Republic Services Inc (RSG) 2012 Q1 法說會逐字稿

Good afternoon and welcome to first-quarter 2012 call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your hosts for today's call are Don Slager, President and CEO; Tod Holmes, CFO; and Ed Lang, Republic's Senior Vice President and Treasurer.

Today's call is being recorded and all participants are in listen-only mode. There will be a question-and-answer session following Republic's summary of the quarterly earnings. (Operator Instructions).

It is now my pleasure to turn the call over to Mr. Lang. Good afternoon, Mr. Lang.

Thank you, Gabby. Welcome, good afternoon, and thank you for joining us. This is Ed Lang and I would like to welcome everyone to Republic Services' first-quarter 2012 conference call. Don Slager, our CEO, and Tod Holmes, our CFO, are joining me as we discuss our first-quarter performance.

Before we get started, I would like to take a moment to remind everyone that some of the information that we discussed 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 re-broadcast or recording of this conference call, you should be sensitive to the date of the original call, which is April 26, 2012.

Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited.

With that, I would like to turn the call over to Don.

Thanks, Ed. Good afternoon, everyone, and thank you for joining us as we discuss Republic Services' first-quarter performance.

Before we get started, I want to acknowledge Tod Holmes' announcement regarding his plan to retire next year. First, I want to say that everyone at Republican has great respect for Tod and we also respect his decision. Fortunately, he has given us a full year to work a smooth transition.

Secondly, Tod has built an incredibly capable and talented financial team here at Republic inclusive of solid financial processes, sound controls, and of course, a strong balance sheet. Tod has been one of the primary architects of the Company's success, fostering and establishing a lasting culture that is firmly committed to creating cash value for our owners through steadfast management, focusing on return on investment with a balanced approach to cash utilization.

Additionally, besides his 15 years of service to Republic, and the countless contributions he has made along the way, he has certainly been an invaluable advisor to me in the past year and a half. We will save all of our goodbyes and our thank yous for next year, as Tod will be with us for a while and we have plenty of work to do together before we host his retirement party. I'll ask Tod to share his thoughts with you.

Thanks, Don. You know, as Don said, I've announced my retirement. It is effective May 1, 2013. But it's a pretty simple story here. I turn 65 years old in 2013 and have always planned on retiring then. As part of my contract, I'm required to give the Company a one-year notice prior to my actual retirement. Therefore, I informed Don and the Board of my decision at this week's Board meeting.

I do want to stress to everyone that I am fully committed to my job here at Republic. We've got a great team, as Don indicated, here. I'm committed to serving Republic over the next 12 months. Don and I, along with obviously the Board's input, will be working together to ensure a smooth and seamless transition. So with that, we will go ahead and start the call. I'll turn it back to Don.

Thanks, Tod. I will now review our first-quarter financial performance before discussing our revised guidance for 2012.

Revenue of approximately $2 billion. Core price growth in the quarter was 0.6% with positive price in both Collection and Disposal businesses. Disposal includes MSW landfill price of 2.6%.

Volumes increased by 0.2%. Our first-quarter earnings per share was $0.38. Our adjusted free cash flow was $175 million.

We repurchased 1 million shares in the first quarter for $31 million. We have approximately $620 million remaining under our authorization to return to our shareholders through 2013.

We remain committed to an efficient cash utilization strategy which includes increasing cash returns to our shareholders through share repurchase and dividends. Total cash returned to the shareholders was approximately $112 million during the first quarter.

Some of our operational achievements during the first quarter include our safety performance continues to improve with a 4% favorable reduction in our frequency rate. We have closed on $65 million of acquisitions through April. That represents $40 million of annual run rate revenue. These are highly-accretive transactions and we expect to achieve the upper end of our acquisition range of $100 million. We have maintained our return on investment focus when reviewing the acquisition market.

We continue to invest in fleet automation and converting the fleet to CNG. During the first quarter, we converted 67 routes to automated vehicles and placed 140 CNG vehicles in service. Our 2012 truck order includes 550 CNG vehicles, which is 65% of our total fleet order.

We opened our renovated single-stream recycling facility in Anaheim, California which increases our recycling capacity in that market by 50,000 tons per year.

I would like to thank our field operations for their continued support in executing our strategy of achieving profitable growth and maintaining a safe work environment.

Tod and Ed will now update our financial performance.

Thanks, Don. First-quarter 2012 revenue, as Don indicated, was approximately $2 billion and reflects the following components of internal growth -- first, core price growth of 0.6%. This level of core price was in line with our expectations that we spoke to in February for our first quarter. Our core price is positive in both Collection and Disposal businesses with slightly higher prices in the Disposal business due to landfill MSW price increases of 2.6%. Within that component of our business are third-party open market landfill customers, where we are increasing the price in the range of 4% to 5%.

