Republic Services Inc (RSG) 2015 Q2 法說會逐字稿

Good afternoon and welcome to the second quarter 2015 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.

(Operator Instructions)

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

Good afternoon and thank you for joining us. This is Brian DelGhiaccio and I would like to welcome everyone to Republic Services' second quarter 2015 conference call. Don Slager, our CEO and Chuck Serianni, our CFO 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 materially different from actual results.

Our SEC filings discuss factors that could cause actual results to differ materially from our 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 23, 2015. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form, without the express written consent of Republic Services, is strictly prohibited.

I 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 events.

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

Thanks, Brian. Good afternoon, everyone and thank you for joining us. The Republic team continued our strong start to the year and delivered another solid quarter. We achieved higher levels of core price and average yield, profitably increased volumes, made continued progress against our multi-year initiatives, and reported earnings and free cash flow growth. We continue to see positive momentum in our business from successfully executing our strategy and the steady improvement in solid waste trends.

Some of our second-quarter and year-to-date highlights include, second-quarter EPS was $0.54. The second quarter benefited approximately $0.03 due to a lower tax rate. Year-to-date adjusted free cash flow was $410 million, which was in line with our expectations. Second-quarter adjusted EBITDA margin was 28.3%, which was consistent with the prior year and our full-year guidance. Core price in the second quarter was 3.8% and average yield was 2.4%. This sequential improvement in yield performance reflects an increase in the level of pricing, of favorable reduction in rollbacks, and an improvement in the impact from churn.

Each of these components of average yield has benefited from our revenue-enhancing initiatives. This is the second straight quarter of reporting average yield in excess of 2%, while growing volumes in excess of 1% which clearly demonstrates our ability to grow both price and volume simultaneously. Second-quarter volumes increased 1.1%, which was broad-based geographically. And, included positive contribution from our collection and disposal lines of business. The year-to-date investment in solid waste acquisitions was $116 million. This includes our normal tuck-in transactions and approximately $80 million of consideration for a life of site agreement to operate the Sonoma County landfill and transfer station network.

We commenced operations of Sonoma County on April 1 of this year. The integration of Tervita is going well and on track with our plan. Performance has been short of our original expectations, due to a sharper decline in the rig counts and drilling activity. But, we remain pleased with the people and the quality of the assets.

We are well-positioned to take advantage of a recovery in this business. As part of our efficient capital allocation strategy, we returned approximately $400 million, total cash, to our shareholders since the beginning of the year. This includes 5.1 million shares repurchased for $205 million. We have $155 million remaining on our existing share repurchase authorization, which we intend to complete during 2015. Additionally, our board recently raised the quarterly dividend to $0.30, an increase of approximately 7%.

We continued to make progress on our multi-year initiatives, that enable us to execute our strategy. These initiatives are designed to profitably grow our business, enhance the customer experience, further differentiate our service offerings, and reduce costs. Regarding our revenue enhancing initiatives, all of our markets are using our capture pricing tool. 75% of our sales force has been trained on priority based selling or PBS. We expect PBS to be fully rolled out by the end of the year.

Nearly 1 million customers have enrolled in the My Resource customer portal and app. And, finally, we have approximately 350 contracts with more than $150 million in annual revenue, that now use an alternative index for the annual price adjustment. We continue to educate municipalities and expand the use of indices that more closely align with our cost structure.

Regarding our fleet, 15% of our total fleet now operates on natural gas. 70% of our residential fleet is currently automated. And, 70% of our total fleet has been certified under our One Fleet maintenance program.

With respect to our recycling business, average recycled commodity prices remain below the ten-year average. Which, continues to put pressure on our results. Most of our recycling business is performed on behalf of our municipal customers under multi-year contracts. As these contracts come to term, we are focused on renegotiating terms that contain the elements most important to us. Including, increasing processing and service fees that allow us to recover our costs and earn a reasonable return. And, implementing a commodity revenue share mechanism that fluctuates with commodity markets, but also incentivizes customers to send us clean invaluable material. We expect it will take several years to realize the full impact of our efforts, given the long-term nature of these recycling contracts.

