Republic Services Inc (RSG) — Q1 2019 Earnings Call Transcript

Good afternoon, and thank you for joining us. I would like to welcome everyone to Republic Services' first quarter 2019 conference call. Don Slager, our President and CEO; Jon Vander Ark, our COO; 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 April 25, 2019. 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 the GAAP reconciliation table; and the discussion of business activities along with the recording of this call are all available on Republic's website at republicservices.com. I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, time, and presentations are posted on our website. Finally, I'd like to point out that in our 8-K filing we've included the table that reflects changes in average yield and volume as a percentage of total revenue by line of business. With that, I would like to turn the call over to Don.

Thanks, Nicole. Good afternoon, everyone, and thank you for joining us. We are very pleased with our strong start to the year. We continue to realize the benefits of executing our strategy of profitable growth through differentiation, which includes strengthening our market position, attracting and retaining the best people, enhancing the customer experience to increase willingness to pay, and leveraging our scale and technology to drive additional efficiencies in our business. As a result in the first quarter, both earnings and free cash flow are in line with our expectations. Through strong pricing, we were able to offset a $0.01 headwind from lower-than-anticipated recycling commodity prices. For the full year, we are reaffirming our adjusted EPS and adjusted free cash flow guidance, assuming current economic conditions continue. The strong momentum in our business will enable us to offset the additional $0.06 headwind from lower-than-anticipated recycling commodity prices. In the first quarter, we continued our balanced approach to capital allocation to increase long-term shareholder value. We invested $86 million in acquisitions. We sustained this momentum into the second quarter and have invested an additional $56 million for a total of $142 million of investment to date. This puts us on track to outpace our original acquisition guidance of $200 million. We now expect to invest approximately $300 million for the full year. During the quarter, we also returned $233 million to shareholders through dividends and share repurchases. I'll now turn the call over to Jon to discuss our first quarter operating performance.

Thanks, Don. The pricing environment in the first quarter was strong. Total core price was 4.7% and average yield was 2.9%, our highest pricing level in nearly a decade. We achieved this pricing while also sustaining our all-time low customer defection rate below 7%. The progress we are making on key initiatives is contributing to our ability to increase prices and retain customers. First, we continue to focus on providing superior service to our customers and making it easier for them to do business with us. Next, we are successfully converting customers from CPI based pricing to a waste related index or fixed rate increase of 3% or greater. These waste indices are more closely aligned with our cost structure and continue to run higher than CPI. To date, $685 million of our $2.5 billion book of business has been converted. Finally, we continue to discuss the true cost of recycling with our municipal collection customers as we renegotiate contracts. To date, we've secured price increases from approximately 21% of our municipal collection customers. In terms of dollars, we have now repriced approximately 17% of our municipal recycling collection revenue. Turning to volume. As anticipated, total volume in the first quarter decreased 1.5% versus the prior year. We faced several known volume headwinds in the quarter. These included a difficult special waste comparison in the prior year, continued shedding of work performed on behalf of brokers, and non-regrettable contract losses in the residential collection business. Excluding these items, underlying volume growth was 60 basis points and in line with our expectations. Next, our recycling processing and commodity sales revenue continued to experience downward pressure from further declines in recycled commodity prices. In the first quarter, our average recycled commodity price per ton decreased 17% to $93, down from $112 per ton in the prior year. Our April price per ton is estimated to be approximately $85. We continue to take action to transform recycling into a more durable economically sustainable business model and more importantly, we are making progress and seeing results. Through the end of the first quarter, we secured price increases on approximately 34% of our recycling processing business. Additionally, last year we rolled out an incremental recycling process charge to our open market collection customers to cover our increased costs. In the first quarter, this contributed 35 basis points of pricing in addition to average yield. Combined, we achieved total pricing of 3.25%. These results demonstrate that our customers do value recycling and are willing to pay for the service. Finally, our adjusted EBITDA margin in the first quarter was 28.3%. We saw good operating leverage in the business, particularly in maintenance and labor. Both of these costs as a percentage of revenue decreased versus the prior year. Our maintenance expense continues to benefit from our One Fleet standardized maintenance program and our labor expense is benefiting from our focus on process and routing efficiencies, as well as our efforts to attract and retain the best people. In the first quarter, our industry-leading turnover decreased versus the prior year. Given the tight labor market, this is a true testament to the culture we are building here at Republic. With that, I will now turn the call over to Chuck to discuss our first quarter financial results in greater detail.

