Republic Services, Inc. (RSG) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Fourth Quarter 2012 Call for Investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your hosts for today's call are Don Slager, President and CEO; Glenn Culpepper, CFO; Ed Lang, Republic's Senior Vice President and Treasurer. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Lang. Good afternoon, Mr. Lang.

Good afternoon, Holly. Welcome, and good afternoon, and thank you for joining us. This is Ed Lang, and I'd like to welcome everyone to Republic Services Fourth Quarter 2012 Conference Call. Don Slager, our CEO; and Glenn Culpepper, our CFO, are joining me as we discuss fourth quarter 2012 performance and 2013 guidance. Before we get started, I would like to take a moment to remind everyone that some of the information that we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 7, 2013. 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 a recording of this call are all available on Republic's website at republicservices.com. And finally, I want to remind you that Republic's management team routinely participates in investor conferences. When presentations are scheduled, the dates and times are posted on our website along with instructions for listening to the live webcast of the event. With that, I'd like to turn the call over to Don.

Thanks, Ed, good afternoon, everyone, and thank you for joining us as we discuss Republic Services 2012 results and 2013 guidance. As I look back over 2012 performance, I'm proud of the Republic team and how in spite of a less than favorable economy, we executed on our long-term strategy and maintained our track record of generating strong cash flows from the business. Consistent with our balanced approach to cash utilization, we reinvested in the business and returned a significant portion of free cash flow to our owners, which included dividends of $329 million. We raised the dividend approximately 7%, demonstrating our practice of steadily increasing dividends. Our dividend payout, as a percentage of free cash flow, was approximately 43%. We repurchased 11.8 million shares for $325 million in 2012, which was consistent with our plan. We have $324 million remaining on our share repurchase authorization, which we expect to complete in 2013. Over the past 9 quarters, we have repurchased approximately 8% of the company's outstanding shares. In 2012, we returned approximately $655 million to our stockholders. This translates to a cash yield of approximately 6.3%, which is the highest in the industry. Additionally, we completed approximately $100 million of acquisitions, our highest level of investment in 4 years. These acquisitions have run rate revenue of $65 million and EBITDA of $23 million. We continue to work on additional transactions and expect to maintain this pace of acquisitions in 2013. Our financial flexibility enables us to complete these accretive transactions and gives us the capacity we need to pursue future deals. I will now discuss some of the other financial and operational highlights from 2012. We recorded revenue of approximately $2 billion in Q4 2012. Core price growth in the quarter was 1.1%, which was in line with our expectations. Net price increase to customer, defined as price increases less rollbacks, was 3.2% in the fourth quarter. Volumes decreased by 0.8%, which is made up of growth in collection business, offset by a decline in the post collection business. Our collection business grew 0.9% versus the prior year, which includes 5.8% increase in temporary roll off hauls. Within the post collection business, the majority of the volume decline can be attributed to contract losses that we have previously discussed and lower special waste streams. Our fourth quarter adjusted earnings per share was $0.37, this includes a remediation charge for a closed landfill of $37 million, or $0.06 in EPS. Excluding this charge, our EPS would have been $0.43. Full year 2012 adjusted free cash flow was $768 million, which was in line with our expectations. Full year 2012 adjusted free cash flow per share was $2.09 or approximately 16% higher than our adjusted full year EPS of $1.80. This demonstrates the strong cash flow characteristics of our business. We saw continued growth in our recycling business. Q4 recycling facility tons increased approximately 3.5% over the prior year. Our safety performance continues to improve with a 3% favorable reduction in our frequency rate. I will now discuss our 2013 financial guidance. Consistent with prior practice, our guidance is based on a current economic condition and assumes fuel and recycled commodity prices remain at current levels for the full year. We expect 2013 adjusted earnings per share to be in the range of $1.86 to $1.91. Our guidance assumes an effective tax rate of approximately 38%. We anticipate 2013 adjusted free cash flow in a range of $675 million to $700 million. We expect annual revenue growth of 2% to 2.5%, with core price improving 1% to 1.5%, acquisition growth of approximately 1% and relatively flat volumes. We expect volumes to remain slightly negative in the first half of the year until we anniversary the contracts lost in 2012 and expect to achieve positive volume growth in the second half of the year. Our EBITDA margin guidance is approximately 29%. 2013 capital expenditures are expected to be $860 million and $835 million net of expected proceeds from sales of property and equipment. Our guidance for EPS and free cash flow represents high-single-digit growth after excluding the impact of a higher effective tax rate and higher cash taxes. This level of growth demonstrates the strength of our business, which is well-positioned to take advantage of an improving economy. Before I turn the call over to Glenn to discuss our 2012 financial performance, I would like to take a moment to thank Tod Holmes for his steady leadership, his financial stewardship and guidance. As you know, Tod retired last month after serving as our CFO for 15 years. We honored him and his wife, Anne, earlier this week at a retirement dinner with our Board of Directors. We'll certainly miss Tod, but we are thrilled for him and Anne, and we wish them the best in their retirement. With that, I'm pleased to introduce Glenn Culpepper, our Executive VP and Chief Financial Officer. Glenn has a deep financial background and experience at large decentralized growth-oriented industrial companies. Glenn has more than 30 years of broad-based financial experience, including 17 years in the CFO role. Glenn joins us from Summit Materials, a leading business in the aggregates and building materials sector. Before that, he spent 20 years -- 21 years at CRH plc, a large publicly traded multinational construction materials company based in Dublin, Ireland. Glenn and Ed will now discuss our 2012 financial performance and provide more details on the 2013 guidance.

