Republic Services Inc (RSG) 2010 Q1 法說會逐字稿

Good afternoon and welcome to the first quarter 2010 conference call for investors in Republic Services. Republic Services is traded on the New York exchange under the symbol RSG. Your host this afternoon 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 Jim O'Connor.

Good afternoon, Holly, and welcome everyone. This is Jim O'Connor, and I'd like to welcome everyone to Republic Services first quarter conference call. Don Slager,our President & Chief Operating Officer, 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 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 recording of this conference call, you should be sensitive of the date of the original call which is April 29, 2010. Please note that this call is the property of Republic Services Incorporated. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited.

I am pleased to report that we have a strong start in 2010. We're on track to perform at the upper end of our EPS guidance, and we've started to see positive signs in our industrial permanent and landfill business. Don will give you details on these volume increases later in the call. We believe we are well positioned for positive results in 2010 due to our pricing discipline, cost controls, realization of merger synergies, and our commitment to improve return on invested capital.

The financial highlights for the first quarter are-- revenue of approximately $2 billion, net income adjusted primarily for merger related and debt refinancing expenses was $158 million or $0.41 per share. Adjusted EBITDA margins were 31.7%. This record performance highlights the ability of our field organization to maintain pricing discipline and a cost competitive structure while working through the integration process. We also saw significant improvement in our risk costs which is a result of our focus on safety. Core price increase for the first quarter was 2.2%. We continue to use our return on investment pricing tools to be sure all business activity meet our requirements.

Volumes declined approximately 6.2% after accounting for weather conditions ,which was better than our expectations. We also benefited from strong pricing for recycled paper, particularly OCC, which had an average price of $145 per ton in the quarter. Currently, OCC is selling for approximately $135 a ton. Adjusted free cash flow was $245 million, or $0.64 per share, which is 156% of adjusted book earnings. Remember free cash flow is the best measure of the quality of earnings.

Our Board has approved also a dividends of $0.19 per share, payable July 15, 2010. During the first quarter Republic issued $1.5 billion of debt , which Ed Lang, our Treasurer, will talk to later in the call. As a result of the refinancing activity completed in 2009 and 2010, we have achieved total financing synergies of approximately $30 million. Therefore, we are increasing our synergy guidance to $185 million to $190 million. Don Slager ,our President and Chief Operating Officer, has been leading Republic through the integration and cost savings process and has far exceeded expectations both in the amount and the timeliness of the synergies achieved. I would turn the call over to

Thanks Jim. Let me start by commenting on the success of the merger to date. We exited the first quarter with annual run rate synergies of $180 million. This includes $150 million from operating and SG&A savings and $30 million from debt refinancing. We continue to outperform against our original goal of $150 million in annual run rate synergies. Throughout the integration process, additional opportunities have been identified, which create value for our shareholders. The senior management team recently developed plans for these post integration business initiatives, which fall into two broad categories.

First, profitable growth and second operational effectiveness. The opportunities in profitable growth include enhancements to our pricing systems and tools, our sales support systems and sales reporting, customer service and call centers, and national accounts management capability. The opportunities within operational effectiveness includes benefits from disposal optimization, repair and maintenance systems and processes, data dashboard and decision support tools for our field managers, and E-Pro, which is our electronic procurement system. We are investing $8 million this year in these initiatives. We expect to realize an additional $40 million to $60 million in annual run rate earnings from these efforts by 2013.

We recently had our first corporate-wide management conference that included 500 leaders from throughout the organization. We used this meeting to discuss and to reinforce five priorities for 2010 which include-- first, safety. Our number one priority is to offer a safe, respectful and rewarding work place for our employees. We have continued our strong performance regarding claim frequency and have started to see this improvement reflected in our self-insurance reserves.

Second customer experience. All of our marketing and service effort have a single focus -- putting the customer first. We will continue to improve our service quality and service offerings to be sure we are exceeding our customers expectations. Third, targeted profitable growth. We are using our return on investment models to analyze our marketplaces in order to get the full value of our national business platform, including our disposal network. We continue to maintain our pricing discipline as we grow our business. As a result, we will have significant operating leverage as the economy recovers.

Fourth, integration and synergy capture. Our ability to integrate our business platform and extract significant cost savings has exceeded our expectations by approximately 25%. We will complete the first phase -- or the final phase of the integration this fall. Fifth is something we call durability. We are utilizing innovative management tools and practices in our field operations to achieve and maintain a high performance level. We have made extra effort during the integration process to validate that our training programs and support systems stand up to our high standards over time.

Our Q1 margin performance validates that our cost savings have been sustained. As we demonstrate continued success around these five priorities, we will create higher returns on capital and improve free cash flow performance. As Jim mentioned, Republic achieved a record EBITDA margin of 31.7% in the quarter. And finally, we are beginning to see improved volume in our cyclical revenue streams. We are seeing the improvement across the country and from different industries, particularly in permanent industrial and landfill volumes. Some examples of this increase in business activity are the following. Petrochemical facilities along the Texas coast, automotive industry and RV manufacturers in the Midwest, steel manufacturers in the east and Midwest, and special waste projects in the west. The business activity's encouraging, and we'll have a clearer picture during our mid-year guidance. I'd like to thank our entire field area and region management teams for their commitment to our success. We've had a great quarter. I will now turn the call over to Tod for a recap of the first quarter financial performance.

