2% from price and 2.1% from volume. I am pleased with our continued discipline in achieving moderate price increases while growing our volumes. This demonstrates the benefit derived from the tools and resources that we put into the field along with our review process. Our operating income was down slightly compared to Q1 2000 to 99 million. As we discussed previously, our margins during the first half of 2001, will be negatively impacted by fuel, labor, and commodity prices. In addition, our SG&A cost as a percent of revenue are higher due to the recent initiatives that we have previously outlined and seasonality. EBITDA increased slightly to 149 million from 148 million in the previous year, and our internalization rate remains at 52%. As we continue to generate strong free cash flow, we will have a balanced approach to share repurchase, debt reduction, and acquisitions. During the quarter, we repurchased 1.6 million shares for $25.2 million on an average price of $15 and ¢60. We have approximately $75 million remaining on our existing board authorization, and we will consider additional repurchase authorizations in the future based on our free cash flow expectations. Our net debt level at the end of the first quarter was $1.2 billion, which translates into a debt of total capitalization of 41%. And I am pleased to note that Moody's Investor Service has recently raised the outlook on our debt rating to Baa-3 positive. We believe that our strong financial profile is definitely a competitive advantage for us. We continue to look for strategic acquisitions at proper evaluations. During the quarter, we acquired approximately $5 million in revenue at 4.7 times EBITDA multiple. We are working on an acquisition, the acquisition of Richmond Sanitary Services. We expect to close this transaction in the second quarter and we will have more information for you during our next call. I am pleased with the direction that we're headed at Republic Services, and I want to thank all of our employees for their high-quality performance in this quarter. Now I would like to turn the call over to Tod Holmes, our Chief Financial Officer for our financial review. Tod?