Thank you, Don. I'm pleased to be part of Republic Services. We have an outstanding business with great assets. Our management is focused on building on its core strengths, and is committed to delivering returns to our customers. I look forward to working with the team to continue to execute on these principles in the future. Now I will discuss financial results for the quarter. Fourth quarter 2012 revenue was approximately $2 billion and reflects the following 3 components of internal growth: pricing, volume and recycled commodities. First on pricing. We had core price growth of 1.1%, with positive price in all lines of business. Core price increased 10 basis points sequentially from 1% in Q3 to 1.1% in Q4. Consistent with our expectations, pricing was higher in the second half of the year, which reflects the higher level of price resets to our index-based customers. In addition, fuel recovery fees increased 0.2%. The average price per gallon of diesel fuel increased to $4.02 in Q4 from $3.87 in the prior year, an increase of 4%. Second, on volumes. They decreased 0.8% year-over-year. As Don indicated, collection volumes were positive, 0.9%. This level of collection volume represented a 60 basis point sequential increase from our Q3 performance. Most of the improvement is coming from the commercial and industrial lines of business. The growth in collection is offset by a decline in landfill and transfer station volumes. Within the landfill business, special waste decreased approximately 9% listed from prior year and landfill MSW volumes were down approximately 5%. The decline in landfill MSW volumes relates primarily to the previously discussed loss municipal disposal contracts and competitive pressures in our Los Angeles market. Our Q4 2012 volume performance also reflects a 30 basis point increase in revenue from an additional work day. Third, a decrease in commodity sales resulted in a 0.8% decrease in revenue. Commodity prices decreased approximately 13% to an average of $109 per ton in Q4 from $125 per ton in the prior year. Q4 recycling facility commodity volume of 527,000 tons was up 3.5% from the prior year. Our 2013 guidance is based on current commodity prices of approximately $112 per ton. For reference purposes, a $10 per ton change in commodity values equals approximately $0.03 of full year EPS, which includes the impact on our recycling facility in collection businesses. Turning to fourth quarter year-over-year margin. Q4 2012 adjusted EBITDA margin was 26.4% compared to 29.8% in the prior year, a 340 basis point decrease. Of this change, 180 basis points relates to the remediation charge Don discussed, 40 basis points relates to net fuel and commodity and about 30 basis points relates to the work day increase. Excluding these items, adjusted EBITDA margin was approximately 29%. The more significant items that comprise the margin change are, first, labor. The 90 basis point increase in expense relates to the revenue mix between the collection and post-collection businesses and an increase in the number of workdays. Collection volumes, which have increased have associated labor costs while post-collection volumes, commodity revenues and subcontract revenues are all down and these all have little or no variable labor cost. Within those collection lines of business, direct labor costs as a percentage of revenue remained relatively flat. Second, maintenance. The 50 basis point increase in maintenance expense also primarily relates to the changes in revenue mix and workdays that I just discussed. As a percentage of revenue, maintenance declined to 8.4% from 8.5% in the third quarter. We are beginning to anniversary the implementation costs of our maintenance initiative, as well as the broad-based tire cost increases in 2012. Third, fuel. The 30 basis point increase in expense is due to a 4% increase in the cost of diesel. After considering the impact of related fuel recovery fees, there was a net margin decline of 20 basis points. Our 2013 guidance is based on the current cost of diesel of approximately $4.02 per gallon. For reference purposes, a $0.20 change in diesel fuel per gallon is about $0.01 of full year EPS, which includes the impact of our fuel recovery fees and our fuel hedges. Fourth, landfill operating costs. The 180 basis point increase in expense relates to a $37 million remediation charge for environmental conditions at a closed landfill in Missouri. As Don mentioned earlier, this charge resulted in a $0.06 reduction in EPS in the fourth quarter. Excluding this charge, landfill operating costs as a percentage of revenue were essentially flat with the prior year. Last on cost of goods sold. The 40 basis point improvement relates to a reduction in rebates paid for volumes delivered to our recycling facilities. Cost of goods sold decreased to an average of $28 per ton from $41 per ton in the prior year. While the change in cost was favorable, when you consider the more significant decrease in related commodity revenues, there was a 20 basis point decline in EBITDA margin. With respect to SG&A, our fourth quarter 2012 SG&A was 10.2% of revenue. This improvement of 40 basis points primarily relates to cost savings from the reorganization of our field operations and corporate office in the fourth quarter of 2012, and a reduction in incentive compensation expense. Our annual run rate SG&A is approximately 10% of revenue. DD&A as a percentage of revenue was 11.6% in Q4 2012, versus 11.5% in the prior year. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles. Ed will now discuss interest expense, taxes and free cash flow.

