Republic Services Inc (RSG) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Republic Services fourth-quarter and full-year 2015 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG.

All participants in today's call will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Brian DelGhiaccio, Senior Vice President of Finance. Please go ahead.

Good afternoon and thank you for joining us. I would like to welcome everyone to Republic Services' fourth-quarter 2015 conference call. Don Slager, our CEO, and Chuck Serianni, our CFO, are joining as we discuss our performance.

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 discussed 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 February 11, 2016.

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 expressed 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.

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 exceeded the upper end of our financial guidance. As a result of successfully executing our strategy, the Republic team delivered higher levels of pricing, reported positive volumes, grew earnings and free cash flow, improved return on invested capital, and increased cash returns to shareholders.

During 2015, we made significant progress on our multi-year strategic initiatives. These initiatives are designed to profitably grow our business, enhance the quality of our revenue, improve the customer experience, and reduce costs.

Regarding our market position, we invested $193 million in tuck-in acquisitions, nearly two times our original goal. The transactions completed in 2015 represent annual revenue contribution of approximately $143 million at a post-synergy EBITDA multiple of 4.3 times.

And we acquired the US assets of Tervita. These assets serve as a platform acquisition in the E&P waste sector with attractive long-term fundamentals and opportunities for future growth.

Regarding our revenue enhancing initiatives, all of our markets are using our capture cloud-based pricing tool and our entire sales force has been trained on priority-based selling. Our sales program is designed to identify and attract customers that are willing to pay for our higher value service offerings.

Additionally, we now have over 500 contracts with approximately $250 million in annual revenue that use a waste related index for annual price adjustment. These waste indices are more closely aligned with our cost structure and have consistently run higher than CPI.

Most importantly, we are realizing the benefits of these revenue enhancing initiatives. During 2015, we recorded our highest level of average yield in over five years.

Regarding our customers, we continue to see very encouraging customer engagement on our digital platform. For example, approximately 1.2 million customers have enrolled in My Resource, our customer portal and mobile app, which significantly enhances our customer interaction and connectivity.

And we launched click-to-buy capabilities in approximately 50% of our residential subscription markets. Click-to-buy addresses the evolving needs of our customers' buying preferences and provides a lower cost sales channel.

Our customers see the difference in our products and services, which is reflected in our customer satisfaction metrics. Our net promoter score, which measures customers' willingness to recommend a company's products and services, improved for the third year in a row.

And, finally regarding our fleet-based productivity and cost savings initiatives, 16% of our total fleet now operates on natural gas. 72% of our residential fleet is currently automated, and 78% of our total fleet has been certified under our One Fleet maintenance program, up from 60% a year ago. These initiatives require investment, but the payback is compelling, and our financial performance reflects the benefits we are seeing.

Fourth-quarter adjusted EPS was $0.50, which exceeded our expectations. Full-year adjusted EPS was $2.06, and adjusted free cash flow was $813 million. Both exceeded the upper end of our guidance.

Core price in the fourth quarter was 3.4%, and average yield was 2.2%. Average yield exceeded 2% in every quarter during 2015.

Fourth-quarter volumes increased 90 basis points. This is the 11th consecutive quarter where we have grown price and volume simultaneously.

We returned $808 million to our shareholders through dividends and share repurchases during 2015. This includes approximately 10 million shares repurchased for $409 million. We finished the year with total shareholder return of 12.4%, which includes stock appreciation of 9.3% and dividends of 3.1%.

Our TSR performance exceeded the S&P 500 average by over eight times.

We made substantial progress in 2015 and are proud of our strong results and many accomplishments, but we have more to do. Last month, we announced a realignment of our organizational structure by combining two layers into one. This included the elimination of our three regions, the consolidation of 20 areas into 10, and streamlining select positions at our Phoenix headquarters. We are reinvesting back into our 10 area offices by creating additional operating and functional support roles which puts resources closer to our business and our customers.

Additionally, we are investing in our customer service capabilities and are in the process of consolidating over 100 customer service locations into three customer resource centers. The new state-of-the-art facilities and technology will enable better levels of customer service across several touch points, including voice, email, text, social and live chat. The savings from the realignment are funding the investments we are making in our customer focused initiatives in 2016 and 2017. We expect these initiatives and realignment will contribute approximately $35 million of annual cost savings beginning in 2018. Our ability to make these organizational changes is a natural evolution and logical next step for our Company.

