Republic Services Inc (RSG) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the second-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' second-quarter 2014 conference call. Don Slager, 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 July 24, 2014. 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. 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 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. We are pleased with our second-quarter results, which include strong revenue growth, margin improvement, and substantial cash returns. Our 2014 business plan assumed industry fundamentals would continue to improve, which we have seen in our year-to-date performance. Our second-quarter results were in line with our expectations and we remain on track to achieve the financial guidance we established for 2014.

Some of the financial highlights include second-quarter adjusted EPS was $0.51. The second quarter benefited approximately $0.01 due to a slightly lower tax rate. Year-to-date adjusted free cash flow was $247 million and in line with our expectations. This level of performance includes approximately 60% of our projected full-year capital expenditures.

Core price in the second quarter was 3.1% and average yield was 1.4%. Average yield increased sequentially due to stronger pricing in our open markets. The restricted portion of our business continues to reflect the relatively low CPI environment. Second-quarter volumes increased 2.6%. Volume growth was concentrated to C&D rolloff, permanent industrial, national accounts, and landfill special waste. Commercial service change levels were positive in the second quarter and increased sequentially. This is a continuation of a trend that began in mid-2013.

We returned $217 million to shareholders during the quarter through share repurchases and dividends. This includes 3.6 million shares repurchased for $124 million. Year to date we have repurchased a proximally 7.5 million shares for $256 million. We expect to spend approximately $400 million on share repurchases in 2014. Our Board recently increased the quarterly dividend to $0.28, an increase of approximately 8%. This is consistent with our historical practice of raising the dividend in the mid- to high-single digit range.

During the quarter we continued to make progress on our multiyear 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 costs. For example, during the second quarter we began rolling out our next-generation ROI-based pricing tool known as Capture. This tablet-based tool standardizes the quote to proposal process, enables better controls at the point of sale, improves the efficiency and effectiveness of our salesforce, and provides a better experience for our customers.

Additionally, we continue to implement priority-based selling or PBS, our new standardized sales process. PBS focuses on delivering stronger, more effective interactions with customer segments that value our service and are willing to pay for enhanced offerings. Both Capture and priority-based selling were designed to work together on the same cloud-based platform to integrate the process of identifying the right type of volume growth at attractive prices. We expect a full rollout by the end of 2015.

Last week we launch the My Resource mobile app, an expansion of our customers' online account management tool. The My Resource app allows customers to schedule a pickup, view their service schedule, receive holiday schedule reminders, and push notifications including weather-related service alerts and pay their bill. These capabilities further differentiate our service offerings and increase value to customers.

The year-to-date investment made in acquisitions was $55 million. We acquired approximately $28 million of revenue at post-synergy EBITDA multiples of 5 times. These tuck-in acquisitions layer in well to existing markets.

Regarding our fleet, 13% is currently operating on natural gas. 67% of our residential fleet is now automated. And approximately half of the fleet has completed our One Fleet maintenance initiatives. We remain confident that we can cost-effectively extend the useful life of our fleet beginning in 2015. We estimate this will reduce future capital requirements by $200 million spread over a four- to five-year period. I'm proud of our achievements during the second 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 Brian will now discuss our financial performance. Glenn?

Thanks, Don. Second-quarter 2014 revenue was approximately $2.2 billion an increase of $114 million from the prior year. This 5.4% 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 1.4%. Second-quarter average yield was up 20 basis points sequentially and in line with our expectations. Core price in the second quarter was 3.1%. This consisted of 4.2% in the open market and 1.4% in our restricted business. Average yield in the collection business was 1.4%, which includes 2.4% in the industrial business and 1.7% in the commercial business. Average yield in the post collection business was also 1.4%, led by landfill MSW, which increased approximately 2%.

Fuel recovery fees increased 0.2%. Most of this change relates to an increase in the rate charged to recover fuel costs. Fuel costs increased approximately $5 million compared to the prior-year but decreased 10 basis points as a percentage of revenue. The average price per gallon of diesel increased to $3.94 in the second quarter from $3.88 in the prior year, an increase of 1.4%. The current average diesel price is $3.89 per gallon.

