Republic Services Inc (RSG) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to the Republic Services Third Quarter 2017 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Nicole Giandinoto, Vice President of Investor Relations.

Good afternoon, and thank you for joining us. I would like to welcome everyone to Republic Services Third Quarter 2017 Conference Call. Don Slager, our CEO; and Chuck Serianni, our CFO, are joining me 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 discuss today is time-sensitive. If, in the future, you listen to a rebroadcast or rerecording of this conference call, you should be sensitive to the date of the original call, which is November 2, 2017.

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 the 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, Nicole. Good afternoon, everyone, and thank you for joining us. Our third quarter results continue to demonstrate the effectiveness of our strategy. Solid price and volume growth as well as continued strength in our energy services business and progress on our multiyear initiatives helped us achieve high single-digit growth in both earnings and free cash flow per share.

Highlights of the quarter and 9 months ended include adjusted EPS of $0.67, an 8% increase over the prior year despite a $0.01 headwind from hurricane-related costs. Our results were positively impacted by solid execution across our business and a lower tax rate.

In July, we raised our EPS guidance range to $2.36 to $2.39. Despite the recent decline in recycled commodity prices and costs associated with the hurricanes, we remained well positioned to achieve the upper end of the range. Year-to-date, adjusted cash -- adjusted free cash flow was $606 million, a 12% increase over the prior year after normalizing for the change in cash taxes. On a per-share basis, adjusted free cash flow increased 14% over the prior year.

Free cash flow was in line with our expectations, and we remain well positioned to achieve our full year guidance of $875 million to $900 million. Adjusted EBITDA margin was 28%. Total revenue grew 6.3%. Core price was 4.1%.

Average yield was 2.5% and was strongest in our small container and large container businesses where the majority of our customers are in open markets. Third quarter volumes increased 1.6%. Our volume growth continues to be broad based and is strongest in the event-driven portion of our disposal business.

Energy services revenue was $40 million, an increase of 130 basis -- 130% versus the prior year. As part of our revenue-enhancing initiatives, we now have approximately $510 million in annual revenue that uses a waste-related index or a fixed-rate increase of 3% or greater for the annual price adjustment. These waste indices are more closely aligned with our cost structure and have historically run higher than CPI.

Year-to-date, we've invested $385 million in acquisitions, including ReCommunity, which closed in early October. The investment in ReCommunity enables us to further vertically integrate our recycling operations without adding capacity in our existing markets; to meet the demands of our customers who have told us recycling is important to them and have also demonstrated a willingness to pay; and to continue to capitalize on secular trends such as the growth in online shopping.

Acquisitions remain a core component of our growth strategy and help us improve our operating density and further strengthen our existing market positions. Our pipeline for the remainder of 2017 and into 2018 is robust and will serve as a catalyst for future profitable growth.

Year-to-date, we returned $682 million of cash to our shareholders as part of our efficient capital allocation strategy. This includes 5.7 million shares repurchased for approximately $357 million. Additionally, our board approved a $2 billion increase in our share repurchase authorization, which extends through 2020. This demonstrates the strength and confidence we have in our ability to grow free cash flow as well as our commitment to increase cash returns to shareholders while maintaining our investment-grade credit rating.

Next, I'd like to discuss some recent events. First, with respect to the hurricanes, we are happy to report that all our employees are safe. In addition, we did not incur any material damage to our assets. Our third quarter results include costs associated with the hurricanes, which were partially offset by revenue from cleanup-related work. In the fourth quarter, we expect storm-related revenue to offset additional costs. I'm extremely proud of the Republic team. I would like to thank them for their tireless efforts to care for each other, service our customers, restore our communities and protect our assets. I would also like to acknowledge the generosity of our employees and Board of Directors who have contributed $0.5 million to our employee relief fund. With the company's matching donation, the fund has an additional $1 million to further support employees in their time of need.

Second, I'd like to provide Republic's perspective on the recent increase in volatility in recycled commodity prices following China's announcement of its National Sword program. From July to the beginning of October, published OCC export prices declined 52% from a high of $237 to $113 per ton. Since then, prices have rebounded nearly 45% and are now above the 10-year average.

In the past when comparable programs were implemented, we also saw a temporary increase in pricing volatility. We believe the recent volatility is again temporary, and the pricing we saw in early October is not indicative of a new normal. Also, we haven't seen a structural change in the demand for packaging or recovered fiber and believe that continued growth in e-commerce and online shopping will further increase demand.