Thank you, Jim. I will speak first about our free cash flow. As you know our primary focus in 2001 is on free cash flow. Our goal for fiscal 2001 is 145 million of free cash flow, an increase of approximately 18% from last year. As Jim indicated, this is based upon our conservative definition of free cash flow, which is net income plus DD&A, less capital expenditure plus or minus net changes in working capital. Our unadjusted free cash flow for the first quarter was $40.6 million, and this is based on net income of 49.6 million plus DD&A of 50.3 million, less capital spending of 39.3 million, less decreased working capital of 20 million, and again that equals an unadjusted free cash flow of 40.6 million. Please note that our free cash flow must be normalized, however, for approximately $40 million of capital expenditures that were accrued, but unpaid at year around. This we mentioned on our year-end conference call. These payments were made during the first quarter of 2001 and caused our working capital to be negative by $40 million in the first quarter. In addition, our first quarter free cash flow must be normalized for capital expenditures and tax payments. As we previously stated, we expect capital expenditures in 2001 to be approximately $268 million or averaging about 67 million a quarter. Cash tax payments for 2001 are expected to be approximately 120 million or about 30 million each quarter on an average, and during the first quarter of 2001, we actually paid approximately 14 million in taxes. Therefore in order normalize our free cash flow the following adjustments are necessary. Again, our unadjusted free cash flow was 40.6 million, plus the payments relating to the 2000 accounts payable of $40 million, less the normalized capital spending and increase in capital spending to come to the 67 a quarter, that would be a negative 28 million, less normalized tax payments through tax payments from 14 million spent to 30 million expected is a negative 16 million, and that equals a normalized free cash flow of about 36.6 million. This puts us well on our way towards our $145 million goal. As Jim indicated, we will continue to use our free cash flow in a disciplined fashion. During the first quarter, we spent approximately 6 million to purchase three businesses with annualized revenue of approximately $5 million. We also used the free cash flow to purchase 1.6 million shares of our common stock for $25.2 million or approximately $15 and ¢60 a share. As of March 31, we have purchased 5.3 million shares of our common stock for $76.1 million or approximately $14 and ¢50 a share. We currently have 73.9 million remaining to spend under our existing share repurchase program. Our first quarter revenue - first quarter fiscal 2001 revenue rose 6.8% to 535.4 million from 501.5 million last year. Our internal growth, excluding the impact of commodity prices, is 4.3%, 2.2 from price and 2.1 from volume. Our first quarter price growth was, however, negatively impacted by decline in commodity prices, including the eight-tenths percent decline in revenue attributable to commodity prices, our net price growth was 1.4% and our net internal growth was 3.5%. Acquisitions were responsible for the remaining 3.3% increase in the first quarter revenue. As we said, our 2001 objective is to achieve internal growth of 5% with 2% coming from price and 3% from volume. We believe we are on track to achieve this objective. Sequentially, our operating margins decreased by 210 basis points from 20.6% in the fourth quarter of 2000, to 18.5% in the first quarter of 2001. There are three key components to this decrease which are as follows. First, commodity prices declined 40 basis points, seasonality declined 40 basis points, and SG&A declined 130 basis points. Again, the total is a decline of 210 basis points. Now, I'll briefly comment on each of these three components of sequential margin change. First, commodity prices, keep in mind that about 25% of our recycling volumes are covered by floor pricing contracts and now that 80% of these contracts are at the floor. Commodity prices declined about 18% from the fourth quarter. Just to give you a point of reference, our first quarter average price was slightly less than $54 a ton and this compares to $65 a ton in the fourth quarter of 2000. Of this, $11 sequential decrease in price, about almost $2 was recovered from lower rebates and about $9 dropped to the bottom line as lower profits. Second, as you know, the first is the seasonally slowest quarter in our business. This year, well, January got off to an especially slow start due to poor weather conditions in the Midwest, we did see activity return to normal levels later in the first quarter. Third and finally, for SG&A, the questions on everyone's mind are first, why is SG&A so much higher, and what for Republic Services is a sustainable level of SG&A? Well, typically, SG&A is 20 to 30 basis points higher in the first quarter due to seasonality. Again, this is the slowest quarter in our business. Also, bonus accruals are greatest earlier in the year when every location expects to meet or see their incentive goals. Finally, the results of impact from additional regional staffing and training initiatives as Jim has already mentioned; looking ahead, we believe SG&A in the 9.5% to 10% range of revenue is appropriate for our existing business platform. Now let's talk about our year-over-year operating margins. Operating margins decreased by 180 basis points from 20.3% in the first quarter of 2000 to 18.5% in the first quarter of 2001. There are 6 key components of this decrease, as follows. First, commodity prices which was a negative 75 basis points; second, DD&A, which is primarily amortization of goodwill was a negative 20 basis points; third, fuel cost was a negative 20 basis points; fourth, SG&A was a negative 110 basis points; fifth, the synthetic lease agreement that we entered into last year was a negative 20 basis points; and finally, we actually improved both our revenue mix and operating efficiencies and that was a positive 65 basis points. So, the total again is a negative net 180 basis points. Now, let me explain these 6 components that comprise this year-over-year margin decline. First, the 75 basis point decline from commodity prices, we saw commodity prices decline about 30% from the first quarter of last year to the first quarter of this year. Our 2001, first quarter average price again was slightly less than $54 per ton and that compared to $77 per ton in the first quarter of 2000. Now, this $23 per ton decline in price, about $3 was recovered in lower supplier rebates and the remaining approximately $20 dropped to the bottom line as lower profits. Second, DD&A was up 20 basis points due to additional goodwill amortization for acquisitions completed during 2000. Third, fuel was up about 20 basis points. A sample of about 8 of our operating locations that we continue to monitor indicates that fuel was up about 7% or 8% or in the range of ¢8 to ¢10 a gallon to $38 a gallon in the prior year. Fourth, the 110 basis point increase in SG&A year-over-year is driven by additional staff at our regional locations, system personnel, and training, as Jim has already mentioned, and again, we believe a sustainable SG&A rate is 9.5% to 10% of revenue. Fifth, the 20 basis point decrease in operating margins for our synthetic lease is essentially a result of our financing arrangement that results in lease payments above the operating income line. As you'll recall, the interest rate inherent in this agreement compare favorably to our bank financing. Sixth and finally, operating efficiencies resulted in a 165 basis point margin improvement. This is due to our decision to exit the New York City market early last year and also ongoing asset swaps and divisional focus on operating efficiencies. Our balance sheet continues to strengthen. At March 31st, our net accounts receivable was 251 million and our daily sales outstanding was 42 days. Shareholders equity at March 31, 2001, was 1 billion 705 million, and as a result of our strong cash flow, our net debt balance at March 31st , was 1 billion 184 million, a decrease of 2.6 million from last year's December 31st number. Of this, approximately 600 million or half of our debt is floating, and the other half is a public debt with fixed interest rates. Consistent with our cash flow performance and previous guidance, our debt-to-total capital at March 31st is 41% and again, we remain committed to maintaining our investment credit ratings. Finally, our capital expenditures - capital expenditure for the first quarter were 39 million, consisting of 22 million for replacement capital, 14 million for internal growth capital, and 3 million for infrastructure. Now, I'll turn the call back over to Jim. Jim?

