Republic Services Inc (RSG) — Q2 2016 Earnings Call Transcript

Good afternoon and thank you for joining us. I would like to welcome everyone to Republic Services' second quarter 2016 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 on today's call contains forward-looking statements which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time-sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call which is July 28, 2016. 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.

Thanks, Brian. Good afternoon everyone and thank you for joining us. We're pleased with our second quarter results which were in line with our expectations and keep us well-positioned to achieve our full-year financial guidance. We continue to realize the benefits of executing our strategy of profitable growth through differentiation which allows us to attract and retain high-value customers, build the best team, increase profitability and create long-term value. During the second quarter, adjusted EPS was $0.55. EPS improved from the prior year, even with a $0.02 increase in the effective tax rate. Excluding the increases in taxes, EPS grew approximately 6%. Adjusted free cash flow grew 5% to $177 million and was in line with our expectations. Core price was 3.1% and average yield was 2%. We expect the average yield to remain relatively consistent with our second quarter performance for the remainder of the year. We continue to see the highest level of average yield in our small container commercial business. The majority of these customers are in open markets, where we can leverage an increase in demand for service through our enhanced product offerings and our digital platform. Second quarter volumes increased 50 basis points. As expected, volume growth moderated from the first quarter but remained positive. We continue to expect volume growth of approximately 1% for the year, consistent with our guidance. Cost of operations improved 20 basis points to 61.3% of revenue, from 61.5% in the prior year. There was a sequential improvement in most cost categories, including labor, maintenance and landfill operating costs. Adjusted EBITDA margin was consistent with the prior year at 28.3% of revenue. We incurred approximately $5 million of legal settlement costs during the quarter which impacted EBITDA margin by 20 basis points and reduced EPS by approximately $0.01. We saw EBITDA margin improvement in all lines of business, with the exception of residential. Pricing in the residential business continues to be impacted by a below CPI environment. We launched and priced a tender transaction and new debt issuance which will reduce annual interest costs by $17 million or approximately $0.03 of EPS. These deals closed in early July. As part of our efficient capital allocation strategy, we returned approximately $400 million in total cash to our shareholders since the beginning of the year. This includes 4.2 million shares repurchased for $194 million. Additionally, our Board recently raised the quarterly dividend by approximately 7%. The annualized dividend is now $1.28 per share. Regarding our revenue enhancing and customer-facing initiatives, first, we now have approximately $340 million in annual revenue that uses a Waste Related Index for the annual price adjustment. These Waste Indices are more closely aligned with our cost structure and have consistently outperformed CPI. Additionally, we moved $25 million annual revenue to a fixed rate increase of 3% or greater. We made these changes for customers that want more certainty around future rate increases and we're confident that we can manage our cost structure at or below this level. Second, approximately 1.6 million customers are enrolled in our customer portal and mobile app, up 60% from the prior year. These tools significantly enhance our customer interaction and connectivity. Third, our eCommerce platform now has the capability for customers to purchase temporary large container and residential subscription services online. This addresses the evolving needs of our customers' buying preferences and provides a lower cost sales channel. Approximately 15% of residential subscription sales are coming through our eCommerce platform. And finally, we opened our second Customer Resource Center located in Phoenix. We expect to open our last Customer Resource Center in Indianapolis later this year. Regarding our fleet-based productivity and cost savings initiatives, 17% of our total fleet now operates on natural gas; 73% of our residential fleet is currently automated; and 85% of our total fleet has been certified under our OneFleet Standardized Maintenance Program, up from 70% a year ago. We recently completed the final wave of our OneFleet implementations and expect the entire fleet will be certified by mid-2017. Recent recycled commodity prices have trended above the prior year by approximately $5 to $10 per ton. If prices remain at these levels for the balance of the year, we would expect to achieve the higher end of our EPS and free cash flow guidance ranges. When assessing other macro conditions, we continue to see a gradual improvement in the fundamentals that impact our business which was the premise for our 2016 business plan. Chuck will now discuss our financial results.