Thanks, Jon. First quarter revenue was approximately $2.5 billion, an increase of $43 million or 1.8% over the prior year. Revenue growth was primarily driven by strong pricing across our collection, disposal, and recycling processing businesses. Adjusted EBITDA was $699 million, and adjusted free cash flow was $349 million, both in line with our expectations. Adjusted EBITDA margin in the first quarter was 28.3%, in line with our full year guidance of 28.3% to 28.5%. As expected, EBITDA margin decreased 50 basis points versus the prior year due to known headwinds. These headwinds included the expiration of C&D tax credits and a decrease in high-margin special waste volume due to the anniversary of a large event-driven project. We also continued to maintain our strong liquidity position and leverage within our optimal range of two and a half to three times. As of the end of the first quarter, we had $8.5 billion of debt outstanding and $1.7 billion of additional borrowing capacity available under our credit facilities. Interest expense in the first quarter was $100 million and included $11 million of non-cash amortization. In the first quarter, tax-related expense was a $0.01 headwind relative to expectations. The headwind was primarily due to higher-than-anticipated non-cash charges of $12 million, partially offset by a lower effective tax rate of 25%. For the full year, we continue to expect non-cash charges of $60 million and an effective tax rate of approximately 24%, consistent with our original guidance. Finally, as Don mentioned, we are reaffirming our 2019 adjusted EPS guidance of $3.23 to $3.28 and our adjusted free cash flow guidance of $1.125 billion to $1.175 billion despite a $0.07 headwind from lower-than-anticipated recycled commodity prices. For purposes of reaffirming guidance, we've assumed recycled commodity prices remain at current levels for the remainder of the year. At this time, operator, I'd like to open the call to questions.

Hi. Good afternoon.

Hi, Tyler. Good afternoon.

Hey, congrats on the 2.9% yield. It seems like the acceleration was maybe a little faster than we were expecting. I was just curious if you could talk about a couple of things or initiatives that kind of allowed you to get to that 3% range so quickly. And just as a point of clarification, the 2.9% yield, is that exclusive of the 35 basis point yield held from the processing fee?

Yes. Tyler, it's Don. It's a great catch, yes. The 2.9% excludes RPC. And so again, a great quarter in pricing. It underpins a couple of things. One, strong economy. As we've always said, when there's good organic growth in the market, pricing is better. Certainly, that's one thing. Two, our tools, the team now has been using our capture tools and part of the selling message now for a couple of years, when Jon introduced those a couple of years ago, so those are well underway. Overall, a rational backdrop competitively. We're really focused, besides the RPC on recycling, we're really focused on extending contracts and changing contracts in and around recycling and Jon mentioned a lot of that in his prepared remarks. So it's a good backdrop. It's a good economic backdrop, and we expect that to continue.

Okay. Very helpful. And then Chuck, I don't want to be super nitpicky here, but why is there such a large adjustment to free cash this quarter? I mean, it looks like there's maybe a $90 million adjustment versus say $30 million last year. I mean, normally, it's not a huge number, but this quarter really stood out. What was going on there?

Yes. Adjustment to free cash flow, you're talking about in the non-GAAP, correct?

Yes.

Yes, I've got to take a look at it, Tyler.

Yes.

Tyler, I'm not sure if this is what you meant, but I don't see a significant change between cash flow and adjusted free cash flow. Maybe you're noticing something in the CapEx section?