Thanks, Don. Before I review financial details for the quarter, I'd like to take a moment to reaffirm our adjusted EPS guidance for the full year. While we don't provide specific quarterly financial guidance, with the recent completion of our debt refinancings that Ed will discuss later, we feel very comfortable with the upper end of our full year guidance range of $1.63 to $1.67 earnings per share. As it is a practice in the past, we will provide updated complete guidance during our second quarter conference call in July. Now let's turn to the first quarter.

First quarter 2010 revenue was $1.96 billion as compared to $2.06 billion last year, a decrease of about 5%. We divested of some operations in 2009 and that contributed to 2.3% decline of that 5%. The remaining 2.7% decrease on a same store basis consists of the following factors. First, core price grow of 2.2%. And again, this is within our guidance range. We continue to see core price improvements in all of our collection lines of business. This approximates 2.8% for the collection lines taken as a whole.

The MSW landfill business had positive pricing of 2.1%. However, this was offset is by mix coming from relatively lower C and D and special waste-event driven work. Therefore, the net landfill price was positive 0.3%. Core pricing, again, is in line with our expectations as we are seeing the impact of the lower price resets to our index-based customer, which is simply a function of contractual terms. As we've mentioned in the past, approximately 50% of our revenues are tied to index-based pricing. Price increases for our non index-based customers remain strong and are relatively consistent with prior quarters.

Now, commodity revenue was a strong positive for the quarter. Commodity revenue increased 1.8%. Commodity prices increased approximately 98% to an average of $125 per ton in the current year, from $63 a ton in the first quarter of the prior year. First quarter material recovery commodity volume of 422,000 tons reflects a 2% decrease from the prior year. First quarter average price increased $27 per ton from $98 per ton in the fourth quarter of 2009. So, a substantial year-over-year and also sequential improvement. We are seeing our average commodity price decrease currently by about $17 a ton from March to April, and this is driven primarily by a reduction in OCC prices of about $33 a ton.

Our fuel recovery fee was an increase of 0.3% in revenue. This increase relates to an increase in fuel cost. What we're seeing is the average price per gallon of diesel increased to $2.85 in the first quarter of 2010 from $2.19 in the prior year, and $2.74 in the fourth quarter. And I might mention that our current fuel prices are slightly higher at $3.07 a gallon. Volumes were down 7%. This is a sequential improvement from fourth quarter 2009 of about 270 basis points. You might recall that quarter it was 9.7%. The year-over-year change of 7% includes a 40 basis points decrease due to Hurricane Ike volumes in the prior year, and then the adverse impact of weather in the first couple of months of this quarter of 30 to 40 basis points.

We saw a mid single digit decline in collection business. Volume losses was in the low double digit range for industrial, driven primarily by the temporary business. We are starting to see an uptick of volumes in our permanent manufacturing concern -- customers, as Don had indicated. The sequential increase in permanent hauls is consistent with pre-2009 changes in seasonality. Additionally the average weights of our industrial customers increased by about 3% compared to the prior year. Again an indicator of increased customer activity. Now our temporary business continues to be slow due to relatively low levels of construction activity and certainly the severe weather experienced in many of our markets early in the quarter may have had an impact.

Our landfill volumes, they declined by 8%. Again this was a substantial improvement over the first quarter of 2009 when those volumes were off 16%. And the trend continues to improve. In the month of March special waste volumes showed year-over-year growth for the first time since the third quarter of 2008. While it's still too early to determine whether we're seeing a sustained improvement in economically-sensitive volumes, we're monitoring volumes closely and we'll provide additional information in July as part of our mid-year guidance update.

Let's talk briefly about our margins. First quarter year-over-year margins for 2010 excluding divestiture losses, restructuring costs, and costs to achieve synergies, was 31.7% compared to 30.4% in the prior year, an improvement of 30 basis points. Excluding the impact of DOJ divestitures that generally carry a higher margin than the company average because of the concentration in landfill and small container collection business, the EBITDA margins actually improved by 40 basis points.

Let me comment on the significant changes in cost as a percentage of revenue. And I would like to remind everyone that detail of our margin and our cost of operations by cost category are available on our website and will be included in our 10-Q filing. First fuel. Fuel expense increased 110 basis points due primarily to a 30% increase in the cost of diesel. Again the average price per gallon increased to $2.85 in the first quarter of 2010 compared to $2.19 in the first quarter of the prior year. And as I mentioned earlier current prices are $3.07 a gallon. So we can expect a little more headwind from fuel. Partially offsetting this increase in fuel costs was an increase in related fuel recovery fees, resulting in a net decrease of EBITDA margin associated with fuel of 70 basis points.

