Republic Services Inc (RSG) 2014 Q1 法說會逐字稿

Good afternoon and welcome to the first quarter 2014 call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. 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). It is now my pleasure to turn the call over to Mr. DelGhiaccio. Good afternoon, Mr. DelGhiaccio.

Good afternoon, Holly. Welcome and thank you for joining us. This is Brian DelGhiaccio and I would like to welcome everyone to Republic Services' first quarter 2014 conference call.

Don Slater, our CEO; Glenn Culpepper, our CFO; and Ed Lang, Senior Vice President of Finance are joining me as we discuss our performance. Before we get started, I would like to take a moment to remind everyone that some of the information 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. The material that we discuss today is time-sensitive. If, in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is April 24, 2014.

Please note that this call is the property Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I 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 the recording of this call, are all available on Republic's website at RepublicServices.com.

And, finally, I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times, and presentations are posted on our website along with instructions for listening to the live webcast of the event. With that, I would like to turn the call over to Don.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us. We are pleased with our first quarter results and are proud of the way the Republic team responded to challenging winter conditions. Even though we lost approximately 3% of our route days in the Central and East regions due to weather, we reported positive volume growth, positive yield in all lines of business, and generated strong cash flow to fund substantial cash returns to shareholders.

Some of the financial highlights for the quarter include first quarter adjusted EPS was $0.43. Excluding the weather impact, adjusted EPS would have been $0.45. About half of the $0.02 weather impact was due to lost revenue opportunities and the remainder was due to increased operating costs.

Adjusted free cash flow was $186 million and was in line with our expectations. This level of performance continues to demonstrate the strong cash flow characteristics of our business. Core price in the first quarter was 3.2% and average yield was 1.2%. Average yield was comparable to the first quarter of the prior year, even with a 110 basis point decline in CPI-based pricing.

We continue to see strong core price contribution from the open market to offset lower CPI-based price resets. First quarter volumes increased 1.5%. Volume growth was concentrated to the C&D roll off, national accounts, and landfill special waste.

Commercial service level changes were positive in the first quarter and increased sequentially. This is a continuation of a trend that began in 2013.

We returned $226 million to shareholders during the quarter through share repurchases and dividends. This includes 3.9 million shares repurchased for $132 million. We still expect to spend approximately $400 million on share repurchases in 2014.

During the quarter, we continued to make progress on our multi-year initiatives that enable us to execute our strategy. We are focused on managing the controllable aspects of our business by improving the quality of revenue, investing in profitable growth opportunities and reducing cost.

For example, during the first quarter, we launched MyResource, a customer portal that gives our customers online access to their accounts and our services. This expanded technology enhances our customers' experience by making it easier to do business with us. These capabilities further differentiate our service offering and increase value to our customers.

We continue to improve service quality by consistently delivering on the promises we make to our customers. The goal is to build customer loyalty and improve customer retention. We grade ourselves using net promoter score, or NPS, which measures the willingness of our customers to recommend our services. Our net promoter scores have improved in five consecutive quarters.

The investment made in acquisitions was $11 million. We acquired approximately $7 million of revenue at post-synergy EBITDA multiple of 4.5 times. These transactions consist of tuck-in acquisitions that layer in well to markets we already service.

At the end of the quarter, we had $18 million of deals under letter of intent.

12% of our fleet is currently operating on natural gas. We expect that 14% of the fleet will be operating on natural gas by the end of the year.

67% of our residential fleet is now automated. 47% of our fleet has completed our One Fleet maintenance initiative. We remain confident that we can cost-effectively extend the useful life of our fleet by one year, once the majority of the vehicles have been certified. We estimate that this will reduce future capital requirements by $200 million, spread over a four- to five-year period beginning in 2015.

Our initiatives remain on track and we plan to launch other initiatives over the next several quarters, including the next generation of our ROI-based pricing tool.

I am proud of our achievements during the first quarter and remain encouraged by the underlying strength of the business. I want to thank the entire Republic team for their hard work and execution. Glenn and Ed will now discuss our financial performance. Glenn?

Thanks, Don. First quarter 2014 revenue was approximately $2.1 billion, an increase of $75 million from the prior year. This 3.8% increase in revenue includes acquisitions of 60 basis points and reflects the following three components of internal growth: pricing, volume, and recycled commodities.

