Republic Services, Inc. (RSG) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Republic Services first quarter 2016 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian DelGhiaccio, Vice President of Finance. Please go-ahead, sir.

Good afternoon and thank you for joining us. I would like to welcome everyone to Republic Services first 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 April 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 express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings and our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities along with a recording of this call, are all available on Republic's Web site at republicservices.com. And finally, I want to remind you that Republic's management team routinely participate in investor conferences. When events are scheduled, the dates, times and presentations are posted on our Web site. 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 first 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 higher value customers, build the best team, increase profitability and create long-term value. During the first quarter, we reported adjusted EPS of $0.48 and adjusted free cash flow of $160 million. Both were in line with our expectations. Core price was 3.4% and average yield was 2%. This was the fifth consecutive quarter with average yield of 2% or more. Average yield was strongest in our small container commercial and large container industrial businesses, where a majority of the business is in the open markets. In these open markets, we have great flexibility and can realize more pricing power from our enhanced product offering and improved service delivery and by leveraging our priority-based selling program and our Capture pricing tool. First quarter volumes increased 2.5%. This included 50 basis points of contribution from one additional work day. Volume growth is concentrated to the event-driven waste streams, including construction and demolition in our collection and disposal businesses and landfill special waste. While a portion of this volume growth can be attributed to favorable weather conditions during the quarter, we saw broad-based volume growth across most of our markets. Additionally, Landfill MSW volumes grew 4.7%. This was the fifth straight quarter where MSW volume growth exceeded 3%. First quarter EBITDA margin was 27.8%. It should be noted that the additional work day resulted in a 50 basis point margin headwind, which will not repeat in future quarters. We returned $191 million to shareholders through dividends and share repurchases. This included 1.9 million shares repurchased for approximately $87 million. Regarding our revenue enhancing and customer-facing initiatives, first, we now have approximately $325 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 run higher than CPI. Second, approximately 1.4 million customers are enrolled in My Resource, our customer portal and mobile app, which significantly enhances our customer interaction and connectivity. Finally, we opened our first customer resource center in Charlotte, North Carolina. The center further enhances our customers’ experience through a more professionally trained customer service team, improved technology and additional communication channels. We expect to open the other two customer resource centers later this year. Regarding our fleet-based productivity and cost-saving initiatives, 16% of our total fleet now operates on natural gas. 73% of our resi fleet is now currently automated and 81% of our total fleet has been certified under our OneFleet maintenance program, up from 64% a year ago. We are expediting the timeline to get our entire fleet through the program by June of this year and fully certified by mid-2017. During the quarter, we completed a realignment of our organizational structure. This included the elimination of our regional teams, consolidation and reduction of our areas by 50%, and streamlining select positions at our Phoenix headquarters. We reinvested a portion of the cost savings back into the remaining area offices by creating additional operating and functional support roles, which puts resources closer to our business and our customers. We were able to make these changes as a result of developing standardized processes, with rigorous controls and further leveraging our scale. At the same time, we maintained our high performance business culture with field management, retaining full accountability and P&L responsibility. The savings from the realignment are funding the investments we are making in our customer-focused initiatives in 2016 and 2017. We expect these initiatives and the realignment will contribute approximately $35 million of annual cost savings beginning in 2018. Before the turn the call over to Chuck, I’d like to provide an update on our recycling business. As many of you know, recycled commodity values have always been somewhat volatile. However, the industry has never experienced such a sustained downturn in commodity pricing. We continue to evolve our recycling strategy to adapt to this new normal. We are focusing on three key areas to evolve our business model. First, as part of our realignment, we centralized management oversight and accountability for recycling processing operations. The new organizational structure ensures clear ownership for the recycling and processing market vertical, provides additional expertise and support to our recycling and collection operations. Second, we're transitioning to a fee-based recycling processing model. This model ensures we can cover our processing costs and earn an acceptable return on our processing investments. Under this model, we are including provisions to incentivize communities to bring us high-quality materials. This includes the right to conduct waste stream audits and assess contamination fees and glass surcharges. Finally, we’re optimizing our recycling and collection business. Many municipal customers still believe there is significant value in the waste stream and are not aware of the cost to recover the material. Currently, our municipal sales team is focusing on educating municipal staff and elected officials on the all-in cost of recycling in these low commodity markets. Although we're still in the early innings, we're making progress. We transitioned our largest municipal processing agreement to a fee-based structure, negotiated a rebate reduction with a large customer on the East Coast, and added a glass surcharge with a large customer in Texas. Our customers have told us they value recycling and are willing to pay for these services. Our collective actions to improve the performance of our recycling business is intended to create a model for Republic and our recycling customers that ensures profitability and, therefore, supports its long-term sustainability. Chuck will now discuss our financial results.