Thanks, Glenn. Q4 2012 interest expense was $92 million, which included $12 million of noncash amortization. Our 2013 EPS guidance includes total interest expense of approximately $365 million. This includes noncash interest of approximately $45 million. The full year 2012 effective tax rate included in our adjusted EPS was 32.2%. This rate reflects the benefit from favorably settling open tax years. We expect an effective tax rate of approximately 38% in 2013, which can vary from quarter-to-quarter. There is a $0.17 EPS headwind as a result of a higher tax rate in 2013 when compared to 2012. I will now discuss free cash flow. Full year 2012 adjusted free cash flow was $768 million, in line with our expectations. As Don mentioned, our guidance for 2013 adjusted free cash flow is in the range of $675 million to $700 million. This guidance includes the impact from the recent extension of bonus depreciation for tax purposes. As a result of the changes in the net impact of bonus depreciation and favorable settlements in 2012 that are not expected to repeat, there is a year-over-year increase in cash taxes of approximately $150 million. In 2013, there is a negative impact of bonus depreciation of approximately $50 million when you consider the favorable impact of the end year bonus depreciation being more than offset by the cumulative impact from prior years. Bonus depreciation is a timing issue and once a deduction has been taken for tax purposes, it is no longer available. Since bonus depreciation has been in effect since 2008, there is very little tax shield available from prior years. Bonus depreciation will impact our free cash flow performance for the next 4 to 5 years. Now I'll discuss the balance sheet. At December 31, our accounts receivable balance was $837 million and our days outstanding was 38 days, or 23 days net of deferred revenue. Reported debt was approximately $7.1 billion at December 31. And excess credit available under our bank facility was approximately $1.4 billion. I will now turn the call back to Don.

Thanks, Ed. Before moving to Q&A, I would like to address the recent discussion about the solid waste industry moving to a REIT type structure. Now, I want to be very clear about this. We have reviewed the matter internally and with outside tax advisors. We have concluded that under current IRS guidelines, these types of structures do not work for Republic on a technical tax basis, as well as for strategic business reasons. As a matter of policy, we do not publicly discuss tax planning strategies that we considered to be proprietary. In 2013 we're going to focus on what -- our attention on what we do best and that's executing our long-term strategy of profitably growing and operating our North American solid waste and recycling businesses. We will accomplish this by continuing our pricing programs and utilizing our ROI-based tools; growing the business through sales, acquisitions and investments in recycling and processing capability; enhancing the customer experience by continuously improving our service delivery and differentiating our service offering; managing our cost structure through programs designed to gain operational efficiencies, including food automation, CNG conversion and standardized maintenance practices; investing in our people, building our talent and improving team engagement; being responsible stewards of the planet and its resources and maintaining our Investment Grade rating. In summary, our strategy has not changed. It is designed to generate consistent earnings and cash flow growth. We remain committed to an efficient cash utilization strategy, which includes increasing cash returns to our stockholders through share repurchase and dividends. At this time, operator, I would like to open the call to questions.

[Operator Instructions] Corey Greendale, with First Analysis.

First, wanted to ask about the guidance. And last quarter you provided some kind of initial thoughts on the year and it sounds like the EPS range you're giving here is a little lower than that and the free cash flow it would bring is a little higher and I just wondered if you can bridge what the reasons are for the differential?

Well, our preliminary outlook that we provided last quarter is sort of encased in this -- I think we gave you $1.90 to $1.92 as preliminary outlook, and we're now saying $1.86 to $1.91. So we're still in that range. We had a little softness in special wastes that we built into our plan and for 2013 I would tell you that, that makes up the bulk of it.

And on the cash flow story, we originally talked about $650 million and was bringing that number up to the $675 million to $700 million is the in-year benefit from the extension of bonus depreciation for calendar '13. And also keep in mind when we talked on the November 1 call, that was more of a preliminary outlook not detailed guidance because we had not completed our full year budget planning process. So it was just kind of a preliminary outlook, not the financial guidance, which we're providing today.

