Republic Services Inc (RSG) 2003 Q2 法說會逐字稿

Thank you for holding and welcome to the Republic Services second quarter Earnings Conference Call with your host, Jim O'Connor. At this time I would like to inform everyone your line will be on listen-only mode only until the questions. At that time I will come on line with instructions. And also, today's call is being recorded. Mr. O'Connor, I turn your call back over to you, sir. Thank you for choosing Sprint.

Thank you, operator. Good morning and thank you for joining us. This is Jim O'Connor, and I'd like to welcome everyone to Republic Services second quarter conference call. This morning Tod Holmes, our Chief Financial Officer and Ed Lang, our Treasurer, are joining me as we discuss our first quarter performance.

I'd like to take a moment to remind everyone that some of the information we will discuss with you today contains forward-looking statements which involve risks and uncertainties and may be 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 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 July 31st, 2003. 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 express written consent of Republic Services is strictly prohibited.

I'm very pleased today to report that Republic Services is on track to meet its financial goals that we communicated to you in January. Our 2003 plan assumed no improvement in the economy this year. We expected internal revenue growth to be 2 to 3% with equal contributions from price and volume. In the second quarter total internal growth was 4.1% with 2% from price and 2.1% from volume.

A number of factors enabled us to exceed our internal growth goals. First, continued strong performance in our franchise markets, which represent over one-third of our total revenue. These markets are in high growth areas and benefit from contractual price increases.

Second, our field organization has a very disciplined approach to price increases and customer retention. Given the general economic weakness, our ability to demonstrate solid internal growth attests to the quality of sales and operating personnel at Republic Services. During the quarter we earned 37 cents a share. We are reiterating our EPS guidance of $1.46 to $1.48.

Although we have experienced higher fuel and insurance expenses, we have been able to stay the track due to good internal growth and our strategic cost initiatives. We continue to generate high levels of free cash flow. During the quarter we generated $89 million of free cash. We are on track to meet our goal of generating free cash that is equal to 90 to 100% of net income. And we're committed to using that free cash flow to enhance shareholder value.

First, our Board of Directors has authorized a dividend program. Shareholders of record September 30th will receive a 6 cents per share dividend. This translates to an annual return of cash of approximately $40 million to our shareholders. The impact of the dividend on 2003 cash flow is approximately 10 million.

Second, during the second quarter we acquired $4.6 million of revenue for $7.3 million in purchase price. We have another $11 million of annual revenue in deals that have been signed and accepted and we anticipate closing these transactions by year-end.

Third, during the quarter we repurchased 1.4 million shares for $30.7 million. Year to date we have utilized $86.8 million of our $150 million board authorization and repurchased 4.3 million shares or over 2.5% of our outstanding shares. Although we are instituting a dividend program, our share repurchase program is the cornerstone of our free cash flow utilization. We believe repurchasing stock at these undervalued levels provides an attractive return to our shareholders. Due to the high level of predictability of cash flow in our business, we are able to fund our acquisition program, repurchase shares and institute a dividend while improving our credit profile. On June 30th our net debt to total capitalization was 36.2%.

During the quarter we received credit rating upgrades from Standard & Poor's and Moody's. Our ratings respectively are BBB-plus and BAA-2. We also renewed our 300 million, 364 day credit facility in early July. Most of all I'd lake to thank all the employees of Republic Services for their continued focus on improving our return on invested capital and generating higher levels of cash flow. I'll now turn the call over to Tod Holmes for our Chief Financial Officer for our financial review. Tod?

Thank you, Jim. I'll begin my review of the company's financial results with second quarter revenue. Second quarter 2003 revenue rose by 6.5% to 637.3 million from 598.2 million last year. Our internal growth from core operations is 3.3%, 1.5 from price and 1.8% from volume. Our core volume growth comes primarily from our residential collection business where we have been awarded a number of new municipal contracts and also from some landfill transfer stations that we opened at the beginning of this year and also where we secured some new contracts. Volumes in our commercial and industrial businesses are holding steady and the remaining 3.2% of revenue growth comes from commodities, non-core businesses, state taxes, fuel surcharges and some acquisitions.

