Republic Services Inc (RSG) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the third-quarter 2012 call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your host for today's call are Don Slager, President and CEO, Tod Holmes, CFO, and Ed Lang, Republic Senior Vice President and Treasurer.

Today's call is being recorded and all participants are in listen-only mode. There will be a question-and-answer session following Republic's summary of quarterly earnings. (Operator Instructions).

It is now my pleasure to turn the call over to Mr. Lang.

Thank you, Anna. Welcome, good afternoon, and thank you for joining us. This is Ed Lang and I would like to welcome everyone to Republic Services' third-quarter 2012 conference call. Don Slager, our CEO, and Tod Holmes, our CFO, are joining me as we discuss our third-quarter performance.

Before we get started, 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 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. Additionally, 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 November 1, 2012.

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.

With that, I would like to turn the call over to Don.

Thanks, Ed. Good afternoon, everyone, and thank you for joining us as we discuss Republic Services' third-quarter performance. I will review financial and operating results before discussing our updated 2012 guidance and preliminary 2013 outlook.

We recorded revenue of approximately $2 billion. Core price growth in the quarter was 1%, which was in line with our expectations, and an increase of 40 basis points versus Q2. Net price increase to customer, defined as price increases less rollback, was 2.8% in the third quarter. Landfill price increased by 2.7% in the quarter. Volumes decreased by 1.6%. The majority of volume decline could be attributed to contract losses we discussed on previous earnings calls and lower special waste streams.

Although we saw an overall decline in volume, our collection business grew 0.3% versus the prior year. This is the first time collection volumes have been positive since 2008.

Our third-quarter adjusted earnings per share was $0.47. This includes a re-mediation charge for a closed landfill of $37 million, or $0.06 of EPS. Year to date, adjusted free cash flow was $480 million.

Q3 adjusted EBITDA margin was 28% and SG&A was 9.5%. Excluding the remediation charge, and impact from net fuel and commodity, EBITDA margin was 30.8%. We repurchased 1.3 million shares in the third quarter for $36 million. Year to date, we have purchased 7.6 million shares for $208 million. We plan to complete our goal of $325 million of buybacks in 2012.

We remain committed to an efficient cash utilization strategy, which includes increase in cash returns to our shareholders through share repurchase and dividends. We expect to return approximately $650 million to our shareholders in 2012. This translates to a cash yield of approximately 6.5%.

We have already met our full-year acquisition goal of investing approximately $100 million and have purchased tuck-in acquisition with $62 million of revenue in our existing markets. We continue to work on additional transactions and expect to maintain this pace of acquisitions in 2013.

Our safety performance continues to improve with a 5% favorable reduction in our frequency rate. We have seen continued growth in our recycling business. Q3 recycling tons have increased 1.3% over the prior year.

The economy is still sluggish, but we have seen an increase in our temporary rolloff business which confirms the improvement in the homebuilding statistics. It is too early to call this a broad-based recovery, but our temporary rolloff volumes have increased by 3.8% as compared to Q3 2011.

As noted in our press release, we are reorganizing the structure of our headquarters and field operations, which will permanently reduce our annual SG&A cost structure by approximately $23 million. We expect to recognize a one-time charge of approximately $30 million for various costs, approximately half of which will be recorded in the fourth quarter. This reorganizations allows us to maintain a streamlined structure that is responsive to market demands.

We are in the process of withdrawing from the Central States Pension Fund. This quarter we took a charge of approximately $31 million for a partial withdrawal. We anticipate there will be future charges as we negotiate withdrawals for additional bargaining units. The liability is payable over 20 years and does not materially affect our free cash flow performance. This decision will benefit our employees and shareholders by limiting exposure to this critically underfunded plan and by moving employees to a well-designed 401(k) plan. We have amended our bank credit facilities to account for these potential future charges.

Tod and Ed will now update our financial performance.

Thanks, Don. I'd like to begin by discussing Q3 earnings and our full-year EPS guidance. As Don mentioned, our Q3 adjusted EPS was $0.47. Included in the earnings was a $0.06 environmental remediation charge for a proposed landfill in Missouri. This was partially offset by a $0.04 benefit due to realizing tax credits on our 2011 returns. Absent these two significant items, adjusted EPS would have been $0.49.

Now in July, we provided full year adjusted EPS guidance of $1.91 to $1.93. Since then, we have seen four components of projected earnings change resulting in a $0.06 reduction in full year EPS. Two of these components I just mentioned. A decrease of $0.06 due to the Q3 remediation charge and an increase of $0.04 due to the Q3 [saleable] tax rate. In addition, there has been a decrease of $0.01 due to a decline in commodity prices and also a decrease of $0.03 due to the increase in net fuel costs.

The net impact of these four components is a reduction in projected earnings of $0.06. As a result, we now expect full-year adjusted EPS in the range of $1.85 to $1.87. This excludes the restructuring expenses we expect to incur in the fourth quarter of 2012.

