Republic Services Inc (RSG) 2005 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter Conference Call for Investors in Republic Services. Republic is traded on the New York Stock Exchange under the symbol "RSG". Your host this morning is Republic's Chairman and CEO, Jim O'Connor.

[Operator Instructions]

At this time, it is my pleasure to turn the call over to Mr. O'Connor. Good morning, Mr. O'Connor.

Good morning, Melissa, and good morning to all of you, and thank you for joining us. This is Jim O'Connor, and I'd like to welcome everyone to Republic's first 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 our 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. In the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is April 29th, 2005. Please note that this call is the property of Republic Services Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited.

I'm pleased to report to you today that Republic's performance in the first quarter has exceeded our expectations and demonstrates our discipline in achieving higher pricing and controlling costs. Although we are still faced with high fuel costs, we experience significant improvement in our cost of operations and margins.

Before our financial review, I'd like to provide an update on the strategic objectives we provided on our February conference call. First, we will utilize our ROI pricing model and other tools to improve operating margins and the quality of our revenue. In addition, we will continue to develop our field management team and invest in training to ensure that we are benefiting from our cost initiatives. In the quarter, Republic earned 43 cents per share versus 36 cents in the first quarter of 2004. Operating margins improved by 30 basis points to 17.6%. We saw lower insurance costs and improved labor productivity. Higher fuel expense offset some of these improvements.

Our second objective. We'll continue to review under performing markets and lines of business. In the first quarter, we completed two transactions that will drive further improvement in our operating cash flow and return on invested capital. Republic sold its operations in Western New York to waste management for $34 million. In March, we were awarded a life-of-site contract to operate a landfill in Arlington, Texas. We're now in a position to vertically integrate our existing business and to continue to grow in a market with strong demographics. These two transactions will help us improve our internalization rate to 56% by yearend.

Our third strategic objective was to continue to rollout our routing tools in residential and commercial collection business. Our 150 basis point improvement in gross operating expenses demonstrates that our initiatives regarding pricing, labor productivity, maintenance and safety are being successfully implemented by our field management team.

Other highlights in the quarter: during the quarter, Republic generated $116 million of free cash flow. We continued to return excess cash to our shareholders. In the first quarter we purchased 5.9 million shares or 3.9% of our outstanding shares for $189 million. Republic also paid a 12-cent per share dividend in the quarter. Based on our improved cash flow expectations and excess cash, our Board of Directors has approved an additional share repurchase of $500 million, above the $275 million that was authorized and approved in October of 2004. We plan to complete this new share repurchase authorization by December 31st, 2006.

During the quarter Republic completed a debt exchange for our notes that mature in May 2009. Approximately $275 million of debt was tendered and the maturity was extended to March 2035 at a rate of 6.08%. The success of this transaction demonstrates the confidence that fixed income investors have in our long-term financial strength. After Todd's financial review, I will have some comments on our 2005 financial guidance. Now, I'd like to introduce our Chief Financial Officer, Tod Holmes.

Thank you, Jim. I'll begin my review of the company's financial results by first discussing the revenue for the first quarter. First quarter 2005 revenue rose 6.3% to 677.2 million from 637.3 million in the prior year. Our internal growth from core operations is 4.7%, 2.3 from price, and 2.4 from volume. During the quarter, as Jim indicated, we continued to benefit from our ongoing price increase strategy, and price growth remains a key initiative throughout 2005.

Our core volume growth comes from all lines of business, including our residential, commercial, industrial landfill businesses, and the remaining 1.6% of revenue growth comes from commodities, non-core businesses, fuel surcharges, and acquisitions. The company's internalization rate increased from 54% during the fourth quarter of 2004 to 55% during the first quarter of 2005, due primarily to the sale of assets in Western New York.

Next, I'll discuss our changes in seasonal -- excuse me; sequential operating margins. Sequentially, our first quarter operating margins increased by 170 basis points. The key components of this increase in sequential margins are as follows: first, risk and health insurance, positive 20 basis points; next, labor disposal and subcontracting costs, positive 160 basis points; third, DD&A, a positive 70 basis points; and finally, SG&A was a negative 80 basis points for a net operating margin improvement of 170 basis points.