Next I'll discuss changes in our sequential margins. Sequentially our second quarter operating margins increased by 10 basis points. The key components of our sequential margins are as follows: risk and health insurance a negative 40 basis points; fuel positive 40 basis points; revenue mix and disposal costs negative 80 basis points; DD&A positive 30 basis points; SG&A positive 60 basis points for a net improvement of 10 basis points.

First risk and health insurance. During the second quarter of 2003 we continued to see higher costs for both risk and health insurance. With a weak economy we are seeing more spurious claims and greater legal and medical costs to defend such claims.

Second, fuel. During the second quarter of 2003 fuel prices decreased sequentially by about 10% from about $1.43 to $1.28 per gallon.

Third, revenue mix and disposal costs. During the second quarter of 2003, we generated more revenue from our non-core line of business and from our transfer stations which have lower margins. We also experienced higher residential disposal rates which had an impact of about 20 basis points and we expect these weights to return to more normal levels during the third quarter.

Fourth, DD&A. During the second quarter of 2003 the company experienced lower DD&A as a percentage of revenue due to the seasonally higher revenue.

Fifth, sequentially SG&A decreased by 60 basis points from 10.3% to 9.2% due again to the seasonal increase in revenue and also lower bad debt expense.

Sequential EBITDA. Sequential EBITDA increased by 10.7 million or 6% from 165.3 million during the first quarter of 2003 to 176.0 million during the second quarter of 2003.

Year-over-year operating margins. Our operating margins year-over-year decreased by 160 basis points from the second quarter of 2002 to the second quarter of 2003. The key components of this decrease are as follows: fuel, negative 30 basis points; termination of an operating lease facility, positive 606 basis points; risk and health insurance, negative 60 basis points; waste taxes, negative 60 basis points; the economy, third party hauling and revenue mix combined to have an impact of negative 70 basis points; statement of financial accounting 143, negative 20 basis points; DD&A negative 30 basis points; and SG&A positive 50 basis points for a net decline of 160 basis points.

Now I'll briefly comment on these components of year-over-year margin change. First fuel. During the second quarter of 2003 our fuel prices were up from the prior year. Average price per gallon increased about 10% from $1.17 in the second quarter of last year to $1.28 in the second quarter of this year.

Second, operating lease facility, our benefit came from the company repaying its operating lease facility during the second quarter of -- excuse me -- the third quarter of 2002.

Third, risk and health insurance. During the second quarter of 2003 we continued to see higher risk and health insurance costs. This is associated with higher fixed premiums and also higher deductibles that we took to mitigate the increase in premium costs.

Fourth, waste taxes. During the second quarter of 2003 we continued to experience an increase in taxes levied on landfill volumes in certain states that were passed through to customers at no margin.

Fifth, the economy, third party hauling and revenue mix. During the second quarter of 2003 volume and pricing in our event business continued to be impacted by the economic slowdown. We also experienced an increase in costs associated with long haul transport of waste by third-party vendors for fuel increases. Furthermore, we generated more revenue from our residential lines of business and our transfer stations, which have lower margins.

Sixth, SFAS 143. As you'll recall, the company's cost of operations improved beginning this year by a hundred basis points as a result of the adoption of statement of financial accounting standards 143. This improvement was offset by a 70 basis point increase in landfill amortization and 50 basis points of accretion expense.

Seventh, DD&A. The increase in DD&A is primarily due to the adoption of SFAS 143, as I just mentioned, and also the termination of the company's lease operating facility in August 2002 along with normal capital expenditures.

Finally, SG&A. The decrease in SG&A is primarily attributable again to lower bad debt expense and higher revenue. Our year-over-year EBITDA increased by 10.3 million or 6.2% from 165.7 million in the second quarter of 2002 to 176 million in the second quarter of 2003.