Now, turning to revenue, third-quarter 2012 revenue of about $2 billion reflects the following components of internal growth. Core price growth of 1% with positive price in all lines of business. Core price increased 40 basis points sequentially from 0.6% in Q2 to 1% in Q3. This was in line with our expectations. The sequential increase reflects the impact from higher CPI-based price resets in our restricted customer base.

Our fuel recovery fee decreased 0.4%. The decrease relates to the lag between fuel recovery fee and the fuel costs when prices are changing. Our fuel recovery fee lagged the current fuel costs by 1 to 2 months. When fuel costs are rising like they did throughout the third quarter of 2012, our recovery percentage decline until fuel costs stabilize.

Conversely, fuel costs declined throughout the third quarter of 2011, which resulted in a timing benefit in the prior year.

Our commodity revenues decreased by 2%. Commodity prices decreased approximately 33% per ton to an average price of $108 per ton in the third quarter from $162 per ton in the prior year's third quarter. Our Q3 recycling facility commodity volume of 500,000 tons was up about 1.3% from the prior year.

The full-year guidance, which we provided in July, was based on our July average price of $116 per ton. We estimate current commodity prices of about $110 per ton and, again, for reference purposes, a $10 per ton change in commodity value equals approximately $0.03 of full-year EPS impact. This includes the impact on both our recycling facility and our collection business.

Now, turning to volume, our third-quarter volumes decreased by 1.6% year over year excluding a 50 basis point decline due to one less work day. Most of the decline relates to landfill and transfer station volume. Within the landfill business, special waste decreased approximately 10% versus the prior year. In Q3 of 2011, we had historically high levels of special waste, which creates a tough comparison for this year.

We are also experiencing a slowdown in special waste jobs. In many cases, we've been awarded the work, but the start dates have been delayed. Our landfill MSW volumes are down approximately 4%, primarily due to the previously discussed loss in municipal disposal contracts and also competitive pressures that we previously discussed in our LA market.

As Don indicated, collection volume is positive 3%. This, despite specific losses that we previously discussed. This level of collection volume represents a 60 basis points sequential increase from our second-quarter performance.

Now turning to margin, I will discuss our third-quarter year-over-year margin. Q3 2012 adjusted EBITDA margin was 28% compared to 30.7% in the prior year. This is a 270 basis point decrease. As Don mentioned, excluding the impact of the Q3 remediation charge of 180 basis points and the impact of net fuel and commodity of 100 basis points, EBITDA margin would have been 30.8%.

Some of the more significant changes in margin include, first, labor. The 90 basis point increase in expense is mostly due to normal increases in wages and health care costs and a change in our revenue mix. Collection volumes have increased, which carry associated labor costs, while disposal volumes, commodity revenues, fuel recovery fees, and subcontract revenues are all down, and these have little or no variable labor costs.

Second, our maintenance cost. The 70 basis point increase in maintenance expense relates to the change in revenue mix I just discussed. Also, implementation costs associated with our ongoing maintenance initiative and increase in cost of tires across our supplier base and refurbishment of containers versus purchasing new, which is a prudent cash decision.

Third, our transportation and subcontract costs. The 30 basis point improvement relates to a reduction in subcontract costs associated with the loss of a large national account which we discussed in July. Subcontract costs tend to be higher in our national accounts business.

Fourth, our fuel costs. The 20 basis point increase in expense is due to a 1.8% increase in the cost of diesel. After considering the impact of related fuel recovery fees, there was a net margin decline of 30 basis points. The average cost of diesel in October was approximately $4.09 per gallon, an increase of $0.31 from the $3.78 per gallon used in our full-year guidance provided in July. For reference purposes a $0.10 change in diesel fuel per gallon is about $0.01 of full-year EPS, which also includes the impact of our fuel recovery fees.

Fifth, our landfill operating costs. As previously mentioned, the 180 basis point increase in expense relates to a 37% remediation charge or environmental conditions at a closed landfill in Missouri. This charge will not have a significant cash impact in the next few years. As I mentioned earlier, this charge resulted in a $0.06 reduction in EPS in the third quarter and, excluding this charge, landfill operating costs were essentially flat from the prior year.

Up next is our cost of goods sold. The 70 basis point improvement relates to a reduction in rebate, paid for volumes delivered to our recycling facility. Cost of goods sold decreased to an average of $31 per ton from $55 per ton in the prior year. While the change in cost was favorable, when you consider the more significant decrease in related commodity revenues there is a net 70 basis point decline in EBITDA margin.

