Republic Services Inc (RSG) 2006 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 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 Kelly. Good morning to all of you and thank you for joining us this morning. This is Jim O' Conner and I'd like to welcome everyone to Republic Services 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 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. Additionally the material we will discuss with you today is time sensitive.

If in the future you listen to a rebroadcast recording of this conference call, you should be sensitive to the date of the original call, which is April 28th, 2006. 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 express written consent of Republic Services is strictly prohibited.

I'm pleased to inform you that Republic reported strong performance in the first quarter. Specifically during the--the first quarter Republic had revenue growth of 8.9% to $738 million. We achieved strong internal growth, 9.4%, with 4.3% of price improvement and 5.1% volume growth. Our normalized free cash flow in the first quarter was 64 million. And we are on target to achieve our full year guidance of 270 to $280 million of free cash flow. Also during the quarter we continued to return cash flow to our shareholders. During the first three months of 2006 we repurchased 3.6 million shares of stock for $141 million. As of March 31st, we have $350 million remaining under our Board authorization which we will execute by year end.

At today's share price we would repurchase approximately 8 million shares or 5.8% of our outstanding shares. It's important to note that since the inception of our share repurchase program in July of 2000 we have bought 55.1 million shares of stock for approximately $1.5 billion. Our earnings per share for the first quarter was $0.46 which was an increase of 7% compared to the first quarter of 2005. In the quarter, I'm pleased to see significant amount of pricing success in our collection business.

We've also had success in raising pricing at our transfer stations and landfills especially those operated in franchise and mid-size markets that have limited overlap with our national competitors. On the other hand our transfer and disposal business in large urban markets has not achieved the same success in recovering cost excalations. At our landfills we are experiencing higher cell construction costs and liner costs. During the first quarter our Senior Management Team was on the road visiting local divisions. We spent a considerable amount of time analyzing our landfill customer base and have determined that we need to focus on increasing landfill and transfer prices during the second quarter. Especially in competitive urban markets like Michigan.

We understand that talented people are critical to the organization's success. Republic is fortunate to have some of the best talent in the industry . Earlier this month a number of our employees were recognized for exceptional service to the solid waste industry. Two of our drivers, Michael Tomas of Arlington,Texas and Ron Settles of [Winstondale] of North Carolina, were recognized as National Drivers of the Year.

Additionally the industry honored two members of our Management team, [Bill Shrom] our Director of Municipal Marketing in Hickory, North Carolina received the special Governor's award for his services. And Ken Baylor, our Vice President and Employee and Labor Relations received a Distinguished Service award. We're very proud of our people and note that these four individuals represent the high quality of employees that can be found throughout our organization. And at this time I would like to turn the call over to Tod Holmes for a financial review of the first quarter. Tod.

Thank you Jim. I'll begin my review of the Company's financial results by discussing first quarter revenue. First quarter 2006 revenue rose by 8.9% to 737.5 million from 677.2 last year. Internal growth as Jim indicated was 9.4%, of which 8% was from core operations. 3.1% from price and 4.9% from volume. During the quarter, Republic continued to benefit from our ongoing price increase strategy. Price, growth remains a key initiative in 2006 in order that we cover our increasing costs.

Our core volume growth comes from all lines of businesses including our residential, commercial, industrial, and landfill businesses. Hurricane cleanup also positively impacted core volume growth by approximately 1.1 million or 20 basis points. The remaining 1.4% of our internal growth comes from commodities, noncore businesses, fuel surcharges, and environmental fees. Our internal growth was partially offset by a 0.6% reduction in revenue due to asset divestitures and a 10 basis point increase in taxes.

Next I'll discuss changes in our sequential operating margins. Sequentially our first quarter operating margins increased by 100 basis points. Key components of this increase are as follows. Fuel positive 20 basis points, risk and health insurance positive 40 basis points, disposal and subcontracting costs positive 130 basis points, DD&A positive 30 basis points and SG&A negative 120 basis points. So that gave us a sequential benefits of 100 basis points.