Second let's talk about recycling cost of goods sold. The 60 basis point increase in expense relates to increases and rebates to customers for volumes delivered to our MRFs. Costs of goods sold at our MRFs increased to an average of almost $38 a ton, from approximately $17 a ton in the prior year. Commodity revenue increases more than offset this increase in cost, and thus resulting in an increased spread on commodities of approximately $41 per ton. This is a net favorable impact of 80 basis points improvement in EBITDA margin for the quarter, and again, as Jim talked about commodity pricing, we would expect to see this favorable benefit going forward.

Third, labor and related benefits. The 20 basis point improvement in margin relates to synergy-related staffing reduction, due to wealth consolidations and overlap markets, and an overall improvement in collection productivity. Fourth, maintenance and repairs. There's a 70 basis point improvement in margin related to synergy-related cost reductions and the timing of our fleet replacement plan. 2010 truck deliveries are more evenly weighted throughout the yea,r resulting in reduced fleet maintenance cost Fifth, transportation and subcontract expenses. We saw a 20 basis point improvement in margin, again resulting from synergy-related cost reductions, arising from redirected waste streams to a more efficient disposal network.

Next, risk management. A substantial improvement here. There was 100 basis point improvement in margin related to reductions and required reserves, and this again, as Don had indicated, is due to improved claims frequency rates, favorable claims development, and the realization of synergy-related cost savings for third party premiums and surety costs. I might mention we do an actuarial report each quarter, and this may be a little bit lumpy but certainly we are in a positive trend here.

Finally SG&A. There's a 20 basis point increase in expense, and this primarily relates to an increase in cost associated with some legal matter,s partially offset by synergy-related reductions and headcount and non-headcount costs including travel, professional fees, and facility costs. Our Q1, 2010 SG&A cost is a percentage of revenue, excluding cost to achieve synergies, approximated 10.2% compared to 10% in the prior year. Looking forward, we believe that SG&A costs in the 10% range is appropriate. These changes comprise the majority of the year-over-year margin improvement in EBITDA.

I'll be -- briefly talk about our DD&A, which declined 50 basis point and that relates to a reduction in landfill amortization expense. Expansions and permit modifications were approved which extend the life and reduce cost in certain landfills, resulting in a favorable reduction in the per ton rate we charge [our air space] consumed. DD&A as a percentage of revenue approximated 11.4%. Finally, our interest expense. The Company recorded non-cash interest expense a little over $28 million in the first quarter of 2010. This arises primarily from the amortization of Allied debt which, as you will recall, was recorded at a significant discount at the time of the merger. During the quarter we also recorded $132 million loss or $0.22 per share related to premiums paid in non-cash write-offs of discounts and fees associated with the recently completed note refinancing and tender of $1.5 billion.

I'd like to take an opportunity to remind everyone of the impact the merger had on book earnings. In purchase accounting, we were required in December of 2008 to revalue Allied's fixed assets, intangible assets, environmental liabilities, and debt. As a result, our DD&A as a percentage of revenue is 11.4%, which is higher than both companies on a pre-merger base, and certainly higher than the industry average. But again, it's not cash. In addition, our non-cash interest expense for the quarter, as I mentioned earlier, was approximately $28 million. As Jim mentioned earlier, cash flow is really the best measure of the quality of earnings, and our adjusted free cash flow was $245 million or $0.64 per share. Substantially above our book earnings. Now, I'll turn the call over to Ed to further discuss our financing initiatives.

Thanks, Tod. First talk about liability management. During the first quarter we issued $850 million of ten year debt at a 5% coupon and $650 million of 30 year debt at 6.2%. With the financing proceeds of $1.5 billion, we called a $1.025 billion of existing notes with an average interest rate of 6.8% that matured in 2014 and 2015. We repaid $300 million account receivable financing, and we also repaid some of our existing bank debt. The positive impact from this refinancing was included in the high end of our 2010 earnings guidance provided in February. Our 2010 interest expense guidance was $500 million to $515 million. We are now at the lower end of this range. We continue to look at additional debt refinancing opportunities which may further reduce interest expense.

Now I'll discuss free cash flow. In the first quarter adjusted free cash was $245 million, which consisted of -- one, cash provided by operating activities of $299 million, less property and equipment received of $128 million, plus proceeds from the sale of property of $6 million, plus merger related expenditures, net of tax, of $8 million, plus legacy tax settlement related to BFI of $60 million. This equals adjusted free cash of $245 million. We define adjusted free cash flow based on capital expenditures received during the period. We have included a reconciliation of the timing difference between capital expenditures received versus paid in our 8K filing. We remain comfortable with our adjusted cash flow guidance of $700 million to $725 million for the full year.

Now I'll discuss our balance sheet. At March 31, our accounts receivable balance was $851 million, and our days sale outstanding was 40 days, or 24 days net of deferred revenue. Reported debt was approximately $7.1 billion at March 31. During the quarter, the principal amount of debt remained essentially flat while the reported amount of debt increased approximately $100 million due to the write-off of debt discounts. Excess credit availability under our bank facility is approximately $900 million. Now I'll turn the call back to Jim.

