Republic Services Inc (RSG) 2009 Q2 法說會逐字稿

Good morning, welcome to the second quarter 2009 conference call for investors in 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 and all participants are in a 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, and thank you. Good morning, and thank you to all of you for joining us today. This is Jim O'Connor. I would like to welcome everyone to Republic Services second quarter conference call. Don Slater our President and Chief Operating Officer, Tod Holmes our Chief Financial Officer; and Ed Lang our Treasurer are joining me as we discuss our second quarter performance.

I would 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 maybe 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 recording of this conference call, you should be sensitive to the date of the original call, which is July 30, 2009. 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 am pleased to report we will be raising our 2009 financial guidance, as a result of our pricing discipline and our ability to adjust our cost structure. In addition, we are significantly ahead of plan in achieving merger synergies. Financial highlights for the second quarter are revenue of $2.1 billion. Net income of $226 million or $0.59 of earnings per share. Our adjusted EPS was $0.39. The adjustment is primarily related to the divestiture gains. Adjusted EBITDA margins of 30.7%. This outstanding performance highlights the ability of our field organization to maintain pricing discipline, and implement cost controls, while working through the integration process. Average price in the quarter was 3.4%. We continue to use our return on investment pricing tools, to be sure all business activity meets our requirements. Volumes declined by 10.3% in the quarter due to weak d economic conditions particularly in the construction business. Year-to-date free-cash flow of $342 million or $0.90 per share. Free cash flow is the best measurement of the quality of earnings of our business. Our Board has approved a $0.19 per share dividend payable October 15, 2009.

Now I want to provide some information on our integration and divestiture efforts. Through the second quarter of 2009 our integration schedule and subsequent financial savings are running well ahead of plan. Our annual run-rate synergies achieved as of June 30, are approximately $115 million. We have already exceeded our 2009 run-rate goal, of $100 million. Based on our successful integration process we expect to achieve $125 million of run-rate synergies by the end of 2009. Excuse me. In addition, we are raising our guidance for total synergies to 165, to $175 million, by the end of 2010.

Today, the systems integration has been extremely successful. We have successfully converted over 80% of our overlap markets including three of our largest overlap markets, Atlanta, Los Angeles, and Houston. Our IT group has completed the integration in individual markets and we're table to realize significant operating synergies through route and disposal optimization. We expect to complete the integration process in overlap markets by the end of the third quarter.

We continue to be on track with migrating to a common general ledger system by the end of the third quarter. Our IT group continues to execute as well as our financial group, on integrating this plan. We have closed or signed contracts on all assets that are required to be twisted. We expect total pre-tax proceeds to exceed $475 million and we have already received $424 million, from divestitures. The open transaction should close within the next 30 days. All divestiture proceeds are being used for debt reduction. We expect total debt reduction for 2009 to be approximately $600 million. Earlier this month, Standard & Poors recognized the continued improvement in our investment grade rating by raising our outlook. Our current rating is BBB stable and we're committed to future improvements in our credit profile. Now I would like to turn the call over to Tod Holmes our Chief Financial Officer to give you a -- the financial outlook for the quarter.

Thanks, Jim. As Jim indicated second quarter revenue for 2009, as reported rose almost 150% to $2.1 billion from $828 million last year. Again, this increase of about $1.25 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 assume that the Company's merged as of January first, 2008. The prior year combined Company financial data, referenced in my comments can also be found on our website. Now on a combined Company basis, theres with a decline in total internal growth of about 12.5%. And I will give you the components. First, core price growth of 3.4%. We continue to see core pricing improvements in all lines of business, including collection, at about 3.9%, and landfill pricing of about 3%. Within the collection business, industrial pricing of 3.2% was less than other lines of business. And is made up approximately of 70% permanent work and 30% temporary work. Price increase, on temporary work, was less than the industrial average. In fact, it was fairly flat.

Now let me talk a little bit about our internal growth methodology. Beginning Q1, 2009, Republic embraced the methodology used by Allied in prior years. Under this approach, price increases are calculated using the average price per unit method. Changes in commodity revenues and fuel recovery fees are calculated separately, and are not included in our reported core price. However, when expressing price increases as a percentage, price dollars are divided by total prior period revenue which includes commodity revenues in fuel and recovery fees. This has the impact of lowering the calculated effect of price increase percentage to our existing customer base.