In the open market, where we do not have the same contractual limitations, we have already taken the following three actions. First, we increased rates charged for recycling collection services to be more in line with solid waste services. Second, we increased the amounts charged for processing materials at our recycling facilities. And finally, we adjusted the rebates paid to third parties for volumes delivered to our recycling facilities. We believe that improving the profitability of the recycling business ensures its sustainability. Which benefits the environment, our shareholders, our customers, and the communities we serve.

In summary, we are very pleased with our second-quarter and year-to-date results. We are raising our full-year financial guidance as follows, based on our expected outperformance for the year. We now expect diluted EPS to be in a range of $2.02 to $2.05. Our original guidance was $1.98 to $2.04. We now expect adjusted free cash flow to be in a range of $720 million to $745 million. Our original guidance was $710 million to $740 million.

Chuck will now discuss our financial results. Chuck.

Thanks, Don. Second-quarter 2015 revenue was approximately $2.3 billion, an increase of $82 million over the prior year. This 3.7% increase in revenue includes internal growth of 1% and acquisitions of 2.7%.

The components of internal growth are as follows. First, average yield growth, 2.4%. Average yield in the collection business was 2.9%. Which includes 3.6% yield in the small container commercial business, 4.4% yield in the large container industrial business, and 1% yield in the residential business. Average yield in the post-collection business was 0.9% which includes landfill MSW of 1.4%. Core price, which measures price increases, net of rollbacks, was 3.8%. Core price consisted of 4.8% in the open market and 1.9% in the restricted portion of our business.

Second, our volumes increased 1.1% year over year. The collection business increased 1.3%, which includes positive contribution from the commercial business of 0.5%, the industrial business 1.9%, and the residential business of 1.8%. Our commercial volume performance of 0.5% includes a 30 basis point decline due to not renewing select national accounts customers in works performed on behalf of brokers. We view these losses as non-regrettable.

The post-collection business made up of third-party landfill and transfer station volumes increased 0.6%. Landfill was up 0.9% which includes positive contribution from MSW of 4% and C&D of 1.9%, partially offset by a decline in special waste of 2.1%. Special waste volumes were up 0.8%, excluding the decrease in same-store B&P waste streams. The sequential decline in our volume performance from the first quarter was expected, since we had a tougher comparison in the prior period.

Next, fuel recovery fees decreased 150 basis points. The change relates to decline in the cost of fuel, which decreased approximately $33 million compared to the prior year. The average price per gallon of diesel decreased to $2.85 in the second quarter from $3.94 in the prior year. A decrease of 28%. The current average diesel price is $2.78 per gallon.

We recover approximately 80% of our total fuel costs through our fuel recovery fees program. Additionally, 20% of our diesel gallons are hedged using financial hedges. At current participation levels, a $0.20 per gallon change in diesel results in a $1 million change in annual operating income.

Finally, commodity revenue decreased 100 basis points. The decrease in commodity sales primarily relates to a decrease in recycled commodity prices. Commodity prices at our recycling facilities decreased 11% to an average price of $97 per ton in the second quarter. From $109 per ton in the prior year. June commodity prices were approximately $100 per ton.

Second-quarter recycling volume of 655,000 tons represents an increase of approximately 5% from the prior year. Excluding acquisitions, volumes were down approximately 6%. Cost of goods sold for recycled commodities decreased $3 million, compared to the prior year. A decrease of 20 basis points as a percentage of revenue.

Overall, we've experienced greater than anticipated headwinds from our recycling business, primarily due to recycling collection. Within recycling collection, we are receiving less than anticipated rebates for materials delivered to third-party facilities. The lower rebates, which are recorded as part of our recycled commodity revenue, reduced second-quarter EPS by approximately $0.01, compared to our original expectations. We recognized this headwind and implemented additional price increases in the open market to help mitigate the impact. This pricing action explains some of the sequential increase in core price in average yield, compared to our first quarter results. Our material recycling facilities performed in line with our expectations.