First, pricing. We had an average yield growth of 1.2%. First quarter average yield was consistent with the same period in the prior year and in line with our expectations. The core price in the first quarter was 3.2%.

Average yield in the collection business was 1.3%, which includes 2.7% yield in the industrial business and 1.2% yield in the commercial business. Average yield in the post collection business was 1.4%, led by landfill MSW, which increased approximately 2%.

Fuel recovery fees increased 0.1%. Fuel costs increased approximately $2 million compared to the prior year and decreased 20 basis points as a percentage of revenue. The average price per gallon of diesel decreased to $3.96 in the first quarter from $4.03 in the prior year, a decrease of approximately 1.7%. The current average diesel price is approximately $3.95 per gallon.

Second, volumes increased 1.5% year-over-year. The collection business was positive 1.1%, primarily due to an increase in industrial volume. Growth in the in industrial line of business was 3.1%, which includes C&D and other temporary activity, which was up approximately 6%.

Growth in the commercial business continues to be positive, but modest at 1.1%. Collection volume also includes a 50 basis point decline in the residential business, primarily due to contracts lost in bid situations. We will only renew business if it meets our return criteria.

The post-collection business, consisting of third-party landfill and transfer station volume, was positive 1.8%, which includes an increase in landfill special waste of approximately 14%. Special waste landfill volumes were lower in the first quarter of 2013, which created an easier comparison. Our landfill MSW volumes were down 1.6%. Our defection rate, which represents the annualized rate of customer turnover, remained stable at approximately 7%.

Third, commodity revenue increased 40 basis points. The increase in commodity sales reflects both higher prices for recycled commodities and an increase in tons sold. Commodity prices increased 4.4% to an average price of $117 per ton in the first quarter from $112 per ton in the prior year. This represents the average price for all commodity types across all regions.

First quarter recycling facility volume of 558,000 tons was up 3.6% from the prior year. Most of the increase relates to additional national accounts brokered volumes.

We closed five older recycling centers that we no longer operate or that were consolidated into other facilities. We intentionally rationalized recycling assets that did not meet our return criteria.

Current average commodity prices are approximately $113 per ton. Cost of goods sold for recycled commodities increased to $12 million compared to the prior year, an increase of 50 basis points as a percentage of revenue. Most of the change relates to brokering recycled commodity volumes on behalf of our national accounts customers. The return on this business is attractive, since there are limited capital requirements.

Now I will discuss year-over-year margin. First quarter 2014 adjusted EBITDA margin was 27.7% compared to 28.5% in the prior year, a decrease of 80 basis points.

As Don mentioned, our business was impacted by the severe weather conditions in the first quarter, which reduced EBITDA margin performance by approximately 30 basis points. The margin impact mostly relates to an increase in operating costs, including labor, fuel, and utilities incurred as a result of weather.

Additionally, we benefited from alternative fuel tax credits of approximately $6 million in the prior year. As we discussed on our last earnings call in February, this credit expired, which resulted in a 30 basis point EBITDA margin headwind in the first quarter of 2014. These margin headwinds are isolated to our first quarter performance.

During the first quarter, we recorded a pretax charge of approximately $36 million or $0.06 of EPS related to an increase in estimated remediation costs at Bridgeton landfill. During the quarter, it became necessary to upgrade the design and the capacity of the leaching treatment facility, which will increase total construction costs. The impact of this charge was excluded from adjusted EPS in the first quarter and our expected adjusted EPS for the full year.

Ed will now discuss interest expense, free cash flow, and selected balance sheet data.

Thanks, Glenn. First quarter 2014 interest expense was $87 million, which included $11 million of non-cash amortization.

Our first quarter effective tax rate was 39.8% of adjusted earnings and in line with our expectations. Our effective tax rate of 33.4% in Q1 of the prior year was favorably impacted by closing out open tax years under audit. The change in tax rate was expected, but resulted in a $0.05 EPS headwind compared to our prior year performance.

First quarter 2014 adjusted free cash flow was $186 million, which was in line with our expectations. Net capital expenditures during the quarter were $213 million. At March 31 our accounts receivable balance was $873 million and our days sales outstanding was 38 days, or 25 days net of deferred revenue. Reported debt was approximately $7 billion at March 31 and excess availability under our bank facility was approximately $1.5 billion.

I will now turn the call back to Don.