Now, I'll briefly discuss components of our sequential margin change. First, risk and health insurance: risk and health insurance as a percentage of revenue decreased during the first quarter due to the company's continued safety focus. These costs were about 5.6% of revenue in the first quarter, which is consistent with our previous guidance of a range of 5.5% to 6%.

Second, labor disposal and subcontracting costs: during the first quarter, we experienced lower sequential disposal costs due to the seasonal decrease in volumes from our residential collection business. We also experienced lower cost due to one less workday, and this was a benefit of about 70 basis points during the first quarter of 2005. Average fuel costs remained relatively consistent sequentially.

Third, DD&A: during the first quarter of 2005, the company completed its annual review of actual and projected costs associated with landfill capping, closure and post closure in accordance with SFAS 143. As a result of this review, the company recorded a 5.9 million reduction in landfill amortization during the first quarter. This reduction is due to the reversal of contractor profit and projected inflation that was included in the company's previous cost estimates as required by Statement of Financial Accounting Standards 143.

Finally, SG&A: sequentially, SG&A increased by 80 basis points. As Jim previously discussed, during the first quarter, the company exchanged $276 million of its public notes due in 2009 for new notes due 2035. The company incurred approximately $3 million of cost or about 45 basis points associated with this exchange. Also during the first quarter, the company incurred higher professional fees and seasonally higher payroll taxes and incentive compensation costs of about 40 basis points. We believe that, looking ahead to the entire year, the company's SG&A as a percentage of revenue will be approximately 10% for the 12-month period. Operating income before depreciation, amortization, depletion and accretion, sequentially, operating income before DD&A increased by 4.3 million or 2.4% from 179.8 million during the fourth quarter of 2004 to 184.1 million during the first quarter of 2005.

Now turning our attention to the year-over-year operating margins for the first quarter. Operating margins increased by 30 basis points for the first quarter -- from the first quarter of 2004 to the first quarter of 2005. Excluding the benefit of one less workday and the impact of higher fuel costs, our margins expanded by 40 basis points, indicating continued management of controllable costs and the effective execution of our price increase strategy. The key components of this margin increase are as follows; risk and health insurance, a positive 130 basis points; fuel, a negative 80 basis points, labor, disposal, and subcontracting costs, positive 90 basis points, DD&A positive 10 basis points, SG&A, a negative 120 basis points with a total of positive 30 basis points year-over-year.

Now let me briefly comment on these components of year-over-year margin change. First, risk and health insurance. During the first quarter of 2005, insurance expense was approximately 5.6% of revenue. This 130 basis point improvement is primarily the result of the company's continued focus on safety, as I mentioned earlier. We expect self-insurance to be approximately 5.5% of revenue on a go forward basis.

Second, fuel. Fuel was approximately 4.7% of revenue during the first quarter of 2005. A sample of some our larger collection divisions indicates that our wholesale price per gallon increased about 34% from $1.51 in the first quarter 2004 to a little over $2, in first quarter of 2005. Currently, prices are approximately 5% to 10% higher than our average price during the first quarter.

Third, labor disposal and subcontracting costs. Again as I previously mentioned, during the first quarter the company incurred lower costs, and this was due to one less workday in the first quarter of 2005 compared to -- the number of workdays in the first quarter of 2004. We estimate about 70 basis points of this 90 basis point benefit is attributable to fewer work days. In addition, improved pricing in the collection business together with the continued focus on productivity improvements resulted in the remaining 20 basis point margin improvement.

Fourth, DD&A the decrease in DD&A is primarily due to a slightly greater benefit from Statement of Financial Accounting Standards 143 during the first quarter of 2005. This benefit was $5.9 million versus to $2.6 million, during the first quarter of 2000 -- excuse me, during the first quarter of 2004. Remember that this is a cost savings that arises from the elimination of contractor's profit and projected inflation included in the previous cost estimates as required by the statement.