And finally, SG&A. Third-quarter 2012 SG&A was 9.5% of revenue. This improvement of 30 basis points primarily relates to a reduction in incentive compensation expense, partially offset by an increase in provision for doubtful account. Looking ahead, we consistently believe our annual run rate SG&A is approximately 10% of revenue. Our DD&A as a percentage of revenue was 10.9% in the third quarter of 2012 versus 11.1% in the prior year. The 20 basis point improvement primarily relates to the favorable impact of landfill expansion in the third quarter of 2012. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles.

Ed will now discuss interest expense, taxes, and free cash flow.

Thanks, Tod. Third-quarter 2012 interest expense was $93 million, which included $14 million of non-cash amortization. Our Q3 2012 effective tax rate was favorably impacted by realizing additional federal and state credits on our 2011 tax return. As Tod mentioned, this provided a $0.04 EPS benefit in the third quarter versus our original expectations.

In July, we guided to a 36% full year 2012 effective tax rate. We now expect a full year 2012 tax rate of approximately 33.5%. Looking forward to 2013, we expect an effective tax rate of approximately 38%. The higher tax rate has a negative impact on our preliminary 2013 EPS outlook of approximately $0.14.

I will now discuss free cash flow. Adjusted free cash flow was $149 million in the third quarter and $480 million on a year to date basis. Free cash flow timing tends to vary by quarter due to capital expenditures and changes in working capital. The components of adjusted free cash flow are detailed in our 8-K filing. As a result of higher fuel costs and lower commodity prices, we now expect full year cash flow to be approximately $750 million. This is down from $25 million from our previous guidance of $775 million.

Now I'll discuss the balance sheet. At September 30, our accounts receivable balance was $854 million and our day sales outstanding was 38 days, or 24 days net of deferred revenue. Reported debt was approximately $7.1 billion at September 30 and excess credit available under our bank facility was approximately $1.4 billion.

I will now turn the call back to Don.

Thanks, Ed. As Tod mentioned, we expect 2012 full-year adjusted EPS in a range of $1.85 up to $1.87, due to lower commodity pricing, higher fuel expense, and the Q3 remediation charge. And as Ed discussed, we are reducing our adjusted free cash flow guidance to $750 million accordingly.

We are about midway through our annual planning process for 2013 and have not yet finalized the details which we will provide next February.

At this point, our preliminary outlook for 2013 EPS is approximately $1.90 to $1.92, which represents high single-digit growth after excluding the impact of a higher effective tax rate. Our preliminary outlook for 2013 free cash flow is approximately $650 million, which represents mid-single-digit growth after excluding the impact of higher cash taxes.

Now, I want everyone to pay close attention to my following comments.

This preliminary EPS outlook for 2013 assumes that fuel and commodities remain at current levels. It assumes no change in the economic environment and a higher effective tax rate compared to 2012. As Ed mentioned, the negative impact that the top higher tax rate has on our preliminary 2013 outlook is approximately $0.14. Our free cash flow expectations also assume that bonus depreciation will expire at the end of 2012. If it expires, the negative year-over-year impact of bonus depreciation is approximately $150 million.

It is important that you understand these facts and assumptions.

Now, before we go to questions, I'd like to highlight a number of key achievements that Republic Services team has made. We delivered free cash flow performance, providing a cash yield to our owners of approximately 6.5%, which is the highest in the industry. We maintained high EBITDA margins even though we are operating at a low growth economy and seeing higher fuel expenses and lower commodity sales prices in our recycling business. We've reported positive price throughout the economic downturn. We've grown the business through collection volume growth and tuck-in acquisitions in existing markets. We continue to demonstrate an efficient cost structure and we remain core-focused and well-disciplined. We are well-positioned to take advantage of an improved economy.

At this time, operator, I'd like to open the call to questions.

(Operator Instructions). Al Kaschalk, Wedbush.

Good afternoon. I guess I want to just start real quickly on the restructuring charge. I know it's not a big, big number, but perhaps maybe some of the things that went into rethinking the organizational structure and the fallout, of course, is the dollar amount, but maybe just from an operations standpoint, why this makes sense and maybe why now?

Well, I think it makes sense now because we continue to develop and strengthen our team. We continue to build our team. Our people continue to grow and we have a high confidence in our region and area leaders that they can operate in lead larger geographies. What's important to note is our general manager business unit level has not been impacted, so we have not spread or expanded the span of control at the business level. Those 170 or so general managers still exist. Those position units haven't been impacted. So our area leaders and our regional leaders have to manage a little larger geography and we believe they have the talent and are keen to do that.

Our Republic rate standards, our initiatives, are taking shape and having good progress and at Republic Services we're always looking for a way to work harder and work smarter and this is just one of those gambles.

And then a follow-up, if I may, and it's sort of a broader question, but obviously the free cash flow number, again, with all of the caveats, is still a little bit dead on from 2012. Is that pricing related in certain markets? Are you still seeing some pressure on that (multiple speakers)?

Al, you're talking about 2012 to 2013, right?

