Allied Waste Industries, Inc. Q2 2008 Earnings Call

Allied Waste Industries, Inc. (AW)

Q2 FY08 Earnings Call

July 30, 2008, 05:00 AM ET

Executives

James P. Zeumer - Sr. VP, Public Affairs, Communications and IR

John J. Zillmer - Chairman of the Board and CEO

Donald W. Slager - President and COO

Peter S. Hathaway - EVP and CFO

Analysts

David Feinberg - Goldman Sachs

Scott Levine - JPMorgan

Leone Young - Citigroup

Corey Greendale - First Analysis

Emily Shanks - Lehman Brothers

Brian Butler - Friedman, Billings, Ramsey & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Allied Waste Industries Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the prepared remarks by the company, we will conduct a question-and-answer session. [Operator Instructions].

As a reminder, this conference is being recorded, Wednesday, July 30th, 2008. I will now turn the call over to Jim Zeumer, Senior Vice President, Communications. Please go ahead, sir.

James P. Zeumer - Senior Vice President, Public Affairs, Communications and Investor Relations

Thank you, Holly. Good afternoon, and welcome to Allied Waste's conference call to discuss operating and financial results for our second quarter ended June 30th, 2008. Earnings released issued earlier today provides information on our strong second quarter results.

On the call to discuss our results are John Zillmer, Chairman and Chief Executive Officer; Don Slager, President and Chief Operating Officer; and Pete Hathaway, Executive Vice President and Chief Financial Officer.

Before we start, I need to remind everyone that certain matters discussed during this conference call are forward-looking statements, intended to qualify for the Safe Harbor from liability established by the Private Securities and Litigation Reform Act of 1995. These statements are generally identified as such, because the context of the statements include the words such as the company believes, anticipates, expects, or words of similar import.

The forward-looking statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those currently anticipated. The description of such risks, uncertainties and other factors can be found in our periodic reports filed with the Securities and Exchange Commission. Shareholders, potential investors, and other participants are encouraged to consider to these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such statements.

Forward-looking statements made during today's conference call are made only as of the date of this call, and the company undertakes no obligation to publicly update these statements to reflect subsequent events or circumstances. Our presentation also includes certain financial measures, including gross profit, free cash flow and EBITDA, or operating income before depreciation and amortization that are considered non-GAAP financial measures.

You can access information required by the SEC about these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure in our quarterly press release, which is located in our website at alliedwaste.com.

I'll now turn the call over to John Zillmer.

John J. Zillmer - Chairman of the Board and Chief Executive Officer

Thanks, Jim, and good afternoon everyone.

Allied Waste continues to deliver excellent operating and financial results as demonstrated by our second quarter in six months performance. The gains, which can be seen throughout our reported number includes second quarter pricing of 6.9%, gross margin up 90 basis points and EBITDA margin of 28.7% and SG&A lower to 9.3% of revenues. These critical performance numbers are all four percentage point or more better than our largest competitors.

The one adjusted number I will highlight is earnings per share, which adjusted for the merger related cost was up significant 29% over the same period last year. It is clear that Allied strategies and supporting initiatives are delivering the results we've promised and in many instances delivering industry leading performance.

Don and Pete will provide more detail in our outstanding Q2 results that keep us on track to deliver our full year financial performance. I will spend a few minutes addressing the strategic merger between Allied Waste and Republic Services, which we announced on June 23rd. This is a powerful merger of two strong well-positioned companies that will create a $9 billion waste and environmental services later.

The merged company, which will be led by an experienced and blended team will have a strong national footprints, industry leading financial performance, and investment great balance sheet in a growing dividend. This combination will produce an asset mix that is second to none and that supports industry leading service to our customers and financial returns to our investors.

Between press releases meeting and conference calls, you've likely heard some of this before, but it's worth repeating why we are pursuing this deal. First in Allied and Republic, you have two companies with complimentary assets positions. Our existing businesses are well diversified throughout the country with few areas of direct overlap. These complimentary positions offer the potential for us to realize maximum operating synergies with the resulting broad geographic footprint creating a strong platform from which we can continue to grow our portfolio of national account work.