Finally, SG&A. The increase in SG&A as a percentage of revenue is primarily due to the $3 million of bond offering costs, increased incentive compensation, and higher professional fees as I previously mentioned. Overall, we believe that the company will experience modest margin expansion throughout the entire year of 2005, as a result of better pricing and continued focus on cost control and assuming no major changes in current fuel prices.

First quarter operating income before depreciation, amortization depletion and accretion, year-over-year operating income before DD&A increased by 12.8 million or 7.5% from 171.3 million in the first quarter of '04 to 184.1 million in the first quarter of '05.

Now let's turn our attention to free cash flow. Again our definition of free cash flow is cash flow provided by operating activities off the statement cash flows less purchase of property and equipment plus the proceeds from the sale of equipment. Using our definition, free cash flow for the first quarter of 2005 as Jim indicated was 116.6 million.

This is based upon cash from operating activities of 166.3 million, less purchases of property and equipment of 50.2 million, plus the proceeds from the sale of equipment of 0.5 million, for a net cash flow of 116.6. Please keep in mind that our free cash flow is historically high during the first quarter because of timing of tax payments and capital expenditures. We have however increased our free cash flow guidance for the year to $280 million.

Let's talk about some items impacting our cash balances. During the first quarter of 2005, we paid $3 million for businesses with a run rate revenue of 2.4 million and received approximately 34 million from the sale of our operations in Western New York. We also purchased 5.9 million shares of common stock for approximately $189 million at 31.98 per share. Our actual share account on March 31st, 2005 was 145.2 million shares.

Our balance sheet remains very strong. At March 31st, our accounts receivable balance was 246 million and our day sales outstanding was 33 days. Republic again continues to lead the industry and managing accounts receivable. Our net debt is 1.068 billion, which is up modestly from the 1.020 billion at December 31st 2004. Consistent with our cash flow performance in previous guidance, our net debt to total capital at March 31st 2005, is 38%. Republic Services remains committed to maintaining its investment-grade rating.

Now I will turn the call back over to Jim O'Connor.

Thank you, Tod. Although 2005 is off to a good start, it's too early to make any significant revisions to our full-year guidance. We will be in a better position to make any revisions when we release our second quarter earnings. However, due to the impact of a reduced share count, we are increasing our EPS guidance to $1.67 to $1.72, from $1.65 to $1.70. As Tod said we are increasing our free cash flow guidance to $280 million from $260 million due primarily to an increase in deferred taxes.

I would once again like to congratulate the members of the Republic Services management team for an excellent first quarter result. Now operator, we will open the call to questions.

Thank you.

[Operator Instructions]

Our first question comes from Lorraine Maikis with Merrill Lynch.

Thank you. Good morning.

Good morning, Lorraine.

The 43 cents that you posted for the first quarter is about -- is about 25% of the high-end of your guidance. Now, first quarter is usually the seasonally weakest, and we also have some tail ends for the share repurchase. So, I was just wondering what type of challenges you see for the next three quarters that would, maybe, make that seasonal shift change a little bit?

Well, Lorraine, I think one thing that you need to recognize, which maybe, we should've highlighted a little bit more when we initially came out with guidance in January is that this fourth -- first quarter includes almost $6 million of benefit as a result of the 143 adjustment. And that's probably between 2 cents and 2.5 cents. You know, so you back that out and we're probably, back to somewhere around 41 cents. I think that's a key driver along with this work they issue that we talked about.

Okay. And then it looks like you plan to borrow some money to buy back stock. Have you had any discussions with the rating agencies? I know that you are committed to that investment grade, but have they given you any guidance in terms of the ratios that you'll need to keep it?