Thanks, Don. First quarter 2016 revenue was approximately $2.2 billion, an increase of $79 million or 3.6% over the prior year. This 3.6% increase in revenue includes internal growth of 2.4% and acquisitions of 1.2%. The components of internal growth are as follows. First, total average yield growth of 2%. Average yield in the collection business was 2.4%, which includes 3.6% yield in the small container commercial business, 2.3% yield in the large container industrial business, and 1% yield in the residential business. Average yield in the post-collection business was 1%, which includes Landfill MSW of 1.5%. 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 3.4%. Core price consisted of 4.5% in the open market and 1.7% in the restricted portion of our business. Second, our total volumes increased 2.5% year-over-year. This includes 50 basis points of contribution from one additional work day. The following discussion of volume by line of business excludes the impact of the additional workday. The collection business increased 1.4%, which includes increases from the large container business of 5.1% and the small container business of 20 basis points. As expected, the residential business declined 10 basis points. With our large container business, temporary C&D volumes were up 13% and recurring volumes were up 2.9%. Our small container volume performance of 20 basis points includes a 40 basis point decline due to not renewing select national accounts customers and work performed on behalf of brokers. We view these losses as non-regrettable. The post-collection business, made up of third-party landfill and transfer station volumes, increased 5.5%. Landfill volume increased 6.8%, which includes MSW of 4.7%, C&D of 17.8% and special waste of 8.7%. While C&D volumes and landfill volumes were broad-based geographically, we saw above-average volume growth in the areas of the country that experienced milder winter conditions. At the same time, we saw heavier rainfall in certain areas of the country. In these areas, we experienced higher disposable expense due to heavier container weights and additional leachate management costs. We believe these additional costs were directly related to the wet weather and expect these costs will return to planned levels for the remainder of the year. Third, fuel recovery fees decreased 140 basis points. The change relates to decline in the cost of fuel which decreased approximately $23 million compared to the prior year. The average price per gallon of diesel decreased to $2.08 in the first quarter from $2.92 in the prior year, a decrease of 29%. The current average diesel price is $2.20 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 60 basis points. The decrease in energy services revenue primarily relates to a decrease in drilling activity resulting from a decline in oil prices. The energy services revenue decline includes a decrease in Tervita-related volumes from the date of acquisition and a decline in E&P volumes at our solid waste landfills. Finally, commodity revenue decreased 10 basis points. The decrease in commodity sales primarily relates to a decrease in recycled commodity prices. Excluding glass and organics, average commodity prices decreased 10% to $100 per ton in the first quarter from $111 per ton in the prior year. First quarter total recycling volume of 621,000 tons represents an increase of approximately 7% from the prior year. Volumes were approximately 1% on a same-store basis. Cost of goods sold for recycled commodities was relatively flat with the prior year. Now, I’ll discuss changes in margin. First quarter adjusted EBITDA margin was 27.8% which compares to 28.9% in the prior year. The change includes a 50 basis point decline from the additional workday, a 20 basis point decline from net fuel and a decline of 40 basis points from an increase in healthcare-related expenses. Regarding the increase in healthcare costs, we self-insure employee medical claims. In the first quarter, we saw an increase in large claims, primarily resulting from non-work-related injuries and one-time incidents. We did not make any changes in our plan structure and our third-party administrator confirmed these were not inflationary type increases. We expect healthcare costs return back to planned levels for the remainder of the year. When looking at other cost line items as a percentage of revenue, there is an impact from the decrease in fuel recovery fees and the sale of commodity revenue. For example, the 1.5% decline in these revenues resulted in an increase in labor expense as a percentage of revenue of 30 basis points and repairs and maintenance expense of 20 basis points. SG&A costs were 10.7% of revenue and in line with our expectations. These costs improved 30 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 2016 interest expense was $93 million, which includes $12 million of non-cash amortization. Our effective tax rate was approximately 38%. The lower tax rate in the first quarter reflects a $0.01 EPS benefit from settling estate tax matter. We expect an effective tax rate of approximately 39.5% for the remainder of the year. First quarter adjusted free cash flow was $160 million and in line with our expectations. During the quarter, we spent $275 million or approximately 31% of our annual projected capital expenditures. Now, I’ll turn the call back over to Don.