As a result of developing standardized processes with rigorous controls, we are further leveraging our scale to continually improve our service offerings. Additionally, we are able to maintain our high performance business culture with field management retaining full accountability and P&L responsibility. We call this approach the Republic way, which we believe is the best way to create durable operational excellence and lasting value for all our stakeholders.

Chuck will now discuss our financial results. Chuck?

Thanks Don. Fourth-quarter 2015 revenue was approximately $2.3 billion, an increase of $61 million over the prior year. This 2.7% increase in revenue includes internal growth of 90 basis points, and acquisitions of 1.8%.

The components of internal growth are as follows -- first, average yield growth of 2.2%. Average yield in the collection business was 2.7%, which includes 3.1% yield in the small container commercial business, 3.8% yield in the large container industrial business, and 1.5% yield in the residential business. Average yield in the post-collection business was 70 basis points, which includes landfill MSW of 1.5%.

Core price, which measures price increases net of rollbacks, was 3.4%. Core price consisted of 4.4% in the open market, and 1.7% in the restricted portion of our business.

Second, our volumes increased 90 basis points year-over-year. The collection business increased 90 basis points, which includes positive contribution from the large container industrial business of 2.8%, and the residential business of 40 basis points. The small container commercial business was flat with the prior year. Our small container commercial volume includes a 40 basis point decline from non-regrettable losses of select national accounts and work performed on behalf of brokers.

The post-collection business, made up of third-party landfill and transfer station volumes, increased 1.8%. Landfill increased 2.1%, which includes positive MSW volumes of 5.5%, and C&D of 8.2%, offset by a decline in special waste volumes of 2.1%. The decline in special waste relates to same-store E&P volumes. Special waste volumes, excluding E&P waste streams, increased 1%.

Next, fuel recovery fees decreased 170 basis points. The change relates to the decline in the cost of fuel, which decreased approximately $33 million compared to the prior year. The average price per gallon of diesel decreased to $2.44 in the fourth quarter from $3.57 in the prior year, a decrease of 32%. The current average diesel price is $2.01 per gallon. We recover approximately 80% of our total fuel costs through our fuel recovery fee program. Additionally, 20% of our diesel gallons are hedged using financial hedges.

Finally, commodity revenue decreased 50 basis points. The decrease in commodity sales primarily relates to a decrease in recycle commodity prices. Average commodity prices for all materials at our recycling facilities decreased 16% to an average price of $95 per ton in the fourth quarter from $113 per ton in the prior year. Excluding glass and organics, average commodity prices decreased 14% to an average price of $108 per ton in the fourth quarter from $126 per ton in the prior year.

We believe excluding glass and organics is a better way to report average commodity prices since they are low value waste streams, and can skew the average price per ton. Our sensitivity to changing commodity prices has always excluded the impact from glass and organics.

Again, I want to remind you that a $10 per ton move in recycling commodity prices results in a $0.03 annual EPS impact.

On our website, we posted the three-year history of average commodity prices, including and excluding glass and organics. Fourth-quarter total recycling volume of 648,000 tons represents an increase of approximately 14% from the prior year. Excluding acquisitions, volumes were up approximately 3%. Cost of goods sold for recycled commodities was relatively flat with the prior year.

Now I will discuss changes in margin. Fourth-quarter adjusted EBITDA margin was 27.2%, which was down 80 basis points from the prior year. The change included a 50 basis point increase in SG&A expenses, primarily due to higher levels of incentive compensation and investments in initiatives, and a 30 basis point decline in EBITDA margin from lower recycle commodity prices.

With respect to higher SG&A costs, the increased incentive compensation expense was due to financial outperformance during 2015. I also want to remind you that we expect the cost savings from the realignment to offset the investments in initiatives beginning in Q1 2016.

On a full-year basis, EBITDA margin was 28.1%, an improvement of 10 basis points over the prior year. Margin expansion in the solid waste business of 90 basis points, primarily due to lower fuel costs, and pricing in excess of cost inflation was partially offset by the impact of acquisitions of 40 basis points and lower recycle commodity prices of 40 basis points.

