Republic Services Inc (RSG) 2014 Q3 法說會逐字稿

Good afternoon and welcome to the third quarter 2014 call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Today's call is being recorded and all participants are in a listen-only mode. There will be a question and answer session following Republic's summary of quarterly earnings. (Operator Instructions).

It is now my pleasure to turn the call over to Mr. DelGhiaccio. Good afternoon, Mr. DelGhiaccio. Thank you.

Good afternoon. Thank you for joining us. This is Brian DelGhiaccio and I would like to welcome everyone to Republic Services third quarter 2014 conference call. Don Slager, our CEO; Chuck Serianni, our CFO; and Ed Lang, Senior Vice President, are joining me as we discuss our performance.

Before we get started, I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements which involve risks and uncertainties and may be materially different from our actual results. Our SEC filings discuss factors that could cause actual results to differ materially from our expectations.

The material we discussed today is time-sensitive. If, in the future, you listen to a rebroadcast or recording at this conference call, you should be sensitive to the date of the original call, which is October 30, 2014. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited.

I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables, and a discussion of business activities, along with the 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 events are scheduled, the dates, times, and presentations are posted on our website along with instructions for listening to the live webcast of the event.

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

Thanks, Brian. Good afternoon, everyone, and thank you for joining us. We are pleased with our third quarter results, which were in line with our expectations. Revenues increased approximately 5% with a balanced mix between price and volume growth. During the quarter, we continued to profitably grow our business by focusing on attracting the right types of customers, differentiating our service offering and improving our service quality.

We completed high-quality accretive acquisitions and have already exceeded our full-year goal. And we remain focused on managing cost, improving productivity, and leveraging our cost structure. We made great progress towards achieving our annual goal and we are pleased with our third quarter performance.

Some of the highlights include third-quarter EPS of $0.52, which was in line with our expectations. Year to date adjusted free cash flow was $433 million. This level of performance includes 84% of our projected full-year capital expenditures.

Core price in the third quarter was 3% and average yield was 1.4%. Average yield was consistent with our second-quarter performance, even with a step down in CPI-based pricing. We continued to see better open market pricing to offset the CPI headwind.

Third-quarter volume increased 2.1% and was concentrated to event-driven lease streams. This level of performance was strong, given the tougher prior-year comparisons.

Year to date, we have returned approximately $560 million to shareholders through share repurchases and dividends. This includes 8 million shares repurchased for $279 million. We expect to spend approximately $400 million on share repurchases in 2014.

During the quarter, we continued to implement our multi-year initiatives that enable us to execute our strategy. For example, we continued to roll out Capture, our next generation ROI-based pricing tool, and priority-based selling, our new standardized sales process. Both initiatives are focused on our open market commercial and industrial businesses.

Capture and priority-based selling were designed to work together on the same cloud-based platform to integrate the process of identifying the right type of volume growth at attractive prices. We continued to make tuck-in acquisitions that layer in well to our existing markets. Year to date, we have invested $111 million to acquire $57 million of revenue at a post-synergy EBITDA multiple of 5 times.

Additionally, we completed the acquisition of Rainbow Disposal on October 1. This high quality franchise business complements our Southern California operations.

Regarding our fleet, 14% is currently operating on natural gas; 68% of our residential fleet is now automated, and over half the fleet has completed our One Fleet maintenance initiative. I am proud of our achievements during the third quarter and remain encouraged by the underlying strength of our business. I want to thank the entire Republic team for their hard work and execution.

Chuck and Brian will now discuss our financial performance. Chuck?

Thank you, Don. Third quarter 2014 revenue was approximately $2.3 billion, an increase of $99 million from the prior year. This 4.6% increase in revenue includes acquisitions of 70 basis points and reflects the following three components of internal growth: pricing, volume, and recycled commodities.

First, pricing. We had average yield growth of 1.4% and core price of 3%. Core price consisted of 4.1% in the open market and 1.2% in our restricted business.

Average yield in the collection business was 1.5%, which includes 2.1% yield in the industrial business and 1.8% yield in the commercial business. Average yield in the post collection business was 1.3%, led by landfill MSW, which increased approximately 2%.