For larger operating network, we'll eliminate a percentage of national account work currently subcontracted and expand the areas of direct service we can offer existing and new accounts. The combination also integrates the network of collection, transfer, recycling, and disposal operations that will enable us to provide even more innovative solutions to meet the environmental services needs of our customers.

Second, the net annual integration synergies have been estimated at $150 million per year by the third year following completion of the merger. The actions associated with achieving this number are basic and include consolidating corporate offices and functions merging field offices, optimizing and eliminating routes, and improving route density, and using our disposal sites more efficiently. I don't mean to minimize the effort required to achieve these synergies. But all our tactical actions that can be implemented quickly.

Additional opportunities existed drive value from large scale purchasing base. The expanded sharing of best practices, internalizing and expanding national account volumes and the expanded use of data and customer volumetrics to capture revenue enhancement opportunities. And third: the combination of our Republic and Allied has important capital structure implications. Allied shareholders will benefit from accelerated de-leveraging and from a robust dividend payments, a first in the history of this company.

At the same time in pursuing this merger, Republic shareholders benefit from the financial flexibilities our company has maintained for several years. Republic had increased its size and comparative position within the industry while maintaining its investment grade balance sheet and generating even grater cash flows. In the weeks since the merger was announced, we have received a variety of questions including why are we doing this deal now.

Jim O'Connor and I had informally discussed different business possibilities after meeting at an industry event a couple of years ago, early... even in those early conversation, we could see the combination of Allied and Republic had the potential to create tremendous value for employees, customers, and shareholders. In the years, since that conversation, we at Allied have implemented a number of new processes and programs to improve our performance. The success of these programs is clearly evident in our reported financials. But not fully valued in terms of the multiple at which our stock has been priced.

Beyond the obvious gains as merger creates for our day-to-day business we see the potential for this merger to accelerate Allied's ability to achieve some important long-term goals. We quickly strengthened our capital structure by moving to an investment grade rating and begin returning funds for our shareholders through the dividend. We've advanced our competitive position in the faster growing national account business. And the potential is certainly there for a higher earnings multiple.

Can Allied achieve these goals on its own? I am confident that we can as we've already made significant strive. But it will take longer, and I am still not sure how quickly we can close the multiple gap that has existed for so many years. By agreeing to a stock for stock merger, shareholders gained the benefits outlined above. And the opportunity to participate in the upside appreciation that we believe will come as the merger is completed, as our synergy and business goals are achieved, and as we delivered industry leading financial performance. I strongly believe that in just a few years the power of this merger will be revealed for having provided great returns to shareholders, tremendous growth opportunities for the business and for our employees, and an unmatched level of service for our customers.

Now let me turn the call over Don Slager for comments specific to Allied Waste's second quarter results. Don?

Donald W. Slager - President and Chief Operating Officer

Thanks John.

Overall, I am pleased with Allied's Q2 results, especially given the backdrop of the top U.S. economy and the material impact of rising fuel costs. Our management teams remain focused on a critical performance drivers as we continue to price business for appropriate returns, control costs, and raise efficiencies where possible while maintaining appropriate investment in the business to insure our long-term success.

In the second quarter, Allied's year-over-year price was up a solid 6.9%. Core pricing was up 4.1% with our fuel recovery fee accounting for the remaining 2.8 percentage points of gain. Fuel costs continue to have a major impact on our reported pricing. And assuming no material change in the price of diesel, we'll likely have a similar impact over the remainder of 2008. Allied's core price is exclusive of any impact from fuel recovery fees. And exclusive of recycling in higher commodity prices.

In spite of a 280 basis points of pricing for fuel recovery, our core price was a solid 4.1% for the quarter, which reflects the ongoing benefits from our strategic pricing program. Pricing and collection services was up 7.8% with continued strength throughout our commercial roll-off and residential lines of business. Pricing at our disposal business was up 5.1%. Landfill pricing in the quarter remains strong as we continue to focus on driving better returns on our critical landfill assets. Given the large investments associated with landfills, sustained pricing is critical to the industries ability to generate acceptable long-term returns.

Partially offsetting pricing gains in the quarter, we continue to experience lower volumes reflecting the more challenging conditions across the U.S. economy. For the quarter, volume was down 4.8% compared with the same period last year, driven by the ongoing weakness in our roll-off business. We estimate that 70% of the volume change in the quarter was tied to the economy, which is in line with prior periods.

