May 1, 2009
Operator
Good morning, and welcome to the first quarter 2009 conference call for Investors and Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol, RSG.
Your host this morning is Republic's Chairman and CEO, Mr. Jim O'Connor.
Today's call is being recorded, and all participants are in a listen-only mode. There will be a question-and-answer session following Republic's summary of quarterly earnings.
(Operator Instructions). At this time, it is my pleasure to turn the call over to Mr.
O'Connor.
Jim O'Connor
This is Jim O'Connor and I would like to welcome everyone to Republic Services first quarter conference call. Don Slager, our President and Chief Operating Officer; and Tod Holmes, our Chief Financial Officer, Ed Lang, our Treasurer are joining me as we discuss our first quarter performance.
I would like to take a moment to remind everyone that some of the information, that we discuss on today's call, contains forward-looking statements, involve risks and uncertainties and maybe materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.
Additionally, the material that we discuss today is time sensitive. If in the future, you listen to a rebroadcast or a recording of this conference call, you should be sensitive to the date of the original call, which is May 1, 2009.
Please note that this call is the property of Republic Services Incorporated, any redistribution, retransmission or rebroadcast of this call in any form, without the express written consent of Republic Services is strictly prohibited. Although we experienced a very weak economic environment in the first quarter, Republic was successful in executing its pricing strategy, maintaining labor productivity and expanding EBITDA margins.
Financial highlights for the first quarter are as follows. Revenue of $2.1 billion, net income of $113 million, or $0.30 of earnings per share, adjusted EPS for integration costs and divestiture charges was $0.37.
As reported EBITDA margins of 29%, if results are adjusted for divestiture-related and restructuring charges, EBITDA margins were 30.8%. Republic is the industry leader for not only pricing, but for margin delivery.
Average price increased in the quarter was 3.5%. Most importantly, our disposal pricing in the quarter increased to 4.1%.
Based on our continued focus on pricing, we expect our full year performance for price, to be in the range of 4%. Free cash flow of $324 million, or $0.85 per share.
Our Board also approved a $0.19 per share dividend payable July 15th. I am also pleased to report on our integration efforts, and the financial savings are running well ahead of plan.
Our annual run rate synergies achieved as of March 31st exceed $75 million. As you know, our target for synergies is a $150 million run rate by the end of 2010.
Although we are not adjusting our synergy guidance at this time, our management team is identified over a $170 million in potential savings, and we will continue to provide quarterly updates on our progress. Today, the systems integration is 40% complete in the overlap markets.
As the IT group completes the integration in individual markets, we are able to realize significant operating synergies, through wealth and disposal optimization. We expect to complete the systems integration in the overlap markets on schedule by the end of the third quarter.
We continue to close on assets that are required to be divested. All closings have occurred after March 31st.
Pre-tax proceeds received to-date are $332 million. All proceeds have been used for debt reduction.
We expect to close, all divestitures by the end of the second quarter. We expect full year debt reduction to exceed $550 million.
Republic is again committed to continuing to prove its credit profile. We continue to be on track for migrating to a common general ledger system by the end of the third quarter.
There have been no system-related problems during the integration and our IT group continues to execute on a well structured integration plan. Now before I turn the call over to Tod Holmes for our quarterly financial review, I'd like Don Slager, our President and Chief Operating Officer to make a few comments regarding our operational performance in the first quarter.
Don?
Don Slager
Thanks, Jim and good morning everyone. During the first quarter Republic's field management team successfully maintained productivity and our effective pricing program.
We have efficiently reduced our cost structure to adjust to the volume changes in our business, while delivering quality service to our customers and improving safety performance. We achieved significant improvement in EBITDA margins of 320 basis points, excluding restructuring charges.
This high level of financial performance is being achieved amidst the additional workload of integrating our businesses and realizing synergies ahead of schedule. We continue to review our capital spending plans to ensure, we are effectively employing our balance sheet and realizing an appropriate return on capital for shareholders.
I would like to thank all of our employees for their dedication and focus. Their commitment and team work has made us, as Jim said, the price and margin leader in the sector.