We expected the first half of the year to be below 1% with prices rising modestly in the second half of the year as the impact from higher CPI-based pricing takes hold on our restricted customer base. We still expect to see this increase in CPI-based pricing in the second half of the year, but we do see pressure on price levels from new business in the open market and also retention efforts in the open market and municipal segments. As a result, as Don will describe in more detail later, we now expect our full-year 2012 price to be approximately 1%.

Our fuel recovery fee was positive 0.5%. The increase in the fuel recovery fee relates to an increase in fuel costs. The average price per gallon of diesel increased to $3.97 in the first quarter of 2012 from $3.63 in the prior year. This is an increase of 9%.

Our commodity revenue decrease was 0.8%. Commodity prices decreased 18% to an average price of $122 a ton in the first quarter of this year from $149 per ton in the prior year. Q1 recycling facility commodity volume of 508,000 tons was up 6.3% from the prior year and up 5.2% on a same-store basis. This volume increase compared to the prior year and was in line with our expectation. Our revised 2012 guidance is based upon current commodity prices of $120 per ton compared to our original guidance of $118 per ton. This provides a little bit of a tailwind. For reference purposes, a $10 per ton change in commodity values equals approximately $0.03 of EPS. That also includes the impact on our recycling facility and collection businesses.

Now turning to volume, Q1 volume increased 20 basis points year-over-year. We continue to see volume improvements in the Collection line of the business. Q1 Collection volume was negative 0.1%, and that improved 10 basis points over Q4 levels.

Industrial volume was positive year-over-year driven by a lot of construction activity. Commercial was only slightly negative.

Disposal volumes were down 1.3% versus the prior year, which is made up of MSW tons at our transfer stations and landfills. This was partially offset by higher levels of landfill special waste volumes.

Our Q1 2012 volume performance includes the impact of one more work day versus the prior year, which resulted in a 50 basis point increase in revenue.

Now I'll discuss the first-quarter year-over-year margin. First-quarter 2012 adjusted EBITDA margin was 28.1% compared to 30.6% in the prior year, a 250 basis point decrease. This decline primarily relates to the following four items.

First, maintenance and repairs. We saw a 90 basis points increase in expense that relates to an increase in the cost of tires across our supplier base, the refurbishing of containers versus purchasing new containers, and upfront implementation costs associated with our one fleet maintenance initiative. Our approach to repair versus replace containers results in a higher level of expense but it is capital efficient and results in a lower total cash cost. We expect to work through this container inventory by the end of the year.

Second, fuel. The unfavorable fuel expense increase of 60 basis points was due to the 9% increase in the cost of diesel. Our revised 2012 guidance is based upon current fuel costs of $4.13 per gallon compared to the original guidance of $3.86 per gallon. For reference purposes, a $0.10 change in diesel fuel per gallon is about $0.01 of EPS and this also includes the impact of fuel recovery fees.

A third margin factor is the work day increase. There is an approximate 60 basis point increase in expenses as a percentage of revenue associated with the additional work day in the quarter. This impact can be seen in almost all cost categories, but obviously it's most notable in labor expense. This results from the additional expense of servicing our customers one more day where the revenue is, on many cases, on a fix-fee basis and therefore very little corresponding revenue increase.

Finally, SG&A expenses. The 80 basis point increase in expense relates to investments in our sales force which occurred throughout last year and also increased levels of bad debt expense, partially offset by a reduction in consulting expenses. The 40 basis point increase in bad debt expense primarily relates to one-time recoveries realized in the prior year. SG&A expense at 11.2% of revenue reflects the seasonality of our historically lowest revenue quarter of the year as well as the highest level of payroll taxes that tend to max out earlier in the year. We expect full-year SG&A expense to be slightly above 10% of revenue, which is fairly consistent with the prior year.

Turning to our DD&A, DD&A as a percentage of revenue was 11.8% this year versus 11.5% in the prior year. The 30 basis point increase in expense relates to a landfill liability adjustment recorded in the current quarter for a site that recently closed. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles.

Now I'll turn the call to Ed, who will discuss interest expense, taxes, and free cash flow.

Thanks, Tod. First-quarter 2012 interest expense was $104 million, which included $17 million of non-cash amortization. As we previously stated, in the second quarter of 2012, we expect to call the notes due in June 2017. The interest benefit of this refinancing is included in our full-year guidance.

Our first-quarter effective tax rate was favorably impacted by closing out state audits and changes in estimates on certain tax matters. We now expect our full-year 2012 tax rate to be approximately 37%, but this will fluctuate by quarter.