Total collections volume for the quarter was down 4.1% primarily driven by the decline in roll-off volume. This change was comparable to what we experience in the second quarter last year, also similar to last year commercial and residential volumes were both lower in the quarter by roughly 2.5%.

Roll-off volumes remain challenging with volume sliding 7.8% in the quarter. At the start of this year, we thought the roll-off volumes could begin to stabilize as we anniversary the class of home building. But we experienced further construction weakness. In response to these conditions, we have aggressively adjusted our costs allowing us to realize a 5% improvement in roll-off gross profit per unit.

For the quarter, disposal volumes were down 7.7% from the prior year. Transfer station volumes in the quarter moved from a positive 4.4% last year to a decline of 12.8% in 2008. In addition to the slower economy, this shift reflects the loss of transfer station management contract in California that we discussed last quarter. The way still comes to our landfill that we no longer record the transfer station volume. Also reflected here is the loss of some volume related to a sanitation contract in New York City.

Adjusting for the shifts and volumes noted above, our landfill business showed signs of improvement in the quarter as reported volumes were down 5% compared with a decrease of 6.7% last year. Third party volumes coming into our landfills were little change in the second quarter. Municipal solid waste volumes were below expectations while special waste volumes trends modestly ahead of our forecast.

Specific to special waste, we saw slight pick up of special waster approvals, which are required prior to work being did and the job being started. These approvals are good leading indicator. So the potential exist for better special waste numbers in the back half of 2008. Equally important, overall pricing has held up well for special waste jobs that we are seeing in the market. People followed this industry know that the trends don't change very much or very fast over the short-term.

Volumes for the second quarter continue to move modestly lower although not much below our expectations. As conditions have changed, our management teams have continued to do a great job of adjusting their operations as shown in our cost numbers. For the quarter, operating expenses as a percent of revenue was 61.4%, which is a decrease of 90 basis points in the prior year. The result was an expansion of our gross margin to an industry leading 38.6%.

Operating cost as a percentage of revenue were down 90 basis points even after the dramatic increase in fuel expenses, which had us paying an average price of $4.30 per gallon or 57% more than last year. The impact was a fuel cost in Q2 surged by roughly $40 million even while fuel usage fell by approximately 1 million gallons. As intended, our fuel recovery fee effectively muted any bottom-line impact, but higher fuel costs in the quarter restrained even greater margin expansion.

Beyond fuel, we continue to successfully control costs and realize greater efficiencies. In the quarter, labor costs declined in absolute dollars by approximately $2 million and dropped as a percent of revenue by 50 basis points. Along with labor, we continue to low our maintenance and repairs cost. As expenses fell by $3 million or 2.5% for the same period last year.

For the past two years, we have stressed consistent fleet investment, uniform truck specs, standardized maintenance programs and lower driver and mechanic turnover. We are reaping the benefits of these programs having saved almost $10 million in maintenance and repaired costs for the first half of this year. $10 million in year-over-year savings is real money, and reflects a lot of hard work by a lot of individuals throughout the organization.

Among some of the other cost lines, we continue to benefit from tremendous gains that are field safety programs have been able to deliver both in terms of the safer work environment for our employees and lower insurance premiums. We started seeing the quarterly financial benefits in the back half of 2007 and these have continued in 2008 as our Q2 risk management cost declined by $15 million. The benefits of our safety program will result in lower retained risk costs going forward as well.

As I said before, the cost savings are great, but as much more poor than our initiatives creating safer workplace. We never saved a penny, but saved one life or eliminate one serious injury. These programs and the efforts of our safety and operating teams will be worth every dollar of investment. Safety remains the first priority of every Allied waste employee.

And finally capital expenditures totaled $197 million, which is up to 38% from last year. The large swing between periods is primarily related to the timing of truck purchases between quarters. For the first six months of 2008, total CapEx is $357 million, which is about $8 million less than last year. We continue to expect full year CapEx of roughly $650 million.

In the quarter, we took leverage of approximately 385 new trucks, which helped lower average fleet age of 7.4 years, which is within the range we believe allows for total fleet cost optimization. Overall Allied's second quarter results were solid. Market conditions remain challenging, but our people are doing a great job adjusting to changing conditions, where we need to.