Thank-you, Tod. Operator, if you would open the call for questions please.

Thank-you. The floor is now open for question. If you do have a question or a comment, please press the numbers 1 followed by 4 on your touch-tone phone. If at any point, your question has been answered, remove yourself from the queue by pressing the # key. We do ask that while you pose your question that you please pick up your handset to provide optimum sound quality. Once again, ladies and gentlemen that is 1 followed by 4. Please hold while we poll for questions. Thank-you. Our first question is coming in from William Genco of Merrill Lynch. Please state your question or comments.

Thank-you. Tod, I was a little confused by your revenue break up by operation, in one of your footnotes you had gross transfer and disposal revenue up 31% year-to-year and your intercompany eliminations went up by 88%.

Right.

And I didn't hear a big change in the internalization rate. Could you just walk us through what caused that phenomenon?

Well, I think when you look those statistics there in that press release, really what you see is a better integration of the business, but that intercompany elimination really takes a look at it from the landfill side of the business. What portion of our landfill revenues are internal versus third party, and as you know, the 52% internalization of rate that we will report, which many companies also report, is from the perspective of a holding company. So, 52% represents the portion of our holding company disposal that goes into our own sites, whereas the intercompany elimination on that schedule represents the portion of the landfill date receipts that are coming from our holding companies.

Okay, what was the internalization rate in last year's first quarter?

It was 52%. No, I'm sorry.

It was lower. It was 49% I think Bill.

Okay.

I got it here Bill. Yeah, it was 49% in the first quarter, and we moved to 52% in the fourth.

I was just surprised that at 52 versus 49, which was an 88% bump in intercompany. I didn't hear you comment in terms of the effect that weather may have had on your reported results in the quarter?

Well, basically our belief is that weather is always out there, and we saw the quarter start out a little bit slower particularly in the Midwest, but then it came back a little bit stronger. So, we look at it and say it's probably less than 10 basis points.

And one final question Jim. You've managed, a solid waste company through three prior slowdowns. How do you see the industry behaving in this slowdown vis-à-vis the prior three slowdowns?

Well, you know Bill; I guess we're still not yet sure of exactly of what we're seeing. I mean in the Midwest what we're seeing to date is some plant shutdowns unscheduled and some shift reductions and it has not materially impacted us yet. I mean our temporary construction business again, we saw in April, we saw our roll off volumes increased over and above last years volume numbers, and then in the second week of April, we saw some tapering off. Right now, we are seeing things level off, so it's just little hard for us to get a handle on exactly, what kind of slowdown we were seeing here, and I think again as we have said in the past, May and June will probably give us a much better perspective as to what the year is going to hold for us.

Okay, Thank-you.

Thank-you Bill.

Thank-you. Our next question is coming from Alan Pavese of Credit Suisse First Boston. Please state your question or comment.

Just a couple of questions on the sequential operating margin impact. First on seasonality, you said that there was 40 basis point impact from seasonality and your revenues were actually up sequentially. I am just wondering how you are measuring that. Is that more mix than total revenues.

Well, the seasonality is really labor and roll off activity, so the other thing that you've got in there in terms of the revenue, be careful of this acquisitions Alan. If you are just looking at the revenue line, remember that we closed the number of acquisitions last year including the purchase of Winston-Salem late in the fourth quarter.

Right. What were the revenue with that again?

24 million.

Okay, great. The other question is on the commodities impact. I haven't heard about you guys talk about that as much and you kind of you made it through last year when things were lot worse without talking about it much. I was just wondering is it something about the timing of the contract that's making it more of an issue now, kind of tail end of the fall off?

No, what we seen is in the past lot of our volumes were in the West Coast. Again, commodities is not a huge portion of our business, but we're seeing those prices go to our floors, whereas in the past they were above our floor, and then certainly in another areas obviously they just continued to drop where we don't have floor protection.