Yes, I'm just trying to pick up the trend in the business here that if you (multiple speakers).

Well, actually, I think if you looked at the normalized trend, free cash flow year over year would be up mid-single digits. The headwinds that we have in 2013 is the exploration of bonus depreciation at the end of calendar 2012. And the impact on a year-over-year basis is about $150 million. So all companies that buy heavy equipment have benefited significantly in their free cash flow performance over the past several years from bonus depreciation.

Keep in mind, as recently as 2011, bonus depreciation was 100%. In calendar 2012, it's been 50%, and in 2013, it will go to zero. So we're assuming in our guidance -- excuse me, our outlook that there is no extension of bonus depreciation. And if that is the case, the year-over-year headwind is $150 million.

Now, if you normalized free cash flow in 2012 and 2013 for a bonus depreciation, as I mentioned, you would see positive free cash flow in the mid-single digit range. So we are -- from the ongoing business, we are seeing free cash flow growth, what we're seeing is the impact of the change in federal tax policy.

Okay. Am I able to sneak one more in here or is this --?

Go ahead. One more.

All right. Sorry. So back to the pricing component. I guess, then, the volume trend that you're seeing, you were a little bit lighter than we had expected. And I'm just wondering if there's something contractually or if it's just some of this commercial and industrial that you haven't seen the uptick yet?

Yes, Al, this is Don. This special waste is really just a little bit lighter than we thought. Our commercial business and our collection business, as we said, is growing for the first time since 2008, so we're really happy with what's happening there. We did have the continued effect of some of the pre lost contracts. It really comes down to the special waste. A little bit lighter, softer, and jobs being pushed. We still have people saying they're going to let the jobs but they just seem to be delaying when they're going to start.

Thanks a lot.

Vance Edelson, Morgan Stanley.

Just wanted to follow up on the special waste question. The slowdown that is being experienced, is that resulting in a stronger pipeline now because these are really just pullouts or pushouts or is this more of the cancellation nature? Can you distinguish there?

Yes, I think is just pushing it out. We've seen slowdown -- I think, you know, people just are a little uneasy with economic conditions, the fiscal cliff. At this time of the year, it's not unusual if the economy is not doing real well that people start to tighten up their capital budgets, government jobs being delayed, those kind of things.

So it's just, it's the event business we're talking about, not the reoccurring special waste [instrument] manufacturer.

Okay. Got it. And on the CPI, it sounds like it's providing a modest lift now based on the contract structure and the lagged impact. Do you think it's going to provide more of a tailwind in the fourth quarter and beyond?

As we look at pricing exiting the year, we looked at pricing will be at least 1% as we exit the fourth quarter so I think we are in a good position versus how we were coming in to 2011, as far as the trend in pricing.

And it's in line with what we had thought -- in line with our expectation.

Okay. And one last one, maybe. You mentioned the $650 million of capital that will be returned to shareholders this year. Any feel for where that number might be next year and 2013?

Well, obviously, we just increased the dividend in that number's [deck]. We expect to have $325 million of share repurchase available as we go into calendar 2013. And, as you know, Vance, we try to be opportunistic, but kind of hold to our plan. But we just kind of work our way through the year, but we would probably have about $325 million available under the current authorization when we enter the new year.

And remember, Vance, working off of a two-year authorization here. So we have a good portion of that left for 2013.

But the cash utilization strategy is very consistent so is the foundational dividend; it's that share repurchase two-year program Don mentioned and then the $100 million or so of tuck-ins.

Yes, there's really nothing we see that would change our approach to that and we've got the tuck-in opportunities, we've got the dividend and we still -- work continues now to the opportunistic in the buyback.

Okay. That's helpful. Thanks, guys.

Hamzah Mazari, Credit Suisse.

Good afternoon. Thank you. The first question was just around guidance. I know you guys said you are assuming the current economic environment, you're assuming current OCC and fuel. Under that scenario, what is your pricing assumption for 2013 assuming you get the same CPI bump that you did this year? And what are you assuming on volume --? I know you had some contract transitions. What does price and volume look like in that 2013 guidance and does that include a buyback as well? And if so, how much?

Yes, as I said, this is not guidance, it's preliminary outlook. We're just in the middle of the business planning process. We wanted to bring to light some of these tax issues so you guys can get a handle on that. We'll see what happens with fuel and commodities between now and when we give guidance in February.

As you know, what we give guidance in February, it's based on how we end the full year the previous year. It's yet to be determined and we talked about the fact that pricing now is up from 60 basis points to 1% in Q3. We'll see how that trend develops.

But we're not really giving guidance today, just a preliminary outlook and we're just going to give that EPS and cash flow just to kind of get everybody focused on that.

And on the share repurchase, we've said repeatedly that $325 million in the two-year program -- or a little over two-year program, the $325 million this year and $325 million next year. So that's consistent with what we said in July.