Because we believe consistency is report -- excuse me, consistency is important we're continuing to report price under this methodology. However, if fuel recovery fees and commodity revenues were excluded from the denominator, the revenue base, our reported price increase would be approximately 30 to 40 basis points higher. Again, price volume calculations -- there is a little bit of a -- a variation, maybe, in the methodology that is used and our approach is to be very clear and very consistent, in our reporting.

Commodity revenue decrease, was about 2.5%. Prices decreased by 45%, to an average price of $0.72 per ton in the current year. From $132 per ton in the prior year second quarter. Offsetting this improvement in price is a relatively weaker volumes than anticipated. A reflection of the weaker economy. Q2 MRF commodity volumes of 470,000-tons reflects an 11% decrease from the prior year. Q2 average price increased $9 per ton, from $63 per ton average, in Q1, 2009. With prices slightly higher in June, than the average for the quarter. Fuel recovery fee, decrease of 3.1%. The reduction in fuel recovery fees relates to a decrease in related fuel costs. The average price per gallon of diesel fuel fell, to $2.33 in the second quarter of '09 from $4.40 a gallon in the second quarter of 2008 or approximately 47%. With current fuel prices now up averaging about $2.53 per gallon.

Our volumes were down about 10.3% for the quarter. Compared to the prior year. Residential and commercial volumes experienced low-to-mid single digit declines. Volume loss was most significant in the industrial and related landfall lines of business which experienced high teen year over year volume declines. Both a reflection of the weak economy.

In 2009, revenues are much flatter quarter-to-quarter. As we're not seeing a normal increase in seasonal revenues. In prior years, Q2 revenues increased 5 to 6% from Q1 to Q2. Due to the construction and business activity picked up -- pick-up from warmer weather, particularly in the northern climates. In 2009, same store sequential revenue increased less than 2%. Looking forward, to Q3, we expect similar volumes as Q2. Again, there is always a -- typically there is a step up, more modest from the second to third quarter. So again, we expect similar volumes in Q3 as Q2, therefore, year-over-year volume loss should be about the same.

In Q4, we expect year-over-year volume declines to lessen, as a sharp volume loss in Q4, 2008, begins to anniversary out. Again, many of you will remember that that is when we saw the housing, construction industry really drop off.

Second quarter year-over-year margins, similar to internal growth, I will discuss the second year -- second quarter year-over-year change in EBITDA margin, as if the Company had merged on January 1, 2008. And again, these components of costs are on our website. Second quarter, 2009, EBITDA margin, excluding divestiture gains of $150 million, excluding restructuring costs of $12.3 million and excluding costs to achieve synergies of $10.1 million which is in SG&A, was 30.7%, compared to a combined margin of 26.7% in the prior year. This is an improvement of 400 basis points. I will now briefly comment on the significant changes in these cost components, as a percentage of revenue. And again they are on our website.

First, fuel. Fuel expense improved 340 basis points due to the 47% decrease in cost of diesel as I mentioned earlier. Partially offsetting the decrease in fuel costs was the decrease in related fuel recovery fee revenue, resulting in a net improvement in EBITDA margin of about 180 basis points. Second, labor. The 140 basis point decrease in EBITDA margin primarily relates to the post collection line of business, due to a required minimum level of staffing, and a sharp decline, also, in commodity revenues. Same store staffing revenues, staffing levels excuse me have been reduced by over 7% since the prior year. Allowing us to maintain collection productivity levels. Third, transportation and sub contract expenses. We had 160 basis point improvement in margin, resulting from synergy-related cost reductions, associated with redirecting waste streams to a more efficient disposal network. Internalizing national accounts collection work that was historically sub contracted. Volume declines at -- fourth, lower fuel surcharges. Cost of goods sold, the hot -- the 70 basis point improvement in EBITDA margin relates to reductions in rebates to customers for volumes delivered to our MRF.