At Republic, we produce a high-quality product and have established relationships with contracts with some of the largest, most reputable buyers and mills across the U.S. and China as well as Indonesia, Thailand, Korea and India. As a result, we continue to sell our material without disruption to our partners across the globe and have not warehoused or landfilled any recovered material.

Recent events reinforce our efforts to transition to a durable fee-based model and the need for additional public outreach and education to reduce the amount of recycling contamination of low-value material in the recycling waste stream. Looking forward, we expect our average recycled commodity price in 2018 to decrease relative to 2017 yet remain above our 10-year historical average price. We expect a $0.01 to $0.02 headwind from recycling in the fourth quarter and a $0.04 to $0.05 headwind into 2018. We will provide an update on recycled commodity prices on our fourth quarter earnings call in February.

Finally, in September, Republic was named to the gold standard of sustainability rankings for a second consecutive year. We were the only recycling and solid waste company in the world to be named to either the Dow Jones Sustainability North America or World indices. We share the view of our customers and shareholders who have told us sustainability is important to them. We believe it drives profitability, reduces enterprise risk and enhances long-term value creation.

Chuck will now discuss our financial results. Chuck?

Thanks, Don. Third quarter revenue was approximately $2.6 billion, an increase of $153 million or 6.3% over the prior year. This 6.3% increase in revenue includes internal growth of 5.9% and acquisitions of 40 basis points. The components of our 5.9% internal growth rate are as follows. First, average yield increased 2.5%. Average yield in the collection business was 3.1%, which included 4% yield in the small container business, 3.1% yield in the large container business and 1.9% yield in the residential business. Average yield in the post-collection business was 1.3%, which included landfill MSW of 1.8%. Total core price, which measures price increases less rollbacks, was 4.1%. Core price consisted of 5.1% in the open market and 2.3% in the restricted portion of our business. This is the second consecutive quarter we've seen a sequential improvement in restricted core price.

The second component of our internal growth rate is total volume, which increased 1.6% over the prior year. Volumes in the collection business increased 10 basis points. This included a 1.8% increase in our large container business, partially offset by a 1.3% decrease in our small container business. Residential collection volumes were flat versus the prior year. Small container volumes included a 130 basis point impact from intentionally shedding certain work performed on behalf of brokers, which we view as nonregrettable. Excluding these losses, small container volumes would have been flat versus the prior year.

Within our large container business, temporary C&D hauls were up 4% and recurring hauls were up 1.2%. The post-collection business, made up of third-party landfill and transfer station volumes, increased 9%. Landfill volumes increased 10.1%, which included special waste of 24.7%, C&D of 14.5% and MSW of 20 basis points. In the fourth quarter, we expect a seasonal decline in C&D and special waste volumes.

The third component of our internal growth rate is fuel recovery fees, which increased 30 basis points. The increase relates to a rise in the cost of fuel. The average price per gallon of diesel increased to $2.63 in the third quarter from $2.38 in the prior year, an increase of 10%. The current average diesel price is $2.82 per gallon.

The next component, energy services revenue, increased 80 basis points. The growth in energy services revenue is primarily due to an increase in drilling activity in the Permian Basin where we are well positioned.

And the final component of our internal growth is commodity revenue, which increased 70 basis points. The growth in commodity sales revenue primarily relates to an increase in recycled commodity prices. Excluding glass and organics, average commodity prices increased 26% to $167 per ton in the third quarter from $133 per ton in the prior year. Cost of goods sold for recycled commodities increased 22%, primarily due to an increase in rebates.

Now I will discuss changes in margin. Third quarter adjusted EBITDA margin was 28%, which compares to 28.9% in the prior year. The change includes a 30 basis point increase in landfill operating costs, a 40 basis point headwind due to a favorable legal settlement in the prior year and a 30 basis point increase in cost resulting from the hurricanes. Excluding these items, we had 10 basis points of margin expansion from strong open market pricing and volume growth, demonstrating the operating leverage in our business.

I want to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing.

Third quarter interest expense was $90 million, which included $11 million of noncash amortization. Our adjusted effective tax rate was approximately 35% and benefited from favorable state tax settlements. We expect an effective tax rate of approximately 39.5% for the fourth quarter.