When looking at individual cost line items as a percentage revenue, there is an impact from the decrease in fuel recovery fees and the sale of recycle commodity revenue. For example, the 2.2% decline in these revenues resulted in increases in labor expense of 40 basis points, and repairs and maintenance expense of 20 basis points. I want to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing.

Fourth-quarter 2015 interest expense was $93 million, which includes $12 million of non-cash amortization. Our effective tax rate was 34.3% in the fourth quarter and 37.2% for the year. In 2016, we expect to return to our statutory effective tax rate of approximately 39.5%. The increase in our tax rate results in an $0.08 EPS headwind in 2016.

Full-year adjusted free cash flow was $813 million. This performance includes a cash tax benefit from the extension of bonus depreciation of approximately $65 million. We expect bonus depreciation will provide a cash tax benefit of $30 million in 2016, resulting in a $35 million year-over-year cash tax headwind.

Now I will turn the call back to Don.

Thanks Chuck. Before I open the call up for questions, I will provide our 2016 financial guidance. We expect adjusted earnings per share to be in a range of $2.13 to $2.17, which is consistent with the preliminary outlook we provided last October. This continues to demonstrate the stability and predictability of our business. Our expected performance represents high single-digit earnings growth after excluding the $0.08 headwind from the increase in our effective tax rate.

We anticipate adjusted free cash flow to be in a range of $820 million to $840 million, which was upwardly revised from our preliminary outlook due to the extension of bonus depreciation. This performance represents mid to high single-digit growth after excluding the change in cash taxes.

We expect annual revenue growth of 2.5% to 3%, which includes average yield of approximately 2%. We believe this level of pricing is strong given the 30 basis point headwind from lower CPI based resets.

Volume growth in a range of 0.5% to 1%. We expect our volume trajectory to be relatively consistent with our full-year 2015 performance with the exception of residential due to known contract losses. Residential volumes are expected to be slightly negative.

Contribution from acquisitions of 1%, this relates primarily to tuck-in acquisitions and the rollover impact from 2015 transactions, and a decline in fuel recovery fees of 1% due to lower diesel prices.

We anticipate an EBITDA margin of approximately 28.5%. This represents 40 basis points of margin expansion over our 2015 performance.

2016 net capital expenditures are expected to be $900 million, or approximately 9.5% of revenue. This level of spending includes a $60 million benefit from cost-effectively extending the useful life of our fleet as a result of our One Fleet maintenance program. This is in addition to the $40 million of capital we saved during 2015.

We anticipate investing $100 million in tuck-in acquisitions, and we expect to return approximately $820 million of total cash to shareholders through $420 million of dividends, and $400 million of share repurchases.

I would like to thank the entire Republic team for their contributions that allowed us to meet our objectives and positioned us well for future growth. During 2016, we will continue to deliver on our promises to our key stakeholders and remain focused on managing the business to create long-term value by executing our strategy of profitable growth through differentiation.

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

We will now begin the question-and-answer session. (Operator Instructions). Al Kaschalk, Wedbush Securities.

Good afternoon, team. Nice, strong finish to the year. I want to focus, if I may, on the volume guidance. In particular I think broader thoughts were that the sector could grow about 1% to 2% in 2016. Maybe with some of these headwinds you're seeing in the broader economy, that would have been a little bit too aggressive. But did you address the 50 basis points to 1% increase that you're looking for? And in particular how large was the residential drop contracts that you lost?

It's actually a couple of contracts. This is just normal in our business. Let's focus on residential for a second. We've made a lot of noise around the fact that the residential business has been the weakest for some time. The residential business, some of those contracts, again, have CPI resets which don't really work for us over the long-term. We've been very good public-private partners with our residential customers, but we ultimately need to have contracts that work for both parties. And so we are taking a very strong approach to trying to get these contracts switched to a new index, which we talked about doing that successfully. And there are some contracts, frankly, that just don't work for us. And so we're going to continue to be focused on return on investments, s. The residential business can be a little bit weaker in 2016 as a result of that. And again, there's, gosh, how many contracts in total do we have, residential contracts? Thousands of them. So that's just the nature of the beast. That's going to be a little lumpy from year to year.