Costs of sole for our MRFs decreased approximately 57% to an average $20 per ton from $47 in the prior year. Despite this decrease in cost, commodity revenue declines more than outweighed the benefit, resulting in a net unfavorable, 100 basis point decrease in EBITDA margin. A fifth cost category, landfill operating cost, 200 basis point improvement primarily relates to $52 million of environmental charges recorded in the prior year. These prior year amounts related to costs to remediate environmental conditions at the Company's countywide and Sunrise landfills and it was partially offset by the favorable resolution of an environmental obligation at an Allied closed site, the prior year.

Sixth is risk management. Of the 60 basis point increase in cost, 30 basis points relates to favorable adjustments to retain loss reserves primarily recorded in the prior year. We have got a -- an excellent performance from our safety folks and operations folks. We continue to see improvements from both frequency and a severity standpoint. The remainder of this variance relates to the impact of relatively fixed insurance premiums on lower seasonal revenues.

Next is our other expenses. There is a 40 basis point increase in cost that includes facility operating expenses, and other costs that are relatively fixed in nature. Despite decreasing in absolute dollars from the prior year, these costs increased due to the lower revenue base. Finally, SG&A, we have got a 90 basis point increase, which includes $10.1 million, or 50 basis points of cost to achieve synergies. Excluding these costs, SG&A dollars actually decreased $24.3 million compared to the prior year. And this improvement reflects both synergy-related and volume-related adjustments.

SG&A as a percentage of revenue excluding cost to achieve synergies was 9.9%. The 40 basis point increase in costs is primarily due to the lower revenue base. To bring it all together, the 400 basis points of EBITDA margin expansion can be summarized as follows--Net fuel, positive 180 basis points. Net commodity, negative 100 basis points. Nonreoccurring items recorded in the prior year, positive 200 basis points. Impact of divestitures, negative 30 basis points. Realization of synergies, positive 120 basis points. And pricing improvements, partially offset by fixed costs and lower volumes, was a net positive, 30 basis points.

Finally, let me talk about depreciation, amortization, and accretion. This increased year-over-year 170 basis points. Of this 170 basis point increase, 130 basis points relates to increased noncash expenses, associated with purchase counting valuation all Allied assets and liabilities completed in connection with the merger.. The remaining 40 basis point variant relates to the fixed cost relative to lower revenues.

Republic had some noncash interest expense, again, this is a function of the purchase accounting with the acquisition of $36 million in the second quarter of 2009. The Allied debt you will recall on December 5, was recorded at a significant discount due to the credit markets. Which were illiquid at that time. Hence despite an upgrade to investment grade for the Allied debt, it was at a discount at the time of the merger. This amortization will continue in future periods, until the related and debt is repaid.

Let me talk briefly about our taxes and our tax rate. Jim will explain revised 2009 guidance in a few minutes. But I want to clarify our expectations for the 2009 effective tax rate. In the second quarter, we realized favorable resolution, on some old Allied Waste state tax issues. As a result, our Q2 tax rate is -- excluding divestitures was about 40%. This provided a one time benefit in the second quarter earnings of about $0.02. We expect the tax rate to be about 43.5%. For the second half of 2009. Therefore, we expect our full-year 2009 tax rate, excluding gains on divestitures, to be about 42.5%.

Next let me talk about free cash flow. Free cash flow trends vary from quarter-to-quarter due the timing of certain payments such as tax cashes and capital expenditures. On a year-to-date basis free cash flow was $342 million which consisted of $681 million cash from operating activities, less purchases of property, and equipment, paid in cash, of $355 million, plus, the proceeds from the sale of property, of $16 million. So that's free cash flow of $342 million. Year to date free cash flow excluding merger-related payments net of tax was $388 million.

Now turning to the balance sheet. At June 30, our accounts receivable balance was $19.4 million(Sic-see press release). And our day sales outstanding was 40 days, or 25 days net of deferred revenue. Our net debt, excluding discounts is approximately $7.7 billion at June 30, and thus far, in 2009, we have paid off $654 million of debt, and currently, the excess credit availability under our bank facility, is approximately $730 million. Again, as Jim mentioned, S&P upgraded its outlook and ratified the Company short term rating. We have no remaining maturities due in 2009.