Fuel recovery fees increased 20 basis points. Most of this change relates to an increase in the rate charge to recover fuel costs. Fuel cost decreased approximately $2 million compared to the prior year and decreased 30 basis points as a percentage of revenue.

The average price per gallon of diesel decreased to $3.84 in the third quarter from $3.91 in the prior year, a decrease of 1.8%. The current average diesel price is $3.64 per gallon. Second, volumes increased 2.1% year-over-year.

The collection business was positive 1.5%, primarily due to an increase in landfill -- in industrial volume. Growth in the industrial line of business was 4.9% and includes C&D and other temporary business, which was up 7.4%. Volume in the commercial business was up 1.1% and residential was down 60 basis points.

The decline in residential was primarily due to contracts lost in bid situations. We will only renew business if it meets our return criteria.

The post collection business consisting of third-party landfill and transfer station volume was positive 4.1%, which includes an increase in landfill special waste of approximately 16%. Our landfill MSW volumes were up 1.8%. Our defection rate, which represents the annualized rate of customer turnover, remained stable at approximately 7%.

Third, commodity revenue increased 20 basis points. The increase in commodity sales reflects an increase in tons sold, partially offset by a decline in recycled commodity prices. Commodity prices decreased 2% to an average price of $115 per ton and in the third quarter, from $117 per ton in the prior year. Current average commodity prices are approximately $108 per ton.

Third quarter recycled volume of 569,000 tons were up 4% from the prior year. The increase relates to additional national accounts broker volumes.

Cost of goods sold for recycled commodities, increased $7 million compared to the prior year, an increase of 30 basis points as a percentage of revenue. Again, the increase relates to additional national accounts brokered volumes.

Now I will discuss year-over-year margin. Third quarter 2014 adjusted EBITDA margin was 28.2% compared to 29.5% in the prior year, a decrease of 130 basis points. A majority of the change can be explained by three line items, most of which relate to one-time benefits in the prior year.

First, landfill operating costs increased 60 basis points. In the prior year, we implemented a low-cost solution at one of our remediation sites, which resulted in a one-time benefit.

Second, risk management costs increased 40 basis points. Risk management costs were approximately $12 million higher than our expectations during the quarter or 50 basis points, due to a few large clients. On a year-to-date basis, risk management costs were 2.1% of revenue in both the current and prior year.

Third, SG&A expenses increased 40 basis points related to a bad debt recovery in the prior year. SG&A expenses were 10.1% of revenue during the quarter and on a year to date basis, which was in line with our expectations.

Of the three expense line items I just discussed, risk management created the largest variance to our current year margin performance. Excluding the 50 basis point increase, EBITDA margin would have been 28.7%. All the other cost changes represent a 10 basis point improvement in margin.

I would like to remind you that we provide a detailed schedule cost of operations and SG&A expenses in our 8-K filing. Brian will now discuss interest expense, free cash flow, and selected balance sheet data.

Thanks, Chuck. Third quarter 2014 interest expense was $87 million, which included $11 million of non-cash amortization. Our effective tax rate was 37.1% of adjusted earnings in the third quarter and 38.4% on a year to date basis. We expect an effective tax rate of approximately 39.5% in the fourth quarter.

Year-to-date adjusted free cash flow was $433 million. Net capital expenditures during this period were $678 million or 84% of our projected full-year spend. Free cash flow can fluctuate by period due to the timing of capital expenditures, cash tax payments, and working capital.

At September 30, our accounts receivable balance was $955 million and our days sales outstanding was 38 days, or 26 days net of deferred revenue. Reported debt was approximately $7 billion at September 30 and availability under our bank facility was approximately $1.6 billion. I will now turn the call back to Don.

Thanks, Brian. To recap our 2014 year to date performance, I am very pleased with our results and the progress we made in profitably growing the business and achieving operational excellence. Most of our business lines are performing well and showing strong year-over-year gains in revenue, EBITDA, and margin.

The one area of our business that continues to lag is residential. The residential line of business has the highest concentration of pricing restrictions and, therefore, the most exposure to low CPI-based resets. While we don't control CPI, we are focusing our efforts on the things we can control to improve our residential business.