Before tuning the call over to Pete, I want to add my comments on the merger with Republic Services. Over the past few weeks, integration planning teams from the two companies have spent significant time together, working to ensure an efficient transition. These meetings have served to reinforce our beliefs that the business strategies, tactics, and cultures of Allied and Republic are very compatible.

The business potential this combination is clear to everyone, but I know integrating two businesses is a challenge. Watching our teams interact, I am more confident than ever that we can effectively merge our two companies and delivered the synergies and business results that formed the basis for this transaction. Meanwhile, the dedicated men and women of Allied remains focused on serving our customers and achieving our 2008 goals. Our second quarter results once again show the logic and our strategy the strength of our business and the capability of our people.

Now, I will turn the call over to Peter Hathaway.

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Thanks Don.

As reported in our release, strong pricing drove Q2 revenue to a record 1.6 billion while cost controls and the benefit from related initiatives yielded reported EBITDA for the period of 453 million, an increase of 7.9%. Leveraging these gains on top of declining interest cost drove adjusted EPS of $0.27 per share for the quarter, a year-over-year increase of 29%.

Reported earnings from continuing operations for the second quarter were approximately $111 million or $0.25 per share including the $0.02 per share and after tax net charge. A details in reconciliations table in our second quarter relies and 8-K adjusted earnings for the quarter were $0.27 per share compared to an adjusted Q2 2007 earnings $0.21 per share.

Reported gross profit for the quarter was $610 million, representing an increase of $27 million or 4.6%. As Don mentioned, the gross margin for the quarter increased 90 basis points as the benefit of higher price combined with cost savings more than offset the 120 basis points drag on margin costs by higher fuel costs.

Q2 operating expenses were benefited by approximately $12 million resulting from the decertification of the decades-old environmental matter. This item becomes re-characterized in this quarter as a post closer liability adding $8 million to depreciation and amortization. The net effect of these two matters is a $4 million benefit to pre-tax operating income.

On the dollar basis, total operating cost for the period increased by roughly 8 million primarily reflecting the impact of much higher fuel, which was up 50% in the period. Said another way, if fuel had been flat, you could more clearly see the $31 million in year-over-year cost reduction we realized in the quarter. Also total staffing was down approximately 1,400 people from last year as we continue to proactively manage variable costs in response to changes in volume.

Second quarter SG&A by approximately $16 million and dropped as a percentage by 130 basis points to 9.3% reflecting lower staffing and TNE expense. SG&A also benefited from a significant reduction in the consulting cost as we have adopted to roles and skills and processes allowing us to minimize the ongoing use of expensive external resources.

Interest expense for the period was $106 million compared with $123 million in the second quarter of last year. Our interest expanse continues to benefit from action taking to lower, our cost of fund, including the recent issuance of $56 million of new IRB and the renewal of our accounts receivables securitization program.

Second quarter cash flow from operations was $317 million compared to $373 million last year reflecting changes in working capital for the period that should reverse in the later half this year. Otherwise, cash was generated from improved earnings offset by the timing of semi-annual interest payments.

Free cash flow for quarter was $113 million compared to approximately $234 million last year. The change in free cash flow reflects the impact from working capital and a shifting of capital expenditures in the second quarter of '08 compared with the higher spend in the first quarter of 2007.

At quarter end, the growing strength of our balance sheet was clearly evident given our debt to the capital of 61.6%, our leverage ratio below 3.9 times and $1.1 billion available under our revolve. As demonstrated by Allied's second quarter in six months results, we continue to make great product reason for financial performance and in further strengthening our capital structure.

For the first half of 2008, market conditions in business results have been directionally in line with expectations although the components have been slightly different relative to guidance. 2008 is shaping up to be similar to last year with stronger price offset by slightly lower volume, allowing the company to deliver strong financial performance.

Based on our six months results, we have expect price for 2008 to be up 5% to 6% with volume down 3% to 4%. Volumes in the back half should benefit from easier comp and the potential for a pick up in specialized jobs based on improving pipeline of work.