Thanks, Chuck. To conclude, our first quarter results were consistent with our expectations and 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 reflects 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, operator, I would like to open the call to questions.

Thank you. [Operator Instructions] And your first question will come from Andrew Buscaglia of Credit Suisse. Please go-ahead.

Hey, guys. Thanks for taking my question. Nice quarter.

Hey, Andrew.

Can you just talk a little bit about your volume? So we’re seeing strength across, not just with you, but with your peers, can you just talk about if this surprised you in the quarter? I know there’s a lot going on with milder weather and extra workday. But does this surprise you and is this inflection we’re seeing with strength sustainable in your opinion?

Yes. So I don’t think the extra workday surprised us. The weather was certainly – if you compare the weather in Q1 to Q1 last year, the weather was much milder, which we like. The standard answer we tend to give in Q1 on this kind of thing is that a big, important quarter for us is Q2, Andrew, as we see the normal seasonality return. So we’re very happy with the trends. We know there’s a lot of good construction activity going on out there that’s driving our volume growth. As I said in my comments, a lot of this is kind of the event business. Construction, special waste doing well. So we’d like to think it will continue into Q2. Again, the weather comp would be a different than Q2 over last year. But there is no doubt that it’s fairly robust out there.

I missed what you said before with your guidance for volume. I know you had said 0.5% to 1% last quarter. But I guess we’re just waiting here on Q2 to see if it is sustainable before you guys feel comfortable.

Look, we would say that our volume guidance – we probably feel like it’s going to be closer to the high end of that range based on how strong Q1 was. So that’s the math we are trying to do. We would agree with it. Keep in mind, we gave that guidance because we’ve got a little bit of loss business coming up in some of the residential contracts that we expect to lose because we couldn’t negotiate reasonable rates to extend the business. So we know that’s coming later in the year that will offset a little bit, but we’ll see probably volume at the higher end of the range.

So, Andrew, you can expect to see residential volumes approximately negative 1% because of the losses that Don had talked about for the full year and that’s what brings us closer to the 1% total volume growth.

Got it. All right, thank guys.

Our next question will come from Hansa Mazzarri of Sterne Agee. Please go ahead.

Hi. This is [indiscernible]. I’m filling in for Hansa. Thanks for taking the question. You guys mentioned in the past about converting the CPI index contracts into an alternative index that better suits your costs. Can you just give us some color on whether this conversion process is going slower or faster than you guys anticipated? Is it getting easier as you convert more?

So I said in my comments, we’re up to $325 million now. That’s quite a bit more than 10% of our total. I think we’re picking up a little bit of speed. I would say it’s – I think, let’s say, it’s getting easier because our people are getting more confident in their ability to have the conversation with customers. As I probably said you before, it’s all about fairness, coming up with an escalator that both the customer and the provider can live with that’s fair based on reasonable inflationary costs. So we’re making headway. We’ll continue to do so. I think the market is becoming more – I would say more adjusted to it. And so, we’ll see how it goes through time. But we’re fairly positive.

Great. And just one follow-up question. Customer churn, how is that trending versus a year ago in terms of the competitive environment? What’s going on with that?

Yeah. So defection, if we’re talking about defection, that’s pretty flat compared to last year. And customer churn, overall, is flattish, but I would say, on a longer trajectory, we continue to see the benefits of our pricing tools, Capture, et cetera, to help us to do a better job with churn.

All right, guys. Appreciate it. Thanks for taking questions.

Thanks.

Thank you.

The next question will come from Tyler Brown of Raymond James. Please go ahead.

Hey, good afternoon, guys.

Hi, Tyler.

Just wanted to go through a couple of cost items. So first off, we saw maintenance and repairs were up 10%. I get it that we have some acquisitions, you had the extra day. But 10% seems kind of heady here particularly when revs were up maybe 4% and 81% of the fleet is under the new initiative. Can you talk a little bit about when you would expect to see that unit cost inflation and maintenance and repair to start going the other way?