Specifically, we reviewed all contracts to ensure we are realizing the full revenue potential for each contract. We identified underperforming contracts and are not exercising options to extend those without a price increase. We are working to convert new contracts to waste-related indexes versus headline CPI because they better reflect our cost structure. And, we are designing and launching priority-based selling for our municipal business segment in 2015.

We will continue to offer high-quality services and products to our residential customers, but must earn an appropriate return to deliver those services. In our earnings release, we updated our 2014 financial guidance and provided a preliminary outlook for 2015. We expect to finish the year with adjusted EPS of $1.93 to $1.94 and adjusted free cash flow of $675 million to $690 million. Both are within the guidance range that we provided you in February.

We are midway through our 2015 planning process. Based on early reviews of the budget and assuming current business conditions, our 2015 preliminary outlook is EPS of $2.02 to $2.06. This represents mid- to high single-digit earnings growth compared to our expected 2014 performance, and adjusted free cash flow of $725 million to $750 million. This represents mid-single-digit to low double-digit growth compared to our expected 2014 performance.

This outlook includes the benefit of extending the useful life of our fleet, partially offset by investment in growth opportunities in technology. Consistent with prior practice, we will provide detailed guidance in February 2015. We look forward to delivering on our promises to our key stakeholders, including our customers, communities, employees, and shareholders.

For our customers, we strive to provide the highest level of customer service. We are committed to develop differentiated and superior products that enhance the customer experience. For the communities we serve, we remain devoted to delivering safe, convenient, and cost-effective solutions while being good stewards of the environment.

For our employees, training and developing our people is a priority. We strive to be the employer of choice. And, for our shareholders, we remain committed to creating long-term shareholder value by generating consistent earnings and free cash flow growth while improving return on invested capital.

I would like to thank the entire Republic team for their contributions that have allowed us to meet our 2014 objectives and positioned us well for future growth opportunities. At this time, operator, we would like to open the call for questions.

(Operator Instructions) Joe Box, KeyBanc Capital Markets.

I recognize that the 2015 guidance is preliminary, but can you maybe just walk through some of the high level assumptions like price, volume, and maybe recycling?

No. You know what, Joe. Again, it is a preliminary outlook. We're going to give you detailed guidance in February, like we do all the time. We are in the midst of the business planning process as we speak. We're just taking a look at current trends in the business.

As you know, things in the business don't change rapidly. You understand the current CPI environment. You understand how the business works. And we are taking that current trend, kind of building it out into 2015, setting goals for the field, and understanding what the business can produce. So that is where we at, and we will give you more detail as we have it in February.

Okay. I can appreciate that. Let me try it from another angle, then. I mean, obviously, we have got guidance and planning set for 2014. So Chuck, you highlighted the three cost buckets that could potentially be somewhat onetime in nature.

But, just optically looking at 4Q guidance and what it implies, it does seem to imply that maybe some costs remain elevated. Can you maybe just talk to some of the areas that we should be aware of for 4Q?

For 4Q or for -- the year-over-year, if I look at the year-over-year -- let me answer that. Right now, we had originally guided to 28.5% to 29%. We are trending a little bit down from there.

But keep in mind that we have got about a 20 basis point headwind because of commodities. We have got a headwind of about 10 basis points due to insurance. And we have got about a 10 basis point headwind because of weather.

So, if you take all those into consideration and add that back to the 28.1% that we are at right now, we end up being kind of on the -- within the guidance that we had given at the beginning of the year. And in terms of Q4, I don't see any significant changes in our EBITDA.

One other thing to consider there, too, Joe, is that most of the things that Chuck outlined were actually prior year items that were one-time benefits in 2013 that just anniversaried. So when you talk about in the current year, the cost that was an increase relative to our expectation was just that insurance item. So, to Chuck's point, ex that when you kind of take a look at our year to date performance, we are kind of in line with what our original expectations were from an overall EBITDA margin performance.

Appreciate that, and one last one for you. Don, in the release, you mentioned that you guys have the ability and the intent to complete some larger transactions. I haven't seen that before. I'm just wondering if that is foreshadowing something or if there is any change to your acquisition strategy.

No, Joe. I think we have always said, look, we set our sights on $100 million spend. We look at a lot of deals to spend $100 million and do that intelligently. This year we had a few more deals in the pipeline, and then of course on top of that, the Rainbow Disposal acquisition came into the market and we were able to successfully complete that.