First for fuel, our average wholesale price per gallon decreased about 8% from $2.60 in the fourth quarter to $2.40 in the first quarter.

Second risk and health insurance decreased as a percentage of revenue because of the seasonal impact of health insurance deductibles and because of favorable actual claims experienced.

Third, our disposal and subcontracting costs. During the first quarter we experienced lower sequential disposal and subcontracting costs due to seasonal decreases in volumes from our residential collection business, and also because of the hurricane clean up costs that we incurred in the fourth quarter of 2005.

Fourth factor, DD&A. During the fourth quarter of 2005 the Company completed it's annual review of projected costs associated with landfill capping, closure and post closure in accordance with Statement of Financial Accounting Standards 143. As a result of this review the Company recorded a $2.1 million increase in landfill amortization during the fourth quarter. This increase was due to actual and projected inflation for costs such as synthetic liner, excavation, and construction costs, partially offset by the reversal of contractor profit that was included in previous cost estimate, estimates as required by this statement. The Company will complete its next review required under Statement of Financial Accounting Standards 143 during the fourth quarter of 2006.

Finally SG&A. During the first quarter of 2006 the Company recorded a $2.0 million expense associated with the adoption of Statement of Financial Accounting Standards123R which is accounting for stock options. Our first quarter 123 R expense exceeded our previous guidance of $900,000 per quarter because of an acceleration of expense associated with grants of restricted stocks to officers that are retirement eligible and also because of an increase in the value of the Company's stock.

Stock option expense for the entire fiscal year 2006 is expected to be $6.8 million. This succeeds the previous guidance we gave in December of 3.8 million. We expect about 1.4 million of 123R related expenses per quarter in each of the next three quarters. Now keep in mind that the sequential impact of 123R is partially offset by the $2.1 million noncash charge recorded by the Company in the fourth quarter of 2005. And that was related to the acceleration of vesting of all options previously outstanding and awarded to employees prior to December 31st, 2005.

During the first quarter of 2006 the Company also doubled its matching contribution to its 401K program. And we also experienced increased bad debt expense which impacted sequential margins. In addition, the Company typically incurs seasonally higher payroll taxes and other compensation costs during the first quarter of 2006 compared to the fourth quarter of 2005. We believe that SG&A as a percentage revenue, is we move through the remainder of 2006 will come back down in the range of 10%.

Now, operating income before depreciation amortization depletion and accretion. Sequentially operating income before DD&A increased $5.3 million from 194.1 million in the fourth quarter, to 199.4 million in the first quarter. Sequential operating income margins before DD&A increased by 70 basis points from 26.3% to 27%.

Let's turn our attention to the first quarter year-over-year operating margins. Year-over-year operating margins actually increased by 30 basis points from 2005 to 2006 once we exclude the accounting changes associated with Statement of Financial Accounting Standards 123R and Statement of Financial Accounting Standards--excuse me 123R for stock options and Statement of Financial Accounting Standards 143 associated with closure post closure.

The key components of year-over-year margin improvement are as follows. Fuel was negative 80 basis points. And again, as we look ahead, we believe that the first quarter is our most difficult year-over-year comp period for fuel. Since fuel ramped up as we moved into the second quarter of last year.

Second, insurance was 20 basis points positive. Labor and disposal was positive 50 basis points. DD&A excluding SFAS 143 was a positive 10 basis points and SG&A excluding SFA 123R was a positive 30 basis points. So that gave us the net positive 30 basis point improvement excluding these changes in accounting pronouncements from one year to the next.

Now let me briefly comment on the detailed changes in margin. First fuel. Fuel was approximately 5.5% of revenue during the first quarter of '06. Our average wholesale price per gallon increased about 21% from $1.98 to $2.40 in the first quarter of '06. This price per gallon is slightly below what we had built into our business plan.