Now, I'll turn the call over to Tod.
Tod Holmes
Thanks, Don. As Jim indicated, the first quarter of 2009 revenues recorded rose 164% to $2.1 billion, from $779 million last year.
Obviously this increase of $1.2 billion relates to the merger with Allied. Since we are measuring performance of the operations on a combined company basis, the remainder of my comments assumes the companies merged on January 1, 2008.
The prior year combined company financial data referenced in my comments can also be found our website. We have also included on our website, additional detail on costs as a percentage of revenue that mirrors the historical detailed presentation from Allied.
On a combined company basis, there is a decline in total internal growth of about 8.6%, consisting of positive revenue growth, core revenue growth of 3.5%. We continue to see core price improvements in all lines of business.
Pricing is led by the disposal line of business at 4.1%, and also the combined commercial and residential collection business, that annuity revenue had a price increase of about 3.9%. Special waste and roll-off pricing was positive.
This is our event type of sale, but it was less than other lines of business in the 2.5% to 3% range, due to a couple large event driven jobs and the temporary construction activity. Commodity revenue decreased 2.9%.
This is both price and volume. Commodity prices decreased approximately 56% to an average of $62 a ton, from $141 a ton in the prior year.
The average price per ton in March was slightly higher than the first quarter average, at $67 per ton. So, we are seeing a slightly stronger commodity market today.
Additionally, commodity volumes sold at our (inaudible) decreased by approximately 17% to 440,000 tons in the quarter. Our fuel recovery fee decreased 1.2%.
The reduction in fuel recovery fees relates to a decrease in related fuel costs. The average price per gallon of diesel fell to $2.19 in the first quarter of 2009, from $3.52 in the first quarter of 2008 or approximately 38% lower.
Volumes were down 8%, now after adjusting for one less workday in 2009, since 2008 was a leap year; volume decline was really 7.5%. Residential volumes were essentially flat with the prior year.
Commercial volumes experienced a low single-digit decline. Volume loss was the most significant in the roll-off and landfill lines of business, both of which experienced mid-teen year-over-year volume declines, both are reflection of the weak economy.
The decline in volumes was partially offset by incremental revenues of about 35 basis points, coming from hurricane-related cleanups in the Houston area for hurricane Ike. Let me talk about our margins.
Republic's first quarter year-over-year EBITDA margins, again similar to internal growth, I am going to talk about this, as if the companies had merged on January 1, 2008. First quarter 2009 EBITDA margin was 29%, compared to a combined margin of 26.8% in the prior year.
There were divestiture charges in the quarter of $4.9 million, restructuring charges of $31.3 million, and asset impairments of $18.5 million, those first two were 2009. The $18.5 million asset impairment related to an Allied landfill in the first quarter of 2008.
So, if these items were excluded, the adjusted EBITDA margin was 30.8% in 2009, compared to 27.6% in the prior year, an improvement of 320 basis points. Of this improvement, 240 basis points relates to three key drivers in our business that Don and Jim spoke to.
Leverage of our strong pricing offset by modest cost increases; number two, our ability to reduce cost and maintain productivity in all lines of business, in spite of declining volumes in some; and three, the realization of synergy-related cost reductions. Secondly, we had 210 basis points of this total improvement relating to the impact of net fuel cost declines, and third, a decrease of 130 basis points, which relates to the impact of net commodity price declines.
Now let me briefly comment on some of the significant changes in cost as a percentage of revenue and again, I would suggest people go to the website and look at the details. First, fuel; fuel expense improved 260 basis points due primarily to a 38% decrease in the cost of diesel.
The average price per gallon, as I said earlier, was 219 in the first quarter of '09 compared to 352 in the first quarter of '08. Currently, fuel prices are approximately 220 a gallon, so that's a fairly constant.
Partially offsetting the decrease in fuel cost was a decrease in related fuel recovery fee revenue, and this resulted in the net improvement in EBITDA margins of approximately 210 basis points, as I mentioned earlier. Second, the cost of goods sold.
The 90 basis point improvement in EBITDA margin, relates to reductions in rebates customers for volumes are delivered to our (inaudible). Cost of goods sold at our (inaudible) decreased approximately 67% to an average of $16 per ton from $49 per ton in the prior year.