Well, first of all, we have a substantial amount of cash available on the balance sheet. We have unrestricted cash that's available. We also have cash that's restricted as a result of industrial revenue bonds, which is being freed up as we speak and will be used more so this year and past years for capital expenditures and then we also saw the surety market improving. So we will be going back and using -- not using our cash for performance. So, I think that a lot of this cash for the share repurchase is really coming off the balance sheet and drawing down cash balances that are really not being efficiently used by the company at this point in time. And our goal with the share repurchase program over the next 18-months is really utilized of excess cash depending on seasonality of -- plus the cash flows and depending on seasonality of cash flows. You know we may be modestly into our bank facility or we maybe, have some modest cash balances from time-to-time that we'd be investing. I will let Ed speak to the credit rating agencies.

Lorraine, we have a very active dialogue throughout the year with the rating agencies and there were advised in advance of our plans regarding the increased share repurchase. And we'll simply keep that dialogue going, so that they understand what the intent of management is, as far as utilizing free cash flow and returning that to our shareholders.

Okay. Operator.

Thank you. Our next question comes from Jamie Cook with CSFB.

Hi, good morning.

Good morning, Jamie.

Hi. My first question, could you talk a little bit about acquisitions? Are you seeing anything new in the market or are there different geographic areas that you may be targeting?

No. Really, nothing different from last quarter, I mean, we continue to stay in touch with some of the larger opportunities that are out there, but those opportunities are not yet ripe.

Okay. And then...

Yes. They’re -- it's not driven by price, I mean, it's a -- they're just not ready to be sellers.

And then my next question is in regards to the assets what you are seeing. If you could just talk a little bit about whether other players in the markets seem more receptive to it and if you could just talk maybe, a little bit too about the quality of the assets you're seeing out there that people are sort of swapping.

Well, I mean, we know -- we've opened up discussions with Waste Management. Obviously, that materialized in the activity that took place in western New York. And we continue to have discussions with them. And I think that's healthy for the sector. And we're continuing to talk to Allied. And to discuss anything that that is specific would be inappropriate, I think on the call. But I will say that all -- that the entire sector continues to talk. And I think that again, speaks to the rationale of the sector as it relates to the marketplace. So, all in all, I think that's a good sign.

Thank you. Our next question comes from Michael Hoffman with Friedman, Billings, Ramsey.

Thank you very much. Congratulations on the share buyback. Tod, Can we talk a little bit about -- thinking about a long term model, if you take the debt up at this point, given the cash flow even if it were to be held at a constant, in theory over the next three or four years, your overall balance sheet will be smaller if you were to take -- pay your dividend but then take that excess cash and then repay debt or buy back stock on a continuing basis just off of cash flow beyond this initial 500 million. And where I'm going with that is, the long-term outcome of this is significant improves and return on capital by returning this capital to the shareholders.

Well, I think we concur with that view. I know, certainly you've been an advocate of my belief, an increase share repurchase. And while we understood, your logic and I think tended to agree with it, it was -- it's a question of timing and magnitude. And I think looking ahead, again the company's view would be -- we're shrinking the balance sheet modestly by taking this cash off the balance sheet to buy back the stock. So, we are becoming I think much more efficient from a capital structure standpoint in that regard. But, again keeping in mind that we want to make sure that we are a solid investment-grade rated company. So, I'll go back to what I said earlier I think was to Lorraine's question, we would continue to focus on the cash available as it arises throughout this next 18 month period along with the cash on -– that’s already existing on the balance sheet that we can free up. And that would be the primary sources of the share repurchase program. At the end, certainly, we're moving more towards your model.

Okay. And then the second question, landfill pricing on your third party disposers clearly had to be up pretty significantly. And is that just you or a reflection of what's happening in the market?

I think our landfill revenue actually was up. We had modest single-digit type of volume growth on the landfill volumes. But the revenue is probably up a little bit higher than the volume growth due to the mix. In other words, last year we picked up some -- we acquired a landfill in Virginia I think in the first quarter -- late first quarter, early second quarter. And the volumes really ramped up later in 2004. And that's a higher price market. So, I think it was the mix that probably, drove the third-party revenue up a little bit more.

From a pricing standpoint, we're not really seeing all that much in terms of disposal price increases at this point.

