Republic Services Inc (RSG) 2014 Q4 法說會逐字稿

Good afternoon and welcome to the fourth-quarter [2014] call for investors of Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. This call is being recorded and all participants are in a listen-only mode. (Operator Instructions)

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

Good afternoon. And thank you for joining us. This is Brian DelGhiaccio and I would like to welcome everyone to Republic Services' fourth-quarter 2014 conference call. Don Slager, our CEO, and Chuck Serianni, our CFO, 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 actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.

The material that we discuss today is time sensitive. If in the future you listen to a rebroadcast or a recording of this conference call, you should be sensitive to the date of the original call, which is February 12, 2015. 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 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 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 fourth-quarter and full-year results, which were in line with our expectations. The Republic team continue to execute on our long-term strategy designed to generate consistent earnings and cash flow growth while continually improving return on invested capital.

Some of our financial highlights for the quarter and full year include fourth-quarter adjusted EPS was $0.50. This result includes a $0.02 benefit from the extension of CNG fuel tax credits.

Full-year adjusted EPS was $1.96 and adjusted free cash flow was $709 million. Both performance metrics were in line with the full-year guidance we provided at the beginning of the year.

Core price in the fourth quarter was 3.2% and average yield was 1.7%. This is our highest level of average yield in the last 4 years. Fourth-quarter volumes increased 1.6%. Volume growth continues to be concentrated to construction and demolition waste.

We returned approximately $780 million total cash to shareholders during the year, which represents a cash yield of 6%. This includes 11 million shares repurchased for $400 million. We finished the year with total shareholder return of 24.7%, the highest level in the solid waste industry and well above the S&P 500 average.

Throughout 2014, we discussed our multi-year initiatives that enable us to execute our strategy. These initiatives are designed to profitably grow our business, enhance the customer experience, improve productivity, and reduce cost.

I will now recap our progress made during the year. 14% of our fleet is operating on natural gas. During 2014, we added 7 CNG fueling stations and now operate a total of 36 fueling stations.

We increased the automated portion of our residential fleet to 69% from 66% in the prior year. During 2014, we certified 14% of the fleet under our One Fleet maintenance program. Approximately 60% of our fleet has been certified since inception.

Some of the benefits we are seeing in our One Fleet divisions include 1% to 2% lower maintenance cost per engine hour, 2% greater fleet reliability, 20% fewer unscheduled repairs, and 50% lower technician turnover.

We continue to make investments in recycling facilities to improve productivity and increase capabilities while rationalizing underperforming assets. We closed seven older recycling facilities that were not earning an adequate return during 2014.

We invested $231 million to acquire $132 million of solid waste revenue at a post synergy EBITDA multiple of 5.6 times. This includes the acquisition of Rainbow Disposal, a high-quality franchise business that complements our Southern California operations.

Additionally, we entered into a definitive agreement to acquire Tervita, LLC for approximately $485 million. The acquisition of Tervita provides a platform to expand our presence in the US E&P waste sector and unites an experienced high-quality workforce with the Republic team.

We believe that E&P way sector provides attractive long-term growth opportunities and leverages our expertise in waste handling, recovery, and disposal. The assets are well positioned, with approximately 80% of the revenue generated in the Bakken, Eagle Ford, and Permian Basins. We expect the deal to close this month.

During 2014, we entered -- or we heightened our focus on our customers to differentiate our service offering, build customer loyalty, and increase willingness to pay. For example, we launched the My Resource customer portal, which gives our customers online access to their accounts and our services. Over 500,000 customers have enrolled to date.

We launched the My Resource mobile app, an expansion of our customers' online management tool. The app allows customers to schedule services and receive push notifications using a mobile device.

We implemented the tablet-based capture pricing tool, which creates a more professional sales experience and helps realize better pricing levels at the point-of-sale. This rollout is complete in 17 of our 20 areas.

And we launched priority-based selling, or PBS, which enables us to identify and segment customers' buying priorities and attract customers that are willing to pay for enhanced offerings. We expect that PBS will be fully implemented by the end of 2015.

I am proud of our many achievements during 2014, which are reflected in our strong performance. Before turning the call over to Chuck, I want to provide an update on the residential business.