Yes, that's exactly where it is Nicole. Yes, you're right there.

Yes. That is just the timing of payments. We manage CapEx based on the CapEx received because it's easier for our business to understand, and we budget accordingly. What happens is we received a lot of equipment, and those will be paid in the next quarter. So you'll see it as a cash outflow in the cash flow statement for Q2.

Okay. Okay. That's helpful.

And then look…

Yes, sorry.

Yeah, I was just going to say, it just has to do with the timing of the receipt of the trucks and this is adjustment that we make is no different than the adjustment that we make every quarter.

Okay. Why are you adding back the $12 million loss from unconsolidated equity method investments? It appears to be below the line in the P&L, and I'm just curious about that too.

The loss on unconsolidated equity method is primarily a tax-related item. If you're looking at EBITDA, you should add that back. Additionally, since it is a non-cash item, you want to include that as well. When adjusting free cash flow, you should also subtract for cash taxes.

Okay.

We're really actually paying the tax liability.

Okay. That is helpful. And then just lastly, maybe as we think about the EBITDA margins. So I think they were down maybe 50 basis points, but that's actually a bit better than we were expecting. But Chuck, I was wondering if you could quantify some of those big moving items such as the CNG tax credit, maybe recycling, maybe special waste.

Yes. So the CNG tax credit was negative 60 basis points. At special waste, we talked about that. That was a negative 50 basis points. But then we had 60 basis points positive from just the solid waste business. The interesting thing here is that the recycling processing and sale of materials that was flat year-over-year, so that speaks to all of the efforts that we've put into place not just last year, but the efforts that continued here in Q1.

Okay. Thank you very much. Thanks.

Thanks, Tyler.

Hey, good afternoon and thanks for the breakout in the filing of yield and volume trends by line of business. And just looking at that really strong volume in MSW again 6.5%. Maybe you can comment on any specific pockets of strength what you're seeing there?

Go ahead Jon.

Yes, we believe it is widespread and not limited to a single area. This isn't due to one-time events. We are experiencing an increase in third-party volume that we missed out on last year. Additionally, there is strong growth from our existing customers, which is a very positive sign.

Yes. I think overall again across the board nationally, and as we've always pointed out, right, when special waste is strong, when C&D is strong, that's just a continued good positive outlook for us for the economy.

Okay. Turning to M&A, you've mentioned that there has been good activity so far this year and expectations for higher spending than you initially guided. Can you discuss the factors influencing that? We've heard from some of your peers that there is increased spending across the board. What kind of environment are you experiencing for deal activity that motivates you to move forward? I assume your spending is still primarily focused on tuck-ins, but could you clarify the mix of your pipeline?

Sure. We've always mentioned that deal flow can vary, depending on where businesses are in their life cycle. Larger deals can come and go. We've seen a strong pipeline for several quarters, which confirms that strength continues. Recently, we've had a few larger deals that are contributing to that progress. So far this year, we've spent nearly $150 million, and we anticipate reaching $300 million by the end of the year, possibly even a bit more depending on timing. Our team is well-positioned with solid relationships with sellers, and many attractive companies are considering monetizing their businesses right now. We don't rush into deals or take on poor opportunities; we focus on companies with high-quality revenue, such as those with significant recurring revenue and stable contracts. Our deal team has been very selective. We're in a good position at this moment, as many people seem motivated to make updates in their businesses. There’s no specific tax factor influencing this. We will continue consolidating the business, as that has been the foundation of Republic, and we will keep looking for valuable deals.

Yes, that makes sense. If I could just ask about the potential for divestitures related to the WMA merger, could you discuss what you see as the opportunities there? It seems like it could provide a new source of targets and how you see the overlap or potential fit with your existing operations.

I will let the team at the big green company decide what they consider suitable for sale based on divestitures or market conditions or any directives from the DOJ. We will be eager to explore any opportunities that arise. We are specifically looking for possibilities that align with our markets. As you are aware of the deal points, we will seek good opportunities to acquire strong companies with healthy cash flow at the right multiple and return. Our approach in this business is to evaluate everything and be very deliberate in our decisions on what we pursue.