Yeah, Alan I mean, in that number of our swaps with Allied last year, while we enhanced our [________________] in the collection business in a number of markets, as well as our ability to internalize, we also picked up some of BFI's older recyclers particular in Indianapolis and Louisville, and in the case of Indianapolis, we received floors that Allied had in place for about 4 or 5 months, and the same thing in Louisville. The floor prices that we had in Louisville had some new launches in the floor that if the floor fell below the guarantee for more than 6 or 12 months, then we would re-average the floor in establishing the floor. So, I mean we picked up a significant amount of recycling activity in Indianapolis and Louisville, some of which had floors for short periods of time, and some have had floors that would readjust. So, I mean all of those things kind of added to the general reduction in commodity prices across the country.

I think another important thing to point out here is that as we looked at commodity prices over the past 2 or 3 years, last year in the second quarter they did move up, but aside from that we haven't seen as dramatic a change in the commodity prices we have seen recently particularly in the first quarter of this year.

And last question, Jim you're talking about the different kind of business lines and geographies and things. Can you talk a little bit about pricing in terms of geography and just what the pricing environment looks like going into the peak spring months here?

Well, again I mean as I said on a number of conferences is that, I believe that our success in pricing goes beyond what's going on necessarily in the industry or is dramatically impacted by what my competitors are doing. It's a function of the discipline that we have instilled within the organization. So, that's why I feel very confident that pricing is sustainable at least from our prospective at that 2% to 2.5% range, unless there are changes in the marketplace, and pricing in the marketplace in general appears to be favorable, so we feel very comfortable with or without the affects of the economy that would be successful in this area, I mean borrowing obviously the impacts of recycling. If you look at it geographically, I am not really so sure that it really makes a lot of difference for us. I think, maybe, what we're seeing from our competitors, which again I think it's more appropriate for our competitors to comment than for me to comment on them.

Okay, you do see some opportunities to get to the higher end of your range to 2% to 2.5% range.

Well, I mean I think our guidance was 2% depending on again the competitive market and how the economy goes and the sensitivity of the economy we will have on pricing, but maybe we could see some upside, but right now our guidance for me is 2%.

Okay, Thank-you.

Thank-you. Our next question is coming from Stacy Devine of Deutsche Banc. Please state your question or comment.

At first, I want to followup with Bill's questions regarding the volume trends. You talked a little bit about April, it sounds like it was up and then it was down, it's a kind of mix. So I am just curious in that net. Is the trend coming out of the winter months as you would expect?

Yes, I mean I don't think we're seeing anything that will lead us to believe at this point Stacy, that we were seeing any significant downturn.

Okay and then as far as, I believe you have the rest of the swap with Allied, did you have some divestures were to occur?

Well we have divestitures that we're still working on in number of marketplaces from the original Allied swap and we have Pittsburgh, which has not been transferred to Allied. We are in the process of giving the landfill permit transferred.

Okay, do you think that second quarter then or?

Well, we would anticipate that that transaction would probably close the second quarter. The balance of the divestitures are really relatively immaterial, I think they told you about $8 to $10 million in the annual revenue, and they predominantly in the Midwest.

And the Pittsburgh piece was how much again?

I think the Pittsburgh piece is about $15 to $16 million in annual revenue.

Okay, great, and what was your average cost of your variable rate debts excluding the fixed fees?

Through the bank facility? We are on a 3-month liable or so, that rate probably started the quarter at around 7 and ended around 6.

Okay, great, and one last question. Just your ending cash position?

The ending cash position, here I have got it Stacy, just hang on, again numbers that we give you are net debt. So that's including our cash. We've got cash of about 19 million and then we got restricted cash of about 65 million, and remember that restricted cash is available for its investor of revenue bond money available for capital expenditures and price 8 states, typically landfills or [________________] development projects.

Okay. Thank-you.

Thank-you. Our next question is coming from Steve Binder of Bear Stearns. Please state your question or comment.

I was wondering if you could isolate the labor cost pressure you have seen on the year-over-year basis. Is it sequentially a year-over-year, how much did that affect margins? The higher wage rate that you are paying to mechanics and drivers?

Okay, Steve hold on, we are getting into the detail here for you. Well, I think sequentially it's a little bit hard to see because included in our labor cost we would have this bonus of accrual reversal. I guess sequentially, what we are seeing is probably about 15% or so.