2008 operating income excluding merger relating cost and impairment should be towards the high end of our initial outlook range of $1.145 billion to $1.185 billion. We also expect depreciation and amortization to be about $15 million lower than our $575 million initial estimate. Free cash flow excluding the BFI related tax payment in merger cost is expected to exceed the higher end of our initial guidance and now looks to be in a range of between 400 and 425 million. As I said earlier, the components may have changed slightly, but our expectations are for Allied Waste to deliver strong operating results continued year-over-year improvement and income free cash flow and our capital structure.

Now as I open this call to questions, I would ask you to confine your questions to Allied Waste and our financial result as well as any actions we are taking in support of our merger with the Republic Service. We will not take question regarding waste management and its proposals towards Republic. Operator, with that we are now prepared to take questions.

Question And Answer

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. David Feinberg with Goldman Sachs, your line is open.

David Feinberg - Goldman Sachs

Good morning, can you hear me? Good afternoon, can you hear me?

Unidentified Company Representative

Yes, David.

David Feinberg - Goldman Sachs

All right, I was getting some feedback, I apologize. One question on fundamentals and one about the merger, and I will get back in the queue. You talked about the components of your outlook moving, but the end result being the same in terms of volumes coming out weaker and pricing a little bit stronger. To that end, can you maybe give us a little bit more color either by geography or by end market. You talked about construction, we are trying to get a sense of where things have deteriorated on the volume side and where it might have accelerated on the pricing side relative to where you were six months ago.

Unidentified Company Representative

Well on the volume side, we said on our comments, construction really is across the board, it's across the U.S. I mean, we don't see any real bright spots today. It just continues to decline as my comments stated. So the pricing is strong is an offset to that pricing is strong across the line to the set 5% pricing plus on both the transferring the landfill assets and is a good back drop and again we are seeing strong pricing in the commercial and residential also. So, we're very happy with the offset.

Unidentified Company Representative

And also add that it's a geographically there has not been much in the way of change. I just think that relative to what we have originally thought early this year. We had an expectation that there might be a little bit earlier slowing on the decline with respect to some of the roll off in C&D volumes that's really come through quite quickly. But as I mentioned in the comment, I made we are beginning to see special waste sort of pick up a little bit, which is kind of nice, and we think that that might help throughout the year.

But the way this works out, we exchange price for volume in essence in terms of the initial guidance, and that will work in our favor. Because obviously the economics work in direction. So that... so the lead is through the upper end of our range of initial guidance, so we are pretty confident with that. I think that pretty well sums it up.

David Feinberg - Goldman Sachs

Okay. And then one question on the merger; just curious. You talked about headcount being off about 1,400 year-over-year, I was curious in terms of attrition if you've seen any acceleration in that given all the moving parts in the industry and in particular your discussion with any merger with Republic if you had to try to reverse that effort and maybe try to retain some folks that you weren't expecting to leave?

John J. Zillmer - Chairman of the Board and Chief Executive Officer

Yes David, this is John Zillmer. No, the numbers that we are talking about with respect to jump-related reductions are really related to an effort we are under took just to right size our operations in the face of declining volumes. So there really hasn't been any merger related job reductions that taken place yet. We don't anticipate any to take place before the real integration of the two companies.

When that happens, we have an integration team. Dan Slager is leading the effort on our side and Jim O'Connor's effort on the Republic side that are working very diligently against organizational issues and merger integration issues. And we expect that at some point in the future we'll be able to comment more completely on that. But at this stage, we really haven't begun to see merger related job reductions.

David Feinberg - Goldman Sachs

All right. I'll hop back in the queue. Thank you.

John J. Zillmer - Chairman of the Board and Chief Executive Officer

You bet, thank you.

Operator

Scott Levine with JPMorgan, your line is open.

Scott Levine - JPMorgan

Good afternoon, guys.

John J. Zillmer - Chairman of the Board and Chief Executive Officer

Good afternoon, Scott.

Scott Levine - JPMorgan

On the of SG&A, you guys were talking on the last conference call about a range normalized 10% to 10.5% sales, the number you guys put up here is clearly well the blow that. Given the updated guidance or thoughts or maybe what the full year might look like on net basis and or how indicative is key to of what we could the expect going forward?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

I think going sort of in a longer-term roughly 10% is where we expect to come out. We do have some benefit this year on a year-over-year base... for this quarter on a year-over-year base. We were incurring some consulting expenses last year about this time. We just want to trail off. But I think 10% is a... maybe slightly under 10% going forward as you watch revenues growing price continue to increase the way it does.

