Republic Services Inc (RSG) 2009 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2009 conference call for investors of Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your host this morning is Republic Chairman and CEO Mr. Jim O'Connor. Today's call is being recorded. All participants are in listen-only mode. There will be a question-and-answer session following Republic's summary of quarterly earnings. (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, Julie. And good morning and thank you for joining us. This is Jim O'Connor and I would like to welcome everyone to Republic Services first quarter conference call. Don Slager our President and Chief Operating Officer, and Tod Holmes, our Chief Financial Officer and Ed Lang our Treasurer are joining me as we discuss first quarter performance. I'd like to take a moment to remind everyone that some of the information that we discuss on today's call 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 May 1, 2009. 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.

Although we experienced a very weak economic environment in the first quarter Republic was successful in executing pricing strategy, maintaining labor productivity and expanding EBITDA margins. Financial highlights for the first quarter are as follows. Revenue of $2.1 billion. Net income of $113 million, or $0.30 of earnings per share. Adjusted EPS for integration costs and divestiture charges was $0.37. As reported EBITDA margins of 29%. If results are adjusted for divestiture related and restructuring charges, EBITDA margins were 30.8%. Republic is the industry leader for not only pricing but for margin delivery. Average price increase in the quarter was 3.5%. Most importantly, our disposal pricing in the quarter increased to 4.1%.

Based on our continued focus on pricing we expect our full-year performance for price to be in the range of 4%. Free cash flow of 324 million, or $0.85 per share. Our board also approved a 0.19 per share dividend payable July 15th. I'm also pleased to report on our integration efforts and the financial savings are running -- that the financial savings are running well ahead of plan. Our annual run rate synergies achieved as of March 31 exceed $75 million. As you know, our target for synergies is $150 million run rate by the end of 2010. Although we are not adjusting our synergy guidance at this time, our management team has identified over $170 million in potential savings. And we continue to -- and we will continue to provide quarterly updates on our progress.

To date, the system's integration is 40% complete in the overlap markets. As the IT group completes the integration in individual markets we are able to realize significant operating synergies through route and disposal optimization. We expect to complete the systems integration in the overlap marks on schedule by the end of the third quarter. We continue to close on assets that are required to be divested. All closings have occurred after March 31. Pretax proceeds received to date are $332 million. All proceeds have been used for debt reduction. We expect to close all divestitures by the end of the second quarter. We expect full year debt reduction to exceed $550 million. Republic is again committed to continuing to prove its credit profile. We continue to be on track for migrating to a common general ledger system by the end of the third quarter. There have been no system related problems during the integration, and our IT group continues to execute on a well structured integration plan.

Now, before I turn the call over to Tod Holmes for our quarterly financial review, I would like Don Slager, our President and Chief Operating Officer to make a few comments regarding our operational performance in the first quarter. Don?

Thanks, Jim, and good morning everyone. During the first quarter Republic's field management team maintained productivity and our effective pricing program. We have efficiently reduced our cost structure to adjust to the volume changes in our business while delivering quality service to our customers and improving safety performance. We achieved significant improvement and EBITDA margins of 320 basis points excluding restructuring charges. This high level of financial performance is being achieved amidst the additional work load of integrating our businesses and realizing synergies ahead of schedule. We continue to review our capital spending plans to ensure we are effectively employing our balance sheet and realizing an appropriate return on capital to our shareholders. I'd like to thank all of our employees for their dedication and focus. Their commitment and teamwork has made us, as Jim said, the price and margin leader in the sector. Now I will turn the call over to Tod.

Thanks, Don. As Jim indicated, first quarter 2009 revenues reported rose 164%, to $2.1 billion, from 779 million last year. Obviously this increase of $1.2 billion relates to the merger with Allied. Since we're measuring performance of the operations on a combined company basis, the remainder of my comments assumes the Companies merged on January 1, 2008. The prior year combined company financial data referenced in my comments can also be found on our website. We've also included on our website additional detail on costs as a percentage of revenue that mirrors the historical detailed presentation from Allied.

On a combined company basis, there's a decline in total internal growth of about 8.6%, consisting of positive revenue growth, core revenue growth of 3.5%. We continue to see core price improvements in all lines of business. Pricing is led by the disposal line of business at 4.1% and also the combined commercial and residential collection business that annuity revenue had a price increase of about 3.9%. Special waste and roll-off pricing was positive. This is our event type of sale. But it was less than other lines of business in the 2.5 to 3% range due to a couple of large event driven jobs and the temporary construction activity. Commodity revenue decreased 2.9%.