Thanks, Ed. To conclude, our first quarter results keep us on track to achieve the goals and objectives we established for 2014. And we remain comfortable with our full year guidance. The fundamentals of the business remain strong, and we are well-positioned to take advantage of an improving economy. We built our plan assuming the positive momentum exiting 2013 would continue, and we believe underlying business conditions are improving as expected.

We remain focused on managing the business for the long-term and creating lasting shareholder value. Our team remains dedicated to providing superior customer service and executing our strategy to deliver consistent earnings and cash flow growth. We are committed to an efficient capital structure, maintaining our investment grade rating, and increasing cash returns to shareholders.

Before going to Q&A, I would like to personally congratulate three Republic employees for being selected as this year's drivers of the year by the National Waste and Recycling Association. The three drivers are being honored for their outstanding customer service and safety records and were chosen out of 908 nominations from across the US. As this award is our industry's highest honor, I am proud that once again Republic secured all three of the coveted award categories.

Congratulations, Tino, [Timone], and Johnny. We look forward to celebrating your achievements with you next week at Waste Expo.

At this time, operator, I would like to open the call to questions.

(Operator Instructions) Hamzah Mazari, Credit Suisse.

Just a question on volumes, Don. Maybe you could give us a sense of any early read you have into seasonality. Are we going to see above normal seasonality based on what you are seeing in volumes today? I realize it may be a little too early. And then, at the same token, maybe you could touch on how much landfill volumes were up as well, if I missed that.

Yes. Sure. I would tell you that Q2 we are off to a really good start in April, looking at a continuation of what we saw with specifically roll off, C&D, and special waste has been strong for us. So again, to your point, Hamzah, it is a little bit too early to judge seasonality. We usually like to have May under our belt before we can start to judge that, but we are off to a good start in April.

As far as landfill volume overall, we had a strong C&D and MSW, but total landfill volume was plus-4%. The special waste led the way, as Glenn said. It's up about 14%.

So we lost some MSW volume. We have had some competitive losses, so about 1.6% decline over last year in trash coming into landfills, based on competitive pricing.

Got you. And just a follow-up question. I will turn it over. I think you are less than 3 times net debt to EBITDA levered. There are a lot of larger assets out there that are private.

I know historically you have spoken about this steady $100 million tuck-in acquisition diet. Could you maybe just comment on how comfortable you are in taking leverage up? I know we did that in the Republic Allied deal. How comfortable are you in taking leverage up to what level to do something larger that makes sense? Thank you.

Well, we have always said, I think our sweet spot is between 2.5 and 3 times, right? So we would like to keep it there. We are right now right at 3 times.

We do look at larger deals, and right now we are focused and have been on the small tuck-ins because they come at the right multiple post-synergy, and they also have less risk as far as integration goes. We do look at larger transactions and we do have flexibility in our balance sheet to do things, whether we can do that using our revolver or if we had to flex the stock repurchase.

We are just looking at it from a real -- again, what is accretive and what brings us the best return. So if you look at our stock trading at 8.5, for us, it kind of come down to that. Would we rather spend 8.5 times EBITDA buying the Company we know and love -- that is Republic? Or would we want to put that money at risk? And we certainly aren't going to be paying 9 times or 9.5 times for EBITDA.

So if we can buy good free cash flow at the right multiple, we are going to do that and we are going to consistently look at larger deals. And they do come across our radar every now and then, but we have to be disciplined in our purchasing strategy.

The limit on our credit facility as far as the covenants is debt to EBITDA of 3.5 times. So again, we are an investment grade credit. Our credit metrics are consistent with that type of a credit rating. And the credit facility does have a limit on debt to EBITDA in order to insure for that type of rating.

Derek Sbrognia, Macquarie.

Just wanted to drill in a little bit here on the weather. The $0.02 impact -- can you maybe talk a little bit more about where you see the lost revenue opportunities? And also I know you framed out kind of the three areas where costs have increased. If you could maybe provide some additional color on why those costs go up and have been poorer weather.

All right. Well, weather specifically, we had some really severe weather in parts of the country that we normally budget weather in, places like Chicago and Detroit. But this was pretty harsh weather. If you lived there, you know that we had brutal cold and we had snow day on day to day.

And we saw weather in parts of the country we don't normally budget for weather. We don't budget for snow in Atlanta and places like that. So when you have weather like that, we have two things happen.