Fifteen basis points.

Fifteen basis points rather sequentially, and year-over-year, I think one of the things that kind of match that a little bit is, this is probably about maybe 20 to 30 basis points year-over-year.

And what kind of trends did you see during the quarter, have you seen much relief with respect to wage rates at all? Not as wage rates, but availability of quality..

I think we may see some loosening of the labor market. Our ability to secure people as it relates to the price side or the wage side of the calculation, it's not something that changes again. I think some of the wage pressure that we had last year was in some of our union negotiations, one being in Las Vegas where we had a contract settlement at 6%, I mean that's not going away, and the additional wages that we had to pay to attract reliable employment base in Atlanta, it's not going to go away, it's not something we can take away. So, the wage side of it and the price side of it is not going to go away, but I think going forward we're starting to see that, especially in the white collar side of the business that it's loosening up.

And how about with respect to repair and maintenance cost scheme. Can you maybe touch on whether you saw any variance year-over-year or sequentially there?

I don't have that Steve, in front of me, but Tod does. I don't see, but we would had it if it was any sort of material change. Again, when we look at that whole category of keeping our trucks running on the road, parts, maintenance, shop expense, it really feels that we've put into that category that was the only driver of change.

And lastly, can you maybe just touch on the capex, if you look at the run rate you are under running the full year obviously, and it well appears that in the last year's first quarter. Just wondering if there is a possibility of you under running this year's budget, and maybe you can just touch on that.

I guess as it relates to capital again, it depends really on what the economy is doing, I don't want to put my foot in my mouth here, but we do have flexibility depending on how bad the economy were to get here, and I think we've talked on occasion that we may have anywhere from $10 to $15 to $20 million range of capital. The reason I said only to put my foot in my mouth is that I am sure there are people on the call who will say then why are you spending them at all? Well again, we want to continue to reinvest in the business and be able to grow the business and have the appropriate levels of capital available to sustain the business volumes that we have today. But again, depending on how bad the economy would get, we do have some discretion there, but it's not something that we would back away from unless we saw the economy worsening.

And remember Steve, there is seasonality to the capital spending particularly in the landfill side of the business.

One another thing Jim, can you maybe just touch on assets swaps. Are there much in the pipeline there at all with respect to potential deals with your competitors, and any thought with respect to further pullouts from certain markets. Do you see that on the horizon at all at least downsizing or restructuring in certain markets? 0:33:20 JAMES E. O'CONNOR: All right. Well, we continue to talk to two of our major competitors about asset exchanges. I am sure we'll do some with the one or both of them during the course of the year, something like that and that continues to have a lot of visibility for me and I can't speak for our competitors. I still think it's important to them. The second piece of your question is whether or not we're looking to divest in any markets; all of our markets are contributing. Obviously, we have a number of markets that when we look at swaps that we would, when we look at the demographics of those markets that we would try consider to swap, but they are all accretive and all generating positive cash flow. It's just really a question of the ones that are lowest on the totem pole, what will they bring in the swap transaction. So, we are not looking necessarily without a swap, we are not looking necessarily to sell any businesses.

Okay. Thanks very much.

Thank-you.

Thank-you. Our next question is coming from Bill Fischer of Raymond James. Please state your question or comment.

Thanks. Good morning. Just on that recycling commodity real quick, what given the declines do you have a rough percentage of what that is of total revenue now and in that other category?

Yeah, sure I can give you an indication of what it is. It's about 2.5% of revenue; it's been running 2.5% to 3%.

Okay, and then back on the intercompany revenue, it was up like 30 million or so sequentially. Is it just like maybe a landfill revenue mix issue or which landfill you took in or ...

I can't say sequentially what would be driving it. There could be some seasonality that we drive the sequential number, but beyond that, I am not sure.

Okay, and just a last thing you mentioned that some of the tools and investments that you are making on the SG&A side, the intention there obviously is to partially help your gross margins or whatever down the road in terms of productivity or not?

Yeah, I mean it's like any investment that we make in the business. We make it for two reasons, one, obviously we would look at it just as we look at capital. We're looking to get a return on the investment in those people and so a portion of that investment at the regional level will have a payback, but the reality is here, I think this came up at previous conferences, what is the appropriate level, and that's why we put the wordings in our comments this morning. We believe that to sustain this business and to continue to train our people and to improve the tools that we have available, we need a certain amount of infrastructure and 9.5% to 10% barring any changes in price and volume or significant accelerations there, we think that the business needs to be sustained at the SG&A level of about 9.5% to 10%.