Since we received a number of questions regarding the potential impact of tax reform, I'd like to make a few comments. As a statutory tax rate payer, we would be a direct beneficiary of tax reform. For example, if a federal tax rate is decreased from 35% to 20%, free cash flow would increase by approximately $180 million. Or said differently, for every 500 basis point reduction in the tax rate, free cash flow would increase by $60 million. Year-to-date, adjusted free cash flow was $606 million, a 12% increase over the prior year after normalizing for the change in cash taxes. On a per-share basis, adjusted free cash flow increased 14% over the prior year.

Finally, as Don mentioned earlier, year-to-date, we've invested $385 million in acquisitions, including ReCommunity. At the same time, we successfully completed the sale of lower-margin businesses for $81 million, resulting in a net investment of $304 million to date.

Now I will turn the call back to Don.

Thank you, Chuck. Given the predictability and consistency of our business, similar to prior years, we are providing a preliminary outlook for next year. We are currently midway through our annual planning process. Based on our initial reviews and assuming current business and economic conditions continue, we project the following for 2018: adjusted EPS of $2.53 to $2.58; and adjusted free cash flow of $925 million to $950 million. This represents high single-digit growth in EPS and free cash flow per share despite a $0.04 to $0.05 headwind from recycled commodity prices.

Excluding the impact of recycled commodities, the business is on track to deliver double-digit growth in both EPS and free cash flow per share. We will achieve these results in 2018 by growing both price and volume for the sixth straight year, executing our strategy to drive additional operating leverage in the business, effectively deploying capital to fund profitable organic growth and accretive acquisitions and consistently and efficiently returning cash to our shareholders through dividends and share repurchases. Similar to prior years, we will provide detailed financial guidance for 2018 in February of next year.

In summary, the current economic backdrop and industry fundamentals, combined with our robust acquisition pipeline, position us well to deliver another year of strong financial results.

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

(Operator Instructions) Our first question today will come from Hamzah Mazari with Macquarie.

The first question is just on operating leverage. I think, Chuck, you mentioned 10 bps margin expansion on a high single-digit revenue growth. But at the same time, I think you talked about better leverage in '18. Maybe just walk us through what sort of costs normalize as you get into '18? The hurricane, the -- some of these landfill operating costs, do they go down? Just walk us through what changes in '18, whether leverage is much higher than 10 bps.

Yes. So there's a couple of things that we're looking at, Hamzah. One would be, as you've mentioned, the landfill operating costs possibly higher this year. We did see a sequential improvement in those operating costs from Q2 into Q3. And obviously, into 2018, we continue to see a decrease in those costs as a percentage of revenue. So that would be one thing I would point to. The other thing is the SG&A line. We do right now have the full cost of our Customer Resource Centers including in our -- included in our SG&A, all 3 centers. This time last year, we only had 2 of those centers open. And as we have talked about, we're going to continue to see leverage in the SG&A line, specifically related to those Customer Resource Centers. So those would be the 2 things that I would point to in particular.

Great. And just maybe for Don. Just any update on the commercial business? One of your smaller competitors highlighted some competitive pressures in certain urban markets. I know you guys are more diversified nationally. But just any color on what you're seeing in the commercial business.

Sure. Yes. Overall, all right, we would tell you that it's still very rational in that business. You think about the yield we saw in small container business is 4%, still very strong. Small container volume growth was negative due to, as Chuck said in his commentary, moving away from the broker business. So we've been doing that now steadily over a number of quarters, and we'll continue to do that into next year. The real reason for it being negative would be on National Accounts. So we've lost some nonregrettable National Accounts, and we've taken a pretty hardline on making sure that, that portfolio is meeting the appropriate return. And as you know, national account business can be a little choppy that way. So overall, though we would say it's pretty rational and we continue to see positive growth, container weights kind of flat quarter-to-quarter, but service increases still are greater than service decreases. So we still think there's additional upside in the small container business for us.

Just a follow-up, I'll turn it over. On tax reform, you mentioned the $180 million if tax rates go to 20%. And it's in the news, the 20%. What do you guys intend to do with the cash? Would that come back in terms of a buyback? Or how are you thinking about deployment of that cash?