We have loss of revenue from garbage not moving to our landfills, or us not hauling rolloff loads from businesses that aren't operating. You have some pickup from the fact that some days you don't run your trucks. But then when you have to come back and pick up where you left off and make up for that lost time, you are paying a lot of overtime. And you have, frankly, in some of that really brutal weather, things tend to break when it is subzero for many days in a row. Steel gets brittle and your maintenance costs go up, those kind of things.

So again, I know we are not the only Company out there beyond the waste industry that has had to talk about weather. So we are not using that as an excuse. We just wanted to point it out that we did have some impact.

And, frankly, a solid $0.02 from a half cost and half revenue loss, but I think it just frames out the fact that we are really positive on the underlying fundamentals of the business. And as to the question I answered for Hamzah, we got a good start here in April and we think the underlying fundamentals are strong.

Okay. No, that's helpful. And maybe just one more. This is -- you know, we've seen a couple of consecutive quarters here of the strength in specialty waste. I know that there has been some easier comps and that business can be lumpy.

But can you maybe talk about the environment you are seeing in those markets and whether some of the pickup is really indicative of you guys winning business, or whether it is just indicative of a strengthening environment?

Yes. I would say it is new volume. We talk about how our business tends to lag the economy, both on the downside and the return. And we would tell you that, as we see special waste volumes returning, it is an indicative sign of a better economy to come when companies are releasing bids for special waste cleanups, it is because they have got confidence in their own capital budgets.

And a lot of times, the special waste is land clearing for new construction. So that bodes well for what is to come. So we have got a strong market in special waste and C&D, and we are just waiting for that to lead the way for a stronger return in commercial.

Corey Greendale, First Analysis.

First, a question on the brokered recycling volume; so, I understand that that is a good business because it is low CapEx, but it is suppressing EBITDA margin. So it would be helpful to understand just what is happening without that in it.

The 50 basis point decrease that I think Glenn talked about from that particular thing, is that the right way to think about this, that EBITDA margin would have been 50 basis points higher if it weren't for the growth in that business?

Corey, the national accounts brokered volumes would account for a 30 basis points decrease in our margins in the quarter. And the reason for it, really, is that we are required to book the full amount of the revenue and the full amount of the cost, even though in many cases we are not even handling the product. So it is really just a pass-through, but we have to record both the revenues and the cost gross.

Okay. Don, I know the dynamic kind of contrasting internal growth components, you versus waste is nothing new. But -- because it would be almost all focused on waste color, I just want to ask, the fact that you are reporting better volume and lower on yield than waste management, how much do you attribute that to philosophy versus the markets you are in? And do you expect that to change with this next generation ROI pricing tool you are talking about at all?

Well, that is a big question, so I will give you some color. One, we don't focus primarily just on a yield metric. There is a lot more to consider when you think about where you want to grow your business and how you want to balance price and volume.

So we are trying to get both positive price and volume in our business, and of course we are focused on return on invested capital. So when it comes to where we will walk away from business, we want to walk away from business when it is not non-profitable, where it doesn't give us an appropriate return. We want to retain business that gives us the appropriate return, even if it is a competitive bidding type of a situation.

So we take two very different views. One, in the post-collection business, we have consistently raised prices in the landfill business and consistently let volume go that didn't meet our pricing expectations. Those landfills are expensive to own and operate, and we feel that they should carry a higher price component of growth every year.

So as I said, we actually saw more defection in our landfill business in Q1 -- 1.6% volume loss, and all that volume loss because it found a better price somewhere else, so a little different view.

In the hauling side, as I said, in our commercial business, that density really matters and it is a very profitable part of our business. So when we are in a competitive situation over a current customer, we are going to try to keep that customer if it is profitable and has the right return.

Now, we are growing our rolloff business because that part of the business is starting to come back. And while someone might argue that that part of the business has a lower return than other parts of the business, the fact is our job is to grow free cash flow and deploy capital at the appropriate return. So we are growing that business and we are getting both price and volume in the rolloff system. So we are seeing margins expand because of the demand.

So we think -- our team is doing a good job of balancing both price and volume. Remember that we have got 7% defection in our business. So if we do nothing, our business shrinks 7% a year. And so we have got to replace that volume.

About half of that 7% is competitive. The other half is structural, but we have got to replace that volume to stay flat. In fact you have got to replace that volume plus in order to stay flat, because -- we have had this conversation probably a number of times, Corey. You are losing business -- if you are losing business for competitive price, you are losing it at a higher than average price. And if you are gaining business at market prices, it is generally coming in slightly below. Right?