Second, volumes increased 2.6% year-over-year. The collection business was positive 1.9%, primarily due to an increase in industrial volume. Growth in the industrial line of business was 6.3% and includes C&D and other temporary activity, which was up 9.6%. Volume in the commercial business was up 1.3%, and residential was down 1%. The decline in residential was 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 5.2%, which includes an increase in landfill special waste of approximately 19%. Special waste landfill volumes were lower in the second quarter of 2013, which resulted in an easier comparison. Our landfill MSW volumes were flat with the prior year.

Our defection rate, which represents the annualized rate of customer turnover, remains stable at approximately 7%.

Third, commodity revenue increased 60 basis points. The increase in commodity sales reflects an increase in tons sold partially offset by a decline in recycled commodity prices. Commodity prices decreased 2% to an average of $108 per ton in the second quarter from $110 per ton in the prior year. Current average commodity prices are approximately $111 per ton.

Second-quarter recycling facility volume of 626,000 tons was up 13.2% from the prior-year. Most of the increase relates to additional national accounts' brokered volumes. Cost of goods sold for recycled commodities increased $13 million compared to the prior year, an increase of 50 basis points as a percentage of revenue. Again, most of the increase relates to additional national accounts' brokered volumes.

Now I will discuss year-over-year margin. Second-quarter 2014 adjusted EBITDA margin was 28.4% compared to 27.6% in the prior year, an improvement of 80 basis points. The change is made up of favorable decrease in SG&A expenses of 90 basis points partially offset by a 10-basis-point increase in cost of operations. The reduction in SG&A expenses primarily relates to $17 million of legal charges recorded in the prior year. Second-quarter 2014 SG&A expense was in line with our expectations at 9.9% of revenue.

The changing cost of operations primarily relates to increases in transportation expenses, subcontract costs, and cost of goods sold, partially offset by favorable reductions in direct labor and risk management expenses. The increase in transportation costs primarily relates to growth in landfill special waste, where third-party transportation was used to deliver the volume. The increase in subcontract costs and cost of goods sold primarily relates to growth in the outsourced portion of our national accounts business and recycled commodity volumes that we brokered on behalf of our customers. The favorable reduction in risk management expense relates to a reduction in ultimate claim costs. Our risk group has been able to favorably settle claims as compared to the actuarial reserves recorded.

Finally, the improvement in labor primarily relates to the mix of volume growth. The increase in landfill special waste and outsourced national accounts has very little incremental labor. I would like to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing.

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

Thanks, Glenn. Second-quarter 2014 interest expense was $87 million, which included $11 million of non-cash amortization. Our effective tax rate was 38.5% of adjusted earnings in the second quarter and 39.1% on a year-to-date basis. We expect an effective tax rate of approximately 39.5% in the second half of the year.

Year-to-date adjusted free cash flow was $247 million, which was in line with our expectation. Net capital expenditures during this period were $482 million or approximately 60% of our projected full-year spend. Free cash flow can fluctuate by period due to the timing of capital expenditures, cash tax payments, and working capital. At June 30 our accounts receivable balance was $933 million and our days sales outstanding was 38 days or 25 days net of deferred revenue. Reported debt was approximately $7.1 billion at June 30 and excess availability under our bank facility was approximately $1.6 billion.

I will now turn the call back to Don.

Thanks, Brian. To conclude, our second-quarter results keep us on track to achieve the goals and objectives we established for 2014. We remain comfortable with our full-year guidance of adjusted EPS of $1.93 to $1.98 and adjusted free cash flow of $675 million to $725 million. The fundamentals of the business remains solid and trends continue to improve as expected. We see strong open market pricing, which is offsetting lower CPI-based resets, organic volume growth driving margin expansion in our large container industrial and landfill businesses, service level increases in our small container commercial business, continued progress on our multiyear initiatives to mitigate cost inflation in the business, and a healthy pipeline of accretive acquisitions.

Our team is dedicated to providing superior customer service and executing our strategy to deliver consistent earnings and cash flow growth. We remain committed to an efficient capital structure, maintaining our investment-grade rating, and increasing cash returns to our shareholders.

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

(Operator Instructions). Hamzah Mazari with Credit Suisse.