So we have got the capacity. We always say that we want to keep our financial flexibility; important for us to keep our investment grade rating to keep that financial flexibility. We want to keep some powder dry so that when there is a good deal on the market, we can take advantage of it. That is exactly what you saw as do with Rainbow.

Al Kaschalk, Wedbush Securities.

Can you add some additional detail behind the insurance? Either I missed in your prepared remarks -- or why is that elevated? And if you could start from there, please.

Yes, so our actuary reviews all open claims every single quarter. So when you think about that process of every quarter, it can introduce a little bit of volatility. But if you take a look at where we were through June, we were actually performing more favorable than our original expectations and we expected that to continue.

What we had with a handful of claims that we saw some increased development on in the third quarter, that was the $12 million that Chuck called out in his notes. But, when you take a look at a year today basis, both in the current and prior year, both are running at about 2.1% of revenue. So what I would just say is that, when we were standing there in Q2, expected the favorable development to continue, and we saw it go a little bit backwards in the third quarter.

And then just another housekeeping item. The $0.01 you show in bad debt provision, is that legacy? Is that -- what is that related to, please?

That was a bad debt recovery that we actually realized last year. And so, when you look at the EBITDA margins year-over-year, that creates a headwind for us. But that was something that happened last year, recovery from last year.

And then, I want to focus on the terms of the core business. And I mean this in a genuine way here. Don, you had said the residential business continues to lag.

That's right.

And the commercial and industrial, I guess, maybe you can comment on that, whether that is in line with your expectations. But if I take a step back and look at some of the adjustments, it doesn't feel from the outside that the conversion rate on the margin is perhaps where it could be, it should be, and probably not where you want it to be. So are there additional areas that maybe you can highlight for us that maybe still remains a struggle, absent price (multiple speakers)?

Yes. So let's back up a little bit further than that, first, okay? We have a backdrop where CPI has been averaging 1.6% for five years. And over that time, in total, 1.6% doesn't get our cost recovered just through inflation. So obviously, we battled back every year with productivity measures and other things to improve our costs.

I would tell you, with that five-year low CPI environment, and pretty steady inflation, we have done a good job running the business and managing the core business with essentially holding our EBITDA margins flattish. And, as Chuck said, if you take out some of the nonrecurring items, they are actually flat to better. So let's start with that. So that is what we have been working out ourselves -- toward is improving the business in that low CPI environment.

Again, as I said in my comments, CPI really impacts us in the residential business. And so, to say it as clear as I can, the resi business ready is just a stinker right now. We have been dealing with these price rollbacks. It is a high capital intensive business. And it is one of the reasons we are really tackling it and focusing in on it.

If we step back and look at the other LOBs, we are actually very well. And when we do the netting of all of the sort of individual issues, the growth that we are seeing in the business is coming in at a good margin. We are seeing the right growth in our commercial business, albeit slow.

We have been bragging about the industrial business growing now for several quarters. That has continued in Q3. Finally, you started to see a little bit of life in MSW volumes at the landfill after many, many quarters of zero to negative. So the rest of the business is performing pretty well and we think, frankly, very well in light of that the macro environment. It really is this residential business that has been dragging us backwards.

Let me just give you a couple issues for a couple of details. We have talked about permanent industrial being up 5.3% and -- in Q3. It was 5.6% up in Q2. Temp is up 7% -- over 7%. So, and pricing is 4.8% in temporary rolloff.

So we are managing that core business as it is recovering. We are getting more volume growth. We are getting price per unit growth and we are getting some margin expansion. And now we are starting to see that in the commercial business.

So again, it is early in the commercial. We thought it would be stronger by now, but it is positive and getting better. So we are not sure the trend is occurring as quick as we would like or probably as much as you would like, but it is happening. It really is residential for us.

So I am sure all of my guys listening on the phone right now are hard to work in figuring out how we are going to improve residential.

Okay. And, throughout the call, maybe you could comment at some point on the opportunity or the progress on the waste-related index pricing that could help you down the road and when that could start to benefit. Thanks a lot.

Let me comment on it. So I think that is your fourth question, but that is okay. It is early. It is early. Here is the issue. I think the industry has used headline CPI or some version of that in the residential business for as long as I can remember. And I have been doing this for 35 years.