The underlying economics we think are good. So you think about how we always talk about the fact that it's population growth driving household formation that really is a critical metric in our business. If you look out at household formation, it's strong. It promises to continue to remain strong and steady growing, so that's good for us. The special waste business looks pretty solid. That's a good indicator of a good economy. And we've seen pretty consistent growth in even our landfill MSW business over the last year. So I think we are in pretty good shape. We reported on the year 4% plus growth in MSW landfill, which -- that's nice to have across the business. So we will continue to look for that.

And then with the capture tool and PBS, we are being very selective about the kind of growth we are getting. And as I said in my remarks, the 11th straight quarter where we've had both positive volume and pricing growth. We think that's the magic where we get both-and, and we continue to get both-and into the future. And that's where we are focused. That's going to deliver the margin. That's going to deliver the cash.

Thanks. If you slice the volume overall -- and I guess my question is a little bit more macro driven -- but historically, we've known that C&D has been a big beneficiary to the RSG/Allied network. How would you look at it and say from either a manufacturing side or -- what concerns should we think about or shareholders be aware of in terms of a slower economy, what that may impact, and in particular what manufacturing verticals, how much are you exposed there?

First, let's step back from all of that and remember we tend to lag. So when things go up and down, we tend to lag a little bit. But when we talk about our large container industrial temp business, that's mostly construction. It's a large container temp. When we talk about industrial large container perm, industrial is kind of a misnomer because that includes a lot of commercial retail business, large multi-family, office buildings, hospitals, anything that requires large container. Only a portion of that perm large container business is truly industrial. And we've continued to see strong performance in that permanent business, both price and volume. So, we are not concerned about that segment of our business.

Thanks a lot and good luck guys.

Corey Greendale, First Analysis.

This is Ken Wang on for Corey. So, just thinking about the incentive comp increase that you mentioned and looking at the labor costs as well, which looked like they were up about 6% year-on-year, was the incentive comp increase something that also had an effect on labor costs just given the increase?

No, the incentive comp increase really occurred all in the SG&A line. And that was due to the financial outperformance that we had during 2015. And obviously, as we look at SG&A costs in 2016, we are not expecting that to repeat.

Okay. Sure. Then in terms of the labor costs being up 6%, what was the driver there?

Sure. So, keep in mind that 40 basis points of that is due to reduction in the fuel recovery fee in commodity revenues, so it's really revenue based. And then the other 20% is really due to acquisitions.

Okay. That's helpful.

When you think about it -- because you are just looking at the straight dollar increase. Is that right? The 6%? You're just taking a look at dollar-to-dollar is what you're looking at?

Yes. (technical difficulty)

(technical difficulty) in the market generally. There's always a market or two. There's always a local competitor or two doing something, maybe making a bad decision or having bad effects where they are making an investment here and there, but overall we are not concerned about it.

Okay. Great, thank you. Congratulations on the solid quarter.

Scott Levine, Imperial Capital.

Good afternoon guys. So, last year, I think you lowered off of your preliminary guidance for 2015 due to recycled commodity prices dipping. Here you are affirming guidance. Just kind of wondering, any appreciable changes in any of the assumptions or drivers beneath the surface of your business from 3Q to 4Q, or is it really kind of status quo, no meaningful change in any particular area here?

No, actually there has been a change. We look at our outlook and look at our guidance right now. We've got about a $0.04 decrease due to commodity prices, so a pretty significant decrease since we gave outlook. But we have been able to offset that by lower fuel costs and also through other improvements in the business. And that's what allowed us to keep our guidance consistent with our outlook that we provided in October.

Got it. That's helpful. Thanks. And as a follow-up, your capital allocation plan for 2016 has you outspending free cash by a bit here. You've come off two pretty active years for M&A. Just looking for your confidence level maybe that you can continue to outspend free cash flow and grow the dividend and then still remain comfortable with where your balance sheet leverage is.

We are very comfortable with the balance sheet leverage. So right now, we are at 2.9 times. When we look at our capital allocation, both in terms of dividend and share repurchase, it is right in line with the free cash flow, and still having the capacity that we need in order to pursue acquisitions. So we are very comfortable with the capital allocation strategy and very comfortable with being able to continue to increase our dividends in the future.