In summary it is clear that the financial results reflect the solid operating performance of our business. Which was driven by solid core pricing, our ability to scale the business to declining volumes, and the realization of integration synergies. Now I will turn the call back to Jim.

Thanks, Tod. Due to our pricing discipline, cost control and integration synergies, we're increasing our 2009 financial guidance. We're increasing our free cash flow guidance for 2009 to a range of 700 million to $725 million before integration costs. The previous begins for free cash flow was $650 million. We're raising our adjusted earnings per share guidance, to a range of $1.43 to $1.45 per share before integration costs. Previous guidance range was $1.30 to $1.35 per share. We expect price growth to average 3.2% to 3.5%, for 2009. This pricing level reflects the impact of a lower CPI rate on municipal contract adjustments. Our current pricing strategy, will continue to deliver improvement in margin, and a return on invested capital.

Full-year volume decline is expected to be in the area of 8.5 to 9% reflecting the ongoing weakness in the economy. The Company anticipates net capital spending of approximately $800 million, due to lower volumes. Previous guidance on net capital spending was $845 million. And finally, EBITDA margins for 2009, are now anticipated to be approximately 30.5%, before cost related to integrating our businesses. Previous guidance was 29.5%. The significant EBITDA margin improvement demonstrates our ability to secure higher pricing, even in this economic environment.

Before going to Q&A, I would like to comment on the exceptional performance of our entire organization. Don and I have been out in the organization conducting operation reviews. I can say with confidence that the two organizations, that is, Republic and Allied are now operating as a cohesive unit. Our success in operating as a single team has allowed us to execute the most successful integration in the solid waste sector. Although we have been operating in weak economy I am very pleased with the team's financial performance. And before going to Q&A, I would like to have Don Slager our President and Chief Operating Officer comment on the operating performance of the business units.

Thanks Jim. It has been a little more than a year ago we began our premerger integration planning. From the beginning Jim emphasized the importance of melding the two organizations. We were very intentional on who we selected for our integration team and how we constructed our integration plans. As we built our operating team and established our corporate and field organization, we remained very focused on blending the Company. Now seven months into the merger, you can see the results of the organizational melding that has occurred. Teamwork, collaboration and mutual respect that has developed in Republic is something we're very pleased with. In short the team has really geled.

Despite the challenging economy, the organization has demonstrated its ability to effectively price our business to offset and exceed inflationary costs. The team is diligently managed the middle and proven itself capable of adjusting the workforce and the fleet, for economic volume changes, on a realtime basis. Meanwhile we're executing our integration plan, with exceptional success. And with all this happening we have improved our safety results to the best level in the Company's combined history. As we visit the field, we continue to see the excitement that our people have for the Company. And for what they are accomplishing. The results are a credit to our people who have a passion for this business and for our customers. Our field organizations is looking forward now to the 2010 business planning process, as we continue to build our national business platform, and strategically develop our markets. We will continue to reward the Republic team for improvement in return on invested capital, and delivering consistent free cash flow.

Thanks Don. With that, operator, if you would, open the line to questions.

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) The first question is from Hamzah Mazari from Credit Suisse.

Good morning,. Thank you.

Good morning,.

Just, could you touch on -- given synergies and cost saves and your proceeds from asset sales and free cash flow guidance going up, you likely expect the faster deleveraging. You touched on how much debt you're going to pay down this year. Would you comment a little more on capital allocation going forward, specifically in 2010 and 2011, how to think about that?

Right now, as you -- as -- I think as the investment community realizes, we're committed to paying down debt. And our commitment is to pay down $2 million over the next three to four years.

Billion.

Billion, I'm sorry. And that is where we're currently at. As any good business, as we meet quarterly, we continue to review our cash allocation, to debt and -- to our equity holders. But today we're committed, all the divestiture proceeds have been used, to pay down debt, a significant portion of the cash flows other than that already committed to dividend, will be used, that is the balance of the $600 million that we're anticipating in '09. And, again, we're going to continue to reevaluate and revisit that, with the Board. Over the next year-and-a-half.

Okay. And just a follow-up question, could you touch on volume declines a little more specifically, on whether you're seeing volume stabilization, you didn't talk about that in the press release. Also, on your commercial business, and could you give us a sense of -- you talked about residential being down low single digits. Would you give us a sense of what commercial is down or what industrial is down right now, how that compares to last year, and what you're seeing in July, in those business lines?

