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Edited Transcript of RSG earnings conference call or presentation 27-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Republic Services Inc Earnings Call

PHOENIX May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Republic Services Inc earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles F. Serianni

Republic Services, Inc. - CFO and EVP

* Donald W. Slager

Republic Services, Inc. - CEO, President and Director

* Nicole Giandinoto

Republic Services, Inc. - VP of IR

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Conference Call Participants

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* Albert Leo Kaschalk

Wedbush Securities Inc., Research Division - SVP and Equity Research Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Corey A. Greendale

First Analysis Securities Corporation, Research Division - SVP

* Hamzah Mazari

Macquarie Research - Senior Analyst

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Michael J. Feniger

BofA Merrill Lynch, Research Division - VP

* Noah Duke Kaye

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Patrick Tyler Brown

Raymond James & Associates, Inc., Research Division - Research Analyst

* Sean Egan

KeyBanc Capital Markets Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Republic Services First Quarter 2017 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Nicole Giandinoto, Vice President of Investor Relations.

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Nicole Giandinoto, Republic Services, Inc. - VP of IR [2]

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Good afternoon, and thank you for joining us. I would like to welcome everyone to Republic Services' First Quarter 2017 Conference Call. Don Slager, our CEO; and Chuck Serianni, our CFO, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss in 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 27, 2017. 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 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.

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

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [3]

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Thanks, Nicole. Good afternoon, everyone, and thank you for joining us. We are pleased with our first quarter results, which were in line with our expectations and keep us on track to achieve our full year financial guidance. We continue to realize the benefits of executing our strategy of profitable growth through differentiation, which is designed to profitably grow our business, generate consistent earnings and free cash flow growth and improve return on invested capital. For the first quarter, adjusted EPS was $0.55; and adjusted free cash flow was $240 million, both representing double-digit growth over the prior year. EBITDA margin was 27.4%. Core price was 4.1%, our highest level in over 5 years. Average yield was 2.3% and was strongest in our small container and large container businesses. A majority of these customers are in open markets, where we can leverage increases in demand for service, our enhanced product offerings and our digital platform. In our small container business, average yield was 3.8%, our highest level of pricing in over 7 years.

First quarter volumes increased 1%. Volume growth was in line with our expectations and was broad based across the majority of our markets. Volumes continue to be strong in the event-driven portion of our business, which tends to be a leading indicator for future volume growth. And as expected, residential volumes turned positive as we anniversary the impact of contracts not renewed.

During the quarter, we invested $55 million in tuck-in acquisitions, and we returned $218 million of cash to our shareholders through dividends and share repurchases. This included 1.8 million shares repurchased for approximately $110 million.

Regarding our revenue-enhancing initiatives, we are now -- approximately have $425 million in annual revenue that uses a waste-related index or fixed rate increase of 3% or greater for the annual price adjustment. These waste indices are more closely aligned with our cost structure and have historically run higher than CPI.

Regarding our fleet-based productivity and cost savings initiatives, 18% of our fleet now operates on compressed natural gas; 75% of our residential fleet is currently automated, and 96% of our total fleet has now been certified under our One Fleet maintenance program. The entire fleet will be certified by the end of the second quarter.

Before turning the call over to Chuck, I would like to congratulate the Republic team for being recognized by Ethisphere as one of the World's Most Ethical Companies. Our commitment to fostering a strong ethical culture, conducting our business with the highest levels of integrity and developing sustainable practices to enhance long-term value creation enabled us to be named to this elite list.

I'll now turn the call over to Chuck to discuss our financial results. Chuck?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [4]

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Thanks, Don. First quarter revenue was approximately $2.4 billion, an increase of $144 million or 6.4% over the prior year. This 6.4% increase in revenue includes internal growth of 6.2% and acquisitions of 20 basis points. The components of internal growth are as follows. First, average yield increased 2.3%. Average yield in the collection business was 2.9%, which includes 3.8% yield in the small container business, 2.8% yield in the large container business and 1.8% yield in the residential business. Average yield in the post-collection business was 70 basis points, which includes landfill MSW of 1.9%. A majority of our third-party landfill MSW business is with municipal customers that have contracts containing pricing restrictions. Total core price, which measures price increases less rollbacks, was 4.1%. Core price consisted of 5.5% in the open market and 1.9% in the restricted portion of our business.

The second component of internal growth is total volume, which increased 1% over the prior year. Volumes increased 1.8% in our large container business and 30 basis points in our residential business. As expected, volumes decreased 70 basis points in our small container business. Small container volumes included a 130 basis point impact from intentionally shedding certain work performed on behalf of brokers which we view as nonregrettable. Excluding these losses, small container volumes would have increased 60 basis points.

The post-collection business, made up of third-party landfill and transfer station volumes, increased 3.5%. Landfill volume increased 2.8%, which included C&D of 17.1% and special waste of 1.1%. MSW volumes were flat versus the prior year.