Now, I will discuss changes in margin. Second-quarter adjusted EBITDA margin was 28.3%, which was consistent with the prior year. Margin expansion from the solid waste business, which includes lower fuel costs, was offset by the impact of well or recycled commodity prices and E&P waste services. Our E&P waste business includes transition and integration costs from our recent acquisition of Tervita.

There was a 250 basis point reduction in revenue, due to a decline in fuel recovery fees and lower recycled commodity prices. As a result, certain cost line items increased as a percentage of revenue. This was most prominent in the larger cost categories. For example, the decline in fuel recovery fees and commodity revenue, resulted in an increase in labor of 40 basis points, maintenance of 20 basis points, and SG&A expenses of 20 basis points, as a percentage of revenue.

The remaining increases in these three cost categories primarily relates to the mix of volume growth and integration costs. I want to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing. Second-quarter 2015 interest expense was $92 million, which includes $12 million of non-cash amortization. Our effective tax rate was 36.3% in the second quarter and 37.8% on a year-to-date basis. The lower tax rate in the second quarter reflects a $0.03 benefit from favorably settling certain tax matters. We expected effective tax rate of approximately 39.5% in the second half of the year.

Year-to-date adjusted free cash flow was $410 million and in line with our expectations. Cash flow can vary quarter to quarter, based upon the timing of cash taxes and working capital.

Now, I'll turn the call back over to Don.

Thanks, Chuck. In closing, we continue to see a broad and sustained recovery in our solid waste business. Improving fundamentals, together with solid operational execution, have resulted in EPS and free cash flow growth and margin expansion.

I'm proud of how we continue to execute our business plan and our strong performance reflects the hard work from the entire Republic team. We continue to manage the business to create long-term value and remain focused on executing our strategy.

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

Thank you.

(Operator Instructions)

Tyler Brown, Raymond James

Hello, good afternoon, guys.

Hi, Tyler

Hello, so, Chuck, you kind of hit on this. But, it looks like the overall EBITDA margins were roughly flat if you take it into totality. And, I guess that doesn't really jive with the 2/4 average yield.

I would like to see some margin expansion with pricing over 2, especially when you're growing volumes and fuel falling. My hunch is that Tervita, kind of, mixed away some of the good things in core solid waste. Is there any way that you could isolate or give us some numbers around what the core solid waste margins did?

Yes, sure, Tyler. So, quarter-over-quarter, solid waste, we know, which includes yield, obviously, was up about 60 basis points. So, very solid growth from that portion of the business.

Recycling, as we have talked about, was a headwind of about 30 basis points. And then, E&P, obviously Tervita, including integration costs, it's a negative about 30 basis points. And, that's what gets you to, kind of, flat year-over-year.

Excellent. Very good.

And then, I also, kind of, want to -- I get it that about 50% of your market is in the restricted piece, and, let's call it 50% in the open. And, I know 60% of the restricted is in CPI.

But, I actually want to ask about the other 40% that isn't tied directly in with CPI. But, it is quote/unquote restricted. So, can you, kind of, help us understand what we should expect core pricing tends to be in that bucket as we move out to 2016? And, what really moves that piece of the business?

All right, so, let's put the pieces together, right? So, half of our revenue is restricted. Half of it is open market. Of the restricted piece we say 60% of that is tied to some kind of an index, right? We'll come back to that.

And, the rest of that's restricted is, might be a fixed price increase. It might be, not tied to an index, but have a 2%, 3%, 4% increase already built in to the contract. And, those might be large industrial accounts. They could be national account. Things like that.

So, what moves the pricing in that part of the business is just our further commitment to pricing intelligently, our business, and knowing when to walk away from business. We mentioned -- Chuck mentioned in his results that are in his comments, that one of the things that impacted volume was some loss of some national account business and some broker business. That we defined as non-regrettable.