Last quarter, we discussed the actions we are taking to improve performance. Since then, we have engaged many of our municipal customers and made good progress. Most of our municipal partners want a pricing mechanism that is fair for both parties and understand low CPA spaced resets have not kept pace with cost increases over the last six years.

We have continued to educate municipalities and expanded the use of indices published by the Bureau of Labor Statistics that more closely align with our cost structure. These include the Water and Sewer and Trash Collection Services Index and the Garbage and Trash Collection Index.

We are very early in the process, but remain encouraged by our initial results. The remainder of our business continues to perform well and is generating strong year-over-year increases in revenue and EBITDA.

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

Thank you, Don. Fourth-quarter adjusted EPS was $0.50, which excluded Bridgeton-related remediation charges of $0.32 and divestiture-related cost of $0.04. During the fourth quarter, we recorded a charge of $191 million, primarily related to the Bridgeton landfill.

The charge primarily relates to additional cost to operate, maintain, and replace equipment through the end of the post closure period.

We were able to make better assessment of future costs -- excuse me, we were able to make a better assessment of future costs now that the Leachate Management Facility is operational and operating costs stabilized on equipment that was operated in prior quarters. The charges accrued up front, because this is a closed site, but the cash will be spent over the next 35 years.

Fourth-quarter 2014 revenue was approximately $2.2 billion, an increase of $84 million over the prior year. This 3.9% increase in revenue includes internal growth of 2.6% and acquisitions of 1.3%.

The components of internal growth are average yield growth of 1.7%. Average yield in the collection business was 1.9%, which includes 2.9% yield in the industrial business, 2.1% yield in the commercial business, and 90 basis points in the residential business. Average yield in the post-collection business was 1.1%, which includes landfill MSW of 1.6%.

Core price, which measures price increases net of rollbacks to our same-store customer base, was 3.2%. Core price consisted of 4.3% in the open market and 1.5% in the restricted portion of our business.

Our volumes increased 1.6% year over year. The collection business was positive 1.8%, primarily due to an increase in industrial volume. Growth in the large container industrial business was 4.8% and includes C&D and other temporary business, which was up 6%. Volume in the small container commercial business was up 1.2% and residential volume was relatively flat.

The post-collection business was up 60 basis points and included landfill growth of 1.4%, partially offset by a decline in transfer station volumes of 1.3%. Within landfill, MSW was up 2.1%, C&D increased 5.5%, and special waste grew 50 basis points. We expected special waste growth to moderate in the fourth quarter due to a tough comparison in the prior year.

Next, fuel recovery fees decreased 20 basis points, most of the change related to decline in the cost of fuel. Fuel costs decreased approximately $22 million compared to the prior year, which includes a CNG tax credit of $10 million.

The average price per gallon of diesel decreased to $3.58 in the fourth quarter from $3.87 in the prior year, a decrease of 7.5%. The current average diesel price is $2.83 per gallon.

During 2014, we increased the amount of fuel we recovered through our fuel recovery fee program. Currently, we recover approximately 80% of our total fuel costs. Additionally, 20% of our diesel gallons are hedged using financial hedges. At current participation levels, a $0.20 per gallon change in diesel results in a $1 million change in operating income.

Since diesel costs decreased significantly over the last two months, we expect to realize a $0.02 EPS benefit in the first quarter of 2015. This relates to the timing of our fuel recovery fee adjustment, which tends to lag the change in fuel expense by 1 to 2 months.

We assume diesel prices remain at the current price of $2.83 per gallon in our 2015 EPS and free cash flow guidance. We expect a favorable impact to EBITDA margins in 2015, since both revenue and costs will decline by a relatively equal amount.

Finally, commodity revenue decreased 50 basis points. The decrease in commodity sales reflects a decrease in tons sold and a decline in recycle commodity prices. Commodity prices decreased 2.5% to an average price of $113 per ton in the fourth quarter from $116 per ton in the prior year.

Fourth-quarter recycling volume of 568,000 tons was down approximately 5% from the prior year. Most of the decrease relates to underperforming facilities we closed during the year. Cost of goods sold for recycled commodities decreased $4 million compared to the prior year, a decrease of 20 basis points as a percentage of revenue.

Current average commodity prices are approximately $95 per ton. This is down approximately $20 per ton from October prices, which we used to provide our preliminary outlook. This results in a $0.06 headwind to 2015 EPS if prices remain at current levels.