I will now discuss free cash flow. First-quarter 2012 adjusted free cash flow was $175 million, which consisted of cash provided by operating activities of $334 million, less property and equipment received of $207 million, plus proceeds from the sale of property of $5 million, plus merger-related expenditures net of tax of $41 million, plus divestiture-related payments of $2 million. Therefore, adjusted free cash flow equals $175 million.

Free cash flow timing tends to vary by quarter, in particular due to capital expenditures and changes in working capital. We expect to achieve the lower end of our full-year guidance range of $775 million to $800 million.

Now I'll talk about the balance sheet. At March 31, our Accounts Receivable balance was $808 million and our days sales outstanding was 37 days, or 23 days net of deferred revenue. Reported debt was approximately $6.9 billion at March 31 and excess credit available under our bank facility was approximately $1.6 billion.

I'll now turn the call back to Don.

Thanks, Ed. Now I'll update our 2012 guidance. We expect adjusted free cash flow at the lower end of our original guidance of $775 million to $800 million; adjusted earnings per share of $1.86 to $1.90, which is down from our original guidance of $1.98 to $2.02. Our EPS guidance is primarily impacted by lower-than-expected internal growth, higher fuel expense, implementation costs associated with our maintenance initiative, and certain one-time costs. Our revised guidance assumes a normal seasonal earnings pattern of 47% to 48% in the first half of the year and the balance in the second half. We expect price to be approximately 1%. We expect full-year volume performance to be flat, down from our original guidance of 0.5%. Our volume expectations are being negatively impacted primarily by three distinct MSW disposal locations and a large national count contract loss.

EBITDA margins for the full year of 29.5% compared to our original guidance of 30.5%. We expect our full-year tax rate to be approximately 37%.

We will remain focused on executing our strategy while improving return on capital through continued disciplined pricing; utilizing our ROI-based tools; growing the business through sales, acquisitions, and investments in recycling and processing technology; protecting our profitable business that generates appropriate returns; managing our cost structure through programs designed to gain operational efficiencies, including fleet automation, CNG conversion, and standardized maintenance practices; investing in our people through training and development and maintaining a safe and positive work environment, allowing us to continue to attract and retain top talent; also enhancing our customers' experience with Republic by continuously improving service delivery and providing solutions to meet their changing demands and buying habits.

At this time, operator, we will open the call for questions.

(Operator Instructions). Scott Levine, JPMorgan.

Tod, best of luck. Obviously, it's going to be a year, but you are making the announcement today, so I'll say it now.

Okay, thank you.

You're welcome. It's been a pleasure working with you.

I guess my first question really would be it's only been two months since you set guidance, so what's changed? We're a little surprised to see things change this quickly, generally speaking. So maybe I'll just, without focusing it on price or cost or any particular item, just wondering how things could have changed or your view of the world could have changed this much, this quickly.

Well, I guess we need to talk about price and buy them, because that's part of it. They are two of the major components there.

When we built our business plan, as we do every year, we consider how we see the world exit speed Q4 and then what we're seeing at the time. We're finalizing the budget in January and setting guidance in February.

At the time, we felt a little better about the economy than we do today. We thought we'd see a little more economic lift than we're seeing right now. We thought the pricing environment in the open market would improve a little bit. It really hasn't. We've maintained the cadence of our pricing program, so we're out in the general market. Pricing is frequently and is consistent as we were last year. Our price to customer was about 2.7% in the quarter. So that has continued. We've seen continued pressure from the Municipal segment in rollbacks and renewing business. That's pretty consistent with what we thought.

Then this fleet initiative has cost us a little more than we figured, so that we talked about that quite a bit last year, Scott. In 2010, we decided we needed to focus more on fleet. We are about I think the eighth largest locational fleet in the nation. And to take the customer service assurance and the productivity to the next level, we need to run our fleet consistently across the nation. We saw some disparity in how our fleets were operating. And so we designed this One Fleet program. We piloted it last year. We began to roll it out late last year. We've gone now and broadened that initiative here in the early part of 2012. What we're seeing is the real main focus there of the fleet initiative is to move more to scheduled maintenance and less reactive maintenance to get to that level of productivity and customer service we're trying to achieve. In order to do that, we've got to spend additional money. That is a temporary adjustment, a little bit of a [bow wave], if you will, to move to the level of world-class maintenance we want to run our fleet at.

So rather than back off of it, we decided to move forward with it, even though it's going to cost us more this year. We're coming to you and letting you know that it's critical enough for us that we are going to adjust our guidance. We are going to move through the initiative over the next three years and become a world-class fleet.

Yes, Scott, when we look at it obviously, as Don said, we saw this volume situation here late in the quarter and then this quarter, earlier in the fourth quarter here, in April. Again, when you look at the cost, as Don indicated, we think that we're seeing about 90 basis points of cost increases on about a year-over-year basis and so that's probably around $0.12.