Second, risk and health insurance. Insurance expense during the first quarter was 5.3% as a percentage of revenue or a 20 basis points lower than the first quarter of 2005. And this is due to favorable claims experience and our continued focus on safety. Our 2006 business plan assumes risk expense as a percentage of revenue in the range of approximately 5.5%.

Third, labor disposal and subcontracting costs. Improved pricing in our collection business, the change of mix of revenue and continued focus on productivity improvements all resulted in a margin benefit. Now, this benefit was partially offset by a higher subcontractor cost due to higher fuel costs for transfer station operations.

Fourth, DD&A. During the first quarter of 2005 the Company record a $5.9 million decrease in landfill amortization and this again was in connection with its review of capping, closure and post closure costs for SFAS 143. And obviously that benefit did not exist in 2006.

Finally, SG&A. As I previously mentioned during the first quarter of 2006, the Company recorded $2.7 million of expense associated with the adoption of 123R. The Company also doubled its match to its 401K program and we also experienced slightly higher bad debt expense. These increases in expenses were partially off set by higher revenue and also $3 million of cost incurred in the first quarter of '05 associated with the exchange of public notes that were due in 2009 for new notes due in 2035.

Overall we believe that the Company will continue to experience modest margin expansion during 2006 as a result of better pricing, our continued focus on improving pricing, and also our focus on cost controls assuming no major changes in fuel prices. Our first quarter operating income before depreciation, amortization, depletion and accretion, year-over-year operating income before DD&A increased by $15.3 million or 8.3% from 184 million or 27.2% of revenue to 199 million in the first quarter of '06 or 27% of revenue.

Now I'll turn my attention to free cash flow. Free cash flow for the first quarter of 2006 was a negative 75 million. This is based upon cash provided by operations of 4 million, purchases of property and equipment of 91 million, and proceeds on the sale of equipment of 8 million. Our free cash flow for the three months ended March 31st, 2006 was impacted by a couple unusual items that we highlighted at the beginning of the year.

First, $83 million of federal tax payments which normally would have been paid in 2005, were deferred until February 2006 as a result of hurricane Katrina. And also $60 million of payments in 2005 for capital and other expenditures which were paid out, and you'll see it in our balance sheet as a decline in payables and accrued liabilities. These payments are evident again in the decrease in those balance sheet accounts attached to our press release. After normalizing for these items our first quarter free cash flow was $64 million and it's consistent with what we expected as we provided guidance at the beginning of this year.

Items impacting cash balances. During the first quarter of 2006 we purchased 3.6 million shares of our common stock for approximately $141 million or about $38.90 a share. Our actual share count at March 31st is decreasing and was 137.1 million shares. Republic's balance sheet remains strong. At March 31st our accounts receivable balance was 279 million and our day sales outstanding improved to 34 days. Again we continue to lead the industry in this area.

Net debt was 1.356 billion which is up modestly from the 1.173 billion last year. Consistent with our free cash flow performance and previous guidance, net debt to total capital at March 31st is 46%. Republic does remain committed to maintaining its investment grade rating. Now let me turn the call back over to Jim.

Thank you, Tod. Republic has performed well in the first quarter of 2006. We are encouraged by our ability to achieve higher pricing and manage key components of our cost structure. Although it's still early in this year, I want to reiterate our full year EPS guidance of $1.90 to $1.93. And believe and-- and we believe that we are on track to achieve the upper end of our guidance. I'd like to thank you all the employees of Republic Services for their dedication and hard work which resulted in strong first quarter performance. And now Operator at this time I'd like to open the call to questions .

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Michael Hoffman. Sir, your line is open.

Good morning. Nice quarter guys.

Good morning Michael. Thank you.

Question one, [Alliance] nice and strong in the first quarter. How much of the rebound in commercial construction seen in the quarter that you might not have if we didn't have such a warm dry winter? How do you think about that as you look into the second quarter?