Thanks, Don. Second quarter 2016 revenue was approximately $2.4 billion, an increase of $39 million or 1.7% over the prior year. This 1.7% increase in revenue includes internal growth of 1.3% and acquisitions of 40 basis points. The components of internal growth are as follows: first, total average yield growth of 2%; average yield in the collection business was 2.3%, which includes 3.7% yield in the small container business; 1.9% yield in the large container business; and 1.2% yield in the residential business. Average yield in the post-collection business was 1.1% which includes landfill MSW of 1.6%. A majority of our third-party landfill MSW business is with municipal customers that have contracts that contain pricing restrictions. Total core price, which measures price increases less rollbacks, was 3.1%. Core price consisted of 4.1% in the open market and 1.5% in the restricted portion of our business. Second, our total volumes increased 50 basis points, which was in line with our expectations. Volume growth moderated during the second quarter, mostly due to the mild winter conditions, which favorably impacted our first quarter performance. Volumes in the collections business increased 30 basis points, which included a 2.9% increase from the large container business, a 10 basis point decline from the small container business, and a 1.4% decline from the residential business. Within our large container business, temporary C&D hauls were up 6.5% and recurring hauls were up 2.1%. Temporary C&D hauls remain strong and continue to reflect an increase in construction-related activity. There was a 50 basis point impact to small container volume from not renewing select national accounts customers and shedding certain work performed on behalf of brokers. We view these losses as non-regrettable. Our residential volume decline of 1.4% was due to not renewing certain contracts that did not meet our return criteria. These losses were known and contemplated in our full-year volume guidance. The post-collection business, made up of third-party landfill and transfer station volumes, increased 1.5%. Landfill volume increased 1.6%, which consisted of MSW volume growth of 2.2% and C&D of 13.8%, partially offset by a decline in landfill special waste of 1.1%. The decline in special waste relates to large event-driven volumes in the prior year that did not repeat. Third, fuel recovery fees decreased 1%. The change primarily relates to the decline in the cost of fuel. The average price per gallon of diesel decreased $2.30 in the second quarter from $2.85 in the prior year, a decrease of 19%. The current average diesel price is $2.38 per gallon. We recover approximately 80% of our total fuel costs through our fuel recovery fee program. Additionally, 20% of our diesel gallons are hedged using financial hedges. Next, energy services revenue decreased 50 basis points. The decrease in energy services revenue primarily relates to a year-over-year decrease in drilling activity, resulting from a decline in the price of oil. Finally, commodity revenue increased 30 basis points. The increase in commodity revenue primarily relates to an increase in processing fees charged to third parties. This increase results from our initiative to transition to a fee-based recycling model. Excluding glass and organics, average commodity prices increased 3% to $116 per ton in the second quarter from $113 per ton in the prior year. Second quarter total recycling volume of 648,000 tons was consistent with the prior year. Cost of goods sold for recycled commodities was flat versus the prior year. Now I will discuss changes in margin. Second quarter adjusted EBITDA margin was 28.3% and consistent with the prior year. Total cost of operations decreased to 61.3% from 61.5% in the prior year, resulting in 20 basis points of margin expansion. Sequentially, the year-over-year change in labor improved 30 basis points and maintenance improved 40 basis points. We expect maintenance expense, as a percentage of revenue, will be below prior-year levels as we exit the year. SG&A expenses were 10.4% of revenue compared to 10.2% in the prior year. The 20 basis point increase was due to settling certain legal matters from prior years. On a full-year basis, we expect SG&A expenses of 10.5% of revenue, which represents a 30-basis point improvement from 2015. When looking at the detailed cost line items, as a percentage of revenue, there is an impact from the decrease in fuel recovery fees. For example, the 1% decline in fuel recovery fee revenue resulted in an increase in labor expense of 20 basis points and repairs and maintenance expense of 10 basis points. 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 2016 interest expense was $92 million, which included $12 million of non-cash amortization. As Don mentioned, we recently completed several financing transactions. First, we refinanced our $1 billion credit facility that was maturing in May of 2017. Second, we tendered $575 million of debt with coupons ranging from 5.7% to 7.4%. And finally, we issued $500 million of 10-year senior notes with a 2.9% coupon. As a result of these transactions, we expect to save approximately $17 million in annual interest expense or approximately $0.03 of EPS. Our effective tax rate was approximately 38%. The lower tax rate in the second quarter resulted in a $0.01 EPS benefit from a settling of federal tax matter. We expect an effective tax rate of approximately 39.5% for the remainder of the year. Second quarter adjusted free cash flow was $177 million and year-to-date adjusted free cash flow was $337 million. Both were in line with our expectations. We expect free cash flow generation will be weighted to the second half of the year due to the timing of capital expenditures and working capital. We remain comfortable with our full-year adjusted free cash flow guidance of $820 million to $840 million. Now I will turn the call back over to Don.