We are taking actions to raise prices for recycling collection services and adjusting rebates to our open market customers in response to lower commodity prices. We know our customers value the high quality recycling services that we provide and we must earn an appropriate return to deliver those services.

Before I move on, I'd like to summarize the impact of changing fueling and commodity prices on our 2015 guidance and reconcile the difference to the preliminary outlook we provided last October. The impact of lower net fuel and lower recycling commodity prices results in a $0.04 EPS headwind, consisting of a decrease of $0.06 due to lower commodity prices and an increase of $0.02 due to the timing difference of our fuel recovery fee program.

Accordingly, the low end of our 2015 EPS guidance is $0.04 lower than our preliminary outlook. This assumes recycle commodity prices remain at current levels.

The high end of our 2015 EPS guidance is only $0.02 lower than our preliminary outlook. The high end considers the impact if commodity prices return back to $115 per ton beginning in the second quarter. Excluding fuel and commodity, our 2015 EPS and free cash flow guidance is consistent with the preliminary outlook we provided.

Now I will discuss changes in margin. Fourth-quarter adjusted EBITDA margin was 28.1% compared to 30.3% in the prior year, a decrease of 220 basis points. Most of the change relates to favorable items in the prior year, which included 160 basis points from one-time environmental and risk insurance savings.

The remaining 60 basis point change primarily relates to an increase in legal accruals of 50 basis points and the timing of incentive compensation accruals of 50 basis points. And these are partially offset by a benefit from CNG tax credits of 40 basis points.

On a full-year basis, our EBITDA margin was 28.1%. I would like to point out a couple of line items. Maintenance cost increased 20 basis points compared to the prior year. Most of the change relates to increased vehicle complexity and cost to refurbish vehicles and containers to support volume growth. We continue to see higher costs to maintain newer engines due to enhanced emissions controls.

SG&A costs were 10.3% of revenue, an increase of 20 basis points compared to the prior year. Most of the change relates to an increase in incentive compensation expense and an adjustment to bad debt expense in the prior year. I want to remind you that we provide a detailed schedule of our cost of operations and SG&A expenses in our Form 8-K filing.

Brian will now discuss interest expense, free cash flow, and selected balance sheet data. Brian?

Thanks, Chuck. Fourth-quarter 2014 interest expense was $88 million, which included $11 million of non-cash amortization. Our effective tax rate was 38.4% of adjusted earnings for both the fourth quarter and full year.

In 2015, we expect to return to our statutory effective tax rate of approximately 39.5%. The increase in tax rate, together with the expiration of CNG tax credits, results in a $0.06 EPS headwind in 2015.

Full-year adjusted free cash flow was $709 million. This performance includes a cash tax benefit from the extension of bonus depreciation of approximately $45 million, partially offset by a capital pull-forward of $25 million.

At December 31, our accounts receivable balance was $930 million and days sales outstanding was 38 days or 26 days net of deferred revenue. Reported debt was approximately $7.1 billion at December 31 and availability under our bank facility was approximately $1.6 billion.

I will now turn the call back to Don.

Thanks, Brian. Before I open up the call for questions, I will provide our 2015 financial guidance. We expect diluted earnings per share to be in a range of $1.98 to $2.04. This performance represents mid- to high-single digit earnings growth after excluding the $0.06 headwind from tax-related items and $0.04 headwind from net fuel and commodity.

We anticipate adjusted free cash flow to be in a range of $710 million to $740 million. This performance represents mid- to high-single digit growth after excluding the cash tax impact from the expiration of bonus depreciation and impact from net fuel and commodity.

We expect annual revenue growth of 2.5% to 3.5%, which includes average yield of approximately 1.5%, volume growth of 1.5% to 2%, contribution from acquisitions of 1.5%, a decline in fuel recovery fees of 1%, and a reduction in recycle commodity revenue of 50 basis points to 100 basis points.

We anticipate EBITDA margin of 28% to 28.5%. Our 2015 EBITDA margin guidance is consistent with our slightly up -- or slightly up versus our 2014 performance. Most of the expected improvement relates to the impact of lower net fuel.