I guess, you're right Michael. I think a lot of the volume excalation in the first quarter resulted from a relatively mild winter in the midwest and the mid-Atlantic states where we've participate in the construction business. I guess -- I guess all that does as far as I can see is really just continue to accelerate the delivery dates of those projects. Again, we continue to see more permits being pulled. We would expect that the volumes would continue into the spring and summer months.

Okay. And then the second question, you alluded to cell development costs rising. When do you schedule that price offset? Do you do it when you spend the money to build the cells, or do you do it when you start putting waste on liner?

Well we do it whenever the market actually allows us to do it. And I think what we're saying at this point in time is since we've gone through an extensive reviews in the first quarter, we're going to be much more active in landfill and transfer pricing in the second quarter. Again, we've seen resin escalate which is a petroleum based product for liners. And I think liner costs are up anywhere from 15 to 20%.

Obviously because of the demand on the construction of commercial property and residential property is put on construction crews, we've seen obviously construction prices escalate for services. So, again, I think we're going to be much more aggressive there. We do have weaknesses in our larger urban markets around the country. I think in my speaker notes I mentioned Michigan in particular. But to that you could probably talk to Atlanta and Denver and a number of other markets where disposals still is relatively cheap and we have some inability to recover costs. So I think we'll space--we'll pay special attention to those particular areas.

Thank you. Our next question comes from Jamie Cook from Credit Suisse. Your line is open.

Hi good morning.

Morning Jamie.

My first question, Jim, can we just get back to the comments you made on the landfill and the transfer station pricing. In the more urban markets. I guess can you--I mean is it the competition that's not raising prices? Will you guys be more price aggressive? And if so, are you willing to lose volume to get the more profitable revenue stream?

Again, we've just completed that review. I think, I guess really what's underlying my comments is we're not-- I can't tell you what our competition is going to do and how they'll react. But I do know one thing, I know our costs are escalating very quickly. We have an inability to recover those costs. And,or we had been--we have had not the opportunity to recover those costs. And we are going to go out and recover those costs in the second quarter. If in effect we lose business, then we lose business. But our returns are declining on those investments. And we're not going to continue to allow them to decline.

Great. And then could you just give us an update on what you're seeing in terms of the portfolio rationalization program, how that plays out in '06 and whether there's any changes I guess since when you guys spoke about it last quarter?

Are you talking about what may be coming available on the marketplace?

Exactly.

We continue to look at the portfolio business that waste management has put out. We continue to evaluate that. We are in active discussions with them on pieces of that business. Not necessarily material to ours. And we continue to talk to Allied Waste about some small swaps. Much beyond that, I don't think we've picked up the activity much. And I wouldn't anticipate at this stage that there'd be any significant amount from what we've seen to date acquisitions or buy sells with our competition.

Thank you. And our next question comes from Amanda Tepper from J. P. Morgan. Your line is open.

Good morning. I've been getting a lot of investor questions around the volume outlook. And obviously Q1 was very strong. But housing is a question mark. And I know a lot of your growth is come on the residential side. Can you talk about this on a broader basis whether aside, what your overall volume outlook is for the rest of the year and touch on both residential, commercial and any kind of other infrastructure volumes you see that might be coming your way in your markets?

Okay well first of all, I think a lot of the commercial construction that's out there right now that we are participating in or my competition's participating in, should ultra ultimately result in either in industrial--more industrial collection, which on a more permanent basis, or commercial revenues. All right so I think we'll see some translation there. I think as the year goes on and we've talked about this on other calls, we would see the volume growth dropping off only because we've got some anniversing of municipal contracts coming on. I think in the area of,if Tod can help me here, but I think it's about 50 to 60 basis points of organic growth dropping out assuming that we're not able to secure additional businesses later--in the latter part of the year. So Tod, I don't know, do you have anything you want to add?