Yes. Thanks, Hamzah. So first, I'd like to say that the $2 billion repurchase authorization that the board approved doesn't estimate there's -- there'd be any tax reform, right? So the $2 billion is based on our current performance, the current tax policy, et cetera. So if you take a look at what we do, historically, we have been pretty efficient returning cash to shareholders. Over the last 7 years, we've returned about $5.5 billion to shareholders through buybacks and dividends. With this new authorization, over the next 3 years, we expect to return about $3.5 billion to shareholders through buybacks and dividends. And that doesn't include any kind of tax reform. So again, when we have cash, we put it to work. So we put it to work in the acquisition pipeline. We returned it to shareholders, as I just described, sort of the normal channels. But that's what we do with it. All of this planning around cash and around our buyback strategy has us keeping our optimum leverage between 2.5x and 3x. So there really isn't a need to do anything with debt service or repay debt at this point.

Our next question will come from Noah Kaye of Oppenheimer.

Maybe starting with your commentary on the robust pipeline. Just maybe give us some color on where that's weighted to in terms of areas of the business, tuck-ins, with core solid waste, recycling. Any kind of color would be helpful.

Well, sure. Other than the ReCommunity deal, which was a large transaction by itself, which again, we bought 26 facilities. 22 are on top of our existing markets. So it's a very nice tuck-in, if you will, to densify and give us more strength in our existing markets. Outside of that, majority was tuck-ins. There were no other really large transactions to speak of. And that's what we think the majority going forward. So we'll continue to look at all opportunities, large and small, that fit our strategy. Again, we're in 240 marketplaces across the U.S. with 39 states. We will look at businesses that are tuck-ins in our current markets, that are contiguous to current markets where we can leverage management and know-how, but primarily across our core businesses.

Okay, great. And then understanding that your guidance is preliminary for 2018, I wonder if you can just help us think as concretely as possible at this point how to kind of bridge from the midpoint of this year to next year's free cash flow guidance.

We -- I will say this, that we are anticipating margin expansion in our preliminary guide for next year. Obviously, what we do in our preliminary outlook is give kind of the -- just the big building blocks here. We'll get into a lot more detail in February.

Fully appreciate it. Just wondering -- I mean, I don't know if you're factoring in any kind of potential debt refi off of that. You talked about kind of keeping leverage optimal. But I mean, given the credit markets continue to be pretty healthy, how are you thinking about debt refi opportunity over the near and medium term?

We have, over the course of the next 3 years or so, a little over $2 billion of debt that is coming due. The coupon on that debt is anywhere from the high 3s into the 5s. And so we're looking to be opportunistic as we refinance that debt. If we were to refinance debt at current levels, current treasury levels right now, there would be somewhere in the neighborhood of $30 million to $35 million worth of cash savings.

Our next question will come from Corey Greendale with First Analysis.

A couple of pretty quick questions. I understand you're not giving more specifics on the guidance. But did -- are you willing to say anything about either the GAAP tax rate assumption or the cash tax assumption baked into '18?

Yes. So as we said before, we're statutory tax rate payers. So 39.5% is what we're -- what's currently in our model.

And cash tax, Chuck?

So cash tax is once again a little over 100 million -- a little over 100% because we're still coming off of bonus depreciation. When we finally anniversary all the way through bonus depreciation, we'll go back to a long-term average of just a little under 100%, call it 95-ish percent.

Okay. And then maybe I'll do a 2-parter for my second question. Risk management costs, they've been elevated for a couple of quarters. Sort of what's driving that? What's your expectation? And the second question is, as you -- I think you have sort of backend-loaded CPI increases. And I know you're switching to other indexes. But should we expect given that, that you may see higher levels of price in Q4 and going into '18?

So in terms of your risk management question, we had a reversal, a favorable development of prior claims last year that didn't repeat this year. So that's why the year-over-year comparison looks a little less favorable. But that's not something that's long-term indicative of the trends in risk insurance. In terms of your question on CPI, right now, we're -- what we're projecting, what we're seeing is maybe CPI coming at a little -- about 2% for 2017. If that's the case, if that holds then in July of next year, July of 2018, we get step-up. We get that step-up in our restricted pricing. And that's probably worth 10 to 20 basis points of yield for us.

Our next question will come from Joe Box of KeyBanc.

So landfill costs have crept up pretty much across the space, and it seems like we're now going on about 4 years of volume growth there. So I'm curious if it's possible to not just fix the cost issues there, but maybe aggressively pull the price lever a little more than you have?