Despite this decrease in costs, commodity revenues declined more, and that outweighed the benefit, resulting in an unfavorable 130 basis point decrease in EBITDA margin, associated with commodities. Third cost category is disposal.
There is a 40 basis point improvement, primarily relating to decreased industrial volumes and reduction in container waste in the commercial and residential lines of business. Fourth, transportation and subcontract expenses, there is 110 basis point improvement in margin from decreased subcontracted collection volumes and also lower transportation expense at our transfer stations.
This reduction in cost at our transfer station results from volume declines, lower fuel surcharges and synergy-related cost reductions that we are beginning to see, from the collection of our waste streams as part of the integration process. The next cost category is labor.
90 basis point decrease in EBITDA margin arises primarily from the post collection line of business, due to a required minimum level of staffing and a sharp decline in commodity revenues. This business, from a cost standpoint, we post collection, we can't flex quite as much as the collection.
It's important to note that productivity was maintained in the collection lines of business, despite declines in volumes and labor cost, as a percentage of revenue in the collection business, were flat with the prior year. Finally, SG&A.
SG&A, as a percentage of revenue for first quarter of 2009, was 10.6% or 60 basis points higher than the first quarter of 2008. It's important to note that this increase was primarily due to a $12.8 million adjustment recorded by Allied in the first quarter of 2008, related to the favorable resolution of a legal matter.
Excluding this adjustment, SG&A as a percentage of revenue was relatively consistent between the periods. Furthermore, SG&A in the current period includes an incremental of 60 basis points of expense related to accruing synergy-related bonus and expense in transition costs associated with the merger.
If you take that into consideration, we would expect our normal run rate SG&A, as a percentage of revenue to be approximately 10%. These above items makeup the majority of the 320 basis point improvement in EBITDA margin and I mentioned on a dollar basis that all ten cost categories that you see, at our website, we actually have a reduction in dollar expenditures in every cost category.
Depreciation, amortization, and accretion increased by 200 basis points. Of this 200 basis point increase, about 140 basis points relates to increased expenses associated with purchase accounting valuations of Allied's assets and liabilities completed in connection with the merger, and again if you will recall what we said back in the end of February, where is normally we would expect DD&A to be about 10% of revenue, on a go forward basis, we are looking at probably about 11.5% of revenue for DD&A, due to purchase accounting noise.
So therefore, the cash flows are stronger than the book earnings. The remaining 60 basis points of variance in DD&A relates to lower revenues relative to the fixed costs and certainly commodity pricing is a factor there.
The 320 basis point improvement in EBITDA margin together with the 200 basis point increase in DD&A results in operating income margin expansion of 120 basis points. For the non-cash DD&A expenses resulting from the purchase accounting, operating margins, excluding restructuring charges and asset impairment would have been 20.3% versus 17.7% in the prior year, an improvement of 260 basis points.
Now we talk a little bit about our interest expense. Non-cash interest expense is a significant factor for the company going forward due to this purchase accounting noise.
The company recorded non-cash interest expense of $38 million in the first quarter of 2009, arising primarily from the amortization of Allied debt that was recorded as of December 5th at a significant discount. The credit markets at the date of merger, as you know, were illiquid, hence despite an upgrade to investment grade for Allied debt it traded at a significant discount.
This amortization will continue in future periods until the related debt is repaid. Next I will talk about free cash flow.
Free cash flow is expected to be approximately 130% of net income for the full year 2009. Free cash flow exceeds net income due to the non-cash amortization and non-cash interest expense arising from the merger, as I just discussed.
Free cash flow for the first quarter was $324 million, which if you looked at it on the face, is unusually high. However, there are a couple of normalizing items that we should talk to.
Again, cash provided by operating activities was $512 million, less purchases of property and equipment of $193 million, and that was what was actually paid for equipment in the first quarter, plus proceeds from the sale of property or retired equipment was $5 million and that equals to $324 million. Now if you want to try to normalize that $324 million, free cash flow benefited from the following items in the first quarter.