There's really, as Don said, three big items. We've got the maintenance, which is the truck. It's also the container maintenance, which is probably worth about 5 to 10 basis points, which we will work through this year. So while the maintenance might be with us for a couple of years, the container is probably just this year.

We've got the fuel, which everyone is aware of, which is about $0.03 of earnings in addition to the $0.04 in maintenance.

Then we have landfill. We've got higher leachate because of the warm weather in the Northeast. And we also had some other closed site costs at one particular landfill, which we think are kind of a either current-quarter or current-year situation that should mitigate -- be mitigated next year.

We've also seen four distinct volume impacts since we set our guidance.

Yes.

That equaled like 50 basis points.

Got it. Okay. Then maybe as my follow up just to understand this and really reconcile the change in guidance with the business environment that you're seeing, so it sounds like most of the revision is internal and programmatic as opposed to the business climate being what it is. But maybe if you could separate the business climate then from the program spending and talk a little bit about -- it sounds like, frankly, you've gotten more guarded on the business environment as the quarter has progressed. Is that an accurate interpretation? How conservative should we think of your guidance as being with regard to the business environment, which, from a macro perspective, seems to be stable if not improving a little bit?

Yes, I would say we got $0.38 of earnings in the first quarter. And we think our guidance is realistic. Again, as Don indicated, and we said this repeatedly, our business is fairly predictable and we get about 46% to 48% of the earnings in the first half of the year and 52% to 54% in the second half of the year. So early April as we were closing out the first quarter, what we were seeing there plus what we were staying in the competitive environment here in April as well is a flatter economy than what we were expecting, lead us to conclude that we weren't going to get -- we weren't going to get the lift from the economy and that the competitive landscape was remaining maybe a little bit more competitive than we originally thought, whether it is in volume or in price, both those categories.

Understood. Thanks.

Corey Greendale, First Analysis.

So the first question just a little bit more on the competitive environment. So is there any change in how you would describe your behavior as far as how you're viewing price competitively?

No, I think -- we've talked about this a lot and I mentioned in my earlier comment, our price to customer is running about 2.7%. There's always churn in the business. It's always a competitive business. Through all that churn and mix and service increase/decrease, new account, lost account, we end up posting this 0.6% price. So we're still actively pricing in the marketplace.

If you look at our landfill pricing, price in the open market, MSW, is 4% to 5%. So for those people using our landfills in the open market, they are seeing continuously a 4% to 5% increase. So that is continuing.

Having said that, we're not really gaining new accounts in the landfill and we probably lost more open market landfill accounts then we gained because we're not willing to subsidize competition. We are going to continue to raise landfill prices because the cost of owning peoples' trash infinitum -- you can't solve that by volume. You've got to charge a certain amount to get that return. So we've continued that consistent strategy and we're not going to change.

Open market, you know, we have our RPM pricing program. As we've talked about, in the open market, about a twelfth of our customers received a price increase a month in the open market. We work through a review of the costs and we look at what we think price elasticity is and we price our business.

We also then have to go through a continuous effort of defending business. We've got a good business, high margin business, so we've got to defend -- and we use our ROI tools and we have what we call a walk-away price. At some point, we won't keep a customer for less than what we think is a reasonable return. But we do defend vigorously. So our actions haven't changed from that perspective.

One thing we started talking about last year, and that is understanding, by market, who is taking share at our expense. Today we're very good at understanding, by market, who is taking share at our expense. We have a sales staff that is targeted at saving business from those, call it, predators, and also making sure that we're selling accordingly into their lines of business, because we can't just simply watch share leave as the total pie really isn't growing very much.

So that all impacts churn. But again, we're very consistently using our ROI tools, our whole strategy and our compensation programs, and personally, Tod and my philosophy is very grounded and ROI. But we've got a good -- always fight a good competitive fight.

On the volume side, I mentioned 50 basis points of volume that we expected to maintain and has already gone away in the year. We lost a large national account, which is about $25 million reported revenue this year, or about 30 basis points of that 50 basis points.

Then we've lost three -- or we know we've lost two disposal contracts that we've contracted with municipalities. Those were based on price. Somebody decided to undercut us on the price, and we weren't willing to lower our price to the landfills for that business.

The last piece of that is, as you guys are familiar with, LA, the Puente Hills landfill has got a scheduled closing date. They have gotten even more aggressive on attracting volume because they are going to walk away from their space. So that market has just further been depressed over the last 30 or 60 days. So we just can't close our eyes to those volume adjustments. Those volumes are gone and we don't necessarily think we can make them up. We are not just going to chase volume to do that. We've got to be reasonable and responsible.