Yes. So we think that's a great idea. We've been talking about that as well. So we talked a lot over the years about landfill costs and the value of these landfills, and they're nearly impossible to replicate. They're expensive to build, to own into perpetuity. So we have been consistently raising landfill prices over the last several years. Most of the landfill volume that comes into our sites today comes from municipalities. So just like we're working to move the appropriate escalator index we use from CPI to something more like larger trash in our collection business, we're trying to do that in our landfill business as well. So we're going to continue to focus on that. For us, some of the landfill costs that have been inflated really have been from just a handful of facilities. So it's not broad based for us from that perspective. So that's why when Chuck said we think some of that landfill increase is going to come down as we go through '18, we believe that we'll get those handful of sites operating better. And -- but we agree, landfill pricing, when you look at the whole list of pricing, for us, landfill price has been 1%, and everything else is sort of a 3%, 4% when you look at the average yield. So our infrastructure needs to be looked at.

I mean, I guess, as my follow-up then. I mean, is it reasonable to think then because we've seen volume flow in at the rate that we have that we could be on the front end of a step-up or an acceleration in landfill pricing?

Well, I just described what we're going to try to do. I mean, we're -- as we're talking to municipalities about extending contracts, again, the same conversation that has taken that $2.5 billion book of residential collection contracts and converted for over $500 million of it now to an alternative index. Those conversations are now going to be had with the landfill customers as well, more municipalities. The same thing is true. We've done that with -- on the recycling processing side. We've already converted about 80% of that book over to a better -- in the most fair index or value sharing arrangement. So one by one, we're getting through that. And again, as I said, landfill is just kind of next on our horizon.

Our next question will come from Tyler Brown of Raymond James.

Chuck, so I want to make sure I have the math right. On the cash flow statement, you spent $138 million on acquisitions. You noted $385 million year-to-date. So was all of the delta, that $250 million, is that all ReCommunity? Or is there some other stuff in there?

So about $200 million or so was ReCommunity. And I don't have the statement of cash flows in front of me, so I'm not -- I'd have to look at the rest of it, Tyler.

Yes. Tyler, if you're looking at the statement of cash flow, remember that, that's year-to-date kind of acquisition, cash paid on acquisitions. So if you take the $385 million number that we spoke to, back out about $180 million for ReCommunity, which again included the 26 operating facilities and some tax attributes, you get back to a number closer to what you see on the statement of cash flow.

Okay. Okay. That's helpful. And then well, some -- so from a modeling perspective, assuming what we know now, assume that all the acquisitions that you've done is all you do, do you kind of have what the revenue rollover impact would be in '18 from those and maybe what the rollover impact from the divestitures would be?

Yes. So a net number then would be revenue contribution, about 185 basis points. Yes, that number.

Okay. And so how much are you expecting to benefit from the call center consolidation?

So right now, it's too early to tell. We'll give you detail on that, Tyler, in February.

Okay. And just maybe last one here. But is there any way to quantify how much of the landfill operating cost was maybe extraordinary? I mean, is there any number kind of that we can think about just maybe falling off in '18?

It depends on how quickly we can actually lower these costs. Keep in mind also that the majority of these costs have to deal with us reducing leachate volumes that are actually in the landfills themselves in order to make them operate more efficiently. So it really depends how quickly we're able to do that, right? So this is -- these are costs that we're incurring today to really help the long-term effectiveness of the landfill. So right now, I don't have a good estimate that I can give you in terms of the timing, but we do expect that they will go down in 2018.

Okay. And maybe -- sorry, one last one. But are you -- when you talk about margin expansion next year, are you including the dilution from ReCommunity so as we see it on the P&L?

Yes. I am including that.

Our next question will come from Michael Hoffman of Stifel.

On the operating leverage, if I can come back, there's a multi-part to it. 10 basis points, but you also had recycling very favorable. So how do I adjust for the year-over-year 26% increase in recycling prices, clearly since the margin leverage is better?

Yes. You got to keep in mind the costs that we incurred also, Michael, are associated with the recycling facility, the whole China National Sword. Because of that, as you're very familiar, there was a higher quality that needed to be produced in our facilities. That created more costs, and so that offset some of the benefit that we saw associated with higher commodity pricing.

Okay. So you're saying that there's -- well, that would actually make my case even stronger. So your margins in recycling is even lower. So if I backed out recycling year-over-year like to like, the operating leverage of the garbage company is better than 10 basis points.