That's right.

Understand. And then a question on the pricing front, I was just wondering if you can just speak to kind of sequential trends in competitive markets. And then how should we be thinking about the quarterly trend in 2013 in CPI increases, it's more of a issue where it gets better as the year goes on, or does it flatline or go the opposite direction?

Well, we're talking about sequential first, right? So we've had now 2 quarters sequentially of 1% plus core price. So that's a good thing coming off where we were and sort of 50 basis points for a few quarters prior. So trending up, again we're giving you guidance from 1% to 1.5% for the full year. We're going to have a little bit of a headwind in CPI later in the year and the second half will start to kind of show up in the following year. Overall, I think the trends are pretty consistent with what we've seen. We don't see the market deteriorating maybe getting a little better, but we're going to continue doing what we do best and that is, again, as I said in my comments, using ROI tools and pricing consistently in the business.

And then on the restricted price, or the index based markets, we still see the calendar 2011 CPI influencing our restricted market pricing in the first half of this year and then the calendar '12 CPI number will come in, in the second half of the year.

Remember, we continue to remind you guys, it takes 12 or 18 months for that CPI to run through our business the way our contracts are structured.

Correct. And the CPI for calendar '12 was just a little bit above 2%. So with the combination of the open market pricing and then the restricted market pricing, we're giving guidance to 1% to 1.5%.

The next question comes from Al Kaschalk with Wedbush Securities.

Just a follow on. I was hoping maybe you could comment a little more granularity about the competitive market, because if you have 40% and about 2% price, it seems very challenged to get price in the other components of your business if you're guiding 1% to 1.5% I realize it's up. But it still seems like we're having some choppiness in the markets, is that fair?

Well, I think what you have to also factor in to the restricted marking -- market pricing, is the pressure we've talked about through last year on the renewals of the municipal contracts. Although, the contracts that are in midstream are being influenced by last year's CPI, keep in mind as contracts come up for renewal, given the state of municipal finance, we are seeing some lower pricing levels, on average on those contract renewals. So although you're getting the 2% as I mentioned in the second half of this year on the existing business, you have to kind of look at it on a net basis and factor in the fact that typically on an annual basis, we have about $350 million of municipal revenue renewing. And so on a net basis, we're coming up to that 1% to 1.5%.

Okay. And then, Don, I think, your recap of the growth initiatives, at least for '13 has a nice lead into, a, the announcements you made today. And then second, there has been in the press and I think it was in one of your larger markets about recycling and some of the cost involved there. So maybe to the extent you want to talk about any one of those particular contracts, great. Although, generally, its heaven. But maybe, you can talk through what you're seeing on the recycling side in terms of the growth?

Well, let me start, Al, by kind of saying that the business -- this business doesn't move at a rapid pace. So when you set out a plan to invest in a certain area or move into initiative, it takes a number of years to roll into it. So if we take the privatization in Flint, Michigan that you were referring to -- Ed mentioned, the pressure we're getting in the municipal renewal with the state of municipal finance, we're having some price pressure there. The same thing that's causing that price pressure, I think is causing some municipalities to rethink whether they should hire somebody like Republic Services to do the trash and recycling service. So we're going to put continued effort into that area of privatization and we'll continue to plow that ground. We don't have a lot of that built it into our pipeline, or into our -- even our plan, but we got a few of those that we're working through and will continue to see some wins there, I think, over the next several years. As rates to recycling, we've talked about this a lot and we've got 25 markets that we think we need to invest in across our 240 markets. And we do that to the tune of 3 to 5 markets a year. So just like we've done for the last 2 years in 2013, we'll invest in several markets to further build our recycling capability and answer the customer demand and to be competitive and broaden our service offering in the market. So it's a very steady pace of change and a very steady pace, but a focused pace.

Could you just comment -- I know we wanted to limit questions here, but on that point, have the economics changed at all? Because I know you were, at least, heeding us to be a little conservative on the economics around recycling given...

Remember we told you when we look at those contracts, we -- and we perform on those investments, we look at the 10-year average. And right now, the commodity prices are right near the 10-year average. So over the cycle, we think those investments still makes sense as I said, Al, we are not moving at a rapid pace. We're spending a portion of our capital budget every year. It's the right thing to do for the customer base. It's the -- it's answering customer demand and we're moving, I think, at the right pace. The investments all have a good return.

Bill Fisher, with Raymond James.

Don, just on the special waste you mentioned. Is the bidding environment -- is it just more aggressive? Are there less jobs out there? Or do you see a potential where there are some more bids later in the year that might change all that?