So we have always had that in our resi municipal business. And even in the municipal side of the landfill business, we have used that kind of an index. It worked for us just marvelously for decades because the 25- and 50-year average of CPI is over 3%.

And as we have grown our business and built density and done acquisitions and everything else we have done to build the business over that period of time, CPI never gave us any heartburn. It was a nice annuity business. Well, again, now we have had this really strange five years of averaging 1.6%.

And if you step back, and we go back in time for years ago, we were probably expecting CPI to right itself. And every year there has been this sort of hint or promise that it could improve and it just hasn't. So we finally had to say, look, enough is enough. And CPI isn't a fair way for those municipal customers to view our business, and so we have looked at alternatives.

And so, if you look on the BLS, one of the components of the CPI basket is an index called water, sewer, trash. And we have been working on introducing that index to customers. We have done it in a very small way. We have done it successfully in a few small, I would say, very small type municipal contracts with some success.

And we are actually using our industry association and things SWANA and so forth to begin to have a conversation about what is reasonable and fair for cities to expect out of their waste hauling companies. And 1.6% CPI is not the ticket. So it is going to take a long time to get that in the business, but the good news is we are on it and we are working in the system.

And that is the expectation that my team has, and hopefully, at some point you would think maybe the industry would support it, catch onto it and do it as well, because it is not good for everybody. And, in fact, over the city, because the city doesn't want to have a partnership with a company that is as important as a waste company to keep its streets clean that is going to be constantly moving backwards in its profitability and will at some point go upside down.

So we have to -- we have got to right it. And the gross operating margin in that business has shrunk because of this situation and we have got to change it. So, early stages; hopefully, we can comment more on it as we go through it year-by-year and hopefully we can see some kind of a shift in industry shift as well.

So that is it. So we are not sitting on our hands and we are not just whining about it. We are controlling things we can control.

Scott Levine, Imperial Capital.

So, a couple of questions. Firstly, special waste volume is very good in the quarter. Wondering if that is project specific, how the pipeline looks in general. We can see this type of growth continue or what is behind it?

Yes. It is pretty broad-based. We don't have any really big, big projects to report and that is the good news; pretty strong growth. Most of it is soil-related, so contaminated soil, which I always look at that, Scott, and think that is a good sign of construction and development to come.

When they are doing land clearing and taking off the soil, it means that they are going to build something new on an old site. So hopefully that continues to fuel construction for us into the out years. So again, broad-based and we think the trend should continue forward.

Got it. Thanks. And my follow-up, maybe a little bit of color and update on One Fleet. I think you said more than 50% of the fleet is there. Are you guys running positive on that? And should we be thinking about that as potentially a margin contributor or a needle moving margin contributor, and/or a free cash flow contributor to the positive in 2015?

It is moving a little slower, still, then we had hoped. But we are more committed to it than we ever have been. So let me give you a couple of comments.

First, and maybe foremost, it is going to contribute to us spending $40 million less next year on truck capital. So as we said, we are going to age our fleet and extend the useful life of it to the tune of $200 million capital savings over five years starting in 2015. So we are committed to that.

And in the One Fleet divisions, we are seeing very good results. So let me give you a couple of stats. Maintenance cost rent in One Fleet divisions has improved by 1% to 2%. Driver productivity in One Fleet sites has contributed approximately $2.5 million to productivity in 2014.

One Fleet divisions have 30% fewer unscheduled repairs and 25% higher truck availability, or we call fleet reliability. So we think that is going to convert to what we would think is a lower driver turnover rate, higher employee satisfaction. At some point, more customer experience and improve customer experience because our fleet is up and running and we are servicing the customers better.

So we are very, very focused here on how we can take care of our customers from a service delivery perspective and a differentiation perspective, so we can improve the quality of revenue. And our technician turnover is lower -- substantially lower at One Fleet sites. And it is really hard today to find good diesel technicians, and so all of those things are real.

The divisions that we are in now that we are converting to One Fleet, it is a lot of heavy lifting and those divisions are probably costing us a little more than we thought they would going into Q3 and Q4. But it is going to come around, and at some point this backlog of workload is going to be behind us. We are going to anniversary that and we are going to get those benefits.