Scott Levine - JPMorgan

Okay. And then one last one on the free cash flow guidance; you guys have endorsed the high end of the range for EBIT, and you guys were saying $400 million plus, now you are saying $400 million to $425 million. Is there any reason, we shouldn't expect the one-for-one if we were assuming the mid point of the range, I needed before at the high and... $20 million higher like free cash flow wouldn't flow through one-for-one; is there any change in any of their operating cash flow lines?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

In the forecast, and there are many pieces that move around as you know. A lot of it has to do with working capital, and exactly how does working capital play out of the end of the year. So we are limiting to... limiting our view now to just that $25 million range.

Scott Levine - JPMorgan

All right thank you.

Unidentified Company Representative

Thanks, Scott.

Operator

Leone Young with Citi. Your line is open.

Leone Young - Citigroup

Good evening.

Unidentified Company Representative

Hi, Leone.

Leone Young - Citigroup

You talked little bit about some signs of stabilization on the landfill and you can see it in the overall volume lots being a stable or a little up slightly. In terms of the bread and butter commercial business, what are you seeing? Is there any more notable deterioration there or as you said it just seems to be worse roll off?

Donald W. Slager - President and Chief Operating Officer

Yes, this is Don. It really is really isolated to for the roll-off business today, and the commercial businesses is very stable. And we are seeing real a very strong pricing in the commercial business as we have now for, I don't know eight or ten quarters. And so we haven't seen any decline there. We obviously look for it, but haven't seen it.

Leone Young - Citigroup

Okay. And Pete, you mentioned obviously working capital is always a big swing factor. Anything you'd willing to forecast for the second half of the year right now?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

No, I am not forecasting specific components of our free cash flow, but historically what ends up happening, Leone, is second half of the year tends to be a positive working capital period as basically the seasonal shifting of the organic change or the organic growth was basically means we collect our receivables that kind of the peak towards the middle of the year with the stronger Q2 and Q3 quarters, and you tend to collect all that money towards the end of the year. And we also tend to have payables, which tend to working our favor towards end of the year as well. Bearing in mind that we want to exclude the tax paying, we are still anticipate that towards the end of this year, we will making another $150 million to $160 million payment vis-à-vis our obligation or our potential obligation towards the IRS. So my forecast obviously exclude that.

Leone Young - Citigroup

Great, nice quarter.

Unidentified Company Representative

Thank you.

Unidentified Company Representative

Thanks, Leone.

Operator

Corey Greendale with First Analysis, your line is open.

Corey Greendale - First Analysis

Hi, good afternoon.

Unidentified Company Representative

Hi, Corey.

Unidentified Company Representative

Hi, Corey.

Corey Greendale - First Analysis

First question for you; I think, Pete, you said the price guidance you are looking for now is 5% to 6% price. And you've been running above that for the last couple quarters. And I think to get to that 5% to 6%, that would imply being at the low end of that range or maybe blow that range for the second half. Is there any reason to think that the price... internal price number drops in the back half of the year?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Not really what I am suggesting is that we have a shift, if you will, in the components of top-line growth or I should say more heavily weighted towards price and less or more heavily weighted towards volume decline as well. The only thing that could have some downward impact on price is that as special waste comes through a little bit stronger at the end of the year sometimes that has a dampening effect on price per unit. But that's just a function of special waste market, it's really not the function of what we are doing otherwise in the pricing business.

Corey Greendale - First Analysis

Okay. Are you reading into the strengthening and special waste other than it's just lumpy and for whatever reason this happens to be a better time?

Donald W. Slager - President and Chief Operating Officer

Yes, our guys are pretty optimistic, Corey; this is Don. We feel pretty good about what we are seeing. As I said we take a look at and how many approvals are coming through the pipeline. We are seeing... pricing remains strong, we are seeing maybe a little bit more little more demand. So we are hopeful that that's going to give us a little more boost in the second half of the year.