Okay. Thanks so much.

Hi. Good afternoon. My first question is just on MSW landfill pricing. Maybe if you could comment whether you think there's more opportunity there. It seems like the 3% number on pretty strong volume is much higher than you've seen in the last couple of quarters. I think your largest competitor had a similar MSW landfill number on pricing. Is this the beginning of investors beginning to see landfill pricing, beginning to see more momentum than we've seen historically?

Well let me start. I'll let Jon give you some color. You have heard me say many times that these landfills are very expensive to own. They're very difficult to develop. You own them in perpetuity. Every single time we bury someone's ton of waste, we're taking the risk, if you will, and owning it and selling that real estate forever. These assets are nearly impossible to replicate, and I have been very vocal about the fact that they frankly have not held up their end of pricing in the marketplace over the past several years. We're certainly evaluating the costs of running landfill. We have some higher costs related to leachate that we have to pass-through to customers. I think part of that is what you're seeing. And I think I'd like to believe what you said Hamzah that this is the beginning of landfill and the infrastructure finally getting some traction on price that it deserves and frankly needs to offset some of the future costs related to owning people's waste forever and ever. Jon, what do you think?

Yes. I think we've been exhibiting a lot of price leadership on this for a long time. And I can tell you we're looking at every ton that comes into every one of our landfills and understanding what is the true cost of that and ensuring that we are getting a fair return to Don's point for taking up that real estate forever and you'll continue to see I think a positive trend in that direction.

Good. Got it. And then just on your adjusted volume number of 60 bps. It seems like that there's a massive disparity with your largest competitor that reported 3% adjusted. I mean if you go back historically the volume differential on an apples-to-apples clean number adjusting for comps is pretty big. They talked about technology investments and customer emphasis driving that. I'm just curious is it just asset footprint? Are you just earlier in your technology spend? Or are you just sort of walking away from more business? Just any thoughts as to what are your thoughts on the volume side? Can you drive more volume? Or is this just sort of your focus is elsewhere or maybe the technology spend maybe gets better and drives more volume?

Yes. There are a couple of things I would like to mention, Hamzah. First, the 60 basis points is affected by having one less work day. When you take that into account, the volume growth is generally 1.1%, which aligns more closely with our historical average. Additionally, regarding the temporary large container business, the volumes were also subdued, but this presented an opportunity for us to increase prices in that segment. We identified more pricing potential there and successfully achieved a price increase of 4.2%. We view the relationship between price and volume as a balance, and we have always maintained a balanced approach in this regard. We will continue to uphold that balanced strategy moving forward.

Yes, Hamzah look, we're digging deep into the recycling book of business. We are raising prices effectively. We're also going to be walking away from some business here and there. This task can be kind of lumpy when you lose a large RISI contract or something that is meeting returns. Winning and losing a national account can have a big impact. As Chuck said, we always try to find this right balance with price and volume and where is the price elasticity. We would tell you, we think we're getting generally speaking our fair share of growth and it will kind of ebb and flow a little bit with mix, but I would read more into that if I were you.

Yes, got you. Just last question. I'll turn it over. I'm just trying to understand sort of Republic's strategy on large acquisitions. Progressive Waste Republic didn't participate. ADSW Republic didn't participate. Is it just sort of DOJ issues? Is it valuation? Is it that the board just wants 100% return of cash and no leverage? Just any sort of big picture thoughts on how we should view that?