We are going to get all those other softer benefits I just mentioned, Scott, and we are certainly going to be able to extend the life of the fleet in a very methodical and thoughtful way without interrupting the business. And again, improving the service quality all along the route. So we're going to get it done and, again, it is just harder than we imagined, but it is absolutely the right thing for the business.

And we have got to think beyond the quarter. We are never going to be, at Republic, a slave to the quarter or a hostage to consensus. We are going to have to run the business for the long-term and do the sustainable right thing for the business.

Alex Ovshey, Goldman Sachs.

A couple of questions. First, on the volumes, just looking at the big picture is a pretty solid number in the third quarter. And I say that because last year in the third quarter you had a nice strong number as well. So you were able to deliver a nice number against what I would say a tough comp, and so a two-part question there.

Does that imply that the economy and the construction markets are sort of in a cycle where we can continue to expect sort of a 1% to 2% volume number out of Republic going forward? And the second part to that, is the volume number you guys are reporting, is that is really what you are seeing in your end markets? Or is there some market share gains that is helping benefit your volumes right now?

Again, we are not giving guidance for 2015. We are seeing good and steady volume growth. Again, the business growth, as you know, through population growth that fuels housing formation, it fuels business formation. So, as long as those dynamics continue, we will benefit from them.

Housing starts are still well below the 25- and 50-year average. So could it improve from there? It could, but we are not seeing that yet.

I would tell you that we are getting our fair share of organic growth. And we are replacing the business that we are losing. So again, we have got the 7% defection every year. More than half of that is competitive.

So we replaced that business. We are doing a good job of replacing that volume, albeit at a lower average rate. And so there is that churn and issue that impacts us, but we are getting the volume replaced and we are getting our fair share of new organic growth. That is really our goal.

On top of that, we have got to replace those units at a slightly higher rate that we have historically, and that is really our focus with things like Capture and priority-based selling. We are really hyper-focused on, internally, what we call quality of revenue. Again, as I said to Scott, really focused on the customer service delivery and everything on that end.

But we are also focused on the selling process, that point of sale decision-making that we are doing to make sure that we are signing on those new customers at higher rates year-over-year. So the things that we are doing are going to continue. If the macro environment continues, you will kind of get more of the same.

But the same thing is true with CPI. We don't have any indication in 2015 that CPI is somehow going to magically get better. And it is an 18-month lag for CPI to work through our system. So you can sort of factor that commentary into why we are giving you this 2015 preliminary outlook.

Got it, Don. Just on the pricing side, so going back to the point around potentially changing some of the residential contracts and what index they are linked to, I mean, is there any timeline you could provide around when we should expect enough progress so it would move the needle on the bottom line?

And the second part to that question and I will turn it over, is you have some really big residential contracts out there. Where are they in the queue in terms of actually going and speaking to the folks who are responsible for those contracts and potentially changing the index structure there?

Well, look, one, it is lumpy. The contracts in that business are generally five years. So, one, we are not going to have 100% success rate. Let's be fair. We would like to think over time, if the industry itself determines that the water, sewer, trash index is a fair way to go and we can start to get cities to believe that is true, then it can maybe get some traction.

But it is a five-year process to work through the entire book of business. It could be a little bit longer because we have got some contracts that are seven-year contracts, so -- and some even longer than that. But I think the bigger franchise type agreements, the contracts are longer.

However, I would say this, that those contracts, they tend to be more like real true public-private partnerships where we really are an extension of the city. And maybe because of the great job we are doing and so forth we might have some opportunity to deal with that. So look, it could be a long road, but there is nothing I am reading that is telling me that CPI is going to get better in a year or two.

There is a lot of commentary out there that informs our thinking that it could be this way for some time, and we just decided we can't wait anymore for CPI to right itself. So the decades that we have benefited from CPI, we don't know when that is going to come back. So everything else that we are doing to improve the business -- Capture, priority-based selling, improving the customer experience -- all of the work we are putting into trying to drive a higher quality of revenue, extend customer loyalty, and earn the price increases year on year, we are going to continue to do that. And if CPI comes back, then that will be a wonderful thing and it will just be icing on the cake for us.

Tony Bancroft, Gabelli.