Just a question on volumes, Don. Maybe you could comment on if you saw above-normal or normal seasonality in volumes during the quarter. Historically you folks have raised guidance at Q2 the majority of time. Do volumes -- do commercial volumes need to get better for you to raise guidance? Or any commentary around volumes and your reiteration versus raise of guidance which you have done historically most of the time?

I will start with your first question. I think seasonality was normal. So, we are pretty confident in the trajectory of the business. Our estimates of guidance -- as we entered into the year we expected to see the economy improving, and we are seeing that. We thought we would see it occur first in the C&D business, and we are seeing it both in the landfill and on the rolloff side of the business. We expected that open market pricing would be stronger and we would actually move more strongly in the open market for price to offset some of the pressure we are seeing in the municipal side of our business.

So most of that is happening pretty consistent with what we expected. So, we are comfortable with the range of guidance for the rest of the year and we will update you further when we get to Q3.

Okay, and just a follow-up question -- on the margin side you've talked about 100 bps expansion from CNG, fleet automation and the one maintenance initiative. Could you give us a sense of is that front-end loaded? Is that going to be pretty linear going forward? And longer-term, is most of the margin expansion -- should we expect that to come from price, given that over the last few years since the downturn you have taken out a lot of cost and you are already pretty lean to begin with?

Thanks, Hamzah. Great question. The three operating initiatives -- fleet, One Fleet, CNG, and automation -- we said is going to be 75 to 100 bps of operating margin improvement over three years. And think about that being probably more mid- to backend loaded because it takes a while to get these things up and going. And as you know, the One Fleet initiative has a lot of frontloaded costs to get through that initiative and get it rolled out. But we are on track and we are very happy with the results we are seeing there.

As far as the margin, we have said all along that it's going to take price in excess of normal inflation. And so that CPI headwind has been hurting us over the last couple of years. But we've kept the margin strong. We think as CPI normalizes again, and we think it will, that we will continue to see margin expansion. And we are going to hopefully see continued strong pricing in the open market.

So, we are comfortable with the guidance. We think the margins have held up nicely and we think, over time, as CPI improves and pricing improves along with it, that we can push the margins a little higher.

Great, thanks a lot.

Thank you. Our next question comes from Corey Greendale with First Analysis.

So it sounds like the tone of business is improving. You got what sounds like a nice year-over-year benefit from special waste in the quarter. Can you help us think through how sustainable that is and what the internal growth assumptions are baked into your reiterated EPS guidance?

Yes. I will let one of these other guys talk about the internal growth assumption baked in. I will talk to you about special waste. The bulk of the special waste year-over-year improvement is coming out of event-driven jobs, so soil, which, to me -- that business is a little bit lumpy. But we've got a good pipeline of special waste that we are looking at for future quarters. So we think that's going to be consistent throughout the rest of the year.

And the good news there for me is that that soil clearing or that soil removal tends to be a precursor to construction, land clearing. And so we just think it's another positive sign of economic growth and potentially more construction. So we think that's a good thing.

And then our E&P business held up pretty well as well. We do receive some material from a various number of drilling sites at our landfills. So that has been pretty consistent for us as well.

Going forward, Corey, the special waste has grown for the last four quarters in a row. And the last three have been double-digit growth rates. So we expect growth in the second half to be muted because we have tougher comparisons there. It really took off in the second half of 2013. And so from here on out the comparisons on special waste will be tougher.

And applying that to the overall guidance, Glenn -- so we should expect the volume growth to be more muted in the back half? And I'm talking about overall volume growth, not just special waste.

Overall, yes. We are sticking with our guidance of 1.5% to 2% volume growth for the full year.

Yes, so the volumes there -- it's just the comp against last year. That's all.

And just one more, if I could -- what commodity price assumption are you baking into the guidance? And what is the EPS impact of if you are baking in lower commodity prices versus what you might have assumed at the beginning of the year?

Yes. It's relatively flat, Corey. So you remember at the beginning of the year we were guiding to the full year of $110 per ton. And in the second quarter we were right about at $108, so relatively in line with where we thought we would be.

Thank you.

Scott Levine with Imperial Capital.

So drilling down a little bit more on the impact of index-based pricing, I know most of your resets, a large chunk of them occur here either midyear or in Q3. Should we expect, based on the inflation information to date, that you are seeing a step down, step up? What should we be thinking about the index side of the business going forward based on past inflation rate?