This is Don. As it relates to the M&A, we can talk about the pipeline of tuck-ins. We've got a pretty good handle we think on what is out there as it relates to tuck-in opportunities. But these larger opportunities that really drove the over -- I say not overspending but in fact we spent more in M&A last year, those are lumpy. Those come to the market once in a while. So we don't have visibility to any of those today as we look at 2016. And again, we are always focused on first and foremost the tuck-ins in our current markets in our core business. So, that's what gives us the better return and lower risk, etc. But as Chuck said, we always want to maintain the right strength in our capital structure so that if the right thing does come along for us, we've got the flexibility. So we are very focused on that.

Understood. Thanks.

Tyler Brown, Raymond James.

Good afternoon everyone. Don, I want to talk about what I'm going to call your own idiosyncratic pricing story. So at this point, captures rolled out, everybody is through PBS, My Resources got increased penetration, and I assume all of that would drive better customer loyalty. So given all of that, can you give us any metrics, maybe even just directionally, about maybe churn or spread between new and lost business? And going forward, would we expect to see the gap between core price and average yield narrow?

Let's back up. First of all, it's a pretty big denominator. So, we talk about -- we talk about taking defection from 7%, which it's been -- I remember defection has been an all-time double-digit high in the past. We got it down to 9%, 8%, now 7%. It's been consistently 7% for some time. Driving that down to 6% will be quite a feat, but we are focused on extending customer loyalty. Remember, half of that defection is really competitive. The other half is what we call structural, businesses close, things move offshore, etc.

We are really focused in on the quality of services we are delivering to our customers through meeting our customer commitments, which is an internal metric, and then also net promoter score, which I said in my comments we've improved the net promoter score every year for three years. We are very, very active in trying to understand how our customers think about us.

And then we brought forward not only better quality and service delivery, but a better way of doing business with us through our digital platform. So all of those things are driven to improve the customer experience. Then on top of that, the toolset you described around PBS, capture and also, frankly, the improved CRM tool that our team uses today makes them, one, more efficient, more effective, but also helps them to get basically the price for new selling to improve. And that's what's happening with what we are seeing with price, with yield, and with churn. That churn, which is essentially the difference between business gained and business lost, or the net difference, has continued to narrow. That's been a big part of our pricing story, and we're going to continue to focus on that as we go through the year. It's the combination of all of those things working toward again extending loyalty, reducing churn, which ultimately means lower defection, and creating what we call internally willingness to pay.

And PBS is directing our sales teams, customers we believe are in the segments that are more likely to buy value and less likely to be only price customers.

So everything we've been talking about over the last couple of years getting rolled out is we think working for the greater good, and it's reflected here in our best pricing ever in 2015, or in a long time anyway, and 11 straight quarters of both price and volume growth.

And as I said -- it was an earlier question, we're going to be focused on the right growth, targeted profitable, unit growth. So we are seeing it, and we are seeing market expansion. We are seeing good cash flow as a result. So that's, as you called it, my idiosyncratic price story.

That's very helpful. Chuck, I do want to understand a couple of the underlying assumptions in the guidance, though. So first off, are you guys assuming about a $10 decline in commodities? Is that right?

$10 from what we actually saw in 2015. That's right.

Okay. And then are you expecting Tervita to contribute more or less EBITDA?

It's going to be about the same. So what we've got is a little bit of a headwind associated with drilling activity, and we're going to make that up through productivity gains and through the anniversarying of some integration costs.

Okay. And then lastly, just do you have specifically what you're kind of expecting for open versus restricted market pricing?

If you kind of take a look at the performance, Tyler, it's a similar level of performance in 2016 as we saw in 2015 with the exception of the step down in CPI-based pricing. You can probably expect a similar level of contribution.

And the subset of muni that we converted to a better index.

Okay. All right. Thanks guys.

Jeff Volshteyn, JPMorgan.

Thank you for taking my question. When we look at Congressional funding for infrastructure that was passed last year, there's a fair amount of enthusiasm about new conversations and new projects in infrastructure. Does that impact -- do you think about that market as a potential opportunity for you? Does that impact your business over the next let's say three to five years?