Sure. So we expect right now that cost as a percentage of revenues for maintenance will decline sequentially for the remainder of the year. We also expect that exiting 2016 that that cost will be lower than what we experienced in 2015. So I would say that the trajectory is going in the right direction here.

You’re expecting the actual physical cost to be down in 2017, is that what you’re saying?

The cost as a percentage of revenue.

Okay, okay.

And when you’re looking at the costs year-over-year on a dollar basis, Tyler, keep in mind that about half of that increase almost is due to volume and acquisitions. You’ve got some timing issues in there also with some heavy equipment. And then, as Don had mentioned, we’re making a push right now to get this OneFleet maintenance initiative all the way through the organization. So that’s what’s causing this to be a little bit higher on a dollar basis year-over-year.

Okay. So it sounds like it pays off more kind of as a percentage of revenue in 2017. And then, Chuck, real quick, can you go back over the healthcare expense? So how much was it in gross dollars? And just to be clear, you’re not expecting that to recur?

So we’re not expecting it to recur. It’s about $9 million in terms of dollars on a year-over-year basis. When we look at the portfolio claims that we got during the first quarter, it had to do with, what we would say, very unusual items. So think about complications associated with implants. Think about gastrointestinal infections. These aren’t types of claims that we typically get. Most of our claims are musculoskeletal. This is totally unusual for us. And we talked to our experts about this, and they said, yes, it’s very unusual for you. It’s very unusual for companies in the transportation industry. But in their experience, on the portfolio of businesses that they look at, every once in a while, you have one of these Black Swan events. We continue to monitor the expenses in April and they are actually coming down to normalized levels. And so, that gives us more confidence saying that this was a one-time blip in these claims.

Yeah, Tyler, you can tell by Chuck’s detailed answer that we spent a lot of time digging into this claim data. So we think that Q1 is somewhat of an anomaly here.

Okay. No, that’s good. That’s two. I’ll call hop back in queue.

All right.

And the next question will come from Corey Greendale of First Analysis. Please go ahead.

Hey, good afternoon.

Hi, Corey.

Hi, Corey.

Maybe for Chuck or whoever wants to take this, the free cash flow in the quarter, it’s softer relative to what we’ve seen in the past few years for Q1 seasonality. Can you just address that? It looks like some working capital things are moving around. But is it in line with what you expected and should we expect the seasonality to be different this year?

Yes. So absolutely in line with what we had expected. When you look at it quarter-over-quarter, you’ve got about $70 million more CapEx during 2016 than we had in 2015. That’s associated with truck purchases that we made, having to do with some contracts in Northern California. And then we had some working capital items also. So the timing of payroll, we actually had an extra payroll during the quarter. Also, higher incentive compensation that was paid during the quarter versus last year. So all timing related. And still feel very comfortable with our annual guidance of $820 million to $840 million.

And, Corey, one of the ways you may want to think of it too is, if you take a look at $160 million that we reported in the first quarter, if you normalize the CapEx, so had we only purchased 25% of full year guidance, that would have added $50 million to our performance, which would’ve put us around $210 million. You can do the math on that and see what that extrapolates to the year.

Okay. And then maybe my second question, also on the cost side, did I understand – Chuck, did you say that fuel was a net negative to margin? Can you just repeat that? And then, is the full benefit of taking out the layer of management, was that in Q1? Or should we expect some more cost reduction in Q2 versus Q1?

Okay. So in terms of the impact of the net fuel on margins, it was about 20 basis points of negative. So keep in mind that what you’re doing is you’re pulling that revenue off, and so it’s having an adverse impact on the margins overall. So that was about 20 basis points. In terms of the initiatives, during the quarter, we had about $3 million in savings. We expect that to go up, maybe closer to $5 million to $6 million in savings on a quarterly basis. But also keep in mind that what we had guided to was the fact that we would have some initiative investments during the year that would offset that. So I would say that, right now, we’re right on track in terms of our initiative savings or realignment savings.

Yeah, thank you.

And the next question will come from Joe Box of KeyBank Capital Markets. Please go ahead.

Hi, guys.

Hi, Joe.

Hi, Joe.