So a long answer to your question, Corey, but I think our approach to business hasn't changed. We may be tougher than ever as far as defending business, and we're certainly a little more prescriptive, understanding who is taking share at our expense.

Okay, I appreciate all that detail, and I also appreciate the detail on the cost side. Can you just, on the cost side, help us think through a little bit more specifically about what portion of the lower margin guidance is really attributable to nonrecurring costs or things that won't be there, at least in 2013?

Well, I think that the majority of it is -- I would say the fuel and fuel-related, which is maybe about one-third of that 90 basis points, could be with us on a ongoing basis. The other items, which are about 60 basis points, would be either dropping off this year or, in the case of our fleet initiative, that's probably about -- that's like a 2013 and 2014 type of time frame for us. That will continue on as we roll through our larger shops into our medium-sized and smaller shops across the country. So that is a multi-year situation. But again, we should be harvesting the value out of that here through fewer road calls and a more efficient fleet in the future.

Great. And congratulations, Tod. Thank you.

Thank you.

Vance Edelson, Morgan Stanley.

The predators that you referred to, Don, could you give a feel? Are they becoming more predatory, more competitive recently? If so, is it your expectation that that's going to continue, or do you think they are eventually going to have to get more disciplined, given their own cost pressures?

Well, I can't speak for them, right? I don't think necessarily the small haulers have gotten more competitive or more active. Again, the whole pie really isn't growing, so they want to keep their trucks in the street. We're -- one of the things we're adjusting our guidance off of is fuel. Right? We're paying $4.16 a gallon for fuel today. Some of these small haulers like to sell no fees, and I don't know how they adjust their pricing and make any money if they're not raising prices at some point with this high fuel cost.

So you'd like to think that we'd see a little more pricing activity there but, again, I can't speak on their behalf. So we have seen some spots in some markets where things have gotten more competitive by, I would say, across the board, both large and small, even a couple of national companies that have been maybe overly-opportunistic in a couple of spots.

I mentioned those couple of big MSW disposal contracts we lost. We were a little surprised at the rates that those contracts were let for.

So the national account I spoke of, our margins were very, very thin there. We enjoyed a 7-year relationship with that national account. We did a lot of good work for them, continued to reduce their price, build their efficiency, recycle more waste, and we were a little surprised by what happened there.

When we met with them, it was just strictly a price issue. We just weren't willing to lower our price any farther.

So we are going to continue to be diligent raising prices, as I said before. We are going to safeguard our infrastructure. We're not going to give it away to undercapitalized competitors. We're going to continue to fight hard in the marketplace. So that's the state of the business.

Obviously, I think a lot of this is resolved if the economy does take off and some of the things you're reading about actually come true, but we don't have that crystal ball. So if the economy improves, we think market behavior improves, and then I think we all win from that.

Okay, got it. And then another question that's also related to the competitive landscape -- is the M&A pipeline robust because smaller players are putting their hands up more than they used to, or is it because you've gotten more aggressive in pursuing these targets, or is it a little of both?

Yes, I don't know. I think it's tax planning. I think it is succession planning. We've got many, many stories from some of our sellers. They want to move on to a different part of their life. They're concerned about taxes and the change in tax law. There's 100 different stories there. But we think it's a robust pipeline. As we said before, we think we can take advantage of a steady diet of acquisitions over the next several years in and around that $100 million range at a very good multiple. It's a very good use of our cash, and there's some very nice businesses out there that we're going to be looking at over that period of time. So we've had a lot of good success and will continue that.

Okay, thanks. And Tod, congratulations in advance.

Well, thank you, Vance. I'll be around for quite a while, so I'm sure I'll see you often.

Michael Hoffman, Wunderlich.

Thank you very much. Tod, I'm not saying good-bye yet. We'll see you lots over the next year.

There you go.

Okay. Sounds good.

Can we talk a little bit about the sort of things that are happening in the macro marketplace? I'm probably going to exceed my two question thing as we do this, but let's try. We're hearing special waste activity has now settled into normal routines, special waste, ex stimulus driven. If you're in the right geographies, there's oilfield waste activity. MSW has found a level but it's not really recovering; it's just hanging, when you listen to other calls and talk to private players and what have you.

What is your view of that kind of environment?

Yes, Michael, special waste is good for us. It's relatively flat to last year. We are getting our fair share of the natural gas drilling waste. Again, two or three years ago, we had none -- we had no revenue from that business. Today, it's a nice little business for us. We focus on it.

But as you said, we're not in all geographies. So what is going on in North Dakota is a neat story, is a headline, but we're not in North Dakota so we don't get to take advantage of that volume.