I just had a quick question on pricing dynamics. On The Street we have heard some of your competitors on recent calls talking about holding yield and pricing. I just want to get your view what you are seeing out there, if that is what you are seeing, or if there is something different maybe.

Look, our view hasn't changed. Let me start with that. So the price volume discussion is always kind of a bifurcated discussion and people sort of get lost in some of the commentary that companies are sharing. We have -- again, a big part of our business is restricted, limited by contract to CPI. Again, not whining about it, it just is what it is. I can't go in and magically change that.

What we have said going into 2014 is that we would go into the open market that didn't have the restriction stronger to offset some of the pricing that we have lost in CPI. And we have done that this year. The open market has held up very nicely. Our open market core price is substantially better than our average.

So the core market, meaning -- or the open market, meaning open market commercial, small container business and open market industrial, so part of that is construction; part of that is permanent business. So that open market has held up well. So if you look at the pricing dynamic in that market, it has done okay.

It could be better if the landfill pricing was moving. And that is the thing that doesn't get enough discussion. The fact is, again, Republic has done a very deliberate job of moving landfill prices forward. You have heard me talk about the fact that we have year-on-year lost landfill volume.

This is the first quarter and I don't remember how many quarters, but maybe 10 or 12, maybe 16; I have no idea, that we have actually seen positive MSW volume growth. And that's just kind of keeping pace now with sort of normal -- some of the construction and some of the other growth into the market. But that is really the issue for us is what will happen with landfill pricing going forward.

We are going to continue to do what we do and we would like to think that if the market gets better as the economy improves, that we could see landfill pricing moving at a more solid rate to support the underlying economics and the supply and demand of the business.

Thank you and just -- (multiple speakers)

The other thing, obviously, is we have got a big presence in these markets. We tend to be number one or number two in size. And market density does drive margin and hold margin, and we don't want to get to a point where we are seeing gaps develop in our density.

So replacing that 7% defection every year, trying to do it better than before, using these new tools and training that we have talked about now extensively. And so back to my opening comments about (technical difficulty) we haven't changed our tune on landfill pricing, certainly, and on price volume overall.

Got it. And (technical difficulty) I know you have spoken about -- you always talk about $100 million of M&A and looking at tuck-ins inside your markets. Is there any update or what would it be -- what would it take to go outside your market? What would you be looking at for there, and are there any -- you said you are always going out in the market and looking. Are there any possibilities that have come up recently or that you are interested in?

Well, we are going to stick with our $100 million general goal. There are some opportunities out there that people are probably aware of, some big deals in the market that -- private equity deals coming back to market. We -- again, we generally look at everything, Tony, in the marketplace.

But primarily, we like the tuck in business because it comes at the lowest multiple post synergy. It comes at the lowest risk of integration because we already have management and facilities and infrastructure in place. And as it relates to the Rainbow Disposal Company, that was just a really high-quality asset that was in an adjacent markets where we already were.

And we felt that, one, that the assets were great. The management team there was outstanding. And some of their infrastructure can actually benefit us going forward in the surrounding markets. So we are going to continue on the same pace.

So I know I said this earlier, but I will say it again. It makes sense for us to stay focused on tuck-ins, in and around that $100 million pace. And then it makes sense for us to look at other opportunities when they are available, and we can get good quality assets at the right price to take advantage of that, just like we did with Rainbow. So we will continue to take that stance going forward.

Michael Hoffman, Stifel.

A housekeeping question for all of us, if you would. What is implicit in your earnings guidance for a tax rate?

This is Chuck. We are not giving that level of guidance right now. Obviously, we will get into a lot more details when we give full guidance in February.

Okay.

But, if you keep in mind that our rate in 2014 is 39.5%.

And there is no reason that is going to change, right?

We will give more guidance in February.

Okay. For whatever it is worth, guys, some of that kind of knowledge would be helpful. Well, that doesn't get into real guidance. So what is -- you have got to have some assumptions.

Year-over-year, 4Q, you were going to have about a 200 basis point margin difference. What are the onetime non-recurrings that we should be aware of?

Michael, we didn't give Q4 margin guidance, though.

Well, it is implicit in your full-year guidance.