So I just want to dig into the margin a little bit further. Your EBITDA margins are down 110 basis points. And if you add back the extra day, which is 50 basis points, it sounds like 40 or so basis points from healthcare problems, call it about a 20 basis point headwind. I’m just curious, if you were to normalize some of those other elevated expenses, whether it’s leachate or disposal costs, where do you think that EBITDA margin would’ve shaken out, Don?

Let’s think about it this way, Joe. You look at the EBITDA margin that we reported, 27.8%, add back, to your point, 40 basis points for the health expense. And then keep in mind that, during Q1, you had your seasonally highest SG&A. So we’re 10.7% versus our guidance of about 10.5% for the year. It’s another 20 basis points. So a total of 60 basis points. Add that back to the 27.8% and you get 28.4%, which is right in line with our guidance for the year.

Okay. Maybe switching gears to the recycling side, can you maybe talk to how long it might take to adapt this fee-based recycling model and maybe at what current recycling prices are – how out of whack do you think the revenues are relative to your processing costs? I’m just trying to understand what the overall benefit could be as this gets absorbed into the system.

Well, starting out, let’s back up to recent year highs. In recycling, today, we are down over like $120 million…

$70 a ton.

Yeah, right. So that’s what we were enjoying, whatever it was, seven, eight years ago. So we realigned the organization, so we said it will be focused on getting better profitability cost structure on the processing side. Those folks are doing a great job at that. We need to migrate that over to the collection side now and into some of the hauling contracts. It’s going to take a little while. We probably have some routes out there that are dense enough that may never have enough participation or density to make sense, so we’re going to be addressing that in the open market certainly and maybe even some other contractual stuff. We’ve got to make more headway with our municipal partners. And as I said in my comments, we’ve got some examples where we’re negotiating glass surcharges. We’re taking glass out. We are changing the rebate structure, the fee-based etc. So we’re getting better at it, but we are very, very early innings. I think we are much farther along in moving the municipal contracts to the new index. We’ve got more momentum there. We’re breathing some fire now into the recycling collection business to move those contracts. I don’t know how long it’s going to take, Joe. It’s going to depend a little bit on – what the market dynamic is. But we’re not going to be caught with getting drunk again on high commodity prices. We’ve got to fix the business for good, get to the right sharing with our customer base. As I always say, and as I said in my comments, sustainability doesn’t work without profitability. That’s what we’re focused on. And we are not going to do business that has diminishing returns.

Got it. Thank you, guys.

The next question will come from Michael Hoffman of Stifel. Please go-ahead

Thank you, Don, for taking my questions.

Hi, Michael. How are you?

I’m well. Thank you. And yourself?

Very good, thanks.

So back to the CPI, at one point over the last couple of years, you had described the pull of addressable revenues at about $2 billion. What do you think is a practical number that can be converted on a percentage basis? And where I’m going with that is, it would be a good thing if you got some number and then inflation comes back to 2%. And when the two blend together, you’re net ahead of the game.

So, again, with everybody listening – hopefully, a lot of my teammates at Republic – we absolutely, positively can’t be entering into contracts with escalators that don’t keep pace with our net inflation, inflation net of productivity. We’ve got to be equal or better. And as I’ve said many times, for decades, as long as I’ve been around, that CPI worked great, it was fair. We need to get to fairness again. And so, my viewpoint is all contracts have to be converted to a metric or an escalator that’s fair and reasonable. And so, we’re tackling this base. We said, look, we’ve got $2.5 billion of this business. About $800 million of that $2.5 billion is the smaller contracts. That’s what we went to work first. Now, we’ve got $325 million of that converted. Now, we’re working toward bigger contracts. We’re, right now, as we speak, talking to customers, some very large customers, about this very thing. And I think at some point we’ll have made some of those conversions successful and the market will continue to move. So if you take a look at our pricing, this quarter, at 2% yield, we’ve been north of 2% now for a few quarters. What keeps holding that back down is residential. And so, we’re very, very close to hitting this overarching metric for us of getting back to a day where yield surpasses inflation on a regular and consistent basis. So we are right on the cusp of that. And so, we’re going to keep pushing the new metric. I don’t have an exact date in mind when we can get there. I know we’re making progress, Michael. You can tell by the determination of my voice that we’re kind of at a place we’re not taking no for an answer because we just can’t be in a situation where we have these large contracts with all the exposure and declining returns. It’s just not feasible or it’s not practical.