Thanks, Ed. As you know we historically provide a detailed update of our financial guidance on our second quarter earnings call. However, I'd like to make a few comments as to trends we are seeing in our business today. As we discussed, we are increasing our year end rate for synergy guidance to $185 million to $190 million. We are starting to see some positive signs in the cyclical revenue stream particularly in permanent industrial and landfill values. We continue to achieve expected price increases, and our volume performance in the first quarter was at the higher end of our expectations.

The fact that we are achieving record EBITDA margins in a business environment that has not fully recovered is a strong statement regarding the operating leverage that resides in our business platform. We have achieved significant financing synergies, and have restructured our balance sheet that ensures a low cost of capital structure for the next ten years. Our focus continues on increasing shareholder value and that remains intact by this quarter's results. During the next two board meetings we will review our cash utilization strategy regarding dividend payout and share repurchase, while maintaining our conservative financial profile. With that, I'd like to open the call up to questions. Operator?

Thank you. (Operator Instructions). Scott Levine with JPMorgan, your line is open.

Good afternoon, guys.

Good afternoon, Scott.

With regard to the uptick that you seem to be seeing in cyclical activity, could you provide me with a little more color geographically across regions where you might be seeing a little bit more activity versus a little bit less?

Well, as I've said in my comments, we are seeing an uptick in the west region specifically with special waste, which is a good sign. It's always been a big producer of special waste for our business, so, seeing the special waste come back, as Tod said, seeing growth in that segment for the first time since 2008 is a good thing. On the manufacturing side, we're seeing it in the Midwest, specifically Detroit and in Indiana, also in the mid-Atlantic states. We're seeing it come back in the way that it left. So, it's a good sign. It's -- we've seen a little bit of seasonality, but we are seeing some real -- I would almost call it structural change in some of the manufacturing going from adding second ships, producing additional loads. So, it's a good sign, and we know, in the manufacturing business that shows up pretty quickly in our waste volume. So, we're happy to see it.

Scott, (inaudible) let me give you some examples of some of the names around the country. Severstal Steel, in western Pennsylvania, Mittal Steel in the Chicagoland area, the refining company, in particular, in Texas, and predominantly Houston. We see the RV and automotive industry, particularly companies like Gulf Stream, Keystone RV. We see in the New England states, we see some additional weekend shifting at 3M. In New England, with their touch screen manufacturing, and we've seen a number of other businesses in the Midwest. So, as Don said, we've to some real anecdotal evidence that we are starting to see some improvement in the economy and in particular, we're starting to see it in our industrial collection, permanent business and the volumes are from our third party competitors probably at our landfill (inaudible) increase organic growth.

Scott, we saw it come in late in the quarter, March, mid March and beyond, and then we've seen it continue into April. So, that bodes well for the future.

That's encouraging. One other thought if I may. Before the merger, Republic had a slight bias, or slight bias in terms of uses of free cash and returning it to shareholders favoring the buy back. When you reach a point where you are looking to do that again, would you -- should we expect the same proportional mix of buy back versus dividend increases, or can you give us some preliminary thoughts on what you would envision when you reach that point of returning cash to shareholders?

Yes, again, when we look at the free cash flow and the distribution of the cash flow, I think we probably look to stay in the range of 40% to dividend, in that range, and the balance, then, a little bit for our continued debt repurchase, and then the balance of the free cash flow would have a bias to a share repurchase because we still believe that there's a tremendous value capture there, and I think you'll see us move in that direction -- the board move in that direction in our third quarter call.

Thanks, guys. Nice quarter.

Jonathan Ellis with Bank of America, your line is open.

Thank you.

Good afternoon, Jonathan.

Good afternoon, how are you?

Good.

First question I wanted to ask is related to -- make it a two part question given the limitation. In terms of pricing changes -- core price changes throughout the year, can you talk a little bit about how CPI adjustments may have impacted your contracts that are resetting as of July 1, and then the second part would be any thoughts on the raising the environmental fee given what waste management mentioned earlier today.

We're not going to comment on waste management's environmental fee, and again, I think what -- in our business, we continue to review all of our costs and fee structures regularly. So when we deem it appropriate to modify those fees and/or adjust our pricing or changes in the cost structure of our business, we'll do so. Again, we continue to review those and at this particular point in time, we are very pleased with the recovery fees that we have in place, and the pricing that we have in the marketplace.

Can you also just quantify in terms of the CPI adjustment what that may mean for contracts that are resetting as of July 1?

I think we built that into our guidance. If we looked at the 2010 guidance for price, we figured that the index-based pricing would be 1.5%. I think where the index is now, it's probably a little bit higher than that, probably about a little over 2%, maybe 2.3%. So, it's going to depend on the contract and we have some contracts that reset in July, some contracts that reset in September and some of them are resetting off of either current price or it's resetting off of December 31, 2009 price. While I think that if it's a December 2009 reset it's going to be a little bit lower, but as we get later in the year we should start to see a little bit more benefit in the resetting of those prices.