Yes, Scott. The inflation rate in 2013 CPI was 1.5%. So we would be seeing a bigger impact of that in the second half of 2014. So we will be stepping down. Now, the more recent CPIs have them in the 2% range. We will see where that goes for the remainder of the year. But if we get a higher CPI for the rest of this year we will see that impact in 2015.

Understood. And as a follow-up on the cash flow, the dividend raise here I think the last couple years has been a step up in terms of rate of increase from years prior. Can you help us understand a little bit how you think about that from a payout ratio perspective and thoughts on for that you would favor either the dividend or the buyback going forward following the dividend increase here today?

Yes. So, one, we are not managing to a yield goal. And we think that the payout ratio that we have today is pretty consistent and will stay pretty consistent through time. We've said now for many years that we think the business as it grows can support a dividend increase in the mid-to high-single digit year-over-year. So think a 6% to 8% kind of dividend increase year on year. That's pretty consistent with our three- and five-year CAGR as we look at the business today. And that's the way we look at it.

We think this balanced approach of free cash flow, having some availability to grow the business through acquisition and then spending the remainder on that kind of split somewhat evenly between dividend and buyback is the right way to go. And that's what we are committed to.

Got it, thank you.

Derek Sbrogna with Macquarie.

Congrats on the quarter and thanks for taking the question. I was wondering if you could talk a little bit more about what you're seeing on the residential side. I know in the past you've talked about this being a drag and that customers wanting to get more out of the service provider without a willingness to pay. Has this thawed at all or do you still foresee this being a drag as we go forward here in what seems to be an improving environment?

Well, the main drag on residential overall is the CPI piece. As we think about our overall business, our industrial business is performing very well, growing units, growing revenue per unit, expanding margins. Our commercial business volumes are modestly -- modest increase, margins remaining flat. We are looking for more service increases to develop as we can start to build density into that business.

The residential line of business has been our drag. Some of that is just CPI, and we are going to work our way through that. Some of that is the customer demand for increased services. But I would say that we feel better about it today than we did six months ago. Anecdotally we are seeing a little bit different behavior out there. I think people are being a little more stingy with their CapEx. These are very expensive contracts to get involved in. Fully automated trucks, three-cart systems, CNG, the capital outlay for resi contracts is large. And so we have stepped back a little bit, too.

And so, we are looking -- as Glenn said in his comments, we are not going to do business unless it's for the right return. And so, we are pushing back a little bit. And I think anecdotally our team would say that the environment is probably improving slightly from that perspective. It hasn't shown up in the numbers yet, but as CPI improves and haulers understand the full cost of running these contracts I think overall the pricing in the reset environment will improve, too.

Okay, great. That's actually a good segue into a follow-up in terms of ensuring that business meets a good return. Can you maybe provide a little bit more detail on the next generation ROI-based tool, just where you are in the rollout process, how it differs from the prior version? And then maybe more specifically if this is being managed at a corporate level or at a field level.

So the one thing that's very much the same is it's ROI based. So the old tool that we've used for years was a lot more manual, more spreadsheet driven. This is a cloud-based software that we frankly administrate from the corporate office. And so when we talk about having better control of the pricing decisions at the field level, that's one of the main benefits. So, we are very focused here on quality of revenue. As we grow revenues, we grow volume, how do we grow body of revenue, quality of units?

And so we have a lot of transactions happening out there every day. We've got the 7% defection; we have to replace those units in the market through new new growth or competitive growth. We want to make sure that every new unit coming into the system is priced at the very best level. And so this tool is, as I said, a tablet-based tool or an iPad-based tool that our salespeople can go to the market with. It allows them to basically enter the customer's data, to segment the customer, understanding what kind of the customer they are and what they might be willing to pay for. Helps them make better decisions, helps them be more efficient with making their sales calls. And actually, as I said on the call, actually improves the customer experience. So all of that is aimed at improving quality of revenue and improving efficiency of our salesforce and then ultimately still improving the experience for our customers.

So, we are pretty excited about it. We are through a couple of markets right now. We've done the pilots to basically get the system rolled out, initiate the training, tweak it a little bit. We are going to be rolling it out, as I said, through the end of 2015. A lot of that will be done this year. But having it rolled out and then having it fully utilized and all the training completed and having that Rule of 78 start to work for you, because risk is really aimed at the replacement of the 7% defection, the new sales, so to speak.