All right, fair enough. Switching gears to margin trend, if I took your 50 basis points for adjustment to your gross margin, so instead of doing 38.60%, you did 39.1% for the first quarter. Given how good the volume was and possibly some of it got pulled forward, is it probable that the gross margin in 2Q might trend down a little bit, 20, 25 basis points? And really, what you want to look at is smoothing the first half and comparing that to the first half’s 15 basis points?

No, I don’t think so, Michael. I think that – I don’t know that we necessarily need to smooth it. Part of the noise that I think that we might be seeing in the first quarter has to do with the workday. And we need to keep in mind that that reverses in Q4, so there’s going to be a little pick up there when that happens. But I would say that, right now, we feel pretty comfortable with our adjusted EBITDA margin guidance that we gave of 28.5% for the year.

Okay. I wasn’t disputing that. I was really actually trying to figure out, given how strong volumes were in the first quarter and operating leverage that comes from that, in all likelihood, those volumes remain good, but not as good as 1Q because of the positive circumstances and that, therefore, you might see a slight shift in margin, 1Q to the next. It’s not a bad thing. If you smooth the two Qs together, you’ve got the objective you’re trying to achieve anyway. But you pulled some of that benefit into 1Q.

This is Brian. So, remember, the largest percentage of our volume growth was in the roll-off business, which was up about 13%. And as you know, that comes along with it the variable costs. I know you’re talking about leverage, but that’s where we saw the concentration of volume. But the other thing is that we know that, while it was a mild winter, in parts of the country it was also wet. So we did see extra operating costs. We saw higher disposal expense where we’ve got predominantly third-party disposal market. And we saw some additional leachate expense, again, where it was wet. So from a weather perspective, it’s not that we feel like we got a whole lot of contribution to the bottom line from the mild winter. So if the revenues fall off a little bit in the second quarter because maybe they were pulled forward, we would also expect some of the cost to taper off as well.

Okay, fair enough.

Too often – sometimes the answer is timing and mix, Michael, right? That’s kind of what Brian said. But you’re right, [indiscernible] quarter was very strong. If you take out some of the anomalies, call it just healthcare, some of the leachate expense, some of that stuff, I look at like we had a [indiscernible] quarter. We’ve got a little bit of noise with a few items. And we’ve got a little bit of – as Chuck described with the residential volume, we’ve got couple of blips on the horizon there with some contracts we’ll walk away from. We talked in the comments about some volume where non-regrettable volume loss with national accounts and brokers. So there is some of that noise in the system, but we’re really confident in the guidance and in the margin. And more importantly, in the actions we’re taking and in the way the team is executing.

And, Michael, maybe to your question, as Chuck kind of mentioned, second half probably looks better than first half because in the second half we have one less work day whereas in the first half we had the one more. So maybe that’s the way you want to think about it.

Okay, fair enough. See you guys in a couple of weeks.

All right, take care.

The next question will come from Jeff Volshteyn of JPMorgan. Please go ahead.

Thank you for taking my question. I might have missed it, but did you give any update in your prepared remarks about 2016 guidance other than what you said in the Q&A for volume and CapEx?

No, we didn’t update our guidance. That’s something that we typically save for the second quarter. And right now, what we said is that we feel comfortable and we’re on track with our guidance.

Okay, fair enough. On acquisitions, in the first quarter, we didn’t see any acquisitions. How is the M&A environment for small tuck-ins?

We set out the year with a target of spending $100 million and spending that $100 million primarily in tuck-ins and primarily within the same EBITDA range that we had over the last couple of years. And we still today think that we’ll accomplish that goal. We’ve got a real slow start here on the year. But we think we will exit the year having very wisely spent $100 million and invested it in some really good tuck-in assets.

That’s helpful. Last question from me, if I may. You mentioned higher leachate costs, one of your competitors also talked about it today in their call. Are there any sizable investments that you expect related to this issue?