The third component of internal growth is fuel recovery fees, which increased 40 basis points. The increase relates to a rise in the cost of fuel. The average price per gallon of diesel increased to $2.57 from the first quarter from $2.08 in the prior year, an increase of 24%. The current average diesel price is $2.50 per gallon.

The next component, energy services revenue, increased 40 basis points. The growth in energy services revenue is primarily due to an increase in drilling activity.

And the final component of internal growth is commodity revenue, which increased 2.1%. The growth in commodity sales revenue primarily relates to an increase in recycled commodity prices. Excluding glass organics, average commodity prices increased 61% to $162 per ton in the first quarter from $101 per ton in the prior year. The current average commodity price is approximately $155 per ton.

The cost of goods sold for recycled commodities increased 49% due to an increase in rebates resulting from higher recycled commodity prices.

Now I will discuss changes in margin. First quarter adjusted EBITDA margin was 27.4%, which compares to 27.8% in the prior year. This change includes a 30 basis point increase in landfill operating cost, primarily due to temporary cost associated with new operating requirements at one of our landfills. These costs were anticipated and should be completed by the end of the second quarter. And a 20 basis point margin decline or $0.01 of EPS from heavy rains on the West Coast. In certain markets, we had to close some of our facilities for several days, which resulted in lower volumes and higher transportation and disposal cost. Excluding these temporary cost increases, we had margin expansion in the quarter due to strong pricing and volume growth, which demonstrates the operating leverage in our business. It should be noted that the margin benefit from higher recycled commodity prices was offset by the change in net fuel.

SG&A cost were 10.6% of revenue and in line with our expectation. These costs improved 10 basis points compared to the prior year. I want to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing.

First quarter 2017 interest expense was $89 million, which included $11 million of noncash amortization. Our adjusted effective tax rate was 36.2%, resulting in $0.03 of EPS benefit relative to our expectations. The lower tax rate resulted from tax accounting for equity compensation. We expect the effective tax rate of approximately 39.5% for the remainder of the year. First quarter adjusted free cash flow was $240 million, an increase of 50% versus the prior year. Cash flow can vary quarter-to-quarter based upon the timing of working capital and capital expenditures.

I will now turn the call back to Don.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [5]

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Thanks, Chuck. To conclude, strong fundamentals, together with solid operational execution, resulted in 6% top line growth and double-digit growth in both earnings and free cash flow. As anticipated, the current economic environment continues to be favorable for the business, and we are on track to achieve our full year goals. We will continue to deliver on our promises to our key stakeholders, including our customers, communities, employees and shareholders.

At this time, operator, we'd like to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brian Maguire at Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Volumes, nice pickup from the trend you had been on the last couple of quarters, up 1%, but it was a little bit lower than some of the peers. I think you talked about some of the business you shed at the small container commercial. Just wondering if you could maybe give us a sense of what the volumes would have been without that? Maybe more of a cleaner number then? And when we would expect to anniversary some of that activity?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [3]

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So a couple of things on that. The first thing is that the weather did have an impact on our MSW volumes coming into our landfill. So we posted, as I said, flat volume growth on MSW. But if you take into consideration the weather, that volume growth would have been closer to 1.4%. So overall, I think that the impact of weather and maybe some contracts that we shed may have had 30 basis point or so impact on our overall volume growth.

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [4]

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Yes, let me add to that. On the small container business specifically, that's just a strategic decision that we've made to not continue to do business with brokers. And that broker volume to us, we have lost is nonregrettable. Our perspective is that brokers don't add any real value to customers. Customers should be doing business with us directly. A strategic decision we've made, and we've been shedding some of that business down for several quarters. We got little ways to go. But otherwise, if you subtract that, to your point, Brian, the underlying economic growth is strong. We're getting good price, and we're getting our fair share of growth in the business.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

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Okay, great. As a follow-up, the margins were a little bit lower than we were expecting, kind of like maybe a little bit lower than what you were expecting too, with some of the rains and landfill cost that you had there. Just wondering if you expect any of that to carry through into 2Q? Or if you think those costs were kind of episodic just to the period?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [6]

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Yes, so the cost that we talked about really related to Q1, especially as it relates to the heavy rains. We're still optimistic regarding the margin expansion this year. If we look at kind of expectations for the rest of the year, keep in mind that net fuel, although it was a headwind for us in Q1, that's going to be a tailwind for us starting in Q2. We do get the step up in CPI, as we had talked about. That's effective in the second half of the year, and we're going to continue to see benefits from our One Fleet maintenance program, which will be fully rolled out in July 1 of this year. So we feel optimistic in terms of being able to achieve expansion in EBITDA margins this year.

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Operator [7]

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The next question is from Mike Feniger at Bank of America.