2015 net capital expenditures are expected to be approximately $855 million. This level of spending includes a $40 million benefit from cost-effectively extending the useful life of our fleet, offset by growth capital of $35 million, infrastructure development of $15 million, and investments in technology of $10 million. Our 2015 guidance does not include the pending acquisition of Tervita, LLC, which we anticipate will close this month.

We expect to maintain our 2015 full-year EPS and free cash flow guidance after the deal closes, since integration costs and infrastructure development expenditures are projected to offset the contribution from the acquisition in the first year. This is consistent with the expectation we provided when we announced the deal in December.

The long-term business fundamentals and strength of our assets has not changed. We will continue to manage the business to create long-term shareholder value. In 2015, we will remain focused on executing our strategy, which is designed to profitably grow our business through organic growth opportunities and acquisitions, gain pricing power through differentiation and superior service delivery, improve productivity and reduce costs through our fleet-based initiatives, generate consistent earnings and cash flow growth, and continually improve return on invested capital and increase cash returns to shareholders while maintaining a strong capital structure.

We look forward to delivering on our promises to 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 developing differentiated and superior products that enhance the customer experience.

For the communities we serve, we are the go-to resource for delivering safe, environmentally-friendly, and innovative solutions that make communities better. 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, improving return on invested capital, and increasing cash returns. 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, I would like to open the call to questions.

(Operator Instructions) Joe Box, KeyBanc Capital Markets.

So 1.5% to 2% volume growth, that looks pretty good for 2015. Can you maybe just walk us through by activity or at least directionally give us a sense of where you see that coming from?

Sure. Well, you know, again, the bright spot in volume for 2014 has been concentrated to construction and demolition. So we think those trends will continue through 2015.

We did start to see at the end of 2014 a little bit of MSW volume activity tick up in our landfills. We haven't yet really seen much activity of real growth in our commercial business. We don't have much of that baked in, really, in 2015, but that is maybe where the upside lies if we can start to see some of the broader economic recovery start to impact our commercial business.

It's directionally good, but we haven't seen the uptick that we'd hoped so far. But somewhere out there on the horizon for us.

Yes, and one of the ways to look at it, too, Joe, is if you kind of look at our full-year performance this year from a volume perspective, it was 2%. So next year being 1.5% to 2%, really kind of a continuation of what we saw in 2014, with the exception of when you take a look at special waste.

Special waste was pretty strong this year, really coming off of a really low comp from the prior year. So again, that would probably be the one difference that's expressed as far as the rate of growth. But other than that, relatively consistent with 2014.

I appreciate that. And I guess I thought that, Don, you would have mentioned maybe the commercial business was a little bit stronger. And I think you mentioned last quarter, it was up 1.8%. This quarter, it was only up 1.2%.

I guess I'm a little surprised to not see that sequentially ramp. Is there something out there, whether it's pricing or just markets that could be holding that back?

Yes, Joe, I'm not sure where you got the 1.8%. I'm looking at Q3 of 2014 was 1.1% in all that growth. So we ticked up a little bit in Q4.

No, no, that was the yield --

The average yield in commercial was 1.8%.

Right.

Okay.

In commercial Q4, yes. Or Q3. So it's -- again, it's trending well. Again, part of this is our focus is improving yield and improving the quality of the sale and reducing churn and those things.

So we are really focus there, but we think continued volume in commercial will look consistent with what it is or it's been. And that -- again, if we see broader improvement, then we will be the first to talk to you about it.

Yes, Joe, just to give you an idea, the commercial volume has been ranged down between 1.1% and 1.3% for the last 5 quarters, with an average of 1.2% for the full year.

Appreciate that. And just one last one, then I'll turn it over. Do you guys think that this complete fall off in recycling prices could potentially be the straw that breaks the camel's back here?

I guess what I'm trying understand is if this could actually be a positive and it might be the impetus to structurally improving this business. I know you guys have closed couple of facilities, but do you think that this might cause a broader-based industry rationalization or just the opportunity to go back to clients and break or restructure contracts?

Well, here is what I would tell you. First of all, this is being impacted by really broad global macro issues. So you got this issue of the ports compounding that, but you got supply and demand issues that are global. You've got China economy. You've got all that going on.

We've not seen a precipitous fall like this in quite some time. Over the long term, we think it probably comes back. Keep in mind that recycling is a core offering for us. It's something -- it's a product or a service that our customers want to buy. I think they value it more, probably, than sometimes the industry thinks it does or they do, so we're going to look at opportunities certainly to price our commodities in our recycling services in the open market.