Thanks, Chuck. To conclude, our second quarter results were consistent with our expectations and they keep us on track to achieve our full-year guidance. I'm proud of how the Republic team continued to execute our strategy of profitable growth through differentiation. And our performance continues to reflect our hard work. We will continue to deliver on our promises to our key stakeholders, including our customers, communities, employees, and shareholders. At this time in the call, I would like to open the call to questions.

Core pricing did decelerate a little bit, but yield has held steady. I think the spread between the two is about as small as we've seen in some time. I know one of your competitors has talked about improved churn. I'm just curious if you're experiencing the same and can you talk a little bit about how PBS and Capture might be helping out there?

Certainly, what we're seeing here is a benefit from PBS and from Capture and that's what's allowed us to decrease our churn by about 30 basis points sequentially. The other thing that we have in here, Tyler, is the fact that we're very much focused on ensuring that we're charging for all the services that we performed and that would include things like delivery fees and extra pick-ups. So that's really the focus that we have placed on these new tools and charging for the services has really allowed us to drive down that churn.

Tyler, this is Don. As you know, PBS is fully rolled out. Capture has now been rolled out for some time. The adoption rates, utilization rates of those tools are very high. We've got great training programs in place to retrain new hires. It's been really a great success for us. There is a lot of pull in the organization for those tools, professionalizing the sales team. As a backdrop to what Chuck said, defection has remained low at 7% and now we've had that low for a long time. Churn is improving, as Chuck said. The underlying fundamentals of small container business are strong. So just all around, a good steady business and really good execution by the sales organization. And year over year, another stat we like to look at, cost or price of new sales compared to price of new sales from last year is also up and that's, again, due to the new tools that we've got out there.

Chuck, this is a bigger picture question, but margins have been hanging around this 28% range for, I'd say, the past couple of years. I know publicly you guys have talked about that there is really nothing structurally that precludes you from getting back to, say, that 30% margin profile. I know there's lots of internal initiatives but what are the real key levers to getting back to that range? Is it really about bending the cost curve or do you guys need some exogenous help from, say, CPI commodities? Is that what's going to help you get there?

When considering the long-term, we need to successfully transition our customers from CPI to another pricing index, which is a major focus for us. A slight boost from commodity pricing would also be beneficial. We're starting to see margin expansion, as we experienced gross margin growth of 20 basis points during the quarter. Additionally, we still believe we will see EBITDA margin expansion this year. Some of this will come from our ongoing emphasis on managing costs, including maintenance and labor, and we will also benefit somewhat from the reversal of the workday. We are optimistic about our progress this year regarding cost management and are confident in our ability to return to 30% margins.

Remember, last time, we were north of 30%, Tyler, and given the size 31ish, we had better recycling commodity prices. We did not have the CPI environments. Those are two important macro factors that you pointed out. But we're now seeing benefits coming through the P&L from the OneFleet initiative that is fully rolled out, as I said. We'll certify everybody by this time next year; that's starting to pay dividends. We will see the benefit start to happen next year in 2018 from the benefit of the reorganization net of the CRC consolidations. Those start to roll in. Those are, I think, costs that will easily be able to achieve, based on what we have seen so far, so there's a lot of good things in the works and again, there's always that next wave of initiatives that we haven't talked about yet.