Let me begin by reiterating a point I've made before: in most situations, there's typically a natural buyer when there's a willing seller. Some companies have certain advantages, such as better capabilities in landfill operations or complementary infrastructure. This means they might be willing to pay a premium for permits or landfill space that others cannot access. All of these factors are important in our current situation. I believe we are securing the deals we seek. Regarding Progressive, it was a clear financial transaction due to the inversion that could occur, which we couldn't have achieved due to our size. In a competitive bidding scenario, I think that same company would still have won the deal because of its inversion advantage. We approach all situations with this perspective. We also consider assets like ADS, which have strong leadership and other appealing qualities. Ultimately, it may come down to which company fits best in the context of a particular deal. I have no negative comments about the assets involved. We are committed to investing $300 million this year, supported by a robust pipeline of opportunities. We will focus on creating shareholder value through a balanced cash allocation strategy, which includes acquiring cash flow at favorable multiples, developing existing assets, expanding landfills, investing in our fleet and technology, and executing share buybacks and dividends at suitable prices. Our dividend growth has been a steady 8% over recent years. We believe we have significant opportunities ahead to consolidate our share of this market, and we expect to pursue that. Additionally, there may be chances to acquire assets that don’t align with current operations or that are required divestitures, which we will also explore.

Great. Thank you.

Hi, good afternoon.

Hi, Brian.

I just wanted to make sure I understood some of the components in the reiterated guidance as it relates to recycling and a couple of other things. It sounds like the impact from lower recycled prices is going to be about a $0.07 headwind and you incurred $0.01 in the first quarter, and you've got $0.06 still out in front of you. And if that's the case, just trying to understand what the offsets are to keep the guidance unchanged. I think it sounds like the upside M&A is a partial contributor to that. But then will the balance of that just be a more favorable outlook in the core business essentially?

It's not really about mergers and acquisitions because the costs associated with integration usually exceed the benefits in the first six to eight months. The true advantages from M&A will primarily come next year when we see the effects of that. What really matters is the underlying strength of the business, including its costs. Jon, who manages the core operations, and his team have effectively managed labor costs, maintenance, and productivity. They've also seen a reduction in turnover, which indicates ongoing opportunities throughout the year. There’s pricing strength as well, particularly related to the work on recycling. Although recycling presents a challenge, we've been proactive in addressing it, positioning ourselves at the forefront of the market. We are experiencing benefits from the actions taken last year, and Jon and the sales team are actively engaged in tackling these challenges this year. Jon, could you share some of the initiatives you're working on to help balance things out?

Yes. In the first quarter, we implemented $12 million in pricing actions, building on last year’s $55 million. We are actively reviewing all 1,100 of our municipal recycling contracts, seeking a fair model that shares the risk and volatility, ensuring we receive a just return for our efforts. While some customers initially resist, we are committed to continuing the discussion. Just as we have succeeded in the alternative index over time, we will make progress in this area as we advocate for a fair model and a partnership in environmental initiatives in the long run.

Okay, that's clear. It makes sense. Just wanted to come back to the question on sort of volume and the different moving pieces in there. So, they're down 15. It sounds like 50 bps of that is just the calendar, so it's probably down one as a better representation there. I'm just wondering if you could break out the components to that as far as the special waste comp, the intentional shedding of business, and any weather-related impact that you maybe saw in there.

Yes, I'll begin with this, and Chuck can elaborate on the numbers. The solid waste business grows with population growth, which drives housing and business formation. This remains the reality of solid waste generation. Favorable economic conditions, job growth, and wage growth all contribute to volume growth. However, the general expectation is that volume will increase by 1% to 2%. There might be occasional periods where growth reaches 2.5% or 3%, but if you're anticipating sustainable 3% growth, you may need to compromise on pricing. This could lead to growth driven by significant volume increases that aren't sustainable long-term, which is our perspective. We don't focus much on acquiring high-profile accounts that yield low margins. While we have a nice portfolio of national accounts, they tend to be mid-sized rather than large accounts that don't provide pricing leverage or opportunities to enhance margins. Therefore, we anticipate staying within that 1% to 2% volume growth range, adjusting with the economy. When Chuck summarizes everything shortly, you’ll see we're positioned in that 1% to 2% volume growth sweet spot, allowing us to secure pricing and work with customers who will accept future pricing changes. The reality is that no one in this industry can fully offset inflation through efficiencies alone, and businesses are becoming more aware of this. So, that's the essential takeaway that you should incorporate into your model. Chuck?