Overall we think a little bit of inflation CPI is good for us, and directionally it's heading in the right direction with the timing of these rollovers.

When we look at the CPI today it's right in line with our December base guidance. So, we don't see any reason to deviate at this particular time.

Thanks. My second question is just related to recycling. I would have expected a little bit more of a contribution to the top line given what had happened to recycling prices during the quarter. Can you help us understand in terms of the contracts that you have in place now, are there ceilings that exist in order to protect yourself a little bit on the down side and any sort of relationship between OCC or commodity prices, generally, and the drill down EBIT for you?

I mean, we've got some of our commodities hedged and I'll let Ed talk to the hedge, but as the contracts have come up with mills, we've continued to renegotiate those contracts and tried to improve the floor position that we have in those contracts. We've effectively either hedged or through mill contracts got a portion of our commodities price protected. Again as the market continues to stay strong and those contracts come up, we're going to try to renegotiate those contracts with our core pricing. So, Ed, do you want to --

Also a sharing component with our customers on the upside. As revenues go up in those commodities we share that with our customers as well. So, we don't keep it all.

It's about 30% that we share.

Just generally our quarterly filings, we have full disclosure and all the existing OCC and OMP hedges we have in place primarily for this year and next year and a little bit into 2012. But if you look at in terms of percentages as far as floor contracts and financial hedges, approximately 60% of our volumes have some type of protection, either the floor contract or a financial hedge.

And you asked the question, Jonathan, about the impact on the profitability, and I think if we were --- I mentioned it earlier. If we look the net commodity impact year-over-year, it's about a positive 80 basis points. If you want to look at the sensitivity from an earnings standpoint, our MRFs do probably to about a $1.6 in terms of tons per year and $10 of commodity price increase is probably worth about a $0.015 in earnings per year for the company.

Great. That's very helpful. Thank you guys.

Next question comes from Hamzah Mazari with Credit Suisse. Your line is open.

Good afternoon. Thank you.

Good afternoon, Hamzah.

Just a question on volumes. Are you beginning to see service increases versus decreases turn positive this quarter? And is this the first quarter you're seeing that? Could you comment on, based on current trends, if they continue, how do you see volumes playing out on a quarterly basis?

We have not seen service increases yet on our commercial business. When we talk about service increases or decrease, we are typically talking the commercial small container business. Again, we're not seeing any movement yet in the construction part of the business. What we are seeing is what you would expect. Again, as I said before, manufacturing increase in volumes converts pretty quickly to our volume numbers. If construction starts to kick up at some point, there's a pretty big lag in that, but service increases and decreases in the commercial system really tend to lag the economic changes.

So, when we first saw the economy start to hurt, we saw service increases start to slow ,and then we saw service decreases start to rise, and service increases stop altogether. So, now we've seen service decreases really start to flatten out and stop. We don't have any net change in that but we are -- we have not yet seen the service increases return. A little complicated, maybe, but we are waiting for it, and we are looking for it, and if the manufacturing continues to stay up, and some of these other segments start to come back, we should, in due time, see those increases come back to the commercial system. So we are looking for it as well as you are.

I might also mention that our volume guidance was based on what we saw in December of 2004. I think, as a company, as Don was talking about the industrial and the special waste, we think that what we're seeing here is a little bit stronger than maybe our initial guidance from the fourth quarter economic conditions. So a bit of a positive, but I'd say stay tuned. We'll have much better clarity in July.

Okay. Just a follow-up question on the cost side of your business. If you could just give us a sense of how to think about the costs in your system coming back when volume comes back. Obviously, you would have some incremental margin as volume starts to ramp-up, but how should we think about some of the costs that you've taken out since the downturn coming back, over the course of the next 18 months?

I think what we've said publicly before is we have some asset leverage. We've taken a number of trucks and put them in the stand-by line. So, we do have about 300 across all lines of business that we can put back in service. Actually, in Texas, we put some of those back in service already. So, I mean, we have asset leverage and then I think when we look at leveraging the business for growth, we're looking at about a percent of organic growth we believe that would come in at relatively higher margin than normal organic growth. Again, stressing the structure that we've got on the way up. I think those EBITDA margins could be a net incremental of 1% of organic growth, 40% to 45%.

Okay, that's very helpful. Thank you. I appreciate it.

Al Kaschalk with Wedbush, your line is open.

Thank you. Hi, Jim, hello team.

Good afternoon.

Really, it's hard to find anything wrong with the quarter, so I wanted to press a little bit further on this last topic. Theoretically it seems you flex down the cost quite a bit, or the cost structure, that as we get a ramp in volume over the next 12 to 18 months, your gross profit margin in the quarter would be maybe a floor. I wonder if you could talk about where this is going, given that it is the new event, new business within the industry, for, I think, both Allied and yourself. So, a little bit theoretically here, but with the leverage you're getting, the strong performance, it seems like we still have room to grow.