Next I'll discuss our free cash flow. As we've said in the past, one of the most attractive aspects of this business is its ability to generate free cash flow. And as you'll see from our free cash flow, we believe that we have a very high quality of earnings which results in strong sustainable cash flows. For 2003 our definition of free cash flow is cash provided by operating activities less purchases of property and equipment plus proceeds from the sale of equipment as presented directly on the company's consolidated statements of cash flows. Using this definition, free cash flow for the second quarter of 2003 was $89 million. This is based upon cash provided by operating activities of 152 million less purchases of property and equipment of 64 million, plus proceeds from the sale of equipment of 1 million. And again that equals second quarter free cash flow of 89 million.

Our free cash flow for the six months ended June 30th, 2003 was 176 million. This is based upon cash provided by operating activities of 252 million, less purchases of property and equipment of 88 million, plus proceeds from the sale of equipment of 3 million. Again, that's the 167 million for the six months ended June 30th. Please keep in mind that our free cash flow is historically higher in the first half of the year because of the timing for capital expenditures. If we normalize our free cash flow for our expected annual capital expenditures, it would be reduced by 42 million. This results in normalized free cash flow of 125 million for the six months, which represents approximately 109% of net income, slightly ahead of the target that we set for the year of between 90 and 100% of net income.

Uses of cash flow. During the second quarter, as Jim indicated, we paid 7.3 million for businesses with a run rate of 4.6 million and we also purchased 1.4 million shares of our common stock or approximately $30.7 million, or a price of about $21.34 per share. From the inception of our stock repurchase program through June 30th, we have repurchased over 12% of our common stock or 21.5 million shares for approximately $387 million with an average price of approximately $18 per share. Even after the substantial repurchase of shares during 2003, our balance of unrestricted cash available at June 30th to fund future internal growth, acquisitions, dividends and share repurchases is approximately $247 million.

Our balance sheet remains very strong. At June 30th our accounts receivable balance was 265 million and our day sales outstanding improved to 37 days compared to 38 days as of March 31st, 2003. Republic continues to lead the industry in managing its accounts receivable. Our net debt is $1.80 billion of which approximately 412 million is tax-exempt financing at very favorable rates. Consistent with our cash flow performance and previous guidance, our net-debt to total capital at June 30, 2003 is slightly over 36%. We remain committed, as Jim indicated, to maintaining our investment-grade rating. Now I will turn the call back over to Jim.

Thank you, Tod. Operator, we will now open up the call for questions and I would ask each of the callers to limit their questions to two. Operator?

If anyone has a question, please press star 1 now. The first question is from Amanda Tepper. Go ahead, please.

Good morning.

Good morning, Amanda.

I have to pick the very best two questions that I have for you guys. Let's talk about the margins. It's always helpful the year-over-year and the sequential, but still, I was surprised that your gross margins were down sequentially. So, can we talk about the pieces and especially I didn't understand on the mix when you talked about transfer stations being a negative. Usually when transfer stations come on-line, that helps internalization and margins. So, what's going on there?

Okay. Well, first let's kind of focus everyone in on the fact that -- I mean, when we review our new business offerings, we're looking at them on a return on invested capital. Exactly how the management team is incentivized, and the ability of that business to generate significant levels of cash over time. So, when we look at the revenue mix, we need to take into consideration that we've had a significant increase in our residential business predominantly from contracts. I think I've shared with at least a couple of analysts in the past a review of a couple of our bids and our follow-up to our bids, and can you see that those margins are historically lower. But the returns are higher than our cost of capital, significantly higher than our cost of capital. And that's how we look at our business.

So, some of it's coming from revenue mix of residential. We had experienced some higher disposal costs. And it's not from pricing. It's really from weights. And as an example, in our residential component, you know, quarter over quarter, last year to this year we have about a one pound increase. Now, you say one pound isn't very much. But when you extrapolate that across all the units that we service in the business, it is a significant component. And I guess if you were to look at the average, it's one pound on 78. I'm sorry, that's on a yardage basis for our commercial business.

Okay.