And then we will use the tool to price service increases and decreases as well. But it puts all the power in the salespeople's hands to be more efficient. But it puts the control in our hands here. And so, we set pricing parameters at corporate with the assistance of our local management teams, but we have the ability to set thresholds and benchmarks. And when we make adjustments here, basically, because it's a cloud-based system, those adjustments can basically -- and those new pricing limits and thresholds can be instituted in the field virtually overnight.

That sounds great. Thanks very much.

Michael Hoffman with Stifel.

In the gory details in the margin data there is, in fact, a positive move in labor and fuel. Am I overreaching when I say that you are starting to see some tiny little benefit from all this work in automation and CNG in One Fleet?

No, we are seeing the benefits. I will tell you that as we look at the quarter June looked better than the first two months of the quarter as it related to those two line items you mentioned. So, we are anxious to see those things flow into July and into Q3. But the system is working. We are seeing the benefit.

We are facing -- the fleet complexity has increased pretty dramatically as we have been buying all these CNG trucks and automated trucks, all the new clean diesel technology over the last several years. That is impacting us a little bit, so that's one of the benefits of having One Fleet out there is it helps us maintain that more complex fleet better than we would have without One Fleet.

So we are on track. As I said in my comment, we're going to come over the hill here and we will see the benefits in the business, not only in those two line items but we will see driver productivity; we will see driver morale and turnover impacted positively. We will see better customer service as a result and then ultimately we are going to get this fleet benefit as we very methodically and intelligently get more life out of our fleet. So, we are feeling pretty good about it.

Okay. And then I can't remember who was framing this. But I have the sense I should think about first half versus second half and if you had an average revenue growth of, call it, mid-to upper 4% for that first half. The second half clearly is slightly lower because CPI has come down, volume comp. But is there -- so I'm trying to understand the gauge of that. Is it sort of 50 basis point?

And then the other question in that is, if this trend in volume is coming through in-service upgrades, is the scope of your rollback starting -- are they narrowing, too, so maybe that's a cushion as well? I'm just trying to understand the combination of all those pieces.

Yes. I'm not sure that -- there's a lot of moving pieces there. I'm not sure that we can give you the exact first half/second half split.

I had to try.

I will tell you that the trajectory is right, that things are improving. Obviously, the CPI second-half headwind. But -- I don't know. Have you got something to add on that, Brian?

Yes. I was just going to sit there and say -- so, Michael, if you take a look at our guidance, right, on the yield side we are guiding to 1% to 1.5%. And year-to-date it has been 1.3%. Right? So you can look at that relative to the overall range. And the same thing on the volume. Year-to-date volume has been 2.1% and our guidance for the full year is 1.5% to 2%. Right?

So, while there might be, in particular, on the volumes, as I mentioned, getting the tougher comps in the second half, you can still see, given the fact that half the year is already done, it's not a substantial change, if you will, in trajectory, given that, like I said, half the year is already in the bag.

And the rollback issue? Are we getting narrowing or less pressure on that so the rollbacks aren't as big as they used to be?

I will tell you that we are doing a better job year-over-year on extending business prior to it going to bid. And I will tell you that when we do have to rollback it's probably similar to last year. But I will tell you anecdotally I think it's improving. But, again, we are talking about resi. Right? We are talking about municipal resi contracts. And again, that gets influenced not only by CPI but it gets influenced by municipalities getting healthier. So if the economy improves and their tax base improves, that whole dynamic is going to improve with it. And that's what would expect to see going forward.

Okay, great. Thanks.

Joe Box with KeyBanc Capital Markets.

A question for you on the cash flow guidance. It implies, call it, $430 million to $480 million in the back half, which is up pretty nicely versus last year. And I get that your cash flow is typically back-half loaded. But can you maybe walk us through some of the pluses and minuses that give you the conviction that you are going to hit that full-year cash flow?

Sure, Joe. If you look at last year our cash flow in the second half of 2013 was over $400 million. And then when you look at CapEx for the full year, our CapEx is going to be lower than 2013. But through the half year we spent more on CapEx in the first half. So, we are going to have a decline that's pretty significant on CapEx in the second half of the year.