The change in accounts receivable of approximately $68 million, there is obviously some seasonality in the first quarter there, we have a one-day improvement, and as revenues come down, we tend to collect a little bit of that cash, bring it back in, so there is a benefit arising from that. The second point is timing of tax payments; where we normally would expect to pay about $80 million.
We made some small state tax payments, but that was not what we would have estimated to be approximately $75 million of federal tax payment in the first quarter. That will occur later in the year.
Next is the timing of capital expenditures. Again, our guidance was net $845 million, so there is another $22 million to normalize the timing of capital expenditures.
Given the above items that are more timing in nature, we remain comfortable with our guidance range of $550 million for the full year, but if you were to do the reconciliation from the $324 million for those three items that I just mentioned, you would find that we are probably in a range of $550 million to $600 million. Now let me speak briefly about our balance sheet.
At March 31st, our accounts receivable balance was $878 million, and as I mentioned earlier, our day sales outstanding sequentially improved from 40 to 39 days. On a net of deferred revenue basis, it's 23 days, again a one day improvement.
Also, our net debt excluding discounts at March 31st was approximately $8 billion. More importantly, we have approximately $800 million of excess credit availability under our bank facility as of today.
The company is maintained its investment grade rating, does not have any significant maturities due in 2009. We have $99 million coming due in May, and that will be paid out of the free cash flow of the business.
At March 31st, we had 378.8 million shares outstanding. Republic now also has about 18.5 million options outstanding, of which $14.5 million are exercisable at an average strike price of approximately $23.50.
In summary, it's clear that the financial results reflect a solid operating performance for our business, which again is driven by strong core pricing, our ability to maintain and maybe modestly improve productivity by scaling the business to declining volumes and certain components of our revenue stream, and also the excellent performance of our organization, both here at the corporate office and the field, have delivered in the realization of synergies. Now, I'll turn the call back to Jim.
Jim O'Connor
Thanks, Tod. As is our standard policy, we will provide a detailed update on financial guidance on our second quarter call in July.
However, we are very comfortable with our previous guidance of full-year reported earnings per share of $1.10 to $1.15. Merger related costs associated with the merger $0.20 per share, adjusted EPS of $1.70 to $1.75, free cash flow of $550 million after merger-related costs and 2008 related tax payment and as Don mentioned, we are reviewing currently our capital spending plans for further reductions.
Our Board is committed to the current dividend payout, which is approximately 50% of free cash flow from operations and I would like to thank the 33,000 employees of Republic Services for their dedication to customer service and their financial discipline. We are in a great position to provide strong returns to our shareholders, due to the hard work of our employees.
Operator now, we'll take questions.
Operator
(Operator Instruction). The first question is from David Feinberg from Goldman Sachs.
David Feinberg
First question is with regard to pricing. You posted 3.5% base price increase in the quarter, but you reiterated guidance of 4%, seems to imply that there is going to be an acceleration of pricing throughout the year.
Am I reading that right or now that I refer to comments? Does that have something to do with the special waste that was weighing on the pricing in the quarter?
Jim O'Connor
Obviously, special waste did have some effect on the quarter, but again I think the pricing discipline within Republic Services, the tools that we developed and our discussions, Don had with the field organization, we feel very confident that we'll, at year end, be at that 4% guidance. So, we've got some opportunities, and we're continuing to look at disposal pricing, as we move through the year.
David Feinberg
Just one point of clarification, perhaps I misunderstood. You intend to be at 4% by the fourth quarter or 4% for the full year?
Jim O'Connor
Full year guidance will be achieved at 4%.
David Feinberg
Great and then my follow-up question relates to volumes. Perhaps you can give us some insight in terms of how the monthly trend shaped up by line of business?
Jim O'Connor
Obviously we've seen overall for the business, an 8% decline and we also reported that as guidance, as we went into the first quarter, in our fourth quarter call. We continue to see weakness in the industrial collection business, and the related associated volumes with that at our disposal and transfer facilities.
Our commercial small container business has started to see some weakness. We've seen service decreases entering into the marketplace, and we've reacted accordingly in adjusting the productivity and the operations of the business.