No, not really. Not for us. We look at leachate as being somewhat unique to the individual landfill. It really is about the geology of the individual landfills and also the weather that exists, whether it’s a dry climate or wet. Obviously, in the Southwest, we don’t have a lot of leachate. We don’t have a lot of rain. We’ve got arid climate, so the water evaporates. We’ve got some landfills that have in-gradient water flows that we’ve got to deal with. So that’s a little bit of a different issue. So really site-specific. The leachate cost that we saw in Q1 was really more about a seasonally wet – an unusually seasonally wet quarter. Having said that, landfills are more expensive to own and operate every day and every year and we’re constantly evaluating our cost structure and constantly looking for ways to effectively pass along price increases into the market that makes sense, to capture the cost inflation. We’ve got to manage these things responsibly and be good environmental stewards and we’ll continue to do that. For us, leachate is really more of a site-specific issue. But that’s all I can tell you. As we look at the quarter, there’s nothing else for us really going on broadly with our leachate story.

Okay, thank you very much.

And the next question will come from Michael Feniger of Bank of America.

Thanks. Did you guys see any changes through the quarter in April? You were speaking about special event volume, C&D, anything that makes you – any cause for concern that the momentum you felt on the volume side would slow going into the second quarter?

Well, no. I think specific construction volume is strong – one, because of the unusual weather. But Q2 is where we tend to see the seasonal pickups and we certainly expect to see that. Event business – the special waste business was strong in Q1. There’s no concern that we have there overall. We’re still only at, what, 1.1 million new home starts. Single-family home starts are actually up, right, on a year-over-year basis. So that bodes well for us. We tend to lag that. So as long as that continues, I think that’s what drives more and more growth in our market. On a total macro basis, we’re feeling really good.

Thanks. And the loss of the residential businesses that you guys were discussing, should we be thinking that as a positive? Or for the mix, would that be positive to margin?

Yeah. Ultimately, look, residential is our weakest line of business in our collection system. And you think about the state of affairs there that we’ve had the sustained low CPI environment there for how many years?

Six, seven years.

Six, seven years. Its average over that time is 1.6%. Our costs don’t average 1.6%. So you can just do some math and figure out what kind of margin erosion we had there in that space. That’s why we’re so adamant about changing the indices to something that’s fair and reasonable. So we get to do a negotiation with the residential customer who can’t seem to understand that degree of fairness, we can’t enter into extending contracts that continue to decline and go below our reasonable rate of return. So ultimately we have to grow the ROI in the business. And so, your point is, over time, that’s a good thing. We either have to shed business that doesn’t equal the right return or we have to get a pricing scenario that is reasonable for both parties. And that’s the story. It’s the same story with national accounts and some of the broker business.

Our next question will come from of Scott Levine of Imperial Capital. Please go-ahead. Q –Megan Barnett: This is Megan on for Scott. So I just want to go back to talk about the volume, any regional outliers, positive or negative, impact on volume?

Well, if you think about places that have really mild weather, the Atlantic area, Philadelphia, Carolinas, Chicago and Boston, places like that that just had very mild, mild winter, I would point those out specifically. We didn’t see much difference here in Arizona quite frankly. But that gives you some idea. Q –Megan Barnett: Okay, thanks. And then another question to discuss trends in your energy waste business and like how it impacted your margins?

Generally speaking, the business is performing somewhat like we thought it would. We knew it would be weaker because this year than maybe we thought when we started the business. But we budgeted essentially for that. Probably a little bit weaker overall, but I think the thing that we always want to point out is we think ultimately through the cycle that that business is going to come back and perform well for the company.

Keep in mind also that it is less than 1% of our revenues, so the impact on the entire company is pretty small.

So, Megan, the overall impact to the total company was about 20 basis points negative to margin. Q –Megan Barnett: Okay, great. Thanks guys.

And the next question will come from Al Kaschalk of Wedbush Securities. Please go-ahead.

Hey, good afternoon, guys.

Hi, Al.

Sorry, I joined late. I wanted to focus on really I guess two areas. One, you talked a little bit about the leachate and maybe you could just take a step back and help us appreciate, is this more focused or more of a concern to companies that have higher number of closed landfills than, say, maybe whether storms or other things could occur and therefore water could increase. Could you just talk a little bit about that? Then I have a follow-up.