I'd certainly add the comment that it will reinforce the comment Jim made earlier about it being a relatively mild winter in the midwest and the mid-Atlantic states. And as a result we probably saw those benefits in the commercial and residential construction area as well as probably some development projects, brown field sites, special waste type of activity, so that would probably drop off a little bit as we move forward.

Okay. Then can you also comment when you said you expect margins to be modestly up over the rest of the year. Don't you have some price resets coming in terms of inflation indexing in some of your major franchise markets? Can you comment on that over the next few quarters?

Yes we do--I mean obviously we've got significant amount of our revenue base that's founded in the franchise business. Most of those contracts anniversary on fiscal year ends of either June 30th or September 30th. So we should see pricing coming back in from those contracts in the mid-to-latter part of a year. Probably again most of them are indexed. Most of them on the consumer price index or a component of the consumer price index. So I guess we'd probably be looking at somewhere around 2.5 to 3.5% depending on where you are at in the country.

Thank you our next question comes from Bill Fisher with Raymond James. Your line is open sir.

Good morning.

Good morning Bill.

Your disposal and transfer revenues I think were up about 11%. Can you give some real rough color on the volume and price mix there? And I assume the transfer side had some decent chunk of the sur--fuel surcharge.

Certainly we saw fuel surcharge across the lines, all lines of business. I think when we look at the disposal and transfer, again, it's predominantly on the volume side. We're not getting enough price to off set the increased cost that Jim spoke to. And, again, the volume side comes from the strong economy that we're experiencing I think coupled with the favorable mild winter that we had. As you know, Bill, this first quarter is always seasonally the weakest quarter in this industry. I think this year it was a lot milder than it was in the past. Therefore, the first quarter, second quarter step up may not be as pronounced.

Okay. And the second for Jim, you talked I think in the past about possibly exiting some of the industrial roll off business in certain markets where as more volatile historically at Independence. Is that something you still look at from time to time?

I mean, I don't know if I actually singled out industrial collection businesses, Bill. What we've done is as we've become more sophisticated in our review process we look at the lines of business at each division, and what returns they're giving us on a go forward basis. Some of these lines are not interrelated necessarily. And in some cases we've looked to refocus our sales force under the stronger lines of business. And in some cases we've looked to exit either through trade or sale with either an independent or a national competitor.

Not a lot of that has occurred. But again, we continue to focus on that from not only a return perspective but to get better pricing in those particular units and better understand them. So we'll continue to evaluate that. It's just part of our normal business process today.

Thank you. [OPERATOR INSTRUCTIONS] I do have a question from [Lorraine Makis] from Merrill Lynch. Your line is open.

Thank you. Good morning. A few of your larger competitors have begun charging environmental fees up to 2% to try to recuperate some of the land fill costs. Have you thought about or begun to implement anything of that nature?

Well we do have--we do break out in our pricing. We have I think about 9 months ago started to implement an environmental fee. Pardon me?

40 basis points.

About 40 basis points of our reported price. So and it is in the area of approximately 1%. I did hear that our national competitors are reevaluating their position there. And whether we do it in an environmental surcharge or we look to get it in general price increase, I can tell you one thing, we need to get it, I mean landfill liner costs are up. Well construction costs are up. Construction services are up. And there're playing havoc with our returns on a highly-- and that's a significant component of our investment Lorraine. So we're going to be more aggressive there whether it comes through surcharge or comes through general pricing we will be more aggressive in the second quarter.

Great. And then can you just comment on how your roll off volumes look to this quarter versus a normal first quarter?

Well, obviously they were stronger.

That I figured out.

[inaudible] Tod if we've got any information, I don't know if we've got any.

Lorraine, we haven't gone back and tried to normalize it. I'd say that I characterize our roll off off activity this quarter as being up above the corporate average. It might be in the low double-digits, which, again is very strong. And, again, it's not just the weather. It's I think the economy also that's provided some lift there.

Thank you and our next question comes from Corey Greendale with First Analysis. Your line is open.

Good morning.

Good morning Corey.