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Michael J. Feniger, BofA Merrill Lynch, Research Division - VP [8]

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On the guide for the margin, it's good you still expect margin expansion, but are we still sticking in the 20 to 40 basis point range for the year?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [9]

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Yes, we are. I mean, that's still what we're looking at for this year. Remember, the headwinds, we knew that the margin expansion would be more back half loaded just because of the fuel and because of some of the other costs that we're looking at the front end of the year. And also, keep in mind that CPI price increase that we get together with the One Fleet maintenance program, so we knew that it would be back-half loaded. So right now, Mike, we're right on track. We've got these temporary landfill operating cost that Chuck spoke of, and -- but we don't like to use weather as an excuse. In general, we don't. But when you got landfills that are closed for several days at a time and we had a couple of facilities in the western part of the U.S. that didn't pull trucks out for 5, 6 days, that really does impact your overall operation. So these are just a couple of basis points. We're going to get Back to it. And again, these other tailwinds that Chuck described are real and that's going to come through in the second half.

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Michael J. Feniger, BofA Merrill Lynch, Research Division - VP [10]

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That's great. And just to think about the mix of the business, I'm just curious, you're seeing energy services recycling prices have been higher. Does the profitability on the waste mix, does it start to move more to being margin accretive? And do you expect that to show up in the back half?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [11]

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Yes. So we saw some of that, right, Mike? In the first quarter, right? So to the extent that we had more revenue coming in from our E&P business and more revenue coming in from commodities, we saw some of that actually in Q1. And if you strip away the noise that we had in terms of the landfill operating cost and the heavy rains, you actually saw the margin expansion partly due, to your point, to the mix of business.

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [12]

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Yes, right. We're seeing growth now across all lines of business, right? We saw growth in residential. We saw growth in small container net of the broker loss, so on and so forth. So we're seeing a broader-based recovery. And again, we're seeing it in all geographies. So it's -- the macro is in good shape. The momentum is there in the business.

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Operator [13]

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Your next question is from Hamzah Mazari at Macquarie.

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Hamzah Mazari, Macquarie Research - Senior Analyst [14]

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The first question is just around how much capacity do you guys have in the current demand environment? What I mean by that is one of your competitors have said that they began adding routes in many markets in the nation on the commercial side for the first time since the downturn. And you referenced your business is picking up. Just curious how much capacity you have on the ground? Have you been adding routes already? Just, if you could frame that for us where you guys are at?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [15]

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Well, we have added some routes, Hamzah, in a few markets. Some markets have a little more capacity than others because they were impacted more deeply by the downturn. But I think it's a mixed bag. We're also very, very focused on compliance of hours of service and all those other areas of the business. So we're employing new route tools as well and getting more precise in and around our daily route standards. So we're going to continue to pick up productivity in the business, while we're also expanding the business. So there's no one answer that fits every market. Everyone is in kind of in a different state in the kind of the continuum, but I wouldn't say that we're at capacity across the board. And as you know, small container business, that -- the new stuff soak in pretty easily, so to speak, in that business. And that's one of the reasons our tuck-in strategy worked so well, because we can very often buy a 4- or 5-truck company and take trucks off the street. So that alone speaks to the fact that we've got capacity in the system.

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Hamzah Mazari, Macquarie Research - Senior Analyst [16]

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Right. And then you had referenced brokers. Do you have a sense of how big brokers are as a percent of the market? And has that gone down over time or is that going up? I know Waste Management had bought Oakleaf, and that wasn't a great deal. But just a sense of how big is the market for brokers? And clearly, you have some nonregrettable losses that you're still working through, and that's strategic and I understand that. But just trying to get a sense of the brokerage business.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [17]

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So I don't think brokers are playing a big a role in the business. When Oakleaf was sold to Waste Management, we said, "Hey, someone is going to fill that vacuum." Somebody always does. And our position, again, is that brokers don't really offer any real value or advantage to customers. We believe we should be owning that customer interface directly with all of our capabilities, with the breadth of our products and all of our digital tools that customers would be better served dealing directly with us and not through a broker. So that's the decision we made. We're going to maintain it. We don't see the business going the other way or the trends going the other way. Because frankly, at the same time, we're improving our capabilities for customers around sustainability, around filling their needs, about being -- selling them solutions that they need, giving them the reporting they need. So some of the things that brokers used to sell above and beyond are things that we can all do ourselves now. And we're not done yet, right? So our products continue to improve. Our product catalog continues to expand. And so little by little, we think it -- there's less and less need for brokers in the business and the market, and we think that's frankly the trend.

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Operator [18]

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Next question is from Al Kaschalk at Wedbush Securities.