And on our residential we're seeing one pound increase on our residential units, and that's on a base of about 25. And again, that's substantial. So, that's where we're seeing a lot of it. And then Tod had talked to already the risk insurance and the fuel impacts, positive in fuel from the second quarter to the first but negative on risk insurance. And we're still fighting that battle of escalating insurance costs, both premium and self-insurance costs there. Tod, do you want to add something to that?

Well, you mentioned the mix of business, Amanda. And we've got two components that tie into that, one being the transfer station. Transfer stations typically have very low margins. And while some of that would be offset maybe by some higher landfill volumes, as we continue to build our transfer station network, two things happen. You get transfer stations that may be a little bit further away from your landfills so there's naturally a slightly higher cost structure in getting the volumes to your landfills. And then the other thing that we see with the people that we contract with, just as our fuel costs are going up, their fuel costs are higher, also. So, you know, that becomes an issue on the transfer station side. And then, of course, our non-core business, which has typically much lower margins, but again good returns on invested capital. Seasonally that goes up in the second quarter. So, those are the key drivers.

I think if you were to go back and look at last year, you would see a similar sequential type of first quarter or second quarter change in margins. And again, a lot of it comes back around to what Jim just spoke about in terms of the waste. Now, we do feel that while the winter months are the lowest weights of any of the four quarters, the summer months do sequentially drop down. And as we looked at our business at the end of the second quarter, we saw east of the Mississippi that our weights had stepped up higher than normal. So, we would expect about a 20 basis point improvement in the third quarter due to those weights coming back in line.

Okay. That's extremely helpful. Thanks. And then, as a follow-up, as a result of your managing the business for the ROIC, you're getting such strong cash flows, and I was a little surprised by -- it sounds like you had very strong working capital, use of cash in the quarter more than I was forecasting. So, I'm wondering what drove that? And then, also, you ended up with a much higher cash balance than I was looking for. And I'm wondering how sustainable you think that is and how you would look at the cash balance perhaps even as something you may want to drive down into overtime to beef up a dividends pay up perhaps in the future.

Okay. Well, the working capital is really a function of our revenue. And while our day sales improved by one day, our accounts receivable, because the revenue had moved up sequentially a substantial amount, has caused the absolute dollar amount of receivables to move up. You know, in terms of our cash balances, again this is -- you know, while people may focus on margins, you can't spend a percentage of margin as you can spend a dollar. So, what we're focused on is building total dollars, which I think 247 million of cash shows that we're delivering by, you know, us building out our business, whether it's in the residential or transfer station areas. As we look ahead on the cash flows, again our guidance was 90 to 100% of net income. I think if you looked at last year, we were about 107% of net income, the first six months of this year about 109% of net income and, you know, we feel pretty comfortable that we're at the high end or above the high end of that cash flow target of 100% of net income and will be for the full year.

And I think, too, I think historically if you look back at the company, you know, we tended to enter the share repurchase on a very moderate basis. At the start it was about a $50 million share repurchase and stepped it up accordingly as we saw the business grow and stabilize. And I would anticipate that the growth and the dividend would be looked at the same way. And again, you know, when you look at out, too, about another 12 months or so, we have our first public debt coming due, which is $225 million in '04. And while we're not making a commitment to pay that today, that is on our screen and has probably a high probability of happening in May of '04.

One thing that needs to be really very clear to everybody is that the share repurchase program is the cornerstone and remains the cornerstone for our excess cash strategy. It's about 60% of our payout. And that's going to continue.

Thanks, Amanda.

I'll remind all participants they are limited to one question and one follow-up question, which must be done at the same time. Thank you. And the next question is from Lorraine Maikus. Go ahead, please.

Thank you. Could you just talk a little bit about the acquisitions you made in the quarter and comment on the pipeline, if there are any landfill or transfer station assets in your acquisition pipeline?

The acquisitions have been predominantly tuck-ins. And the pipeline -- you know, the pipeline is actually the -- all of the private haulers that still exist. It's really hard to say because we stay in contact with all of them, and the only ones that we tend to usually want to report on are ones that we think have some probability of coming to fruition in the next 12 months. And so, we're looking at closing $11 million of revenue. But the pipeline, while it's large, doesn't appear to have many acquisition candidates coming to fruition. But we still think we're on-line to meet our original objective of about $25 million of annual run-rate revenue, maybe a little bit north of that.