Right now, we are saying that year to date, that we are at 28.1% on our EBITDA guidance. (multiple speakers)

Right. And a year ago you were at 30.3%.

Right. We called out some of the factors that were included in our year to date numbers, including commodities, weather and insurance. When you adjust for that, we are right in that range of the guidance that we gave at the beginning of the year. So --

So that is the point. Those numbers are in the fourth quarter as well. That is what I was trying to get at -- of last year. We got those same callouts there.

Yes. And, remember, Michael, in the last year, in the fourth quarter, which we had called out that we did benefit from some favorable environmental adjustments that were more prior year items, which brought the margin up about our original expectations. So again, when you kind of take a look at what we had expected for this year, we knew that those things would anniversary out.

Right. That is what I was trying to get at. And then, Don, you have talked about in the past you did share that $200 million in CapEx spread over five years. But you also talked about 75 basis points spread out over three or four years, of improvement as it results from automation productivity CNG, One Fleet. How do you feel about that today?

Yes. So look, we are getting the benefit from automation on the productivity side. We are getting benefits from CNG on the fuel side. The maintenance benefits are coming a little harder than that.

As I said earlier, the One Fleet initiative is the right thing to do. It is coming in a little slower than we would like. And it is costing us a little more in this quarter and in the remaining quarter of the year than we maybe expected. We also have some other things going on in there.

So again, as you know, Michael, there is a lot of mix in this business. You have got a lot of geographical mix. You have got a lot of line of business mix. There is a lot of puts and takes.

And the one thing we have found as we have dug deeper into the maintenance initiative is fleet complexity. So these emission standards from the 2008 and 2010 and 2014 engines are driving cost up on those trucks. We really were not anticipating that when we went down the road with One Fleet.

And -- but the fact is, we are probably spending more time than any company out there really understanding our fleet dynamics and trying to drive fleet costs out and anniversarying some of these costs. But, there are some things like that that are masking it.

The fact that the CPI presets in the resi business, where, again, most of our automated fleet is working, that has not helped us. So we are committed to those initiatives. We are going to continue to roll them out and see them through.

And there will be a day when we anniversary some of this bow wave cost in maintenance. And it will flatline and then we will have the benefits throughout other parts of the business.

Barbara Noverini, Morningstar.

In reviewing your residential contracts, we have talked at length about the challenge of CPI-based pricing on the solid waste side. But can you comment a little bit about the possibility of your residential recycling programs, now that commodity prices are kind of holding at these relatively low levels? How are you looking to improve this part of your residential business as well?

Well, Barbara, the review that we are doing with all of our residential contracts includes recycling as well. So we are constantly looking at improving the recycling line of business through making it more efficient at our sorting facilities. Part of what we are doing through collection methodology, by getting efficiencies there.

When we do look at residential or -- I'm sorry; recycling contracts, we tend to look at sort of 10- to 15-year returns and average using sort of an average market price. So they are not performing as well as we had hoped, but, again, all things are cyclical. So we are using all the learnings that we are putting into this now to bid new contracts and it will just get better through time.

But it is not the recycling part of the residential business that is dragging us down. It's the overall CPI environment for, again, in that line of business that is almost 30% of our total collection business. So it is a big chunk of our business that is weighing down the other components of the business that are actually operating pretty well.

Sure, got you. And do you guys have any leeway to put forth a processing fee or something like this? I know some other competitors in the industry have been talking about this.

Well, you know, things like contamination and performance criteria is sort of a normal part of these contracts. So we do our best to hold anybody who is delivering material or producing material for these contracts to their end of the bargain. So you can't just break a contract in a middle of a contract and introduce new features or new penalties. If they are not in there generally at the beginning, you don't get to pull those triggers.

And that is the issue with municipal buyers. They like to have a fixed price month to month throughout the course of the contract, and only one time a year do they want to open it up to some kind of a standardized index that you don't have to argue about. And that is the way they have bought for decades, and that is probably not going to change much except for the fact that we can get them focused on a different type of index that is more fair to a waste hauler like Republic Services, and over time just continue to move through that book of business and improve it.

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

Great. Well, thank you, Holly. I would like to thank all the public employees for their hard work, commitment, and dedication to operational excellence and creating the Republic way. Thank you all for spending time with us today. And have a good and safe evening.

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