So, all lines of business are seeing some negativity, but again the lion share of it still resides in our temporary construction businesses, both residential, which we're thinking is bottoming out and we'll see that maybe in the fourth quarter performance, as it relates to volume, but we're still seeing a weakening of the commercial real estate construction market, and in essence, that's starting to have some bleed over into what we would have historically related as our annuity streams in our commercial and residential business. So, while the declines are relatively small in those two lines of business, we are seeing some weakness there.
David Feinberg
But no indication sequentially month-over-month the things were getting better throughout the quarter?
Jim O'Connor
Well, I think sequentially we're seeing about flat. We're not seeing really much change in the environment, as it relates to any of our lines of business.
David Feinberg
Great, I'll get back in the queue. Thank you.
Operator
The next question is from Hamzah Mazari from Credit Suisse.
Hamzah Mazari
Would you comment a little on the volumes that you're pulling out of the divested assets, and how much of that is going to landfills that you have in those existing markets, and how much is committed to stay at those divested site and what your outlook is for your internalization rate?
Jim O'Connor
First of all, the internalization rate is about 69%, and maybe up ever so slightly, but fairly constant. We don't have specific details, and we wouldn't give out specific details on individual assets, or even the group of divested assets, but normally if you look at those assets across the industry, about half the volumes going into disposal site, come in on the company's own vehicles.
So, obviously landfills or transfer stations, where we actually are collecting the volumes, that portion would then be diverted to one of our own sites.
Hamzah Mazari
Got you and my follow-up question relates to the cost side. Looks like you guys are doing a pretty good job on the cost side versus expectations.
Could you give us a little more color or perspective on how much of the benefit that we're seeing on your cost side is coming from synergies versus you flexing down on costs and I know you got $75 million of synergies as at the end of the quarter, but where are we most likely to see that? Are we most likely to see that in which line item, SG&A, operating expenses?
How should we be thinking about that?
Tod Holmes
It's in both. Obviously we have the closure of the Fort Lauderdale our corporate office, so there is a synergy benefit coming out of SG&A there, and I’d say that leads the synergy, and then in the field organization.
There is some SG&A synergies, but the operating synergies are to some extent dependent upon system conversions. When we look at the actual benefit in the quarter, the dollars that we benefited from within the quarter, it was about $15 million of synergy.
So, the impact for synergies in the first quarter is not huge. It's something that's ramping up.
Jim O'Connor
Let me ask Don to give you guys on the call a little bit of color about how well the operations of the business have adjusted to the economic impact to volume. So, Don, you want to give a little color there?
Don Slager
Sure, thanks, Jim. So, keep in mind, as we said, we maintain productivity during the quarter.
In fact, in a couple of lines of business we actually improved productivity. So, we measure units per hour, as an example in our front loader or commercial line of business.
We've flexed our costs almost exactly against the change in revenues. We've parked hundreds of trucks, as a result of the volume loss.
We've unfortunately had to send people home, as a result of that, but our team has been very efficient and very real time in adjusting to those changes. So, in the past, we've actually done a good job, I think, over the last year as the volume is decreased, flexing the commercial or the roll-off side of business, and that's continued.
Now we're seeing the lag effect in our commercial line of business. We've flexed that as well and up until now, we've told you that we've had a difficult time changing our cost structure in the disposal line of business, because there is so much fixed cost, but we've seen enough volume dropped in the landfills in the post collection side, that we've actually been able to make some changes there as well.
So again, we measure productivity against the tons we take in on an hourly basis, and accordingly, we adjust the number of pieces of equipment we run at the landfill. We reduce personnel staffing levels.
We've actually gone to the next level of adjusting hours of operation, where we're opening the gate later, we're closing the gate earlier. In some markets, we are actually closing our landfills on Saturday.
So, we have three or four landfills in the marketplace, Detroit would be an example, where we're actually only going to remain one landfill open on the weekend. So again, we're flexing those costs down, as the volume changes, and frankly, as the volume comes back, some of those changes maybe permanent.