So, we're going to continue to look at business and all customers aren't created equally. So, the capture tool, the PBS training that we talked about; all those things are proving valuable. Throughout our business we're going to continue to move price. We think now, with what we've been seeing, that price for the full year will be closer to 2% based on all of these actions.

Okay. Perfect.

So, the -- that restricted piece that's not tied to CPI doesn't necessarily move in sympathy with CPI? It's actually fairly independent? Okay.

Somewhat independent. And, again, there's -- the' re many, many different versions of contracts within that bucket. But, we're basically taking our same, sort of, core philosophy on pricing throughout our business.

Okay. Perfect. Thank you.

Scott Levine, Imperial Capital.

Okay. Good afternoon, guys.

Hi, Scott.

So, I guess you mentioned use of these revenue enhancing initiatives, kind of, driving some of the -- your ability to get price and volume at a better rate than you guys have, I think, overall last few years. I was hoping you might be able to elaborate on that a bit more?

The pricing metrics, in particular, over the last couple quarters have been surprisingly good. And, is there anything going on in the marketplace that is driving this? Or, is it more internal in your opinion?

No, there's a lot going on and let's talk first about our efforts, right? So, we have put an incredible focus on customer experience, on service delivery, on our fleet initiatives.

So, our fleet is more reliable today. Our customer delivery is better. We think we're extending customer loyalty. We think we're earning that price increase more easily from our customers. So, that's at work.

I think we're easier to do business with than we were a year and two years ago. So, we're increasing the value proposition. That's part of it.

We're going out with higher price increases. We've got more confidence in earning the price increase or asking for a little higher price in the open market and getting it. Specifically, also on the recycling business in the open market with the way that recycling commodity prices dropped pretty quickly in the first half of the year.

We went right to work on pricing that open market recycling business. And, as we said in our comments we've moved the prices up substantially in that segment, so that's driving it.

Certainly, when there's volume growth in the marketplace, market dynamics change. Generally speaking, I think competition is less likely to go out aggressively for competitive waste streams when they're getting waste streams organically. So, I think that's happening. I think that's just sort of normal supply and demand kind of activity that happens in a marketplace.

We are using our tools, right? So, captures rolled out to all of our areas across the country. That gives us -- it makes us more efficient in talking to customers and calling on new accounts. It makes the selling process better and more desirable and enjoyable for our customers. And, it gives us better pricing control at that point of decision.

So, that's happening. That's helping effect churn.

And then, PBS tied to that training. We're also -- have refined our sales compensation plans, et cetera. So, there's a lot of work inside the Company that's doing that. Again, a normal growth environment, organically, would be a better market to get price in.

And then, obviously, on the municipal side of the business. We talked about moving a portion of that business to the better index. And so, every quarter now, we've reported an increase in moving more customers to the new index that's more in line with our cost structure.

We're going to continue that hard work and over time, we will move the needle consistently. And, basically, kind of, re-imagine how we price municipal customers because we have to have an index that's fair.

So, that's a mouthful. But, all those things working together for the greater good here.

Yes, that's helpful. Thank you.

And, as my follow up, I guess, here so, would the dividend hike, I have that equating to about, I don't know, 55%, 60% of your free cash flow target for this year. I know you're buying back stocks. So, that share base comes down.

But, that coupled with the fact that you guys are spending a little bit more in acquisitions last year and on pace to do so again this year. Is there any thought we should have in terms of what, kind of, guides the thought proc -- from the dividend? Which, I know is a Board decision.

But, you guys comfortable? I don't know where the leverage sits today. But, maybe, just a little more color around that.

We're certainly comfortable with the leverage, where it's at today. And, keep in mind, also, that we're going to be growing the EBITDA of the Company. When we think about dividend growth, we think about growing dividends in line with our growth and free cash flow. So, that's something that's very, very comfortable for us.