First question Tod I think in your margin commentary you said that fuel in Q1 was a bit below what you budgeted. Given that it's tracked up since then, is it fair to say it's above what you budgeted now? And either way how are-- are you off setting all your higher fuel costs both direct and indirect that are being passed onto you with surcharges at this point?

Yes. It is definitely at this point above what we had in our business model. I think current price is about -- wholesale price about 2.76. Our business plan was probably somewhere in the 2.60 range I think. So it's above that. But, again, we feel confident that we can recover these higher costs through a combination of the fuel surcharges and also through the CPI that we get in the franchise markets.

Okay. And second question is could you comment on special waste activity and pricing?

I think it's still relatively weak. It kind of -- I think it tracks with my earlier comments that we're not being able to recover our costs just in general from landfills. Special waste is really not that much different than construction and demolition or MSW. Consumes air space. That space is more expensive. We're going to look to reevaluate our pricing position on those particular waste streams as well as MSW and construction demolition.

Thank you. Our next questions comes from Leone Young from Citigroup. Your line is open.

Good morning. Most of my questions have been answered. But I was wondering Tod if you could shed a little color on SG&A and whether you see a gradually turing back down towards 10 or whether you had so many unusual items in the first quarter that it should be back towards 10 as early as the second quarter?

I'd expect to see it back towards 10 in the second quarter. And again, just on a percentage of revenue basis, the first quarter is typically the seasonal low quarter for revenue. Now that might be a little bit muted this quarter because of all that we talked about. But there are a number of unique costs that occurred here in the first quarter. First of all, 123 R , that was compared to last year, that was a negative 30 basis points. Excuse me a negative 40 basis points, $2.7 million. Now going forward we'll continue to see some costs there. But it'll be half that level. So I think there's probably 20 basis points there to pick up.

Our 401K match typically is higher, not only did we double it year-over-year, but as we look through the year 2006 it's typically higher in the first part of the year. I think the same is true of the payroll tax increases where you've got probably -- we had probably about sequentially $1.6 million of expense in the first part of the year, or negative 20 basis points. We had a number of regional meetings that last year occurred maybe a little bit more in the second quarter than in the first quarter. And this year all of our meetings were in the first quarter. They're not meetings to me, they're meetings to focus our people on training. So it's hands-on on computers. But that was probably a 10 basis point cost in the first quarter.

Then we saw our bad debts tick up a little bit. And hopefully we'll have a little better performance there. I think as we look at the second quarter, the combination of higher seasonal revenues in some of these onetime items going away should get us back down into that 10% range.

Great. And Jim, you're obviously very focused on getting your costs back on the landfill side. In general though, is landfill pricing better than it was at this time this year--last year?

Yes I think we--and again, in our -- in the markets where we have got -- where we've got a better market position like in our mid-size markets and some markets where we have our best integration of assets, we've had better pricing flexibility. But I mean again, our landfill pricing, while I don't have it exactly it's probably somewhere in the area of 0.5 to 1%. It's not near enough to take care of these costs that we're looking at what, when we're looking at liners escalating at 15 to 20%.

And service delivery anywhere from 8 to15% for construction services. And that's not mention engineering, the costs of wall construction and so on and so forth. So these numbers are starting to move quickly. They not only impact our estimates for cell construction and what we've got to recover in cell construction. But they also start to lay into our closure, post closure numbers. So these are numbers that we need to recover today, not tomorrow. And so we are focused on it. And while we receive minimal amounts and we see a market that may be a little bit more receptive, we're going to take advantage of that.

Thank you. Our next question comes from [Steve Coe] with [Matador] Capital. Your line is open.

Good morning guys.

Good morning Steve.

Quick one here. Can you give a little bit more color, Jim I know it's something you brought up earlier, kind of the roll off-- the industrial piece of the business and maybe speaking to the mix of the residential verses commercial? Maybe you could give us a little bit of color there what you expect to see both of those things, hopefully offsetting each other.