Yes. It feels like it's just the event business, Bill, just people deferring jobs and maybe their discretionary budgets being tightened. So that's not unusual to see that in the second half of the year when people are uncertain about what their next year looks like for some of our customers. But again, as we said in our comments, every year, when we bring guidance forward, we can only kind of base it on what we know today. So when we look at the current state of special waste, the current state of commodities, the current state of fuel, we bake that into our guidance. Could it get better? Sure, it could. But we're seeing a slowdown here in Q4 and we're kind of baking that into, at least the first half of this year and we'll see how the pipeline treats us.

I think we saw a kind of historic in Q3 and continue into Q4 and I think it would be consistent with the general news that you saw about some of the trimming of corporate capital expenditure budgets and even some of the government spending given when you go back to the second half of last year some of the political and economic uncertainty heading into year end. So it's not like these projects have been canceled. Generally the folks who had awarded us the business are just telling us it's been deferred, but until the business actually comes into the revenue stream, we're not going to put it into our budget or our forecast.

And just following up on Q4, your labor and maintenance costs were up like mid-single digits and I think you had an extra day in there, but just looking at '13, do you see some of that easing off a bit with like the One Fleet on the maintenance side? Or how would you look at those costs?

Yes. We're seeing -- Bill, this is Glenn. We're seeing a slowdown in our maintenance cost increases. And actually, in the fourth quarter, it was lower as a percentage of revenue than the third quarter. And we'll see more of that, we believe, in 2013. And on the labor, it's going to move with our volumes on the collections side of the business, we hope to do more, if we do, there will be labor costs associated with that.

So on the maintenance initiatives, by the end of this year, we'll have -- by end of '13, we'll have about half the fleet addressed. As I said, we've kind of stretched that to maybe a 4-plus year program. So we'll have half the fleet address. We've anniversary-ed the uptick and then we'll start to see the longer the new maintenance practices are in place, we'll start to see the benefits start to come in as we start to impact the second half of the fleet in the out years.

Adam Thalhimer with BB&T Capital Mortgage (sic) [Markets].

I wanted to ask about C&D volumes. Are you seeing any pick up in roll off activity?

Yes so we said in the comments that our temporary roll off business hauls, venture and hauls, was up over 5% in Q4 year-over-year. But it's coming off of a very low base. So when it comes to construction and demolition, construction specifically, we're very late cycle. And so we're pretty excited about the 5% uptick. But it's coming off a pretty low base. So we'll continue to be late cycle, that's just the way our business is and we'll continue to get our fair share of that growth as it comes through the pipeline.

And then, were there any impacts to your business from Hurricane Sandy in the quarter?

Not really to speak of. We're not heavily engaged in that part of the country. We had some -- a few impacts in New Jersey. But you know how all those things work, is they cost you a little bit of money upfront, with revenue interruptions and service interruptions and some additional cost to run your facilities without power and such and then you make a little bit of money on the backhand. But net-net of net, you don't really make out too well. So it's about net even for us.

And lastly, I just wanted to ask, I mean, Commercial and Industrial revenue is up really nicely year-over-year in Q4. I mean, are those kinds of growth rates sustainable?

Well I guess some of that is anniversary-ing some losses, et cetera. We've got that baked into our guidance. We've got some continued anniversary-ing of some volume in the first half of the year, some contracts we lost last year and then it starts to come back to us in the second half. So it’s probably too early to tell on construction and demolition and some of these things, but directionally, it's good. And I would tell you that we feel better about where it's heading coming into this year than we have in the last couple of years.

Next question comes from Joe Box with KeyBanc Capital markets.

Just a question on your mix shift toward collection. I appreciate the comments that were made earlier on labor in the quarter. I guess just going forward, based on what you could see in the macro right now, is the mix issue something that's likely to be an ongoing headwind? Or is it maybe a quarter or 2 blip until we see, maybe the landfill situation reverse in L.A.?

Well, Joe, I would say, seeing increasing activity in any line of business, we would view as being a positive, not in any way a negative. So I think the increasing versus the volumes we're seeing in the collection business is a reflection of a little bit better economic activity. Their results we're seeing from our marketing efforts and what we would view in total as a positive. I also think the blend of, say, collections and post-collection, or disposal revenue is also kind of reflecting, as Don had in his speaker notes. We did lose a number of larger disposal contracts earlier in calendar '12 and we just haven't anniversary-ed those numbers yet. And then second, is as we discussed on a previous question, a little bit lower, what we would identify as event special waste streams, those tied to corporate capital spending or some type of government related work were being deferred in the second half of 2012. So on a net basis, the revenue mix were shifting a little bit and just the fact that collection is a little bit more labor-intensive will impact some of the average cost items. But if the event work comes back, then I think things will just rebalance to a previous level.

And those large contracts that we lost, that we mentioned about 9 months ago, they all anniversary out by the end of June. So we go into Q3 with that behind us.