Sure. Sequentially, I think we're seeing the business to be relatively flat. Okay? Year-over-year, second quarter, we're looking at increasing volume losses due to service declines in commercial, continued weakness in the industrial collection business, which is predominantly construction-related of about 18%. Commercial running at about 5.5 to 6%. Residential is low single digit as you mentioned, but escalating over the first quarter, we're looking at about 2.5 to 3% of volume decline there. Disposal, obviously related to weakness in the collection business, and volumes in general in the construction market down about 16%, to 17%. And the MRF is roughly flat.

So as you look at the seasonal impacts which we're seeing very little seasonal impact. The little bit we saw was in the -- the Midwest, and the East. We saw nothing, even though we have pretty good construction seasons in the South and West we usually see marginal pickup there from first and second quarter, we did not see that. Again, our weakest areas appear to be the East and the Midwest. Okay, great, thank you.

Your next question is from Scot Levine from JPMorgan.

Good morning, guys.

Good morning, Scott.

Touching on the disposal volumes a little bit more detail you indicate I think in the first quarter that you were seeing in addition to the weakness in C&D business, declining weights in your less cyclical business lines. We think about the trend, Q1, Q2 and the early part of Q3. Is it getting better or worse in each of those areas or is one area having more of an impact on disposal volumes and any additional color on that subject?

Well, obviously we've continued to see some service declines in our commercial business. They are going to directly reflect on our third party disposal volumes. But think think when you look at unit weights and what we call the annuity screams of the commercial small container business and residential business, we saw the unit weight decline, which obviously would have some fact on disposal. We have seen it get a little better, still declining but not as much in the second quarter. It appears to be flattening out.

Okay.

Scott, I would add that -- it's not really so much this year as it was last year. This year it seems to be rolling first to second to third at -- a relatively confident level. Obviously we didn't get the seasonal uptick so, it is really more about last year ramping up second and third quarter than it is this year, ramping down. This year is consistent, last year it was moving up and therefore the comps are a little more difficult in the second and third quarter, and when we get to the fourth quarter, we view that as a trend that will reverse itself.

We also -- this is Don. We also didn't see the special waste jobs we typically see in the second quarter. That gap has widened on us a little bit. But we have a pipeline full of volume. We just have to get the customers to release it.

Yes, it is all evidenced by looking at our defection rates. They are flat, but they're relatively consistent with last year.

Understood. One last one maybe on pricing in the cyclical business, it sounds like things are starting to weigh maybe a little bit on pricing in the cyclical business, a little bit more but still seeing stability in the balance of the business. Is that an accurate characterization? And if you could talk to degree you know specifically in pricing and C&D and temporary rolloff.

Pardon me? Yes, I would say it is relatively flat which is good, that has been one of the barometers we told people to look to as to the stability of pricing in the sector. I would say flat is good and we will see I think benefits of that as the economy starts to -- to recover.

If I could add, I think to back up what Tod said in his comments there is a lot of mix that goes on in the pricing calculation but the fundamentals of the business has been strong. The pricing atmosphere and competitive pricing nature of the markets is pretty consistent with what we have seen in the past.

Do you still like what you're seeing out of the competition then?

We think the sector is stable.

Got it, thank you.

The next question is from Corey Greendale from First Analysis.

Good morning. Could you just speak to landfill pricing. I think last quarter -- it was 4%, this quarter 3%. It -- not to quibble over 100 basis points but I see something move there more than expected or tougher to get the pricing than you expected?

Well, I think -- we have got a number of disposal contracts with municipal -- with the municipal sector. That we're seeing some -- pressure, related just to the CPI, being down. So that -- that's predominantly it. We do see some weakening in the special waste markets, but again, nothing significant there. So as you said, disposal pricing at 3%, is still well above where it was three years ago. Continue to drive pricing in the market place. And, we still feel very good about that.

Okay. And I know it is hazardous to compare companies directly given the nuances of the calculation but--?

--in the hazardous waste business.