A 7% growth in the dividend this quarter is right in line with our five-year CAGR. And, it's obviously something that we are all very comfortable with; that the Board's very comfortable

Yes, Scott, we expect the leverage to continue to drop through the course of the year to sub-three. We anniversary some events. The business continues to perform and grow, as Chuck said. So, we're very comfortable with the leverage.

And, we do a very in-depth discussion with our Board every year on our financial policies and cash allocation. We had a very big discussion with our Board this week on the dividend. We always had that, kind of, a holistic view of cash for acquisitions, cash for dividend and for buyback.

And so, we'll continue to do that and we think this is the right sort of balanced approach to officially return cash to shareholders. And, the question was do we have confidence? We wouldn't have done it if we didn't have confidence in it.

Understood. Thank you.

Michael Hoffman, Stifel.

Thank you very much for taking my questions Don, Chuck and Brian

How are you -- hi, Michael.

Hi, guys. On the operating leverage of the business. When I think about Chuck's comment that there was 60 basis points of leverage on solid waste, but it's offset by 60 basis points from recycling and E&P.

How do I think about that tracking into the second half? Is the 60 on the E&P and recycling, kind of, going to be a constant? And the -- but, the solid waste should have some acceleration, maybe, running towards 100 basis points

And, I think it's going to be relatively consistent, Michael, over the course of the remainder of the year. I don't see the headwind. We're not forecasting the headwind in recycling to go away anytime soon.

And, we're certainly not calling for a upturn in oil rigs. We don't see that anytime real soon. So, I think that that headwind's going to consist -- stay consistent.

I would also say that we feel very comfortable with the increase in solid waste. And we think that we're going to continue to benefit from the initiatives that Don had talked about, as well as our continued focus in on driving up our yield.

Yes, so, Michael, I'll add to that. I look at that as upside, right? Because, the underlying business, the majority of our business, our solid waste business, is performing very well.

And, we've got these two components, right? Recycling is 9% of our revenue. Commodity sales is about half of that 9%. And then, our E&P business is less than 2% of overall business.

So, we've got these two, sort of, micro-verticals here that are fairly volatile. But, we're confident that they'll return. We're bringing more focus to the recycling space than we ever have. So, as we get those businesses to come around, and the broader macro environment approves, that's just, sort of, added fuel to an already very well operating and performing core business.

Okay. So, just so I make sure I understood, that this it isn't my second question, operator -- (laughter)

Oh, I think it is Michael. (laughter)

Then, well, just so I -- so the 60 basis points stay 60 basis points is the headwind; three, two, four, two. But, the 60 that was solid waste should improve, maybe, at 70 basis points, 80 basis points. 80 basis points goes to 90 basis points, 100 basis points; 3Q, 4Q. That's the way to think about based on what you all have just said.

Yes, well when you think about it, one of the big points, when Chuck mentioned the headwind from E&P integration. Some of the integration costs tend to taper down, right?

And then, obviously, as you know, you've followed this business a long time. There's a lot of moving parts in mix, geographical business mix. Some of a cycles of pricing. As we said, we expect pricing to be more like 2% for the full year now.

But, yes, I mean, we think the underlying performance of the business improves from here. So, and we've got to continue to do the same things we've been doing. We got to continue to have success in moving to the new index in the municipal business.

And, it's going to depend a little bit on the macro environment. A little bit on the market dynamic.

Okay. And then, on the underlying volume trend, should we see a year-over-year improvement in the second half relative to the first half, as this -- the drivers of this continue to improve? Residential construction, nonresidential construction, it turns into more volume in the cans, the whole bit.

Yes, I think, based, Michael, on where we are right and what we see in the future, we feel comfortable with a volume for the year of about 1.5%.

Okay. That's --

So, to your point on more volume in the cans. We are seeing some pretty good trends in service increases, less decreases. We didn't talk about that in our comments. But, that's all continues to trend very well.

But, and again, as you know, we've all thought this thing was going to recover quicker than it did. And so, I'd want to temper everyone's excitement.