So, another thing to point out is, I think our pricing is pretty strong. So we have about 3.2% core price and that includes 4.2% in the open market. So we are out there pricing pretty consistently in the open market every month.

And, as you know, we really control that pricing movement from the corporate office, our pricing team working with the local divisions, pushing out those pricing programs month after month, every market, about 1/12 of the market every month that we are reviewing customer costs and pricing and patching it into the market. So I think we are doing a good job.

The thing you mentioned about the new pricing tool, what that is going to do for us, it is a technology solution, frankly, to bring some better control and user-friendliness to our frontline salespeople, so that we are going to try to work harder to control that point of sale pricing and help those salespeople make better decisions at the front end. So, a lot of the things that we are doing at Republic are focused in and around improving yield, and I would say more improving the quality of revenue and improving the decision-making about how we quote business and how we prove to the customer that our value proposition is better.

So as I spoke in my comments about customer service, about launching the user portal, thing we call MyResource, so whatever we can do around here to improve that quality of revenue, that quality of the product to the customer, increase their willingness to pay, that is where we are living and breathing here.

But we believe that you have got to balance that volume and price growth as long as it you have got a keen eye in and around a returns-based philosophy, we think it is the right thing to do for cash and, ultimately, for long-term returns in the business.

I appreciate the detail; thank you.

Joe Box, KeyBanc Capital Markets.

Don, it sounds like you guys are getting pretty close to getting over the hump on One Fleet at about 47% installed. I think comps get a bit easier in 2Q on the maintenance and repair side. Are you still thinking that mid to late 2014 One Fleet starts to pay for itself?

Yes. And we start again. When half the fleet is certified and no longer causing that cost bottle wave, we will start to see more benefits from the first half of the fleet. Again -- improved productivity, less downtime, more -- better customer service, driver engagement scores improve in the business. So we are still positive about the process.

Again, this is a really big change initiative as we talked about. It is kind of slow going, but the deeper we get into it, the more committed we are to it. It is the right thing to do. It is going to pay us back.

And then, of course, over and above that, just running a better business, having a stronger operation and a better customer service reliability, we are going to have that reduced CapEx over the long-term. So we are committed to getting more out of our fleet and beginning to reduce CapEx in 2015 by $40 million to $50 million a year over a four- or five-year period.

No, I certainly get the benefits of it. I am just -- maybe just to dig into the numbers a bit, and I get that 1Q maintenance and repair expense probably was somewhat inflated by weather. But should we start to think about that year-over-year increase in maintenance and repair leveling off or even declining on a year-over-year basis?

Yes, well, we'll probably just put it in the context of this. The three initiatives that we have got going on in and around cost and productivity, our One Fleet, our C&G, and our automation, they are worth about 100 basis points over a three-year period. So that is the way we'd have you look at it.

And we are going to have better science around this as we get into it. And ultimately, we are going, I think, get really good at understanding the efficient frontier of our fleet and tweaking our maintenance even further. But from where we stand today it is that 1% across those three initiatives of operating costs over a three-year period.

Fair enough. I just want to ask one very high level question for you. It seems like there has been several states out there that have added recycling mandates recently, which I guess I find it a bit interesting because, at the same time, you have waste firms like yourself that are pushing back and even rationalizing some recycling assets.

So I guess, what would you tell us? How should we think about reconciling the difference between what customers are saying versus what vendors are doing right now? It just seems like you guys are kind of moving in opposite direction.

Well, I guess to start with, we don't think recycling is going away. We think it is core to our business and we recognize the customer demand. At the same time, we are in the business to turn a profit and we need to expand our business services to meet customer needs as long as they bring the appropriate return.

So again, Glenn mentioned that we rationalized couple of assets. We closed a couple of facilities because they weren?t bringing us the proper return. It really is a market by market basis.

So we have got 240 markets across our 40 states. California is not going to change. They are going to continue to have very strong recycling goals, and they have got teeth in those goals.

Consequently, they have also got a lot of money to spend in education and the recycling is much more part of sort of the social conscience there. There are other states that are similar to that. There are some states that have increased their goals, but they really haven't put any teeth around that.