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Albert Leo Kaschalk, Wedbush Securities Inc., Research Division - SVP and Equity Research Analyst [19]

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On the -- a little more color on the operating landfill costs. I think it was a 30 basis point headwind. Is that -- that includes 20 basis points from the heavy rains? Or is there something else that maybe you could help just articulate further what that occur in the quarter?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [20]

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Yes, so there is 30 basis points associated with the landfill operating cost and then an additional 20 basis points associated with the heavy rains. So the landfill operating costs really relate to 1 landfill, and it has to do with intermediate cover and some other enhancements that we're making to certain operating processes at that landfill.

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [21]

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Some of those costs we just kind of pulled forward into Q1 from later parts in the year when they were budgeted.

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Albert Leo Kaschalk, Wedbush Securities Inc., Research Division - SVP and Equity Research Analyst [22]

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Okay. Is this the Midwest landfill?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [23]

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No, it's not. This is actually a landfill in California.

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Albert Leo Kaschalk, Wedbush Securities Inc., Research Division - SVP and Equity Research Analyst [24]

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Well, there's a Midwest in California too. But anyhow, secondly, and this is more, I guess, you have concentrated or invested where you're able to get returns and related to recycling. I think overall you say there's about a $0.03, $0.04 headwind for $10 change. Yet commodities that have come down here sharply. But I guess, my point is I'm just trying to ask from a business and an operating perspective, is that the right -- your commitment to that businesses and the impact it has on your operations, correct? Because I thought it also had further impact, greater impact one way or the other based on the dollar change. So in other words, the contract changes you may have made or processing fees, are those revisions showing up, and that's why maybe there wasn't as much leverage from -- in the model in the quarter based on...

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [25]

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Yes, so we've updated the market and the sensitivity as it's changed. It used to be greater than it is, right? So that sensitivity has decreased. Our focus on the business remains. In other words, we've continued to migrate our agreements with customers who deliver material to our facilities in a more fair sort of cautionary arrangement. So a good portion of those contracts have already been converted. We're working with municipalities to convert the collection portion of contracts to more of, again, a fair cautionary arrangement. That works going to continue. And we're going to continue to invest in the recycling business, to your point, Al, where it makes sense, with the right terms and an equitable contract. And meanwhile, we still shuttered MRFs that -- recycling facilities that didn't return an adequate return on capital. So that's all going to continue. So we still think it's a business where we have good partners, specifically municipal partners who want to be forward thinking in their sustainability plans. But as you heard me say, you can't have sustainability without profitability, so that's our view. And we think as we continue to work toward fair sharing arrangements, that the volatility and the exposure will continue to come down. Having said that, we will also probably be giving up a little bit of the upside along the way, but we will have insulated the business from a volatile downturn. So that's still the right way to run the business, we think. But it's going to just cap it one step at a time.

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [26]

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Yes, and we're still early on in the process, Al. So we've got about 50% of our processing contracts currently converted over to this processing fee. But the majority of the material that we handle right now, we actually collect on behalf of municipalities. Those are covered under longer-term contracts, so it's going to take us a little while longer to cycle through those contracts. But we'll continue to keep you updated in terms of the changes and the sensitivity now analysis that we do relative to the price of commodities.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [27]

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Yes. And as it relates to the overall price of commodities now, they started out strong at the beginning of the year. They came down in the end of March and now April. But we think, frankly, they're for the long term, for the full year, they're still going to be at or slightly above the rate that we guided to.

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Albert Leo Kaschalk, Wedbush Securities Inc., Research Division - SVP and Equity Research Analyst [28]

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Okay. And that rate is what?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [29]

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$140 per ton.

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Albert Leo Kaschalk, Wedbush Securities Inc., Research Division - SVP and Equity Research Analyst [30]

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Okay. And finally, just to clean up, how many cents were benefiting the quarter from recycling?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [31]

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So recycling was actually $0.01 benefit during the quarter. But at the same time, we had $0.01 negative associated with fuel, with net fuel. So if you remember last year, we called out a lag benefit that we received in Q1. And that -- so year-over-year, there's actually $0.01 benefit from fuel. So those two kind of net out.

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Operator [32]

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The next question is from Sean Egan at KeyBanc Capital Markets.

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Sean Egan, KeyBanc Capital Markets Inc., Research Division - Associate [33]

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I just wanted to touch on One Fleet now that you guys are almost completely rolled out. Can you help us understand that maybe what proportion of the benefits that you've seen from the program either through the P&L or the cash flow statement? Just trying to understand the tail after you are fully implemented. If we continue to see benefits for another 6, 12 months as the program matures? Or if we're kind of through our total savings?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [34]