Okay, perfect. I appreciate that. A question for you on your automated arm conversion, I mean, you guys seem to be making, maybe, the most visible push with this initiative and I certainly understand it’s a major productivity tool. I'm just kind of curious, is it having maybe any unforeseen impact on your landfill volume?

Well, the landfill volumes' more impacted by the conversion to a multi-cart system and one sort capability when you give a customer a 90 gallon cart for recycling versus an 18 gallon bin that they maybe had previously. Automation is first and foremost aimed at the waste collection side and then supplemented with the expansion of our recycling business. So productivity is #1 gain, driver safety, driver engagement, broadly the hardened demographic, all those are really good things. The customers like the carts. So it's got a good -- it adds to our customer experience. And then as we add a cart for recycling and so on, it does drive the recycling volumes up, which is what the customers want to see. So that's all built into our plan. When we look at investments in recycling, we look at the market pre-investment and the vertically integrated market post-investment and these investments make sense to us.

And just to [indiscernible], we exited 2012 with approximately 62% of the residential fleet being automated. We do plan to buy, or convert, over another 200 routes in calendar '13. So at that pace, we should exit '13 with approximately 66% or about 2/3 of the residential system being automated.

Great. Just one more clarification, I apologize if I missed this earlier. So on the $37 million environmental charge in the quarter, should we think about that as a recurring item to a certain degree? And do you guys have any additional charges for the landfill included in your 2013 guidance?

No. It's a remediation charge. So essentially, there is a process we conduct internally with both internal and external engineering group. That work is then also reviewed by our outside auditors and their engineering staff and it is viewed as a one-time item, so that we incur that as an expense in the current quarter, but it will be spent over multiple years. So although we do take the charge in a single quarter from a cash flow perspective, it's extended. The payment is over a multiyear period.

Right. Okay. But on the...

But it's not a recurring charge.

Alex Ovshey with Goldman Sachs.

Just to follow-up on that last question, the remediation charge. I believe this is the second quarter in a row that we've had a remediation charge. And so, as we think about your outlook for 2013, are you including any potential remediation charges on that number?

No. The answer is, you're right. It is the second quarter that we've done this. There was further engineering work done that necessitated the additional $37 million charge. But we do a full engineering review at all of our landfills annually and out of that process, we do not see any other remediation cost in '13.

Okay. And just to get back to the discussion around C&D volumes. At the end of 2012, can you tell us what percentage of your volumes would be exposed to the C&D market? And as you think about your 2013 volume outlook, are you factoring in any volume growth in the C&D category at this point? Are you going to leave that as potential upside to your expectations?

Well, no. We don't factor in any type of economic outlook or forecast into the financial guidance we've provided today. As far as the revenue contribution on the collection side, the C&D or collection and demolition work represents between 6% and 7% of our total revenue. And then probably between 2% and 3% on the landfill side where we're taking debris from other haulers. So in total, it's kind of high single-digit of our total revenue. I think that the conferences we've attended, we have spoken in the past at the peak of the economic cycle, say, in the '05, '06 period, C&D both collection and disposal, it was about 17% of the revenue and then at a trough, which was probably late '09, first half of '10, it was about 7% of our revenue. So we're obviously up off the trough. But still down significantly from the peak of the economy that we saw in '05, first half of '06.

Our guidance is based on what we know today about the economy and as it changes and/or improves. We'll be talking to you about it quarter-by-quarter.

Next comes from Hamzah Mazari, with Crédit Suisse.

Don, given how much the REIT landscape has changed, as you know, maybe help us understand what is your downside in going and seeking out a no name private letter ruling? As you know, there's nothing black and white with REIT conversions, particularly recently.

Hamzah, as I said in my comments, we're not going to spend time on the call today talking about the restructure. We've done our work. We had a lot of discussion about it internally with external advisers. We even talked about it with our board. We have concluded, as I said in my comments, that it doesn't pass the test in our mind, and it doesn't fit our business. So let's move past it.

Okay. And then just maybe a follow-up, along the same lines if you could share any work you've done on the MLP structure and what your views are there?

My answer is the same.

Okay, okay. Maybe I'll ask a question on the business then. Maybe if you could talk about -- do you think we are past the pricing pressures that we've seen in this business over the last few years? Pricing has come off each year since we came out of the downturn. Are we past the pricing trough, in your mind? Or do we have -- or is 2014 sort of the recovery year for you guys? And we still see sort of price relief going on in some parts of your business this year?