That, too, since the other national company just reported how do you -- their volume comp wasn't as -- negative as yours comparing Q1 to Q2, I am not asking you to comment on that specifically but how do you know that you're not losing share whether it is to another public Company or to smaller competitors who may be getting -- who may be starting and getting more aggressive on price?

I think when we look at our defection rates and retention rates we feel those are pretty good indicators of the stability of the marketplace. We haven't seen any movement there in the area of 7 to 8%. And they have been for a number of years and I think I commented on that in the past. So, again, those are our leading indicators. We also have other marketing tools out there with our customer -- customer relationship management system. Which is basically a telemarketing -- not a telemarketing but a prospecting system. And, we still have a very good funnel there and we also track our losses within that -- within that tool. So I think when we look at all those metrics, we say that the market is relatively stable again.

Okay. Thank you.

Next question is from Bill Fisher from Raymond James.

Hi, Good morning,.

Good morning, Bill.

Hey, this -- if you look at your kind of run-rate gross margin now going forward now that you got the divestitures out of there and I guess fuel is a little more stable. You have on one side you have pricing, stability is building and on the other side I guess landfill volumes are down quite a bit. Can you go forward with those kind of variables or others and just, do you think you can continue to push up gross margins a bit as you go forward ex the seasonality?

Well, yes, if you are talking short term like first half of this year to second half, I think there is a little bit of a margin headwind due to higher fuel costs that we're seeing here. I think I mentioned that diesel was about $2.55. It's up from the second quarter average. Then the other is bad debt expense. We had some recoveries, we -- we had some -- third party contractors to the government and -- obviously there is -- there is risk there if they don't pay us and so, we had some reserves that we had set up at the end of last year that we recovered. From -- from payments since the Government finally paid them, FEMA, so that's kind of a short term headwind.

I think as you look longer term it becomes, what Don and Jim spoke to. It is our ability to get pricing a little bit better than the CPI. Again it is not the absolute percentage of price. It is the relative price to -- to CPI and costs. That should allow us to expand margins from, say, 30% -- modestly up each year. Maybe it is 50, 100, 150 basis points over a multi-year cycle. So again--.

Okay.

--I think longer term we look for margins.

Yes, if I could add, -- Bill, this is Don. Tod mentioned in his comments that we didn't see the seasonality change Q1 to Q2 that we have enjoyed in previous years. If we had seen that seasonal revenue increase like it typically would our margins would have even been better than they were in Q2. So, we're actually operating even a little better maybe than the margin says. And then our guys have done a great job as I said in my comments. They are effectively getting price to exceed inflation. We have gotten really good at that in this Company over the last three or four years. We have gotten really good at cost management over the last 18 months because we have had to. And if this volume comes back naturally in our business through our customers we should see that volume come back at a good margin, right? So -- we -- we think there is upside there.

Okay.

We will essentially see it in SG&A and other expenses which I think in my notes I mentioned, they are relatively fixed. And also DD&A, which is running close to -- DD&A and accretion is running close to 12%. That is a couple hundred basis points more than our capital spend. Which obviously indicates a strong cash flow characteristic for the Company.

All right and then just to follow up on -- given your landfill volumes are down say mid teens. If you look at 2010 and kind of CapEx and I know you just getting through '09 and you brought '09 down, given the kind of landfill CapEx lags, is there a prospect that your '10 CapEx could be down, over '09?

I knew somebody would try to get guidance out of us for 2010, Bill. So -- we appreciate that. But we're not prepared to say that right now. Or to give guidance to 2010. So, the level of 800 is appropriate for -- in today's economy and I guess we will look at what the appropriate level is when we do our planning in the fourth quarter.

One thing that we didn't touch on is where our assets are, and our Fleet 8 is pretty consistent.

It is still about 7.1, 7.2, so, we think the blended fleets really working well for us.

I think as you look longer term, CapEx somewhere in that 10% of revenue, is appropriate.

Okay thank you.

The next question is from Jonathan Ellis from Merrill Lynch.