This is both price and volume. Commodity prices decreased approximately 56% to an average of $62 a ton from $141 a ton in the prior year. The average revenue per ton -- or price per in to March was slightly higher than the first quarter average at $67 per ton. So we're seeing a slightly stronger commodity market today. Additionally, commodity volumes sold sold at our MRF decreased by approximately 17% to 440,000 tons in the quarter. Our fuel recovery fee decreased 1.2%. The reduction in fuel recovery fees relates to a decrease in related fuel costs. The average price per gallon of diesel fell to $2.19 in the first quarter of 2009 from $3.52 in the first quarter 2008, or approximately 28% lower. -- 38%, excuse me. Volumes were down 8%. Now, after adjusting for one less workday in 2009, since 2008 was a leap year, volume decline was really 7.5%. Residential volumes were essential flat with the prior year. Commercial volumes experienced a he low single-digit decline. Volume loss was the most significant in the roll-off and landfill lines of business, both of which experienced mid teen year-over-year volume declines. Both are a reflection of the weak economy. The decline in volumes was partially offset by incremental revenues of about 35 basis points, coming from hurricane related cleanups in the Houston area for Hurricane Ike.

Let me talk to our margins. Republic's first quarter year-over-year EBITDA margins again similar to internal growth I'm going to talk about this, is at the -- is if the companies had merged on January 1st of 2008. First quarter 2009 EBITDA margin was 29% compared to a combined margin of 26.8% in the prior year. There were divestiture charges in the quarter of 4.9 million. Restructuring charges of 31.3 million, and asset impairments of 18.5 million. Those first two were 2009. The 18.5 million asset impairment related to an Allied landfill in the first quarter of 2008. So if these items were excluded, the adjusted EBITDA margin was 30.8% in 2009, compared to 27.6% in the prior year. An improvement of 320 basis points.

Of this improvement, 240 basis points relates to three key drivers in our business that Don and Jim spoke to. Leverage of our strong pricing, offset by modest cost increases. Number two, our ability to reduce costs and maintain productivity in all lines of business, in spite of declining volumes in some. And three, the realization of synergy related cost reductions. Secondly, we had 210 basis points of this total improvement relating to the impact of net fuel cost declines, and third, a decrease of 130 basis points which relates to the impact of net commodity price declines.

Now let me briefly comment on some of the significant changes and costs as a percentage of revenue. And again, I would suggest people go to the website and look at the details. First, fuel. Fuel expense improved 260 basis points due primarily to a 38% decrease in the cost of diesel. The average price per gallon, as I said earlier, was $2.19 in the first quarter of '09 compared to $3.52 in the first quarter of '08. Currently, fuel prices are approximately $2.20 a gallon, so that's a fairly constant. Partially offsetting decrease in fuel cost was decrease in related fuel recovery fee revenue, and this resulted in the net improvement in EBITDA margins of approximately 210 basis points, as I mentioned earlier. Second, the cost of goods sold. The 90 basis point improvement in EBITDA margin relates to reductions in rebates to customers for volumes delivered to our MRF. Cost of goods sold at our MRF decreased approximately 67% to an average of $16 per ton from $49 per ton in the prior year. Despite this decrease in costs, commodity revenues declined more, and that outweighed the benefit, resulting in an unfavorable 130-basis-point decrease in EBITDA margin associated with commodities.

Third cost category is disposal. There's a 40-basis-point improvement, primarily relating to decreased industrial volumes and reduction in container waste in the commercial and residential lines of business.

Fourth, transportation and subcontract expenses. There's 110-basis-point improvement in margin from decreased subcontracted collection volumes and also lower transportation expense at transfer stations. This reduction in cost at transfer station results from volume declines, lower fuel surcharges, and synergy related cost reduction these we're beginning to see from the redirection of our waste streams as part of the integration process.

The next cost category is labor, 90-basis-point decrease in EBITDA margin arises primarily from the post collection line of business due to a required minimum level of staffing and a sharp decline in commodity revenues. This business, from a cost standpoint, we can't -- post collection we can't flex quite as much as the collection. It's important to note that productivity was maintained in the collection lines of business despite declines in volumes, and labor cost as a percentage of revenue in the collection business were flat with the prior year. Finally, SG&A. SG&A as a percentage of revenue for first quarter of 2009 was 10.6% or 60 basis points higher than the first quarter of 2008.