Those hours of operation changes may become permanent. So, we've become pretty good cost managers process, and if volume comes back, we think we'll get the benefit of that as well as obviously the benefit of the volume coming back at that higher prices, because we've been able to maintain the prices.
So again, we've parked hundred of trucks. We've made the staffing level adjustments.
Our field is reacted very well to this and again, it shows up the margin. So, we are very proud of productivity volumes.
Jim O'Connor
I mean, the operations of the business have adjusted very well and I think, the strength of this organization, while there will be some job loss due to the volume. The philosophy that the organization has adopted that every one is contributing and looking for operational efficiencies, so that we can save jobs.
So, this is really about saving jobs, not eliminating jobs.
Operator
The next question is from Jonathan Ellis from Merrill Lynch.
Jonathan Ellis
Wanted to talk a little bit about capital structure, you talked about your debt pay down plans for this year. Wondering, I know in the past you’ve talked about not really considering a share repurchase opportunities until, I think, net debt to EBITDA got below two times or at least approached two times.
Can you update us on your thinking? Have you perhaps revisited the potential for share repurchase programs a little bit in advance of that two times threshold?
Jim O'Connor
Jonathan, I'm going to turn that over and let Ed Lang, our Vice President and Treasurer, respond. Ed?
Ed Lang
Sure. Obviously, the debt reduction plans of the company are really geared on our conversations with the rating agencies and having further improvement in our credit status.
Obviously, Republic, premerger had debt to EBITDA coverage of less than two, and what we've stated is, we want to move gradually over time back to the two to one level. I think as we start to approach those type of levels, our Board of Directors will discuss cash flow utilization over time, and obviously I think we would consider reintroducing the share repurchase program.
The fact is today our debt to EBITDA is approximately three to one. So, really for the next 12 or 18 months we still have to be focused on that commitment to debt reduction to get the debt to EBITDA back into the low to mid two’s before we could initiate those type of conversations.
It is something that, Jim does bring the Board through on a regular basis as far as our cash flow utilization strategies and share repurchase is part of that discussion.
Jonathan Ellis
Thanks and just on pricing, can you talk a little bit about any opportunities that you may have recently or plan to over the next few quarters to implement a higher environmental fee and if so, if you can help us maybe quantify what the potential impact of that might be for your core pricing?
Jim O'Connor
We're going to continue to evaluate all the opportunities we have available, and we're continuing to evaluate our environmental fee. Whether or not we yet have a commitment to move forward on an increased environmental fee, I mean those are things we're still analyzing, but again I think in general, we're still on track to achieve our full year guidance of 4% price.
Operator
The next question is from Bill Fisher from Raymond James. Bill Fisher - Raymond James Just on the divestitures, I think you originally targeted about 1.5% of revenue, which I think works out to like 140 million.
Just if you think about it, since obviously it starts in Q2, should we just think about it is like 35 to 40 a quarter, or how does that flow out of there?
Jim O'Connor
A lot of it actually flows out here in early Q2.
Don Slager
A lot of the closings were done in early April.
Jim O'Connor
Yes, the first week of April. I mean, I think you can look at some of the press releases from other public companies to see that.
So, there will be some that should close throughout the second quarter, and if there is a permit that needs to be transferred a bit, it might go into the beginning of the third quarter, but I’d say the lion's share of it is behind us, maybe about two-thirds. Bill Fisher - Raymond James Okay and I guess my point was that $140 million revenue, if that works out to say, 35, 40 a quarter, you will to see that each quarter for the balance of the year?
Jim O'Connor
Right, that’s correct. Bill Fisher - Raymond James Okay, and just to follow-up on the free cash flow, Tod, the 550 to 600, you noted earlier, I think it's $70 million or so, the '08 tax payments in '09.
So, just to be clear, was that paid in Q1, or is that going to be more of a Q2 event or something?
Tod Holmes
That was paid in Q1. The taxes that $75 million that I spoke to is, we would have expected to have a tax payment in the first quarter of $80 million, but obviously the estimated tax payments that a corporation make, don't necessarily all have to occur in the quarter in which you earn the money.