It doesn't make a huge impact. Think about that infrastructure bill funding roads and bridges. We do work for customers who build roads and bridges, but that doesn't generate the same kind of waste volume that comes out of track homes and multi-family homes and skyscrapers. The waste that comes from building sites is not from things like excavation and pouring concrete, but things like putting up studs and drywall and carpeting and insulation and roofing and those kinds of things generate waste from construction. So roads and bridges, we have some containers out along some of these building sites, but unfortunately for us, we don't get to pull them very often.

Okay, that's helpful. And just a few clarifying questions. On the organizational announcement or restructuring, what is the timing of it through 2016? Are there certain quarters where it's going to be more impactful?

I'll let Chuck talk about how the numbers roll in, but the reorganization are complete. So the organization is complete. The organization is functioning under the new model. So basically we have the absolute lower cost of the organization functioning today net of the one-time severances and relocations that some of the relocations have to occur over the next couple of months.

Yes, that's right. So, what we are saying is that the savings we are going to receive from the realignment will really start in February and that's about $20 million or so. Now, that's going to be offset by additional investments in initiatives primarily due to our customer resource centers, so that will be an offset within our P&L.

We are also going to have about $35 million of restructuring charges. $25 million of that are associated with the realignment that Don just talked about. A lot of that should be front-end loaded, so more towards Q1/Q2. And then about $10 million of that associated with the customer resource centers. That's going to be more spread out through the year.

That's helpful. Thank you very much.

Michael Hoffman, Stifel.

Thank you very much, Don, Chuck and Brian. Sorry about my raspy voice. I had the sense that solid waste operating leverage is a little bit masked by some of the noise that happened throughout the year. If you were to strip away Tervita, how do you think about the solid waste profitability trend through the year and coming into 2016?

Let me start by going through some of the numbers. So, if we just reconcile the EBITDA margin from 2014 to 2015, 2014 was 28%. And we got about 90 basis points of margin expansion just from the solid waste from the base business. A lot of that due to pricing above cost inflation and lower net fuel. That was offset during the year by the recycling business, which ended up being about 40 basis points, and by acquisitions of about 40 basis points.

So, to your question, you eliminate recycling and you eliminate the 40 basis points from acquisitions, that gives you a better idea of where we think the true margin potential is of the business, of the base business.

Okay. That's very helpful. Then within the cash flow sort of discussion, you finished this year's cash flow from operations with some nice healthy 18.4% of adds. That's a nice healthy increase year-over-year. Admittedly there's a nice deferred tax bump, that's bonus depreciation. Your guidance for next year looks like you're retaining a lot of that. It's still over 18%, so it's like down a little bit. Year-over-year it's still over 18%, which is up on a long-term basis. So, is that a sustainable permanent trend here now, your 18% or better of ops going forward?

Yes, we would say that is -- we believe that to be sustainable going forward. When we think about growing free cash flow on an annual basis, somewhere in the mid to high single digits is something we feel comfortable with. And that's exactly what we're doing this year if you exclude the impacts of bonus depreciation on both 2015 and 2016.

I think I misunderstood your commentary -- or didn't understand it. The $65 million was in 2015 December and $30 million is in 2018 -- or 2016? Is that what you were saying?

That's right. Yes, that's right Michael. That's right.

Maybe another way to think about this as well is that if you take a look at the 2016 guidance for free cash flow of $820 million to $840 million, even though there's a $30 million benefit from the extension of bonus depreciation, if you look at the in-year impact, so from all prior years, together with what was just extended, it's still a net negative in 2016 to the magnitude of about $20 million. So if you want to kind of think normalized, you would take that guidance and add $20 million. That's a normalized level of free cash flow had bonus depreciation never existed at all.

So think about it, your first question, the underlying solid waste business expanded 90 basis points. Again, forget about some of the other noise. The cash flow point you made is right on, and as you always say, you've got a pile of cash. Think about what we've done in the business to shift the pricing to offset costs, we've still got some good cost initiatives underway. Certainly the reorganization and CRCs are part of that. And (technical difficulty) improvement still in our product set and in our customer service and so on to continue to drive willingness to pay. So, we've shifted a gear here, and now we are funding, with some of those improvements, funding the next wave of initiatives and so on. So we think we are going to continue to do that year-on-year and at some point in the future, there will be other waves of initiatives that we talk about still. We just can only do so much at one time, but we think we've turned the corner on it.