It's important to note that this increase was primarily due to a $12.8 million adjustment recorded by Allied in the first quarter of 2008, related to the favorable resolution of a legal matter. Excluding this adjustment, SG&A as a percentage of revenue was relatively consistent between the periods. Furthermore, SG&A in the current period includes an incremental 60 basis points of expense related to accruing synergy related bonus and expense and transition costs associated with the merger. If you take that into consideration, we would expect our normal run rate SG&A as a percentage of revenue to be approximately 10%.

These above items make up the majority of the 320-basis-point improvement in EBITDA margin. And I mention on a dollar basis that all ten cost categories that you see in our -- at our website, we actually after reduction in dollar expenditures in every cost category.

Depreciation, amortization, and accretion increased by 200 basis points. Of this 200 basis point increase, about 140 basis points relates to increased expenses associated with purchase accounting valuations of Allied's assets and liabilities completed in connection with the merger. And again, if will you recall what we said back in the end of February, where as normally we would expect DD&A to be about 10% of revenue, on a go forward basis, we're looking at probably about 11.5% of revenue for DD&A due to purchase accounting noise. So, therefore, the cash flows are stronger than the book earnings.

The remaining 60 basis points of variants in DD&A relates to lower revenues relative to the fixed costs and certainly commodity pricing is a factor there. The 320 basis point improvement in EBITDA margin together with the 200 basis point increase in DD&A results in operating income margin expansion of 120 basis points. Were it not for the noncash DD&A expenses resulting from the purchase accounting, operating margins, excluding restructuring charges and asset impairment would have been 20.3% versus 17.7% in the prior year. An improvement of 260 basis points.

Now let me talk a little bit about our interest expense. Noncash interest expense is significant factor for the Company going forward due to this purchase accounting noise. The Company recorded noncash interest expense of $38 million in the first quarter 2009 arising primarily from the amortization of Allied debt that was recorded as of December 5, at a significant discount. The credit markets as of the date of the merger were illiquid, hence despite an upgrade to investment grade for Allied debt that traded at a significant discount. This amortization will continue in future periods until the related debt is repaid.

Next I will talk about free cash flow. Free cash flow is expected to be approximately 130% of net income for the full year 2009. Free cash flow exceeds net income due to the noncash amortization and noncash interest expense arising from the merger, as I just discussed. Free cash flow for the first quarter was $324 million, which if you looked at it on the face, is unusually high. However, there are a couple of normalizing items that we should talk to. Again, cash provided by operating activities was $512 million less purchases of property and equipment of $193 million, and that was what was actually paid for equipment in the first quarter. Plus, proceeds from the sale of property or retired equipment was 5 million, and that equals the 324 million.

Now, if you want to try to normalize that 324 million, free cash flow benefited from the following items in the first quarter. The change in accounts receivable of approximately 68 million. There's obviously some seasonality in the first quarter there. We have a one-day improvement, and as revenues come down, we tend to collect a little bit of that cash, bring it back in, so there's a benefit arising from that.

The second point is timing of tax payments. While we normally would expect to pay about $80 million, we made some small state tax payments but there was not what we would have estimated to be approximately $75 million of federal tax payment in the first quarter. That will occur later in the year.

And next is the timing of capital expenditures. Again, our guidance was net $845 million, so there's another $22 million to normalize the timing of capital expenditures. Given the above items, that are more timing in nature, we remain comfortable with our guidance range of 550 million for the full year, but if you were to do the reconciliation from the 324 for those three items that I just mentioned, you would find that we're probably in a range of 550 to 600 million.

Now let me speak briefly about our balance sheet. At March 31, our account receivable balance was 878 million, and as I mentioned earlier, our days sales outstanding sequentially improved from 49 -- excuse me, 40 to 39 days. On a net of deferred revenue basis, it's 23 days. Again, a one day improvement. Also, our net debt excluding discounts at March 31, was approximately $8 billion. More importantly, we have approximately $800 million of excess credit availability under our bank facility as of today. The Company has maintained its investment grade rating, does not have any significant maturities due in 2009. We have $99 million coming due in May, and that will be paid out of the free cash flow of the business. At March 31, we had 378.8 million shares outstanding. Republic now also has about 18.5 million options outstanding, of which 14.5 million are exercisable at an average strike price of approximately $23.50.