Maybe we just start with the recycling part of the business? First of all, can you just remind us how far you are through that process of reworking the contracts? And how long you think that will take? And I think there's a second part of that question: I think recently, in particular, you put in place some pretty state-of-the-art automation on some of the recycling facilities. To what extent are you seeing that in a higher automation level helping you on the margin profile and helping the economics along? Thanks.

Let me begin by emphasizing that the recycling business is distinct in every market. We continue to invest heavily in recycling and are dedicated to assisting our customers in making environmentally responsible choices to achieve their sustainability objectives. This model is only viable in markets where customers are prepared to pay for the service and where we have sufficient density and participation to support it. I often highlight that sustainability is not feasible without profitability, which are crucial factors. Customers must appreciate its value, and we must have the necessary density and participation for it to be effective. While we've made significant investments in cutting-edge technology, and have even received accolades for our innovative recycling practices, we've also needed to close some outdated low-volume facilities that lacked the participation necessary for recycling to be feasible. It cannot operate at a loss. As for the progress in redefining recycling, it's worth noting that recycling constitutes only about 10% of our revenue and is one of the more unpredictable segments of our business, especially in relation to commodity pricing. Although prices have shown signs of recovery, they started the year quite low and may strengthen further in the latter half; time will tell. There are two key aspects of recycling: processing, where we accept materials from third parties, and collection. On the processing side, approximately 40% of the volume we handle involves agreements with more favorable terms, allowing those customers to share the risk and benefits associated with the material and market prices. These are solid contracts. The remaining 18% of our processing customers will become eligible for renegotiation over the next 18 months, and we aim to establish fairer terms with them during this period. Regarding the collection aspect, which is mainly tied to our residential municipal business, we are collaborating with our municipal partners to address this situation and are renegotiating contracts gradually. These contracts typically span a longer duration, so we are still in the early stages of this process. Most discussions thus far have led to practical solutions, and both parties recognize the need for an arrangement that benefits everyone involved. We will continue to navigate this and make investments where it is justifiable.

I'd like to ask you a question on the relationship between increasing customer profitability and some of the technology initiatives that you're adopting. You mentioned that you've seen good progress on customer churn continuing to trend lower. I would also think with some of the early events that telematics and route optimization technologies that you've got; it's becoming easier to pinpoint the types of accounts that will improve route density and integrate profitability. To what extent should we continue to expect that to be a tailwind for you, as basically a secular technology benefit?

We have been using route-based technology, including GPS systems and geocoding, for a long time. We will continue to enhance how we utilize those systems, but it won't be a significant factor for us. Our improvements will be gradual over the years as our tools advance. We've relied on these tools for some time, so I want to clarify that our routes are already highly efficient and well-structured. This efficiency contributes to our margins of 28%, which is driven by the density model of our business.

Can you discuss your topline performance? I thought it was slightly below my expectations. It seems like expectations for volume may have been a bit high from Q1, but overall they were mostly aligned, though there are some nuances when you break down the volume. Can you explain which segments met your expectations and which ones fell short? I realize there are many factors at play with comparisons.

We'll approach this together. To start, we experienced a strong volume growth rate in the first quarter, but we noted that it was influenced by anomalous year-over-year comparisons. This past winter was quite mild compared to the harsher winter of the previous year. We've maintained our volume guidance for the year at 0.5% to 1%. Currently, we're indicating that volume growth is projected to be around 1%, which aligns with our expectations and may even reach the higher end of our forecast.