With the growth in the industrial revenue that we are starting to experience, and we haven't seen any changes Don mentioned in the small container business, again we think that we have leverage there. And we think those, when they start to come, density is what usually drives our operating margins up. It's a little bit hard for us to tell you ,between stock A and C, what B is in the small container business. But ,we believe if this industrial -- if this industrial pickup will eventually, I think, trickle down into our small container business. With that, I think we've got a lot of leverage there.

As I said, I think we can bring that volume in at 40% to 45% which is well above our EBITDA margin in the area of 31% today. It's just a little hard to predict all of that. As good as all of our tools are, moving a stop in between two of our existing stops, it's really hard to predict the actual incremental benefit. But, we do believe it's there, and we know it's there.

I was going to say, you're on the right track, because we're expecting our people to get operating leverage as the volume returns. If you look at our collection productivity matrix, we've improved in a couple of lines of business, and help flat even though we lost volume. We've gotten better at this, over the last couple of years as the economy has come out from under us. We fully expected operating leverage as well.

I would just add or reinforce that the positives that we see ,such as maybe a little bit more volume and the commodity prices offset by maybe the net negative on fuel, it causes us to be at the higher end of our guidance, up towards that $1.66, $1.67 range rather than $1.63 range. And, again, we've fot two or three months where you get, if we are back to normal seasonality, we'll have a much better idea in july. That's yet to come. So we'll be giving much clearer guidance in July.

Excellent. Great work guys.

Thank you very much.

Next comes from Vance Edelson with Morgan Stanley. Your line is open.

Hi. Thanks a lot for taking the questions. On the pricing front, beyond the CPI impact, can you provide any color on the competitive landscape? How are the smaller players acting, on the collection side, for example, is discipline improving along with the brighter economic outlook, or would you say it's still fairly competitive out there?

I would say it's about the same as it's been. We don't see anybody really radically changing any of their marketing behavior or strategy, so to speak, on the front of pricing. There's always some examples somewhere in some market where somebody thinks somebody had bad facts or a got a little crazy with a bid, but we don't see anything that is alarming. As you would imagine, the longer the downturn lasts, the trickier people's trigger fingers get, when you think about volume. But I think we've gone through a very long downturn and held up pretty well. If pricing was going to be a problem, it would have been a problem by now. The biggest function of the 2.2 reporting is that CPI factor, as that comes back, I think we'll be in good shape. We're holding our own and it's pretty much the same as it's always been.

Okay. Makes sense. And, as my follow-up, on the cost side, with the range for run rate synergies going up fairly quickly, I think you mentioned the initiatives that could add further to savings by 2013, is it conceivable that there's additional upside this year or do you feel like the 185 to 190 is probably the limit for now?

We just raised to 190. So I think we're going to stick with that number. This year, as I said, we're going to spend about $8 million in getting these new initiatives off the ground, while we are still completing the integration of the base merger. So, we've got a few system things to finish. We'll get these new things off the ground and we'll start to roll. We might see a little benefit in the last half of the year, but were going to stick with that 185, 190.

The 185 and 190 has about $30 million of interest savings taking this new debt to an investment grade credit spread. When you look at the impact on the operating margins, we are talking about $155 million to 160 million. Run rate by the time we get done with that is going to be maybe 180 basis points or so. So, keep those two components in mind when we talk about synergies and margins.

But, I think it's also important to recognize that we will start to be getting some incremental benefit from these strategic initiatives, that Don talked to in his comments, in 2011. We'll get more in 2012, and we'll get the balance and the run rate in 2013. So, again, I think there's a lot more value extraction from the cost side of the business. Again, it's a function of how much the fuel organization can absorb and how many initiatives they can effectively manage and produce value for our shareholders. So, again, when you really look at it, all along we said there was more than $150 million, and now we're saying that we're tracking at 185 to 190, and we've now identified another $40 million to $60 million that we'll start to extract over the next two and a half years..

Keep in mind, as I mentioned in my comments, I used the word durability. We've got a thousand dots on the map across this company. The kind of business change and processes we're installing take a great deal of effort. We're looking for real change that's permanent. So, working real hard with good project management, with good training and tools, we're going to roll them out slow enough with the organization to absorb them, as Jim said. I think we're focused on that, so the change is real change, and it's lasting value for the shareholder.

That's great. Thanks for all the color. I appreciate it.

Corey Greendale with First Analysis, your line is open.

Hi, good afternoon.

Good afternoon, Corey.

I just had a couple of real quick ones. Can you comment on any trends or changes in commercial account customer churn rates?

I think as Don said the rate and our churn is pretty much similar to what has been in prior quarters. So, again, which would give rise to some of Don's comments on the stability of the marketplace.

When we look at churn, we look at the customer retention or (inaudible), all those kind of metrics we track. They are very stable this quarter versus the past three or four quarters. So, again, nothing there to report.

Good. Maybe you explained this and I just missed it, but the increase in the synergy target, is that solely because of the refinancing or some operational.