Thanks guys. Good morning, guys. Just to follow-up on a question earlier about the pricing outlook for the year. I know you mentioned that the -- you're now anticipating price being between 3.2 and 3.5% and I think previously it was 4% and you highlighted the CPI as being one of the primary drivers. Just recognizing that I think in most of your contracts the CPI is backward looking and theoretically you would have had some sense at the beginning of the year what CPI escalators would be, are there any other factors, any other end markets where, you spent some deviation pricing relative to your original expectations earlier this year?

No, Jonathan. And again, I guess my commentary on price would be that look that price is relatively strong at over 3%. It is consistent, in the sector I think as -- as we're seeing the reports come in. That pricing should allow us to expand margin and cash flows. And that is really kind of where we're at. We have some contracts, municipal contracts that are setting on a month over month basis. And, and that's creating a little bit of pressure. But overall, pricing is strong. It is going to continue to improve margin. And we're going to continue to be able to improve cash flows.

One thing, Jonathan, is I think, what we missed was probably the CPI, inflation. And inflation is -- maybe a little bit less than what we thought it might have been, earlier in the year. So, it really comes back to the relative price increase compared to inflation. Which is probably a couple hundred basis points above inflation. If you think back to what we said year after year, we need to get our return on investment backing to a decent level in this business, and, to accomplish that, pricing is maybe 100 to 150 basis points over CPI over a longer term should accomplish it. I think it is more the relative price which is constant, than that, 4% versus 3.5%. By the way, our second quarter pricing is consistent with the first quarter, and the guidance going forward is consistent. So while we were stretching towards 4%, the performance is really pretty consistent, pretty solid.

Okay, great, that's helpful. And then just my other question, excuse me, as it relates to -- the impact of commodities and fuel surcharges and -- if I have this correct, that you haven't changed your guidance for commodities to be about a 2% drag for the year. Fuel surcharges to be about 2.5% drag year-over-year, and just given what has happened to commodity prices first half of the year, and as you mentioned, fuel prices going up, just curious why those full-year revenue guidance figures haven't been adjusted.

I think a lot of it is the volume that we're seeing in our processing facilities. Jonathan, and that's really the lion's share of it here.

Up about 11% I think.

Yes. And then we have seen some price escalation here and we're -- we're still trying to see where all that stuff kind of bottoms out at. So to modify the guidance at this time we think would be pre-mature.

Well, if you look at our -- the volumes that are on it that we generate and then brokered volumes that come in that we deal with from third parties, say from our -- first quarter $63 a ton or second quarter $72 a ton that is about $9. $9 or $10 net of the rebates that we give back, at the volume levels that we're at should give us probably on an annualized basis, somewhere between $0.01 and $0.02 of additional earnings. Maybe there is a little bit of upside there. And, hopefully, that is a base that we carry from 2009 into 2010.

Okay. Thanks guys.

Thank you.

(Operator Instructions) The next question is from Michael Hoffman from Wunderlich Securities.

Good morning, and congratulations on the progress. Clearly what we're consistently hearing through the conversation today is this ongoing concern and doubts about how do you possibly sustain price in this kind of volume pressure. It -- and do you want to take another crack at sort of the explanation to the world of why this is sustainable?

Well, I -- again, I guess what I -- we have always said this. It is -- if you're going to really look at margin expansion in this business, and you're going to look at improving the returns on invested capital, it -- while -- while cost improvement is always important, it is a mitigator. The reality is that you have to be dealing with the top line. I think the discipline that Don and the rest of the senior management has put in the organization, towards pricing, has really accomplished the results that you see today. And that's discipline and that intestinal fortitude to continue to move it is what drives it. That's how simple it is. It is not simple to execute but it is that simple when you come to that realization. If you're going to grow cash flows and improve margins it is going to come from the top line, expansion.

Remember the lion's share of our business is in that 2%, 2.5% to maybe 5%, 5.5% margin decline. If you look at these economic cycles this may or may not be a little deeper or longer than '01 or 91. But this is a pretty stable resilient business. Those are relatively modest declines that should start to anniversary out here. And therefore, the price increases we think is very solid.

Yes, I would like to add, Michael, this is Don. The business hasn't changed, right. We have always said and it is remaining, it is a capital intensive business. You have to continue to reinvest. It is a people intensive business. There's a lot of cost and a lot of overhead in the business. You have inflation in your business. We're no different than a company bigger than us or the company smaller than us. Even the three-truck company has inflation. And you have got a price to meet or exceed that inflation, every year. Because you cannot make up for inflationary costs just through productivity. You just can't do it.