I mean, we feel really good about the business. We're very proud of the team. Well, let's see how things -- let's see how the market and the macro issue, sort of, comes around in Q3.

Perfect. Well, nice job in the quarter. Thank you for the Q&A.

Thanks, Michael.

Thanks, Michael.

Joe Box, KeyBanc Capital Markets.

Hello, guys.

Hello, Joe.

Hi, Joe.

Don, could you just put some figures, or maybe, at least, some color around the reduction in rollbacks and churn that you alluded to earlier?

Yes, we can do that. You want to give him some stats, Brian?

Yes, I mean, Joe if you, kind of, take a look at each of those components, right? So, we talk about, call it gross price, what we're going out to the market with, to our customers. As well as then the impact of rollback. And then, obviously, that impact to churn.

And, if you, kind of, take a look at the sequential improvement in yield, from 2.1% to 2.4%, each of those components had a relatively equal contribution. So, think of it like 10 basis points each, getting better sequentially, from each of those three components. That is basically the way that you compute average yield.

Okay. Understood.

Yes, it's interesting that you guys are actually capturing a greater percentage of that. Whereas, it looks like one of your competitors is capturing less, which might be a mix issue. But, maybe, switching gears for my follow up.

Don, I get the $0.01 hit from commodity prices sold. I'm just curious how you view that?

Is it theoretically possible that -- or is it positive that your third-party Murph vendors are actually doing away with rebates now? Does it suggest that, maybe, there's some momentum in the industry to pushing back on recycling? And, theoretically, this business could be structurally improved?

Yes, it's -- theoretically, yes, right? So, I tell you what's happened historically when we've seen down cycles in recycling is, just about the time the market starts to, sort of, revolt and raise prices and, maybe, constrain some service. The volume in, or, the commodity prices bounce back. And then, the market doesn't really change right much, so.

So, the fact that this has been so steep, and I would say, sustained, probably causes the market to maybe take a closer look at it. So, certainly we're doing that. As I said, we've had great luck with moving prices forward in the open market. Which says, frankly, customers are willing to pay almost as much for recycling as waste.

And, we've done a lot of customer insight work; our marketing group here and customers are telling us that. It's important. If it's really important to them, they're willing to pay for it. So, customer demand should accompany willingness to pay and that's our view.

Now in the open market it's one thing because the contractual obligations that we have customers are different and shorter-term. A lot of our recycling is done with municipalities. Those are longer-term contracts. As I said in my comments, those will take longer to turn.

But, I guarantee you this, our team here; our recycling group, our operating group, our sales team, our pricing team, all working very diligently together to think about how we're going, as I said, re-imagine the recycling business here, of the future. And, our view is that it's not going to be the same way it occurs today. It just can't be.

And so, the overarching point there is, if we want recycling to really truly be sustainable, sustainability can't happen without consistent profitability. It's just impossible. And so, we've got to find a new way to make the model truly sustainable. Therefore, sustainably or consistently profitable.

That's again, a mouthful, but that's what we're working on. We're still committed to it because our customers want it. And, I said if they really demand it, then that should be accompanied with willingness to pay.

Appreciate it. Thank you.

Thanks.

Ken Lane, First Analysis.

Hello, guys. Thanks for taking my question.

Sure.

Hello, Ken.

So, let's see. Just a little bit more on the pricing side again. It looks like this was the second quarter where average yield came in above 2%. Just wanted to see if you have any view or expectations for the remainder of the year?

Yes, we're not going to give you quarterly expectations. But, I've said I think pricing will look more like 2%. The original guidance we gave you was 1.5%.

So, all these things coming together, the -- again, the tools are being deployed. The benefit of organic growth. All the things I mentioned earlier. Yes, we think we'll continue to see that kind of pricing for the remainder of the year.

We do have a couple of things on the forefront here. The comp gets a little tougher in the second half of the year. We had some one-time pricing actions that we took in the second half of last year that don't happen again in 2015. But, all in, we think pricing will be a pretty good story for us from here out through the end.