What I would add to that also is that we did see, as I mentioned before, we did see a step-down in residential volumes, and that's because of certain contracts that we did not renew because they didn't meet our return criteria. So keep that in mind also. The other thing is that you've got a 50 basis point sequential decline in volume, just due to the additional workday, so that's obviously something that's driving the topline in a pretty significant manner. But as Don mentioned, we still remain comfortable with our guidance of hitting about 1% for the year in volume guidance, which, as you mentioned, is the upper end of our original guidance range.

A significant portion of this recovery has been driven by our C&D business, which continues to perform well. We noted that churn rates are favorable and defections remain low. Container weights have seen a slight increase, and service increases are gradually outpacing decreases. All these factors indicate strengthening fundamentals, and we're also being strategic with our pricing. Additionally, we have stepped away from some broker business, determining that the broker model has not been beneficial for the company, and we have intentionally reduced that business over the past few quarters. As a result, the overall numbers are considerably more favorable.

And can you talk a little bit just looking at the top line as well? It looks like the tuck-in was a little bit lower than normal. Just curious what you're seeing in the private market. It sounds like things have quieted down with that. You also may have had some divestitures in there, so?

We were a little slow out of the gate this year but we're confident that we will intelligently spend $100 million or so in and around tuck-ins. Again, we're focused primarily on tuck-ins because of the return profile of those. And as you know, these things are kind of lumpy. But we've got a good pipeline and we've got a number of deals that we're working on now that we think will come through for the second half of the year and we will be right where we said we would be.

My first question is about the special waste environment. We conduct this survey every quarter, and while the results showed strong performance overall, the special waste segment seemed a bit weak. I'm curious if this is just an anomaly in our survey, so I’d like to know what your observations are.

For us, the second quarter presents a bit of a challenge from a comparison standpoint because we had a significant project on the West Coast last year that did not recur. A project of that scale can skew year-over-year comparisons. However, our special waste in the first half was about 3% above our three-year average, indicating that we are still trending positively overall. It's important to note that a portion of our special waste is related to manufacturing, which generates consistent waste, and that segment has remained stable and strong. The event business, which is linked to land clearing and construction, tends to be inconsistent, and we've observed that variability. However, overall construction activity remains positive for us, and we believe we are in a solid position for the long term.

Okay and then I actually had a question on recycling. As you have done some restructuring in that business, I imagine we've all been focused on what happens when commodity prices are down; now it's actually trending up. Is there a formula you can give us? I think in the K, you've given us a formula each $10 per ton change. Does X to revenue and operating income, how that formula changes as you've restructured those contracts?

I think the formula is basically the same so for every $10 change in commodity prices for our basket of commodities it has about $0.03 in EPS impact on the business.

And you all see that changing?

It will change as we continue to modify the contract. So, Corey, when we make sufficient progress, we will reassess it and provide an update, hopefully by the time we give guidance next year, we will have a new perspective on that.

I'm going to ask one last quick question, Chuck, which quarter do you expect the reversal of the extra day to occur?

It's going to hit in the fourth quarter.

So I appreciate the comments earlier that you guys have narrowed the gap between core price and yield and maybe I'm reading into the a bit much, but when you look at core price, your open market component in Q2 was 4.1%; that's down from where it was that in 1Q and it's down from I think it was 4.8% last year. I guess I would have thought that, that this lever would have been pulled a little bit harder given the restricted component is down on CPI. Is there anything that we can point to that would maybe explain some of the moderation or is it just tough comps?

I think we need to keep in mind that core price includes the anniversarying of recycling collection prices that we pushed real hard in Q1 of last year. So because those anniversary, we had a little bit of a headwind in core price but as we mentioned before, even though we had that headwind, we were able to keep average yield consistent at 2%.

And Joe, we expect that by focusing on pricing and maintaining strong internal controls, along with our tools that foster synergy, we will closely monitor this aspect. We are incentivizing our sales team to sell wisely, and additionally, the overall market has been performing well. Growth is evident, and our strategy for growth differentiation is effective. We believe our value proposition for customers continues to improve. All of this suggests that we anticipate maintaining favorable pricing in the open market because we will earn it, which can help us mitigate some costs that we typically cannot address through productivity. Therefore, our approach and the overall market structure remain unchanged.