Okay. Just so I understood Brian's comment about what you were saying I think was the $813 million less the $65 million, you'd normalize it, it would still be plus $20 million, and then that grows to $830 million would be the midpoint, less $30 million. So it's still showing growth. That's the point you were making?

I guess what I was saying, Michael, is if you just take the 2016 guide of $820 million to $840 million, if you take a look at the in-year impact of bonus depreciation, what we are going to see due to the reversal of prior years in 2016 together with the in-year benefit from the extension, when you take the net impact of that, that's still a net negative $20 million to free cash flow, or $20 million in higher cash taxes than had bonus depreciation never existed at all.

So the notion of kind of what normalized would be in a normal tax environment, it would be closer to $840 million to $860 million, not $820 million to $840 million. That's what I was saying.

Got it. Okay. That's very helpful. Thank you so much and congrats on a good year.

Andrew Buscaglia, Credit Suisse.

Thank you for taking my question. So on your fleet savings for around the 72% automated and 78% maintenance programs, do you expect those to be pretty much complete by the end of this year?

No, we will have -- let's take them one at a time. The automation is focused on the residential part of our business going from multiple individuals working on a crew to single operator vehicles. So we've moved that number up 2% or 3% a year. I think last year, we converted, what, 200 or 300 routes to single operators. That's just been ticking up. That thing will probably max out somewhere at about 80%. I'd like to think it could be a little better, but some neighborhoods and some contracts just can't quite get there. That's going to continue to tick up year-on-year until we are fully automated.

The One Fleet initiative is going to be complete this year with all of our divisions being fully trained on One Fleet, and then they will be certified. Some of them will be still be in the certification process into the beginning of next year.

But we are seeing the benefits of the most mature sites, as we talk about generally, accrue in the business. So the longer these divisions are on the One Fleet program, the better they perform, and not to mention, right, obviously, the extension of the fleet, the useful life of the fleet, which has been a very methodical, well thought out process. And as we said in our comments, we are continually taking advantage of that, and as a result, our CapEx this year is only about 9.5% of revenue.

That's right. Just to just put a finer point on that we had -- we are expecting $200 million capital savings associated with the One Fleet program. $40 million of that we actually obtained in 2015 and we are expecting another $60 million benefit in 2016.

We originally said it would take four to five years to fully roll that out or take full advantage of extending the life.

Okay. And then switching gears on the volume side, can you talk a little bit about your expectations specifically on the commercial volumes? I know they were flattish this quarter. What are you seeing or what do you expect in 2016 for that segment?

We would say generally flat. We've got a couple things going on in there. We have back to my comments earlier about more discipline, internal discipline, on our end around price and volume, finding that right balance, really using the tools, the capture tool, etc.

We have talked about in previous quarters the fact that we partnered with some nonprofitable national account business. And we're going to continue to be very certain in our actions around that.

And we've also walked away from some broker relationships. Those are third parties who don't own trucks. They don't own containers. They don't own landfills. They have no risk. They bring no value to the customer. And we have had some relationships there that we've had to part ways with.

And we're going to continue to be very selective about partners, and that will impact our commercial small container growth in 2016, and in 2017, frankly. But we will continue to be flat, at least for 2016. And ultimately as our products continue to improve and everything else, we'll get our fair share of growth. And that's the thing we always say, is look, 240 markets 42 states, we are number one or number two to market position in about 93% of those. As growth is there, we get our fair share of growth and we want to focus that share on, again, customers who are in the right segments, who value quality and are willing to pay.

Fair enough. Thanks guys.

Michael Feniger, Bank of America Merrill Lynch.

Thanks guys. You're guiding to EBITDA margins up 40 basis points. Can you just walk us through some puts and takes on what's helping you really expand that margin in a very tough CPI backdrop?

Sure. Let me put a little bit of color first of all on fourth-quarter margins. And the EBITDA margin for Q4 2015 was 27.2%. Now, included in that, you'll see that we had higher SG&A costs. Incentive comp was about 50 basis points higher. We had some legal settlements of about 20 basis points, and we had some initiative investments of about 30 basis points.