Well, as I said in my comments earlier, leachate is really two things. We talk about it being site-specific. It’s really about geology and weather. If you have a large landfill with a big open face that’s not covered, then you get a lot of rainfall. All that rainfall goes into your landfill and becomes leachate. Okay? If you are in an arid clime where we don’t have leachate or don’t have rainfall you don’t have a problem. So it’s very site-specific. And again, we have a lot of rainfall in certain parts of the country. In certain parts here, we have snow normally. Snow tends to fall and sit on top of the landfill and then evaporate before it melts. Rainfall tends to get inside your landfill. I’m not a weatherman, but that’s kind of how it works out. So we have a number of closed landfills certainly. Some of those are so closed that they’re inert and there’s virtually no leachate coming out of them. So once you completely cap the landfill and it’s in a completely closed state, there’s no more rain water getting in the landfill. So it’s just about timing I guess when it comes to that point. For us, we don’t have from our perspective – as I said on an earlier question – a broad-based concern about leachate today. We have some specific sites that saw more leachate in the quarter because of rainfall and we are dealing with that through normal operating expense.

And just to put a finer point on that, with the areas – the landfills that we saw that had an increase in leachate, they were active landfills in the areas that had very, very heavy rains during the quarter.

So I guess from the novice point being from my side, the item we want to focus on or center our questions on are those landfills that are closed where you’re not able to potentially charge someone for those extra costs you incur versus an active one you theoretically have the ability to pass through some costs. Whether you get that is a whole different story. Is that fair?

Yeah. I’m not sure I totally understand your question. I can’t tell you off the top of my head the exact percentage of our leachate that comes from closed landfills and open landfills, but the majority of our leachate comes from open operating landfills. As I said, the longer the landfill is capped and closed, the less leachate is present in the landfill.

And keep in mind also, when we cap our landfills, there is a synthetic liner that is put on top of it that prevents the leachate from going into the landfill – the rainfall.

Our leachate expense was normal across the company with the exception of those sites that saw a much higher level of rainfall than normal. Or potentially a landfill that was in the midst of construction and rainfall event while part of the landfill was open where normally it wouldn’t be. But other than that, our leachate expense across the company net of those landfills is just inflating at what would be normal inflation rate.

Got it. Okay, I think I’ll leave that one.

And so, we generally – to your pricing question, we generally deal with leachate expense and the cost of leachate expense through our environmental recovery fee with our landfill customers. And so, over time, we have raised our environment recovery fee to deal with certain issues like leachate expense and we’ve done that very effectively over recent years and customers seem to understand that. So that’s been our mechanism to deal with it.

Got it. Okay. And then my follow-up would be, if you could give us some type of – I won’t say I’m a macroeconomist et cetera, but generally I think at the peak you had at C&D volumes on landfill, I thought, were 17%, 18% of your revenue. You commented where housing starts are, et cetera. And you’ve always had a better leverage to – or higher leverage, in my understanding, than you competitors to sort of that non-residential construction activity. So, A, could you maybe just frame where we’re at in terms of percentage of revenue? And then, sort of, how much tailwind do we have on these positive volume numbers that we saw?

We don’t really give a lot of data on non-res versus res construction because…

That’s a fact.

Because again, to us, it’s not that important. And we’re not economists either. Our total C&D for the company is about 8%. And at its peak, it was 12%. Okay? At its peak. So we think about – I always think about it this way. Again, back to housing starts, we’ve said for many moons now, our business grows with population growth that drives household formation, that drives business formation. And while the household formation creates – business formation does create some construction debris, what we really like to see is it creates the ongoing recurring revenue part of our business which is the small container, large container pickups and pulls that are ongoing. That’s the part of our business that’s kind of our bread and butter. And we know that the construction is going to ebb and flow a little bit with the economy. Having said that, housing starts are 1.1 million. The 50 year average, if we take the peak out, is a 1.5 million. Most people I talk to that are in the housing business are pretty bullish on housing continuing to improve. I mentioned that single family housing is – home starts is up like 20%. And you know we lag sort of a year plus when that’s happening. So we think [indiscernible] strong temp volume, 13% in that space. So we’ll continue to do that. So we feel overall pretty positive about the macro.

Great. Good luck, guys. And thanks a lot for taking my questions.

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

Thank you, Denise. I would like to thank all of Republic’s employees for their hard work, commitment and dedication to operational excellence in creating the Republic way. Thanks for spending time with us today and have a good evening. Be safe out there.

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