Sure. Thanks. That's helpful. And then, I guess, switching gears a little bit. More on the recycling side.

Are you expecting, sort of, any improvement in the back half of the year? Just given some of the recent stabilization in the commodity pricing environment.

No, the guidance we've given you assumes that recycling stays flat. Commodity sales just stay flat from here for the remainder of the year. If it takes a bounce, that'll be a little upside for us.

Sure. Okay. Great. Well, thanks, guys and good job.

Thank you.

Thank you.

Alex Ovshey, Goldman Sachs.

Thank you. How are you, guys?

Good, Alex. How are you today?

Good, Don, thanks. On the cost side.

So, just looking at the details that you provide. So, buckets like labor and benefits, maintenance and repair, SG&A. I think of those as relatively fixed and so buckets where you should have leverage on when volumes start to really pick up.

And, just looking at the year-over-year change on those costs. It sounds like they're up almost in that high single-digit range.

So, just on those buckets, can you just talk about why we're seeing that kind of inflation there? Maybe you -- maybe, zoning in on the repair side, where you have one fleet happening. I mean, I would think at some point, those costs start to level out for you.

Yes, so, Alex, you got to keep in mind, also, what I said during my comments. That you've got a 250 basis point reduction in revenue and that reduction in revenue is driving an increase in those costs in terms of a -- in terms of a percentage of revenue. So, if you -- some of the line items that you called out are some of a larger cost categories.

So, in terms of labor, that's about 40% or 40 basis points of the overall increase. It's about 20 basis points on the maintenance side. And, just for reference, it's 20 basis points on the SG&A also. So, you've got to take that into consideration when you're looking at the basis point increase year-over-year.

The other thing that we need to take into consideration is the mix of business over -- year-over-year. As we've mentioned, the volume increases that we've gotten have really been focused in on the industrial business and on the residential business. And, there's not as much of -- our ability to leverage those costs isn't quite as great as some of the other cost categories.

So, remember too, we've got acquisitions year over year. We've got volume growth.

And, as it relates to maintenance, specifically, we pointed out a couple times before. While we're very pleased with our One Fleet initiative and we -- it's exactly the right thing to do. When we started that program, we did not see some of the fleet complexity coming our way. So, we do have some cost increases coming from the new cleaner engines and some of that.

So, and I'll just remind everybody, we didn't talk about it here on the call. But, one of the paybacks on one fleet is the aging the fleet in a methodical fashion and getting that CapEx savings that we've talked about a number of times. A one time $200 million savings.

Plus, the ongoing benefit of running a fleet that's about a year older. Which is about $15 million a year in CapEx. So, maintenance, specifically, is we're getting a great payback on that

One finer point, also, I think on the labor side to keep in mind, is that we did call out some integration costs this year and that's obviously included in those -- in the labor numbers.

Yes, and Alex, just to put some numbers around the acquisition in volume growth that Don was talking about. Our acquisition revenue's up 2.7% year-over-year and volume's up 1.1%. So, when you add those types of revenue it's going to come along with it, costs. And so, when you're just looking at cost change expressed as a percentage year-over-year you got to include those revenues as well.

Yes. Okay. I appreciate everybody's thoughts there.

And then, in the file -- in the 8-K, you do break out an E&P waste services revenue number. I think it's $27 million for the quarter. So, is that essentially the Tervita revenue that you're reporting?

Yes, that's Tervita. That's primarily the Tervita revenue.

Okay. Great. Thank you.

Al Kaschalk, Wedbush Securities.

Good afternoon, guys.

Hello, Al.

Hope you're all doing well. I want to focus on core price for a minute. And, I joined a little late, so I apologize if -- I know you had 3.8% for the quarter. I'm not sure what it was in the first quarter.

But, my question is driven at the open market piece. And, in particular, if the volume trends are favorable, why we should not expect that number -- the contribution of open market pricing to be better going forward? Or, is that the real reason why guidance is being lifted?