In summary, it's clear that the financial results reflect a solid operating performance for our business, which again is driven by strong core pricing, our ability to maintain and maybe modestly improve productivity by scaling the business to declining volumes and certain components of our revenue stream, and also the excellent performance our organization, both here at the corporate office and the field, have delivered in the realization of synergies. Now I will turn the call back to Jim.

Thanks, Tod. As is our standard policy, we will provide a detailed update on financial guidance on our second quarter call in July. However, we are very comfortable with our previous guidance of full-year reported earnings per share of $1.10 to $1.15. Merger related costs associated with the merger, $0.20 per share. Adjusted EPS of $1.70 to $1.75. Free cash flow of $550 million after merger related costs, and a 2008 related tax payment, and as Don mentioned, we are reviewing currently our capital spending plans for further reductions. Our board is committed to the current dividend payout which is approximately 50% of free cash flow from operations, and I would like to thank the 33,000 employees of Republic Services for their dedication to customer service and their financial discipline. We're in a great position to provide strong returns to our shareholders due to the hard work of our employees. Operator now we'll take questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). The first question is from David Feinberg from Goldman Sachs.

Good morning.

Good morning, David. How are you?

Good, thank you. First question is with regard to pricing. You posted 3.5% base price increase in the quarter but you reiterated guidance of 4%. Seems to imply there's going to be an acceleration of pricing throughout the year. Am I reading that right, or does that have something to do with the special waste weighing on the quarter?

Obviously special waste did have some effect on the quarter, but again, I think the pricing discipline within Republic Services, the tools that we developed and our discussions Don has had with the field organization we feel very confident that we'll, at year end, be at that 4% guidance. So we've got some opportunities, and we're continuing to look at disposal pricing as we move through the year.

Let me -- just one point of clarification. Perhaps I misunderstood. You intend to be at 4% by the fourth quarter or 4% for the full year?

Full year guidance will be achieved at 4%.

Great. And then my follow-up question relates to volumes. Perhaps you can give us some insight in terms of how the monthly trend has shaped up by line of business.

Well, we have seen -- obvious we've seen overall for the business an 8% decline is -- and we also reported that as guidance as we went into the first quarter, in our fourth quarter call. We continue to he see weakness in the industrial collection business, and the related associated volumes with that at our disposal and transfer facilities. Our commercial small container business has started to see some weakness. We've seen service decreases entering into the marketplace, and we've reacted accordingly in adjusting the productivity and operations of the business. So all lines of business are seeing some negativity, but again, the lion's share of it still resides in our temporary construction businesses, both residential, which we're thinking is bottoming out and we'll see that maybe in the fourth quarter performance as it relates to volume, but we're still seeing a weakening of the commercial real-estate construction market, and in essence, that's starting to have some bleed-over into what we would have historically related as our annuity streams in our commercial and residential business. While the declines are relatively small in those two lines of business, we are seeing some weakness there.

But no indication sequentially month over month that things were getting better throughout the quarter?

Well, I think sequentially we're seeing about flat. We're not seeing really much change in the environment as it relates to any of our lines of business.

Great, I'll get back in the queue. Thank you.

The next question is from Hamzah Mazari Credit Suisse.

Thank you.

Good morning.

Good morning. Could you comment a little on the volumes that you're pulling out of the divested assets, and how much of that is going to landfills that you have in those existing markets, and how much is committed to stay at those divested sites and what your outlook is for your internalization rate.

First of all, the internalization rate is about 69%, and that may be up ever so slightly, but fairly constant. We don't have specific details, and we wouldn't give out specific details on individual assets, or even the group of divested assets, but normally if you look at those assets in the industry, across the industry, about half the volumes going into disposal site come in on a company's owned vehicles. So obviously landfills or transfer stations where we actually are collecting the volumes, that portion would then be diverted to one of our own sites.

Got it. And my follow-up question relates to the cost side. Looks like you guys are doing a pretty good job on the cost side versus expectations. Could you give us a little more color or perspective on how much of the benefit that we're seeing on your cost side is coming from synergies versus you flexing down on costs? And I know you got 75 million of synergies as of the end of the quarter, but where are we most likely to see that? Are we most likely to see that in which line item? SG&A, operating expenses somehow should we be thinking about that?