Yes, we discussed a total volume decline of 1.5%. As mentioned, 0.5 points of that is due to the workday. Additionally, there are 210 basis points related to special waste and non-regrettable losses. When you consider all of this, you can see that we achieved solid growth consistent with our historical average in terms of volume.

And so, does it sounds like much impact from weather that you guys saw?

No, the impact from weather was pretty minor. It was only about 10 basis points, so overall it was not significant.

Okay. And last one, just kind of related. Will the one fewer work day sort of reverse out in the third quarter, or some time later in the year?

Yes, it reverses in the third quarter.

Okay. That's what I thought. Okay. Thanks very much.

Hi, team. The first question is about recycling. It's encouraging to see positive developments in the core business that are helping to mitigate some challenges. However, considering the ongoing price changes and discussions throughout the year, is there an updated sensitivity we should consider regarding potential further fluctuations in the recycling commodity price basket compared to what was outlined in the annual filing from 2018?

No. We're still at $0.04 of EPS impact for a $10 decline in our basket of commodities, and that's an annualized number. But as we continue to make progress on all the various initiatives associated with recycling, our expectation is that sensitivity will go down.

Okay. That makes sense. And then, it's great to see the leverage on the maintenance and labor lines. I just wondered, how much more juice we have there on that leverage and that One Fleet program and some of the labor programs? What inning are we in terms of driving those efficiencies and still seeing that into the future?

Well, I'll start and then let Jon share some insights. As he mentioned, we're experiencing the advantages of the One Fleet initiative. We've moved beyond One Fleet 1.0 and are entering the next phase, focusing on utilizing all the data we have and understanding the real life cycle of the fleet. Jon has some excellent ideas. I always mention that there is much more happening than we discuss because we have numerous technological advancements in progress and several phase two and three initiatives planned. We generally keep those under wraps until we're ready to integrate them into a model and include them in guidance. Jon, could you provide a bit more detail?

Yes. On maintenance costs, we're fighting underlying inflation of parts cost on increasingly sophisticated vehicles, so we're doing a great job of maintaining that on the maintenance side. On the labor cost side, we're going through routing efficiencies, using technology and certainly it's technology customer of our vehicles, but lots of initiatives, lots of effort underway there to understand it. We want to service, but first of all we want to be safe. We want to service the customer and pick them up every time, but then we want to do that efficiently. And lots of efforts underway to figure out how we do that, and showing some real progress in fleet market.

Okay. Thanks. Then the last one for me. This could be totally not material, but I just keep seeing headlines on this Rainbow business you guys own. Something about some potential turnover in that one of their big contracts and then also some class-action suit around that purchase. So just wondering is there anything there or just noise?

Well, here's the thing, right? One of the great things about owning a portfolio, right, is that it ebbs and flows, right? And so one economy, one market may be booming or another may be dragging. Weather might be 50 degrees below in Chicago, but the sun is shining in Florida. It's the same as it relates to the sort of the lumpiness of business. We have several hundred million dollars a year of municipal contracts that come to term and we have to renegotiate. In the midst of all that, there are certain political issues and so on and so on and so forth. We've built this business through acquisitions. And when you buy companies, you have to sort of work out sort of some legacy issues and part of that is we're going through. What we don't do is, we don't, on this call or in any time, speak specifically to any one contract or any one issue, because we've got this portfolio. I would tell you this, these kind of things really are no different than the kind of things we dealt with last year or the year before that or 20 years ago, right? It's just part of what we do for a living. And so we do win some we do lose along the way, but overall the strength of the portfolio and the mix carries today. So we're working around the clock with a lot of customers right now to find new solutions overcome recycling issues and deal with some of the legacy stuff that just sometimes we inherit along the way. So that's all I'm giving you on that one.