The role-off business has been decent for us. We've talked about the industrial strength that we saw last year and coming through Q4. We just haven't necessarily seen it get stronger. People ask me, what about automotive? Frankly, we are not a big player in automotive. The margins in that business tend to be very small. Automotive companies tend to be very aggressive purchasers of services, and it's not been a big segment for us, so I can't really speak to that.

Construction -- we had a good seasonal -- I mean more than expected seasonal activity in temp roll-off in Q1 but we also had no winter. So we're not going to hang our hat on that, thinking that's the baseline to go forward from. We have, we think, some belief that some of that was pulled forward -- roofing jobs, light construction for some early spring cleanup. So we're not so sure about what that means yet for the year. As you know, we don't really see true seasonality till May and June and that's when we can really tell you what's happening there.

Commercial is flattish, still a little bit down. We've had improving volume for a lot of sequential quarters in the Collection business. We just haven't been able to come over the top and turn positive yet.

So I don't think -- I don't know if the economy is getting worse, but it's not -- I don't really see it getting too much better and it's certainly not getting as when we posted original guidance. We thought it was getting a little better at more of a rapid rate. So some of this is about velocity of change. We're not willing to go further in the year with our former guidance based on what we're seeing today.

Okay. Then understanding the 150 basis point impact to EBITDA on the revised guidance out of the (multiple speakers) --

It is 100 basis points -- 30.5 to 29.5 with 90 basis points of that coming out of costs. Commodities is a positive 20 basis points, and then dropping the price is probably a negative 30 basis points from, say, 1.5% down to about 1%. That is how we get to 100 basis points.

The first quarter's margin is obviously driven very much by the normal seasonal makeup of the business, as we described earlier.

Right. So I guess part of the question I was going to -- and thank you for that information -- to ask about the main -- the four items you identified earlier -- the maintenance, fuel, workday, and SG&A -- the maintenance and the workday would have seemed to have been known back on February 9 where I get the fuel and the SG&A were maybe things that can happen later in a quarter, but I'm not --

Well, the maintenance wasn't really known. I think this is something that has continued to evolve as we've gone from a view pilot locations to a broader rollout.

Yes, that is the thing you've got to understand, Michael. We fanned out here, right? So we've gained speed and traction. So, we went from a handful of facilities and now we're multiplying them or facilities where we're touching and that where we're starting to see this thing ramp up. Again, we could have -- we could make two choices, right? We could say hey, stop, slow down. But again, as I said earlier, we believe we've got to get through this. We believe -- as you know, when you look at our operating costs, we've got strong margins. We're good operators. To get to the next level of efficiency and customer experience, we need to have better fleet reliability. Part of that is moving to, as I said, more programmatic maintenance and planned maintenance versus reactive maintenance. What that means is you've got to move through that phase. So there's a little bit of maintenance catch-up to get to that point where your fleet availability and uptime improves, your road calls decrease, and you're really doing planned maintenance.

So that's a lot of work. It's a real high-touch, real high-change -- change management process, but we don't think we can put it off. We think we need to move through it and think it's going to pay dividends in a lot of ways -- customer experience, productivity, driver morale, even, frankly, mechanic retention. Mechanics are hard to come by. Good mechanics want to work for a company that takes maintenance seriously, the way we are. It's all going to pay dividends.

It's just going to take some time and we've got to make the investment. So I think it's the right thing to do and we didn't feel it was a good thing to say, hey, this is harder than we thought, a little more expensive, let's stop. We think that, frankly, would have negatively impacted the morale of the business and the future of the business.

Michael, you have a good question there in terms of our visibility, I guess, a couple of months ago. Again, when you look at this, we've got an impact of about $0.06 in price. That's something that has really just emerged here, I would say, in the last 30 days to 45 days at the most. Then the volume is the same sort of thing. That's just a very current thing that we were realizing. The commodities obviously is a positive. That's about $0.03.

Then when you look at this $0.12 of cost increase, the fuel we didn't anticipate. We were very explicit in the guidance there. I think the maintenance for containers was something -- as Don indicated, is something that has evolved recently. The container maintenance is just a smart thing to do from a cash standpoint. So a lot of these costs are things that are more current in nature.

Now, we also have some positive things. Our original tax guidance was 39%. In interest, also, I think the credit markets are probably a little bit more favorable. So we've got a little bit of a benefit we think on taxes and also on interest. In fact, we've got a number of open tax years. We've got three cycles. We've got some other planning issues and opportunities. So, we may do a little bit better than that, but again, these are things that have recently unfolded. We, frankly, Don and I talked about should we adjust the guidance now or should we wait until mid-summer, which is our traditional practice? Our feeling was, with a $0.38 first quarter and our knowledge that something dramatic would have to change in the second half of the year to meet the guidance, and the fact is there is a rhythm to the quarterly earnings in this business, absent some external influence, we felt that it was appropriate to be upfront and direct with the guidance rather than waiting until July.