The next question is from Mike Hoffman. Go ahead, please.

Hi, guys.

Michael, we're not gonna do $500 million. [Laughter]

Well, you know my philosophy on --

I understand, I understand.

Let's talk about the dividends and share repurchase. Just so we close the loop on this, there's no in lieu issue, right? The dividend will be incremental to the 150?

It's both.

It's combined.

It's combined.

We will do both.

So 150 includes the dividend?

No, it's 150 plus the dividend on top of that.

Okay. That's what I want to be clear. That's my major question other than, I wish you'd buy more stock back.

[Laughter] Thanks, Michael.

Next question is from Brad Coltman. Go ahead, please.

Thank you. Good morning.

Good morning, Brad.

I just want to follow up on Amanda's earlier question again on the gross margins. Last year you saw a sequential decline of 10 basis points. This year it's 90 basis points. I understand some of the comments about the weight. But how do you get back up to more than normalized run rate in the third quarter? I'm assuming you're referring more to the first quarter, somewhere up around 38% --

What I'm referring to is a sequential move up. Also, one of the things that we see in addition to the weight issue is when you look at a lot of our franchise business, about a third of our business being franchise, the price increases come in in much of that business in the month of July. So, you know, we would expect some additional margin expansion just as a result of the normal type of price increase cycle that we see for that CPI component of our business. Also, you know, traditionally in this business the summer third quarter volumes are a little bit stronger. So, those are three key factors.

And again, I would caution everyone not to get too hung up on percentage margins because it's not about margins. It's about return on invested capital and it's about delivering total dollars in cash to our shareholders so that we continue our share repurchase program and the dividend. We're basically paying out between 4 and 5% to our shareholders in the share repurchase program each year and now we've thrown in a 1% dividend on top of that. So, there's a payout, a portion of which is immediate, a portion of which is designed for longer term owners in the 5 to 6% range.

Okay. I understand that. Let me go back to one more financial question, although I understand the focus is free cash flow. Can you remind me again what's on the other income line?

Sure. We had some assets that we had sold, some sale of assets, and actually with the other larger companies in the industry they in turn had purchased some routes from us. And this was just, you know, the accounting for our book basis and the assets, so there was a slight gain on those assets.

Does that carry through in the second half or is that done now?

No, I don't think that that really carries through in the second half. We'll continue to have -- you know, continue to look at those types of opportunities, and we may have some other minor gains, but again, that's a book gain. That's not a cash item.

Thanks, Brad. Operator?

Next question is from Trip Rogers.

Thank you. Good morning.

Good morning, Trip.

Last quarter you talked about 50 million in new franchise opportunities. Is that still business opportunities that are out there, or did you capitalize on that in this quarter?

No, we had -- I mean, there are significant opportunities out there right now that are either currently in the hands of our competitors, which is probably the lion's share. The balance of that, or a smaller component of that is in privatization opportunities. So, you know, some of the things that we've more recently been successful with is Westin, Florida and Redondo Beach, California in Southern California. Some of it we've actually already achieved and some is on the horizon here over the next six months.

We also picked up something in Palm Beach.

The Palm Beach franchise?

Yeah.

Yeah.

So what would that $50 million number look like today?

It's probably down into the $30 million, $25 million range. But again, it's fairly volatile. I mean, there are opportunities continuing to come up. And they usually come up on the fiscal year ends of counties, which would be either June 30th or September 30th.

Your next question is from Corey GreenDale. Go ahead please.

Good morning, Jim and Tod.

Good morning.

Just wondering, the price increase in the quarter, was there any of that that you'd attribute to landfill versus collection? And I'm wondering what you're seeing our there in terms of landfill pricing environment.

No, we haven't seen very much activity. We've not moved our price very much, again because we haven't seen a tremendous amount of activity.

The next question is from Kevin Monroe. Go ahead, please.

Good morning.