Now, the initiative investments in 2016 are going to be offset by the cost savings from the realignment that I had talked about. And we are not expecting the initiative comp -- the incentive comp and the legal settlements to recur. So just from that alone, you're ending up with 100 basis points more in margin for the quarter.

And we are looking at SG&A in 2016 closer to 10.5%. And once again, that has to -- it's a little bit higher than the 10% that we've called out just because of some of the costs that we are incurring associated with initiatives. But after 2018 and getting the full benefit associated with both the realignment and the customer resource centers, we are expecting SG&A to be back to around 10%. So looking longer-term, really we're going to be able to start leveraging our SG&A and that's what's going to be a primary driver of our margins going forward.

Just to kind of look, if you look at the full year-over-year, what Chuck just described on the SG&A expenses, that's probably 30 basis points of the 40 basis points of margin expansion from 2015 to 2016 just on SG&A. And then the rest is basically just due to better business performance.

Okay. Thanks guys. And then with free cash flow coming in ahead on 2015 and the very healthy cash flow from operations, is there any thoughts about maybe taking up that tuck-in acquisition target of $100 million higher?

We've got a target of $100 million, as I said, and we've got a pipeline. I know each of our area presidents and our general managers have a responsibility to contribute to that pipeline with ideas around companies that might be interested in selling.

Here's what I always say, right? In order to have a good deal, one of the main components of having a good deal is having a willing seller. And you need a willing seller; you need good synergy, real synergy. You like to get real assets and real property and real goodwill of customers. We don't buy startups. We don't buy serial sellers. We buy good quality companies with recurring revenue and good assets. And so there's a limit to what is out there and there is a limit, frankly, to owners who are willing to sell. And they've got to be at a point in their lives, frankly, where they are.

So we are going to be as opportunistic as we can be. We think the tuck-in really looks like $100 million. If something comes along that's not in our sights today, we will let you know as the quarters tick off.

We always have the capability to do more, and that's one of the reasons that we maintain our capital structure the way that we do. And again, we are very focused on trying to grow the core and we know the value of tucking more business into already a very strong management team and a really strong asset base. So if it's there, we will take a look at it.

Perfect. Thanks guys.

Adam Baumgarten, Macquarie. (Operator Instructions).

Sorry guys. Just a quick question on the post-collection yield. It was pretty stable quarter-over-quarter despite a pretty nice tick-up in MSW yield. Can you kind of walk me through the puts and takes there?

Let me back up and give you just a sense too and then I'll let Chuck walk you through the numbers. But remember that post-collection includes, right, transfer and landfill, and remember that a good portion of our landfill business today, MSW still comes through as municipal waste or municipal customers. And a lot of that business -- so these are cities who have their own trash fleets, their own trucks collecting their own trash from ratepayers, but they don't have their own landfills. So unfortunately for us, some of those contracts are still in with a CPI escalator. So as we are thinking about moving to new indices, that is one of the areas that we will focus on over time.

In the other part of the business, sort of the open market part of the landfill business, we do much better. But it's heavily weighted still towards that municipal waste board.

For the restricted piece of the business, the yield there is closer to 1% to 1.5%. And then to Don's point, the unrestricted price is probably closer to 3% or 4%.

Okay, cool. Thanks guys. And then just one quick one. Should we expect any material impact on key markets from the extra selling day?

Yes. We think there's going to be a downward pressure on margins, higher costs I should say, in Q1 because of the extra selling day. That's about 30 to 40 basis points.

Yes, and then the other thing, again, just to kind of keep in mind when you take a look at the first quarter is, last year, we got the benefit from a lag in the fuel recovery fee. And that was about a $0.02 EPS benefit. It contributed about 60 basis points to margin in the first quarter of 2015. So when you look at the combination of the two, just kind of something to keep in mind as you're looking at your model for next year or for this year.

Great, thanks a lot. Good luck.

At this time, there appear to be no further questions. Mr. Slager, I turn the call back over to you for closing remarks.

Thank you Emily. 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. Have a good evening and be safe out there.

Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.