Yes, again, historically, as we said, we're going to earn 47%, 48% in the first half and the remainder in the second half. There's not enough change in the macro situation to generate that additional earning. There has been these couple of big volume losses that we've experienced here just recently that we have to admit to ourselves. Then there's a couple of decisions that we made that continue to spend (inaudible) these other initiatives.

Yes, and then one other thing I would say on the cost side is the landfill costs are up. We saw a lot of leachate in the Midwest and the Northeast. One of the questions is well, does that mean that leachate in the second quarter is going to be less?

Well, it continues to reign in the second quarter and we felt that, well, that is a one-time item. It doesn't necessarily mean that it's going to be lower later on. So that's in our guidance also.

Michael, I would just tell you we tell you what we know when we know it. And that's what we did when we did guidance. We do every year. That's what we're doing now and then we'll work through it and then we'll keep you informed.

Okay, thank you very much. Tod, it has been a pleasure working with you.

Well, you know, you're stuck with me for another year.

Bill Fisher, Raymond James.

I will echo Michael's comments and Tod, I hope to see you around (inaudible) next year.

You will.

So congrats on that.

I just -- to totally beat the maintenance to death, but I just want to understand the rollout to the facilities, to your major facilities. Does that continue to ramp up through the year? I was just trying to understand when it might inflect down and will you still be ramping up next year?

Great question. So the plan as we have it today is that we would impact 40% of our fleet this year. Right? We would be landing in the divisions that represent 40% of our trucks, another 30% in 2013, another 30% in 2014. We may ebb and flow that depending on progress, but that's rough numbers. Right? So what we're seeing is it's kind of a nine-month hill to climb there of some additional expense to get to that promised land of scheduled maintenance and so on. So that's what we're experiencing. We're seeing that in Q1 and we think that's how it's going to progress throughout the year.

So we -- that's it. With three years, will be through it, and then will be gaining benefits throughout the rollout at some point as these divisions get certified and are operating at a new level of performance, we'll begin to benefit from the productivity gains and so on and so forth.

Some of our test divisions that had been through it last year, we've seen the improvement in things like inventory, driver morale, turnover. There's a lot of good benefits. Some in there are a little softer than others, but that is the cadence we're on.

And the other thing I would say, Bill, is that we're managing the business for the long term. We know this is the right thing to do. While it's difficult to swallow this additional $18 million, $19 million of cost this year, it's important that we stay the course and we are committed to that.

Okay. Just unrelated though kind of a minor thing, but on that 60 basis points of price, on that Collection side, were you still negative on the residential side?

$0.06 -- price was 30 basis points on the margin. $0.06 of earnings.

He is talking about reported I think.

I'm sorry.

Reported price, yes.

Reported, okay.

Just a little color on like was residential still negative? Just how that was comprised?

Well, a little color, I guess, Collection, total Collection is positive. Commercial is still a little negative. Industrial is positive. Residential is actually positive this quarter.

It is positive, okay.

So, landfill again was a bright spot. I know you didn't ask me that, but I'll tell you again. Landfill was -- is it 2.6% total or 3.4%? For the quarter. So 3.4% total. And MSW was 2.6%. So we had good special waste pricing as well. Not only did we maintain our special waste volumes but we saw price go up in special waste for the quarter. So that was nice to have.

Okay. Perfect, thank you.

Thanks, Bill.

Thanks, Bill.

Al Kaschalk, Wedbush Securities.

On the -- related to the maintenance, I saw there was a small acquisition in the quarter, or at least $20 million I think was the cash acquisition price. Is that related to recycling initiatives or what type of -- could you shed a little color on whether it was a minor acquisition?

That was tuck-in acquisitions. We did talk about $65 million of acquisition price and $40 million of revenue through April because we had probably the largest single transaction that we've done this year close on -- it was on, I think, April 2.

So what we have been buying this year are tuck-in acquisitions on the hauling side.

Yes, that is right.

Again, just to say, not to say that all of our acquisitions will be collection or hauling. We are looking at some other recycling-based infrastructure, etc., but so far, this year, it has been collection.

Right, so could --

And we've got a strong pipeline there, so we are -- again, our original guidance there was $50 million to $100 million of purchase price. We're at about $65 million with a strong pipeline ahead of us.

Is there any pullback from the recycling multi-year top 25 market initiatives or where are you at in that thought process?