Good morning, Kevin.

Given that the economy, third party hauler waste and events business was a pretty significant factor in the decline in operating margins, is that business, and probably the special events in the economy, are you seeing deterioration, or is it stable or is it modestly improving? What are you seeing there?

I think it's relatively stable. Again, as Tod has said, our focus is on return on investment and cash flow. But you know, I mean, on the margin side, when you look to the upside of margins, it's really going to come when the economy recovers and a number of components of our costs are to stabilize, predominantly fuel. But I don't see risk necessarily stabilizing a whole lot in costs in the near term. But when we look at the cyclical components of our revenue, our industrial collection business, our special waste disposal business.

I mean, to give you an idea, if we were to return to pricing in 2,000-2001 time frame, you know, based on the current volumes that we're seeing today, we'd see almost a 200 basis point pickup just from that alone. And then if pricing were to return to the levels that we achieved in that period, which we're closing to 2.5 to 3%, that's roughly another 100 basis points. So, you're looking at almost 300 basis points on our current margins today in a better economy. And then that's still without any significant move in landfill pricing. So, I mean, if margins are your interest, which they're not necessarily our focus, but obviously the investment community's, then I think you can see the return to higher margins and margins that we achieved back in the -- again, the 2000-2001 time frame. When the economy starts to get better and the cyclical components of our business improve.

Okay. Thank you.

Thank you.

Next question is from Leone Young. Go ahead, please.

Yes, good morning.

Good morning.

On the weight issue, would you attribute that to weather or is there a possibility that there may be a little bit of a pickup in your volumes from the economy but you haven't yet recouped it in the service interval?

I don't think we see it in the economy at all, Leone. And again, what we're hearing and what we're seeing as we look at it by geography, it tends to be in the Midwest, in the midAtlantic and eastern states. So, it's not economy. It's probably weather.

And secondarily, did you also experience some higher costs with the Toronto contract with, you know, SARS and everything else?

No, no, we did. I don't think that's any secret. The border crossings became slower. We went through a time where we were doing some driver importation. And that has since stopped and there was even a point in time where we relocated some waste to a closer Canadian site to offset some of the time delays at the border. But that's pretty much behind us. But every time there's a scare, you know, since 9/11 whether it's the hoof and mouth disease that occurred up in Canada or SARS, it tends to lock the border down.

Your next question is from Bill Fisher. Go ahead please.

Thanks. Good morning. On the cash taxes, have you guys had a chance yet to look at the Bush tax plan and what it does on accelerated depreciation? I don't know how you look at it.

Yeah, we have actually. Did a little survey and what we came up with, it's probably -- I think, Bill, for everyone else's edification, you're speaking about the increase in bonus depreciation from 30% to 50%. And it was originally due to expire in I think it was September of '04. Now it is through the end of '04. That impact for us this year we believe is in the 10 to $15 million range on a pretax basis. You need to tax effect that. And so, the tax benefit that we get would be in the 4 to $5 million range this year for additional non-cash taxes.

Okay. And just real quick, you mentioned on the sequential revenue mix, and I think disposal transfer was up about 34 million or so sequentially, which, if you had to guess, was transfer more than half of that or kind of what the mix was?

It might be about half and half. I honestly -- between the transfer and the non-core business, is that what your question is?

I'll need to press star 1 again.

Well, you know, again, as I said, the disposal piece was about 20 basis points essentially. And so, the balance would have come from transfer and non-core business. And it's probably about even between those two. Maybe a little more non-core. Okay, operator.

Next question is from Aldo Masafaro. Go ahead, please.

Good morning.

Good morning. Most of my questions were answered. I was wondering if you had any change in your internalization rate in the quarter?

I think we moved up to 54%, 1%. Is that correct?

Yeah, it's 54 --

Year-over-year it's up 2% to 54 from 52. But I think sequentially it's up --

It's flat. I'm sorry. It's flat.

We reported 54 last quarter.

Internalization had gone up essentially in the first quarter due to the landfills that we opened up at the beginning of the year in transfer stations.