Well I mean there is not any question that our industrial collection business was strong in the first quarter. All right? It obviously over shadowed commercial and residential growth. And because the industrial collection was up, we saw corresponding volume increases in the landfills. But that's not what led -- that wasn't necessarily the majority of the growth there. We did see some -- I think good growth in commercial and our residential lines of business.

From a volume probably and again -- I'm going to give you something that is -- I don't have the data for, but is probably, industrial collection is probably 6 maybe to 7%volume growth. Organic growth, year-over-year. So you can kind of back into whatever else you want to back into there Steve. But that's kind of the area that I recall without having my notes in front of me.

Very good. One quick one just on insurance. We've heard some of your brethren out here talk about continued improvements on safety programs and other things that keep [widling] that away. Where are you guys in that program? I know you've been pretty efficient . Are there still areas that you can be more efficient then as we look forward?

I think over the last three years, Steve, we've been focused on that. We had a partnership that we talked about before with Dupont which we have terminated. We think we thought we reached a point that they couldn't take us any further. And the rest was really our responsibility.

But we've seen substantial decreases in frequency which is really the leading indicator to what your insurance cost will look like in the future. We've seen some lessening in severity, but most of it's in frequency. Again, if you talk to experts in the field, they'll tell you that we should eventually start to see less severe accidents occurring. And we would continue to see better insurance performance and lower costs in that particular area. So, I think we've seen a lot of good results to date. I think we've probably got the lion's share of what we can get here. And I think the rest of it comes from a continued focus and a less severity.

Very good. Thank you very much.

Okay Operator, we'll take one more call.

Thank you. And our next questions comes from Kevin Monroe from Thomas Weisel Partners. Sir your line is open.

Thank you. Good morning. Was wondering if you could give us some color on why these urban markets you haven't been able to get price there in the past? Is it the private players or national competitors? Or municipalities? What's kind of in the region for the inability to get price?

You know, Kevin, I'm running out of color.

Okay, I guess a follow up--

At the end--no seriously. Again, the landfills are going to step orientated--are step cost oriented. I don't have to tell any of you who are on the call probably that when you lose $1 of revenue coming out of the landfill, for all practical purposes it all comes off the bottom line,other than depletion which is its own cost. We're all very sensitive to that I think in the industry and have been very hesitant. Because the market I think it was less rationale a number of years and we're still trying to get more rationale.

But I think, as I said earlier, I think the time has come where we're going to step out. Where we have the ability to--where we have discretion over customers, we're going to step out in the second quarter. Whether or not our competitors do or not, I would hope that they would recognize the same cost escalation that we do. But at the end of the day, we're going move out and we will take the risk of the volume loss.

As a follow to that, do you think the cost escalation is tied to the overall improvement in commercial construction you're seeing? Do you think it will trend down as perhaps commercial construction activity trends down?

That's--it's not an area that I have any expertise in, Kevin. I guest we still see the construction market relatively strong. It's hard for us to see out another 6 to 12 months. Because again, before that starts to trend down, it takes that long to go through the cycle. So it's just very difficult to predict that.

Jim, I think another factor is the energy costs. The energy costs are obviously imbedded in the contractors' bids as well as the liner that Jim spoke to. And a lot of the equipment that we use the yellow [inaudible] in there we've seen steady increases in price there.

That's a good point. I mean really our equipment capital and landfills is probably escalating to 7 to 10 [count].

And really what we're talking about here is you've got additional capital outflow for these landfills. We need to recover that increased capital outflow whether it's in caterpillar equipment or construction costs. We need to do it now, not five or ten years from now over the amortization life of the landfill.

Okay at this time I am showing no further questions.

Thank you Operator. I'd like to remind everyone that a recording of this call is available today and tomorrow by calling 203-639-3967. Additionally recording the call will be available at Republic Services website at republicservices.com. Thank you for spending time with us today. And have a good day.

Thank you at this time all the parties may disconnect.