As you can imagine, we've already adjusted our tipping rates at our facilities in the open market. We've got a number of really long-term contracts with large municipalities that we are bound to deliver on through the remainder of the term. We will do that.

We will continually look, to your point, Joe, for ways to structure things better. But just generally, municipalities are not built to accept the risk of commodities -- commodity markets, so we've got to figure out a better way to do that.

Thank you.

Al Kaschalk, Wedbush Securities.

I just want to press further on C&D waste. Don, could you just maybe share, given your footprint, is this broad-based and are we still climbing along with either retail occupancy rates or starts on housing in terms of this activity?

Yes, so it is broad-based. We are seeing this growth year over year and consistent quarterly growth across the entire Company. We're not only seeing volume growth, but we're seeing pricing growth. So temporary pricing is up almost, frankly, as much as the volume is up.

So we are growing units across all of our geographic areas and we're growing price per unit as well. So the demand is there. We've put a lot of our equipment back to work.

Chuck made the point that we spent a lot of maintenance expense this year getting small rollup boxes put back in service. So we think it's going to continue and remember, household formation is still not at the 50-year average. So we think over time, it could get back to that.

But I think we've got a pretty solid plan for 2015 in that we will see this sort of continued volume as we saw in 2014 in C&D. And of course, we have seen it at our landfills, too, which again, very broad-based.

I think I've told you before. We don't really track our hauls between residential and commercial. It's not that meaningful to us. We track more between permanent and temporary. That's what the meaningful statistic is in our business.

Okay. And the point being there is that the temporary number has been strong, but it's also been benefiting from price.

Yes, absolutely. Think about almost 5% price per unit per haul basis across the business. That's pretty strong. So again, we would expect that -- we've been talking about this for year. This is what we would expect, right.

As volume demands come back, we would be able to get our fair share of the growth naturally because our footprint so strong and that we would be able to price for it accordingly. That's what we've done.

Yes, in the [tenth] business in the fourth quarter, the hauls were up 5.6% and the pricing was up 4.8%. So you are getting double-digit organic growth in that portion of the business.

The other question I had, and sort of two-part, but given what's happening with diesel prices or trash [conservation] costs, etc., two things. One, do you expect or have you started to see any benefit in the residential side of the business? Maybe reduction on consumption and then therefore waste generation.

And then secondly, can you speak to the dynamic that may occur as a result of lower diesel prices by private companies or competitors in the market that theoretically could get more aggressive on price and do we -- is that out there? Is it a concern or how would you respond to that?

Okay. So first of all, you know that our fuel -- we're basically have a natural hedge built into our operating model with our fuel recovery fee and then our fuel hedges. So as Chuck spoke to in his remarks, we're not going to see much of a benefit for dropping fuel prices. So that's that.

As far as consumption goes, will the average consumer, because they are spending less on fuel, spend more in the economy? I think maybe over the long term, I saw some stats here today that said that people are pulling back a little bit because we are not sure that this low fuel environment is going to last very long.

But if it lasts long enough and it looks like a structural shift, then maybe people start putting some of their cash back to work in the economy. That would certainly be good for us in the small container and the landfill business. So we'll see what happens with that.

As far as what it does competitively, certainly, the small companies that don't have fuel recovery fee, that don't have this pass-through mechanism, they are experiencing today sort of an immediate improvement in their operating expenses. If they are really smart, they will hang on to that and realize that this fuel environment may not stay low for very long and they won't just get it back in their pricing. That would be the smarter way to look at it.

If, at the same time, our customers are experiencing price benefit from us, because we have this fair [ferf] mechanism that as fuel goes up, we share the risk, and as fuel goes down, we share the benefit. And so our customers are seeing some pricing relief on their bills, which I think positions us pretty well with the customer as a contractor's apartment that's being fair.

So we have not heard of any irrational competitive behavior because of fuel issues at this point. I don't know that I expect it. It's not keeping me up at night, Al. I think overall, with dropping fuel prices, our customers probably feel pretty good and we are doing a good job for them. And we will continue to adjust their pricing as necessary with our other inflation.

Thanks a lot. I will hop in queue.

Adam Baumgarten, Macquarie.