Well, I think I would categorize it as saying we're coming out of the trough. We are probably about halfway through our Commercial -- or I'm sorry, our Residential Municipal business. As you know, those contracts are, call it, 5 years on average in duration. We've been taking some price rollbacks to extend those business -- those business contracts over the last several years. We're probably halfway, maybe a little better than halfway through that. We're going to continue to see some price pressure there as the municipalities have their own pressures related to their tax base, et cetera. So we baked that into our guidance for this year. We expect to have some continued pressure. As it relates to the open market, we think -- we think, as we probably said many times, we think, generally, larger companies tend to be rational, and we think sometimes the very small companies tend to be less rational. The best thing for pricing in that situation is going to be some organic growth, as organic volume returns to the sector, we think the open market pricing improves and that's just the nature of open competition. I think that will give us a little bit of a tailwind. The other thing that we face, of course, is half our business is indexed, to CPI and we've seen a little bit of up and down here in CPI. But we're still kind of holding up better than we did a couple of years ago, where we had CPI in the flat, negative and 1% range. So again, I'd characterize that as sort of the past. And coming out of the trough, we've got a couple of quarters of plus 1% core price in -- ending '12, and so our exit speed in '12 is good and we'll continue to be diligent in the way we price our business. So we're feeling pretty good about it and I think that's recognizing our guidance of 1% to 1.5% price.

Okay. Can I ask a follow up question, since you didn't answer the first 2 tax questions. How should investors...

[indiscernible] question?

I said, can I ask a follow-up on the business? Maybe if you could frame for us when you think we'll see the benefits of a housing recovery in your numbers and what the lag there is? Any sort of derivative impacts of a housing recovery, like new business formation, et cetera?

Well it's raised the housing construction. I would tell you that we're probably, at least -- we're probably 12 months to follow. So again late cycle. We've got to see these housing starts turn into finished houses and again, that's where the waste is generated and then when you see business formation around that. So we're hopeful the way you are, but we're also cautious and we don't want to be the guys out there trying to predict the economy. It hasn't worked for us too much in the past. So we're going to -- again, base our guidance, as we have, on what we know about the economy today and as it improves, we're going to be talking to you about it every 90 days and giving you guys updates on what we're experiencing and seeing. And like you, hoping for the best, as it relates to that and that would be upside for us.

The next question comes from Michael Hoffman, with Wunderlich.

Glenn, welcome aboard, by the way.

Thank you.

Can we talk a little bit about return on invested capital and your annual incentive compensation plan as we go into '13? As a group and individually, the companies have been fighting sort of a negative slope on the line of ROIC for all the reasons that have been talked about ad nauseum today and previously. But the trends are shifting and based on your dataset it feels like you should reverse that trend in the ROIC in '13 and could you talk about your annual incentive comp plan, how it drives some of the behavior to assure that happens?

Michael, #1, there's been no change in our incentive compensation systems. We have 2 programs for management, one is an annual plan and the other one is a 3-year rolling plan, we call it a long term incentive plan, or an LTIP. The ROIC calculation really comes into the rolling 3-year LTIP plan. And essentially, there are 2 metrics in the plan. One metric is return on invested capital and the second is, we term, as cash value creation. So essentially, it's a balanced approach where we look at -- you get the maximum or higher payouts when you show gradual improvement on return on invested capital over time. And also free cash flow growth. But what we want to recognize in the compensation system, it's not just one-sided. Meaning, we don't want to shrink the greatness just to grow the ROIC. We also want to grow the free cash flow in the business. So although we'll have very firm hurdle rates, based on our weighted average cost of capital and associated premiums for business risk, we want to grow the free cash flow, we want to grow the revenue and we're also looking to return, or improve our return on invested capital. So essentially, it's a balanced approach over time in order for management to maximize their pay out.

So, Michael, we think we have all the right triggers, as Ed said, cash flow, EPS, ROI and cash value creation, all the way down to the local manager. They have upping targets and they have pricing plans built-in to their plans and they also get charged for CapEx. Right, so there is no free CapEx at Republic Services. So we're hyper-focused on cash and as you said, the #1 thing we've faced over the last couple of years, putting pressure on ROI, has been price compression. And the #1 thing that's going to drive that forward is going to be some organic growth that's going to change that. It's going to impact CPI, it's going to impact sort of a small competitive behavior and a little bit of new volume growth will sort of come in at a higher margin than average. All of those things will help move that ROI forward and as it relates to price, we've got 3 strong controls in place internally, so that we don't have people out there pricing our post-collection assets in a way that is in conflict with our growth plans for the marketplace. So we think we've got the right controls and processes in place to keep pricing moving in an intelligent direction.

Okay, that's great. And then change of direction, slightly. Are you starting to see in your collection operations in the market, new business formation? The empty storefront in the strip mall or it's the new Dunkin' Donuts being opened. Is that -- how would you characterize what's happening in the marketplace?