So, we have a slight lag effect for federal taxes associated strictly with 2009 business activity, and that's $75 million from the first quarter that would flow into probably the third quarter. I think its August or July.
Operator
The next question is from Michael Hoffman from WSI.
Michael Hoffman
Hey guys, how are you? Congratulations, terrific numbers.
Jim O'Connor
Thanks.
Michael Hoffman
I guess the focus I’d like to, on two sides, free cash flow and then pricing and productivity. One of the messages, I'm clearly hearing through the whole earnings season, and you all seem to repeat it is that, the higher you can drive productivity in good times or bad times, the greater probability you can sustain pricing regardless, and that core focus on productivity is seems to also being embraced by the private sector as well, because you're hearing lots of anecdotes of equipment being parked, maintain high productivity and you'll be more profitable and by the way you can get price.
Is that philosophically, what we're hearing from you all as well and you're actually producing results from it and you’re also seeing evidence that the market participants are doing the same?
Jim O'Connor
I’d say, Michael that the productivity is directly linked to the margins. So, as a result of strong productivity, we're able to maintain good operating margins in our collection business and offset some of the decline from commodities.
From a pricing standpoint, I think, it's a slightly different issue. It really goes to the discipline within the company to focus on getting better returns on assets.
Now obviously, they're both linked, productivity and price are necessary to get the good margins and the good returns on assets.
Tod Holmes
Michael, I think what we see, like most businesses, when the going gets tough, the tough get going, and our field organization has been able to focus on productivity and because of the volume declines, has really stepped up and really started to uncover every opportunity on the expense side for savings other than jobs. I think, what we learn about our business in these times, and I think most businesses do, that we can always do better.
So I mean, we're coming out strong, as Don said, the productivity of the field is delivering on now with the volume reductions and flexing the business back. They're doing extremely well and I think, we're learning that we've got a lot more opportunity out there.
Michael Hoffman
Okay and then on the free cash flow, the guidance unadjusted for the acquisition stuff and February it was 550. Tod, you've alluded to a 550 to 600 without changing the guidance.
Tod mentioned that 845 is still a capital spending, but I can't remember whether it was Jim or Don suggested CapEx might come down. So, the $50 million is because of the successes of the cost savings and productivity and synergies, and there could be more if you take capital spending down?
Jim O'Connor
That's correct.
Tod Holmes
We’re currently reviewing on capital spending. I guess what we can say is, that it will be less than the 845.
We're just right now still trying to finalize our plans there, and we'll give clearer guidance in the second quarter.
Michael Hoffman
The change in that is across all things or mostly disposal because of volumes, less sell development?
Jim O'Connor
No, I think it’s across all areas of our business. Again as the volumes decline in all lines of business, we're adjusting capital and reviewing capital spends in all those areas.
Don Slager
Again, as Republic practice in the past, we will take a look at all aspects of our guidance, midyear with the Board, and then come back and update that guidance, but right now, it appears as if we're trending at or slightly above our range that we gave.
Tod Holmes
Cash flow guidance.
Don Slager
Right.
Operator
The next question is from Scott Levine from JPMorgan.
Scott Levine
On your pricing, I believe the franchise market resets are calculated based on calendar '08 CPIs. Could you remind us what percentage of your business that would be roughly and what the Delta would be on this year's reset that kicks in toward the middle of the year most markets versus last year's?
Is that driving some of your expectation or the thought process that pricing could accelerate throughout the year?
Jim O'Connor
Well, let's start with the component of our revenue base that is index price is about 27%. The CPI currently at the end of March, is going to annualize out in 2009 at about 2%, at least it looks like that today, but when you look at what the impact is during the 2009 term, it's really based on the index that was pegged either in July of 2008 or October of 2008.
So, we're going to be looking at price increases from our municipal work, our index price work, in the area of 3% to 4%. So, we don't see much change there and as we go into 2010, again, it's going to peg off of 2% assuming that holds, but while that pricing will put some pressure on delivering price in the area of 3.5% to 4%, we believe there is enough flex in the discretionary revenue to achieve the balance and makeup that balance.