There's some operational in there. The lion's share of it is, I think we moved it up to what, $30 million, Ed? And, I think $25 million -- or $20 million to $25 million of it was financing. But, while we have other opportunities, I think by the time we get to the end of this year we'll be pretty much at that run rate. I wouldn't expect to see that number move up dramatically going forward. It might inch up a little bit.

When we say the 30 of the 185ish is financing synergy, there was a portion of financing synergy in our -- again there was a good portion of upside there in the operational part of the business.

Thank you for clarifying that.

And, that kind of goes back to the original interest expense guidance that we gave back in February where we said $500 million to $515 million of interest expense, and because of the successful refinancing, we're probably down closer to $500 million which allows us to up to the middle or upper end of the range in EPS. It was put in that EPS range.

I understand. Thank you.

Bill Fisher with Raymond James your line is open.

Good afternoon.

Good afternoon, Bill.

Just a couple of quick ones. The $8 million investment Don talked about (inaudible) synergies. Is that running through the SG&A line or is that a capital cost?

Some capital and SG&A cost.

$5 million of capital and $3 million of SG&A expense.

Okay, and the other thing, the tax rate, I think I had around 40%. With the non-deductible interest amortization dropping, is that rate going to stay around there, or move down a little bit or --?

I think it's going to stay in that 11% plus range. I don't see that moving all that much. Now, it has been very successful with this refinancing, we'll see a portion of non-cash interest expense drop away, but there's still some long dated debt out there, particularly some of the BFI debt with some favorable rates that will stay with us. So when you look at the cash earnings versus the book earnings, the cash earning will be stronger on the longer term basis for those two factors.

But the tax rate would be similar?

Tax rate, obviously we had the anomaly in the first quarter. As we go through the year, I think excluding the boundary financing tax impact, we're probably looking at something in the range of about 41.5%. Maybe a little bit better than our initial guidance. It just depends. We closed out some of the old Republic tax years and there's a little bit of a benefit there from the 2005 to 2007 tax years for Republic. So, that gave us a little bit of a tailwind. But other than that I'd say we're pretty much right on that 42% or just under 42% tax rate.

Okay, thank you.

Next question comes from Richard Skidmore with Goldman Sachs. Your line is open.

Thank you. Just wanted to follow up a little bit on the operating leverage question. Can you just give us a sense in the cyclical parts of your business, what ,in terms of revenue from, say of 2007, the combined entity from an absolute dollar level, how much revenue went down in those cyclical businesses? So we can get a sense, as volumes come back, as revenues -- what's the opportunity for that incremental margin and what the revenue base is.

Well, the biggest -- I don't have the dollar amount. Might have been at the peak, with our temporary roll off and landfill, might have been 15 -- 12% to 15% of revenue, and we're now down to maybe 6 -- well, plus disposal, maybe 7% or 8%. So that was cut in half. So we probably lost around 8% of our revenue, and it just depends on the mix. If it's roll off collection business, it's kind of the average collection margin, which on an incremental basis might be 30%, 35%. If it's landfill on an EBITDA basis, that incremental volume might be 50%. So, it's going to depend a little bit on the mix of those two components, and that's why we end up talking to that 40% to 45% blended rate.

Okay, and when you think about the need to add capacity or put trucks back on the road or add more headcount, is there a number in terms of how you think about volume comes back X percent then we need to start adding capacity, and what would that X percent be?

Sure, on the collection side, on the roll off collection side, we measure that productivity in minutes per pull. And we've been able to pretty much hold that productivity. So, when the pulls go up, we will take trucks and we are going to have to maybe put a little more over time, and at some point add drivers and add routes. So, there's almost a linear relationship on that side of the business, for the roll off collection, for temporary roll offs. On the landfill side, it's very fixed, and that's where you get a lot more cash leverage.

Keep in mind, Richard, that one of the reasons we've been able to manage the margins so well in a downturn, is that we park trucks as Jim said. Rather than take our drivers that work an average of 55 hours and getting them down to 40 hours, we kept them working the mid-50 hours a week and parked the trucks. That's one reason our costs have been in line throughout this process. We think, as Jim said, we've got some capacity in our current fleet, even before we have to add trucks back. We have those 300 trucks sitting that we parked, that we can put back into motion, so we don't have to buy those trucks again. The containers are in the yard. So, we've got some upside there.

Probably where we get a little more leverage is in that small container commercial business.

Yes, small container business and the landfill business, as we've said, Tod, that's where you'll see the best leverage.

I think, too, those are all things related to economic growth and how we're going to manage that economic growth. The other thing I'd like Don to comment on is some of the operating savings that we anticipate with some of the fleet change to augment the collection. Again there's a big focus on the part of Don and the fuel organization to automate the fleet.

Well, sure, on the operating side, we've converted last year over 200 of our routes to single operator routes, fully automated. Another 200 plus this year will be over 50% of our residential system being fully automated, and we've got a view to, over the next five to seven years, carrying that through. So, we've got a continued focus on improving the productivity on that part of the business. We've been very successful. There's only so much you can do at a time, because, again, change is hard for people, but not only our people, but the customers as well. So, we're very focused on that productivity, and as I've said before, we fully expect our people to get operating leverage as the volume comes back. We're well poised to do that.