Just a question -- how should we think about the capacity for additional acquisitions and share repurchase, given the Tervita deal?

Well, we gave guidance that we were thinking about $100 million of spend again in this year in and around tuck-ins in the core space. There may be some opportunity to spend some acquisition dollars in and around the E&P space over time.

But basically, you can figure that we will spend another $360 million this year on share repurchase. $100 million on tuck-ins. We have certainly got the debt capacity to do that. Of course, we're going to pay a dividend again and we have consistently raised the dividend through time.

So our same balanced approach to cash utilization is -- been part of our strategy for a long time. It's part of the value that we create for our owners. That really hasn't changed.

The degree of acquisitions is somewhat limited by the pipeline. We're only going to do quality deals. We're not going to buy companies that haven't been around for a long time with good assets, so that focus hasn't changed.

Yes, the $360 million, Adam, is actually the amount remaining on our authorization, so we intend to complete that in 2015.

Great, thanks.

Michael Hoffman, Stifel.

So I'm trying to reconcile the cash flow from guidance at the beginning of 2014, what you did, and where bonus -- because you didn't think there is going to be any bonus depreciation when you gave us guidance last year at this time. And at the end of the year, we have it.

But I'm trying to understand what's the delta between the $709 million and the original guidance? Is it $20 million and so X bonus depreciation, you came in at $689 million. That's still within your range. It was a good number and bonus depreciation helped by $20 million?

Michael, you're right -- this is Chuck. You are right on with that. But let me just walk through that, just in case others on the call don't follow it.

So free cash flow, we reported $709 million for the year. You've get a benefit from bonus depreciation of $45 million and then we've got a $25 million offset to that, because we pull forward the capital into the year, which gets us to $689 million on an adjusted basis. And that falls actually on the high end of the range in our guidance that we gave in October of $675 million to $690 million.

Right, okay. So that's cool. And then what -- is there any bonus depreciation in the $1.555 billion to $1.585 billion cash flow from ops assumption?

No, no. Actually, Michael, it reverses in 2015. So when we think about free cash flow for 2015, you actually have a negative, because the bonus depreciation of $25 million. And that's offset by the $25 million of pull forward capital that we have -- the capital that we pulled forward into 2014. So that ends up being a net neutral in 2015.

Okay. All right, that's great. Special waste trends, I get that you had a tough comp in the fourth quarter. But are you starting to see special waste coming from nonresidential, site prep, that type of activity that could suggest that while it may not be in your guidance, and 1.5% to 2% seems like a good number for volume to me. But if nonres construction starts showing up, maybe that number gets stronger and a leading indicator would be special waste?

Yes, special waste has been strong for us. You are right, we are seeing a little bit more of that activity. It's probably too early to call it, but you are exactly right.

When we see more and more of the kind of land clearing jobs that are a precursor to industrial and commercial development, it will bode well for that part of the business, but also construction volumes at large.

Okay, great. Thanks.

Charles Redding, BB&T.

Where do you peg the current differential right now between CNG and diesel? I guess, has this dislocation impacted any kind of plans for CNG fleet spend?

I would say that the difference between the two is probably about $1 right now. And that doesn't have a lot of impact on our long-term plans. We still think that the movement into CNG makes sense, so we are going to continue that initiative.

Yes, so this year, the CNG trucks that we're purchasing will be delivered into facilities where we've already got the infrastructure. Where we have already set up the fueling stations -- as you know, that's a big part of the investment when we convert fleets over.

So we won't be putting in as many new CNG fueling stations as we have over the last couple of years. We will just continue to bring density to the fleets where we already have the investments made.

Okay. And then maybe you could just speak a little more to overall trends on the residential side? What are you seeing here and are you seeing any projected pull back in spending requests or perhaps any regions that are stronger than others, at least with respect to residential?

No. I guess the most exciting trend that we have going on in residential is that we've been converting some of our residential customers to the new waste index. Or indices.

And so we've got -- of our total revenue, call it $700 million to $900 million of residential business that's on a typical five-year contract. So these might be anything from an HOA to a large -- call it a large city, but a typical five-year contract in that business. And so $700 million, $900 million of total annual revenue.

We've already converted about $70 million of that revenue to one of the new indices. So getting them off of CPI. And it's going to take some time to work through the remainder as contracts come due, but we've been at that now for a couple quarters, making some pretty good progress.