We have got some great productivity programs in the Company. We're very excited about what we're accomplishing but you have to got to offset that inflationary change through pricing. That is what we're seeing in the business. So again, what is most important is as Tod has said, is that relationship between inflation and pricing and that's what we're seeing, we're seeing that continue. Inflation may be down a little bit but pricing is still going to meet or exceed that and that is really our battle cry.

As Jim said we have got the controls in place internally to move that needle, and our field organization is really focused on it. And then ultimately, pricing is a function of what the market allows, and so, the market continues to move forward and how many people who own landfills understand the cost of operating or owning those landfills into perpetuity just like we do. We've got to price those landfill assets correctly and we're going to continue to move disposal pricing according to that cost and to sort of liability profile those landfills represent. None of that has changed in the market. Yes, there is some volume pressure but we haven't seen anything globally, anything on a national basis that makes us believe that people have changed their pricing philosophy.

There is always going to be a pocket here or there. There is always going to be a manager who has bad facts locally who makes a bad decision but those -- those happen in isolation. And we have not seen a move that -- that we think threatens the pricing family for our business. I think -- I think people still remember what happened in the early 2000s and, we haven't seen anything like that.

So we're very confident, we're very focused, and we're going to continue to take costs out of the business as the volumes change and we're going to -- and add the costs back appropriately as the volumes come back and, hopefully, see volume at a better margin and we are going to continue to price because we think we have the controls and the systems to do that.

Okay. Thank you. So, follow up on that, what I am hearing is you have been able to cut into the cost structure, far deeper than you have ever thought, given the economic environment. You have got this pricing leverage over inflation. You have discipline from your customers, your competitors, so what I am also hearing is that there is very little need to add a lot of costs back in as volumes recover except maybe in the roll-off space, and so the operating leverage to be upside, on any incremental tonnage is fairly significant, more than probably we have ever seen before in the past.

Well, -- we like to think that. Again, in my comments I said we have gotten better at cost management than probably we ever thought we would. And for us to adjust our cost, as real time as we have, you have seen in our margins, Michael, I think it is phenomenal. I think it is a great job by the field. They are tracking units against labor hours, and any time the units change, the labor hours have to track. They have taken almost a manufacturing approach to some of that cost. And, as volume comes back as uploads increase we will have to add man hours, we'll have to put trucks back on the street. We are going to manage it on the way up the same we managed it on the way down and my expectation the field organization is that we will see margin improvement and great margins come in as the volume changes and the leverage.

And as Tod said, again that volume comes back naturally. When the factory went from three shifts to two shifts goes back to three shifts we get that volume. Just pick up a phone and ask for another load. When the restaurant calls and says, hey, I know I reduced from six days to four days I need to go back to five and then six days we will manage that on the way up the same as we did on the way down. But we will get it I think with a better answer because of what we have learned about how to manage costs in this business. Again, this is the worst economy we have ever seen -- in light of that I tip that the results are exceptional.

I think like most businesses in America today running through this economy, they realized that potentially they got a little bit com place innocent their business cost structure. I think we understand that and we understand I think going forward when the economy starts to expand I think how much more we can stress the organization. That all really translates into additional margin and cash flow.

So with that, operator, I think we will conclude the questions. And in summary, I am very pleased with our second quarter results. We continue to be focused on achieving appropriate return, on invested capital through pricing. Maintaining labor productivity through route and disposal optimization. Continue to meet and exceed expectations for realizing our merger synergies, generating higher levels of free cash flow performance and reinvesting in our people and our business platform to ensure customer service and a high quality and safe work environment.

I would like to thank our field organization for their continued focus on exceeding financial targets, integrating our national operating platform, and maintaining a high quality and safe work environment. I would like to remind everyone that this call is being recorded, and is available through August 2 of 2009. By calling area code 203-369-1434. A recording of the call will be available on Republic's website at republicservices.com. In addition, all of our SEC filings and discussions of business activities are available on our website. Thank 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.