I appreciate it. Understood. Thanks very much for the time.

Thank you for taking my question. I may have missed this. Why is cash from operations down year-over-year, even though it's just one quarter?

It's really just a timing issue, Michael. It's related to the timing of working capital and the timing of CapEx. For the entire year, we're right on our guidance in terms of our free cash flow.

Sounds good. And Chuck is there any reason why margins should not sequentially step up in Q2 and Q3?

Yes. We're expecting that margins to continue to increase obviously over the course of the rest of the year. And that's right in line with our guidance of up 30 to 50 basis points of EBITDA margin expansion.

Got it. And then – did you – or was there any change in trend in April? Did you actually see underlying volumes potentially maybe pick up as we started Q2? And on the opportunity you mentioned on the temp business where you're pushing price, did you still see that momentum where you reported a really strong open price number? I mean, is there any reason why that number should decelerate from here?

Well, I'll take the first half and then I'll let Jon talk about what's going on in temp volume. What was the first part of the question?

What we've seen in April.

Oh, April volume. Yeah, so we're not really talking about April right? We're talking about Q1. Look, when we reaffirmed guidance, right? We are reaffirming guidance based on all the underlying great work that the team's done in the quarter. Certainly, we're taking it into consideration what we're seeing in April, but we don't generally give commentary on it other than we want to give you a little bit of color in and around what we've closed to date on the M&A front. But the real time for us when we're talking about seasonality is May. We've got to kind of get May in the books for us to really just kind of compare year-over-year seasonality. But by the very fact that we are reaffirming guidance with such confidence, I think would tell you that we feel really good about what we're seeing in the business on this very day.

I would just say that we see strong underlying demand across most of our markets. We have the tools to analyze the price and volume trade-off and make adjustments on a daily basis as demand comes in. Our focus is on maximizing the return on our assets and not on acquiring more assets for low-margin work.

Thank you.

Hey, gang. Thanks for taking the questions. Nice Q.

Thanks, Michael.

Thanks, Michael.

The $142 million spend what did you get for it in revenues?

So in total that's about $55 million in annualized revenue, Michael.

And how do I think about the margin of that?

I would say that it's probably just a little bit higher than the company average.

Okay. That helps.

But again, Michael, just to put a comment on that. As Jon mentioned, sometimes there's a little bit of implementation and integration costs upfront, so we'll grow into that margin that Chuck mentioned, but it's not right out of the gate accretive overall to the company margin.

I understand. It’s useful for modeling. Regarding the volume question that everyone is focusing on, I believe that in most scenarios, it’s more beneficial to achieve higher prices with lower volume for better leverage. More importantly, based on the data you provided, I recall that your landfill business mainly comprises third-party volume tied to municipal contracts. Therefore, achieving a 0.3% price increase and a 6.5% volume increase indicates that pricing power is strong, especially since it’s an indexed business, which shows significant leverage. Additionally, the volume suggests that the underlying economy is performing well. Am I correct?

Yeah. On top of that, and somebody else on the call brought up, is landfill pricing is starting to get traction, because it's been a little bit flattish more than maybe you would expect with the consolidation. So I think that's really the good news. But you're right we don't have a lot of third party volume that makes up a big percentage.

Yeah. I'd also say Mike you're seeing the fruits of our efforts around purchasing CPI come up. So its contracts and the fruit of our alternative index work. We didn't just work on municipal collection contracts. We certainly worked on MSW contracts as well.

Right. So...

On your earlier point, right? I mean every time we dig our profitability by customer, by call, by route, by point of business, right? And you're right I mean that each one of these things has to carry its own weight. And we're going to continue to work through the business the way we've always had. Just talking about landfill, I mean we're slicing and dicing every stream. Jon mentioned it earlier, at the landfill and making sure that everything carries the appropriate return.