Thank you.

Thank you, and our last question comes from Michael Hoffman with WSI. Your line is open.

Thank you very much.

Michael, how are you?

I'm good. How is your shoulder, by the way?

My shoulder -- actually, ever since I saw this earnings report, it's been outstanding.

Okay. And ---

Michael, I think I can do some more heavy lifting.

There you go. Good job. On the landfill side, can you help me understand the mix of volume? So, I get C and D and maybe some of your landfill cover volume was down, but what other -- the other components like special waste or MSW, how did those trend in the quarter and coming into April?

Special waste was up, for the first time since the fall of 2008.

Right.

Really a bright spot. We have primarily a lot of them in the west, which we've got a number of really large landfills out there that do a lot of special waste business. That's a good sign. How does it trend? We. frankly, we usually aren't talking about seasonality at this point. We typically -- seasonality is more of a Q2 topic. A lot of the country that sees winter weather, we don't see that seasonality starts to break until April or May, so --

I'm not talking about seasonality as much as, primarily, what is the pattern of the, like MSW --

MSW is of our total revenue streams for landfill, we're looking at MSW to be about 49%. Of that 49%, about 65% of it is index price, and 35% would be open market price, and the pricing would range anywhere from open market 3% to 4%, index is obviously right around that 1% plus range. C and D represents about 10%, and special waste represents about 41%.

If you think back to my earlier comment, Michael, that 10% C and D volume, I think those are historical lows for the industry, in terms of C and D volume.

That 10% is now.

The MSW is maybe flat to slightly up, and as Don had said the special waste was up. The issue is C and D and we're at those historic lows, and the question is, what happens with residential construction, commercial construction to bring those volumes up.

We really haven't seen any further decline there. It's still relatively soft in the commercial development market, but, again, all you have to do is look at the -- how much our industrial collection has dropped off in the last two years, and that trickles right into the disposal side of the business. We're experiencing what the market is experiencing. That's been down 18% to 20% in the last couple of quarters.

So, certainly, at the end of the day, that's the most cyclical part, that's the part that's going to lag. We probably couldn't -- we may not see a recovery there until the latter part of 2011, maybe even into 2012.

If you looked at the first half of 2009 our total landfill volumes were down in the mid-teens, maybe 14%, 15%, 16%, and now it's down around half of that, around 8%. And, so, what we've got is really this negative C and D, that is anniversarying out and once that anniversaries out, which would probably be second quarter, third quarter, sometime in the third quarter, then we would expect our landfill volumes to go positive, and it's going to be going positive maybe a little bit on that MSW, but certainly this industrial activity that Don spoke to.

Pretty good margin leverage.

The one thing, with special waste being up a little bit, more than we otherwise had maybe suspected, that's put a little downward pressure overall on just our overall reported price. Special waste has come in a little lower than our total waste average.

That's a good point.

It's a mix issue. It's not a competitive issue. If we are bringing in volumes in the market that's $20 a ton versus $40 a ton, it's just mix.

Okay. And then, to the balance sheet, Tod, if I harken back to old Republic you managed DSOs into the high 30s, if I recollect. Say again?

We're at 40 this quarter.

Right, so, can we get to those old levels (inaudible) and when?

Well, I think that we've got maybe one or two days. Each day is worth about $25 million, $24 million. So, they're might be $25 million to $50 million of working capital there. I think for us, it's a question of getting through the economic cycle. Frankly, I've been pleased with our receivable performance given the economy, and also our bad debt performance, given the economy that we're in, and all the focus on system conversion that our people have had, probably has caused a little bit of a slow down there on our collections. But, I think 38, 39 days is realistic. I applaud our collections people and the financial organization for doing a great job, here.

The second part was when, how fast?

I think it's probably, did you tell me when the economy recovers? Maybe next year, early next year. Maybe later this year.

If it's recovering now, it will probably get better every day, Michael.

Okay, see you next week.

I'd like to thank everyone for their questions today, and operator, thank you. In summary, I'm very pleased with our first quarter results. We continue to focus on all the appropriate things, achieving appropriate returns on capital through pricing discipline, maintaining labor productivity through route and disposal optimization, continuing to meet and exceed expectations for realizing merger synergies, reinventing our people and our business platform to ensure high quality customer service and a safe work environment, and, finally, continuing to reduce our debt and improving our credit profile. Again we will maintain our disciplined cash utilization strategy, and we'll have more news on that to come in our third quarter call. I'd like to thank our field organization, as well as Don, for their extraordinary efforts through the integration process, and our excellent financial performance this quarter. I'd like to remind everyone that a recording of this call is available through May 6 by calling (203)369-3221. Additionally, I want to point out that our SEC filings and our discussion of business activities along with the recording of this call are available on Republic's website at www.republicservices.com. Again, thank you for spending time with us today. Have a good evening.

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