It comes down to regulation. It comes down to density, participation rates, and ultimately for us it has got to come down to can we create a decent return. In some markets we think we will be able to have a good return in recycling. In other markets, we won't, and consequently we won't do it or we will do it through a third-party.

In some cases we have a network of third parties that we use their facilities and so forth because we don't want to make that investment just yet. So we are just taking a very disciplined approach. I think it is a slow mover.

It is probably moving a little quicker than it was 10 years ago, but I think our approach has been pretty rational. It seems that the industry seems irrational today. I mean, there have been some companies that grew from nothing in recycling over the years, but they don't tend to stick around very long.

We look at this thing over the 10-year cycle. So when we make those investments, we look at what are these commodities worth over the long-term.

Understood. Thanks for the color guys.

Alex Ovshey, Goldman Sachs.

A couple of questions. On the volume side, looking at your key geographies and at the parts of the country where you were not impacted by weather as much, was there a notable difference in volume trends there relative to the Northeast, Southeast, during the quarter?

Well, I think we had pretty good volume across the board, but the West did a great job for us. Again, they didn't have weather. So our West region is Texas to California and up to Oregon, Washington. So, not a lot of weather impact, good economic recovery. I have got a very good landfill network in the West, so a good special waste quarter for us there.

And if we look at those underlying trends there, and that is what gives us a lot of confidence in just the overall fundamentals of the business. So, as I said, weather is kind of out of the way now. April is starting off very strong and we have got a lot of confidence going forward.

That is helpful, Don. And then on the recycling side, there has been some volatility in the recycling paper commodity prices. It went up materially in March and then we gave it back in April. I mean, do you have any visibility into what recycled paper commodities will do over the next couple of months? Any thoughts around that?

Yes. I would just tell you flat. I wish I had a crystal ball, and then I would know when to bet on the Bears again. But flat, I think. (multiple speakers)

That's fair. And then just last one for me, any -- can you update us on the Southern California market with Puente Hills now being closed for more than six months? Anything incremental or interesting there?

No. You know, we have the closest landfill in the heart of the market. Consequently, we have probably the highest priced landfill in the market as far as our gate rates and our rates to customers. So when that landfill closed, a lot of that volume went to Orange County. They took the volume at a reduced rate, built a transfer station there at Puente and we did not really benefit from any volume. And any volume we would get would come at higher rates, to sort of work within our current rate structure. We are not looking at discounting there in L.A. to attract cheap volume.

Got it. Thank you.

Michael Hoffman, Wunderlich.

Do you really think -- this isn?t one of my questions -- that you can win with Jay Cutler?

Don't blow your question on that one, Michael.

Service intervals -- you alluded that you were seeing positive service interval changes. And then you?ve shared in several of your answers areas like the Western region and the volume trends. It seems through the breadth of the call so far, there is this sentiment of just fundamental volume improvement occurring.

And no hockey sticks, but just an overall trend that it?s moving in the right direction. And that is how I am supposed to interpret some of the things you have said? Is that what you are (multiple speakers)?

Yes. I would say we are very positive. No hockey stick, that is important. I mean, everyone would like to think that there is some inflection point because everything is going to happen at once. We don't see that happening.

A lot of good momentum, albeit slow. We think, specifically for Republic, we are doing a lot of the right things. We are improving the core business. We are working on cost. We are working on our panel agenda.

We are focused on the customer. We are doing a lot of good things to improve the business and the economy is responding better than it has in previous years, so a lot of good trends. And that is why I said we are comfortable in confirming our guidance. We are strong on the cash flow.

We are buying back our stock. We are very positive on that. So all in all, we thought we had a really good quarter and we think we are going to finish the year right on track.

Okay. So last few items, and they are interrelated. You have a 28.5% to 29% EBITDA guidance, so we are reaffirming that for a full year of 28.5% to 29%. So to do that, is your pricing covering inflation at this point? I'm trying to figure that out. Is, the price you report, are we covering inflation at this point? Your inflation.

Yes. Remember, we have got to go out and get better pricing in the open market to do that. So I would tell you, we are comfortable with what is going on in our commercial open market business, our industrial business. Our residential business continues to be a drag for us. That has been a real low spot for us.

The state of municipal finance, the condition of those cities, we are taking a harder stand on some of these renewals. They want us to deploy more and more capital. And if you look at some of these recent bids that have been on the street, they want every kind of automation and every kind of recycling and the capital intensity is growing, but the willingness to pay is not.