I think we've seen some modest price increases. But I think again the sensitivity to price on the special waste business is still there. So it's still holding it back in the aggregate.

Okay. Thanks a lot, Craig.

Thank you.

Again, congratulations on the quarter.

Thank you

Thank you. Our next question comes from Leone Young from Smith Barney.

Good morning.

Yes. Good morning. I just want to make sure I am clear. You'd talked a little bit about expecting a modest margin expansion during the course of the year as long as fuel doesn't jump around on you too much. Can you just make it explicit for me, is that on a sequential basis or you intent to just to keep margin expansion on a year-over-year, I just want to make sure I understand you correctly?

It's -- what we've always talked about is year-over-year margin improvement. And I think it's we see that in the first quarter. And I’ll let Tod talk to specifically to some of the drivers that again, I think it's just that the culmination of a number of activities improving the quality of our revenue through our pricing initiatives. I think, probably, to a great degree too a flexibility of pricing in the market in a much more rationale marketplace. And then all of our cost initiatives, I mean, you can see it in our gross operating expenses and even discounting the day, that’s still -- we're still up 80 basis points or so. And we continue to see that through the balance of the year. At least, we hope to see that through the balance of the year this year. Will we confirm that in our second quarter call. Tod do you want to add anything?

Yes. I would just reiterate, I think what we said in January, which is, we'll have I think year-over-year benefits in the first half of the year from insurance from risk and a little bit of a head wind from fuel. Hopefully, they should bring pretty much offset, depending on where fuel prices are. And then in the second half of the year, obviously, fuel shouldn't be as big a factor. Hopefully, it will kind of anniversary out as will the insurance. So really what we're left with is 20 to 30 basis point type of margin expansion that we're seeing, excluding this extra workday benefit that we saw. The other thing I would say is down below the line in the SG&A category, again because of the bond deal, this first quarter was a high -- and also seasonally, the revenues were lower. This first quarter was a high SG&A quarter as a percentage of revenue and sequentially, we would expect that to be -- get back down probably below 10% and comparable to prior periods, prior years.

And maybe one other contributing factor here to the positive outlook for margins would be again in that third of our revenue that's franchised predominantly in the West and Florida, we're seeing strong CPIs, a stronger than last year. And those are anticipated to kick in midyear and some in the mid year and some in the fourth quarter. So those would be stronger pricing that we have historically experienced there.

Great. That's very helpful and just a housekeeping question. In the remainder of the year, is DD&A more likely to approximate where you were in the latter part of last year, which is say 10.2, 10.3 that area?

I think that's fair. Again this first quarter is an anomaly because of 143.

Great and congratulations on a great quarter.

Thanks.

Thank you. Our next question comes from Amanda Tepper with JP Morgan.

Good morning.

Good morning Amanda.

On the share repurchase, so you got I think 80 odd million left on the current program, 500 million on the new, should we take all of that and have it be spent equally between now and the end of '06? Or how are you looking at that keeping in mind that you guys --

From a modeling standpoint, again, we're going to be looking at the cash that's free and available on the balance sheet coupled with the cash flows that we generate.

Well, coupled with your borrowing availability though, right?

But again, we're not necessarily going to be extremely aggressive in terms of leveraging up the balance sheet just to buy the stock in more quickly. I think a fair depiction would be ratably throughout the year, but I'm not going to say that that's how it’s exactly going to work out.

We're going to be opportunistic. I mean that's historically the way we have approached the share repurchase. We've not been in there to price support the stock. We're going to be in there to take advantage of opportunities. Actually that's exactly what we did in the first quarter. I mean the reason we accelerated was because the stock dropped off and we recognized what the fair value of the stock was, up into the high 30's, and we saw that as a buying opportunity. So again we're going to take advantage. The reason for the larger authorization in the longer term is to be able to take advantages of those dips in a fact they occur. So we'll be opportunistic Amanda.