It's in both. Obviously we have the closure of the Fort Lauderdale Corporate office, so there's a synergy benefit coming out of SG&A there, and I would say that leads the synergy, then in the field organization, there's some SG&A synergies, but the operating synergies are to some extent dependent upon system conversions. When we look at the actual benefit in the quarter, the dollars that we benefited from within the quarter, it was about $15 million of synergy. So the impact for synergies in the first quarter is not huge. It's something that's ramping up.

And let me ask Don to give you guys on the call a little bit of color about how well the operations of the business have adjusted to the economic impact to volume. Don, you want to give a little color?

Sure, thanks, Jim. Keep in mind, as we said, we maintain productivity during the quarter. In fact, in a couple of lines of business we actually improved productivity. We measure units per hour as an example in our front loader or commercial line of business. We flexed our costs almost exactly against the change in revenues. We've parked hundreds of trucks as a result of the volume loss. We've unfortunately had to send people home as a result of that. But our team has been very efficient and very real time in add adjusting to those changes. So in the past, we've actually done a good job, I think, over the last year as the volume has decreased, flexing the commercial or the roll-off side of the business, and that's continued. Now we're seeing the lag effect in our commercial line of business. We've flexed that as well. And up until now, we've told you that we've add difficult time changing our cost structure in the disposal line of business because there's so much fixed cost, but we've seen enough volume drop in the landfill in the post collection side that we've actually been able to make some changes there as well.

So we measure productivity against the tons we take in on an hourly basis, and accordingly, we adjust the number of pieces of equipment we run at the landfill. We reduce personnel staffing levels. We've actually gone to the next level of adjusting hours of operation, where we're opening the gate later, closing the gate earlier. In some markets we're actually closing our landfills on Saturday. So we have three or four landfills, Detroit would be an example, where we're only going to remain one landfill open on the weekend. So we're flexing those costs down as the volume changes, and frankly, as the volume comes back, some of those changes may be permanent. Those hours of operation changes may become permanent.

So we've become pretty good cost managers through this process, and if volume comes back, we think we'll get the benefit of that as well as the benefit of the volume, because we've been able to maintain the prices. We've parked hundreds of trucks. We've made the staffing adjustments. Our field has reacted very well to this, and, again, it show up in the margin. We're very proud of the productivity numbers.

The operations of the business have adjusted very well. The strength of this organization, while there will be some job loss due to the volume, the philosophy that the organization has adopted that every one is contributing and looking for operational efficiencies, so that we can save jobs. So this is really about saving jobs, not eliminating jobs.

Thanks. That's very helpful. Appreciate it.

The next question is from Jonathan Ellis from Merrill Lynch.

Thanks, and good morning, guys.

Good morning, Jonathan.

I wanted to talk a little bit about capital structure. You talked about your debt paydown plans for this year. In the past you have talk about not really considering share repurchase opportunities until, I think, net debt to EBITDA got below two times, or at least approached two times. Can you update us on your thinking? Have you perhaps revisited the potential for share repurchase programs a bit in advance of that two times threshold?

Jonathan, I'm going to turn that over and let Ed Lang, our Vice President and Treasurer, respond.

Sure. Obviously, the debt reduction plans of the Company are really geared on -- our conversation with the rating agencies and having further improvement in our credit status. Obviously, Republic, pre merger, had debt to EBITDA coverage of less than two, and what we've stated is we want to move gradually over time back to the two to one level. And I think as we start to approach those type of levels, our board of directors will discuss cash flow utilization over time, and obviously I think we would consider reintroducing the share repurchase program. The fact is today our debt to EBITDA is approximately three to one, so really for the next 12 or 18 months we still have to be focused on that commitment to debt reduction to get the debt to EBITDA back into the low to mid 2's before we could initiate those type of conversations. But it is something that Jim does bring the board through on a regular basis as far as our cash flow utilization strategies and share repurchase is part of that discussion.

Thank you, Ed.

Thanks. And just on pricing, can you talk a little bit about any opportunities that you may have recently or plan to over the next two quarters to implement a higher environmental fee, and if so, if you can help us quantify what the potential impact of that might be for your core pricing?

We're going to continue to evaluate all the opportunities we have available, and we're continuing to evaluate our environmental fee. Whether or not we yet have a commitment to move forward on an increase environmental fee, those are things we're still analyzing. But again, I think in general we're still on track to achieve our full year guidance of 4% price.

Okay, great, thanks, guys.

Thank you, Jonathan.

The next question is from Bill Fisher from Raymond James.

Good morning.