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Yes, so I'll start out by just emphatically saying that we haven't seen all the benefits from One Fleet yet. Okay? So let's talk One Fleet in a couple of different -- from a couple of different views. The first being CapEx. One of the benefits of One Fleet is to extend the useful life of the fleet, which means aging the fleet a year, which is a onetime $200 million savings. We're halfway through that. We'll save yet another $200 million from what we've saved so far, so that will happen this year. And then there's an ongoing tail. In other words, if you maintained your fleet to now an older age indefinitely, there is a $20 million, $25 million a year savings every year from doing that. So that's the gift that keeps on giving with One Fleet. So that's on the CapEx side. But that's real cash that's happening. We're seeing that. On the operating side, the goal of One Fleet, right, is to maintain the fleet to be the most safe and efficient, reliable fleet you can have. That doesn't mean the youngest fleet, right? It means maintaining these trucks to a high standard throughout their life. So in the division, the business units that have had One Fleet in place the longest, they've seen the greatest benefit in their operating metrics; fleet availability, engine hour cost and all the other things that we measure, the handful of key metrics we measure within One Fleet. Every one of our divisions has a maintenance dashboard where they follow and closely track their metrics related to One Fleet, and our maintenance staff here at headquarters works with them directly to put extra emphasis on those divisions that need additional help and support. So we know the thing is working. We know that the division they've been under the longest have had the best results, and the divisions that just went on last year, who're still in the certification process, are still working through some of the bumps. So this is a big, big undertaking. We're still very convinced it was the right thing to do. And frankly, we're seeing the benefits. And now we're going to really work hard to find an efficient frontier of our fleet, and we're going to start seeing other benefits from having the most reliable fleet in the industry that's going to start showing up in areas like driver morale and turnover. In fact, our driver turnover is down year-over-year. Our employee engagement score is up year-over-year. All these other metrics that we measure point positively to some of the things -- some of the underlying fundamentals things we're doing. So I could go on and on about One Fleet, but I won't because we only have an hour. So we're glad we did it. We're almost through the certification process, and then we'll have some time and capacity to tackle another initiative to be named later.

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Sean Egan, KeyBanc Capital Markets Inc., Research Division - Associate [35]

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Great. And then secondly, I know you alluded to the conversions or the progress that you've made on conversions to a [maintenance] water sewer trash index or an alternate to CPI. Can you maybe help us understand the split between collection and disposal within those contracts? And maybe kind of give your comments a little toward the disposal sides?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [36]

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Well, I would tell you most of that is collection, right? But as you know, we don't have a great deal of third-party competitive volume at our landfills because we have consistently raised prices on MSW at our landfill. And a lot of that other volume has sort of found other homes. But most of the MSW volume at our landfills that's not coming in on our own trucks, comes from municipalities. And to your point, those volumes are tied to some kind of a CPI escalator. But we are working those just like we're working the other collection contracts moving to an index that makes sense. And so we are -- most of the -- I'll say this, most of the more recent conversions have been with the water sewer trash and/or a fixed fee of 3% to 4% because we think that's fair and equitable, and we still have been able to sell that to customers as fair and equitable, and we continue to make progress, and we're not giving up. Even though CPI is improving, to Chuck's point earlier, we're going to start to see some benefit from an improved CPI environment certainly come through in the end of the year. We're going to continue to push to an index that makes sense. And meanwhile, we'll take advantage of an improving CPI environment if that continues for us as well. So it's the best of both worlds.

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Operator [37]

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The next question is from Michael Hoffman at Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [38]

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Let's talk about cash flow. And just sort of the -- how do you get from here to there to $900 million? You've had heck of a start. So help us walk through the flows, if you will, through the remainder of the year. And given the conditions in recycling E&P and the seasonal trends that could or couldn't happen, how does that all play out to get to the $900 million?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [39]

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Well, like you said, Michael, I think that we're already off to a very good start. And some of that has to do with the timing of CapEx that can be a little lumpy. But we're seeing very strong operating results. Obviously, we've got very strong EBITDA, and that's manifesting itself in our free cash flow. So we feel very confident with our guidance that we gave relative to our cash flow for the year.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [40]

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Okay, great. How you going to get there? Talk to me about the how do you get there.

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [41]

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I think, it's the execution with the rest of our plan, right Michael? So we said that we would get double-digit growth in earnings, EPS this year and in free cash flow. And we demonstrated in Q1 -- we've actually got that in Q1. And so it's continuing the blocking and tackling. And also, it's the tailwinds that I had talked about, right? So it's the net fuel, it's the CPI, it's the One Fleet. It's all of those coming together. And that's going to produce the cash flow for the year. And like I said, we're confident right now that we're going to be able to hit our guidance.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [42]