Okay. That makes sense. And then, just a follow-up question. On your collection volume being up, how much of that is just a general lift in the economy and how much of that is you guys being more aggressive in the marketplace and maybe defending some business?

Well, I'll tell you, it's a couple of things. It is puts and takes, certainly. We won the San Jose contract. That's been there. We've got some puts and takes of large contracts.

We've been very open with everyone about the fact that a couple of years ago we really started defending our business more ferociously against some of the less rational smaller players. That's paid off as we go in to close the gap. I would tell you we are losing less business days as a result of that. And rule one, if you're going trying to grow you got to stop shrinking.

So we've stopped the shrinking. We're defending our turf very well and we're very specifically competing back in markets where we need to. We are continually pricing and our pricing shows that and that's really all I can tell you. There's a lot of blocking and tackling and (technical difficulty) business and it's really no different then it's always been. We've been very competitive. But we're getting a little better at it in the trenches that we have been historically.

I appreciate that. Just last one. Any update on the CFO search process? Thank you.

Yes, sure. We've got a great process, well-defined. We are right on course and on schedule. We have a number of internal high quality candidates, as you know, and we've got a couple of extra candidates were looking at. And we'll be bringing it to a close here before too long. But, as you know, Tod is going to be here through May, if we require him to, and he's committed to that.

So we're right on course and there's really no need to worry or hurry, but we'll have an outcome before too long.

All right. Thanks a lot.

Bill Fisher, Raymond James.

Good afternoon. Just maybe for Tod. I noticed the maintenance expense is up like $40 million or so year to date. How do we think about that expense into 2013 in terms of the one fleet initiative and some of the puts and takes there?

Well, again, we're not really going to talk about 2013 any more than the general comments that we've made in the past. I think when you look at, kind of, sequentially how that maintenance expense rolls out, our container expense continues to be a little bit higher as we continue to repair containers. But that is the right cash decision. I would say that we're kind of working through the probably the tail end of that inventory.

So, as a result, that would drop off a little bit and we revert a little bit more to buying containers.

And then on the one fleet initiative, as we've said in the past, that's a multi-year program. We talked last quarter about slowing it down, but really that slowdown takes a little bit of time to work through. So it will probably step down a little bit here in the fourth quarter and then be at that level as we go forward.

The other thing that we have is that probably more of a margin noise thing is that change in revenue. Again, when you look at the total mix of business, and this is more from a percentage standpoint, the higher disposable commodity type of business gives you a lower percentage whereas a little bit more collection business, pushes your maintenance costs up a little bit. So obviously, on a dollar basis, as we grow the business, as Don said, this is the first quarter since, I think, 2008 that we see a positive there in the collection business that there's going to be a little bit more dollars spent on the fleet.

Okay. Thanks. And then maybe for Don, you mentioned the temporary rolloff was up 3% or so. I'd like to think [the vector] hadn't really invested in the rolloff fleet the last four or five years and I know it's a smaller piece of revenue now but if that stays strong on the volume side, could that kind of benefit price and that speaks a little bit more given the past (technical difficulty)?

Bill, this is Tod. I might have misspoke because I think I said 3% for the collection volume being up and the total Company was actually 0.3%

The temporary was up 3%.

I was just talking about the temporary (multiple speakers).

Temporary rolloff is going to be construction. It's going to be businesses cleaning out, that type of thing. We haven't seen that kind of an uptick in a long time so it's a little too early to tell. I guess that's what I said in my comments, we wanted to make a note of it because (technical difficulty) positive but 3%.

So its temp rolloff is only 30% of our total industrial line of business. So it's a small portion of a small portion. But it is a positive. We'll have more on it as we see how things kind of develop through Q4. And obviously, supply and demand, right, Bill, if at some point that thing starts to take off a little bit, it should give us a little more pricing power (technical difficulty).

Corey Greendale, First Analysis.

Thanks. Good afternoon. First I wanted to ask Tod, when you went through the impacts to your new EPS guidance for 2012 relative to the prior guidance, I was a little surprised that you were saying there is more of an impact from fuel than from commodities, just given the relative movements. I just wanted to confirm had you assumed in the prior guidance that commodities were going to come down further and, on fuel, are you actually recovering less structurally or is it just a lag issue?

I think you got it. That's exactly it, Corey. It's the lag. And then I would say the other thing is commodities have kind of come back a little bit here in the past month or so. So it's those two factors.

It's about a 60 day to get the first batch up. I think what we saw here in the third quarter is that fuel was just continuing to move against us week after week throughout the quarter. So it was just you were running after a higher and higher number and just the way the math works, it was difficult to have this [spur] kind of keep pace where actual fuel was going.