All right. Thank-you.

Thank-you. Our next question is coming from Leone Young of Salomon Smith Barney. Please state your question or comment.

Yeah, thank-you. Most of my questions have been answered, but perhaps Jim you could comment on the acquisition outlook aside from Richmond Sanitary, any trends there or any changes?

No. I mean we have, if I have a pipeline of around $20 to $30 million, and not to mislead here, that's probably comprised of one large acquisition and probably a number of small ones, the large one probably comprising about half of that which is in the pipeline. Much beyond that again, we are really more concentrating right now on the infrastructure of the company and driving costs out of the company, as well as continuing to improve our ability to price increase.

And there has also been a lot to talk about fuel increases this coming summer due to the refinery shutdowns and various issues. Could you speculate a little bit on what your costs may look like as we go in to the summer months?

Well, it's hard for me to guess what's going to happen on fuel and oil, but I can tell you that we are currently in negotiations with some people to hedge our fuel on a go forward basis, so I would imagine we would conclude those negotiations within the next week and then our intent would probably to be to hedge about somewhere between 40% and 50% of our fuel in a number tranches, one be in the tranche for maybe a 6-month period and the other being for a 12-month period.

Great, and just lastly, Tod I am I'm sorry if I missed it, but did you mention the amount of the lease this quarter?

We're down with that synthetic lease.

Okay.

Okay, we finished that up last year and again it was an attractive financing alternative for us, but we don't see that vehicle going forward as something that will be viable.

Okay. Thanks.

Thank-you. Our next question is coming from Tom Ford of Lehman Brothers. Please state your question or comment.

Good morning.

Good morning.

Jim, could you give us some idea for the fuel on the hedging, I mean, what are we talking about in terms of prices, is it something similar to what market prices are today?

I'm going to let Tod answer that. Tod and Edward Lang our treasurer are in the negotiations themselves.

Well, Tom, there is a number of different ways to structure one of these and we could do a collar and we could do just a straight forward contract, we could just hedge a position. We're looking at a couple of different options, but it can range anything from really a nil cost type of arrangement to something where we might pay up to say ¢6 or ¢7 a gallon for the cost of a hedge.

Okay, now, I didn't mean per se the cost Tod, as much as what kind of range on a sort of per gallon we were talking about relative to, just to get a sense of where your price, where you hedge relative to market prices?

It's probably within about 10% of where we are today in our pricing.

Okay.

Again our objective here is to take some of the volatility out.

Okay. Great. Jim in terms of the expected benefits in terms of the G&A investment, I mean, is there anything that you want to add or could provide there in terms of timing or magnitude?

I think as we move through the next 18 to 24 months, we're looking at probably anywhere from 10 to 25 basis points and again, what we're trying to do is get an idea of how much we can actually increase productivity, and also last year, we've talked about [________________] and our ability to couple that up with the standardization of our billing system. We are currently out in the field, and in fact, actually I think one or two of our investors have actually firsthand seen this. They've come to some of our regional meetings. We were actually taking people through training and productivity, and how to better utilize not only [________________], but also our system. I can just give you an example. I was just in Louisville, Kentucky, last week. They have just completed their review process and they run 26 or 27 frontloading vehicles, and we have eliminated 2 [________________] at that location just due to the training that they received in the last 30 days. I don't want to say that that's what we'll see throughout the company, but we will see impact and benefit.

Okay.

I think there is another point to make here and that is while we see some of the benefit on the operating margin line, there are some other intangible benefits, for example, we're in the process of investing in a new general ledger platform that should help us in our working capital particularly on the payable side of the equation to get a better handle over our payment terms on a consistent company-wide basis. So, it's not just the operating margin, its some other control benefits and cash flow benefits that we're seeing.