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And so, Michael, this Don. You've been around a long time, and I mean that as a compliment. You know it's never about one quarter. And this frankly is a very good quarter. This quarter is right on top of our operating plan. It's right on top of the guidance we provided. We've got a lot of momentum in the business. We talked about the best pricing in years. It's not just this quarter. That started at the end of last year. We've talked about the momentum in volume, shifting to positive volume in all lines of business. That's a trend, it's not just a quarter. We talk about the fact that we're still only at a 1.2 million household starts. And we still haven't hit sort of the 25- and 50-year average. So there's still growth to come in that business. And we had a couple of things that touched us in Q1, a couple of things we didn't expect, some -- we made some decisions ourselves to pull some cost forward. That's just running the business, because we don't run just for the quarter, and you know that, right? So we've got ongoing strength in pricing. We've got a great sales force that's pulling their weight, and we're getting our fair share of growth. We're using our pricing tools to get the best customers at the best price. Price per unit for new sales is up. All those things are going to continue, right? We've got improving metrics in areas like safety and turnover and NPS. And of the gazillion metrics that we track, many of them are moving in the right direction, right? So -- but it's a game of inches. So we're going to continue to do those things. We've got, as you said -- as Chuck said, these tailwinds. We've got the net fuel flipping in our favor in the second half. We've got CPI coming back. We've got some of these other what we call temporary costs subsiding. That's how we get there. It's just good old-fashioned execution, getting our fair share of the growth, getting better around service delivery, getting better around customer acquisition, getting better around safety. And we're going to continue to invest in the business. We're not going to get there by taking a CapEx holiday. We're not going to get there by not covering our landfills. We're not going to get there by taking shortcuts. We're going to get there by running the business for the long term, making the business better and better, and all those things are well on their way. So we expect to have a solid Q2 and a solid year. We've said, look, we're going to -- we're reaffirming our guidance, and we expect that we're going to achieve toward the higher end of the EPS guidance. And I think there's a lot of confidence in that statement. So what else do you want to know?

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [43]

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So when I look at it in the data you give us, so you gave us cash flow from ops ranges and then you subtract out your PP&E received, plus divestitures. There's a pretty healthy ramp to get the cash flow from ops number to get to the $900 million, and that happens has to come with operating leverage. I mean, you can't -- there's no other way to make that up. I mean, there's not monster working capital savings. So I -- that was what I was getting after is the -- if I get the seasonal trend normal, nothing unusual, 2Q, 3Q, given what you've done with your cost, I should see something in and around $1.86 billion in cash flow from ops. You spend what you're going to spend, there's your $900 million?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [44]

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Right. Michael, it does come back down to the operating leverage that you had talked about. That's what's going to drive the free cash flow. That's going -- what's going to drive the margin expansion. Absolutely. That's baked into the numbers, and that's what was baked into our guidance.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [45]

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But it's not -- you're not doing this through working capital. This is operating leverage through the income statement, not -- I managed to take a negative working capital and turn it into a source. It's not...

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [46]

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That's exactly right.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [47]

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Yes. We're not taking shortcuts. There's no smoke and mirrors. It's good old-fashioned running the business. You've got all these benefits of these initiatives layering in. You've got the momentum builds. Again, every new unit, every new ton comes in at a higher margin. You got to arrest a few cost along the way. You've got to be -- you got to hit your productivity goals, which we have set for the team. Everybody has goals in the organization, right? So all that has to happen. But that's what they pay us to do, and that's what we see happening in Q1 net of a couple of anomalies and a couple of things that we kind of did to ourself here. But as I said, the momentum is there. We are reaffirming the guidance. It's a really good quarter here, but we don't have our feet up on the table celebrating. We're -- as soon as I hang up the phone, we're going to go right back to work.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [48]

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Okay, fair enough. So on the landfill side, if my memory serves, a disproportionate amount of your landfill comes on your truck. You don't take that much third party?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [49]

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Well, we take third party, but most of our third party is MSW tied to municipal, which is price restricted, right? So...

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [50]

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In that third party, what was the trend there on the year-over-year volume?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [51]

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About flat on the -- are you talking about on the MSW coming in third party?

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [52]

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Yes.

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [53]

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Yes. The MSW was kind of flattish. But then you look at -- the C&D was very, very strong with 17.1%, as I had mentioned. And that's coming off of a 17.8% last year. So very strong on the event pieces of work coming into the landfill.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [54]

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So what I'm trying to get at a little bit is you had good front-end loader growth volume-wise in your own business, but your third-party MSW, which you realized from residential side loaders, what it's MSW so it's still a consumer, is flat. I'm trying to reconcile that. Help me a little bit with that?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [55]

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Yes. But you keep in mind that those MSW volumes that we had talked about were impacted by the weather, and if you strip that weather out, they were closer to an increase of 1.4%. But still, it's not monster growth. It's not 5%, 6%. So we generally feel that landfill growth should be fairly consistent; third-party landfill growth should be fairly consistent with the growth that we have in our core hauling business. They tend to flow with each other. And that's our view of the world. Now the only thing that sort of changes that is -- like when we are recording -- when we're reporting price volume, in aggregate it really is a revenue calculation, right? And so when we get a little bit of noise, when you compare the 2 based on container weights or a container's 100% full and those kind of things. Because as you know, as people continue to provide -- want more service increases, it takes a while before you actually can convert that to revenue. There was some of that noise in the system, but we still think it's on a macro basis a very broad-based recovery. It's just not -- it's not spiking. It's not happening in any big way. It's just happening a little at a time.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [56]