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

But you do point out something is important is special waste can be lumpy, and we are seeing the pipeline finish show up a little bit, that's good sign. I don't know what that means more systemically if you will from an economic perspective. But look, given the six month horizon we are looking at, that's good news. I also want to point out that the expectation is that our fuel recovery fee is a percentage of total price. We'll tend to flatten out a little as bit as far as year-over-year comps go. At least that's again that's an expectation versus the significant increase as we've seen over the past six months.

Corey Greendale - First Analysis

Okay. Don, if I could follow up on what you are saying about the commercial businesses? Can I extrapolate from that figuring out you are seeing any meaningful change in customer churn and response to price increases?

Donald W. Slager - President and Chief Operating Officer

No, its pretty stable with where it's been. Again, the pricing program has been effective. The customer satisfaction levels are up, customer retention is really stable. And again pricing is strong in that sector. So, we are pleased with how that's performing.

Corey Greendale - First Analysis

Okay and one last one, if I could, on the insurance cost; that dropped pretty meaningfully in the quarter. Was there anything... any kind of non-recurring accrual adjustment in there. Is that really the level, it's going to be at going forward?

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

Well, let me just talk about that a little bit. In the $50 million number in its... certainly that something we take absolute credit for given the program we started, I don't know five years ago or six years ago, we've had a significant increase in our incident rates and a very significant improvement in our cost per claim, all attributable to program that we put in place focused on and stayed with over a long period of time. I think it's to the credit there is a lot of people in that arena. The word that comes through is a recognition by the actuaries that the program that we put in place is working. And so in this quarter during a normal review of our claims experience and a quantification of those. There's a recognition that that program has been working. So some of the $15 million relates to claims that are 2004, 2005, 2006, 2007 year claim.

That said, we will get the benefit of going forward better claims development factors, which are basically assumptions of actuaries used to try to estimate would those claims would be overtime. So those claim development factors will... hasn't come down as well as... they should have a positive... quite positively on our premiums as well. So those are just the stock-lost premium. In fact last year, we already had a benefit coming into 2008 of approximately $7 million. So, it's all working sort of to our advantage and even though you get a billable lump in this quarter, we expect going forward certainly a cost benefits resulted from...

Donald W. Slager - President and Chief Operating Officer

But what has Pete said, something you've got to give credit for. This is an absolute sign of the safety culture becoming in trends [ph] that Allied that the operations and safety teams working hand in hand and the results are there, and so the actuaries have got to recognize that. And it lowers our cost into the future. So it's real work, it's true benefit.

Corey Greendale - First Analysis

Yes, and understood. And you do deserve credit for that. But I... as a just modeling question, so the dollar amount, the $22 million in the quarter might not be that low going forward, but it should be below what it had been running at prior to that.

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

That's the idea.

Corey Greendale - First Analysis

Okay, good. Thank you.

Operator

Our next question comes from Emily Shanks with Lehman Brothers. Your line is open.

Emily Shanks - Lehman Brothers

Hi, good afternoon.

Unidentified Company Representative

Good afternoon

Emily Shanks - Lehman Brothers

Just a quick question around debt; it looks like you guys did a very nice job during the quarter. Can you give us any color on if that pay down came out of the revolver and/or term loan or elsewhere [ph].

Unidentified Company Representative

I have to look specifically. I think probably some of the revolver and the balance would have been internal, but I... we have to follow up with you, specifically I'm not exactly sure, which trounce that you prepared [ph].

Emily Shanks - Lehman Brothers

Okay, great and then...

Unidentified Company Representative

We can take that out before the call is over, I will just make a make a statement.

Emily Shanks - Lehman Brothers

That will be perfect. And then could you speak at all around what you are seeing by geography?

Unidentified Company Representative

In terms of what, Emily?

Emily Shanks - Lehman Brothers

In terms of, I am sorry, in term of volume trends.

Unidentified Company Representative

Yes, as I think we said earlier, no real change on a geographic basis to speak out. We've seen the same weakness in the lines of business in our role-off construction business continues to show the decline a little more as we saw more than we expected. Special wastes are starting to look at a little better across the geography. There is a... as Pete said, there is a little bit of lumpiness in special waste. So, there are couple of markets that didn't really well last year with some really big special waste jobs that haven't quite reoccurred this year. Those are the kind of things we are dealing with. But overall there are... there is no real bring spot and there is no real dark spot for us. It's pretty much across the lines business.