Okay. And then on the insurance savings, which are pretty impressive and I know you have done a lot of efforts on the safety side, still when you self insure there is a greater risk of an accident and some of the big deductibles kicking in any given quarter. Can you just talk about what those deductibles would be and how you factored in the chance of something like that happening in your guidance this year?

Well, we have our retention for risk is $3 million per incident. And obviously, a large accident –- I mean $3 million is a little over a penny. And so if there were some incidents, it could be a little bit lumpy. You could see a little bit of volatility around that 5.5% that I mentioned earlier. One thing that I will say is Republic does a quarterly actuarially review, which is something that we went to two years ago. And it's probably a little bit unlike other companies. We used to do it on an annual basis. So we're going to be looking every quarter to what the actuary is saying the development dollars are, and then that's the expense that we would recognize. But again, we have got strong safety programs in place. I think it is a culture driven by safety. So, our experience, it come down from the 6.5 to 7% range to this 5.5% range and we feel that's pretty good going-forward on average. The one other thing I would add is our workers comp retention limit is $1 million.

And I guess what I would say is that our claims management, I mean, not only prevention but our claims management has significantly improved over the last 18 to 24 months. And we're much more aggressive in getting people back to work those -- all those best practices that are associated with that. But the claims management itself, closing claims out earlier. I think we said this when we actually took the charge, I guess in '03, that we never felt that we would payout the entire charge. I think that is somewhat coming to fruition, I mean, we're closing claims out at a much lower level than were initially accrued for, but -- so I mean now all those things I think are entering into the equation. Not just prevention in our safety focus but claims management focus.

Thank you. Our next question comes from Bill Fisher with Raymond James.

Good morning.

Good morning, Bill.

Just a couple, maybe housekeeping things. One -- I may have missed it. But do you have what the rough cash balance was including the IRB cash at the end of the quarter?

Hold on a second. We will get that for you.

Our cash balance at the end of the first quarter was 72 million. And our restricted cash for IRBs and financial assurance, which not all of but hopefully a portion -- a good portion of -- could become available over the next year to 18 months, is $180 million. So you are looking at $250 million there.

Okay. And just a couple of things, the landfill in Texas what -- when did that open and kind of how quickly does that ramp this year?

That's Arlington.

Yes. The City of Arlington landfill is currently open. It is not open to third-party waste streams yet. We are in the process -- we concluded the contract. We are probably anywhere from 60 to 90 days away from operation. And looking here is Mike Cordesman, our Chief Operating Officer is telling me that we could be open as early as May 1st.

Thank you. Our next question comes from Corey Greendale with First Analysis.

Hi. Good morning and congratulations on the quarter.

Thank you.

First question, Tod on the, the effect of having one fewer Labor Day, I would think you also would have one fewer day of revenue that would offset that. Can you just explain why that nets out to a margin benefit?

Well, remember that a good portion of our revenue is a standard bill. So, our residential revenue, our commercial revenue -- that revenue does not -- is not altered as a result of the changing workdays. And what you have is the roll off activity, which obviously is workday dependent, as well as the landfill activity and landfill volumes, which is workday dependent. So, you know, I think it's really the fact that over half our revenue is not going to change. And then you have the lower labor costs and disposal costs with fewer days.

Okay. And then Jim, I was just hoping you could give us a little bit of an update on the municipal contract front, any sizable new contracts you won, anything large you are bidding on that you're willing to share with us so or anything that size that up?

Yes. Nothing that would significantly drive the numbers, but my best recollection is here we probably got about $25 million in the pipeline right now.

Thank you. Our next question comes from Tom Ford with Lehman Brothers.

Thanks. Good morning and congratulations.

Thank you, Tom.

Just going back to Bill's question on Arlington, Jim. The upfront payment was that -- I assume that you -- were you guys assuming that in the CapEx number that you gave us?

No, it is not in the CapEx number. I think we might have made $1 million initial payment in the first quarter and then there's probably another 20 million that would be paid here -- would’ve been paid actually in April. So it is a lease, but there is -- in the lease structure a modest upfront payment, which is at $20 million.