Yes. I would say it's not quite a headline yet. But as I said, to answer some of these questions -- some of these questions earlier, we -- generally, I speak for the whole management team, we feel better about the business as we exited '12 than we did a year ago. We feel better about some of the growth potential out there that we're seeing and some of the anecdotal things that we're seeing than we did a year ago. So I think -- somebody mentioned, I think it was Hamzah who mentioned, where are you at the trough? I think we're coming out of the trough. But again, this business doesn't change very quickly. You probably heard my predecessor say that 1,000 times in the time that you knew him. So it's true in this business, but it's directionally good and we think this guidance is, again, a good step forward for the company, it creates net of some of the adjustments, good high-single digit cash flow growth and EPS growth and as the organic growth comes back and we have continued success in executing all of our plans and our productivity measures, we're reporting quarter-by-quarter and again, hopefully, we'll see some of that growth everybody wants to see.

The next question comes from Barbara Noverini with Morningstar.

Can you give us an update on your National Accounts business? And on a related note, I appreciate your earlier commentary on your pace of investment in recycling capacity. But do you feel that this pace is sufficient enough to remain competitive in winning new national accounts? How important is this to your future growth plans?

Yes. So we have 240 markets that our business is divided into, 40 states. But 240 marketplaces. We have coverage across those marketplaces either through handle recycling for our national accounts, either through company-owned facilities, or through partnerships with a third-party networks. So we have -- in markets where we don't have our own capacity, we have contracted with other third parties to handle our recycling processing, et cetera. So we've got about 80 or so percent coverage across those markets, which we think is substantial and sufficient, quite frankly, to provide the services needed and requested by our national account clients. So we are growing our National Accounts business. We have even recently unveiled some very new programs for some of our existing National Accounts who wants to see more recycling and diversion. So we're very active in that space and we'll continue to do that. So we don't think we're deficient and as I said, we'll continue to be very steady in our approach in investing in the business. So we're going to spend about 10% of our revenues every year in CapEx. It takes a certain amount of money to replace the fleet every year, to replace containers that rust out, to replace airspace in our landfills that is consumed and then we have enough left over to do 3 to 5 markets a year, as it relates to building our recycling capability. We think that pace is sufficient based on my earlier comment of the coverage we have with our third-party network and alliances. So we'll continue on the march in a slow and steady pace, slow and steady wins the race. The tortoise is never boastful, but the tortoise perseveres. So that's our view on life here at Republic Services.

I know in the past you've been able to give us how much revenues that business represents for you. Could you give that to us again?

Recycling probably represents about 9% or 10% of our total revenue.

No, no, no, for your National Accounts business, how much of that...

National Accounts, well, we've not made disclosures specifically about National Accounts as a percentage of total revenue.

The next question comes from Stewart Scharf, with S&P Capital IQ.

Could you talk a little bit about -- you mentioned you're stewards of the climate and a little more about your renewables and environmental initiatives, what you're planning to do with that. And also regarding landfills, your landfill life is -- averages roughly 60-plus years and I was wondering with all recycling increasing, is that looking to -- like it will extend further, or stay pretty much close to that target?

Okay, Stewart. So you've probably heard us talk before about something we call the evolving ton, which kind of describes the fact that we think that total waste stream in America is changing. And frankly, growing. Per capita, I think people are throwing out, maybe a little less trash year-over-year, but the population continues to grow. And so in total, the waste stream grows year-on-year. Our business grows with population growth, as the tonnage increases household formation and the like. So today, we have a substantial recycling business, albeit, it's a small percentage of the whole. We continue to build out our recycling capabilities, as I just talked about with the last question. And we haven't seen, again, a substantial shift year-on-year of waste coming out of the landfill into -- into our recycling plants, but it is a steady pace of change. We believe more and more of the growth in the waste stream will come from recycling and diverted materials. So we've got a great asset base in our landfills. We may not fill some of the air space today, but we'll fill it up over time. And so we've described before that these landfills are not like airline seats. The volume -- just because you don't fill the seat today, you haven't lost the opportunity. That landfill airspace will become more valuable over time. So we continue to invest in recycling in the markets that want it and when customers demand it and are willing to pay for it. And it makes sense economically and with a great return. So we're very focused on that. We're focused on being good stewards of the planet with our engineering group and running our facilities well. We continue to build out our CNG fleet of -- roughly half of our CNG -- roughly half of our truck buy this year, again, a little bit less than half this year will be CNG fuel. So we're continuing to take advantage of, 1, the cost savings, but also the fact that it's a very clean alternative for fuel source. So again, a steady pace of change, continually rolling out these initiatives and taking -- making a little bit of progress every year toward our ultimate goal.

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

Thank you, operator. I would like to thank all Republic employees for their hard work, commitment and dedication to operational excellence in 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 disconnect.