Operator

Thank you. Our last question comes from Brian butler with FBR. Your line open.

Brian Butler - Friedman, Billings, Ramsey & Co.

Good afternoon guys.

Unidentified Company Representative

Hey, Brian.

Unidentified Company Representative

Hi Brian

Brian Butler - Friedman, Billings, Ramsey & Co.

Just a quick way on the special waste again. Can you give some color on kind of where you are seeing I guess demand wise for that especially considering that the economy is slower, any thoughts on kind of what's driving that increase in bids?

Unidentified Company Representative

Yes, again maybe it's a pent-up, because we haven't seen as much that we'd like in the first-half again. We just answered in the last question that it is a little lumpy as we said in the comments, we're just seeing a modest uptick over our forecasts. And so it is a bright spot in the line of the business that we are watching closely, we are happy to see it. We are happy to see that while demand is picking up a little bit, pricing is still holding, maybe little too early to tell, but it's... it seems to be across the board. And so we'll wait and see how it turns out. But it looks good us to. We certainly like to have a little bit of that when that backs go into the second half of the year.

Brian Butler - Friedman, Billings, Ramsey & Co.

Okay. And then second question on... you had an announcement on today is on the gas to energy project can you put any idea on opportunity there, when you think about it from a larger prospective for Allied?

Unidentified Company Representative

Yes, I don't think we've given a lot of detail on this other than we have 57 plans operating today. We've got 200, and got 161 open landfills, and 112 closed landfills. We've got 57 operating gas systems, I think we've got 28 under some sort of development in at very early stages or late stages development. It's something that we're going to continue to develop. It's great for us that in a way that we were sort of a slow developer in our gas systems back when we are capitally constrained and now with gas prices being all time high, we get to capitalize on good programs with good purchase contracts. So, it's something that we're continue to develop. It just takes time to do it. It's upside force.

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

I might also add that obviously with the increased cost of energy, the economics of putting the capital into those development projects make whole lot more sensitive and used to often the projects in the past is to be dependent on some sort of energy credit from the Federal Government. But there is just pure sample of economics here. The returns on capitals on some of these projects approved goods. So, we will continue to pursue them and should generate decent revenues through...

Unidentified Company Representative

And just to keep in mind, it's something we have to do anyway, right? I mean we have to manage the gas, the landfills. We have to manage it in accordance with the environmental permits. And we've got to manage it in accordance with the time line of when we close those cap. So it's something we have to do any ways, now we're going to be able to maximize it.

Peter S. Hathaway - Executive Vice President and Chief Financial Officer

I just want a follow up on the previous caller's question with respect to what transit of debt were paid off; between March and June quarters, we paid off potentially revolver down to zero. But I also would mention that we added our shift in some of that to the IRBs as I mentioned. We issued to some IRBs, and we also increased the accounts receivable securitization trounces. We refinanced that and upsized it a little bit. So the actual reduction in that came from the revolver.

Operator

Thank you. That is all the time we have for questions today. I'll now turn the call back to Mr. Zillmer for his closing remarks.

John J. Zillmer - Chairman of the Board and Chief Executive Officer

Again, thanks everybody for joining us this afternoon.

In summary, let me say that we are very pleased with our second quarter results. We were very focused on delivering our full year financial expectations as we have talked about previously. The company believes very strongly that its primary purpose is to deliver consistent financial results at the market place, can expect.

We also continue to work very diligently to close our transaction with Republic Services as soon as possible. As you know, we're already working through our second request from the Department of Justice. And we believe that's a very manageable second request, and believe that we can accelerate the timeframe in terms of getting this deal done. We believe that this transaction is in the best interest of both sides of shareholders. And that Republic share price post closing integration should trade in the mid to high 40s. Obviously, we believe this transaction creates significant shareholders value for both organizations. And we very much appreciate your time and attention. Thank you.

Operator

Ladies and gentlemen, this concludes the Allied Waste Industries conference call for today. Thank you for your participation. You may now disconnect.

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