So then it's fair to say then that some of your bigger open market classes or products like commercial and landfill are good probably seeing similar, if not better core pricing?

Well, remember on landfill, specifically MSW, most of the waste that comes in is municipal under long-term contracts. We have very little open market MSW coming into our landfills anymore just because we have priced those assets according to what a realistic return is for running a landfill. So but we do see decent pricing across the board.

And then Don, just a question for you on some of the customer-facing initiatives that you alluded, the eCommerce in the release. I certainly get that this is aimed at reducing churn and if you do that, you guys could boost revenue and margins. So I'm curious, have you started to see the meaningful reduction in churn from the systems? And I guess more generally, when you guys think about pursuing a project like this, how do you measure the returns associated with it and what's your expected payback period?

There are two key points to discuss. First, the introduction of click-to-buy or eCommerce tools is already showing a significant portion of new business in markets where we implemented them. The return on this investment comes from lower customer acquisition costs, as people are shopping online and making purchases without needing direct interaction with our sales team. Additionally, online purchases are generally at a higher price point due to the added convenience, and we have seen better compliance with contract agreements as customers prefer opting for service agreements because of this ease. With these tools now widely available and user-friendly, we need to focus on increasing participation, which will yield positive results. The current consumer landscape reflects this trend, and while our industry may have been slightly late to adopt these strategies, we are still ahead of many smaller competitors with fewer resources. It's essential for us to connect with customers on their terms, and this is another way we can enhance our market competitiveness, boost revenue smartly, and reduce acquisition costs.

So on the volume side, did you see any discernible trends in the underlying volume during the quarter, and is it on track through July?

Yes, I would say that we're on track. We're exactly where we thought we would be. As we mentioned before, we're at the high end of our guidance right now. Therefore, we feel very comfortable with the volume growth we've seen and the momentum we have for the rest of the year.

Okay, and was there anything specific, any region or were there any slowdown as you went through the quarter?

No, this is Don. I would say it's very broad-based across geographies, across most lines of business. So again, we talk about the fundamentals being strong. We talk about the fact that we're still mid-cycle in the recovery. All of those things are pointing in the right direction. So we think it's a solid quarter and as Chuck said, we're reiterating guidance. We're saying that we think we'll perform to the high end of that, as long as commodities hold up and the volume side as well. So we're pretty pleased with how the business is performing today and the economy is cooperating.

Just my last question, I think restricted pricing was 1.5%. Is this the bottom that we should see with how we've been seeing CPI trend or is this going to take another step lower in the second half of the year?

Yes, this is pretty much the bottom right now in terms of restrictive pricing. Obviously, we've got a little bit of a CPI headwind in the second half of the year but that's already contemplated in our guidance. But the should be close to the bottom right now.

Yes, what you'll likely notice, Mike, is that the majority of our price adjustments occur in the second half of the year. Therefore, you will begin to see the influence of the 2015 CPI environment on restricted pricing during the second half of 2016 and into the first half of 2017. However, we intend to maintain an average yield of 2%, and we plan to achieve this through slightly improved pricing in the open market. Chuck mentioned some of the pricing adjustments we made for recycling collection last year in Q2, which have now realigned with what we charge on the solid waste side, and we expect to implement more of these adjustments in the second half of this year to counteract the CPI challenges.

We will continue to convert customers to alternative indices and address some of the current pricing related to recycling to ensure it's fair for us. This process will persist through this cycle, and as we've mentioned before, a bit of inflation can be beneficial, so if we experience that, it will eventually aid us.

But also remember, we have been managing in this low CPI environment for quite a long time now and I think we've done it pretty effectively. So if you think about the number of years we've had an average CPI of 1.6%.

1.1% over the last decade.

We maintained our margins. We continue to produce strong free cash, so this business is built to withstand it and I think there's upside on the horizon.