Okay. That helps. And then Chuck, earlier you mentioned that CNG is a negative 60 and special waste is negative 50. That figure wasn’t at the EBITDA line, but if I translate that to gross operating expenses, does that just carry through directly since those are all operating related?

Yes, they are Michael. That's right.

So when I look at 61 versus 60.5, that's the waterfall I'm building? Okay.

Yeah, that's right.

Okay. And then directionally on gross margin, I know you don't give this, but can you talk about the trend of the three sort of major lines of business, solid waste, recycling, E&P year-over-year? Directionally, what was happening in the trend in the gross margin?

Yeah. The gross margins are all trending positive, Michael. And you would think that that would be the case right? We're once again working back into the guidance that we gave for EBITDA margin expansion, 30 to 50 basis points for the year.

So on all three businesses, its positive even recycling? I have a thought recycling might have been flat.

Yeah, but it went slightly positive. But keep in mind, all of the initiatives that we've put into place, once again back in the 2018 and here again in 2019. So we are starting to see the benefits associated with those initiatives. And that's once again why we were able to offset the recycling and processing headwind here in Q1.

If you think about that in context of what we've accomplished so far in getting this headwind from recycling if you will, and think about how the benefits of that will roll into next year. Let's just say let's just hope for a minute that commodity prices stay where they are and don't get worse. Let's hope for a minute that these other mills come online in the U.S. and that has a positive impact. Let's hope for a minute that our long-term view of recycling holds up, right? That population growth and emerging economies and middle-class and all blah, blah, blah is all going to be right. And we've already offset sort of the current headwind. If we combine all the efforts that the team has put into place, it really sets us up pretty well for next year as well, right, as these things anniversary and we just build on the momentum and as we shift the model. And again, the operating leaders Jon and the sales organization is doing a great job, and customers one by one by one are coming to the realization of what has happened here. Wouldn't you say, Jon?

Absolutely.

Right. So let me follow on with that. If you took the current run rate of revenues on an $85 commodity book, what should the profitability of that be in an absolute dollar opportunity?

How about this? How about we stick with Q1? And how about we stick with our guidance for 2019, Michael? We're going to meet our guidance. We're going to meet our cash flow guidance, and we're going to be, if not one of the leaders, the leader in turning this recycling business around and making it sustainable for customers, we being a great environmental partner. And as we get more and more traction through the year, we'll be talking in October about how it sets us up for 2020, but it will be a good story.

Well, okay, fair enough. It was much of a higher-level question of, it's a big number when you fix this, some it might take two or three years, but it's a big number.

It's a big number. It will be fixed. The underlying issue is customers want to do this. We'll just have to help them do it right.

Right.

And it will be a good growth story for Republic Services.

Right. Last question Chuck. Your cash flow from operations was 22% of revenues, which is terrific in the context of the expectation for the year. So maybe the dollars are down, but the percent of revenue is a very good number.

Yes, that's right, Michael.

Okay. Yeah, all right. Okay.

And Michael, just to add a point for your model. So if you look at the CapEx spend in Q1 relative to our capital guide, it was less than 20% for our full year guide. So Q1 is a really strong cash flow quarter for us, and that might trickle down a little bit for the remainder of the year and as this kind of timing goes through the year.

Got it. Thanks very much.

Thanks, Michael.

Thank you so much, Denise. In closing, we are extremely pleased with our first quarter performance. Solid waste fundamentals remain strong in the current economic backdrop is supportive of continued growth. Given our team's relentless focus on operational execution and the passion they have for our customers, we are reaffirming our full-year financial guidance. Finally, I would like to extend a heartfelt thank you to the men and women of Republic Services. As a result of their collective efforts, we remain on the world's Most Ethical Companies list by Ethisphere for the third year in a row, as well as Barron's 100 Most Sustainable U.S. Companies list for the second consecutive year. Every day our 36,000 employees come to work to serve our 14 million customers. They do this safely. They complete five million pickups per day with a 99.9% reliability. Thank you for spending time with us today. Have a good evening and be safe out there.