So, that should tell you that margin expansion will be much greater in 2010, if costs are declining and prices are still holding in that range of 3.5% to 4%.
Scott Levine
Okay. In addition, turning to synergies, you mentioned before several times that you have a parking lot of opportunities you’d look at pursuing, once you make sufficient headway through your formal or more formal synergy targets.
Do you have any additional thoughts? You moved up timetable a little bit on the last call for the $150 million by the end of 2010.
Any thoughts on how far along you need to go with regard to this process before dipping into that bucket and update us on some ideas on cost saves or synergy opportunities within that parking lot.
Jim O'Connor
On some of these we're executing today in the national accounts arena, as we relocate from Houston to Phoenix. We're seeing additional savings there that we had identified early on that.
We didn't think we could get to, in light of the commitment for IT to integrate the overall business, but we are finding some additional times to work on sophisticating the national account process. So, that should help us a little bit, but I think probably as we get into the first quarter of 2010, we'll start to move into the parking lot, because we're ahead of schedule, and on almost all fronts, that we've identified for synergies, and so I'd say the parking lot and start moving cars out of the parking lot, Scott, in the first quarter of 2010.
Operator
The next question is from Corey Greendale from First Analysis.
Corey Greendale
First question, I know you touched on the free cash flow guidance. I know you said, you will update the guidance next quarter, but I’ll ask anyway.
Historically, just seasonally, Q1 is less than 25% of your full year earnings, and if you just annualize the numbers you've recorded this quarter, it looks like you're running fairly nicely ahead of the guidance for the full year. So, what would have to happen for the rest of the year it would be within the guidance range rather than above?
Tod Holmes
Well, again I think we'd rather wait until the next quarter. First quarter there is always a lot of noise.
Typically on the capital spend side, you see the landfill spend being very low in the first quarter, just due to the construction cycle. We've got obviously a benefit from working capital on the receivable side due to the step down in the volumes.
Now, that won't reoccur. I think another aspect is just divestitures and that impact on it.
The taxes, I mentioned earlier. There is so much noise in the first quarter.
While we don't see any downside, I'm reluctant to say, we want to get out of ahead of where we are right now on the current guidance.
Corey Greendale
Sorry, I meant more of the EPS, but would the same answer apply?
Tod Holmes
Yeah. Our divestitures are a factor on the EPS side.
In the first quarter, again the headline number was $0. 30, but if you exclude the cost to achieve synergies, and we had a little bit of one line item on costs associated with divestitures of around $4 million.
If you exclude all of that, our earnings for the quarter were $0.37, which is run rate earnings, but again there is about $0.03 in that $0.37, which is associated with hurricane Ike and also the divested business.
Corey Greendale
Okay. Second question is on the volumes.
Would you attribute 100% of the volume decline to the economy, or do you think there is any share loss either, because you are leading on price or because of local issues around integration or anything like that?
Jim O'Connor
The majority of the loss is uncontrollable losses, okay. They're not controllable losses.
So, they're related to the economy and so we continue to look at defection rates and retention rates, and they appear to be consistent what we've seen in past years. We see the market to be relatively stable from a competitive perspective.
I guess, what I’d say as a follow-up to Tod's points, while we don't give any guidance. We feel really good about this quarter.
The fields organization is really outperformed my expectations and Don's expectations. So, we're looking forward to a great year.
So, operator with that, I'd like to thank everyone on the call, and in summary, as my last comments, as I just said, I'm very pleased with our first quarter results. We continue to be focused on achieving appropriate returns on capital through improved pricing, maintaining labor productivity through route and disposal optimization, continue to meet and exceed expectations for realized merger synergies, generating higher levels of free cash flow performance and reinvest in our people and our business platform to ensure high quality customer service and safe work environment.
So, I’d like to remind everyone, that the recording of this call is available through May 5th, by calling 203-369-0653. A recording of this call will be available on Republic's website at republicservices.com.
In addition, all of our SEC filings and discussion of business activities are available on the website and again, I would like to thank all of you for spending time with us today. Have a great day.
Operator
Ladies and gentlemen, this concludes the Republic Services conference call for today. Thank you for participating.
You may now disconnect.