And on the impact of labor, on margin side, I understand the mix issue. Where do you think you're at in terms of efficiency of operations? The 0.3% in increase in collection, obviously that's moving in the right direction, but that's not a level where you think you need to be having a bunch of labors so are there opportunities still to make that side of the business more efficient?

Yes, we continue to work on our automation initiative, Corey. That's a long-term initiative converting our resi system from two purchasing vehicles to single operators and we're going to be at the end of this year 63% complete. We might get in sort of the 80% range when we're done so we've got some work to do there. We continue to work on routing efficiencies and we'll get an additional productivity enhancement in the year from those things. But we're pretty good at routing so there's not a big material change. It's just constant steady improvement.

If I could just throw in one quick one. Ed, I was hoping you might be able to give us tax rate guidance just for Q4 given the moving pieces. I want to make sure I'm modeling that correctly.

I'd use the full year 33.5%. So look at the nine month and just (multiple speakers)

It's going to average 33.5% for the full year --

So just for the fourth quarter to get you a 33.5% for the full year.

It will be roughly equal to our statutory rate.

Okay. Thank you.

And again, the third quarter was the return to provision true up where you typically actually file your tax return.

Thank you.

Michael Hoffman, Wunderlich Securities.

Good afternoon, thanks for taking my questions. If you were to go back to the beginning of when bonus depreciation was dumped upon us in 2009 and you wiped it out and never happened, what's the free cash flow -- basic free cash flow of the business?

Well, I think it's probably -- if we looked at this year, it would be about $700 million. If we looked at next year, it would be about $750 million. Somewhere in that range. That's kind of that mid-single digit free cash flow growth that Ed and Don spoke to.

And again, if you look at the history of bonus depreciation, 2008 and 2009 it was 50%. In 2010 it was 50% until September and then it went to 100% in kind of in the closing months of the year. And then in 2011, it was 100%.

So, yes, we are getting a benefit this year which is a combination of some of the late 2011 capital that we put into place. Where we probably overpaid a little bit of 2011 taxes and actually, once we knew it was going down to 50% we accelerated capital in 2011, if you'll recall, to take advantage of that. And this year is 50%. So we think that we have probably, I'd say, a realistic, but depending on what happens all this political uncertainty, we don't have any bonus depreciation in for next year. If there is some, that's upside to what we just told you.

And keep in mind, Michael what we are seeing in the free cash flow out while we're talking about is the impact of lower than average commodity prices that we're currently seeing above average fuel costs, but I think if you pull back and you kind of just look at the normal depreciation schedules that, historically, we would depreciate equipment over a five-year period and if you looked at a normalized level of fuel and commodity values, I think what generally you'd see in the long term in this business is that free cash flow tends to run about 110% of net income. So there is, as long as you're continuing to reinvest in the fleet, you get that benefit of the five-year depreciation schedule.

So this is a business that, normally, you do see free cash flow per share higher than book earnings per share and that's one of the beauties of the business. But right now, we are just dealing with the volatility on a year-to-year basis created by bonus depreciation. And then from an operating perspective, a pretty significant decline in commodities during the third quarter or, as Tod mentioned, it has picked up a little bit here at the beginning of the fourth quarter.

And then, your dividend is now at 3 1/2% -- if I am not mistaken your borrowing costs on 10 year or longer money is well below that. So why not borrow a bucket of money and buy a lot of stock back and play the spread?

Well, we do like being investment grade and I am sure there's a few fixed income investors on the call that appreciate us stating that. So we do to --

There's also a cost associated with not being investment grade.

And there is a significant cost with our -- keep in mind, we rely on letters of credit, we rely on surety bonds, we do like having or prefer to have an investment grade profile. We think it's also a benefit for us as we look at municipal marketing opportunity and having access to capital to expand our business platform through enhancing the fleet, recycling, or tuck-in acquisitions. So we don't want to get distracted by some near-term events and be focused on the business for the long term.

We want to maintain that financial flexibility, Michael, in the event there is a business opportunity we can take advantage of so it's critical for us.

And Don, just one quick question for you. In your text and in your presentation, if I summarized, you believe the underlying fundamentals with this business are sound and stable and with an improving bias, but macro factors and the bonus depreciation create oddities. But structurally, you believe the business is in a good fundamental position and improving.

Yes, we think the underlying fundamentals of the business are very strong. We think we are well-positioned to take advantage of improving conditions. We're very happy with the team. They're very capable of executing the plan. That's evidenced by the fact that we just reduced our area count and increased our coverage. We're that confident in their capability.

We are at a unique point here we are, as Ed said, commodities are below average, fuel is way above average, and we have some of these interesting puts and takes year over year. We are still, you can see, producing consistent cash flow. The business has that hallmark and we think, overall, the industry is still very fairly rational even though there is some noise out there.

Well, they put cash yield to the owners for the dividend.

Yes, so you asked me do I feel better about the business now than I felt last year. I would say, yes, I do. We just have some noise here to sort out.