Yes, I think what we're saying is that we are lifting guidance because of the favorability that we're seeing right now in our solid waste business. Where -- what I called out before is a 60 basis point increase in margin year-over-year due to the solid waste business.

Keep in mind, also, that if you look at, kind of, our increase in guidance overall. A good portion of that increase is really due to the solid waste business and that which is primarily yield.

Yes, and it's being offset by a couple of things we called out. We called out the commodities and we called out some of the headwind from the E&P. But, you're right. The core business is operating very well and as we turn around these two very small parts of our business, although, obviously volatile parts of our business, that'll all -- that'll call -- come in behind it, so.

All right.

You're on the right track. Business is doing really well, Al.

No, I hear you and, I guess, the question that -- the follow on to that would be at some point we'll start to see that in terms of the EBITDA margin. I know there's a number of moving parts and when we need that restricted portion to get north of 2% to give you some help.

Another way of saying it, right, is if recycling hadn't cratered on us, and E&P hadn't dried up, right? Our margin's wouldn't have been up 60 basis points.

Yes.

Right?

Right.

So, that's it.

Just a follow up, I guess. One of your competitors articulated, probably for the first time, they're affection for another price index as well. And, I know you've talked about it's a slow process.

But, can you give any more insights in terms of how that's going? I know it's a process. But, in terms of the realization of the new index on the customers?

Right. So, we've said that approximately, what, $2.4 billion of our business is that -- again, that 30%, right? So, it is restricted to some type of index.

And, we've been talking about lately, it's about $800 million of that piece, is the smaller municipal contract. Generally, residential only. Call it a five-year contract.

So, that $800 million that's the first piece we've been working on to move to a new index. We've now moved $150 million of that business -- $150 million of the $800 million, to a new index. That's confirmed.

I'm still working on the balance. As you would expect, logically, when we tried to change how this occurs to -- with our customers and within the market, we would start with smaller contracts. And, having good success.

The remaining $1.7 billion is larger contracts and franchise agreements that tend to run a lot longer than five years and also include, oftentimes, commercial small container, large container business. So, we're up to $150 million out of the targeted $800 million. We're progressing every quarter. We don't know how far it will go.

We're certainly making strong arguments, and frankly, successful arguments for it, and we'll continue to do it. Again, the overarching issue here is in these kind of public-private partnerships, they've got be mutually beneficial. It's unrealistic for our municipal partners to expect us to settle for an index that doesn't adequately cover our inflation.

So, we've got to cover our inflation, net of productivity, on a consistent basis. That's reasonable. It's fair. And, that's one of the reasons we're getting it done.

The fact that there is this water sewer trash index, something we can point to that's been in use now, for what, 15 years or whatever, is helping. And, so, it's too early to tell how long it's going to take and how far it's going to go. I can tell you this, we're not going to stop pushing.

And, that's -- we'll update you every quarter. As we go through time. But, it's certainly helping and we'll certainly show some benefit into next year

I guess, in terms of the customer feedback, maybe, you don't want to share. But, I guess, if it's helpful for them on their side of the equation, they would seem to be reasons that the acceptance rate would be high going forward.

Yes, so it's fair. It's equitable. And, in some cases, it's helpful for them. Especially, those municipalities that have their own sewer and water infrastructure, that has been struggling to keep up with the pace of inflation.

Frankly, we weren't the only ones that didn't know that this sewer/water, water/sewer/trash index existed. So, we're shedding a lot of light on that. And, so again, progress continues and we -- we're hopeful and confident that we'll have another positive update for you as we go through the year.

Thank you.

Now conclude the question-and-answer session. I would like to turn the conference back to Don for closing remarks.

Well thank you, Gabrielle. I would like to thank all Republic employees for their hard work, their commitment, and most of all, dedication to operational excellence in creating the Republic way.

Thank you for spending time with us today, everyone. Have a good evening.

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