And Tom, I mean again we've added in the regional structure a regional sales person, maintenance person, and already we're starting to see the benefits of the standardization in some of our maintenance activities while many of the people on the call may not understand this, but one of the things that we saw with the new world transmission from Allison, they have extended all change intervals. Just the education and training process that we're going through with our field personnel, we've seen where the all change interval is 2000 hours, if I am not mistaken, and we have seen in the field where we're going through service oil changes of 500 hours. So, I mean, there is a lot to be had with enhanced training and communications and that's some of the benefit, while its not always quantifiable in terms of let's say saved motor oil and filter expense, it's not as easy as that. We see the same thing in sales and marketing. We are out there and we're not only assisting the general manager with understanding the tools and getting the sales departments to utilize the tools, but I mean, there is also benefit in helping the general manager, who is a "General Manager", not necessary a sales expert or maintenance expert or an operational expert, drawing conclusions much faster, either on people decisions or on operating processes within the location. So, again, I think those are the benefits that we're going to actually retrieve from the additional SG&A. It's just really hard to put your finger on them. And in a certain amount if it is just to sustain the organization at the level that we expect.

Right, okay. The last thing I wanted to ask, there are two quick questions for you. Number one, commodity, I know you had outlined the impact in 2001. I know that you had a slightly different exposure in 2000, but what was the commodity impact in price in the first quarter of 2000 and...

Well, let me answer the first question before you ask the second one. If you look at last year's first quarter, I think our price was about 2.6% and included in there are later in the quarter we started to see some fuel moving up, and we actually got fuel surcharge, and so we had about a 30 basis point fuel surcharge which is pretty much rolled out now. So, excluding the food fuel surcharge, we're looking at 2.2% versus 2.3% last year, and I think that commodity prices last year, we really didn't see any sort of impact, I mean, we did go back and look at 1999 to 2000, but there wasn't an appreciable impact there. So, again we feel comfortable with our pricing being in that 2 plus percent range in line with our guidance excluding commodity prices.

Okay and was the same thing true, Tod. Do you know in the second quarter of 2000, because obviously you had a very, very positive comparison, 2000 over 1999 in 2Q?

Well, the first quarter to the second quarter last year our commodity prices sequentially, actually grew up probably about $15 a ton.

Okay.

Okay?

And last, but not least, if you could just give me a census to what the internal growth progression was during the quarter in the sense of what you thought in the early months versus what you exhibited in March?

Well, we don't report monthly revenue numbers or monthly internal growth numbers. I think what we can do is give you that sense that we did see a little bit of a slower start, again particularly, in the Midwest in January. I think I recall being up in Chicago in that timeframe and there were whole series of storms blowing in midway January. So, it started out a little bit slow, but then it came back strongly later in the quarter in the month of March. So, on balance, it was pretty much in line with our expectations.

Okay, great. Thank-you.

One more question operator.

Thank-you. Our final question is coming from Jaimi Goodfriend of First Analysis. Please state your question or comment.

Good morning.

Good morning Jaimi.

I heard you this morning talk about how you might slowdown capital spending depending on the outlook of the economy this year, but you talked about hedging programs in light of an economic problem that could occur later in the year, and yet in your press release you talk about how your business outlook in 2001 assumes the economy will strengthen during the third and fourth quarters.

Well, I think historically we've said that we think that, I mean our guidance's were based on the fact that we think this economic slowdown takes the shape of a we versus you. So, we're assuming in our guidance that the economy comes back in the third and fourth quarters to some degree. Now if that changes, obviously that will change out outlook.

What kind of flexibility or correction did you sort of put into the second half in the event that it doesn't come back exactly when you...

Well, I think that when we look at capital, obviously we have some of our roll off equipment that we'd be anticipating either replacing or adding due to the growth for a permanent or a temporary business. Obviously, we'll curtail that, and relocate that around the country as we see it affecting various parts of the country. We have some infrastructure capital, some bricks and mortar that we could actually slowdown, but again, I don't want to do that because that's just really a deferral of what really needs to be get down to sustain the business.

My last question is within the internal growth projection of 2% for price in a year, is that including or excluding commodity downturns that you have already experienced?

That 2% was our original guidance Jaimi, that excluded any sort of commodity impact.

Okay. Thank-you.

And we're not going to forecast what commodities do. Obviously, that's somewhat will follow through.

Pretty good. Thank you all for calling in and participating. For those of you who aren't aware of it, we do have a replay of this call available today. It is on our Republic Services website, which is www.republicservices.com and the call-in line to listen in would be 877-519-4471 and the pass code for the replay here is 252-5275. Thank you again and have a good day.