Good morning, Bill.

Just on the divestitures, I think you originally targeted about 1.5% of revenue, which works out to 140 million. If you think about, since obviously it starts in Q2, should we think about it like 35 to 40 a quarter, or how does that flow out of there?

A lot of it actually flows out here in early Q2.

A lot of the closings were done in early April.

Yes, the first week of April. I mean, I think you can look at some of the press releases from other public companies to see that. So there will be some that should close throughout the second quarter, and if there's a permit that needs to be transferred, it might go into the beginning of the third quarter. But I would say the lion's share of it is behind us, maybe about two-thirds.

And I guess my point was that 140 million revenue will just be -- if that works out to say, 35, 40 a quarter. You will just see that each quarter. So the balance of the year?

Right.

And just to follow up on the free cash flow, Tod, the 550 to 600, you noted earlier, I think it's 70 million or so, the '08 tax payments in '09, just to be clear, was that paid Q1, or is that going to be more of a Q2 event?

That was paid in Q1. That 75 million that I spoke to is -- we would have expected to have a tax payment in the first quarter of 80 million, but obviously the estimated tax that the corporation make don't necessarily all have to occur in the quarter in which you earn the money. So we have a slight lag effect for federal taxes associated strictly with 2009 business activity, and that's 75 million from the first quarter that would flow into probably the third quarter. I think it's August, or July.

The next question is from Michael Hoffman from WSI.

Hey, guys, congratulations. Terrific numbers.

Thanks.

I guess the focus I would like to -- on two sides, free cash flow, then pricing and sort of productivity. One of the messages I'm clearly hearing through the whole earnings he season, and you all seem to repeat it, the higher you can drive productivity, good times or bad times, the greater probability you can sustain pricing regardless, and that core focus on productivity seems to also be being embraced by the private sector as well, because you are hearing lots of anecdotes of equipment being parked. Maintain high productivity, and you'll be more profitable, and by the way, you can get price. That philosophically what we're hearing from you all as well, and you're producing results from it and seeing evidence that the market participants are doing the same?

I would say, Michael that the productivity is directly linked to the margins. So as a result of strong productivity, we're able to maintain good operating margins in our collection business and offset some of the decline from commodities. From a pricing standpoint, it's a slightly different issue. It really goes to the discipline within the Company to focus on getting better returns on assets. Now, obvious, they're both linked, productivity and price are necessary to get the good margins and the good returns on assets.

Michael, I think what we see, like most businesses, when the going gets tough, the tough get going, and our field organization has been able to on focus on productivity, and because of the volume declines, has really stepped up and really started to cover every opportunity on the expense side for savings other than jobs. And I think what we learn about our business in these times, and I think most businesses do that we can always do better. So we're coming out strong, as Don said, the productivity the field is delivering on now with the volume reductions and flexing the business back, they're doing extremely well, and I think we're learning that we've got a lot more opportunity out there.

Okay. And then on the free cash flow, the guidance unadjusted for the acquisition stuff, February was 550. Tod, you've alluded to a 550 to 600 without changing your guidance. Tod mentioned 845 is still capital spending. I can't remember whether it was Jim or Don suggested CapEx might come down. So the 50 million is because of the successes of cost savings and productivity and synergies, and there could be more if you take capital spending down?

That's correct. I mean, we're currently reviewing capital spending. I guess what we can say is that it will be less than the 845. We're just right now still trying to finalize our plans there, and we'll give clearer guidance in the second quarter.

And the change in that is across all things, or mostly disposal because of volumes, less sell development?

Across all areas of our business. As the volumes decline we're adjusting capital and reviewing capital spends in all those areas.

Again, as is Republic's practice in the past, we will take a look at all aspect of our guidance midyear with the board, and then come back and update that guidance. But right now, it appears as if we're trending at or slightly above our range that we gave.

Cash flow guidance.

Right.

The next question is from Scott Levine from JPMorgan.

Good morning, Guys.

Good morning, Scott.

On your pricing, I believe the franchise market resets are calculated based on calendar '08 CPIs. Could you remind us what percentage of your business that would be roughly and what the delta would be on this year's reset that kicks in toward the middle of the year most markets versus last year's? Is that driving some of your expectation or the thought process that pricing could accelerate throughout the year?