Okay. Thank you.

Scott Levine, JPMorgan.

Good afternoon, guys. A question -- I don't know if you mentioned this earlier. Could you quantify the dollar amount of the bonus accrual that was reversed that was the component of SG&A?

We did not quantify it. I think you can see it in our SEC filings in the SG&A detail. Typically, this third quarter ends up being a little bit lower than our average of around 10%-plus. We were at 9.5% so we had a positive net of 30 basis points, but then offsetting that we had some higher bad debt expense year over year.

I will say this is not an unusual phenomenon as you go through the second half of the year, the bonus accruals. This year probably is a little bit more than in the past because we've got the headwind from the commodities and fuel, which is bringing our EPS number down.

So we're going to see around 10% SG&A going forward. So it's not 9.5% for the quarter isn't something that we're going to carry into the future. It's still going to remain about 10% next year. (multiple speakers)

And the put and take here is cost savings on the (technical difficulty) and obviously a bonus accrual next year will be higher than this year.

Got it. And then, I am not sure if this is covered in terms of the remediation charge. So is that basically a one-shot deal with a cash flow impact of a direct magnitude a few years out or is it still a fluid situation where it is still unresolved?

It's a one time. The $30 million is one time. The $23 million is ongoing. The cash impact is (multiple speakers) $2 million.

$2 million. Got it. Okay. And then one follow-up on acquisitions. So it sounds like you guys, you hit your acquisition target here in three quarters. Just wondering whether, what your appetite and interest levels still is and whether you're considering outside of traditional tuck-ins, I know that's traditionally been the focus, and whether you may overspend your budget if appealing opportunities become available to you whether you'd be willing to lever up a little bit more to do that?

Well, I'll say this. We're always looking and we look at everything -- small, medium. We're looking within our core. So solid waste, North America, in the markets we are in, typically, which is the definition of tuck-in, we take a look at everything. We're very pleased with the ones that we have done. If there was something else that came up in the remainder of the year, we'd look at it.

But at this point, the idea of closing anything that's not on our radar today with this much -- with only 60 days left in the year, is probably not going to happen. So where does it go from here? We think there's a pipeline that lets us do a steady diet of call it $100 million a year into the future, but we'll have, as we've said before, the financial flexibility to do a little more if we run into good opportunities.

Got it. Where is your leverage as of the end of the quarter?

You mean our debt to EBITDA?

That's right.

Just right around (technical difficulty)

Got it. Great. Thanks, guys.

That's just calculated under our bank target.

Understood. Thanks.

Adam Thalhimer, BB&T.

Thanks. Afternoon, guys. Most of my questions have been answered, but I did want to ask the growth that you saw in the quarter, temporary roll-off, I think you said up 3.8%, how does that compare to recent quarters?

Stronger. A little bit stronger.

So it's accelerating a little bit.

Yes, I wouldn't get too excited.

It's coming off a low base. We have seen a little bit better temporary roll-off down in the South and some areas in the West. But it's kind of mixed geographically, but maybe some of the areas where there was very little activity are actually showing some new activity.

Got it. Okay. That was all for me. Thanks.

[Alex Ovshey], Goldman Sachs.

Thanks. How are you guys? A couple of questions. First, can you just talk about how you see the Company's delevering to the nascent housing and repair and remodeling recoveries as those markets begin to approach normalized levels over the next couple of years? What kind of impact do you see that happening in the Company's volumes?

Well, Alex, if you just look at our total revenue, C&D collections is about 6% of our revenue and then C&D volumes at our landfills are about 2% of our revenue. So through all types of construction and demolition, it's about 8% of our revenue. It is up slightly where -- versus a couple of years ago where we were at 7%. So we're still at fairly low levels.

Let me say that again. C&D revenue three years ago, four years ago at the peak, 2006 --

It was about 17% of our revenue.

And today?

It's about 8% --

If 2006 was normal and we would argue it was probably greater than normal, and (inaudible) 2006 anytime soon but that's the gap. So today we are up 9% of our volume.

So it's still down 50% from the peak. Now, what the normal level, we are not going to go out there and try to give that (technical difficulty). We just kind of report as to what's happening in the business and as those opportunities come to us, we are seeing a little bit higher activity.

Yes, the good part is, we are well-positioned geographically in the Sunbelt in those markets that would maybe grow faster with population. We've got the assets, the landfills, and we certainly have roll-off containers stacked up and we sort of naturally get that growth as it occurs. It's not as though you've got to go out and fight the hard core that is going to get you a fair share and that fair share would get us back ultimately to the numbers that they're talking about.

And as we've said before, we are a late cycle so as they're clearing land you are going to see all that activity and that is quite some time before they get into the interior of the building where a lot of the waste is generated in the finishing process.

Yes, so it's still a little bit too early to call. But let's just leave it there.