If I could just follow up, on your overall price change up about 2% or so, would you be able to break that down and say residential was up a little more than that and you might have seen a decline in actual pricing in rolloff or --

Yeah. Well, again, when we look at pricing, we're measuring it based upon the price increases that we put out on the street. So, our core business price, which was, you know, just about 1.5% or so, that came predominantly from our commercial and residential business. I mean, the reality is you start to get into this mix of business in the landfills, you know, special waste versus MSW. MSW tends to be fairly stable, but special waste is priced to the market every time you bid a project.

Right.

And the material, the distances, it all varies. So, it's very difficult to do a -- you can do a per unit price volume manufacturing type of analysis, but, you know, we have not adopted that methodology just because every sale is different. And the same on the rolloff where your pricing may be different because you're picking up more weight or you're picking it up from a greater distance and you've got a longer haul time. And that's not really a function of true price. That's a function of greater operating costs and time. And obviously those two sectors are weak because the economy continues to be weak. Not getting worse, but it's sure not getting better.

Okay. Thank very much.

One more question, operator.

Next question is from Tom Ford. Go ahead, please.

Good morning, guys.

Good morning, Tom.

Hey, Jim, you mentioned earlier about the retention program. I was just wondering if you could maybe, you know, to the degree that you could, if you could expand on it in terms of how things are going there?

Well, I mean, again it's been a focus of ours for the last 24 months. I mean, we modified our systems to classify accounts by size, and then based on their size it would depend on the frequency or the type of communication we would have with the customer. I think we're starting to see some of the benefits of that. Our lost business, while it continues to be high, it's predominantly due to business closures versus lost business to our competition.

I think we've been much more sensitive to our customers, Tom, as it relates to how we do business with them. I mean, we have services where we get verbatim transcripts of calls into the division and then do our training off of real calls. I guess we're trying to take our training and do what is happening on national television these days. We're going to do it on a reality basis versus what we think is happening basis. So, you know, for the most part its us just -- again, it's like everything else. It's our attention to it, the discipline that the field puts into the process.

Okay. And Tod, I apologize if someone asked you about this. I had to pop off. And I don't mean to split hairs here, but I'm just trying to get a sense of magnitude because you -- when you were talking earlier about the sequential margin trend and you had said last year you probably saw something similar, I mean, I guess, yeah, last year the sequential gross margin came down by 10 basis points as opposed to this year. So, I'm not trying to, you know, take you to the mat over the difference. I'm just trying to -- in your estimate if you could break down that change in terms of the drivers, like what was really different do you think this year sequentially versus last year?

Well, I think I already covered that, Tom. You must not have been on the phone when I covered it. It's a function of again the -- you know, the waste that Jim spoke extensively about, which we think should bounce back. It's also, you know, the fact that we do have higher insurance costs, substantially higher. And again, those are accruals. So, when you get to looking at our cash flow statement and you see the 10-Q that comes out, we'll be showing you the dollars that we paid out and the accruals that we're putting up. Probably a little more conservative, but we think that's a function of the times that we're in from an insurance standpoint.

While we have higher fixed costs, we have substantially higher exposure as a result of our deductibles going from 1 million to 2 million dollars. On a workers' comp standpoint, you get higher medical costs, you get employees that may have some additional claims for personal reasons. You get some of these spurious type of claims that I mentioned earlier. And then on the revenue mix side, again it's all about dollars. It's not about percentages. And there we're stepping out a little bit farther. I think Leone had mentioned something that we hadn't focused on, but certainly there was the cost at the border. And I don't know if it's 85 basis points. It's not huge. But these items add up. So, I think that there is a bounce back in the third quarter. And again, I would caution people not to just focus on percentages but also focus on the dollars that we're delivering.

Thanks, Tom. Okay, operator, we'll end the call now. Thank you. I want to thank all of you for spending time with us today. A replay of this call is available today by calling area code 402-220-2491. The pass code is 17967418. Additionally, this call will be archived on Republic Services website at www.republicservices.com. Again, thank you for joining us and have a great day.