Well, let's start with the component of our revenue base that index price, about 27%. The CPI currently at the end of March is going to annualize out in 2009 at about 2%. At least, it looks like that today. But when you look at what the impact is during the 2009 term, it's really based on the index that was pegged either in July of 2008 or October of 2008. So we're going to be looking at price increases from our municipal work, our index price work in the area of 3 to 4%. So we don't see much change there. As we go into 2010, again, it's going to peg off of that 2%, assuming that holds, but while that pricing will put some pressure on delivering price in the area of 3.5 to 4%, we believe there's enough flex in the discretionary revenue to achieve the balance and to make up that balance. So that should tell you that margin expansion will be much greater in 2010 if costs are declining and prices are still holding that in range of 3.5 to 4%.

Okay. In addition, turning to synergies, you mentioned before several times that you have a parking lot of opportunities. You would look at pursuing once you kind of make sufficient head way through your formal or more formal synergy targets. Do you have any additional thoughts? You moved up the timetable a little bit from the last call for 150 million by the end of 2010. Any thoughts on how far along you need to get with regard to this process before dipping into that bucket, and updates us on some ideas for cost saves or synergy opportunities within that park lot.

Some of these we're executing today in our -- in the national accounts arena as we relocate from Houston to Phoenix. We're seeing additional savings there that we had identified early on that we didn't think we could get in to light of the commitment for IT to integrate the overall business, but we are finding some additional times to work on sophisticating the national account process. So that should help us a little bit. But I think probably as we get into the first quarter of 2010, we'll start to move into the parking lot, because we're ahead of schedule, and on almost all fronts that we've identified for synergies, and so I'd say the parking lot, start moving cars out of the parking lot, Scott, in the first quarter 2010.

The next question is from Cory Greendale from First Analysis.

Good morning.

Good morning, Cory.

You touched on the free cash flow guidance. I know you said will you update the guidance next quarter, but I will ask anyway. Historically, just seasonally, Q1 is less than 25% of your full-year earnings, and if you just annualize the numbers it looks like you're running nicely ahead of the guidance. What would have to happen by the end of the year for you to be within the guidance range rather than above?

We'd rather wait to the next quarter. First quarter there's always a lot of noise. Typically on the capital spend side you see the landfill spend being very low in the first quarter just due to the construction cycle. We've got obviously a benefit from working capital on the receivable side due to the step-down in the volumes. Now, that won't reoccur. I think another aspect is just divestitures and that impact on it. So there's so much -- and the taxes, I mentioned earlier. There's so much noise in the first quarter, while we don't see any downside, I'm reluctant to say we want to get out ahead of where we are right now. On the current guidance.

Sorry, I meant more of the EPS, but would the same answer apply?

Yes, divestitures are a factor on the EPS side. In the first quarter, we had -- again, the headline number was $0. 30, but if you exclude the cost to achieve synergies, and we had a little bit of one line item on costs associated with divestitures of around 4 million, if you exclude all of that, our earnings for the quarter was $0.37, which is kind of a run rate earnings, but again, there's about $0.03 in that $0.37 which is associated with Hurricane Ike and also the divested business.

Okay. Second question is is on the volumes, would you attribute 100% of the volume decline to the economy, or do you think there's any share loss either because you are leading on price or because of local issues around integration or anything like that?

The majority of the loss is uncontrollable losses. They're not controllable losses. So the related to the economy. And so we continue to look at defection rates and retention rates, and they appear to be consistent with what we've seen in past years, so we really don't see -- we see the market to be relatively stable from a competitive perspective.

Thank you.

I guess what I would say as a follow-up to Tod's points, while we don't give any guidance, we feel really good about this quarter. The organization is really out performed my expectations and Don's expectations. So we're looking forward to a great year. So, operator with that, I'd like to thank everyone on the call, and in summary, as my last comments, as I just said, I'm very pleased with our first quarter results. We continue to be focused on achieving appropriate returns on capital through improved pricing, maintaining labor productivity through route and disposal optimization, continue to meat and exceed expectations for realized merger synergies, generating higher levels of free cash flow performance, and reinvesting in our people and our business platform to ensure high quality customer service in a safe work environment. So I'd like to remind everyone that the recording of this call is available through May 5, by calling 203-369-0653. A recording of this call will be available on Republic's website at www.republicservices.com. In addition, all of our SEC filings and discussion of business activities are available on the website. And again, I would like to thank all of you for spending time with us today. Have a great day.

Ladies and gentlemen, this concludes the Republic Services conference call for today. Thank you for participating. You may now disconnect.