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Yes, I think the recovery is very metered because that's the nature of the housing recovery. And what I was trying to feel -- get a feel for is are you seeing a commercial business growth that's a combination of housing driving new business and your existing group business walking up service intervals? And a corollary to that would be it's the consumer everywhere, and so your third-party volume and your landfill, all those numbers should -- there's a relationship to them.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [57]

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Yes, I think all of those things are very well balanced and consistent with what we've seen in our business, in our markets, in our collection of assets historically, at least over the last several quarters as we've seen a more pronounced recovery from certain -- some -- the dark days we've seen in the past. So I think, it's very correlated. Again, other companies that may report may have a different set of assets. Some companies have a bigger landfill concentration. Some companies have businesses north of the border. Some companies have landfills in markets where they're not vertically integrated. We don't have any of that, right? So we're more of a vertical integrated business across 240 markets. So our business behaves a certain way. But there's nothing we're seeing in the trend, in the macro that has us worried. We think there's more to come. We think you look at our positive trends in price and volume, they're not just a quarter, but they're sequential. And the same thing is happening within the business. When I talked about operating metrics we track, they're improving, right? And we're only doing $100 million of tuck-in a year, so we're not spending $300 million, $400 million, $500 million, $1 billion on acquisition. So we look a little different, right? But the business is performing well, and we're talking double-digit free cash flow growth and double-digit EPS growth, Michael, and that's frankly something we hadn't seen it in a number of years. So I would say, strong, strong performance for these assets. And again, as I said, more to come because the trends are -- and the momentum is in the business.

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Operator [58]

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The next question is from Corey Greendale, First Analysis.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [59]

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So just a couple of questions, and apologies if this is treading back over some things you touched on a little bit already. But just to sort of the future expectations, Don, you mentioned on the broker business, there's still some more to go. Can you give us a sense how much of your revenue now consists of work you're doing for brokers?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [60]

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Yes. I don't know if we can give you the exact number, but I think we'll be through it probably sometime next year, okay? It'll sort of trickle its way out between now and the end of next year.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [61]

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Okay. And then on the volume point, I totally get the different mixes, and I understand the weather impact. But I think, just to put a finer point on one thing, I think one question we're going to be getting is just sort of the comp between your MSW volume growth and waste MSW growth. And I realize you can't really address specifically other companies. But any thoughts on why? Presumably they would have been hit by weather also. Why the delta between the kind of flattish for you and the 7%-ish that they got?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [62]

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Yes. One thing I would point out is that we're coming off a very hard comp on the MSW side of 4.7%. And I'm not sure what they reported last year, what kind of comp they're coming off of. So that might have something to do with it.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [63]

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Okay. I'll recall, I'll check. And just one last question...

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [64]

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We're not paying as much attention to what they're saying as what we're doing, so.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [65]

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Yes, I know. I totally get it, and you're running your own business, and the business is going well. Just in terms of -- I think it's a question people looking at both companies will ask. The last question I had is just, Chuck, as far as on the cost side, one thing that -- not to overemphasize 30 basis points, but the increase in the labor under SG&A was a little higher than I expected. I think it was up about 11% year-over-year. Is that the trend we should expect for the rest of the year?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [66]

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No, that really has to do with our Customer Resource Centers that we're in the process of opening. That'll be done by the end of this year, so our expectation is that salaries will come down as a percentage of revenue for the rest of the year.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [67]

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Because of cost savings? Or you're saying there's some implementation cost you are incurring now...

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [68]

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It's an implementation. Yes, that's right, Corey, it's an implementation cost. That's exactly right.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [69]

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If you think about duplicate staffing levels and having to employ more people and the overlap and all the rest of it.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [70]

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Got it. And remind me, when should we start to see the savings coming in?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [71]

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So it's next year is what we had said that you'll see a full run rate of savings associated with the CRCs.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [72]

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Beginning -- at the beginning of '18?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [73]

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Yes, sorry. At the beginning of '18.