It is better than 10 basis points. It's absolutely right.

Yes. That's what I'm trying to get at. What...

So without -- Michael, without giving all the detail, I mean, when we constructed here in the various parts of our business, we saw really strong operating leverage in our small container business; in our large container business where, as you know, as density grows, margins grow with it. So that part of the business is working great. We had this noise around recycling, as Chuck described, and we did a lot of acquisition work, so we've got some acquisition start-up costs in the quarter. The good news is we have a lot of acquisitions. The bad news is there are a lot of acquisition start-up costs. So we've also been investing in our digital platform, investing in some other fleet issues, as Chuck said, the leachate issues. So -- and we're making decisions around the business better that we think will all benefit us in '18, but there's definitely margin expansion going on in the right parts of the business the way we'd expect. And since we have such a strong quarter and we're still guiding to the high end of the range and producing a lot of cash flow, we're making some other investments along the way.

Okay. So following that line of thinking, what's the EBITDA and free cash flow implications of your $0.01, your $0.02 in 4Q and your $0.05 to $0.06 in -- or $0.04 to $0.05 in '18 from recycling?

Well, Michael, it's about, call it, say, like, 10 basis points when you look into 2018. 10 to 20.

10 to 20 on EBITDA?

Yes.

Okay. And then in your free cash flow outlook for next year, if you start with a $2.53 and work upwards, clearly, there's margin expansion. But when you start thinking about the components of cash flow from ops, it looks like you have a pretty healthy working capital use going into '18. I'm trying to understand why that would be versus your normal pattern.

Yes. No, Michael, we're not seeing that. We're not seeing any unusual increase in working capital.

Our next question will come from Brian Maguire of Goldman Sachs.

Just following up on some of the questions on the initial outlook for the cash flows next year. Just wondering if you can give any initial look at CapEx, either on a dollar basis or percentage of sales or even just maybe directionally from the 2017 levels where you think you'll be landing in 2018.

Yes. So CapEx as a percentage of revenue has trended about 10%, maybe a little bit less than that. And we right now are expected to be at a similar level for 2018.

And it seems like this year's cash flow and next year's guidance implies maybe something in the very low 30s as a percentage of EBITDA. I know comparing you to others in the industry isn't totally fair. You had a different tax rate, different capital structure, lots of different things. But some of the others have made a little bit of progress moving that up recently. Just wondering if you're thinking about the number that we're at this year or next year, there's any sort of unique things that might go away. Maybe it's the CapEx coming down. Maybe it's like you say, those cash taxes reverting back a little bit. But where do you sort of see that free cash flow as a percentage of EBITDA settling out in a more normalized environment?

Yes. We think that for next year, it will probably be relatively in the same zone as a percentage of EBITDA. Longer term, we are looking at the tax side of the equation to see if there's anything that we can do there to help lower the cash taxes we pay. We're obviously very much focused on our post-closure liabilities also, making sure that we're being intelligent about how we spend that cash and looking at our cash tax -- our cash interest rate also and seeing what we can do in terms of lowering the amount of cash that we're paying there. So we are focused in on it. I would say that we're working very diligently on it. I wouldn't say that we've got a lot of arrows in the quiver here in order to kind of slay this dragon. The one huge benefit for us would be tax reform. So just doing the math very quickly, if we were to get tax reform, if the federal tax rate were to go from 35% down to 20%, that would increase the conversion from where we are right now, to your point, in the low 30s almost to 40%. So it would be huge for us.

Brian, remember that as we grow, growth requires CapEx. And at the same time, we're still working on extending the useful life of the fleet. So we're only partway through that initiative, and we'll see benefit from that yet in 2018 and a little bit beyond.

Okay. And then just shifting to the recycling topic. You mentioned, I think, in response to one of the prior questions that you had a little bit of expenditure, trying to get to the [pains] back in China. I guess, they're looking to get things down to as low as 0.3%, which I think most people we've talked to said it's pretty unachievable. I guess, maybe if you could just give your own comments as to how realistic that is, given the current set of technologies that we've got in the industry. And where do you think that this spec will eventually settle out at?