So the people we've been talking to so far have been pretty open to that idea. We haven't been successful everywhere, of course, but we're going to continue to move down that road. That's probably the most compelling thing that's going on for us in residential and where most of our focus lies right now.

Okay, thanks, Don. Nice job on the quarter.

Tyler Brown, Raymond James.

So Chuck, just thanks for the help on the recycling expectations. So can you give us, though, a little bit of color on your composition of your recycle basket? Maybe by type, say, fiber, glass, plastics, etc., etc.?

Well, fiber makes up about 70% of our overall recycling. The rest of it is made up of, as you mention, glass and various plastics and aluminum, also, and other metals.

Okay, good. Is plastics bigger in that mix? Of the three?

It's probably about 5% or so of the mix.

Okay, perfect. And then Don, I'm kind of curious. Can you give us a little bit of -- a little more color on capture. I think you said 17 of 20 areas. I assume that's the preponderance of your salespeople? Is that a good way to look at?

Yes, that's right. We will get the other three areas completed here pretty soon. But we just didn't get them done by the end of the year.

Okay. So bigger question -- where does that really attack in average yield? Is that designed to go after gross price? Is it about reducing rollbacks or is it about narrowing the loss to gain spread or is it kind of all of the above?

Yes, so when you think about churn, think primarily of the business lost versus business gained. So again, we review and adjust pricing on every customer throughout the year in what we call our RPM process. So 12 monthly buckets, basically.

Every customer gets reviewed because we have cost inflation. Even net of our productivity gains and everything else we do to improve the business, we still have cost inflation. Better we cover that. So everyone gets adjusted.

There's some negotiation, there's some rollbacks. There may even be some losses of customers -- some of those due to pricing, some of those due to just competitive behavior. Every once in a while, we make a mistake and don't give the service that we need to give and customers may leave for that reason. Fewer and fewer of those, let's say.

But as we are replacing those customers that we lose -- and remember, we've got about a 7% defection rate in our business every year. 7% of customers leave us for some reason. We replace those customers.

Well, the capture tool is designed really at the heart of that. So as our sales reps are out in the marketplace calling on new accounts -- these may be new from competition, they may be new new. Brand-new businesses springing out of the ground. We want to make sure at the point-of-sale for those new accounts that we've got better controls in place to get the very best pricing in that situation.

So capture allows our salespeople one, to be more efficient. They cover more ground. They can see more customers. Two, when they get in front of the customer, they can do a better job of understanding and segmenting that customer and understanding their needs. That ties right into the PBS selling initiative we call priority-based selling.

So between the PBS training and the capture tool, we think our salespeople now are better equipped to go in and get better pricing on those new customers by doing a better job of understanding what's important to them and what they are willing to pay for.

It also, again, makes them more efficient. It makes, actually, the experience better for customers, because it's a tablet-based tool. We can show the customer their sample invoice. We can get a customer's signature on the tablet for their electronic service agreement. The whole process just gets tighter and better.

And we've got better controls. So it's a cloud-based software, so if we want to raise prices in Denver tomorrow, tonight we can make price adjustments to the actual price sheets that the salespeople use. And tomorrow, they can be selling at higher prices with very stringent guardrails and limits on their authority on what decisions they can make them in front of the customer. So that was a mouthful, but does that help you, Tyler?

No, that's great color. So as of to date, are you seeing any reduction in churn and/or the gap between loss to new business narrow?

Yes. So we look at average selling price of new customers as kind of on a per-unit basis is one of the ways we do that. You think about average yield in our -- average yield in our commercial business in Q3 was 1.8%. In Q4, it was 2.1%.

This is largely focused on the open market commercial and open market industrial business. It's not necessarily the municipal business. It's not the residential subscription business. It's those two big open market verticals for us.

And we are seeing improvement. We're getting great feedback from the field, great feedback from the sales team. It makes their jobs little easier and so it is the right thing to do. We're excited about it. We're going to roll out these next couple of areas and then continue to move forward from here.

Okay, that's great. And then if I can squeeze one maybe last one in. So clearly, residential has been a big drag, just given CPI. And you noted some great success on the new indices -- some great data, actually, that you gave.