Okay. And Tod, should I look for that in the CapEx in 2Q?

No, it's really an acquisition. So it is part of our acquisition number. So, the $300 million of CapEx guidance that we had for the year is at this point unchanged and that does not include Arlington.

Thank you. Our next question comes from Kevin Monroe with Thomas Weisel Partners.

Good morning.

Good morning, Kevin.

I was hoping you could help me just understand these kind of different one -- maybe onetime items kind of in the margins. So it looks like you've got about a 5 million or 70 basis point benefit in the gross margin line from the one extra workday?

Yes.

You've about a 3 million drag in the SG&A line from debt to debt?

Right.

And you have got about a 6 million benefit in the DD&A line from the FAS 143, could you explain what that is a little more?

Sure, under 143, every year each company in this industry -- 143 is the viability associated with basically closing up long-lived assets. And what we have to do is go ahead and estimate what those costs are going to be for capping and for closure and for post closure. And we estimated it if you'll recall, the pronouncement when it first came out we talked about the fact that it required a contractor profit in there. And as a result, the costs typically are inflated above what we actually incur since we construct on some of these internally and end up with lower costs. The other thing is in the model that companies put together, there is an inflation factor. And obviously, if their actual construction costs are a little bit lower than that inflation factor, then the real costs are less. So every year we go through and basically true up those estimated costs of the real costs that are incurred and have a little bit of a benefit. And it is a once a year type of an event.

Right. Okay. Yes. I remember from last year. So if you kind of normalize for these factors. Is it fair to say that your gross margins are still up about 80 basis points, EBITDA was up about 10 basis points but operating margins were down about 80 basis points?

I'm not -- I'd have to go through those numbers and I guess, look at the way you are looking at it. Again, I would come back to what we said earlier, which is, as we look at the business all in at current fuel prices and the strong pricing initiatives and efforts and success that we've had, we believe that going-forward through this year we should have some modest margin expansion year-over-year.

Thank you. Our last question comes from Steve Cole (ph) with Meditor Capital.

Good morning.

Good morning, Steve.

I just want to get some clarification now that we have gone on the FAS 143 thing. First of all, I guess, I just want to clarify, we do have this benefit from one year to the other year, so from one year to I guess to the next and I just -- last year I think you said incrementally the benefit was 3 million from Q1, '04 to Q1, '05. I want to make sure I understood that right? There's no reason to believe that in Q1, '06 that we're also going to have a benefit to some degree from that, am I right on that?

Last year's benefit was about $2.6 million. This year's benefit was $5.9 million. And next year we should see a benefit in the first quarter of next year. It is an annual event that occurs. And again, it's structural because of some of the silliness of this pronouncement in terms of how costs are put into the estimates and then you have to take these artificial costs back out and record a benefit.

And what drove it -- is there one or two thing you know -– was this year you just had the ability to do more yourself versus the prior year or was there anything other...?

It's really the estimation process, Steve.

Okay.

And again, the magnitude of this is not all that great relative to the total estimate of future closure/post closure costs, which are in the hundreds of millions of dollars. This might be 1% or so adjustment or true up to that. So, it is not all that big in the scheme of things when you look at the estimation process. And I guess what I would encourage people to do is go back to the disclosures that we have in both our 10-K and 10-Q where we detail out our assets and we detail out the amortization and depreciation on individual asset categories and the units. And you can see how the unit costs are trending. And I think you will see that they're fairly consistent. There's always going to be some fluctuation due to mix of different sites. But it is not exactly precise. We're looking ahead in terms of future estimates here.

Thank you. I'm showing no further questions at this time. I will turn the call back over to Jim O'Connor.

Thank you. Melissa. I want to thank all of you for spending time with us this morning. A replay of this call is available today by calling area code 4022209769. Ask for the Republic Services earnings conference call. And additionally, this call is also archived on Republic's website at www.republicservices.com. Have a good morning. Thank you.

Thank you. That concludes today's conference. You may disconnect at this time.