Well, I think it's too early to tell. We've seen this type of thing before. Everyone agrees. They were serious about it. And -- but again, we think we can have a better starting point than a lot of people have. So I know there's been a lot of things in the press, people talking about how this has impacted them more negatively than it has us. But one, again, we're just start from a better place. We've invested a lot in our facilities over recent years to make them more efficient, to produce higher-quality pack to reduce residual. And so we're going to continue to work on it like everybody else. And it will level out at some point, but I think it's too early to tell where they'll really end up. At the end of the day, they need fiber. And packaging demand isn't going to go down in my mind. It's not going to go down in my household, I'm pretty sure. So we think we're going to be in a good place when it all shakes out.

And have you seen any pickup in export orders yet? I think we've been hearing kind of maybe some of the import licenses for '18 will be granted maybe later this month. But just wondering if there's any people who have some licenses left over that they're using now. Or any pickup just in the last couple of weeks there?

Yes. So for us, we have never had an interruption in shipping, right? So we don't warehouse our inventory material. We don't play the market. We consistently flow material out of our facilities, ship it regularly. We've never had a backup. We haven't landfilled any material. I know people have reported they have to had to, we have not. So we haven't seen any interruption in the flow of the business. So the rate structure is a whole different story but we've seen no interruption in that. As I said in my comments, we got long-standing relationships with good, reputable partners across the globe. Again, we ship a fair amount of our material domestically, even though we understand it's a global market, but China, now India, South Korea. The list goes on. So we've got a lot of outlets and we've got a lot of great partners. And as it settles down, I think we'll be in a good place.

I would back that up by this. Willingness to pay for recycling in the U.S. is on the increase. So we continue to report, for instance, in our open market business, our open market recycling customers are paying 90% of the rates they pay for solid waste because they're willing to pay. And so we need to take that same approach across our residential business, across our franchise business. The customers are saying they're willing to pay for it, and they are and because they value the idea of recycling sustainability. And their viewpoint is simply if I'm going to carry it out to the curb, I'm okay paying garbage prices. I just want you to do something positive with it, right? So -- and I want you to prove to me that you do. And that's what we're doing, and it's working. So it's been very effective in the open market. Now we got to get busy moving it into some of these longer-term contracts. But the consumerism of recycling is on the upswing. And that's what people have to understand.

Just one last one. I can't remember if you said anything in the prepared remarks -- if you did, I apologize. But any expected benefit in the fourth quarter or 2018 from some of the hurricane cleanup activities?

Yes. So as we said, we got about a $0.01 negative from total hurricane net-net in Q3. We're going to have kind of a flat impact in Q4, and then we'll get that trickled-in benefit into next year. So we're -- think about it, 3 different hurricanes where you know enough about what happened in Houston, but we've got a lot of landfill space in Houston. So we're going to benefit there in the landfill side and then through the construction material that comes through. Puerto Rico has a similar story, although had much more devastation, but we're well positioned there with landfills. We've got a great workforce in Puerto Rico. The people there got back to work within 7 or 9 days of the hurricane. So we were one of the first ones to get back to work. Landfills are in good shape. So where we have landfills, we'll get some benefit as we go through time. And then the Florida hurricane really hit, for the most part, the Keys and Marco Island, Naples, and we're just not in that market. So we just maybe lost one day of work in the process and not a lot of benefit there. So anyways, we'll just trickle in as they rebuild. And we're heavily situated, prepared in the market with great assets and great people, and we'll get our fair share of that business.

Our next question will come from Andrew Buscaglia with Credit Suisse.

Just a couple of quick ones. Most of the good ones are taken. So if you could comment -- I don't know if you had said this, but does your 2018 preliminary guidance contemplate any buyback? Like, does it assume money in there?

For the share repurchase, Andrew?

Yes. Yes.

Yes. Yes, it does. It does contemplate the buyback.

Okay. So can you comment how much? Or...

We won't give you that. We don't have detail right now. We'll give it to you in February.

Okay. And then just on the January of '18 when you announce those organizational layer and resource center changes. Exactly which line items do the -- would we modeled those into? I mean, is it just SG&A?

Yes. It is in SG&A. That's correct.

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

Thank you, Allison. To conclude, we are very pleased with our third quarter performance, and we are well positioned to achieve our full year 2017 earnings and free cash flow guidance. We will continue to manage the business to create long-term shareholder value and remain focused on executing our strategy of profitable growth through differentiation. I would like to thank all Republic employees for their hard work, their commitment and their dedication to operational excellence and creating the Republic way. Thank you everybody for spending time with us today. Have a good evening, and have a great and safe weekend.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.