This is Brian Butler in for Michael today. The first question, just on the margins. In the first half, on EBITDA margins, first and second quarters it was down, I think around 40 or 50 basis points. When you think about getting to the midpoint or the high end of your guidance, that means there's about another 120 to 100 to 120 basis points in the second half. How should we think about that from a waiting perspective in third and fourth quarters? Was that more back-end weighted to the fourth quarter where you see much stronger margins or is it going to be more even?

So right now, keep in mind that here in the second quarter, the EBITDA margins were 28.3%, right? So consistent with last year, had a little bit of a headwind as we had mentioned in those margins because of those legal settlements that we had talked about. So if you back those out, you're close to that 28.5% that we had guided to for the year. In the back half of the year, we continue to see strong EBITDA margins. Keep in mind that work day that I had talked about will also benefit the margins in the fourth quarter of the year, so right now, we still feel very comfortable with our EBITDA margin guidance.

And we have said, our operating costs are improving, right? We think that continues through the second half; again, this legal settlement doesn't repeat. Those are the things that will continue to pull that EBITDA margin up through the end of the year.

Brian, you are probably going to see a heavier weighting to Q4 than Q3 again because of the workday that Chuck mentioned. We're going to get a benefit from that, but also we have an easier comp in the fourth quarter from the EBITDA margin performance in the prior year, so most of it will be weighted to Q4.

Okay, and what was the benefit from the day? Did you guys give that?

Well, just think of it this way: In the first quarter when we actually had one extra day, it was about a 50 basis point drag on margin. So think of something similar in Q4 but obviously flipping the other way.

Okay, and then I just on a follow-up question, when you talked a little bit on the service upgrades looking better, can you give a little bit more color on those trends on the commercial side of the business and are you seeing any recessionary signs for any of the commercial customers? No, the trends are just moderately incrementally better, but nothing negative.

We continue to get strong price on the small container piece of the business, once again for the quarter, it was 3.7% for the quarter.

Just wanted to turn to the residential side for a second and the contracts you decided not to renew. I get the reason for shedding unprofitable volumes, but just wondering what happens to these volumes? And where do the volumes go and how much capacity do you guys have left to shed?

I won't share the specifics on what we might shed, but we approach renewals with the belief that our strong relationships, excellent service, and ongoing improvements to customer interfaces will help us maintain business. However, some contract losses are an expected part of our operations. We've experienced a unique CPI environment for several years, where we've faced challenges with certain customers during renegotiations. When we signed agreements years ago, we anticipated a price increase of 3% to 3.25%, but instead, we've seen increases of 1.6% or less, while our costs have risen by 2% to 2.25%. If a customer does not appreciate our cost structure and expects further price reductions that do not align with our return criteria, we cannot proceed, regardless of our positive relationship. This is simply how business operates. Currently, we anticipated some contract losses in Q2, which contributed to the decline in volume growth from 2% in Q1 to 0.5%. I don't want to exaggerate this; it's just part of the business dynamics. However, we've also seen many successes in extending our business and enhancing our services and value while building strong relationships. Overall, despite these challenges, the economy is treating us well. The company is growing, our team is executing effectively, our initiatives are in place, and we are seeing positive results. This quarter is performing as expected, and we remain on track with our guidance, anticipating we could reach the upper end if we maintain our pricing in commodity sales. So, I urge you not to make too much of these issues.

Okay. Can you provide an update on the refinancings you've completed? Is there a possibility for additional refinancings in the future, or what is the current situation regarding that?

This is Brian. The reality of it is that we start seeing a number of maturities coming due beginning in 2018, right? So I think we've got maturities every year from 2018 through 2023, so that's the more likely scenario, as those maturities come to term, you will see us then obviously issue new debt at the market rates at that point in time.

Thank you, Nicole. I would like to thank all Republic employees for their hard work, commitment, and dedication to operational excellence and creating the Republic way. Thank you all for spending time with us today. Have a good evening and be safe out there.