No, no pullback. Again, we do believe that the waste stream is changing, that customer demand is changing. I'll just use a minute here to remind everybody, there are some very, very interesting things that we look at that are very global macro across the whole Company, but when we look at investing in the business and recycling, we look very distinctly at the marketplace. We have 240 distinct unique markets across Republic Services. Those markets are changing at different speeds. It's our job to understand what is changing and the velocity of the change.

So we have earmarked, again, about 10% of those markets, or 25 markets, that we think we'll invest in over the next five years. And it is a dynamic list. There are some things moving up and down in that list of 25. But we're on track to make investments in about five markets this year. As I said, we just completed in Q1 the renovation of our Anaheim facility, which will increase our recycling capacity there. Our recycling tons in total are up, in Q1, 5% same-store, so that is part of the business that is growing. We can't deny that customer demand is changing and we need to be in that space so we can provide all the solutions in and around the waste stream that our customers need and we are committed to doing that.

On the large national account, I guess when your competitor made the announcement on the acquisition, there was some value or amount that was that so-called potentially at risk on revenue. Have you cleared all of that which you view at-risk with the definition that value at risk is maybe something you know about or something that is coming up for contract negotiation?

We've disclosed everything that we know about as far as all these contracts.

As you can appreciate, every year, we enter into a business plan and we have contracts that are being renewed. We have to look at trends in the business. We have to look at how far we think we are along in extension negotiations. We've got to then budget an amount. We think we are going to retain x% of these customers. We already know we are well down the path to retain certain ones. Some are more at risk and we budget for certain amount of business loss, business gain, service reduction, and we have to obviously take a stab at that.

In the case of this large national store, again, as I said, we had a 7-year relationship that we thought was very strong. We've done a lot of good work for the client. When we put our budget together, we were convinced, frankly, that we were going to extend the business based on the work we've done. We were wrong. There was something else afoot, and there was somebody with a dramatically different price structure, apparently, than we had.

So that happens. And that's the nature of that.

The other thing I would say is we've got a very strong pro forma discipline for either bids or acquisitions which we've applied to this large account. We know what our investment is. We know what the returns are. With an existing customer, we would want to retain it, so we might stretch there because we know the risks, we know what the waste stream is. But when you get to the point where it becomes a little bit irrational, we have to have a walkaway. And that is what we did.

When you are an incumbent, you tend to know all the costs. So we still believe in the national accounts business. We've got a decent pipeline of opportunities, both nationally and regionally, that we are working on. We've got many, many national account clients that we are working very diligently with on managing their waste stream and so forth. So we're continuing to do the work and it is just, again, as we've said before, it's a competitive business. It always has been, it always will be. Sometimes a couple of these things take you by surprise.

Then if I may, finally, sorry about the multiple question part, but on the margin front, EBITDA in particular, given some of these fall-offs and walk away from and contract issues, it would suggest, given that they were multi-year contracts or relationships, that -- and the lack of volume in the market, that the opportunity for margin expansion beyond even 2012 at the moment is going to be something you've got your work cut out for you.

Well, we've got -- remember what Don said earlier. We have a whole series of other initiatives that will give us multi-year margin expansion. So, when you look at automation, when you look at CNG, when we look at this maintenance initiative, which while it's a little bit of a head wind, that will -- we'll get over that hurdle. So there are some productivity and operating opportunities there. We are continuing to price increase.

So some of what we're seeing on the margin is kind of short term in the quarter which affects the full year. Some are annual in basis or in the maintenance situation it's been fuel -- it's a little bit longer-term, but there are opportunities to expand the margin.

Sure. I mentioned in my comments our safety frequency improved by 4% again in the quarter. We've deployed more automation. We ended last year at 59% of our resi fleet was automated. Our goal this year is to get it to 63%, I think. Ultimately, we will get it over 80%. We are going to continue to invest accordingly and that CNG is a good investment for us.

Our overall headcount in Q1 was less than it was in Q4. So we are obviously good cost managers. We're tracking those kind of metrics across the business. The strategy really of the Company hasn't changed and that is it in a nutshell.

Very good. Thank you, guys.

Thank you. That is all the time we have for questions today. I will now turn the call back to Mr. Slager for his closing remarks.

Well, thank you, Gabby.

In closing, I'd like to think the entire Republic team for their continued hard work and dedication in the first quarter. We remain focused on the business fundamentals required to improve our return on invested capital and further position our Company to grow across all lines of business.

As a reminder, a recording of this call will be available through May 3, 2012 by calling 203-369-1833 and using a pass code of 4589. Additionally, I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables, and a discussion of business activities, along with a recording of this call, are all available on Republic's website at RepublicServices.com.

Finally, I want to remind you that Republic's management team routinely participates in investor conferences. When presentations are scheduled, the dates and times are posted on our website along with instructions for listening to the live Web.

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.