So we are taking a different position there. So we are going to have to work a little harder to get the cost recovery out of those residential contracts that are only giving us 1.5% CPI.

So -- but, you know, we are trying to make up for it in other parts of the business. So we do think the pricing environment is improving subtly and -- not CPI, necessarily, but the open market. And we are going to continue to improve the quality of our products and services to earn more from the customers.

And that translates into disposal pricing as well?

Well, yes. I am not so sure how much more we can do to earn the -- to improve our quality in our landfills for disposal customers. I think it just comes down to what is available in the marketplace. And we have consistently raised our prices at landfills, and we have consistently lost volume at landfills.

So that is okay with us, because we think those assets are so critical. So over time, I think, as I said, probably many times, as the general consumer sentiment improves, as general volumes improve, I think competitor behavior improves, I think that speaks well to pricing overall and hopefully disposal pricing as well.

And, Michael, remember, we discussed in the call that we had 60 basis points of margin headwind in the first quarter that will not recur during the rest of the year. So essentially what we are looking at is the current low CPI environment, flat margin performance year-over-year when you look at 2014 full year compared to 2013.

Okay, thanks.

Al Kaschalk, Wedbush Securities.

Just a follow-up on that. So the 60 basis points of headwind, is that the remediation or is that (multiple speakers)?

No. That was -- the impact of weather was about 30 basis points. And in Q1 of 2013, we had a benefit of an alternative fuel tax credit, which obviously goes through the fuel expense line. So the combination of those two items, the 60 basis points, unique to the first quarter of this year and not rolling into the second quarter.

Okay. Thanks for clarifying that, Ed. Don, just on the -- this whole pricing dynamic -- and I appreciate some of the comments and responses you have had here -- at the landfill side, realizing the market is local, are you suggesting or implying that you are, on average, having trouble? Maybe that's the wrong word ? of raising price at the landfill because it is defecting volume away? Or is that not a fair (multiple speakers)?

Well, like I said, we lost 1.6% volume in MSW at the landfill and they were all pricing-related losses. So, some of those were -- one, specifically, was a bid of municipality and others were individual customers. So we are going to continue to raise landfill prices. Again, these landfills are expensive to own and operate. They need to be able to handle a year-on-year price increase to cover those additional costs. And so we are going to continue to do that.

And we can't subsidize other people in the business by lowering landfill rates. We can't do that. And so that is the way we have approached our infrastructure for many years, and we are going to continue to do that.

And then on the volume side -- I'm sorry. I joined the call a little late. The number was -- what it is in the first quarter, but the trend here is that a little bit more headwind in the back half of the year or comps relative to the back half of 2013?

Our guidance was for the full year on volume was 1.5% to 2%. So I would say we are tracking right within our expectations.

Okay. Great. And then finally, any update on -- it sounded like you said earlier that the open market pricing is trending up, not necessarily accelerating, but there is net improvement in the overall price environment.

Well, I think we expect it to continue to improve through the year. We?ve relied, as we said at the beginning of the year and we gave guidance, we were going to have to rely on the open market to carry a little more pricing than it did last year, in light of the low CPI environment in the rest of our index business. And we think that is going to be the case.

That said, we will get 4.2% core pricing in the open market as a component of that 3.2% core. So we are consistently out in the market looking to improve the quality of revenue, some of those through pricing actions and for existing customers as well as the pricing structure that we are using to bid on new business.

Okay. Thanks a lot, Don.

Tony Bancroft, Gabelli.

Just quick question on any update with municipal contracts. I saw the news with Los Angeles last week. Anything there as far as maybe new trends or color there?

No. I mean, if you are talking about the City of L.A., Puente, or are we talking about the --

The Los Angeles contract where they decide to break it up if you (multiple speakers)

Oh, yes. Yes. Yes. They are going to franchise that. Right. So we are involved in that process. There is a limited number of sections of the city that you are able to win. I mean, we are going to be a part of that process.

We expect that because of our capability and our -- the location of our landfill that we will fare okay in that process. And it is a little ways away yet, but we are knee-deep into it. And that is all I can report for now, but we will keep you updated as we get a little further down the road.

Thanks so much.

I am showing no further questions at this time.

All right. Thank you, Holly. I would like to thank all Republic employees for their hard work, commitment, and dedication to operational excellence and creating the Republic way. Thank you for spending time with us today. And have a good evening.

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