That's helpful. And my second question is, based on what you guys are seeing out there in the trenches in the recycling business, do you have a view of the outlook for OCC parts in the next couple of quarters?

No. Kind of flat where they are.

We really don't put any type of forecast of OCC or other product into our outlook or guidance. Historically, there's a little bit of seasonality tied to holiday season buying, but other than that we don't really see changes in the pricing. We just kind of assume what the current market is is what we'll see going forward.

Tony Bancroft, Gabelli & Co.

Quick question. Just go a little further on Michael's question as far as nontraditional acquisitions regarding the [R-360] deal. What are your thoughts on for the drilling waste business and actually dealing in the front end not just for the backend of that business?

Well, as I said, we are really looking in and around the core then if that's not as core to us as maybe it might be to somebody else. And we think there is enough opportunity in the tuck-in arena in the markets we are in and we think for us if we are going to spend $100 million a year in acquisitions, which is what we said (technical difficulty) decent run rate, we can buy businesses in markets we are already in and businesses we are already in and, with that, we'll get the best return, the lowest risk of integration. It's hard work buying at $5 million and $10 million chunks, but it's giving us the best return so far.

And that's where we're going to be focused for the foreseeable future.

And we will participate in that energy sector to the extent that we have the infrastructure in those drilling areas like Louisiana or eastern Ohio. So we do see a piece of that business which we consider part of our core.

But purely on the landfilling side. We're not on the front end, as you said. We're not in the deep water or some of the other services at this point.

And then just one quick question. Could you give us a little more color maybe regionally with what you've seen recently with landfill pricings or defending landfill pricing?

I don't think there is much to tell there regionally. Our total disposal price was up 2.7% in the quarter so we are consistently raising prices in our [first selection] business fairly effectively. We haven't seen any major losses of contracts in and around that space. And we think there is going to be a couple of areas to recover -- I know there's been some talk about what happens in the LA market when one of the landfills closes there next year. They will see some things occur. But we think it's overall a fairly rational market for landfill proposals.

Joe Box, KeyBanc Capital Markets.

Just a quick question for you on your industrial collection business. If my model is right, it looks like this is actually the first decline since Q4 2010. I'm just curious, in talking to some of your customers, does it feel like more of a pause in activity or could it be more sustained?

No, that's just really a combination of -- we talked in previous calls about one of our large competitors purchasing Oakleaf and that business being migrated over to their collection routes and then also the large -- the big-box retail store that was lost, our national accounts system earlier in the year. And that's really it. You've got to net those things out. Things are positive and going okay.

Okay. And changing gears a bit, I think one of your peers was out recently talking about a decline in rollbacks in the quarter. Is that something that's been broad-based throughout the industry in 3Q or could it be more of a one-off?

Yes, I don't know. I think rollbacks are pretty consistent. The general state of municipal finance in this country with our public/private partnerships, as we said, we're probably kind of halfway through renewing that book of business, about $400 million or so of revenue comes up every year in that space. And our municipal customers are struggling in other ways and so we've had some rollbacks there. We'll probably have a little more in over the foreseeable future and I don't think it's going to change much.

What has to happen is, generally, you've got to see -- to see meaningful movement and pricing, we're going to have to see CPI increase. Again, that's half of the book of business. We're going to have to see household formation, business formation, manufacturing pickup. We're going to have to see generally consumer sentiment improve and people feel a little better about the state of the economy and, exactly, the tax base. So, when those things occur, prices are going to get better.

In the meantime, we're pretty happy that pricing has moved up a little tick here. We're doing good on costs. The fundamentals are sound so we're just working hard through it and things feel a little better today than they did maybe six months ago, but we'll see -- we'll talk to you next quarter.

Got it. That's it for me. Thanks, guys.

That is all the time we have for questions today. I will now turn the call back to Mr. Slager for his closing remarks.

Thank you, operator. We would like to express our concerns for all areas impacted by Hurricane Sandy. Our thoughts and prayers are with you. We are happy to report that we have made contact with all the public employees and all are safe. Our facilities and assets did not incur any material damage and we are fully operational with substantially all of our locations. We are committed to providing the high level of service required to address the needs of our customers.

I'd like to thank the entire Republic team for their efforts in working through our reorganization and their commitment and dedication to operational excellence and creating the Republic way.

As a reminder, the recording of this call will be available through November 8, 2012,, by calling 203-369-1886, and using the passcode 4589. Additionally, I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activity, along with a recording of this call are all available on Republic's website at Republicservices.com.

And finally, I want to remind you that Republic's management team routinely participates in investor conferences. When presentations are scheduled, the dates and times are posted on our website along with instructions for listening to the live webcast and the event.

Thank you for spending time with us today and have a good evening.

Ladies and gentlemen, that concludes the Republic Services conference for today. Thank you for participating. You may now disconnect.