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Operator [74]

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The next question is from Noah Kaye at Oppenheimer.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [75]

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Maybe if we could start with the dynamic around core price versus average yield. Assuming when you've got both numbers moving in a positive direction, it sets a strong start. But if I look at the gap between core price and average yield, which is a metric that you talked to, it did increase somewhat in the quarter since you're getting 4.1% price. I think that delta was about 1.8%, I guess. Do we make of this that some of your recent initiatives around pricing and price capture are starting to take stronger root? And how do we think about the stickiness of some of the core price increases?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [76]

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Yes. So let me just address the churn a little bit. So we saw a slight increase in the churn sequentially, and that really had to do with a supplemental revenue initiative that we had in place in 2016 that we ended up anniversarying. And knew that, that was coming, and that's why we were able -- we were very focused in on going out with additional pricing actions, which helped push our yield up over the 2% level. So that might be some of what you're seeing right now. And certainly, that's what you're seeing in terms of the core price that we've been able to push out in the open market.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [77]

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But to your point, the tools are fully deployed. The adoption rate is high. People are using the tools. Our selling rate for new sales is up, so we're selling new business on a per unit basis at a higher rate this year than we were last year. The tools are designed to do that. Customer retention stays strong at 93%. So all those other metrics are in good shape. And again, it -- sometimes the benefits of these things show up slowly, but they continue to -- and continue to provide benefit, and they'll continue that through the year.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [78]

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Okay, that's very helpful. And then there's been a lot of discussion of the different components of volume. I guess, we could just back up, thus far, have you seen normal seasonality in the second quarter?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [79]

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Yes. The second quarter, it means -- it seems fine to us. Really, we usually wait to really talk about seasonality until the quarter's completed because it's really May and June where that really comes to roost, probably a little bit too early to tell. The frost isn't always -- there's still some chance of frost in the Midwest kind of thing. And I know that because I'm doing a little construction project there, and they keep complaining that there might be frost in the ground, that's why they can't get things done. So anyways, we get to the seasonality question through sort of mid-May into June. Then we'll give you an update on the Q2 call.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [80]

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Okay. I appreciate that. And maybe if I could just finish up. I'm trying to get at this MSW versus C&D may be from a slightly different angle. If you have double-digit increases in C&D, and as you've always framed this, housing starts and construction should presage over time an increase in the higher margin MSW-type volumes. Do you think that you just have some footprint in relatively younger markets or higher growth markets and that is going to take a bit more time for those MSW growth rates to catch up? Could that be a possibility?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [81]

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Well, I don't know that we slice it quite that finely. We talked about the various types of markets we're in. It's a pretty good balance of urban centers and secondary markets, and 25% of our business is in franchise market. So it's a pretty balanced portfolio. So we don't spend a lot of time analyzing that because I don't think it really does us a lot of good to help run the business. So I'm sorry, I can't find any insight. Overall, we look more market-by-market, how we make investments, how we deploy the sales force and products and are all of our markets contributing. And the good news to that answer is all the markets are really doing pretty well. I mean, we've got a really broad-based recovery here. It really is, as I will share and talk about with Michael Hoffman, I think it's taking a lot longer for us to see the benefit of small container growth in this recovery. We had hoped and thought we would see it sooner than we did. But we've been seeing it. And net of this broker issue we're working through, we've got -- we think there's a growth there too. So when all lines of businesses are contributing, including your higher margin, things start to make a difference for you on the margin, and that's what we're going to begin to see here now in the second half of the year.

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Operator [82]

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The next question is from Tyler Brown at Raymond James.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - Research Analyst [83]

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Chuck, just to be clear. So the landfill operating cost headwinds, they sunset at the end of Q2?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [84]

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Yes, that's right.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - Research Analyst [85]

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Okay. And then was the lack of the CNG tax credit a notable drag?

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [86]

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It was a drag. That's part of that drag that we called out, that $0.01 of EPS, about 50 basis points, that was all part of it.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - Research Analyst [87]

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Okay, okay. And...

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [88]

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But the big piece of it was the fuel lag, the benefit that we received last year part.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - Research Analyst [89]

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Okay, okay. And so if -- my last question here is just, if CPI is set to help us here in the back half, I mean, it seems that the open market is very rational. It seems like churn is lower stable. Why wouldn't yields be better than the 2%, 3% here in the back half?

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [90]

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Well, we're not there yet, right? Historically, when CPI is more normal or in that sort of 2%, 3% range, open market pricing is better, historically. So we're certainly thinking about how we will go to market, and we'll think about what the market bears and allows, and we'll be evaluating competitive behavior and the rest of it. It's too early to tell. But historically, if CPI is up, the open market pricing is up as well. So we'll just see what happens.

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Charles F. Serianni, Republic Services, Inc. - CFO and EVP [91]

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And we'll update our guidance as we always do in July.

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Operator [92]

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At this time, there appear to be no further questions. Mr. Slager, I'll turn the call back over to you for closing remarks.

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Donald W. Slager, Republic Services, Inc. - CEO, President and Director [93]

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Thank you, Amy. In closing, we will continue to manage the business to create long-term value and remain focused on executing our strategy of profitable growth for differentiation. I would like to thank all Republic employees for their hard work, commitment and dedication to operational excellence in creating the Republic Way. Thank you for spending time with us today. Have a good evening, and be safe out there.

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Operator [94]

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Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.