Okay. So that's the biggest good guy on the list. Anything on the minus side that could detract?

Well, if our profits stay where they are we will pay a little bit more in tax. But there's also some other good guys on the working capital side. So overall we are comfortable in maintaining our guidance of the $675 million to $725 million.

Got it, got it. I do want to dig into the 13% recycling volume growth just a little bit more. Glenn, I know that you said earlier that the bulk of that came from national accounts. But can you maybe just quantify what was national accounts and then maybe give us a sense of where the rest of the growth is coming from?

Well, it's almost all national accounts and the biggest piece of that is volumes that we are brokering for national accounts customers. That accounts for almost all of the increase that you see there.

So this is one of those -- kind of skews the margins a little bit. We get a fee to manage that volume because we already have 4 million tons of our own volume that we are managing recycling. Right? So we got people that do this for a living for us. So when we have national accounts that need their old corrugated containers managed, they do the baling and we basically broker company to come in and move that material and take it to an end destination, one of our mills. So we just get a small fee. So kind of a pass-through thing. It kind of skews our margins, but it's, on an ROI basis, good business. So we will do that for customers when they need that service.

Understood. Thanks.

Charles Redding, BB&T.

Just a quick follow-up on the national accounts piece. Can you just remind us of the increase there for the quarter? And then is it generally fair to assume that that's going to be much less cyclical than special waste?

Yes. Well, national accounts, I guess, is less cyclical than special waste unless you have a large win or loss. Overall, we focused more of our effort here recently on the midsized to small national account and have spent less time worrying about or chasing the large national account because, quite frankly, they tend to be less profitable and you have a harder time creating customer loyalty we found. So, I would expect that to be less lumpy over time.

But national accounts is a good business for us. We are committed to it. We've got a reasonable-sized portfolio that we are growing mostly, as I said, in small or regional kind of accounts, et cetera. And the only thing that really skews our numbers with national accounts is when we have to sub contract services in markets that we are not in or when we do this recycling brokerage that makes the margins look at little bit strange. But I would tell you that, again, on an ROI basis the business we are bringing onboard with national accounts is producing good returns for us.

Okay. And are there factors there aside from labor that really move the needle in terms of margins? Or is it mostly labor in terms of just having that subcontracted?

With national accounts, again, when we do the hauling ourselves, these accounts fit right into our network, into our density. And when we have an inordinate amount of a customer's locations outside of our footprint, then that changes the overall margin because of the subcontracted portion. So, again, as I said, good margin -- low-margin but high return when you factor all that in.

Okay. Many thanks.

Al Kaschalk with Wedbush Securities.

I joined a little a late, so my apologies. But I wanted to drill on this cost of operation inflation and the growth in revenue. It still seems to be -- obviously, there is a difference of about 40 basis points, I think, costs of going up about 5.5%, and revenue went up a little over 5%. So is that mix -- is that not getting enough traction yet on the cost savings program? It seems like it's a little bit of a struggle here. And I would have thought you would have gotten a little bit of benefit, given that we have comped the CPI hurdle that we have been talking about for a while.

I think, Al, if you look at our cost of operations -- and this is in our 8-K -- in 2013 it was 61.6%. And this quarter it 61.7%. So it's pretty even. And as we said in there, we've had quite a bit of growth in our national accounts and in this brokered business where the margins are thin. So, you've had some increased cost of sales from that, increased cost of sales from the commodity brokerage type business. Overall, the costs have only gone up 10 basis points.

On basis points I agree, but on dollar-wise it's up. Right? I understand.

We've got a little bit of fuel, too, a little bit of fuel drag there as well, Al.

Right, right. Just one other comment and then I have a follow-up. Just make sure, when you get over that hill, that all this repair and maintenance work keeps the trucks having their brakes -- no pun intended, but -- on the commodity side I understand where prices are as we sit. But can you remind us your central region, more Chicago-based export market? Is that fair? And I think you just have a tradition of using the period closing rate to incorporate into future guidance. Is that fair?

Yes, that's what we've done. And our guidance for the full year as $110. And right now the average is about $111. And that's all regions and all commodities.

Okay, 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.

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, everyone, and have a good evening.

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