But how should we think about this business longer term? To me, it's probably one of your lower ROIC businesses. Would you look to retrench if you really don't have any pickup in CPI and/or success on the new indices?

Well, one, we are having success. Again, we're not going -- I wouldn't advise you to extrapolate that success easily. It's very difficult work. Though the business we have has an ROI that's above our WACC. So it's returning positively. It just has fallen off from where we've come from.

And so -- look, we went through a really tough recession. These municipalities faced with these municipal pensions that were failing, faced with their tax bases crumbling -- property taxes and all the rest of it.

The economy is -- has been battling back. You see all those metrics in the economy. We have been good public-private partners to these municipalities. We did the right thing by trying to help them rightsize their cost in the time of trouble. We are, frankly, not willing to go in any lower because we can't, and it's time for us now to expect a more fair and reasonable pricing mechanism in our contracts going forward.

The other thing to remember is four years ago, when we were first living for the first couple years in this low CPI environment, nobody thought -- nobody I'd talked to thought CPI was going to stay low. Now back now four years ahead of that to where we are today and no one really believes that -- no one sees CPI normalizing to its 25-year average of above 3% and everyone sort of agrees on the fact that the CPI is being manipulated.

So we can't live in that environment. And so we are moving forward, as I said, with the new indices. We're not going to do business or take new business that doesn't meet our return criteria. And we intend to improve this business over the long term. And we've got some good traction so far.

All right, perfect. Great stuff. Thanks, Don.

Alex Ovshey, Goldman Sachs.

Don, on the CPI point, I think over the last couple months, the Index has actually drifted lower, probably partially due to the decline in energy. Are you anticipating any potential headwinds from CPI in 2015 or is it going to be potentially more of an issue for the Company in 2016 if it stays at these levels?

You've got it right. We've got that 12 month to 18 month lag on CPI that -- the way it works through our pricing. And it will be more of a 2016 event for us. So we're hoping that these low CPIs that are being forecasted start to bump up a little bit between now and the end of the year. But for 2015, we won't have much impact from it.

Okay, that makes a lot of sense. And then on the closed acquisitions in 2014, can you talk about what the expectation is for contribution to EBITDA from those acquisitions in 2015? And I know you talked about a post-synergy acquisition multiple. How long could this typically take to accomplish the synergies?

This is Chuck. So most of those acquisitions are relatively small, but probably in the $2 million to $3 million range. And I would say that we can get them up to the Company's current margins relatively quickly, so they will perform at pretty much -- at post-synergy levels in 2015.

Okay. Appreciate that, Chuck. And then just last question for me. You spent some time talking about some of the new customer service tools that are out there.

And I'm sure it's early, but do you think that you could potentially reduce the churn rate in the business as a result? I know that the 7% number we always talk to, but is part of the goal with these new customer service tools that that number potentially comes down? Are you seeing any progress at all on that front?

The tools we talked about, the PBS and the capture, really are really focused at bringing on new business correctly. When you think about defection -- the 7% of business that we lose. The way we are focusing on that, Alex, is really through all of our customer service metrics.

So we track across the entire Company at every division. We track missed pickups. We track service commitments. We've got a number of service commitments that each of our general managers makes to customers in each of our divisions. We know what their adherence is to those commitments.

We also use something called net promoter score, which we have talked about in the past. And we get direct feedback from our customers in every one of our markets on how they feel about our service and whether or not they would recommend us to somebody else.

So we focus on those customer metrics to understand how we're doing in servicing our customers and how they value us. And basically, we are trying to drive all of those metrics up, because we want to extend customer loyalty.

We want customers to come with us, we want them to stay with us because we are a great service provider, and then we meet their needs. And we handle all of that for them. That's our tagline. We will handle it from here. So we are working on that.

Can we get defection down from 7%? Well, it used to be 10%. We've brought it down to 7% and we will see where we go from here. We do all this, we know our service metrics are improving. Missed pickups are down, service commitments are up, and our net promoter score has improved dramatically since we introduced it.

So we also brought customer service metrics into our compensation programs for our general managers. So everyone has got some skin in the game now to improve the customer experience for each and every one of our customers. So that's how we're looking to get that done.

Appreciate all the thought, Don. Thank you.

Thank you. And that's all the time we have for questions today. I will now turn the call back to Mr. Slager for his closing remarks.

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

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